Chinese Banks Lower Deposit Interest Rates to Alleviate Cost Pressures
In July 2024, several Chinese banks have successively lowered their deposit benchmark interest rates to alleviate the pressure of bank liability costs. On July 25, the six largest state-owned banks first adjusted deposit rates, followed by China Merchants Bank and Ping An Bank. By July 29, another ten joint-stock commercial banks had also updated their adjusted rates. This adjustment adopted an "asymmetric" model, with the largest decline in interest rates for fixed-term deposits of two years or more, reaching 20 basis points. For example, the current deposit rate of Hengfeng Bank has been reduced to 0.15%, while the five-year fixed-term deposit rate has dropped to 2.10%. This series of adjustments is expected to help improve the interest rate differential performance of listed banks in 2024 and 2025.
Key Takeaways
- 12 joint-stock commercial banks have lowered their deposit benchmark interest rates, with the 5-year fixed-term rate falling below 2%.
- The six largest state-owned banks and joint-stock banks have adopted an asymmetric model to lower deposit rates.
- The current deposit rate has been reduced by 5 basis points, and fixed-term deposits of two years or more have been lowered by 20 basis points.
- The reduction in deposit rates aims to alleviate the pressure of bank liability costs and the trend towards fixed-term deposits.
- The reduction in deposit rates is expected to enhance the interest rate differential for banks in 2024 and 2025.
Analysis
The reduction in interest rates by Chinese banks directly alleviates the pressure of bank liability costs, indirectly reflecting slowing economic growth and the trend towards fixed-term deposits. In the short term, this move will improve the interest rate differential for banks and enhance their profitability. In the long run, it may encourage depositors to seek higher-yielding investment channels, impacting the bank's deposit base. Additionally, the interest rate reduction may have a cascading effect on the bond market and stock market, influencing investor strategies and market stability.
Did You Know?
- Deposit Benchmark Interest Rates
- Explanation: Deposit benchmark interest rates refer to the interest rates of various deposit products announced by banks through official channels such as websites and branch notice boards. These are standard interest rates that customers can refer to when depositing funds, typically reflecting a bank's willingness and cost in paying for deposits of different durations.
- Asymmetric Model for Lowering Deposit Interest Rates
- Explanation: An asymmetric model for lowering deposit interest rates refers to the uneven adjustment of deposit interest rates for different term deposits by banks. For instance, the adjustment for short-term deposit rates may be smaller, while long-term deposit rates experience larger adjustments. This model helps banks maintain short-term liquidity while reducing the cost pressure of long-term funds.
- Interest Rate Differential
- Explanation: Interest rate differential refers to the difference between a bank's lending interest rate and deposit interest rate, serving as a significant source of bank profits. The magnitude of the interest rate differential directly influences a bank's profitability. By adjusting deposit rates, banks can impact the size of the interest rate differential, thereby controlling and optimizing their financial performance.