China to Further Liberalize Deposit Rate?

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Feb. 17 – A February 17  report on Bloomberg News cited Mizuho Securities Asia Ltd. and Deutsche Bank AG as saying Chinese banks may receive more freedom to set deposit rates this year.

Ma Jun, a Hong Kong-based economist for Deutsche Bank, said that the government may relax a deposit-rate ceiling for well-managed banks.

Furthermore, another Hong Kong-based economist at Mizuho Securities, Shen Jianguang, mentioned that such experiments may begin only after the annual meeting of the National People’s Congress in March. However, he added that any trial would likely initially be limited to corporate rather than retail deposits.

Shen believes China will move “cautiously” towards interest rate liberalization, because it is most likely to drive the interest rates up and narrow down the banks’ profit margin.

As the four major Chinese banks rapidly expand their market value, they are also looking for more diverse and efficient capital allocation. Currently, the major share of their profit still resides in the lending benchmark (currently 6.06 percent for one year) and the deposit rate (currently 3 percent for one year) differential.

Dependence on profit from loan interest also brings about concerns over bad loans. A recent comment on the Financial Times warned that Chinese banks may again face a situation of ballooning bad debts in 2011 as it did in 2006, when over RMB3 trillion of non-performing loans stacked up in Chinese banks.

Interestingly, China Merchants Bank (CMB), China’s sixth largest lender by assets and market value, has just denied a China Daily report saying that CMB would be included in a trial scheme that would allow banks to compete for large corporate deposits in a “price bidding” system – a looser control on interest rates still seems to be the future trend. Zhou Xiaochuan, governor of the People’s Bank of China, said in December that China intends to push forward its interest-rate “liberalization” before 2015.

So far, China has allowed the market to set the short-term interbank rates and longer-term corporate bond rates by itself. The country has also let banks set their interest rates on over-RMB30 million Chinese insurers’ deposit with terms of more than five years.

Some experts believe Chinese banks should gain more maturity before rushing to interest rate liberalization. Lu Zhengwei, chief economist of Industrial Bank (China), mentions the profit of lenders still needs to be protected before they can improve their business diversity to reduce the dependence on interest income for profits.