State okays new postal savings bank
By Zhao Renfeng (China Daily)
Updated: 2005-07-29 06:16

The plan to reform the postal savings service has ignited heated discussion in recent years and the government is now considering what avenue the reform should take.

The postal savings service occupies 9.25 per cent of China's banking market, the fifth largest institution in terms of savings, but only conducts deposit business.

Deposit interest rates in postal savings are level with those of commercial banks, but money deposited in the service can be re-deposited in the central bank, which used to pay a preferential interest rate - more than 4 per cent.

The broader interest rate spread guarantees a stable income for postal savings, meaning depositors do not have to fear bad loans.

As such, the postal savings sector worked hard to lure deposits, while at the same time shouldering the central bank with a larger burden.

During the six years from 1996 to 2002, the central bank slashed interest rates eight times, but re-deposit rates stayed higher than initial deposit rates.

In 2002, the central bank forked out 18 billion yuan (US$2.21 billion) to compensate for deposits taking advantage of this rate gap.

Without any incentives to reform, the postal savings sector was reluctant, but the word came down that changes needed to be made.

In August 2003, the central bank announced a cut in interest rates to 1.89 per cent on new funds re-deposited by postal savings, lower than the one-year, 1.98-per cent rate offered by the postal savings system.

That move was aimed at forcing the postal savings sector to seek higher returns in the marketplace, while keeping risks to deposited money at a minimum.