China state banks to cut dollar deposit rates

09Jun 2023
The Guardian Reporter
Business
The Guardian
China state banks to cut dollar deposit rates

China’s four big state lenders have effectively cut dollar deposit rates, according to people familiar with the matter, at a time when strong demand for the US currency in the banking system helped push the yuan to a six-month low.

The banks have recently lowered the ceiling on the rates — which are a spread over the US Secured Overnight Financing Rate — for both companies and individuals, said the people who requested anonymity discussing private matters. 

Some of the lenders’ provincial branches now offer around 5.7 percent on dollar deposits to their biggest clients, down from 6 percent previously, one of the people said. 

The four lenders, namely Industrial & Commercial Bank of China Ltd., Bank of China Ltd., Agricultural Bank of China Ltd. and China Construction Bank Corp., didn’t immediately respond to requests for comment. The news was earlier reported by the Securities Times. 

 

The yuan has dropped 3 percent against the dollar this year, as the rates differential widened with the Federal Reserve tightening and China keeping policy accommodative. 

Chinese currency renminbi, or the yuan, weakened 121 pips to 7.1196 against the US dollar Wednesday, according to the China Foreign Exchange Trade System. 

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day. 

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day. 

The deposit rate cut, while limited in scope, indicates Chinese policymakers are seeking to manage the scale of its currency’s decline. 

Cutting dollar deposit rates is a creative move to reduce the impact of lower yuan interest rates, said Tommy Xie, economist at Oversea-Chinese Banking Corp. 

However, it is “probably not enough” to deter carry trades that use cheaper yuan borrowings to fund dollar purchases, he said. 

China’s central bank and foreign exchange regulator vowed last month to curb currency speculation and look into ways to strengthen management of dollar deposits. 

Foreign currency held in the Chinese banking system totaled $881.9 billion at the end of April.

 

Still, “lowering onshore USD deposit rates may drive key accumulators of foreign currency to keep even more of their FX earnings offshore,” Nomura Holdings Inc. strategists led by Craig Chan wrote in a note. That may only add to the current negative balance of payment pressures for China, they said. 

Meanwhile, China's central bank continued to inject funds into the financial system through open market operations Wednesday. 

The People's Bank of China said that it conducted 2 billion yuan (about US$281 million) of seven-day reverse repos at an interest rate of 2 percent. 

The move is aimed at keeping liquidity reasonable and ample in the banking system, according to the central bank. 

A reverse repo is a process in which the central bank purchases securities from commercial banks through bidding, with an agreement to sell them back in the future.

 

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