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China’s Banks Cut Deposit Rates in First Broad Move Since 2015

·2 min read

(Bloomberg) -- China’s biggest banks lowered their benchmark deposit rates across the board for the first time since 2015, a move designed to help them boost lending to shore up growth in the world’s second-largest economy.

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Seven major banks, including Bank of China Ltd., Industrial & Commercial Bank of China Ltd., Bank of Communications Co. and the Agricultural Bank of China Ltd. on Thursday cut deposit rates on a range of products, including demand deposits, three-month and five-year deposits. At some lenders, rates for one-year deposits were cut by 10 basis points to 1.65%, according to the lenders’ websites.

This is the first time since 2015 that banks have cut rates across the board. While banks have previously reduced deposit rates in April, that was only on selected tenors and on some deposit products.

Beijing has rolled out a raft of measures to support an economy battered by Covid restrictions and a deepening property crisis. The move by the banks will help lower funding costs to allow lenders to meet calls from authorities to extend more loans to help millions of struggling businesses.

“The PBOC’s earlier interest rate cuts have been transmitted to deposit rates, and this will in turn open up more space for banks to further lower their lending rates,” said Liu Peiqian, chief China economist at NatWest Group Plc. She now sees a higher possibility that banks will cut the five-year loan prime rate, a reference for mortgage rates, again by 5 to 10 basis points in the coming months.

Even so, banks have found it difficult to increase lending because of scant demand from businesses that are seeing little reason to load up on more debt amid growing economic uncertainty. At the same time, the $52 trillion banking industry is being squeezed by mounting bad debts and even a mortgage boycott by homebuyers stuck in stalled property development projects.

The deposit rate cuts will crimp the income of millions of customers, many of whom are also struggling as the economy slows. Economists expect China to grow 3.5% this year, compared with the government’s forecast of 5.5%. In August, the People’s Bank of China lowered its benchmark lending rates in a surprise move.

While lower deposit rates are positive for bank margins, its impact on the economy is limited, according to Nomura Holdings Inc. analysts including Ting Lu in a report on Thursday.

“These moderate interest rate cuts will have a negligible impact on the economy,” the analysts wrote. “In our view, adjusting the way in which the pandemic is handled and a decisive package to boost property demand are the two keys to an economic recovery in China.”

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