Smaller net interest margin for Chinese banks

Chinese banks are facing a smaller net interest margin as they compete for deposits after having been allowed to set their own deposit rates at no more than 1.1 times the benchmark.

Smaller banks, including the China Minsheng Banking Corp., Ltd. and the China CITIC Bank, both raised their one-year deposit rate to 3.575 percent, higher than the 3.5-percent benchmark rate.

Meanwhile, the one-year deposit rate at the nation's four major state-owned banks, including the Industrial and Commercial Bank of China and the China Construction Bank, remain at 3.5 percent.

The People's Bank of China, the central bank, announced on June 7 a 25-basis points cut in benchmark interest rates, which took effect on June 8. It also allowed financial institutions to set their deposit rates at no more than 1.1 times the benchmark and lending rates at no less than 80 percent of the benchmark.

Lian Ping, chief economist of the Bank of Communications, said medium-sized and small banks will face relatively bigger pressure in the narrowing net interest margin. Meanwhile, the cut of lending rates will also affect banks' profitability.

Guo Shiping, a finance researcher with Shenzhen University, said the interest rates battle between banks will also prompt them to further improve services and products to attract clients.

China's commercial banks previously were generally not allowed to offer deposits rates higher than the benchmark. Analysts say the adjustment marked a big step forward in the nation's efforts to push forward market-oriented interest rates.