June 13, 2023

China’s Interest Rate Cuts Aim to Boost Economy Amidst Economic Challenges

China’s largest state banks recently announced a reduction in interest rates on yuan deposits, a move intended to alleviate pressure on profit margins, lower lending costs, and provide relief to the financial sector and the broader economy.

Industrial and Commercial Bank of China Ltd (ICBC), Agricultural Bank of China Ltd, Bank of China Ltd, and China Construction Bank Corp implemented rate cuts, as indicated on their respective websites. The adjustments primarily affected demand deposits, with a decrease of 5 basis points, and three-year and five-year time deposits, which experienced a reduction of 15 basis points.

This marks the second interest rate cut within a year, following a similar action taken in September. Gary Ng, Asia Pacific senior economist at Natixis, believes that the deposit rate cuts will encourage savings to flow into consumption and investment, easing the pressure on banks’ net interest margins (NIM) and potentially paving the way for further monetary stimulus. He expects a 50 basis points cut in the reserve requirement ratio (RRR) in the near future to support local government bond issuance. However, additional cuts to the loan prime rate will depend on economic data and financial risks, with Ng suggesting that a deterioration preventing China from meeting its 5% target would be a prerequisite.

While China reduced the RRR in March, the benchmark lending rate has remained unchanged this year due to widening yield differentials with the United States, which have limited the extent of substantial monetary easing measures.

Major state banks have faced shrinking net interest margins due to the pressure to lower borrowing costs for individuals and businesses in order to stimulate the economy, compounded by subdued credit demand.

China’s economy demonstrated a faster-than-expected rebound in the first quarter but encountered a slowdown at the start of the second quarter, grappling with challenges such as declining exports, a sluggish housing market, and a high unemployment rate.





Additionally, a regulatory body overseen by the People’s Bank of China has reportedly requested the reduction of U.S. dollar deposit rates from the lenders, according to individuals with direct knowledge of the matter.

As a result of these developments, the benchmark CSI Banks Index experienced a 0.35% rise in morning trading on the day of the announcement.

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