Who Needs Economic Reform? China Cuts Deposit Rate
The book Red Capitalism wasn’t overstating things when it said that Chinese economic reform stalled out in the mid-2000s. Foreign investment in the stock exchange was delayed, property taxes are “never” happening after a decade of work, the capital account is closed, mercantilism was turned up to the max with export sectors relatively unrestricted during SARS2 lockdowns while import sectors were bottled up. The capital account is closed and the currency nowhere near floating. Belt and road loans going sour. Now a major banking reform, market deposit rates, are going bye-bye.
信号!国有大行拟下周集体调降!存款利率或进一步下调?
Securities Times Brokerage China reporters confirmed from a number of bankers that relevant departments have issued relevant notices to adjust the self-regulatory upper limit of agreement deposits and notification deposits, which will be implemented from May 15. Among them, state-owned banks shall not exceed the benchmark interest rate plus 10 basis points, and other financial institutions shall not exceed the benchmark interest rate plus 25 basis points.
It is understood that the proposed adjustment of the self-discipline upper limit of two types of deposits, agreement deposits and call deposits, aims to guide banks to further reduce deposit interest rates. At present, the call deposit rates of the six major state-owned banks are 0.45% for 1 day, 1% for 7 days, and 0.25% for demand deposits.
Some analysts told reporters from brokerage firms in China that relevant departments have guided the flow of funds to "live" and support the real economy as much as possible and reduce financing costs.
Prior to this, major state-owned banks had collectively lowered personal deposit rates in September 2022. The market expects that more banks will join the ranks of lowering deposit rates. In order to stabilize interest rate spreads and reduce debt costs, banks have also been proactive in recent years. With the continuous deepening of interest rate liberalization reforms in China, banks have significantly increased their initiative in managing debt costs.
Deposit rates are being cut to finance loan rate cuts.
The reporter also learned from senior bankers that starting from the first quarter of this year, banks have been lowering the loan interest rates of small and micro enterprises in accordance with national policies to support potential small, medium and micro enterprises to obtain sufficient financial support. Some time ago, the People's Bank of China lowered the deposit reserve ratio to stimulate credit, hoping to stimulate the economy and achieve a full economic recovery as soon as possible.
China used financial repression in the 2000s as part of a recapitalization plan and to help finance economic expansion. The reversal of this policy tells us China is in serious economic trouble. Not necessarily a crisis, but this is pretty much an admission that all reform efforts are dead. China isn’t developing into a consumer or import economy; it is turning into a hyper-mercantilist economy. Perhaps China anticipates decoupling and assumes tariffs and sanctions are coming no matter what, in which case mercantilist bank policy isn’t altering the eventual course of the global economy.
Additionally, I’ve seen some coverage speculating lower deposit rates will spur spending or investing. Perhaps its an attempt to follow in the Fed’s footsteps and create an “everything bubble” in financial assets. Historically though, Chinese have approached savings in a goal-seeking manner. Which is to say, if deposit rates go up, they save less because they can hit their goal with less capital. If deposit rates go down, they save more to hit their target. This is the opposite of the deeply-indebted U.S. where consumers cut debt and save more as rates rise.
In conclusion, China’s reopening is in deep trouble and the government cannot get the economy going. Their reform efforts are also dead. The long delayed reforms are now to the point where the unreformed economy requires unreformed policies. Financial repression via artificially low loan and deposit rates helped boost output during the boom years. This was reformed, but the economy didn’t. The old economy that requires deposit subsidies for growth, now requires deposit subsidies for survival.
Nothing I’ve written prevents the government from engineering a stock market boomlet or a period of more rapid growth, but the long-term outlook is decidedly negative even before supposing a non-braindead, non-traitorous U.S. president decides to offset Chinese domestic and international economic policies with U.S. responses.