Feb 20, 2020 09:19 PM

Coronavirus Outbreak Stirs Debate Over Deposit Rate Cut

In January, the consumer price index in China rose 5.4% year-on-year, the highest expansion in more than eight years. Photo: IC Photo
In January, the consumer price index in China rose 5.4% year-on-year, the highest expansion in more than eight years. Photo: IC Photo

Shockwaves from the coronavirus outbreak have rattled China’s economy and financial markets, stirring debate within and outside the government over whether cutting benchmark deposit rates is an effective solution to enable banks to cut lending rates and help businesses survive the epidemic.

Those calling to cut the benchmark rates argue that doing so could significantly reduce the cost of banks’ liabilities, helping cut struggling businesses’ financing costs. However, opponents argue that the conditions for the cut are poor, and that such an administrative intervention runs contrary to the country’s ongoing market-oriented reform of interest rates.

Since December, China has been grappling with a fast-spreading coronavirus that has infected more than 74,000 people across the country as of Wednesday. Government efforts to contain the virus include restricting the movement of tens of millions of people and ordering companies and factories to delay reopening. The measures have caused a huge loss of production, with many small and midsize enterprises seeing their liquidity dry up. Economic and financial authorities have rolled out multiple policies to give them a helping hand.

To help troubled enterprises weather the epidemic, the central bank can consider lowering the benchmark deposit rates to give banks more room to cut lending rates, Ma Jun, a member of the monetary policy committee of the People's Bank of China (PBOC), said at a seminar on Feb. 13.

Lowering the benchmark deposit rates, combined with rising inflation amid the epidemic, will further depress real deposit rates, said Sheng Songcheng, a former head of the PBOC’s Financial Survey and Statistics Department.

“If the benchmark deposit rates are cut amid the current severe outbreak, it will cause more losses to ordinary people, especially those with lower incomes,” he said.

In general, a real deposit rate can be calculated by subtracting an inflation rate from the deposit interest a bank provides a depositor. The inflation rate is often measured by changes in the consumer price index (CPI), which gauges the prices of a basket of consumer goods and services.

In January, the CPI in China rose 5.4% year-on-year, the highest expansion in more than eight years. The benchmark deposit rates have remained unchanged since October 2015, with the one-year rate standing at 1.5%.

The CPI is likely to rise even more in the coming months as the outbreak has a severe impact on the economy’s supply side, Sheng said.

He suggested that the central bank should refrain from cutting the benchmark deposit rates, as this kind of administrative measure goes against the market-based reform of interest rates.

It is unnecessary to adjust the benchmark rates, as letting banks themselves adjust their deposit rates is a more market-oriented practice, multiple economists and bankers said.

China’s latest reform of interest rates, launched in August, did not involve the benchmark deposit rates. It replaced state-set benchmark lending rates with ones set by the market that give commercial banks more room to price loan interest.

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Although China has loosened requirements for banks to follow the benchmark deposit rates in recent years, they still loom large in the minds of bankers and borrowers.

To cushion the impact of the coronavirus on the economy, the PBOC on Monday cut the one-year rate on its medium-term lending facility loans, a tool it uses to lend money to commercial banks, in a move seen to pave the way for cutting loan prime rates (LPRs). On Thursday, the one-year and five-year-plus LPRs, a new reference for banks to price loans, both dropped.

Contact reporter Tang Ziyi ( and editor Gavin Cross (

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