October 26, 2015 / 1:29 PM / 4 years ago

China's rate liberalization won't trigger deposit war

BEIJING/SHANGHAI (Reuters) - China’s landmark decision to scrap a long-standing ceiling on bank deposit rates is unlikely to have much impact on the real economy - or help credit-starved smaller firms - as lenders focus on protecting margins rather than competing for new funds.

The Industrial and Commercial Bank of China Ltd (ICBC) building is pictured behind the Puente de La Mujer (Women's Bridge) at the Buenos Aires docks April 18, 2015. REUTERS/Enrique Marcarian

The weekend move freed up China’s interest rate market, allowing lenders to competitively price deposits to attract more funds at a time when more and more retail investors are choosing to put their savings into more lucrative online financial wealth management products (WMPs).

Together with a string of interest rate cuts, it forms part of a series of financial reforms the central bank is pursuing in the hope of encouraging banks to lend more to the real economy to combat slowing growth.

Most mid-sized banks, including China Minsheng Banking Corp (600036.SS) (1988.HK), China CITIC Bank Corp (601998.SS) (0998.HK) and Ping An Bank Co (000001.SZ), have set their 1-year deposit rates at 2 percent, 30 percent higher than the 1.5 percent benchmark deposit rate, in a bid to win over funds from larger commercial banks and to beat inflation, now at 1.6 percent.

But with 1-year lending rates set at 4.35 percent after the most recent rate cut, banks are unwilling to go much higher.

“If we price deposits too high, then we would have to issue high-return loans to cover the cost. That comes with high risks,” said a source at Minsheng Bank. “We need to find the correct balance between our costs and our income, between our deposits and our loans.”

China’s big five state-owned banks, including Industrial and Commercial Bank of China Ltd (1398.HK) (601398.SS) and China Construction Bank Corp (1939.HK) (601939.SS), priced their 1-year deposit rates at just 1.75 percent, underscoring the banks’ reluctance to cut into their margins at a time when China’s economy is growing at its slowest in a quarter of a century.

“Given the current weak loan demand, to increase deposits only means to increase the cost of credit for banks,” said a banker at one of the big five lenders.


In May, China launched a deposit insurance scheme that covers depositors for up to 500,000 yuan each, covering the vast majority of savers and setting the stage to free up deposit rates.

Letting the market set the cost of credit is seen by economists as a key step towards allocating capital more efficiently and avoiding the wasteful investment that continues to dog the world’s second biggest economy.

While the large and often inefficient state-owned enterprises favored by China’s big banks have gorged on cheap credit in recent years, many smaller and more productive firms struggle to secure bank finance.

Giving smaller banks more scope to compete for deposits could, in theory, increase the funds available to lend to those nimbler companies, offsetting the contradictory impact of cutting lending rates while allowing deposit rates to rise.

But even before the liberalization move banks had not set deposit rates up to the limit - which stood at 1.5 the benchmark rate, or 2.625 percent before the latest weekend cut - said Jiahe Chen, chief strategist at Cinda Securities in Shanghai.

“So even when you remove the limit, it won’t really have much of an impact,” he said. “Also, much of the money which is sensitive to deposit rates has already flowed into WMPs, which are not limited by deposit rate restrictions, so basically, this won’t have much impact in the macro economy.”


Even with the deposit rates ceiling removed, banks will still not price deposits at a level high enough to compete against wealth management products, which currently offer returns from 3 to 20 percent, bankers said.

“The bank’s opportunity to (issue loans) isn’t that great, so it’s not necessary to attract too many deposits,” said a banker at mid-size China Merchants Bank. “It will depend on whether the economy is improving.”

Meanwhile, depositors continue to pour money into thriving online finance products, a threat to the banks’ deposit base.

These products “are attracting deposits away, weakening the effect of deposit rate control, and adding the urgency to quicken interest rate liberalization reform”, the central bank said in an online question-and-answer explaining its decision.

Yu’e Bao, a money market fund launched by Alibaba’s financial affiliate Alipay in 2013, offers interest rates of more than 3 percent.

WeBank, the online finance arm of tech giant Tencent Holdings Ltd (0700.HK), offers wealth management products that can be purchased and sold at any time at a return as high as nearly 4 percent.

Thousands of riskier 1-month or 3-month products available through high-risk peer-to-peer lending platforms can yield investors more than 20 percent of annualized interest returns.

Additional reporting by Matthew Miller; Editing by Lisa Jucca and Alex Richardson

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