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China’s state banks told to lower cap on dollar deposit rates
Interest rates offered by Chinese banks on dollar deposits of $50,000 or more will now be capped at 4.3%, according…
A self-regulatory committee supervised by the country’s central bank has urged big state-owned banks to decrease dollar deposit interest rates, according to four people with direct knowledge of the subject.
This may encourage Chinese companies, particularly exporters, to settle foreign exchange receipts in yuan, which has fallen to six-month lows versus the dollar. The strong US dollar and interest rate hikes by the Federal Reserve have pushed many Chinese companies to stockpile dollar revenues.
Interest rates offered by Chinese banks on dollar deposits of $50,000 or more will now be capped at 4.3%, according to the persons, who declined to be identified because they were not authorized to speak to the media.
According to them, the adjustment went into effect on Tuesday, and the new rates the big banks can offer would be reduced by up to 100 basis points from the previous cap of 5.3%.
Disappointing economic data, increasing yield differentials with the US, looming corporate dividend payments, and persistent capital outflows via overseas selling of stocks and bonds have all contributed to the yuan’s depreciation.
Since January, when China reopened its borders, the yuan has lost more than 6% against the dollar, making it one of the worst performing Asian currencies this year. It was last worth 7.1199 per dollar.
Last month, China’s central bank stated that it will firmly limit big changes in the currency rate and investigate ways to tighten the self-regulation of dollar deposits.
A growing interest rate differential between the world’s two largest economies has fueled a so-called carry trade, in which investors borrow in one currency to fund purchases in the other, in order to profit.
“Subsequent carry trade will have to bear higher FX risks, and the move (to lower the cap on dollar deposit rates) could be considered as an official counter-cyclical measure,” a yuan trader said of the move.
China’s central bank has been tranquil since the yuan broke over the psychologically crucial 7 per dollar barrier in May. Analysts and traders, however, felt the People’s Bank of China (PBOC) would implement policy actions if the pace and magnitude of the losses became unsettling.
During earlier waves of yuan depreciation, the central bank issued verbal warnings against yuan one-way bets. It has also employed a ‘counter-cyclical component’ to price the yuan’s daily guiding rate in order to reduce market “herd effects” and has altered its FX risk reserve ratio to preserve the yuan.
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