China Banks to Cut Mortgage, Deposit Rates in Stimulus Bid

China’s largest banks are preparing to cut interest rates on existing mortgages and deposits, the latest state-directed measures to shore up growth in the world’s second-largest economy.

(Bloomberg) — China’s largest banks are preparing to cut interest rates on existing mortgages and deposits, the latest state-directed measures to shore up growth in the world’s second-largest economy.

The big state-owned lenders are working on reducing rates on the majority of the nation’s 38.6 trillion yuan ($5.3 trillion) of outstanding mortgages, according to people familiar with the matter. The reductions will only affect loans on first homes, two of the people said.

Lenders such as Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. are also poised to cut deposit rates later this week for the third time in a year, people familiar said.

The moves are part of a targeted push by Beijing to spur consumer spending, drive more funds into the stock market and alleviate pressure on lenders’ profit margins.

While Chinese shares gained in offshore trading after Bloomberg reported the banks’ plans, it’s unclear whether the moves will be enough to spark a sustained revival in investor confidence. Authorities have so far avoided broader stimulus measures despite a deepening property crisis and growing deflation pressures that have put the government’s economic growth target of around 5% at risk. 

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“This is an incremental policy step, not a game changer because people’s confidence is still low,” said Larry Hu, head of China economics at Macquarie Group Ltd. “I think we’re going to see property easing come through in the coming weeks, I just don’t know if it’s going to be strong enough.”

The People’s Bank of China didn’t immediately respond to a request for comment.

The cuts to mortgage rates were highly anticipated by investors after the central bank hinted at support in mid-July. While China has reduced benchmark rates and pushed the average mortgage cost to a record low, most Chinese households didn’t benefit as banks won’t reprice existing loans until the beginning of next year.

JPMorgan Chase & Co. analysts estimated that the annualized rate on new mortgages stands at 4.18%, about 60 basis points lower than the outstanding borrowings. That has prompted some consumers to take out out short-term loans to repay mortgages early.

More than 90% of China’s outstanding mortgages were for first homes as of July 2021, according to the latest public data available from the banking regulator. In 2022, more than 80% of new home loans were on first homes, according to the housing ministry.

Agricultural Bank of China Ltd., one of China’s largest lenders, will formulate detailed guidelines and complete the preparation of new loan contracts as soon as possible, Shanghai Securities News quoted Vice President Lin Li as saying at its earnings briefing on Tuesday. 

Bloomberg Economics estimate the mortgage rate cuts will be the equivalent of a 5 to 10 basis point cut in the policy rate, saying that will boost growth by 0.1 to 0.2 percentage point on top of the impact already coming from policy rate cuts, according to a report from David Qu and Chang Shu. 

Lower deposit rates may help lenders protect their margins as they extend lower rates to homebuyers. Big state banks may cut rates on local-currency deposits across key tenors by between 5 and 20 basis points, the people familiar said, asking not to be identified discussing a private matter. Regulators have signed off on the plan, the people added. The cut may come as soon as Friday, one of the people said. 

China’s financial sector is already struggling with rising defaults at shadow banks, which have triggered a fresh wave of anxiety about hidden stress and the potential spillover to state-owned lenders. Analysts have also highlighted growing risks associated with debt-laden local government financing vehicles, with Goldman Sachs Group Inc. saying the exposure of banks could weaken their capital positions and lead to lower dividend payouts.

Beijing has so far moved cautiously to revive the economy while at the same time safeguarding financial stability. China’s central bank kept a key interest rate that guides mortgages on hold and made a smaller-than-expected cut to another rate in August, which could help boost supply without squeezing banks’ margins too much. 

As of June, 100 out of 343 Chinese cities have lowered the rate floor of new-home mortgages or removed the minimum required, the PBOC said in its quarterly monetary policy report on Thursday. That has brought the nation’s average mortgage rate to 4.11% in June, down 0.51 percentage point from a year earlier.

In an extreme scenario assuming the entire mortgage loan book is refinanced with a rate reduction of 60 basis points, earnings at Chinese bank for next year will be cut by 8%, with net interest margins narrowing by 7 basis points, according to JPMorgan. The US bank expects that about 50% of mortgage owners are likely to refinance and most of the impact on bank earnings will be in the near-term.

The last time China allowed a similar move was during early 2009, when some state-owned banks gave a discount on interest rates to qualified borrowers in certain areas in response to the global financial crisis, according to a Zhongtai Securities report.

Futures on the Hang Seng China Enterprises Index rose 0.8% in Hong Kong as of 7:13 p.m. local time, building on a two-day rally that’s been fueled by a slew of market-boosting measures from authorities. The contracts are still down about 17% from this year’s high in January.

–With assistance from Fran Wang, Jing Zhao, Emma Dong and Lucille Liu.

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