As of December 1, a profound shift is unfolding within China's banking landscape as significant measures targeting deposit rates come into effect, marking the end of an era characterized by elevated interest returns. These modifications arise in the wake of regulatory advancements aimed specifically at the interbank lending sector and corporate deposits, representing a strategic move expected to redefine how banks approach their liabilities and how market interest rates align.

The initiatives announced primarily suggest that non-bank interbank demand deposits should be priced according to market benchmarks, specifically the seven-day reverse repurchase agreement rates set by the central bank. This is expected to correlate demand deposit rates closely with prevailing monetary policy, creating an environment where banks cannot offer rates significantly above this benchmark without regulatory repercussions. Moreover, an additional clause termed the “interest rate adjustment guarantee clause” will be integrated into corporate deposit agreements to ensure that changes in market rates are reflected promptly, elevating transparency in banking practices.

This regulatory shift follows the prohibition of “manual interest supplementation” introduced earlier this year, aimed at curbing hidden costs associated with deposits in the banking sector. It is believed that as standardization of deposit rates takes hold, the overall cost of bank liabilities will decrease, which could potentially enhance net interest margins by around 1-2 basis points. While banks might face heightened challenges in managing individual liquidity, the overarching impact on industry liquidity is forecasted to remain limited.

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The result of these new guidelines has sparked various analyses within financial circles. Some experts, like Zeng Gang, director of the Shanghai Financial Development Laboratory, maintain that the interchangeability of corporate and interbank deposits implies that banks may proactively lower corporate deposit rates to manage their overall funding costs more effectively. This downward pressure might particularly affect large value agreements and structured deposits, thereby significantly reducing interbank deposit rates.

Statistical data from regulatory releases highlights that since 2022, net interest margins of commercial banks have witnessed a steady decline, with the net interest margin reported at 1.53% by the end of the third quarter of 2024 - a stark contrast compared to previous years. This overall tightening of profit margins has prompted calculation from various market institutions predicting significant impacts on interbank demand deposits, with expectations of further reductions in net interest margins as a direct consequence of the new initiatives.

Interestingly, the average interest rate on interbank demand deposits hovers around 1.70%, noticeably above the reverse repurchase rate of 1.50%. Analysts estimate that should these interbank rates see a reduction of approximately 20 basis points due to the new regulations, banks would report savings in interest expenditures reaching up to 28 billion yuan, thus optimizing their liability management further.

The implications of these regulations extend beyond merely adjusting rates. Market participants raised concerns about potential shifts in deposit flows following the formal implementation. With interbank demand deposits expected to decline in attractiveness, some banks may witness a notable outflow of these deposits as investors seek alternative avenues promising higher returns or liquidity. Indicators from the bond market, such as the reduction in spreads of credit bonds, suggest a responsive market atmosphere eager to react to rate changes.

While the dominant narrative has warned of potential liquidity shortages for banks, alternative perspectives question the magnitude of such impacts. Analysts like Liao Zhiming from Huayuan Securities argue against fears of banks experiencing a significant withdrawal of funds, anticipating that the newly prescribed regulatory framework will actually mitigate generalized deposit pressures rather than exacerbate them. This implies a redirection of funds primarily back into the banking system, thereby fostering a more stable liquidity environment than previously perceived.

Highlighting the vulnerability of larger state-owned banks to these reforms, commentators emphasize their historical dependency on interbank deposits for funding. Statistics revealing that state-owned banks have relied heavily on interbank deposits, with substantial increases even during recent regulatory shifts, stir conversations about the sustainability of such a financial structure moving forward. The broad assumption posits that if state-owned banks fail to supplement their deposits adequately, they might face intensified asset-liability misalignments.

In anticipation of these systemic changes, banks have been urged to engage in more adaptive asset-liability strategies, seeking innovative mechanisms to attract and retain deposits from businesses and individuals alike. As financial institutions recalibrate amidst an evolving interest rate landscape, regulatory bodies continue to foster an economic atmosphere ripe for adjustments that align both market realities and consumer expectations.