Regional Lenders Drop Rates Below LPR Following Call for Chinese Banks to Sacrifice 1.5 Trillion Yuan in Profits

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Chinese regional lenders are already cutting interest rates in response to calls from Beijing for the banking sector to sacrifice profits in the interests of small businesses hit by the COVID-19 pandemic.

Sources said to 21st Century Business Herald that some banks are already reducing interest rates below the loan prime rate (LPR) – China’s key benchmark rate released once a month – in order to fulfil the central government’s mandate for greater financial inclusion.

“The lending rates we provide to small and medium-sized enterprises and the manufacturing sector are all on the decline,” said one source at the branch of a major state-owned lender in Zhejiang province.

“This is a major direction for transferring profits. At present our (one-year) lending rates are around 3.8% – lower than the LPR by 50 basis points.”

Sources in the Chinese banking sector said that while they haven’t yet received specific directives from regulators for profit-transfer measures, many banks have already reduced their profit growth targets.

Others said that they have already received directives calling for them to reduce lending rates to a greater extent than declines in LPR’s.

Pre­mier Li Ke­qiang called for banks to “sac­ri­fice” 1.5 tril­lion yuan in their 2020 prof­its at a State Coun­cil meet­ing on 17 June, in or­der to re­duce the fi­nanc­ing costs of small busi­nesses in China. 

The profit sac­ri­fice is ex­pected to be around 75% of the full net prof­its of Chi­na’s com­mer­cial bank­ing sec­tor in 2019, which were around 2 tril­lion yuan ac­cord­ing to data from the China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion (CBIRC). 

Regional lenders were quick to respond, with Xin­jiang Kashi Rural Com­mer­cial Bank re­duced in its 2019 div­i­dend to 0.8 yuan from 1 yuan per 10 shares, ac­cord­ing to a fil­ing made with the Na­tional Eq­ui­ties Ex­change and Quo­ta­tions (NEEQ) on 18 June.

Members of the banking sector said that regulators are unlikely to use administrative targets to drive the 1.5 trillion yuan profit sacrifice, and are instead more likely to employ “market-based” methods such as guided reductions to lending rates.

Chinese banks have posted comparatively strong results since the start of 2020, despite the dismal performance of much of the rest of the economy as a result of the impacts of the COVID-19 pandemic.

Data from Wind indicates that total profits of Chinese industrial enterprises posted a YoY decline of 36.7% in the first quarter, yet commercial banks saw net profits of 600.1 billion yuan, for a YoY rise of 5.0%.

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