SHANGHAI/SINGAPORE- China’s banks will cut deposit rates soon as part of efforts to make mortgages more affordable and revive property demand, analysts reading China’s cryptic policy messages reckon.
Beijing’s decision to leave a key mortgage benchmark lending rate unchanged even as it cut short-term policy rates this week seemed at odds with a pledge made just weeks ago to support the property sector via monetary policy.
But China did not opt for a broad rate cut that would further depress banks’ narrow net interest margins, instead deferring to banks to cut their deposit rates and give themselves room to cheapen mortgages, analysts said.
Like in previous instances of monetary easing, major state-owned banks might take the lead in cutting deposit rates, setting off a chain of such cuts, two banking sources told Reuters. Lowering deposit rates will give banks much needed wiggle room to cut mortgage rates.
Bankers also said households are making a beeline for bank-issued certificates of deposit (CDs) to lock in current yields.
“Further reductions to the deposit rates are ‘arrows on the string,’” said Wang Yifeng, banking analyst at Everbright Securities.
“At the current stage, the biggest uncertainty lies in the contradiction among the narrowing net interest margins (NIM) at banks, supporting the real economy and maintaining financial stability.”
Such concern among policymakers is rare in the communist state that has in the past often pressed banks into national service, demanding commercial banks sacrifice profits to serve the economy.
In its second-quarter monetary policy statement published this month, the PBOC said “commercial banks need to maintain a reasonable level of profit and net interest margin, in order to keep prudent operations and prevent financial risks.”
It speaks to the state of the economy, struggling to grow after three years of strict COVID restrictions and regulatory crackdowns, and the systemic risks to bank balance sheets from the debt burdens of property firms and local governments.
Chinese commercial banks’ net interest margins, a gauge of profitability, was at a record low of 1.74 percent at the end of June, below a regulatory red line of 1.8 percent .
China cut its one-year loan prime rate (LPR) by 10 basis point this week but left the five-year tenor, which influences the pricing of mortgages, unchanged at 4.2 percent. The People’s Bank of China (PBOC) has reduced rates on its lending to banks.
Outstanding personal mortgages in the country amounted to 38.6 trillion yuan ($5.30 trillion) in June, according to PBOC data. Rates for existing mortgage loans are revised every year, based on the 5-year LPR in December.
Zhu Qibing, chief macro analyst at BOC International China, estimates the weighted average rate of new mortgages is 4.11 percent , while the average rate on all existing mortgages is at least 100 basis points higher. – Reuters
