May 25 – HSBC and Citibank have cut interest rates for medium-term yuan deposits for retail consumers below the central bank benchmark.

The move highlights differing policies between local and foreign banks. While foreign banks have refrained from lending more, local banks have gone ahead to fund various projects related to the stimulus plan.

During the first quarter of the year, total new yuan lending by local banks amounted to RMB4.6 trillion in contrast to lending made by foreign banks which dropped by RMB26.4 billion during the same period.

Foreign banks tend to cater mostly to multinational corporations who because of the global economic crisis have been more cautious in expanding into China, thus the lowered financing demand. This results to a lesser need for foreign banks to keep deposits. Add that to the fact that bank profit margins in the country have also declined, banks then have even less motivation to keep deposits and more motivation to cut on costs.

HSBC cut interest rates for yuan deposits with maturities of two years to five years to between 1 percent and 1.2 percent. This is below the bank’s one-year deposit rate of 2.25 percent and also below the central-bank benchmark.

Citibank on the other hand, cut interest rates for two-year term deposits to 1 percent, and three-year term deposits to 1.1 percent. “In the past, banks were afraid of losing market share if they lowered their deposit rates. But when the economy is slowing, there are fewer channels to lend money, so banks have less of a need for deposits,” Wang Qing, an economist at Morgan Stanley told The Wall Street Journal.

So far, local banks have kept deposit rates for retail customers in line with central-bank benchmarks. HSBC told the WSJ that the cuts were made following their business strategy given the current market situation while Citi declined to comment.