Chinese commercial banks have agreed to adjust their deposit rates, in line with policy interest rate benchmarks, starting December 1. This decision, made under a self-disciplinary mechanism, is intended to reduce banks’ funding costs, which could lead to lower loan rates. This move is part of the government’s effort to reduce financing costs in the real economy and enhance counter-cyclical adjustments.
On Friday, China’s self-disciplinary interest rate mechanism released two initiatives aimed at aligning deposit rates with the central bank’s policy rates. One initiative requires banks to include clauses in their agreements with corporate clients, ensuring that any changes in deposit rates are reflected promptly during the agreement period.
Additionally, nonbank financial institutions’ deposit rates will also fall under this self-disciplinary management. The rates for financial infrastructure institutions will now be tied to the excess reserve rate (currently 0.35%), while other nonbank financial institutions will reference the seven-day reverse repo rate, a key policy rate at 1.5%.
These measures address the gap in interest rate transmission, where nonbank financial institutions’ deposit rates have remained largely unchanged despite policy rate cuts, leading to potential arbitrage. For example, from mid-2022 to mid-2023, the reverse repo rate dropped from 2.2% to 1.5%, but nonbank financial institutions’ demand deposit rates stayed around 1.75%.
The People’s Bank of China emphasized the need for strict compliance with these agreements to ensure proper communication with clients and pass on stable funding costs to lending rates, supporting the real economy.
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