China Withdraws Short-Term Market Funds... First Application of Revised Interest Rates

Chinese Commercial Banks to Apply 0.75% Addition Method Instead of 150% Multiplication from 22nd
Short-term Funds Under 1 Year to Be Withdrawn, Corporate Loans Expected to Increase

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Major commercial banks in China have adjusted their deposit interest rates. Despite the People's Bank of China, the central bank, keeping the Loan Prime Rate (LPR), which is effectively the benchmark interest rate, unchanged for 14 consecutive months, interest rates on deposits under one year have been raised, while those on medium- to long-term deposits over one year have been lowered.

Xinhua News Agency reported on the 23rd that major commercial banks in China have raised interest rates on short-term deposits under one year and lowered rates on medium- to long-term deposits over one year.

[Image source=Yonhap News]

Previously, Chinese financial authorities had announced that the upper limit for deposit interest rates should be set by adding a certain margin to the benchmark deposit rate announced by the People's Bank of China.

For example, the previous method applied a 150% multiplier to the People's Bank of China’s announced rate, but going forward, the method has shifted to adding a 0.75% margin to the benchmark rate. In this case, the two-year fixed deposit rate, which was previously 3.15% (2.10% X 1.5), will be lowered by 0.3 percentage points to 2.85% (2.1% + 0.75). The three-year fixed deposit rate will fall even further. The fixed deposit rate, which was previously 4.125% (2.75% X 1.5), will drop by 0.625 percentage points to 3.5% (2.75% + 0.75).

On the other hand, fixed deposit rates for less than one year will increase. The six-month short-term deposit rate will rise from 1.95% to 2.05%, and the three-month deposit rate will increase from 1.65% to 1.85%.

This change in the deposit interest rate calculation method is interpreted as the Chinese financial authorities’ intention to withdraw short-term liquidity funds from the market.

Additionally, due to this change in the calculation method, it is expected that corporate loans, including those to small and medium-sized enterprises, by commercial banks will increase. As medium- to long-term deposit rates over one year fall, it is widely anticipated that banks’ corporate loan interest rates will decrease.

An official from a Beijing commercial bank explained, "Last year, Chinese financial authorities implemented quantitative easing policies due to the impact of COVID-19, but from this year, as the economy normalizes, they have expressed their intention to gradually withdraw market funds. With this revision in the interest rate calculation method, short-term market funds are expected to be naturally withdrawn."

This content was produced with the assistance of AI translation services.