Chinese Central Bank Encourages Cuts to Deposit Rates as Part of Interest Rate Reforms

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A senior official from the People’s Bank of China (PBOC) says reductions to deposit rates made by Chinese banks are a “normal market phenomenon,” arriving at a time when deposit level are expanding while profitability has come under pressure due to narrowing interest rate margins.

At a press conference held on 20 April, Zou Lan (邹澜), head of the Monetary Policy Department of PBOC, said that Chinese commercial banks should adjust deposit interest rates flexibly based on market supply and demand as well as their own operating conditions.

“This is a normal phenomenon in the market-oriented environment of deposit interest rates as a result of the overall decline in market rates,” Zou said.

The remarks from Zou arrive after multiple banks around China announced reductions to their deposit rates, as narrowing interest margins put a squeeze profitability.

Zou pointed in particular to a significant increase in deposits since the end of last year, leading to changes in supply and demand conditions and thus a decline in deposit rates.

Loan rates have also come under pressure in China, with regulators exercising moral suasion to reduce the cost of borrowing for households and enterprises, in order to provide support to the real economy in the wake of the pandemic.

In April last year, PBOC established a deposit interest rate market-oriented adjustment mechanism, under the guidance of the market-oriented interest rate self-discipline mechanism, which encouraged banks to make rational adjustments to deposit interest rates based on changes in market interest rates

In September last year, leading Chinese banks reduced deposit interest rates based on market changes, with other banks subsequently following suit.

“At that time, many banks proactively lowered their deposit interest rates,” Zou said. “Recently, it has mainly been small and medium-sized banks that did not make adjustments last time that have made supplementary adjustments. Some banks have also made adjustments to their deposit interest rates following the Spring Festival.

“Through the coordination of the self-discipline mechanism, large banks should adjust deposit interest rates first based on changes in market conditions, while small and medium-sized banks should follow up and make supplementary adjustments based on their own situation, maintaining a relatively stable gap in deposit interest rates compared with large banks.

“This is conducive to maintaining market competition order, safeguarding the stability of bank liabilities, maintaining a reasonable interest rate spread, achieving sustainable and stable operations, enhancing the ability to support the real economy.”

Zou flagged further reform of China’s interest rate environment in 2023 that will give greater play to market forces.

“PBOC will continue to deepen market-oriented interest rate reform and play an important role in the continuous application of the deposit interest rate market-oriented adjustment mechanism,” he said. “It will maintain good market competition order, and create a favourable interest rate environment to provide financial support to high-quality development.”

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