China's major state-owned banks have initiated cuts to deposit rates in a bid to alleviate pressure on their profit margins and support economic growth amid a challenging economic environment. On Thursday, Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, China Construction Bank, Bank of China, and Bank of Communications announced reductions ranging from 5 to 20 basis points on various deposit rates. This move follows a surprise reduction in lending benchmarks earlier in the week, as authorities strive to stimulate the faltering economy.

The latest cuts mark the first broad reduction in deposit rates by Chinese banks since December of the previous year, and follow three cuts in 2023 and earlier cuts in late 2022. The rate reductions come as commercial banks' net interest margins, a critical measure of profitability, have narrowed to a historic low of 1.54% as of March. With these changes, China's banking sector aims to optimize output and adapt to tough market conditions, including a property crisis and weak loan demand.

"The cuts to deposit rates will enable banks to have more room to implement lending rate cuts," said Nie Wen, an economist at Shanghai Hwabao Trust. "Otherwise banks will lack motivation to do that given their enormous profit margin pressure." He added that smaller banks are likely to follow suit but with milder cuts amid fierce competition to attract customers.

ICBC, for instance, has cut its demand deposit rate by five basis points to 0.15% and its one-year deposit rate by 10 basis points to 1.35%. Rates on deposits of two years or more have been cut by 20 basis points to a range of 1.45% to 1.8%. This move is expected to help lower funding costs for banks at a time when they are under significant pressure to support economic growth.

In an unexpected move, the People's Bank of China also cut its lending rate for one-year medium-term policy loans by 20 basis points to 2.3%, the most significant rate cut since the COVID-19 pandemic in 2020. Additionally, the rate on 7-day loans was reduced to 1.7%. These measures are part of a broader strategy to reinvigorate China's slowing economy, which expanded at a 4.7% annual rate in the last quarter, down from 5.3% in January-March.

Despite the cuts, analysts remain cautious about the impact on consumer spending. "Banks are already passing on lower deposit rates to savers, which will do nothing to encourage spending in the current environment," commented RaboResearch. "People will instead save even more to generate the same return they were earning before."

In a parallel effort to boost economic activity, the Chinese government has doubled subsidies for electric vehicles (EVs) purchased to replace older cars. This move is part of a broader program to encourage the scrapping of old cars, appliances, and housing. The National Development and Reform Commission announced details on subsidies and funding, offering 20,000 yuan (about $2,750) for eligible EVs replacing vehicles made before April 2018, and 15,000 yuan (nearly $2,100) for fuel passenger cars with engines of 2.0 liters or less.