Central Bank Official Dashes Hope for Deposit Rate Reform

China will keep its benchmark deposit rate for the foreseeable future even as policymakers have moved to make loan rates primarily decided by the market, a central bank official said Thursday.

The benchmark deposit rate will remain the cornerstone of China’s system for steering the amount of interest that banks pay deposit holders, and the People’s Bank of China (PBOC) will adjust it as needed, Sun Guofeng, director of the PBOC’s monetary policy department, said at a briefing (link in Chinese).

Sun’s words threw cold water on any hope that China’s interest rate reform would also take on deposit rates. Last year, policymakers replaced the loan benchmark rate with a set of national loan prime rates (LPRs) — market-oriented rates that now serve as references for how banks price their loans.

The deposit benchmark rate has remained unchanged since 2015. The current benchmark rate is 1.5% for a one-year lump-sum deposit and 2.75% for a three-year deposit. The last “rate cut” was in October 2015, when the central bank lowered the benchmark rates for both loans and deposits.

When people now talk about a “rate cut,” they should be referring to actual lending rates, Sun said. Last year, policymakers sought to cut borrowing costs and channel more credit to the economy by giving administrative orders to expand bank lending to small businesses, lowering banks’ reserve requirement ratios (RRRs), and reducing the rates of the loans its issues through its medium-term lending facility (MLF).

The MLF rate is a key part of the central bank’s policy toolkit to provide funding to banks and manage liquidity. The PBOC also uses the rate as a reference for the national LPRs. The one-year national LPR now stands at 4.15% and the five-year-plus LPR is 4.8%. Both are lower than they were when policymakers launched the revamped national LPRs in August.

Borrowing costs have also come down, Sun said. The weighted average interest rate on new ordinary loans fell to 5.74% in December, the lowest since the second quarter of 2017, and comprehensive borrowing costs for small businesses fell by more than 1 percentage point last year, he said.

Credit growth was a mixed bag in 2019. Growth in outstanding yuan loans slowed by 1.2 percentage points from the previous year to 12.3%, according to central bank data (link in Chinese). New yuan loans rose to 16.8 trillion yuan last year, with growth in loans to the manufacturing sector hitting 14.9%, the highest rate since 2012.

Many economists expect that the central bank will ease monetary policy even more in 2020 to head off a further slowdown in economic growth. At Thursday’s briefing, Sun said there was room for more RRR cuts, but not very much.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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