China’s banks are expected to reduce deposit rates in order to make mortgages more affordable and stimulate property demand, according to analysts deciphering the country’s policy messages. Despite cutting short-term policy rates, Beijing chose not to lower a key mortgage benchmark lending rate, which seemed contrary to its recent commitment to support the property sector through monetary policy. However, instead of a broad rate cut that would further impact banks’ net interest margins, China is relying on banks to decrease their deposit rates. This will enable them to offer cheaper mortgages. State-owned banks are likely to lead the way in cutting deposit rates, prompting a chain reaction of similar cuts from other banks. Lowering deposit rates will provide banks with the flexibility to lower mortgage rates, meeting the demand for more affordable housing. In addition, people are turning to bank-issued certificates of deposit (CDs) to secure current yields.
Analysts, such as Wang Yifeng from Everbright Securities, have referred to future reductions in deposit rates as strategic moves. However, there is a concern among policymakers about narrowing net interest margins at banks, supporting the real economy, and maintaining financial stability. This is particularly significant in a country where commercial banks have traditionally been pressured to prioritize national service over profits.
China’s commercial banks are facing challenges due to the country’s strict COVID restrictions and regulatory crackdowns, as well as the risks associated with the debt burdens of property firms and local governments. The net interest margins of Chinese commercial banks, an indicator of profitability, hit a record low of 1.74% at the end of June, below the regulatory threshold of 1.8%.
The People’s Bank of China (PBOC) recently reduced rates on loans to banks and cut its one-year loan prime rate (LPR) by 10 basis points. However, the five-year LPR, which influences mortgage pricing, remained unchanged at 4.2%. Personal mortgages in China reached 38.6 trillion yuan ($5.30 trillion) in June, and the rates for existing mortgage loans are revised annually based on the 5-year LPR in December. Despite the downward trend of the LPR, the average rate on existing mortgages is still higher.
Analysts, including Lu Ting from Nomura and Xing Zhaopeng from ANZ, anticipate future actions from Beijing to lower deposit rates and existing mortgage rates. Banks will be more likely to lower lending rates for new loans once they are able to reduce deposit rates. Adjusting deposit rates and existing mortgage rates will require careful balancing to protect banks’ net interest margins while making mortgages more affordable.
In summary, China’s banks are expected to lower deposit rates to enable cheaper mortgages, stimulate property demand, and support the economy. Policymakers are concerned about the narrow net interest margins at banks, the need to support the real economy, and the stability of the financial sector. Analysts predict that Beijing will take actions to reduce deposit rates and existing mortgage rates in the future.
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