New bank rate rules change saving habits

Most Chinese banks are scrambling for deposits to meet the China Banking Regulatory Commission rules that require they keep loans to a certain proportion of their respective deposits.

Banks' profits will show "obvious" declines this year as economic growth slows, credit demand softens and net interest margins narrow, said the China Banking Association earlier in July.

The pressure generated from more liberalized interest rates will mainly go to the corporate banking sector. "And surely the spread will continue to fall in the future," Li said.

The banking association said regional small and medium-sized lenders probably cannot stand the crush of a much-narrowed spread, and will become a "short board" for interest-rate liberalization.

For these lenders, credit assets take up more than 80 percent of their total assets, and interest income also accounts for 80 percent of their total income, it said.

As for major banks, credit assets account for 50 to 60 percent of the total assets, while interest income takes up 60 percent of total income.

"This year, it's getting more difficult for small banks like us to collect deposits," said Deng Zhongwu, general manager of the Bank of Sanmenxia in Henan province.

"Our market shares in lending to small enterprises, an area we are concentrating on, have been squeezed by big lenders because they want to adjust their business to counter the narrowing spread due to more market-oriented rates, and show their response to the government's call."

Ma Weihua, president of China Merchants Bank Co Ltd, added: "The liberalization of interest rates is a test of life and death for us."

The lender estimated that if rates become market-oriented, 20 to 30 percent of its clients will have greater bargaining power, which means lending rates to those clients are likely to go down by 15 to 20 percent.

Therefore, it started to restructure its business in 2010, trying to improve the proportion of retail banking and lending to small and medium-sized enterprises to make the effect less once rates were loosened.

But even the "Big Four" State-owned banks are getting increasingly nervous.

Zhang Yun, president of the Agricultural Bank of China Ltd, urged employees at a half-year convention: "In the coming months, we must closely watch market prices, and adjust ABC's pricing and strategy of its liability business in a timely and flexible way."

The State-owned banks' fast reaction and proactive attitude in adjusting prices have shocked smaller lenders and made them even more restless.