Chinese banks seek to nurse bruised interest margins with deposit-rate cuts as slowing economy bloats savings
- Since the pandemic, China cut the one-year loan prime rate (LPR) by 50 basis points to 3.65 per cent but one-year deposit rates have remained steady at 2.26 per cent
- Deposit growth has surged amid a glut of savings with a first quarter rise of 9.9 trillion yuan (US$1.4 billion) following last year’s 17.8 trillion yuan surge
Squeezed by high funding costs and pressure from Beijing to alleviate corporate borrowers’ financial burden by issuing cheap loans, major banks in China are cutting their deposit rates to preserve margins.
Since the pandemic struck, China’s benchmark one-year loan prime rate (LPR) has been cut by 50 basis points to 3.65 per cent but the one-year certificate of deposit rates has remained steady at 2.26 per cent. Still, credit demand has decelerated. Chinese banks extended 718.8 billion yuan (US$103.99 billion) in new loans in April, less than a fifth of March’s tally. Weak credit demand is expected to continue to weigh on Chinese banks.
“As favourable base effects subside and post-Covid recovery momentum wanes, credit growth is likely to remain subdued in months to come,” said Lu Ting, chief China economist with Nomura said in a note.
“As the pent-up demand for in-person services may not be long-lived, property woes re-emerge and the export sector deteriorates, we believe the post-Covid sweet spot for China’s economy is drawing to a close.”
Meanwhile, deposit-taking institutions have been inundated with a glut of savings. In the first quarter, household savings soared by 9.9 trillion yuan on the heels of a 17.8 trillion yuan rise in 2022. Deposit growth surpassed loan growth in the first quarter among the five largest banks, with time-deposit growth continuing to outpace demand deposit growth.
