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Chinese banks cut deposit rates to fuel sluggish growth


China’s six largest state-owned banks cut deposit rates on Thursday as Beijing looked at ways to boost growth in the world’s second-largest economy amid doubts about the strength of the recovery.

Lenders including the Industrial and Commercial Bank of China, the China Construction Bank and the Bank of China are now offering 2.45 percent and 2.5 percent on three- and five-year deposits, respectively, down 15 basis points from September, according to the banks’ websites. Similar cuts were made at Postal Savings Bank of China, Agricultural Bank of China and Bank of Communications.

The banks also cut the rate on demand deposits by 5 basis points to 0.2 percent, the lowest level since 1996.

China’s economic recovery gained momentum in the first quarter following last year’s tight containment of the pandemic, with growth at 4.5 percent, just short of a prudent full-year target of 5 percent.

But growth did not accelerate in the second quarter due to weak real estate sales and weak industrial production and consumption. The post-pandemic rebound fell short of forecasts as consumers appeared to be sitting on savings rather than spending.

The coordinated deposit rate cut, the second among China’s state-owned banks in less than a year, will put pressure on lenders and stabilize profitability, CICC analyst Lin Yingqi said. “It could boost consumption and reduce the amount of money that is idle in the monetary system.”

State-owned banks should benefit most from falling deposit rates, which will boost returns on equity while making dividend yields on their shares more attractive, said Dexter Hsu, an analyst at Macquarie.

China has cut its key prime loan rate, mortgage reference rates and reserve requirement ratio in recent years to boost money supply and lower corporate borrowing costs in an effort to support the pandemic-hit economy.

But average deposit rates remained unchanged, encouraging households and firms to make safe returns from deposits, while their outlook for the economy remained bleak.

CICC’s Lin said banks could save about Rmb120bn ($16.8bn) in borrowing costs after Thursday’s cut and expected a deeper 20bp cut in deposit rates over the next 12-24 months.

Still, deposit rate cuts alone will not be enough to boost economic recovery, analysts argued.

“Cutting the deposit rate should help push some savings towards consumption and investment, but it will take a combination of other policies to achieve the goal,” said Gary Ng, senior economist at Natixis in Hong Kong.

“Consumers are still conservative due to sluggish disposable income growth and a diminished wealth effect, especially due to the still poor outlook for real estate. It will need a stronger stimulus in car sales and in the housing market to get the economy going again in the near term.”

Policymakers need to do more to break the negative feedback loop of deflation, subdued consumption and rising unemployment, says Tan Yifei, founder of Jence Frontier, a Beijing-based consulting firm. “It will take time and policy for the economy to take hold and really pick up.”

Merry C. Vega is a highly respected and accomplished news author. She began her career as a journalist, covering local news for a small-town newspaper. She quickly gained a reputation for her thorough reporting and ability to uncover the truth.

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