(Reuters) - China nudged banks this month to cut deposit interest rates further, seven people with knowledge of the matter said, in the latest effort to channel the country's vast savings pool into spending and more productive investments.
Members of China's "interest rate self-regulatory mechanism," mostly banks, met this month and were urged to reduce deposit rates, according to two attendees and two other bank sources who were closely briefed on the meeting.
China's central bank does not set bank rates directly but guides them through the market-based mechanism, which comprises banks big and small. The guidance comes as banks and the economy groan under the weight of huge inflows of savings and deposits.
Activity in the world's second-largest economy has gained momentum since the lifting of stringent zero-COVID policy in December, but investors remain cautious as businesses grapple with debt risks, structural woes and a slowing global economy.
"The message is that banks need to collectively bring down deposit rates," one person with knowledge of the directive said.
Money is being injected into the banking system, but "what's the point if people save every cent they get, instead of spending, or investing?" he said.
One of China's "big four" state lenders plans to cut some personal and corporate rates next week, another person briefed on the plans told Reuters. Products to be affected include "call deposits" and "agreement deposits".
Other people familiar with the meeting said the mechanism asked for a roughly 10-basis-point cut to weighted average term deposit rates in the quarter from a year earlier, and some banks were urged to dial back high-yield deposit products.
All agreed to speak on condition of anonymity as they are not authorised to discuss the matter publicly.
The People's Bank of China did not immediately respond to Reuters' request for comment.
Several small and mid-sized Chinese lenders lowered their deposit interest rates this month, after larger rivals did so last year. The latest guidance will likely trigger a fresh round of cuts.
REDUCE BUSINESS
While the benchmark one-year loan prime rate (LPR) has been slashed by 60 basis points since 2019 to 3.65%, deposit rates have lagged behind as banks compete for accounts. The one-year certificates of deposit rate has stayed unchanged around 2.26% during the period, according to data from Rong360 Digital Technology Institute.
That's drawn vast flows to the banking system at a time when Beijing is trying to encourage spending, and it has squeezed bank margins while credit demand remains subdued.
Household savings surged 9.9 trillion yuan for the first quarter, after record growth of 17.8 trillion yuan last year. Net interest margins, a key measure of banks' profitability, hit a record low of just 1.91% during the fourth quarter of 2022.
Bankers said they were also under pressure to lower yields and cut back on structured deposits, while analysts said oversight on deposits had become tougher under new rules published earlier this month.
"The market adjustment mechanism of deposit rates has turned 'rigid' from 'soft'," Golden Credit Rating International Co said in a report.
With margins at record lows, "banks have no choice but to appropriately lower deposit rates as the government continues to push financing costs steadily lower to aid the real economy."
Structured deposits, which combine traditional deposits with higher-yielding investments to pay a better rate - albeit with withdrawal restrictions - grew 558.5 billion yuan, or 12% in the first two months of this year to 5.12 trillion yuan.
"Faster growth in structured deposit business this year was common at many lenders, and the message from the regulator was clearly to reduce the size of such business," a bank source said.