Latest Cover Story | Coping with Low Interest Rates (AI Translation)
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文｜财新周刊 丁锋 吴雨俭 刘冉 全月 王力为
By Caixin Weekly Ding Feng, Wu Yujian, Liu Ran, Quan Yue, Wang Liwei
文｜财新周刊 丁锋 吴雨俭 刘冉 全月 王力为
By Caixin Weekly's Ding Feng, Wu Yujian, Liu Ran, Quan Yue, Wang Liwei
最近，李真（化名）2020年初在银行存的一笔5万元5年期定期存款到期了，按照当时4.2%的年利率算，她拿到了10477元的利息。不过，当她准备续存时却犯了愁，如今国有大行的5年期定期存款利率只有1.6%左右，即使一些小规模民营银行，最高也只有不到3%。想寻找其他收益稳定且安全没有后顾之忧的替代产品并不容易，因为无论是银行理财还是货币基金，年化收益率超过3%的都不多。
Recently, Li Zhen (a pseudonym), saw a five-year time deposit of 50,000 yuan she made at the beginning of 2020 mature. At the then interest rate of 4.2% per annum, she received 10,477 yuan in interest. However, when she prepared to renew the deposit, she faced a dilemma. Now, the five-year time deposit rate at major state-owned banks is only around 1.6%, and even smaller private banks offer a maximum of less than 3%. Seeking other stable and secure products with consistent returns is not easy, as few banking wealth management products or money market funds offer an annualized return rate above 3%.
人们开始用“低利率时代”来描述当下的市场环境，中国金融市场正进入陌生水域。
People have begun using the term "era of low interest rates" to describe the current market environment, as China's financial market enters uncharted waters.
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- China's interest rates have significantly dropped since 2020, with five-year time deposit rates falling from 4.2% to around 1.6%, complicating investments for savers.
- The era of low interest rates in China has impacted both individual investors and financial institutions, with challenges in finding stable, high-yield products.
- Many investors are shifting towards global financial markets, such as U.S. dollar deposits and high-dividend stocks, while the insurance industry adapts through global asset strategies to mitigate interest rate spread risk.
[para. 1] Li Zhen recently faced a dilemma renewing her matured time deposit as China's interest rates have markedly declined in recent years. What was once a 4.2% annual yield now hovers around 1.6% at major banks, illustrating a shift towards an "era of low interest rates" in China's financial markets.
[para. 2] China's interest rate system is layered across policy rates, market benchmark rates, and market rates. The central bank's action in modifying these rates reflects monetary policy intentions to mitigate the effects of a long-term cycle of declining interest rates, which became evident when the 10-year government bond yield fell below 2%.
[para. 3] Analysts foresee a protracted period of low interest rates in China, similar to trends observed globally. This projection indicates a need for adjustment strategies among individuals and financial institutions to navigate these economic conditions.
[para. 4] The experience of low interest rates is not new worldwide; the U.S., Europe, and Japan have all navigated periods of low rates, influencing investor behavior and leading to changes in investment preferences.
[para. 5] Investors in China, facing conservative expectations for income growth and three years of stock market losses, prefer stable-return assets over volatile equity markets, suggesting a natural response to lower risk appetite.
[para. 6] Banks are under pressure as narrowing interest margins challenge their profit models, while money market funds decline and bond funds ascend, though future high returns are less likely considering exhausted potential for bond price increases. Life insurance companies also face fresh challenges in managing interest margins.
[para. 7] The search for high-yield investment options has led investors towards U.S. dollar-denominated products due to their superior returns amid declining yields on domestic financial products.
[para. 8] During rapid interest rate declines, analysis shows overseas investors increase their allocation to liquid and low-risk assets. As interest rates stabilize, asset diversification occurs, with different nations exhibiting varied investment approaches, hinting at possible trends for China's investors.
[para. 9] The bond fund market is experiencing unprecedented growth, shifting the lure away from declining money market funds towards bonds, which offer notable yields amidst a strong bull market. However, as bond yields continue to decline, fund managers are reassessing strategies to sustain growth.
[para. 10] China's massive asset management sector, particularly public mutual funds, faces a turning point with bond funds slated to play an increasingly critical role. Yet, the strategies that drove growth must adapt to sustain yields as market conditions evolve.
[para. 11] The Jian savings plan trend highlights global and domestic influences shaping China's investment landscape, with overseas investments and multilateral financial strategies gaining traction amid these evolving economic conditions.
[para. 12] Caixin's comprehensive special report delves deeply into the challenges and shifts characterizing a low-interest-rate era, offering exclusive analysis to their dataPro members, augmented with rich data and insights.
In sum, China's financial markets are experiencing a complex transition marked by declining interest rates, echoing global trends. Investors and financial institutions alike are tasked with recalibrating their approaches to manage risk, seek yields, and sustain profitability amid these economic shifts. The adaptation strategies being considered reflect lessons learned from past global experiences, requiring careful navigation to harness new and evolving opportunities.
- China Merchants Bank
- China Merchants Bank, through its app, offers dollar investment products primarily targeting U.S. bonds, with performance benchmarks ranging from 3% to 4.5%. Amidst the current low-interest environment, these products provide personal investors options for relatively higher returns compared to declining domestic interest rates. However, there remains inherent exchange rate risks tied to such USD investments.
- Bank of East Asia
- The Bank of East Asia offers attractive interest rates on dollar deposits. Currently, USD deposits starting from $10,000 have a 3-month or 6-month term interest rate of 3.4%, and a 12-month term interest rate of 3.5%. For deposits of $20,000 and above, the rates are 4.4% for 3-month or 6-month terms, and 4.5% for 12-month terms. These rates reflect new investment strategies amid low domestic interest rates.
- Industrial and Commercial Bank of China
- The Industrial and Commercial Bank of China (ICBC) is engaged in price wars within the retail loan sector, specifically focusing on consumer and business loans to maintain higher pricing amidst intense competition. Additionally, an ICBC branch manager highlighted the bank's effort to find high-interest assets while carefully monitoring asset quality, especially in response to consumer loans often issued for investment purposes.
- Everbright Securities
- Everbright Securities is mentioned in the context of banking strategies under low interest rates. Analyst Wang Yifeng from Everbright Securities suggests that in such environments, banks must enhance asset-liability management to stabilize net interest income. The emphasis is on finding high-interest assets, supporting real economy loans, especially to SMEs, while maintaining competitive interest rates to manage net interest margins effectively.
- UBS Securities
- UBS Securities' Chief Japan Economist, Masamichi Adachi, discussed Japan's zero interest rate period, noting that despite current deflation, purchasing power increased, leading to less concern about deposit erosion. However, deflation contributed to Japan's prolonged economic stagnation, often referred to as the "lost decades."
- China Minsheng Bank
- China Minsheng Bank's chief economist, Wen Bin, stated that the Chinese banking industry is entering an era of low interest rates, narrowed interest spreads, and reduced profitability. The banks face pressure to maintain net interest income stability by enhancing asset-liability management and controlling interest spreads, as the liability costs decline slower than asset yields. The industry is taking lessons from global experiences to navigate these challenges.
- Zhongtai Securities
- Zhongtai Securities' financial analyst team, led by Dai Zhifeng, analyzed 42 A-share listed banks' interim reports for 2024. They found that these banks' overall non-interest net income grew by 1.3% year-on-year in the first half of 2024. Additionally, investment income and changes in fair value, which constitute other non-interest net income, increased by 22.8%.
- CICC
- The article mentions that the CICC research team, led by Zhang Shuaishuai, noted an increase in Japanese banks' investments in long-term government bonds as part of their strategy during low-interest periods. This was in response to Japan's rising government leverage and served as a measure to manage interest rate risks and stabilize income amidst a challenging economic environment.
- Haitong Securities
- Haitong Securities report indicates that during periods of rapidly declining interest rates, overseas residents generally increase their demand for financial assets with high liquidity and safety, opting to allocate more to cash and deposits while reducing equities and investment fund products. This behavior is driven by a shift in macroeconomic conditions and stock market declines.
- At the beginning of 2020：
- Li Zhen made a five-year time deposit of 50,000 yuan with an interest rate of 4.2% per annum.
- 2022 to 2024：
- Individual investors experienced three consecutive years of valuation retracements in the A-share market.
- 2024：
- The central bank reduced rates twice, totaling a 30-basis point cut.
- 2024：
- Bond funds experience explosive growth amidst a robust bull market, while money market funds lose their shine.
- By 2024：
- The 10-year government bond yield fell below 2% confirming China had entered a period of low interest rates.
- In December 2024：
- The regulations as of December 2024 adjusted the cap on mutual recognition funds' sales proportion in Mainland China.
- By the end of 2024：
- Public mutual funds are projected to lead with a 31.94 trillion yuan under management.
- By the end of 2024：
- Money market funds total 13.03 trillion yuan and bond funds amount to 10.39 trillion yuan, together making up over 70% of public mutual funds.
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