Competition for Deposits Will Be “White Hot” as Stress on Liabilities Structures Intensifies


As the next round of macro-prudential assessments for the Chinese banking sector fast approaches and liquidity conditions become increasingly constrained, commercial lenders are facing greater pressure on the liabilities side of their balance sheets, spurring intense competition for retail funds.

The concerted deleveraging campaign launched by Beijing this year has led to easing debt growth, with small and medium-sized banks amongst the worst affected, suffering from a widespread scarcity of deposits and other funding sources.

Since mid-November medium-term funding costs have risen for Chinese financial institutions, as embodied by gains in the Shanghai Interbank Offered Rate and rises in the rates for interbank CD’s.

During the first two weeks of December the yield on some wealth management products – a key source of funds for smaller banks who are poorly positioned to compete for deposits, also broke through the 5% threshold, while a number of commercial banks increased their deposit rate structures.

As of 21 December the 3-month Shibor had hit a record high for 2017 of 4.87%, for a 46 basis point increase compared to the start of November.

As a consequence interbank certificates of deposit have also recently risen to record highs for the year, with 1 month, 3 month and 6 month tenors lifting to 5.43%, 5.34% and 5.33% respectively.

Given constraints on China’s interbank lending market, observers point to increasing demand for deposits and greater pressure to attract deposits amongst lenders, which has already become challenging given the expanding presence of alternatives such as asset management products, money market funds and wealth management products.

China Minsheng Bank, for example, is about to raise its 1-month deposit rate to 3.85% from 3.7%, and plans to raise the rates for 3-month and 6-month structured deposit products to 4.5%.

New requirements with respect to liquidity are also compelling Chinese banks to adjust their liabilities structure, given that they provide preferential treatment to bank deposits and longer-term debt.

As a consequence competition is intensifying amongst banks to grab deposits, while lenders are also supplementing capital by shifting to subordinated capital debentures, asset securitisation and financial bonds.

Chen Jianhong (陈健恒), chief fixed-income analyst for China International Capital Corporation, expects the competition for debt amongst Chinese banks to be especially intense in 2018.

Chen also expects commercial banks to increase the share of their medium and long-term debt as a result of Beijing’s new regulations governing liquidity. 

“Deposits are the foundation, and competition amongst banks for deposits will enter a white-hot phase next year,” said Chen to Securities Journal