China’s mulling of a ‘surprise’ deposit rate cut suggests a need to shore up coronavirus-hit economy

A cut in the sidelined official one-year deposit rate, unchanged since 2015, is unlikely to push down the cost of loans for battered companies. But the central bank’s hint that it is considering the move signals more policy measures may be required

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A lone worker eats during lunch break at a factory canteen in Wenzhou, China, on February 27. China is working to get its factories and its economy back up and running. Photo: AFP

Hao Zhou currently serves as a senior economist (emerging markets) with Commerzbank.

Published: 9:00pm, 5 Mar 2020Updated: 9:33pm, 5 Mar 2020

When China’s central bank announced last August that the loan prime rate would become the new benchmark for bank lending, the market regarded it as a milestone move towards full liberalisation of interest rates, which would allow commercial banks to price deposits according to their discretion and risk appetites.

As such, it seemed that official deposit rates – including the benchmark one-year deposit rate – would soon disappear from China’s banking industry. In fact, the People’s Bank of China (PBOC) has not touched these traditional policy rates since October 2015.

Yet recently, there has been talk among investors that China could opt to cut the official one-year deposit rate, to lower the cost of funds for coronavirus-hit companies. Such a policy move feels increasingly imminent after senior PBOC officials and advisers hinted publicly that the central bank could lower the rate.