China Unveils New Method for Calculating Bank Deposit Rates
(Bloomberg) -- China adjusted how banks can set deposit rates in a move that could lower longer term funding costs and boost economic growth.
Under a new way of calculating the ceiling on deposits rates, banks will be allowed to add basis points on top of the existing benchmark rate instead of as before using a multiple. Under the new regime, ceilings for short-term time deposits and certificates with a term of six months or less will rise, while longer-term rates will fall, the self-discipline body backed by the People’s Bank of China said in a statement on Monday.
Lenders in China have had some leeway in setting their own rates since the central bank scrapped direct control in 2005, but the body working under the PBOC also set a cap on deposits.
The change will prompt banks to lend more support to the real economy and also help eliminate arbitrage opportunities for companies between larger banks and smaller banks, Citigroup Inc. analysts led by Judy Zhang said in a report.
The PBOC said some banks have been using “innovative” products disguised as long-term deposits to attract savers, which pushed up borrowing costs and distorted the gap between short-term and long-term rates when using a multiplier.
It’s also another step in allowing more market influence over how bank rates are set following a 2019 revamp of how the Loan Prime Rate, the de facto benchmark interest rate for banks’ lending, was set. But the reform left the benchmark deposit rate -- currently at 1.5% -- intact. Central bank officials call it the “ballast” of the rate system and have said it will stay in place for a long time.
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