MNI: China Deposit Caps Act Like PBOC Rate Cut

A change by the People's Bank of China to rules setting the ceiling on commercial deposit rates will reduce funding costs for banks and make it easier for them to give cheap loans to manufacturers, possibly easing credit conditions without the need for a benchmark cut but potentially forcing a shakeup of smaller lenders, bankers and other sources told MNI.

Banks' inability to cut their deposit rates in a competitive market has seen margins squeezed as they come under official pressure to provide long-term credit to manufacturers, with some even finding themselves lending at rates lower than those they are paying to savers, said one source familiar with the initiative. The PBOC's move last week is meant to force the deposit rates of long-term loans down, providing relief, he continued.

As cheaper funding for banks should further facilitate the flow of credit, the measure has a similar effect to a cut in benchmark interest rates in practice, but without negative side effects the PBOC wants to avoid, such as further fueling already elevated property and financial asset prices, said Zhao Junhong, deputy governor of Guangdong Nanyue Bank, a city commercial bank.

The new rules though give an advantage to big state-owned banks, said Zhao, because they will restrict the interest premium that smaller lenders can offer to attract customers. Joint-stock banks will also be allowed to offer the same rates as small banks, making life still harder for them, he said.

Zhao noted, though, that restrictions on deposit rates probably restrained those lenders who would otherwise be tempted to turn to risky high-yield investments to cover their elevated funding costs as they drive to boost their customer base.

DEPOSIT CEILING TO IMPOSE ORDER ON SMALLER BANKS

According to Liu Xiaochun, former governor of China Zheshang, a national joint-stock commercial bank, the new arrangement could help impose order in a market with too many small banks, by forcing them to increase efficiency after years of expansion, improving the overall health of the financial system. China's over 4,000 smaller lenders now account for more than half of the industry.

Following the move last week, big state-owned banks will be allowed to add up to 50 basis points to the benchmark rate on demand deposits while other banks can sum up to 75 bps, whereas previously they could apply multiples of 40% and 50% respectively. This means lenders will effectively be allowed to pay savers more for short-term deposits and certificates but will lower rates over terms of more than one year, with three-year deposit ceilings falling by 77.5 bps at big state-owned banks and 67 bps at other lenders, according to China International Capital Corporation.

It should take about six months before banks feel the benefits of the move and boost lending, the source familiar with the initiative noted.

The rule change extends the PBOC's control of the funding side of banks' business, adding to the additional leverage it gained over lending costs with the introduction of the Loan Prime Rate in 2019, according to the source.

The PBOC has now kept the LPR unchanged for 14 months in June, as it tries to lend a helping hand to manufacturers, driving the squeeze in banks' margins. The interest rate on new loans fell to a record low 5.03% in weighted average terms at the end of 2020, pushing net interest margins to historically tight levels for some small and medium-sized banks. The biggest bank in the world by assets, Industrial and Commercial Bank of China, saw its interest margin slip to 1.97% in 2020 from 2.12% in 2019.