Big banks cut deposit rates to strengthen sector stability

Several major Chinese commercial banks cut deposit rates on Thursday, signaling a new round of deposit rate cuts that could pave the way for further reductions in policy benchmarks of lending rates to bolster economic growth, market analysts said.

China's six largest State-owned banks — Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and Postal Savings Bank of China — cut their deposit rates for the first time since December.

The cuts ranged from 5 to 20 basis points for different terms. Notably, deposit rates of 2 percent or more are no longer available at the banks as they cut the interest rate on five-year time deposits by 20 basis points to 1.8 percent.

This means, if a depositor saves 1 million yuan ($138,347) in five-year time deposits, the total earned interest will reduce by about 10,000 yuan to about 90,000 yuan.

Analysts said the cut is in line with expectations as loan prime rates, China's market-based lending rate benchmarks, dropped on Monday. The country has established a market-based adjustment mechanism whereby commercial banks align their deposit rates with changes in the one-year LPR and the yield on 10-year Chinese government bonds.

The LPR reduction was, in turn, triggered by the People's Bank of China, the country's central bank, which cut the seven-day reverse repo rate — it has emerged as the most important policy benchmark of interest rates — from 1.8 percent to 1.7 percent on Monday, after second-quarter economic growth figures came in lower than expected.

"Other (smaller) commercial banks will follow up in cutting deposit rates," said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

Wang said this new round of deposit rate cuts will help stabilize commercial banks' net interest margin — roughly calculated as the difference between the interest rate banks charge on loans and the rate they pay out to depositors — and therefore strengthen the stability of the banking sector.

Official data showed that the net interest margin of Chinese commercial banks dropped to 1.54 percent in the first quarter, down 0.15 percentage point from a quarter earlier and lower than 1.8 percent, which is deemed as a warning line.

Also on Thursday, the PBOC cut the interest rate of the medium-term lending facility — whose role as the key interest rate benchmark has been replaced by the seven-day reverse repo rate — by 20 basis points to 2.3 percent, a move experts said will also help ease commercial banks' funding costs and stabilize their net interest margin.

Wang said banks' net interest margin may therefore stay generally stable in the third quarter, which could pave the way for further lending rate reductions.

"Considering the economic and price trends, we think there remains room for a reduction in the seven-day reverse repo rate in the fourth quarter, which will drive the LPRs to drop as well. This means that it is possible to see another round of deposit rate reductions around the end of the year."

Wen Bin, chief economist at China Minsheng Bank, said that the recent series of interest rate cuts show that policymakers are prioritizing growth stabilization while improving the monetary policy framework.

Following a meeting presided over by PBOC Governor Pan Gongsheng, the central bank vowed last week it will create a sound monetary and financial environment for sustained economic recovery, by moving faster to improve the modern monetary policy framework with Chinese characteristics.