The deposit rate in US dollars has also decreased!, After lowering the RMB deposit interest rate, multiple banks have made further moves

Recently, following consecutive cuts in RMB deposit rates by commercial banks, major domestic banks such as Bank of China have lowered their USD deposit rates.

The reporter learned from the interview that this is a proactive adjustment made by the bank after considering its own business strategy, changes in market supply and demand, and other factors, which is conducive to alleviating the problem of "inverted" domestic USD deposit and loan interest rates. In addition, depositors participating in US dollar deposits also face exchange rate risks, as exchange rate fluctuations may offset the gains caused by deposit interest rate differentials.

Many market analysts believe that the rising interest rates in the US financial market are driving up interest rates related to various US dollar deposit products worldwide. But as the Federal Reserve's interest rate hike cycle approaches its end, it is difficult for the US dollar to sustain its strength, and the spillover effects are expected to weaken. Holding foreign exchange deposits not only requires consideration of interest rate fluctuations, but also exchange rate trends.

Pan Gongsheng, Secretary of the Party Committee of the People's Bank of China, stated at the 14th Lujiazui Forum that the US dollar index began to strengthen after mid April. At the same time, coupled with the unstable foundation of domestic economic recovery, there have been some fluctuations in the RMB exchange rate. However, the overall operation of the foreign exchange market is stable, and the expected RMB exchange rate and cross-border capital flows in China remain relatively stable. Looking ahead, the overall operation of the Chinese economy remains stable with an upward trend, while some market institutions predict that the US economy may face a mild recession.

Relieve the "inverted" interest rates of domestic USD deposits and loans

Due to the continuous interest rate hikes by the Federal Reserve and other factors, since 2022, domestic US dollar deposit interest rates have significantly increased, and there has been a certain degree of "inversion" in domestic US dollar deposit and loan interest rates.

The Monetary Policy Implementation Report for the first quarter of 2023 shows that in March, the weighted average interest rate for one-year US dollar large deposits in China was 5.67%, a year-on-year increase of 4.15 percentage points. The weighted average interest rate for one-year US dollar loans in China during the same period was 5.34%, a year-on-year increase of 3.74 percentage points.

"Affected by the continuous interest rate hikes by the Federal Reserve, the US dollar deposit interest rate has risen accordingly." The Chief Economist of CITIC Securities clearly pointed out that the Federal Reserve has continued to raise interest rates significantly against the backdrop of high inflation in the United States, tightening US dollar liquidity and driving high US dollar deposit interest rates in China. Specifically, the US economy is relatively resilient, inflation stickiness slightly exceeds expectations, and the hawkish stance of Federal Reserve officials has led to a pullback in market expectations for interest rate cuts. Although the Federal Reserve held interest rate levels unchanged at its June meeting, the dot matrix chart shows that the endpoint level of interest rate hikes has increased to 5.5% to 5.75%. This indicates that Federal Reserve officials believe there are still two 25BP interest rate hikes this year, and the market is still playing a game with the Fed's subsequent monetary policy changes.

Wen Bin, Chief Economist of China Minsheng Bank, told First Financial that in the current situation where the expectation of continuous interest rate hikes by the Federal Reserve has cooled down, major banks have appropriately lowered domestic US dollar deposit interest rates, which is conducive to maintaining the competitive order of the domestic US dollar deposit market, streamlining the pricing mechanism of domestic US dollar interest rates, and alleviating the problem of "inverted" domestic US dollar deposit and loan interest rates.

The inversion of domestic USD deposit and loan interest rates in commercial banks has also objectively increased the motivation for commercial banks to lower USD deposit interest rates.

Since June, commercial banks have launched a new round of interest rate cuts. Wen Bin said that objectively, the appropriate reduction in domestic US dollar deposit interest rates also has a certain degree of synergy with the decrease in RMB deposit interest rates, which is conducive to reducing the demand for US dollar deposits by domestic enterprises and residents, and has a positive significance for maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level.

The high-yield strategy of seeking US dollar deposits is not suitable

Against the backdrop of banks continuously lowering RMB deposit rates, are there any risks associated with slightly higher interest rate USD deposit products? Is it necessary for ordinary depositors to exchange and deposit US dollars?

It is clearly believed that participating in US dollar deposits mainly faces exchange rate risks. In recent years, the flexibility of the RMB exchange rate has increased, and exchange rate fluctuations may offset the benefits brought about by deposit interest rate differentials. The current US dollar to RMB exchange rate is at a relatively high historical level, mainly influenced by factors such as the periodic rise of the US dollar index. Therefore, although the one-year US dollar deposit interest rate is slightly higher, exchange rate fluctuations one year later may offset the gains caused by deposit interest rate differentials.

Wen Bin gave an example, saying, "Currently, the highest interest rate for one-year US dollar savings deposits in major domestic banks does not exceed 2.8%, while the average interest rate for one-year RMB deposits is about 2%, with a spread of about 0.8 percentage points. According to market institutions' expectations, the exchange rate of the RMB against the US dollar may appreciate to 6.8 yuan in the second quarter of 2024, an increase of about 6.5% from the current level. Based on this expectation, if the exchange rate is used to purchase US dollars and deposit them in banks now, after calculating the deposit returns and exchange rate appreciation effects one year later, the actual loss will be about 5.7 percentage points."

Based on this, Wen Bin suggests that financial institutions should also adhere to the risk neutral concept when conducting USD deposit business with customers, and guide customers to manage USD positions based on real needs. If one sidedly uses the excuse of high US dollar deposit interest rates to "induce" customers to withhold or exchange foreign exchange deposits, without elaborating on the exchange rate risks involved, it is likely to mislead customers.

For depositors, the strategy of seeking high returns from US dollar deposits is also not suitable. "Depositors should establish a risk neutral philosophy and manage their USD positions reasonably based on their actual needs," Mingming said.

Wen Bin also said, "Currently, simply seeking high interest rates from US dollar deposits may not be appropriate, and it may even outweigh the benefits."