China Anticipated to Test Relaxed Deposit Rates

Mizuho Securities Asia Ltd. and Deutsche Bank AG have reported that China may begin to relax deposit rates for banks this coming year. According to an article on Bloomberg, Chinese authorities may loosen their deposit rate ceiling for ‘well capitalized’ lenders. This speculation has largely been confirmed by Ma Jun, a former employee of the World Bank, a China government researcher, as well as a current employee for Deutsche Bank in their Hong Kong branch. Mizuho Securities has furthered this point by saying that an experiment is predicted to take place using relaxed deposit rates for major banks starting this year and lasting through 2012.

Notably, China is host to four of the world’s ten leading lenders in terms of market value. This move is largely an attempt to move their economy in the direction of a more efficient allocation without undermining the stability of their banking institutions. The move toward removing the ceiling on deposit rates may have the effect of increasing returns for investors, counteracting inflationary pressures, as well as lowering profit margins for lenders according to Bloomberg.

However, other analysts at Mizuho have indicated that the liberalization of China’s deposit rates may have the adverse effect of directly increasing the costs to banks. Currently, China’s policy has been to cap deposit rates, and are not allowed to lend at rates lower than 90 percent of the one-year mark. This rate is currently set at 6.06 percent.

While there are indications that the aforementioned ‘experiment’ will be conducted with China’s deposit rates for ‘well capitalized’ lenders, the Chinese government has been tight-lipped about the matter. China’s Merchants Bank has denied receiving a green light to set their deposit rates freely at this point in time. Additionally, according to China’s Central Bank Press Official, any further plans or developments regarding changes to the deposit rates will be announced on the Central Bank’s website when they happened and declined to further discuss the issue.

Sources:

http://www.bloomberg.com/news/2011-02-16/china-may-ease-deposit-controls-in-step-toward-markets-deutsche-bank-says.html

http://www.reuters.com/article/2011/02/16/china-economy-rates-idUSTOE71F00A20110216

http://online.wsj.com/article/BT-CO-20110215-702447.html

http://www.pbc.gov.cn/publish/english/955/2011/20110210150433054299880/20110210150433054299880_.html