Credit: Chinese banks lower deposit rates amid ample liquidity
Seven major Chinese banks lowered their deposit rates across a broad range of tenors yesterday, even as the PBoC left its 1Y MLF rate unchanged at 2.75% given RMB weakness. The cuts in deposit rates should help widen Chinese banks’ interest margin, given previous PBoC cuts to the 1Y and 5Y loan prime rates. However, we do not expect the fall in deposit rates to have much impact on spurring new financing.
Chinese banks’ loans-to-deposits ratio (LDR) has been steadily rising since the removal of a statutory cap in 2015, and as loans displaced shadow banking assets in financing. This explains why Chinese deposit rates have not been lowered in a broad manner since 2015, until yesterday. China’s LDR had reached a peak of 83.3% in January, before easing to 82.5% in August amid softening loan growth. The recent fall in LDR could have been a factor nudging banks towards cutting deposit rates, alongside a softening in short-term repo rates. If credit demand remains sluggish and liquidity stays ample, further cuts to Chinese deposit rates cannot be dismissed, and this may also translate to further outflow pressures on the RMB.
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