Beijing's latest interest rate increase this week will help depositors more than lenders, say analysts.
The People's Bank of China raised benchmark interest rates for the fifth time since October on Wednesday. The benchmark 12-month lending and deposit rates were increased by 25 basis points, taking them to 6.56 per cent and 3.5 per cent respectively.
Based on the year-on-year growth of the consumer price index, which topped 6.2 per cent in May, depositors have been earning a negative interest rate of nearly 3 per cent. The deposit rate rise will help correct this, stemming a decline in bank deposits and tempering off-balance sheet activity, said Liu Ligang, head of China economics at ANZ Bank.
Credit-related wealth management products, which effectively help banks free space on their balance sheets to enable more lending, have steadily gained popularity among investors who seek alternatives to low-return bank deposits.
'Increasing off-balance sheet activities are posing a significant risk to China's banking sector,' said Liu, adding that the new interest rate increase will help mitigate the rise of wealth management products.
It will also help boost household income. A modest interest rate increase is equivalent to 60 billion yuan (HK$72.15 billion)in extra income for Chinese households, which means that consumer sentiment should be boosted provided inflationary pressures are successfully contained, Qu Hongbin, HSBC's chief China economist, said.
For lenders, there may be limited room for raising lending rates as loan costs are already very expensive, said Lu Zhengwei, chief economist at Industrial Bank. 'Actual lending rates are already higher than the policy benchmark rate,' Lu said.
He said that while raising interest rate rises were necessary to temper inflation, it would take at least one to two more rounds of increases to see a greater impact.
Interest rate rises, unlike increases in the reserve requirement ratio, which directly constrain credit growth, take effect much slower, usually with a lag of as much as two quarters, he said.
HSBC's Qu said he expected two more reserve ratio increases but no more rate rises for the rest of this year. This week's increase was an essential step for anchoring public inflationary expectations ahead of next week's release of CPI data, he added.
Market concerns that Beijing will face a hard landing are an overreaction, as there will be no shortage of firms willing to borrow at the new benchmark rates, which will remain well below the pace of growth of nominal GDP, said Mark Williams, senior China economist at Capital Economics.
ANZ's Liu said he expected CPI figures to remain at high levels, above 6 per cent, from June to September, peaking at 7.8 per cent in August amid rising food prices.