Big mainland banks yesterday responded to an official cut in lending rates by raising deposit rates, underscoring intensifying competition as the central bank edges towards interest rate deregulation.
In the first rate cut since 2008, the People's Bank of China on Thursday cut the benchmark one-year lending and deposit rates by 25 basis points, effective from yesterday.
The central bank also allowed banks to offer borrowers a discount of up to 20 per cent on the benchmark rate, and to pay depositors an interest rate up to 10 per cent higher than the benchmark rate, an important first step on the road to interest rate liberalisation.
This effectively narrows the gap between the rate at which banks can borrow and the rate they can charge customers.
As a result, the benchmark one-year lending rate dropped yesterday to 6.31 per cent from 6.56 per cent, and the one-year deposit rate fell to 3.25 per cent from 3.5 per cent.
The Industrial and Commercial Bank of China and its four biggest rivals responded by setting the rate for on-demand deposits at 0.44 per cent and one-year deposits at 3.5 per cent, the maximum allowed under the new rules and the same levels before the interest rate cut.
Mainland bank shares closed lower yesterday, reflecting investor concerns about the impact on banks' margins. In Hong Kong, ICBC closed down 4.9 per cent, Agricultural Bank of China lost 3.8 per cent, China Construction Bank lost 4 per cent and Bank of China fell 3.2 per cent, outstripping a 0.9 per cent fall in the benchmark Hang Seng Index.