Negative Deposit Rates Pose Risk to Funding of China’s Banks, Moody’s Says

China’s negative interest rates may hinder banks from increasing deposits and weaken the nation’s ability to cope with shocks from the global financial crisis, Thomas Byrne, a senior vice president at Moody’s Corp. said.

“It’s important to eliminate negative interest rates as it runs the risk of undermining the deposit bases banks use to fund themselves,” Byrne said in an interview in Beijing yesterday. Having “dependable” funding “can reduce lots of vulnerabilities” for China’s banking system, he said.

Deposits in China’s banking system rose the least in almost four years in the third quarter, data from the People’s Bank of China show. Savings rates have lagged behind inflation for 20 months, encouraging money to seek higher returns in areas such as property and informal lending, where interest is as high as 70 percent a year, according to Dong Tao, a Hong Kong-based economist with Credit Suisse AG.

The benchmark one-year savings rate stands at 3.5 percent while inflation in September was 6.1 percent. Consumer-price gains may have eased to 5.5 percent last month, according to the median estimate in a Bloomberg News survey of 27 economists. The statistics bureau will release the data in Beijing today.

Competition among lenders in China to attract deposits amid “rigid” controls by the central bank on savings rates is becoming “more intensive,” according to a survey of 818 mainland bankers by the China Banking Association and accounting firm PricewaterhouseCoopers LLP.

More than 80 percent of bankers said that their biggest challenge in 2011 was “increasing pressure for deposit- taking,” according to the survey released last week.

Debt Peak

Interest rates are likely remain negative for some time as the government may not be able to bring inflation back to its historic range of 2 percent to 3 percent, Byrne said. Moody’s estimates the consumer-price gains will be about 5 percent by the end of this year, slowing to 4 percent by the end of 2012.

Debt borrowed by China’s local authorities has “essentially reached the peak and over time will gradually decline,” Byrne said.

If China can maintain economic growth of at least 7 percent a year over the next few years, the problems resulting from local government debt and a correction in property prices can be “easily” absorbed by banks and to a certain extent by the government without destabilizing the economy, he said.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Nov. 9 (Bloomberg) -- Shen Minggao, the Hong Kong-based head of China research at Citigroup Inc., discusses the outlook for China inflation, the country's economy and stock market. Shen speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)