Many major state-owned banks in China have lowered their deposit interest rates, which experts say will help stabilize bank liability costs.

On October 18, the Chinese banking sector experienced a new wave of deposit rate cuts. Major state-owned banks, including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank, lowered their savings account and various term deposit rates by 5 to 25 basis points.

Industry experts note that commercial banks have been intensifying efforts to support the real economy in recent years. By the second quarter of 2024, the net interest margin for banks dropped to a historic low of 1.54%. Following adjustments in the central bank’s policy rates, October’s Loan Prime Rate (LPR) is expected to also decrease. Coupled with an upcoming batch adjustment of existing mortgage rates, banks are under increased pressure to stabilize their net interest margins.

One expert highlighted that reducing deposit rates helps stabilize banks’ funding costs and ease the tightening pressure on net interest margins, striking a balance between supporting the real economy and maintaining prudent banking operations.

Market analysts pointed out that on September 27, the People’s Bank of China cut the policy rate, lowering the 7-day reverse repurchase rate from 1.7% to 1.5%, which subsequently brought down the medium-term lending facility rate by 0.3 percentage points. The adjustment of deposit rates by major commercial banks on October 18 suggests that the upcoming LPR, to be announced on October 21, will reflect these changes, further enhancing the market-oriented interest rate control mechanism and streamlining the transmission channels for interest rates.

Zhou Maohua, a macro researcher from the Financial Market Department of Everbright Bank, remarked to a reporter that the reductions in deposit rates by these six state-owned banks signal the beginning of a new round of cuts, with smaller banks likely to follow suit. The extent of this cut is more pronounced due to the central bank’s unexpected larger-than-anticipated rate cuts, creating favorable conditions for current deposit rate reductions.

A recent report from the Bank of China Research Institute indicated that the decrease in deposit rates will inevitably have long-term ripple effects on residents’ saving and investment behaviors. While some deposits may migrate to smaller financial institutions, the volume of this transition is expected to be limited due to factors such as convenience and stability. Additionally, a portion of deposits may shift towards wealth management markets, presenting new challenges for the asset management industry. Looking ahead to the second half of 2024, wealth management assets are expected to continue growing rapidly.