FameEX Hot Topics | Chinese State-Owned Banks Lower Dollar Deposit Rates, Dismissing Government Influence Allegations

Major Chinese state-owned banks have recently taken the step of reducing interest rates on U.S. dollar deposits. While doing so, they strongly denied any allegations of being influenced by the Chinese government, asserting that the rate cuts were purely driven by market forces.

In response to reports from certain news outlets suggesting government interference, the banks emphasized that the rate reductions were a result of market dynamics. Reuters, for example, reported that a self-regulatory body overseen by China's central bank had instructed major state-owned banks to lower interest rates on dollar deposits in an effort to strengthen the Chinese yuan. However, the banks refuted these claims, stating that their decisions were independent and not influenced by any government directives. The Global Times also reported that some bank insiders viewed the rate cuts as a self-regulatory measure aimed at maintaining stability in the dollar-yuan exchange rate, which has experienced a decline of over 6% against the USD since the start of the year.

A bank manager at a Bank of China branch in Shanghai revealed that the bank had reduced its one-year dollar deposit rate from 5% to 4.3% for deposits exceeding $50,000, effective from Monday, while deposits below $50,000 would receive a rate of 2.8%. The manager anticipated that the deposit rate would remain stable in the short term but gradually decrease over time. Several factors were cited as influencing the rate reductions, including the volatility of global interest rates and an increase in the amount of dollar deposits held by the banks.

Similarly, a manager at an Industrial and Commercial Bank of China (ICBC) branch in Beijing confirmed significant cuts in dollar deposit rates in anticipation of the U.S. Federal Reserve pausing interest rate hikes. For instance, the rate for $30,000 deposits was reduced from 4.8% on Sunday to 2.8% on Monday. It was also noted that some Chinese banks had lowered rates on yuan deposits. A manager at a Shanghai branch of Ping An Bank mentioned that the bank was considering reducing its three-year yuan deposit rate from 3.25% to below 3% in the coming week. Reuters reported that China's largest banks had already lowered interest rates on yuan deposits.

Xi Junyang, a professor at the Shanghai University of Finance and Economics, explained that Chinese banks have ample dollar reserves, eliminating the need to offer high-interest rates to attract deposits. Xi further highlighted that the anticipation of a decrease in U.S. interest rates allowed Chinese banks the flexibility to make this adjustment, reiterating that the decision was market-driven.

Tommy Xie, an economist at Oversea-Chinese Banking Corp., characterized the reduction in dollar deposit rates as a strategic approach to mitigate the impact of lower yuan interest rates. However, he cautioned that this measure alone might not be sufficient to discourage carry trades that utilize cheaper yuan borrowings to fund dollar purchases. Nomura Holdings' strategists expressed concerns in a recent note that "lowering onshore USD deposit rates may drive key accumulators of foreign currency to keep even more of their FX earnings offshore," potentially exacerbating China's negative balance of payment pressures.

In summary, Chinese state-owned banks have implemented rate cuts on U.S. dollar deposits, rejecting allegations of government influence and attributing the decision to market-driven factors. The objective is to adapt to global interest rate fluctuations and maintain stability in the dollar-yuan exchange rate.

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