The People’s Bank of China (PBOC) has published an official statement on recent moves by Chinese commercial banks to reduce the interest rates offered for deposit products.
On 20 September the Monetary Policy Department of PBOC published an article entitled “Deeply Driving Interest Rate Marketisation Reforms” (深入推进利率市场化改革).
According to the PBOC article the cuts to deposit rates by Chinese banks are part of efforts by to strengthen balance sheet management and stabilise liabilities costs, and represent a major step toward for marketisation reforms of deposit rates.
“PBOC will continue to deepen and drive forward marketisation reforms, continue to unleash the efficiency of loan prime rate (LPR) reforms, strengthen deposit rate supervision and regulations and make full use of the adjustment mechanism of deposit rate market-based reforms,” the article said.
“[We] will drive increases in the level of marketisation of interest rates.”
PBOC first launched reforms to the LPR formation mechanism in August 2019, serving as a benchmark rate formed on the basis of interest rate quotes from banks that would “more fully reflect supply and demand changes and drive the level of marketisation higher.”
“Against a background of market interest rates declining, this is of benefit to driving reductions in the actual rates for loans,” PBOC said.
According to PBOC the LPR reforms launched in 2019 have helped to bring enterprise loan interest rates to an all time low, falling from 5.32% in July 2019 to 4.05% in August 2022.
The latest round of LPR’s released on 20 September were 3.65% for the 1-year LPR and 4.30% for the 5-year LPR, holding steady with the rates for the preceding month.
Since the start of the year the 1-year LPR has fallen by 15 basis points and the 5-year LPR has fallen 35 basis points, as PBOC has pushed for lenders to reduce the cost of funds for the real economy.
“In driving market-based reforms to interest rates, it is necessary to continually uphold the decisive role of the market in the formation of interest rates,” said the PBOC article.
Since April 2022, PBOC has also pushed for member banks of the Market Interest Rate Pricing Self-Regulatory Mechanism (市场利率定价自律机制) to make reference to the yield for 10-year government bonds as representative of bond market rates, and the 1-year LPR as representative of loan market rates, when making rational adjustments to deposit rate levels.
At present fixed-term deposit rates in China stand at between 1 to 2%, while deposit interest rates are around 4 to 5%. According to PBOC real interest rates are currently slightly below potential growth rates for the real economy.