How China’s Deposit Rate Cut Aims to Boost Growth Amid Economic Struggles
China has slashed deposit rates in the country’s six largest state-owned banks amid a stagnant recovery and economic struggles, according to reports. Regulators are hoping to boost growth in the world’s second-largest economy but such a cut alone may not be enough. Although the China’s economic recovery accelerated in Q1 of 2021, it failed to gain speed again in Q2 as weak property sales, sluggish industrial production and lackluster consumption held it back. Data also showed that consumers were sitting on their savings instead of spending them, posing even more risks to its growth outlook.
State-owned banks stand to benefit from the rate cuts as it will boost equity returns and make dividend yields on their shares more attractive to investors. But while the coordinated cut will ease fundraising pressure on the banks and stabilise profitability, it has led to concerns that less money will flow into the economy.
Why experts think cuts to deposit rates won’t be enough
Gary Ng, senior economist at Natixis in Hong Kong commented that lower deposit rates would help push some savings into consumption and investment, but it will take a combination of other policies to achieve the goal. Ng noted that consumers have remained cautious due to slow disposable income growth and a reduced wealth effect particularly due to the still poor housing outlook.
CICC analyst, Lin Yingqi suggested that banks could save around Rmb120bn ($16.8bn) in funding costs after Thursday’s cut and expects a deeper cut in deposit rates over the next 12 to 24 months.
Tan Yifei, Founder of Jince Frontier, a Beijing-based consultancy, believes that policymakers need to do more to break the negative feedback loop of deflation, lackluster consumption and rising unemployment. Yifei suggests that “It takes time and policies before the economy finds its place and really picks up.”
Experts have said that although deposit rate cuts sound good in theory, they may not be able to achieve the desired outcome of stronger consumption. Analysts believe that China now needs to do more to support small and medium-sized businesses and help add jobs, all of which could eventually strengthen the country’s economic outlook.
The Chinese government has exerted a lot of effort since 2020 to support the economy, particularly as the country was the first to experience Covid-19. The country was also among the first to begin recovering economic activity. Policymakers have made significant reductions in benchmark prime rate, mortgage rates and reserve requirement ratios to boost money supply and reduce borrowing costs; but on the consumer side, average deposit rates remained unchanged, encouraging households and businesses to earn safe returns from deposits since their economic outlook remained bleak.
Deposit rate cuts could stimulate consumption and reduce the amount of idle funds in the monetary system. With the deepening of the cut in deposit rates and more supportive policies, it would indirectly encourage people to put their money in stocks, grid and other areas resulting in increased confidence in the economy.
However, China still has many unaddressed issues such as the lack of sustainable income growth for households, the gap between the rich and poor people and the disappearance of middle-income groups. These issues will need more than a simple reduction in deposit rates to fix.
Summary
Financial analysts claim that the recent deposit cuts to the six most prominent banks may not be sufficient to address the long-standing problems affecting China’s struggling economy. To boost the country’s growth, the Chinese government needs to do more to support small and medium-sized businesses and job creation. Policymakers lowered mortgage rates, benchmark prime rates and reserve requirement ratios to help reduce borrowing costs and boost the supply of money to businesses. While deposit rate cuts could stimulate consumption and reduce idleness of the monetary system, there is still uncertainty about whether such measures will achieve greater economic strength.
Additional Piece
The Effect of the Pandemic on China’s Economy
When the Coronavirus disease (COVID-19) first began to spread globally in 2020, China experienced the least economic activity due to its strict regulations on movement. The drop in economic activity was short-lived as the country bounced back within the year and began its road to recovery. However, while the country’s goal was a 5% year-on-year growth, its economy only expanded by 4.5% in Q1 of 2021. Consumption across the country remained sluggish, and sales of industrial products still seemed weak as of Q2 of 2021.
The country was forced to make significant changes to maintain economic stability despite its export and digital economies thriving. China’s central government policies focus on tax cuts, revenue outlays, and the reduction of various fixed expenses for companies, including social security contributions, rent, and interest on loans.
Pandemic-induced shifts resulted in new opportunities for the country’s tech industry as home-based lifestyles are on the rise, and in turn, tech-focused businesses like Pinduoduo and JD.com are seeing better sales. The country has also invested in the manufacturing of medical equipment, personal protective equipment, and sanitising products to cater to the global demand for such products.
The situation is not all rosy for the country, as small businesses lack support from the government, leading to their long-term shut-off. A vast number of people have lost their jobs, and with the wage system based on individualism, the income gap continues to widen to worrying levels.
The rate cuts being witnessed have represented various methods policymakers have used since the outbreak to increase liquidity in the country. However, non-performing loans and deflation are still big concerns that must be addressed, along with income inequality, an ageing population, and environmental issues.
In conclusion, while deposit rate cuts offer support to China’s economy and other stimulus methods being implemented, economic issues such as low-quality consumption, the income gap, and increasing unemployment require sustained strategies to solve. The pandemic has presented several challenges to China’s economy, and policymakers must provide practical long-term solutions rather than reactionary quick-fixes to counter the effects of the pandemic.
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China’s six largest state banks cut deposit rates on Thursday as Beijing sought ways to boost growth in the world’s second-largest economy amid doubts about the strength of its recovery.
Lenders including Industrial and Commercial Bank of China, China Construction Bank and Bank of China are now offering 2.45% and 2.5% on three- and five-year deposits respectively, down 15 basis points from September, according to the banks’ websites. . Similar cuts were made at the Postal Savings Bank of China, the Agricultural Bank of China and the Bank of Communications.
Banks also cut the overnight deposit rate by 5 basis points to 0.2%, the lowest level since 1996.
China’s economic recovery accelerated in the first quarter after last year’s strict pandemic control measures, 4.5% expansionjust behind a cautious target of 5% for the full year.
But growth failed to pick up speed in the second quarter amid weak property sales, sluggish industrial production and consumption. The post-pandemic rebound did not live up to projections, while consumers seemed sit on savings instead of spending them.
The coordinated cut in deposit rates, the second among China’s state-owned banks in less than a year, will ease fundraising pressure on lenders and stabilize profitability, said CICC analyst Lin Yingqi. “This could stimulate consumption and reduce the amount of idle funds in the monetary system.”
State-owned banks stand to benefit the most from lower deposit rates, which will boost equity returns while making dividend yields on their shares more attractive, said Macquarie analyst Dexter Hsu.
China has reduce its benchmark prime ratebenchmark mortgage rates and reserve requirement ratio over the past few years to boost money supply and reduce borrowing costs for businesses in a bid to support the pandemic-hit economy.
But average deposit rates remained unchanged, encouraging households and businesses to earn safe returns from deposits as their economic outlook remained bleak.
CICC’s Lin said banks could save around Rmb 120 billion ($16.8 billion) in funding costs after Thursday’s cut and expected a deeper cut of 20 basis points in the deposit rate over the next few months. next 12 to 24 months.
Still, cuts in deposit rates alone may not be enough to spur economic recovery, analysts argued.
“Lower deposit rates should help push some savings into consumption and investment, but it will take a combination of other policies to achieve the goal,” said Gary Ng, senior economist at Natixis. in Hong Kong.
“Consumers remain cautious due to slow disposable income growth and a reduced wealth effect, particularly due to the still poor housing outlook. It will take a stronger recovery in car sales and housing markets to revive the economy in the short term.
Policymakers need to do more to break the negative feedback loop of deflation, lackluster consumption and rising unemployment, said Tan Yifei, founder of Jince Frontier, a Beijing-based consultancy. “It takes time and policies before the economy finds its place and really picks up.”
https://www.ft.com/content/5d207650-bf7a-4f1a-93f3-6fc88f4d1b7a
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