China’s cut in interest rates is set to squeeze banks’ margins, the head of the world’s most profitable lender said.
On Friday, the People’s Bank of China raised the cap on what banks can pay customers for deposits to 120 percent of the benchmark rate from 110 percent, as it announced a 0.4 percentage point reduction in the one-year lending rate and a 0.25 percentage point cut in the 12-month deposit rate. This means depositors’ returns would be unchanged if lenders raise rates to the new ceiling.
The cut is the first in more than two years as the central bank aims to support China’s economy, heading for its slowest expansion in 24 years. The increased premium banks are allowed to pay depositors is “another important measure in deposit rate liberalization,” the central bank said in a statement on Friday.
The move would “inevitably squeeze the profit margins of banks, and the narrower margin is a long-term trend,” Industrial and Commercial Bank of China Ltd (ICBC) (中國工商銀行) president Jiang Jianqing (姜建清) said at a forum yesterday in Beijing.
The erosion of profit margins would hurt banks’ ability to grow and capability to expand assets, Jiang said at the forum.
“The asymmetric interest rate cut could put significant pressure on bank profitability,” JPMorgan Chase and Co chief China economist Zhu Haibin (朱海濱) wrote in a note on Friday. “This may raise the question whether banks will maintain the distribution of lending rates around the benchmark rates, or will choose to float up the range.”
With factory growth stalling and a decelerating property market hurting demand for steel, cement and several other products, Beijing is under pressure to drive new areas of growth.
Chinese Premier Li Keqiang (李克強) has called for “new growth engines” to counter slowing growth in the world’s second-largest economy, Xinhua reported late on Friday.
China should help people set up their own businesses and speed up the development of new business models, Li said.
He encouraged Chinese manufacturers to expand overseas, establish strong, world-renowned brands, and launch more innovative products and services, the news agency said.
He also urged policy efforts to aid small and mid-sized banks and bolster the development of the Yangtze River economic belt, which covers nine provinces and stretches from southwest Yunnan Province to Shanghai on the east coast.
Additional reporting by Reuters
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