China may be close to deregulating deposit interest rates, economists believe, after the central bank raised the maximum amount that banks may pay in interest.
On May 10, the People’s Bank of China (PBOC) lifted the ceiling for deposit rates from 1.3 times the benchmark level to 1.5 times, marking the biggest raising of the ceiling since China began to liberalize the interest rate system in 2012.
Lian Ping, chief economist with the Bank of Communications, said although he does not expect banks to pay savers the maximum rate allowed by authorities, he believes their interest rates will diversify following the latest move.
China’s introduction of a bank deposit insurance scheme in May laid a “systematic foundation” for the ultimate deregulation of interest rates, said Lu Lei, head of the PBOC’s research department.
Under the scheme, which was in the planning for 20 years, savers are guaranteed that they can get their money back if their banks suffer insolvency or bankruptcy, according to the central government’s announcement one month ago.
The reimbursement cap of 500,000 yuan ($81,500) covers around 99.6 percent of Chinese bank accounts. Close to 12 times the annual per capita GDP, the cap is more generous than the prevailing international standard of two to five times annual per capita GDP.
Now financial institutions have been given much greater independence in setting interest rates, it is high time that the ceiling is removed, Lu said.
China is trying to strike a balance between deepening structural reform and boosting growth.
On May 11, the PBOC also lowered its benchmark lending rate by 25 basis points to 5.1 percent while cutting the benchmark deposit rate by the same amount to 2.25 percent.
The moves came days after the release of weaker-than-expected April trade and inflation data which signaled the world’s second-largest economy still faces relatively significant downward pressure as external demand continues to fluctuate.
This is the third cut of benchmark interest rates in six months, following other measures designed to support growth, including tax cuts.
The cut was in line with market expectations of pro-growth monetary measures, but the interest rate cuts should not be interpreted as a Chinese version of quantitative easing (QE) said Ma Jun, chief economist with the PBOC’s research bureau.
QE, adopted in some developed countries, is a set of unconventional policy measures used when interest rates are close to zero and the real economy faces recession, but this is not what is happening in China as the central bank still has many conventional tools to pump liquidity, Ma said.
Facing grave downward pressure, it is necessary for China to cut actual interest rates and stabilize investment growth through reducing nominal interest rates. If nominal interest rates were not cut while inflation was dropping, real interest rates, where the effects of inflation have been factored in, will climb with risks of passive contraction in monetary conditions, Ma added.