China's economy reopened after zero-COVID policies were lifted in December but commerce and domestic demand are not back to pre-pandemic levels. The foundation of the recovery is not yet solid, analysts warned. "Against the backdrop that financial institutions are encouraged to support the economy, lending rates have obviously fallen," Ming Ming, a fixed income analyst at CITIC Securities, wrote in a research note released on Monday.
"But the costs of liabilities of banks remain relatively rigid, and net interest margins continue to shrink, which added to their operating pressures," he said. Nicholas Zhu, a banking analyst at Moody's, said smaller banks' pricing changes usually follow larger banks' initiatives with a time lag. In September, China's largest banks lowered deposit rates in their first broad-based move since 2015 to ease margin pressure.
The deposit rate cuts by some Chinese banks in April were "normal behavior" guided by the self-disciplinary mechanism, the People's Bank of China (PBOC) said in response to a Reuters request for comments, a mechanism that was rolled out for market-orientated pricing of interest rates. Lower deposit rates could also help ease banks' margin pressures at a time when investors have raised their hopes for a cut in lending rates to prop up the economy. "The economy is still running below its potential," said Zhiwei Zhang. "There is room for fiscal and monetary policies to boost growth further." "With inflation dropping in China and the rate hike cycle in the U.S. coming to its end, the likelihood of a PBOC rate cut is rising," he said. (Reporting by Ziyi Tang and Ryan Woo; Additional reporting by Winni Zhou; Editing by Jacqueline Wong)
