Chinese banks cut deposit rates to boost sluggish growth

China’s six biggest state-run banks cut deposit rates on Thursday as Beijing searched for ways to boost growth in the world’s second-largest economy, casting doubt on the strength of its recovery.

Lenders including Industrial and Commercial Bank of China, China Construction Bank and Bank of China are now offering 2.45 percent and 2.5 percent respectively on three- and five-year deposits, down 15 basis points from September, according to the banks’ websites. Is. , Similar cuts were made at Postal Savings Bank of China, Agricultural Bank of China and Bank of Communications.

Banks also cut rates on on-demand deposits by 5 basis points to 0.2 per cent, the lowest level since 1996.

China’s economic recovery gained momentum in the first quarter after last year’s strict pandemic restrictions, expanding 4.5 percent, just short of a cautious full-year target of 5 percent.

But growth failed to pick up in the second quarter amid weak asset sales, a decline in industrial production and consumption. The post-pandemic boom fell short of projections, while consumers appeared to be sitting on savings rather than spending.

CICC analyst Lin Yingqi said the coordinated cut in deposit rates, the second among Chinese state-owned banks in less than a year, would ease fundraising pressure on lenders and stabilize profitability. “It can boost consumption and reduce the amount of money sitting idle in the monetary system.”

State-owned banks should benefit most from the fall in deposit rates, which will boost returns on equity while making dividend yields on their shares more attractive, said Dexter Hsu, an analyst at Macquarie.

China has cut its benchmark prime lending rate, mortgage reference rates and reserve requirement ratio over the past few years to boost the money supply and lower borrowing costs for companies in an effort to support the pandemic-hit economy.

But average deposit rates remained unchanged, encouraging households and businesses to earn safe returns from deposits while their outlook on the economy remained gloomy.

CICC’s Lin said banks could save Rmb120bn ($16.8bn) in funding costs after Thursday’s cut and expected a deep 20bp reduction in deposit rates over the next 12-24 months.

Yet a deposit rate cut alone may not be enough to spur economic recovery, analysts argued.

“Lowering deposit rates should help drive some savings into consumption and investment, but reaching the target will require a combination of other policies,” said Gary Ng, senior economist at Natixis in Hong Kong.

“Consumers remain conservative due to slow disposable income growth and low wealth impact, especially due to the still poor outlook on real estate. Strong stimulus is needed in car sales and housing markets to revive the economy in the short term.” will be required.

Tan Yifei, founder of Beijing-based consultancy Commodity Frontier, said policy makers needed to do more to break the negative feedback loop of deflation, low consumption and rising unemployment. “The economy needs time and policies before it finds its footing and truly takes off.”