In an anticipated move to enhance the affordability of mortgages and rejuvenate the housing market’s demand, China’s banks are expected to lower deposit rates. This observation, made by analysts, emerges from interpreting the subtle cues from Beijing’s recent policy shifts.
The Policy Dilemma
Recent weeks saw Beijing maintaining the primary mortgage benchmark lending rate even amidst decisions to reduce short-term policy rates. This move appeared contradictory to Beijing’s earlier commitment to aid the real estate sector through monetary policy interventions. However, in an unexpected twist, rather than opting for a comprehensive rate cut—which could further erode the already slim net interest margins of banks—China has chosen a strategy that relies on banks to lower their deposit rates. By doing so, banks can avail more flexibility in pricing their mortgage offers more competitively.
The Pattern of Monetary Easing
Historically, during periods when monetary policies are relaxed, it’s the major state-owned banks that initiate a decrease in deposit rates. This typically sets off a domino effect, causing other banks to follow suit, as per sources from the banking sector. The reduction in deposit rates provides these institutions with the necessary latitude to adjust mortgage rates more favorably for borrowers.
Currently, there’s a notable trend of households flocking to bank-issued certificates of deposit (CDs), aiming to capitalize on the present yields.
Expert Insights
Wang Yifeng, a recognized banking analyst from Everbright Securities, remarked, “The potential to further cut deposit rates is like ‘arrows on the string’—ready to be deployed.” He continued, “The pressing uncertainty now is balancing the slimming net interest margins at banks, bolstering the real economy, and ensuring overall financial stability.”
This level of apprehension amongst policymakers seems unusual for a nation like China. Historically, Beijing has frequently directed its banks to serve nationalistic goals, even if it implied compromising their commercial profits.
Reaffirming this, the People’s Bank of China (PBOC) mentioned in its recent quarterly monetary policy report that “Commercial banks are encouraged to strike a balance between ensuring a sustainable profit margin and executing operations with caution to avert financial risks.”
This directive reflects the current economic challenges China faces. After enduring three stringent years of COVID-19 restrictions, coupled with rigorous regulatory clampdowns, China’s economic growth has been beleaguered. The precariousness is further accentuated by the looming debt carried by property firms and local administrations, which could potentially destabilize bank financials.
By the end of June, Chinese commercial banks experienced a record net interest margin low of 1.74%. This is notably beneath the regulatory benchmark of 1.8%.
The PBOC, in a recent move, decreased its one-year loan prime rate (LPR) by a marginal 10 basis points, leaving the five-year tenure—which considerably influences mortgage pricing—static at 4.2%. Additionally, the rates on the central bank’s lending to commercial banks have seen a downward adjustment.
Impact and Implications
Outstanding personal mortgages in China stood at a staggering 38.6 trillion yuan (equivalent to $5.30 trillion) as of June, based on the PBOC’s data. The rates for these existing mortgage loans undergo an annual revision, influenced by the 5-year LPR values of December.
Zhu Qibing, a chief macro analyst at BOC International China, asserts that the weighted average rate for new mortgages currently hovers around 4.11%. Meanwhile, the average rate for all pre-existing mortgages exceeds this by at least 100 basis points.
Over the past months, there has been a noticeable decline in the five-year LPR, which stood at 4.3% in December and subsequently dropped to 4.45% in July 2022. It’s crucial to understand that the LPR is one of many rates determined by Chinese banks. It holds significance as the PBOC doesn’t directly set these bank rates.
Zhu provided a hypothetical scenario: if banks were to reduce interest rates for existing mortgages by 30 basis points, the resulting loss in annual interest earnings could surpass 70 billion yuan. This would approximately equate to a 3% decline from the banking sector’s net profit in 2022.
Lu Ting, Nomura’s chief China economist, emphasized the importance of closely monitoring whether Beijing prompts banks to decrease deposit rates in the upcoming weeks. He remarked, “To protect their net interest margins, banks will only consider reducing the lending rates for new loans when they have the flexibility to decrease their deposit rates.”
In a similar vein, Xing Zhaopeng, a senior strategist focusing on China at ANZ, highlighted the correlation between deposit rates and the one-year LPR. He projects a potential reduction of these rates by 20 basis points in the near future. Moreover, he anticipates a modification in the regulatory framework that would facilitate a downward revision of existing mortgage rates.
In Xing’s words, “A strategy to lower the existing mortgage rates is currently under consideration.”
Conclusion
China’s intricate dance between rejuvenating property demand and ensuring the financial stability of its banking sector is a testament to the challenges faced by economies worldwide. While the road ahead remains uncertain, the potential rate cuts and their cascading effects will be keenly watched by global markets.
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