Deposit Rates Expected to Slide Following China’s Interest Rate Reforms

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Deposit rates in China are expected to fall in the wake of efforts by regulators to reduce the liabilities costs of financial institutions, as well as reforms to the interest rate regime and ongoing declines in the benchmark loan prime rate (LPR).

Securities Journal reports that members of the Chinese banking sector forecast a new round of declines in interest rates for deposit products following falls in LPR and bond market rates.

“Given that we recently saw a 5 basis point decline in the 1-year LPR, as well as a drop of around 20 basis points in 10-year Treasury bond yields, it is expected that rates for bank deposits of various maturities will further decline,” said Ren Tao (任涛), a researcher from the National Institute for Financial & Development (NIFD).

Observers also point out Chinese regulators have put pressure on the asset returns for commercial banks, as part of efforts to raise financial inclusion and reduce borrowing costs for the real economy. This in turn is putting pressure on the liabilities costs of financial institutions, and is likely to lead to further declines in deposit rates.

Rates for wealth management products (WMP) and some deposit products have already fallen, while demand for jumbo certificates of deposit (CDs) has surged because of the higher rates they offer.

In April of this year PBOC oversaw the launch of market-based adjustment mechanisms for deposit rates by the Market Interest Pricing Discipline Mechanism (市场利率定价自律机制) for the banking sector.

Under the adjustments, the member banks of the Mechanism will make “rational adjustments” to deposit interest rates with reference to the 10-year Treasury bond yield as representative of bond market rates, and the 1-year loan prime rate (LPR) as representative of bank loan market rates.

PBOC recently stated that it would strengthen regulation of deposit rates, drive implementation of the market-based adjustment mechanism for deposit rates, and make fuller use of the Market Interest Pricing Discipline Mechanism in order to stabilise bank liabilities costs.

PBOC also highlighted efforts to use LPR reforms to drive reductions to the overall financing costs of enterprises.

Zeng Gang (曾刚), chair of the Shanghai Institution for Finance & Development (SIFD) banks will further optimise their liabilities structures and give greater consideration to their security, liquidity and yields as part of reductions to liabilities costs, as well as seek to appropriately reduce the share of high yield debt and increase the use of market-based financing with flexible interest rates.