Chinese state banks have reportedly cut deposit rates and short-term lending rates amid the ongoing economic woes. This move is mainly aimed at stimulating consumption, and China’s financial bodies would implement a lower interest-rate approach in the future, financial analysts suggest.
Wind, China’s financial information service provider, combed through the interest rates of state banks and concluded that the demand deposit rate generally cuts to 0.2 percent, the one-year deposit rate has fallen to less than 2 percent, while the interest rate on time deposits with a maturity of between two to five years was reduced to 2.05–2.8 percent, according to a report of Chinese financial media Ifeng.com on Aug. 25.
In some affluent areas and megacities, interest rates on large deposits have fallen slightly less. At a branch of China Merchants Bank in a district in Beijing, the interest rates for large certificates of deposit with maturity of three years and five years were reduced to 2.9 percent per annum.
Likewise, a wealth manager of a subbranch in Guangzhou city, the capital of Guangdong Province, told Stcn.com on Aug. 23 that the interest rate for two-year time deposits starting from 10,000 yuan (approximately $1,372) is currently 2.6 percent, and the interest rate for three-year time deposits starting from 50,000 yuan ($6,860) is 3.15 percent—all of which are about five basis points lower than the previous month.
It has been clear that, in any case, low-interest rate operations are the way forward for state banks, with Ifeng’s report even claiming that “China is about to enter the era of actual negative interest rates.”
State-owned banks’ move appears to be “a bargaining chip” over Chinese residents that they’d better keep their money in the bank for more than five years as short-term deposit rates are meager, according to Mike Sun, a senior China investment strategy expert and consultant, said in an interview with The Epoch Times on Aug. 25.
State-Designed Consumption Structure
In Mr. Sun’s view, the world’s second-largest economy is facing the plight of weak spending power, and Beijing policymakers have to alter the country’s consumption structure.Mr. Sun further articulated that in past decades, Chinese people saved up to buy houses or cars; today, there are fewer such consumers due to the downturn in the real estate and auto markets.
People’s psychological expectation is “buying when the market’s on the rise, but not when it’s on the drop,” so they would wait till the price of a home or a car touches the bottom in case of a weak market outlook.
However, if people are not willing to spend, the nation’s economy gets worse; this is not something the CCP regime can afford.
Therefore, the Chinese authorities are striving to “shift the direction and rhythm of consumption” to the domestic tourism and catering field, said Mr. Sun, citing an example of the Zibo barbecue economic mode, one of the CCP’s endeavors that has been highly touted in much of the state media this summer.
“This is to say, the CCP is regulating and pushing people to consume inbound, like spending their money on eating, drinking, and traveling around domestically,” Mr. Sun said.
Two Kinds of Lending Rates
The National Interbank Funding Center, a subordinate of the central bank, the People’s Bank of China (PBC), announced on Aug. 21 new loan prime rate (LPR), with the one-year LPR at 3.45 percent, 10 basis points lower than the previous period, and the five-year and above LPR at 4.2 percent, remained unchanged.The LPR is a Chinese-style lending rate for business and household lending. The one-year LPR, along with the 10-year governmental bond yield, is pegged to the level of deposit interest rates, as regulated in April 2022 by the PBC.
The PBC had lowered the short-term LPR, “which is an attempt to stimulate the consumer market and promote the production recovery of enterprises,” said Lu Yuanxing, a U.S.-based political and economic analyst who once worked as a marketing executive for a Chinese company.
While the the central bank’s move to stabilize the long-term LPR is intended to ensure banks’ profit margins and reduce the risk of losses, as the long-term LPR is closely related to housing loans, Mr. Lu told The Epoch Times on Aug. 25.
Interest Rates Reduction Will Continue
Mr. Sun believes that that Beijing policymakers will keep on reducing interest rates out of two considerations.First, the U.S. Federal Reserve probably won’t raise interest rates because it’s already at its cap, so the monetary pressure on other countries will be relatively less, Mr. Sun said. “With less pressure, there will be more room for the CCP to maneuver [interest rates as desired].”
Second, interest-rate cuts mean that domestic bonds, including state bonds, corporate bonds, or local bonds, are paying less interest. “If corporate bonds are issued at a low interest rate, it will be profitable for [the state banks].” In other words, if a reduced interest rate is applied to the old debts, the amount of interest to be repaid will be less, which is equivalent to the reduction of bank bad debts and financial losses, according to Mr. Sun.
“In this case, I think there’s still room for [Beijing to cut] interest rate, and there’s even more incentive for the CCP to reduce interest rate [in the future],” Mr. Sun said.
Mr. Lu also held that the deposit rate would be reduced gradually, but not in one step.
Clearly, the current low-interest stimulus still cannot boost sluggish consumption, said Mr. Lu, in his view, adding that the root cause of the weak consumption in China is not the interest rate. “The main purpose of the Chinese people to deposit their money in the bank is not to use the interest as an investment return,” he said.
Overall income decline renders people’s reluctance to consume and results in the difficulty of reviving consumption in the Chinese market, according to Mr. Lu.
“Investment risks are increasing, and incomes are decreasing, so a tiny cut in deposit rates is not yet enough to get people to take out their savings to spend so that the authorities may cut interest rates further,” he said.
