As economic developments unfold, China’s primary state banks have once again reduced their dollar deposit rates, marking the second such cut within a span of a month.
A strategic move, it underlines the attempts by the Chinese authorities to halt the depreciating yuan and thus, shapes the country’s monetary landscape.
China’s attempt to salvage the yuan
China, the global powerhouse, has seen its currency, the yuan, fall out of favor this year. It has become one of the underperforming Asian currencies, depreciating nearly 5% against the dollar due to a sluggish Chinese economy and expanding yield disparities with the United States.
These circumstances have incited worry among policymakers, who fear that a protracted yuan devaluation could both dissuade foreign investment and stimulate a capital outflow abroad.
In an attempt to rectify this situation, state-owned banks, including Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of Communications, have reduced their dollar deposit rates.
Previously at 4.3%, the rates are now confined at a ceiling of 2.8%. This adjustment can be perceived as an effort to align dollar deposit rates – typically following offshore rates – closer to domestic rates, which have been reduced to support the struggling economy.
According to Ken Cheung, chief Asian FX strategist at Mizuho Bank, the step indicates a move to minimize the interest rate advantage of the U.S. dollar in onshore markets. He suggests that the maneuver is likely designed to deter dollar stockpiling and promote foreign exchange settlements.
By reducing these rates, households may be discouraged from investing savings into higher-yielding dollar deposits.
Additionally, it may push Chinese firms, particularly exporters, to settle foreign exchange receipts in yuan, further bolstering the local currency. This could be a significant step in reversing the yuan’s downward spiral against the dollar.
Impact on commercial lenders and beyond
Interestingly, some currency traders note that the cut in dollar deposit rates may alleviate pressure on commercial lenders’ net interest margin. Before these recent modifications, banks’ dollar deposit rates had ascended above lending rates.
The most recent data from the People’s Bank of China (PBOC) showed that the weighted-average interest rate on large dollar deposits was at 5.67% in March, which was a surge of 4.15 percentage points from a year earlier.
The weighted-average dollar lending rate saw a less drastic increase, only rising by 3.74 percentage points to reach 5.34%.
As China’s central bank, the PBOC has recently taken measures to brake the yuan’s slide against the dollar. This has involved setting stronger-than-expected daily fixings for the currency and occasional dollar sales by state banks in both the onshore and offshore markets.
China’s monetary landscape is in a state of flux, with the yuan’s depreciation being a source of concern for policymakers. As they navigate these economic challenges, the reduction of dollar deposit rates by state banks appears to be a strategic maneuver to stem the yuan’s slide.
As the economic climate continues to shift, the world will be closely watching how these policies unfold and shape the future of China’s economy.
