TMTPOST -- China's major state-owned commercial banks announced Friday reductions in deposit interest rates.

The one-year fixed-term deposit interest rate was cut by 25 basis points to 1.1%, according to the official deposit interest rates released by Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China and Bank of Communications.

After the reductions, the deposit interest rates with terms of 2, 3 and 5 years are 1.2 percent, 1.5% and 1.55%, respectively.

This was the second deposit interest rate cut for state-owned big banks in 2024, with previous cut implemented in July.

For instance, a deposit of 200,000 yuan placed in a three-year term deposit would generate 1,500 yuan less in interest after the 25-basis-point cut.

This marks the sixth time since September 2022 that state-owned banks have proactively lowered deposit rates, with the previous reduction taking place in July 2023. Compared to the earlier round of cuts, the latest adjustment sees a steeper reduction for fixed-term deposits, which were previously lowered by 10 to 20 basis points depending on the term.

Meanwhile, China's central bank is considering a cut of 0.25 to 0.5 percentage points in reserve requirement ratio at an appropriate time before the end of 2024, depending on market liquidity situations, Pan Gongsheng, governor of the People's Bank of China, said on Friday.

The central bank is also considering reducing the interest rate of seven-day reverse repos by 0.2 percentage points and lowering the medium-term lending facility (MLF) interest rate by 0.3 percentage points, Pan stated at the Annual Conference of Financial Street Forum 2024.

The reserve requirement ratio was cut by 0.5 percentage points in late September. Major state-owned commercial banks announced reductions in deposit interest rates on Friday morning. The loan prime rate (LPR), which will be released on October 21, is expected to move downward by 0.2 to 0.25 percentage points, according to Pan.

As deposit returns diminish, many households may start exploring alternative investment options, such as wealth management products and stock markets, in search of higher returns.

“Since the beginning of the year, as deposit rates have fallen, we’ve seen an increase in purchases of bank wealth management products,’ said Zhao Qingming, an international finance expert, in an interview with AsianFin.

Although the stock market has been volatile recently, the surge in late September encouraged residents to reallocate some of their funds to equities. This may further drive the growth of equity markets and other non-deposit assets, though it will require households to adopt a more cautious and diversified approach to managing their portfolios, balancing risk with return, Zhao added.

As deposit rates continue to decline, low-risk cash management products, fixed-income wealth management products, and public mutual funds are becoming more attractive. Industry experts have noted that the asset management sector must adapt to these changes by offering a broader range of products that align with residents' evolving investment needs.

The reduction in deposit rates is not an isolated move but is closely tied to the broader macroeconomic environment. According to Zhao, during periods of economic downturn, interest rates typically fall to stimulate economic growth. With several stimulus policies already introduced in the second half of this year—particularly since late September—certain economic indicators have begun to show signs of recovery, raising expectations for an improvement in macroeconomic data in the fourth quarter.

Some industry insiders believe that more banks, particularly joint-stock commercial banks, will soon follow the lead of state-owned banks in lowering their deposit rates. Meanwhile, smaller regional banks may implement their own rate reductions in stages.

Xue Hongyan, deputy director of the Xingtu Financial Research Institute, noted that lowering deposit rates helps banks reduce their funding costs, enabling them to pass on the savings to borrowers by cutting loan rates. This, in turn, supports the policy goal of channeling financial resources into the real economy.

He further explained that small and medium-sized banks face higher costs in attracting deposits due to their smaller branch networks and customer bases. As a result, their deposit rates tend to be slightly higher than those of larger banks.

However, by following the lead of major banks in reducing rates, smaller institutions can maintain their relative pricing advantage without risking a loss of deposits to larger competitors.