China may start to give banks more freedom to set deposit rates this year, a shift that may lead to higher returns for savers, Mizuho Securities Asia Ltd. and Deutsche Bank AG said.
Authorities may relax a deposit-rate ceiling for “well capitalized” lenders, said Ma Jun, a Hong Kong-based economist for Deutsche Bank who has worked for the World Bank and as a China government researcher. Mizuho Securities said that an experiment involving “well-managed banks” may begin this year and run through 2012.
China, home to four of the world’s 10 biggest lenders by market value, aims to move toward more efficient pricing and allocation of capital without destabilizing the banking system. Scrapping a ceiling on deposit rates may boost returns for savers, helping to offset the effects of inflation, while also cutting profit margins for lenders as they compete to attract money.
“If they liberalize, the only way for deposit rates to go will be up and that will directly increase banks’ costs,” Shen Jianguang, a Hong Kong-based economist at Mizuho, said yesterday. Officials will move “cautiously,” said Shen, who has worked for the International Monetary Fund and the European Central Bank.
China caps the rates that banks can pay on deposits. In addition, banks cannot lend at rates lower than 90 percent of the one-year lending benchmark, currently set at 6.06 percent. Inflation accelerated to 4.9 percent in January, higher than the one-year deposit rate of 3 percent.
National People’s Congress
In Beijing, a central bank press official said yesterday that any developments related to deposit-rate rules would be announced on the agency’s website when they happened. The official declined to be named or to comment further.
Shen said any trial may begin after the annual meeting of the National People’s Congress in March, where legislators will approve the government’s next five-year plan. Any experiment would likely initially be limited to corporate rather than retail deposits, he added.
Central bank Governor Zhou Xiaochuan said in December that officials will press ahead with interest-rate “liberalization” in the period through 2015.
The lenders with the best ability to price risk should be given more freedom to set rates, ahead of those bearing heavy “historic burdens,” Zhou said Dec. 17. He didn’t specify the burdens.
The government is seeking to move to market rates without undermining the financial system after a decade-long bailout of banks, capped by a recapitalization of the Agricultural Bank of China Ltd. in 2008, cost more than $650 billion. Bad debts had ballooned during years of state-directed lending.
The nation’s credit boom since late 2008 to drive an economic recovery has revived concerns that lenders may end up saddled with bad loans, including to local-government investment vehicles.
Still, the strength of China’s economy, which has expanded at an annual average of 11 percent over the past five years, and tightened supervision may help banks withstand market risks. The industry may post profit growth of 15 percent to 20 percent this year, Bank of Communications Co. forecasts.
Short-term interbank rates and longer-term corporate bond rates are already set by the market. Since 1999, China has also let banks set their own rates on deposits from Chinese insurers of more than 30 million yuan ($4.6 million) with terms of more than five years.
Officials may avoid moving on lending- and deposit-rate controls simultaneously because of the extra risk of squeezing banks’ margins, Shen said. They may also steer clear of “weaker banks” that might price rates “too aggressively” to capture business, the economist said.
Deutsche Bank’s Ma said that freeing up restrictions on deposit rates will “likely” start this year, beginning with large deposits and certificates of deposit.
China Merchants Bank Co., the nation’s sixth-largest lender by assets and market value, this week denied a China Daily report that it was taking part in a trial program letting some banks set deposit rates. The lenders will be able to bid on deposits of up to five years from large insurers and companies, the newspaper said. The People’s Bank of China also said that it hadn’t started any trial.
The global financial crisis may have made the government “more cautious about interest-rate liberalization,” UBS AG economist Wang Tao, who’s based in Beijing, said this month.
Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co., said policy makers shouldn’t rush any relaxation of controls because of the need to protect the earnings of lenders, under pressure to meet capital requirements. The government should first let banks take on a broader range of business to curb their dependence on interest income for profits, he said.
China may order its biggest lenders, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., to raise capital ratios to as high as 14 percent when credit growth is judged excessive, a person familiar with the matter said last month. That compares with a current minimum level of 11.5 percent.
Since mid-October, the People’s Bank of China has boosted benchmark interest rates three times.