Interest dips below inflation rate, pushing savers to move money
China's recent cut in interest rates, the sixth since November last year, has made the return on deposits lower than inflation. This could result in outflows in banks' deposits, injecting liquidity that could help warm the cooling economy, analysts said Sunday.
The People's Bank of China (PBC), the country's central bank, announced on Friday it would lower the country's one-year benchmark bank lending rate by 25 basis points to 4.35 percent, and the one-year benchmark deposit rate by 25 basis points to 1.5 percent, effective Saturday.
Along with the interest rate cut, the bank reserve requirement ratio (RRR), the amount of money banks are required to hold in reserve, was also cut by 50 basis points for all banks.
The RRR for some banks will be lowered by an additional 50 basis points in order to provide financial support for small companies and rural areas.
The PBC's Friday move marks the sixth interest rate cut since November 2014 and the fourth across-the-board RRR reduction since the beginning of this year.
The current one-year deposit interest rate of 1.5 percent is lower than the country's inflation rate of 1.6 percent recorded in September, meaning that the real deposit rate has entered into the negative realm.
The value of a deposit of 100,000 yuan ($15,750) will shrink by around 100 yuan in a year, according to media calculations on Saturday.
"The low deposit interest rate may result in an outflow in banks' deposits and in turn boost people's motivation to invest," Liu Xuezhi, an analyst at the Bank of Communications, told the Global Times on Sunday, noting that investment in the stock market may rise amid low interest rates.
Stock market boost
Li Daxiao, chief economist with Shenzhen-based Yingda Securities, also noted on Sunday that the recent monetary loosening may help bring another bull run for the stock market.
"The stock market is expected to react positively on Monday," Li told the Global Times.
Stock markets in Europe and the US also surged Friday, boosted by China's decision to cut interest rates, Reuters reported Friday.
Along with the Friday rate cut, the central bank also announced it was lifting the ceiling on deposit interest rates, amid the government's efforts to deepen financial reforms.
Friday's cut in interest rates and the RRR is expected to inject around 800 billion yuan to the market, according to a research note the China Merchants Securities sent to the Global Times on Sunday.
"The interest rates and RRR cut … is expected to help stabilize growth, ease companies financing burden and increase their motivation to invest," read the research note, noting that stable growth in investment will still be the major driving force for growth in the future.
China's economic growth slowed to 6.9 percent in the third quarter, the first time the country reported a quarterly growth rate lower than 7 percent in six years, government data showed on October 19.
Major economic indicators like trade volume and investment also point to great downward pressure in the economy. Customs data showed that China's trade volume dropped 7.9 percent year-on-year in the first three quarters and growth in fixed-assets investment also dropped to a 15-year low of 10.3 percent.
"China is expected to continue the loosening trend in its monetary policy in a bid to combat the slowdown, with a RRR cut more likely in the future," said Li from Yingda Securities.
The PBC also said in a post on Friday that it will enhance its "policy fine-tuning" in a bid to provide a reasonable level of liquidity for the economy.
Six interest rate cuts
November 22, 2014, one-year benchmark bank lending rate cut by 40 basis points to 5.6 percent, deposit rate cut by 25 basis points to 2.75 percent.
March 1, 2015, lending rate cut to 5.35 percent, deposit rate to 2.5 percent.
May 11, 2015, lending rate cut to 5.1 percent, deposit rate lowered to 2.25 percent.
June 28, 2015, lending rate cut to 4.85 percent, deposit rate to 2 percent.
August 26, 2015, lending rate cut to 4.6 percent, deposit rate to 1.75 percent.
October 24, 2015, lending rate cut to 4.35 percent, deposit rate to 1.5 percent.
