Change to China’s Interest Rate Pricing Mechanism Expected to Reduce Borrowing Costs

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A key adjustment to the Chinese banking sector’s interest rate pricing mechanism is expected to make a significant contribution to reductions in borrowing costs.

China’s Market Interest Rate Pricing Self-Disciplinary Mechanism (市场利率定价自律机制) made adjustments to its method for determining the ceiling on deposit interest rates on 21 June, shifting from the use of a fixed multiple of the deposit benchmark rate to the use of the deposit benchmark rate plus a set number of basis points.

Analysts say that the change to the mechanism will help to reduce the cost of funds and better support the real economy, while also pointing to the positive impacts for China’s capital market of certain interest-rate sensitive funds potentially shifting from bank deposits to other asset management products.

“Effectively controlling the liabilities costs of the banking system is a foothold for unifying service of the real economy with the prevention of financial risk,” said Wang Yifeng (王一峰), chief banking sector analyst with Everbright Securities, to China Securities Journal.

“This adjustment is for appropriate control of banking system liabilities costs on the foundation of reduction of social financing costs; strengthening the sustainable operating capabilities of tail organisations, and maintaining the stability of the financial sector.”

Xiao Feifei (肖斐斐), chief banking sector economist with CITIC Securities, said that the adoption of differentiated curbs for the ceiling on deposit rates as opposed to policy-rate based methods would help to avoid excessively strong signalling playing havoc with market expectations.

“Additionally, the new plan is of benefit to curbing irrational pricing behaviour by banks, and stabilising long-term interest rates in the financial system.”

Multiple Chinese banks have already reduced the rates for fixed-term deposits of 1-year maturity or more in anticipation of changes to the Mechanism.

The branch of a big state-owned bank in Beijing’s Xicheng district has reduced its interest rate for 3-year large-sum certificates of deposit to 3.35% from 3.85% previously.

A joint-stock bank in the Xicheng District has also reduced the 3-year fixed-term deposit rate to 3.5% from 3.85% previously.

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