As loan growth faces increasing pressure amid heightened economic risks, several smaller and mid-sized banks in China have reduced their deposit interest rates, which could help alleviate costs. Over the weekend, rural commercial banks and credit unions in Hubei and Henan provinces reduced rates on various deposits, following cuts at some regional lenders in Guangdong province last week, according to statements from the banks.
On Saturday, Henan LuoShan Rural Commercial Bank decreased the interest rate for one-year deposits by 35 basis points (bps) to 1.9%, by 30 bps for two-year deposits to 2.4%, and by 45 bps for three-year deposits to 2.85%, as stated in an announcement. This action comes as lenders face growing pressure from shrinking profit margins as China's economy rebounds from three years of stringent pandemic restrictions and a housing market downturn. While household savings have soared, credit demand remains stagnant.
China's economy reopened after zero-COVID policies were lifted in December, but commerce and domestic demand have not yet returned to pre-pandemic levels. Analysts have cautioned that the recovery's foundation is not yet stable.
"Financial institutions are encouraged to support the economy, and lending rates have clearly fallen," said Ming Ming, a fixed income analyst at CITIC Securities, in a research note published on Monday. "However, banks' liability costs remain relatively rigid, and net interest margins continue to contract, increasing their operational pressures," he added.
Nicholas Zhu, a banking analyst at Moody's, noted that the pricing changes of smaller banks typically trail those of larger banks with a time lag. In September, China's largest banks reduced deposit rates in their first comprehensive move since 2015 to ease margin pressure.
The People's Bank of China (PBOC) stated in response to a Reuters request for comments that the deposit rate cuts by some Chinese banks in April were "normal behavior" guided by the self-disciplinary mechanism, which was implemented for market-oriented interest rate pricing.
Reducing deposit rates could also help banks mitigate margin pressures when investors have heightened expectations for a cut in lending rates to bolster the economy.
"The economy is still operating below its potential," observed Zhiwei Zhang. "Fiscal and monetary policies have room to further stimulate growth."
"With inflation falling in China and the rate hike cycle in the U.S. nearing its end, the likelihood of a PBOC rate cut is increasing," he concluded.
