China Cut Rate, Raise Deposit Ceiling; Won't Hurt Banks -- Barron's Blog

        By Shuli Ren
        Wall Street analysts have been expecting the People's Bank of China to cut interest rate this quarter - as early as this month - and they were right.
        China announced over the weekend that benchmark lending and deposit rates will both be cut by 25 basis points, to 5.1% and 2.25%, starting today. Meanwhile, the deposit rate ceiling will be raised from 1.3 times to 1.5 times. In other words, banks can compete and offer as much as 3.375% one-year deposit rates to attract Chinese consumers.
        At first glance, this can not be good for banks. On the one hand, they do not get as much returns as before for the loans they issue; on the other hand, they have to offer higher rewards for their main sources of funding - deposits.
        The deposit rate ceiling is essentially meaningless because banks have not been hitting them anyhow, economists from Goldman Sachs to UBS say.
        "Even though the deposit rate ceiling will be further raised to 1.5 times of the benchmark rate, banks probably may not all fully utilize the deposit rate ceiling anymore, similar to when they did not fully utilize the earlier 1.3 times ceiling," wrote Goldman Sachs this morning.
        UBS's Tao Wang said that big state banks have only floated their deposit rates 10% above the benchmark instead of the full 30% and "following today's rate cut, we think large banks may keep their deposit rate largely unchanged from the current level." If anything, smaller banks, which have been offering 20-30% above the benchmark, may be more affected. China's largest four banks are Bank of China ( 3988.Hong Kong), ICBC ( 1398.Hong Kong), Agricultural Bank of China ( 1288.Hong Kong) and China Construction Bank ( 939.Hong Kong).
        The market can be reading this interest rate cut two ways. First, lower interest rates make it easier for corporates to pay down debts and incentivize more borrowing, which de-risk and provide new businesses for banks. Second, the deposit rate ceiling could theoretically hurt banks' profit margins.
        Last week, China's stock market suffered the heaviest loss in five years. The iShares China Large Cap ETF ( FXI) fell 2.5%, the iShares MSCI China ETF ( MCHI) dropped 2.7%, the Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund ( ASHR) retreated 4%, the CSOP FTSE China A50 ETF ( AFTY) fell 4.8%, the iShares MSCI Emerging Markets ETF ( EEM) dropped 0.6%.
        See my last weekend's column " What Spurred Shanghai's Selloff" for why Shanghai's sell-off was only temporary and the bull market is not done.
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        (END) Dow Jones Newswires

        May 10, 2015 20:37 ET (00:37 GMT)

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