Case builds for China’s banks to cut deposit rates

By Winni Zhou and Tom Westbrook

SHANGHAI/SINGAPORE (Reuters) -China’s banks will cut deposit rates soon as part of efforts to make mortgages more affordable and revive property demand, analysts reading China’s cryptic policy messages reckon.

Beijing’s decision to leave a key mortgage benchmark lending rate unchanged even as it cut short-term policy rates this week seemed at odds with a pledge made just weeks ago to support the property sector via monetary policy.

But China did not opt for a broad rate cut that would further depress banks’ narrow net interest margins, instead deferring to banks to cut their deposit rates and give themselves room to cheapen mortgages, analysts said.

Like in previous instances of monetary easing, major state-owned banks might take the lead in cutting deposit rates, setting off a chain of such cuts, two banking sources told Reuters. Lowering deposit rates will give banks much needed wiggle room to cut mortgage rates.

Bankers also said households are making a beeline for bank-issued certificates of deposit (CDs) to lock in current yields.

“Further reductions to the deposit rates are ‘arrows on the string,'” said Wang Yifeng, banking analyst at Everbright Securities.

“At the current stage, the biggest uncertainty lies in the contradiction among the narrowing net interest margins (NIM) at banks, supporting the real economy and maintaining financial stability.”

Such concern among policymakers is rare in the communist state that has in the past often pressed banks into national service, demanding commercial banks sacrifice profits to serve the economy.

In its second-quarter monetary policy statement published this month, the PBOC said “commercial banks need to maintain a reasonable level of profit and net interest margin, in order to keep prudent operations and prevent financial risks.”

It speaks to the state of the economy, struggling to grow after three years of strict COVID restrictions and regulatory crackdowns, and the systemic risks to bank balance sheets from the debt burdens of property firms and local governments.

Chinese commercial banks’ net interest margins, a gauge of profitability, was at a record low of 1.74% at the end of June, below a regulatory red line of 1.8%.

China cut its one-year loan prime rate (LPR) by 10 basis point this week but left the five-year tenor, which influences the pricing of mortgages, unchanged at 4.2%. The People’s Bank of China (PBOC) has reduced rates on its lending to banks.


Outstanding personal mortgages in the country amounted to 38.6 trillion yuan ($5.30 trillion) in June, according to PBOC data. Rates for existing mortgage loans are revised every year, based on the 5-year LPR in December.

Zhu Qibing, chief macro analyst at BOC International China, estimates the weighted average rate of new mortgages is 4.11%, while the average rate on all existing mortgages is at least 100 basis points higher.

The five-year LPR has been trending down, it was 4.3% in December and 4.45% in July 2022. The LPR is one among rates set by China’s banks, and counts among the de facto policy rates as the PBOC does not set bank rates directly.

If banks cut their interest rates for existing mortgage by 30 basis points, their annual interest earnings will shrink by more than 70 billion yuan, or about 3% of the 2.3 trillion yuan net profit of the banking industry in 2022, Zhu said.

Lu Ting, chief China economist at Nomura, wants markets to pay close attention to whether Beijing nudges banks to lower deposit rates in the coming weeks.

With the need for protecting their net interest margin, banks will only lower their new loans’ lending rates when they are able to reduce their deposit rates,” Lu said.

Xing Zhaopeng, a senior China strategist at ANZ, points to how deposit rates are pegged to the one-year LPR and estimates banks will cut those by 20 basis points. He also expects a tweak to rules so that existing mortgage rates can be reset lower.

“The plan to reduce existing mortgage rates is in the making,” Xing said.

($1 = 7.2890 Chinese yuan)

(Reporting by Winni Zhou in Shanghai and Tom Westbrook in Singapore; Additional reporting by Samuel Shen in Shanggai; Editing by Vidya Ranganathan and Jacqueline Wong)