China’s central bank is in discussions to cut the interest rate banks pay on deposits for the first time since 2015, in a bid to help banks eke out higher profits as they are enlisted to help spur an economic recovery following the coronavirus outbreak.
The country’s economy has been brought to a standstill since the global pandemic started in January. But the PBoC’s response to the crisis has been relatively muted compared to efforts in the US and Europe, where billions of dollars are being deployed by central banks to fight a global recession.
Chinese banks have been recruited, however, to help boost the economy. They have been told to extend loans to struggling companies, lower lending rates and increase their tolerance for bad debt created during the crisis.
While such measures could be effective in helping companies survive over the next few months, they are also expected to hurt bank profitability in 2020.
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A deposit rate cut could be announced in the coming days, according to two people familiar with the discussions at the People’s Bank of China.
Lowering the deposit rate would provide more breathing room by widening the spread between how much they pay out to depositors and how much they charge for loans.
The PBoC has been pushing through interest rate reforms for several years in which it has sought to move away from setting the rates for loans and deposits. But banks still use deposit rates set by the central bank to determine how much they pay depositors.
The PBoC last cut the demand deposit rate, or the rate it pays on ordinary deposits, in 2012. Term deposit rates for deposits held for a set amount of time were last cut in 2015.
A cut in the benchmark savings rate would be primarily aimed at shoring up the banking sector rather than spurring consumption, according to people familiar with the PBoC’s deliberations.
“The main reason is to encourage banks to lend without squeezing their margins,” one of the people said. “It’s mainly about protecting the banks.”
The people added that the measure would probably be paired with more cuts in the central bank’s medium-term lending facility, which influences the benchmark loan prime rate announced by banks on the 20th of each month. The LPR is a new benchmark lending rate adopted last year that is intended to be more market oriented.
Since the coronavirus pandemic erupted, the LPR has been lowered just once and only by 10 basis points, to 4.05 per cent. The central bank has also cut the reserve requirement ratio to free up more capital in the banking system.
Many analysts have been expecting a cut to the deposit rate for weeks.
“The chances [for a savings rate cut] are quite decent,” said Harry Hu, a senior director for financial institutions ratings at S&P Global. “They need the banks to continue to make a profit.”
Last week, China’s National Bureau of Statistics released a series of weak economic indicators for January and February, after which analysts began to revise down their already low expectations for first-quarter gross domestic product growth.
Based on a calculation by Capital Economics, gross domestic product in the first three months of this year is expected to contract by about 20 per cent quarter on quarter.
Source: Economy - ft.com
