Antler Capital

Stanley Tsai, CFA

Macroeconomics

Following consultations with the industry earlier this month, the PBOC has rolled out a new deposit pricing framework, which has the net impact of raising short-term rates while lowering long-term rates for depositors. In our view, this is marginally positive from a macro standpoint, but is far from a major market catalyst.
While policy rates were left untouched, the central bank has tweaked the way deposit rate ceilings are calibrated. The maximum add-ons to base current account, term deposit and negotiable CD rates are 10bp / 50bp / 60bp for SOE banks and 20bp / 75bp / 80bp for the rest of the banking system. This results in a flattening of the deposit rate curve, similar in form to the intended outcome of Operation Twist in the treasury market (Exhibits 1 and 2).
However, the latest move should not be construed as a signal of monetary easing by the PBOC. At the margin, the rate structure reform may encourage some additional consumer spending and corporate investments. But we expect the bulk of the impact to be seen in institutional money flows, with investors such as insurance companies moving away from term deposits to wealth management products and the rates market.
Average deposit rates were already very close to the ceiling prior to the change. And we believe the smaller banks may take the opportunity to raise short-term rates to attract retail money from the G-SIBs and each other. This may lead to further divergence in funding costs between the national and regional players, although we take some comfort from the fact that long-term rates are set to fall, minimizing the potential for irrational pricing that is locked in for two to three years.
Loan prime rates (LPRs) have held steady at 3.85% and 4.65% for one-year and five-year tenors. We continue to see little room for China's LPRs to change in the rest of 2021. Having said that, the runaway housing market seems increasingly more than a tail risk and may trigger a surprise lending rate hike on the long end if price appreciations show no signs of abating in 2H21.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 352.333px;">Exhibit 1: SOE Banks | Deposit Rate Ceiling (%)</td>
<td style="width: 352.333px;">Exhibit 2: Non-SOE Banks | Deposit Rate Ceiling (%)</td>
</tr>
<tr>
<td style="width: 352.333px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/214/570/original/image_44634500891624334029988.png?1624334029" class="editor-image img-responsive" data-smartkarma-image-id="214570"></figure>
Source: PBOC, Our analysis
</td>
<td style="width: 352.333px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/214/572/original/image_517531219111624334079589.png?1624334079" class="editor-image img-responsive" data-smartkarma-image-id="214572"></figure>
Source: PBOC, Our analysis
</td>
</tr>
</tbody>
</table>
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Following consultations with the industry earlier this month, the PBOC has rolled out a new deposit pricing framework, which has the net impact of raising short-term rates while lowering long-term rates for depositors. In our view, this is marginally positive from a macro standpoint, but is far from a major market catalyst.
While policy rates were left untouched, the central bank has tweaked the way deposit rate ceilings are calibrated. The maximum add-ons to base current account, term deposit and negotiable CD rates are 10bp / 50bp / 60bp for SOE banks and 20bp / 75bp / 80bp for the rest of the banking system. This results in a flattening of the deposit rate curve, similar in form to the intended outcome of Operation Twist in the treasury market (Exhibits 1 and 2).
However, the latest move should not be construed as a signal of monetary easing by the PBOC. At the margin, the rate structure reform may encourage some additional consumer spending and corporate investments. But we expect the bulk of the impact to be seen in institutional money flows, with investors such as insurance companies moving away from term deposits to wealth management products and the rates market.
Average deposit rates were already very close to the ceiling prior to the change. And we believe the smaller banks may take the opportunity to raise short-term rates to attract retail money from the G-SIBs and each other. This may lead to further divergence in funding costs between the national and regional players, although we take some comfort from the fact that long-term rates are set to fall, minimizing the potential for irrational pricing that is locked in for two to three years.
Loan prime rates (LPRs) have held steady at 3.85% and 4.65% for one-year and five-year tenors. We continue to see little room for China's LPRs to change in the rest of 2021. Having said that, the runaway housing market seems increasingly more than a tail risk and may trigger a surprise lending rate hike on the long end if price appreciations show no signs of abating in 2H21.



Exhibit 1: SOE Banks | Deposit Rate Ceiling (%)
Exhibit 2: Non-SOE Banks | Deposit Rate Ceiling (%)




Source: PBOC, Our analysis



Source: PBOC, Our analysis




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China Financials: Silver Linings Playbook

Glut and Famine: We Might See Snow in China This Summer 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows


China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 


Shanghai Shenzhen CSI 300 Inde (SHSZ300 INDEX EQUITY)

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

Shenzhen Stock Exchange Composite Index (SZCOMP INDEX)

China Macro: Operation Twist | The Deposit Version