PBOC Signals it Won’t Cut Deposit Rate Soon But Will Evaluate
PBOC Signals No Imminent Cut to Deposit Rate, Evaluation Needed
(Bloomberg) -- The People’s Bank of China needs to make a more complete evaluation before taking any decision to change the interest rate paid on bank deposits, a senior official said in Beijing Friday.
The deposit rate is an “anchor” for the interest rate system and due to its role, “there needs to be more consideration when using it,” Deputy Governor Liu Guoqiang said at a briefing. “The deposit rate is more relevant to the public, and we need to thoroughly evaluate and think about their feeling if the rate is negative.” Liu was referring to the fact that after subtracting inflation, the real interest rate is already below zero.
The comments counter expectations that the central bank would act soon to alleviate the pressure on bank profit margins, amid reductions of lending rates in recent weeks. The yuan pared losses and bond futures erased gains after Liu spoke.
China’s monetary and fiscal authorities are currently increasing support for the domestic economy as the global coronavirus crisis hammers nations around the world. At the same time, they’re sticking to a relatively measured approach taken since last year amid high debt levels and fears of financial instability.
“The PBOC has surprised the market -- investors had been expecting a deposit rate cut very soon, whereas now the comments suggest a reduction won’t happen in the second quarter,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group.
At the end of March, the PBOC cut the interest rate it charges on loans to banks by the biggest amount since 2015. The deposit rate, through which the central bank fixes what banks must pay customers for their deposits, stands at 1.5%.
Bad Debt
While the economy is expected to have contracted in the first quarter, the central bank and banking regulator expressed confidence that the financial system was stable and capable of withstanding an increase in bad loans.
A recession would not only lead to more bad debt but also damage the quality of assets, hitting banks’ balance sheets. If economic growth slowed to 4.15%, 17 of 30 major banks would fail stress tests, according to the worst-case scenario in a central bank report last year.
While that seemed unlikely then, with growth forecast at just 2.9% this year, it has become a much more immediate problem. When asked about that stress test, Liu said that it contained a lot of assumptions, and was an extreme case with a small possibility of really happening.
“At the end of 2019, the non-performing loan ratio of China’s commercial banks was 1.86%, far below the 5% regulatory standard,” Liu said. “The balance of loan loss provisions reached 4.5 trillion yuan ($635 billion), so this cushion is sufficient to cope with the increase in non-performing ratio. In 2019, the banking industry disposed of 2.3 trillion yuan of non-performing assets, and the bank’s asset quality control measures were diverse.”
“The financial system is stable and robust,” the China Banking and Insurance Regulatory Commission’s Vice Chairman Zhou Liang said, adding that the government will continue to help replenish the banking system’s capital stock.
Relending and SMEs
The PBOC’s emphasized that the government and central bank were working to reduce the cost of loans, especially for smaller firms.
Using one of the PBOC’s relending programs, Chinese banks have lent about 229 billion yuan as of March 30, Liu said. Another 277 billion has been lent from a separate relending program, and when the total quotas of 800 billion yuan are exhausted, the central bank is planning another 1 trillion yuan quota, he said.
That new program was recently announced by the State Council, and while the PBOC will not set a ceiling on the interest rates charged, it’s calling for banks to use preferential rates, and local governments to provide subsidies, Liu said.
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With assistance from Bloomberg