China’s Privately Operated Banks May Scramble for Funds as Regulators Step up Pressure on Deposit Interest Rates

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Interest rates for deposit products offered by China’s privately operated banks have sunk in the wake of heightened regulatory scrutiny, leading to greater pressure on their ability to access funds.

Chinese authorities stepped up their regulation of interest rates for deposits towards the end of 2020, putting the kibosh on graded interest rate products, as well as the use of online platforms by regionals banks to offer deposit products beyond their permitted jurisdictions.

A 7 June report from Securities Daily found that this heightened regulatory scrutiny has already led to an across-the-board decline in interest rates offered by privately operated banks, with some lenders advertising rates of less than 4% for 5-year term deposit products.

Analysts say that this could put heavy pressure on these lenders, given their limited access to funds via conventional channels such as extensive branch networks.

“Regulators have cleaned up the use of high interest rates by privately operated banks to grab funds,” said Professor Pan Helin (盘和林), head of the Digital Economy Research Institute at the Zhongnan University of Economics and Law.

“For this reason privately operated banks have removed high-interest rate deposit products from the shelves.

“The deposit sources for privately operated banks have contracted, affecting their interest rate spreads, and they will have no choice but to open alternative paths to search for new sources of funds.”

China is currently host to 19 privately operated banks, ever since Tencent-backed WeBank (微众银行) became the first such lender upon obtaining a financial operating license from Shenzhen authorities in December 2014.

Many of these private banks have focused on the provision of services via the Internet, given their lack of extensive offline branch networks, and have also formerly made use of high interest rate deposit products to attract funds from retail customers.

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