Why China's tech stocks could boom thanks to the profit woes of commercial banks
Low deposit rates could spur the rise of China's capital markets.
China's deposit rates have fallen to worryingly low levels, as Beijing pushes for reduced borrowing costs in a bid to sustain economic growth.
Hopes abound, however, that capital market reforms can harness the shifting dynamics created by low deposit rates, to drive a profound shift in China’s financial sector as well as a bull market in tech stocks.
Low deposit rates a source of economic woe
China long implemented a policy of financial repression that kept deposit rates at artificially low levels, in order to reduce financing costs for the nation's corporate borrowers.
This policy is considered the culprit for major problems that continue to hamper China’s national economy today.
The poor returns on savings contributed to weak domestic consumption, by undermining household wealth and forcing savers to accumulate more to compensate for low interest earnings.
Low deposit rates also incentivised households to search for more lucrative returns via speculative investment in risk assets, contributing to China's property bubble.
Renewed pressure on deposit rates could once again drive a heightened preference for risk assets amongst the country's teeming herds of retail investors.
Instead of a speculative bubble, however, some economists hope that this time it can drive a transformation in China's financial sector, shifting its model from bank-dominated indirect financing towards direct financing via a reform-enhanced capital market.
Deposit rates under heavy pressure
China's loan prime rates (LPR) for May both fell 10 basis points compared to April, for the first reduction since September 2024. The one-year LPR now stands at 3.0%, while the five-year LPR sits at 3.5%.
The LPR is considered the benchmark rate for China's banking sector, and is based upon a survey of the rates offered by leading commercial lenders to their best clients.
The fall in the LPR arrives following the announcement of a raft of monetary policy loosening measures by China's central bank on 7 May.
These included a 10 basis point reduction to the seven-day reverse repo rate - which is considered the central bank's main short-term policy rate.
Beijing hopes reducing interest rates will help the Chinese economy withstand the economic uncertainty created by Trump's mercurial trade war.
The move also puts heavy pressure on the profitability of Chinese banks, however, by undermining their interest revenues.
In order to deal with this issue, China's leading banks have already adopted the measure of reducing the rates they offer on deposits, so they can ensure profitability by maintaining their net interest margins
The net interest margin is the difference between the interest payments that banks earn on the loans they provide to borrowers, and the interest payments they make to clients for taking their deposits.
Since the latest LPRs were announced on 20 May, the big state-owned banks have all reduced their fixed deposit rates for two years and less by 15 basis points, and their three and five-year deposit rates by 25 basis points - both in excess of the 10 basis point declines in the benchmark rates.
Low deposit rates transform risk appetites
Xue Hongyan (薛洪言), deputy-head of the Xingtu Financial Research Institute, argues that this has led to the critical shift of short-term deposit rates falling beneath the 1% threshold at some of the big state-owned banks.
A spate of seven cuts since September 2022 has reduced the 1-year deposit rate at ICBC - China's biggest bank - from 1.75% to 0.95%.
"It's generally acknowledged that when the one-year deposit falls below 1%, the ability of deposits to preserve or increase value is comparatively weakened," Xue writes in a recent opinion piece ("薛洪言：跌破1%，存款降息如何撬动股市长牛?").
"The sensitivity of household investment returns markedly increases, thus accelerating the shift towards other assets.
Reductions on deposits for longer terms - as well as a contraction in the spreads between term deposits - is also expected to drive a heightened preference for risk assets amongst Chinese retail investors.
At ICBC, the five-year deposit rate has fallen from 2.75% to 1.3%, which leaves only a 0.35 percentage point gap between the 1-year and 5-year deposit rates.
"When the spread between term rates narrows, and banks are no longer able to resort to covert means to provide higher deposit rates, this makes it harder for depositors to use longer terms to preserve their investment earnings," Xue writes.
"Deposit outflow starts to become a trend."
Alternative financial products rise in popularity
With China's property market in the doldrums, some household savers have instead opted to channel funds from low-paying deposits to alternatives such as wealth management products.
"Given that the real estate sector is in a downturn, the flow of savings towards property is greatly easing," Xue writes.
"Financial products such as wealth management products and investment funds have become the main pool for transferred savings."
From June 2023 to the end of 2024, the value of China's wealth management products increased from 25.34 trillion yuan to 29.95 trillion yuan, as deposit rate declines triggered "price comparison effects."
Deposit rates fell as bonds welcomed a bull market, heightening the appeal of wealth management products that invest in China's debt market.
Other financial products have also seen a rise in popularity on the back of declining deposit rates.
From June 2022 to the end of March 2025, the operating balance of insurance funds increased from 24.7 trillion yuan to 34.93 trillion yuan,
Mutual funds increased from 13.69 trillion yuan at the end of 2019 to 30.12 trillion yuan at the end of 2024, for a net rise of 16.45 trillion yuan.
Despite this trend, however, Xue notes that China's deposit levels have still continued to grow.
This is due to concerns over the safety of these other financial products, that do not enjoy the perceived security amongst the Chinese investing public of bricks-and-mortar real estate.
This is especially the case given the economic turmoil created by the Covid pandemic, and mounting tensions between Beijing and Washington since Donald Trump's first term in office.
Between 2021 and the end of April, China's saving deposits rose from 102.5 trillion yuan to 159.08 trillion - an increase far surpassing that for other financial products.
"Amidst an environment of uncertainty, household risk preferences decline," Xue writes.
"Even though wealth management products, insurance products and money funds are 'competing goods' with higher yields, this yield differential is not enough to trigger a large-scale outflow."
Capital market reforms
In tandem with the current cycle of deposit rate cuts, China is accelerating reforms of its capital markets.
The goal is to increase the role they play in the Chinese financial sector, and better harness the power of the market when it comes to efficient resource allocation.
Beijing hopes this will in turn drive funding of China's indigenous innovations, which can neutralise Washington's ability to make economic threats by withholding access to key technologies.
A central focus of these reforms involves expanding the role of "patient capital" - essentially long-term investment by institutional players.
Beijing wants this to quell the volatility created by the capricious animal spirits of China's huge masses of retail investors.
A related goal is to overcome the long-standing "asset drought" in China's investment landscape, by offering retail investors a broader array of comparatively secure financial products.
On 22 January 2025, Beijing issued the "Implementation Plan on Driving Medium and Long-term Capital to Enter the Market" (关于推动中长期资金入市工作的实施方案).
The Plan calls for raising the ratio and stability of A-share equity investments made by Chinese insurance funds, as well as the share of equity fund investments by enterprise annuity funds.
On 7 May 2025, the China Securities Regulatory Commission (CSRC) released the "Action Plan for Driving the High-quality Development of Mutual Funds" (推动公募基金高质量发展行动方案).
The Plan outlines 25 measures that specifically target the problem of mutual funds "focusing on scale instead of returns," pushing instead for a shift from investments being "scale driven" to "performance driven."
Key mechanisms mooted include floating fee rates and long-term assessment measures.
"The entry of medium and long-term funds into the market, as well as floating rate reforms and long-term assessments, could markedly reduce the short-term speculative behaviour of the stock market," Xue writes.
"It will guide institutional funds to focus on long-term performance, which is a strong fit for the cross-cyclical allocation needs of households.
"This will thus form a positive feedback effect that could drive deposits into the market, accelerating the formation of a 'long money' ecosystem."
Overturning China's traditional finance model
Xue is hopeful that these capital market reforms will enable the current cycle of deposit rate cuts to drive a positive transformation of China's financial sector, instead of a speculative asset bubble as it did in the past.
If deposit rate cuts incentivise Chinese households to search for other investments, and capital market reforms overcome China's "asset drought" by expanding the supply of comparatively safe and reliable investment alternatives, this could achieve a massive channelling of funds towards the real economy via direct financing.
"In the next several years, the movement of deposits and capital market reforms will create an 'overlay' effect," Xue writes.
This process will firstly involve the conversion of household savings into long-term capital via standardised financial products.
Capital markets are then expected to optimise resource allocation, by focusing on blue-chip stocks and tech companies with high ROE and strong cash flows.
Xue believes this could lead to a positive cycle of "fund flows -> enterprise growth -> earnings feed back -> fund reallocation. “ Capital markets will emerge from this process as the biggest beneficiary from the rehousing of bank deposits.
He argues that this development is tantamount to a "structural leap in China's financial system," from the long-standing dominance of indirect financing via the state-owned banks, towards the "rise of direct financing" that will give greater play to market forces.
"This leap will not only overturn the traditional model, it will also enable the capital market to become an 'oasis' for nourishing the real economy," Xue writes.
His optimistic take is that this development will also help to increase household wealth via asset gains, helping to cure the other major problem created by low deposit rates.
The resulting wealth effect could in turn advance Beijing's goal of expanding the role of consumption in China's macroeconomy.
"It will enable household wealth to achieve a cumulative 'snowball effect' when it comes to sharing in economic growth," Xue writes.
"When top-level reforms and the market's spontaneous forces act together, a bull run in capital markets will no longer be just a vision, but a necessary outcome jointly nurtured by our system and the era."