China reforms bank deposit rate system to unleash liquidity for small businesses
- The People’s Bank of China (PBOC) has changed the way banks calculate deposit rates, lowering fundraising costs for financial institutions
- The central bank also left the one-year loan prime rate (LPR) at 3.85 per cent, while the five-year rate remained at 4.65 per cent
China’s central bank on Monday reformed the way banks calculate deposit rates, setting new ceilings that will lower lenders’ funding costs to help provide ample liquidity for small businesses.
The move will allow banks to set the upper limit on deposit rates by adding basis points to the benchmark rate set by the People’s Bank of China (PBOC), rather than multiplying the benchmark rate, the PBOC‘s Self-Disciplinary Mechanism for the Pricing of Market-Oriented Interest Rates said.
The reform will reduce banks’ borrowing cost by 0.7 basis points this year, 1.7 basis points in 2022 and three basis points in 2023, according to research by Zhongtai Securities.
Under the initiative, banks will be allowed to add up to 20 basis points (bps) to the benchmark rate on demand deposits and small Chinese banks and foreign banks will be permitted to add up to 75 bps to the benchmark rate on time deposit rates, sources told Reuters.
China Minsheng Bank chief analyst Wen Bin said the adjustment to the way banks calculate deposit rates would lower fundraising costs and create room for lenders to support the real economy.