Smaller Chinese Lenders Slash Deposit Rates To Relieve Margin Pressure

Following their larger counterparts, a number of small and mid-sized Chinese banks are lowering deposit interest rates in the first widespread move since 2015 to relieve margin pressure brought on by a series of lending rate cuts.

The slashing of deposit rates , a crucial funding source for Chinese banks, underlines the constraints of lower benchmark borrowing rates in resurrecting loan demand and growth in the second-largest economy of the world, which currently is having problems for traction, analysts and bankers said.

A number of Chinese city commercial banks and rural commercial banks have slashed their rates on a spectrum of deposits earlier this week, according to statements released on the banks’ websites.

Its interest rate for three-month deposits was slashed by Bank of Nanjing Co Ltd on Thursday by 5 basis points (bps) to 1.35 per cent, by 15 bps for one-year to 1.75 per cent and by 20 bps for five-year deposits to 2.90 per cent, according to a statement on its website.

Relatively small banks followed the example of several of China’s largest state-owned banks, which lowered interest rates earlier this month.

This comes after the central bank reduced the one-year loan prime rate (LPR), its benchmark lending rate, by 5 basis points (bps) in August and the five-year LPR, which impacts mortgages, by a larger margin.

Even so, attempts to increase credit demand in order to support the slowing economy have yet to bear fruit.

“Now banks are facing the same problem, which is that credit demand is not strong,” said a person at a regional bank, declining to be identified as he was not authorised to speak to the media.

Because there aren’t enough customers to lend to, banks must keep costs under control, according to the source.

In August, 1.25 trillion yuan ($173.78 billion) in new yuan loans was given out by China’s banks which was lower than expected by experts. On the other hand, there was a slowing of broad credit growth, showed data from the People’s Bank of China.

In the second quarter of the year, the Chinese economy came very close to contracting because of widespread COVID-19 pandemic related lockdowns as well as the slump in the real estate and property sector which negatively impacted demand.  

According to experts, business and consumer confidence currently are still fragile.

Wang Yifeng, an analyst at Everbright Securities Co., believes there is still room for further deposit rate cuts.

Bank deposits are somewhat expensive because banks are more willing to absorb low-cost funding when they are struggling to lend money, according to Wang.

Wang Yudong, analyst at Minority Asset Management Co, compares China’s bank problems to those of manufacturers.

“If prices of finished products drop, you need to lower the prices you pay for raw materials too to protect your profitability.”

The rate cuts on deposits by commercial banks of China were a part of the monetary policy transmission mechanism  which followed the key policy rates being slashed ion August by the country’s the central bank, according to Peiqian Liu, China economist at Natwest Markets. 

“This rate cut by commercial banks will help improve the profit margin slightly and is technically opening up more space for further (benchmark lending) rate cuts.”

For the second quarter, a fall in their net interest margins (NIMs) was reported by four of the five of China’s largest banks, except for Bank of China.

The NIM of Industrial and Commercial Bank of China Ltd was 2.03 per cent at the end of June, with Agricultural Bank of China at 2.02 per cent and China Construction Bank Corp at 2.09 per cent.

NIMs for smaller lenders were lower. Bank of Beijing Co Ltd, for example, reported a 1.77 per cent margin at the end of June. Bank of Qingdao Co Ltd reported 1.76 per cent NIM, while Bank of Shanghai reported 1.66 per cent NIM.

(Adapted from

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability

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