China tells banks to cut interbank deposit rates to boost growth

CHINESE regulators told the nation’s banks to lower rates they paid to deposits from other financial institutions to free up funds to boost the economy, according to sources familiar with the matter.

China’s interest rate self-disciplinary mechanism, a supervisory body overseen by the central bank, said banks should benchmark the interbank deposit rate against the seven-day reverse repo rate, currently set at 1.5 per cent annually, said the sources, asking not to be identified discussing a private matter.

Banks were told not to collect funds from interbank peers at a rate that is substantially higher than policy rates, said the sources, adding that some lenders are now paying 1.8 per cent annually or above to attract savings from financial counterparties.

The People’s Bank of China did not immediately respond to a request for comment.

Chinese banks are grappling with liquidity strains as stepped-up policy loosening has caused an erosion of savings, increasing the need for them to raise funds elsewhere. A rally in the country’s stocks diverted more funds away from lower-yielding debt instruments widely used by lenders.

The guidance, which takes effect on Dec 1, comes as lenders are under increasing pressure to help support the economy even as their margins have slid to record lows.

Chinese banks had about 31 trillion yuan (S$5.7 trillion) of outstanding deposits from non-bank financial institutions including money market funds and securities firms, according to the official data. BLOOMBERG