Chinese small and medium-sized banks are competing to raise their deposit rates, a move analysts said Monday indicated tightening liquidities in the market and deficiencies in the assessment mechanisms of the banks.
Beijing-based China CITIC Bank has raised its two-year and three-year deposit rates by 10 percent since September 19.
Other banks such as Beijing-based China Everbright Bank also raised their deposit rates recently.
In addition to fixing higher deposit rates to absorb savings, the banks launched some financing products with higher than expected return rates.
The Bank of Nanjing issued a 35-day financing product with its expected return rate reaching as high as 6.1 percent on September 25, according to bankrate.com.cn, a financing products portal.
"The rise in recent deposit rates could be ascribed to tightening liquidities of the financial sector," Zhang Taowei, an associate professor at the School of Economics and Management of Tsinghua University, told the Global Times Monday.
The Shanghai Interbank Offered Rate (Shibor), the benchmark interest rate in China's interbank market where banks trade currencies, and an indicator of market liquidities, has seen a noticeable rise in the past month. The one-week lending rate jumped to 4.203 percent on September 30 from 3.742 percent on September 2.
Zhang said the current tightening liquidities will not be resolved in the short term due to the short-sighted strategies that some banks undertook after the global financial turmoil in 2008.
China launched a 4 trillion yuan ($653.6 billion) fiscal and monetary stimulus program in 2008 to battle the global financial crisis, and some banks used short-term funds to offer loans for long-term investment projects such as airport construction, "that is the main cause of the liquidity tightening for those banks now," Zhang noted.
Jin Lin, a senior banking analyst with Orient Securities, said the recent rise in deposit rates indicated some deficiencies with the assessment mechanisms for the banks.
Commercial banks always assess their business performances based on indexes like the deposit scales at quarterly end, "which forced the banks to draw deposits with high rates," Jin noted.
The increasing competition among banks to draw deposits will narrow the bank's interest margins and net profit, according to Jin.
In China, banks were allowed to float deposit rates at 1.1 times the benchmark rate in June 2012, and lower the lending floor to 0.7 times the benchmark rate in July 2012, as the country pushed forward the liberalization of interest rates. The central bank further removed controls on the lending rate on July 19 this year, while the lifting of the ceiling on deposit rates is seen by observers as a move that will happen soon.
The commercial banks will face more pressure to make profits once the deposit rate is liberalized, "if they didn't change their assessment mechanism," said Jin.
But Jin said a repeat of "serious capital shortages that happened this June" will be unlikely in the upcoming months of this year, as the banks have stored more money to avoid liquidity tightening.