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China Banks Prepare for Deposit Rate Cuts Ahead of Mortgage Rate Reductions
Large commercial banks in China are planning to lower some deposit rates starting Friday, ahead of widely anticipated mortgage-rate cuts that will further squeeze their profit margins at a crucial economic juncture.
Key Takeaways
- Major state-owned banks in China are planning to lower interest rates on time deposits.
- The deposit rate cuts aim to discourage individuals and companies from saving more amid the need for higher spending to boost the economy.
- Lowering lending rates will help cushion banks from further profit declines.
- Banks are also preparing to cut interest rates on existing residential home loans.
- The recent wave of mortgage prepayments has negatively impacted banks’ future income.
- Banks may incur significant losses due to mortgage-rate cuts, but deposit rate cuts will partially offset those losses.
- The Chinese central bank plans to allow refinancing of existing mortgages at lower rates.
- Mortgage rates in China have dropped to around 3.9%, down from above 5% in previous years.
Content
Major state-owned banks in China are expected to cut interest rates on time deposits ahead of anticipated mortgage-rate reductions. A customer-service representative at one of the country’s biggest banks confirmed that rates on one-year deposits would be trimmed by 0.1 percentage point, while rates on three- and five-year time deposits would be cut by 0.25 percentage point. These deposit rate cuts aim to discourage excessive saving and stimulate higher spending to boost the Chinese economy.
In addition to the deposit rate cuts, banks are also preparing to lower interest rates on existing residential home loans. This move comes in response to a significant increase in mortgage prepayments, which have reduced banks’ expected future income. Chinese borrowers repaid around $508 billion in mortgages ahead of schedule in the first half of 2023, accounting for approximately 10% of Chinese banks’ outstanding mortgage loans. It is estimated that the forthcoming mortgage-rate cuts may cost Chinese banks $110 billion in annual profits, but a deposit rate cut of 0.1 percentage point will help offset these losses.
Unlike in the U.S., borrowers in China have not been allowed to refinance their mortgages at lower rates. However, the Chinese central bank plans to change this policy by encouraging banks to renegotiate contract terms with their customers or replace old loans with new ones. The average rate on new residential mortgages in August was 3.9%, which is significantly lower than the benchmark five-year loan prime rate. This lower mortgage rate aims to provide homeowners with more affordable financing options.
Overall, the deposit rate cuts and mortgage-rate reductions are expected to impact Chinese banks’ profitability. Several large banks have already reported drops in their net interest margins, reflecting the declining difference between their asset earnings and deposit costs. However, these measures are necessary to stimulate the economy and support individuals and businesses during this crucial economic juncture.
Sources: [email protected], [email protected]