China directs lenders to cut deposit rate ceilings

China has directed commercial banks to set a cap on rates for some deposits from next week to help lower lenders’ funding costs and support the country’s economy. The four largest state-owned banks, including Industrial and Commercial Bank of China, can offer 10 basis points above benchmark rates on call and agreement deposits. Other lenders have been directed to cap the ceiling at 20 basis points. The change is expected to reduce the previous ceiling on such deposits by 40 to 55 basis points, said Guotai Junan Securities.

This new regulation follows rounds of deposit rate cuts last year and earlier this month and is aimed at alleviating pressure on banks as they seek to balance falling margins and government directives to increase lending support. China’s central bank conveyed the directive through the nation’s interest-rate self-disciplinary mechanism. The notice will take effect from May 15.

While Chinese commercial banks have had some freedom to set their rates since the People’s Bank of China scrapped direct control in 2005, the bank still maintains considerable influence by setting a ceiling and floor for rates through the interest-rate self-disciplinary mechanism. China Merchants Securities analyst Liao Zhiming reported that the latest change will effectively lower rates on call and agreement deposits at smaller banks. The impact on large banks will be relatively limited, according to the report.

As banks face pressure to maintain profitability due to falling rates and a government push to provide low-cost loans to small businesses and homebuyers, Guotai Junan noted that the overall impact of the cap is expected to be limited since most lenders’ current rate offerings remain below the new caps. The CSI 300 Financials Index rose by up to 1.5% in early trading on Thursday, extending its 6.9% gain this year.