Hao Zhou

China’s mulling of a ‘surprise’ deposit rate cut suggests a need to shore up coronavirus-hit economy

A cut in the sidelined official one-year deposit rate, unchanged since 2015, is unlikely to push down the cost of loans for battered companies. But the central bank’s hint that it is considering the move signals more policy measures may be required

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A lone worker eats during lunch break at a factory canteen in Wenzhou, China, on February 27. China is working to get its factories and its economy back up and running. Photo: AFP

Hao Zhou

Published: 9:00pm, 5 Mar 2020Updated: 9:33pm, 5 Mar 2020

When China’s central bank announced last August that the loan prime rate would become the new benchmark for bank lending, the market regarded it as a milestone move towards full liberalisation of interest rates, which would allow commercial banks to price deposits according to their discretion and risk appetites.

As such, it seemed that official deposit rates – including the benchmark one-year deposit rate – would soon disappear from China’s banking industry. In fact, the People’s Bank of China (PBOC) has not touched these traditional policy rates since October 2015.

Yet recently, there has been talk among investors that China could opt to cut the official one-year deposit rate, to lower the cost of funds for coronavirus-hit companies. Such a policy move feels increasingly imminent after senior PBOC officials and advisers hinted publicly that the central bank could lower the rate.

Ma Jun, a PBOC adviser, said early last month that China should consider lowering the benchmark deposit rate, as the fast-spreading coronavirus epidemic left smaller businesses struggling.

On February 22, PBOC deputy governor Liu Guoqiang said the central bank will free up part of the reserves of some commercial lenders for long-term funding to the economy, and consider adjusting the benchmark deposit rate at an appropriate time.

It would be a real surprise to many if the PBOC were to cut the rate, as recent reforms suggest China is pushing ahead with the liberalisation of the interest rate regime. As such, the central bank is unlikely to want to directly guide lending and deposit rates for commercial banks and would instead conduct open-market operations and use other market-based instruments to indirectly influence the rate dynamics.