The central bank of China is in talks to reduce the interest rate that banks pay on deposits for the first time since 2015, with the aim of helping banks to generate higher profits as they are committed to help stimulate an economic recovery after the coronavirus epidemic.
The country’s economy has stalled since the start of the global pandemic in January. But PBoC’s response to the crisis has been relatively moderate compared to efforts in the United States and Europe, where billions of dollars are being spent by central banks to fight a global recession.
However, Chinese banks have been recruited to help boost the economy. They were told to lend to distressed businesses, lower lending rates and increase their tolerance for bad debts created during the crisis.
While these measures may help businesses survive in the coming months, they are also expected to hurt bank profitability in 2020.
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A drop in the deposit rate 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 flexibility by widening the gap between the amount they pay to depositors and the amount they charge for loans.
The PBoC has been pushing interest rate reforms for several years, during which it has sought to move away from fixing loan and deposit rates. But banks still use deposit rates set by the central bank to determine how much they pay depositors.
The PBoC last reduced the demand deposit rate, or the rate it pays on ordinary deposits, in 2012. The term deposit rates for term deposits have been reduced for the last times in 2015.
A drop in the benchmark savings rate would mainly aim to strengthen the banking sector rather than stimulate consumption, according to people familiar with the deliberations of the PBoC.
“The main reason is to encourage banks to lend without reducing their margins,” said one of the people. “It’s mainly about protecting the banks.”
People added that the measure would likely be associated with further reductions in the central bank’s medium-term lending facility, which influences the prime lending rate announced by the banks on the 20th of each month. LPR is a new benchmark interest rate adopted last year which is intended to be more market oriented.
Since the outbreak of the coronavirus pandemic, the LPR has been lowered only once and only by 10 basis points to 4.05%. The central bank also reduced the reserve requirement ratio to free up more capital in the banking system.
Many analysts have been expecting the deposit rate to drop for weeks.
“The chances [for a savings rate cut] are perfectly fine, ”said Harry Hu, senior director of ratings of financial institutions at S&P Global. “They need the banks to continue to make a profit.”
Last week, the National Bureau of Statistics of China released a series of weak economic indicators for January and February, after which analysts began to lower their already low expectations for growth in gross domestic product in the first quarter. .
According to a calculation by Capital Economics, gross domestic product for the first three months of this year should contract by around 20% from one quarter to the next.