This recent shift in deposit interest rates has sent ripples through the banking sector, sparking a wave of adjustments from various financial institutionsAs banks across the board reduce their rates on different types of deposits—including demand deposits, time deposits, and notice deposits—the once enticing allure of large-denomination certificates of deposit (CDs) has also diminished significantly.

In these changing dynamics, some smaller and medium-sized banks have opted to increase the interest rates on their short-term deposit products, indicating heightened competition for funds as the Lunar New Year approachesThe competition for capital around this time has reached a notable intensity, driven in part by the seasonal need for liquidity to manage year-end bonuses and increased consumer spending.

Industry analysts have pointed out that the tightening of year-end funds may be prompting local banks to raise rates on their short-term deposits as a strategy to attract customers

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However, looking ahead, the overarching trend appears to be a downward trajectory for deposit ratesWith the recovery of returns on wealth management products, it is expected that in 2024, investors will increasingly diversify their portfolios across various financial assets, such as deposits, investment products, and insurance.

It is becoming common to witness the phenomenon of ‘short-term spikes and long-term declines’ in deposit ratesThe latest data from various banks reveals that the interest rates for three-year fixed deposits, particularly at state-owned and select joint-stock banks, have been lowered to around 1.95%. Most joint-stock banks have similar rates hovering under 2% for these longer-term depositsMore alarmingly, the rates for large-denomination CDs have seen substantial reductions—starting December 22, 2023, the maximum interest rate for one-year and shorter large-denomination CDs dropped by 10 basis points, while the two-year rate fell by 25 basis points, and rates for three-year and five-year CDs were cut by 30 basis points.

By January 25, 2024, banks such as China Merchants Bank and Citic Bank reported that the annualized interest rate for individual large-denomination CDs starting from a deposit of 200,000 yuan had fallen to 2%. Additionally, the two-year CDs from China Merchants Bank experienced a similar decline, bringing their rates to 2.15%. The Agricultural Bank of China listed a 1.80% rate for one-year large-denomination CDs beginning from 200,000 yuan and an even lower 1.90% return for deposits of 1 million yuan.

A retail banking manager from a joint-stock bank disclosed that over the past year, despite fluctuations in the market, individual investors have remained notably loyal to deposit products—especially those like large-denomination CDs that typically offer higher yields

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However, with recent widespread reductions in yield, many clients have rushed in for consultations but ultimately decided against purchasing due to the excessive drop in rates.

According to Zhou Yiqin, the founder of Guanti Consulting, the lackluster performance of real estate, stock, and foreign exchange markets has resulted in increased risk aversion among residentsThis backdrop facilitated a surge in commercial bank deposits, transforming the competitive landscape into a situation where banks have shifted focus from a "deposit war" to becoming significant depositors themselves, unwilling to incur high costs for long-term deposits.

Despite the general decline in deposit interest rates, some smaller and medium-sized banks have continued to defy the trend by temporarily boosting short-term deposit ratesPublicly available information reveals that dozens of rural commercial banks have announced hikes in certain fixed deposit products, especially those with terms shorter than one year, indicating a responsive approach to the prevailing market conditions.

For instance, the Rural Commercial Bank in Runan stated that it would raise the interest rates for three-month and six-month fixed deposits to 1.50% and 1.70%, respectively

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Conversely, rates for one-year, two-year, and three-year fixed deposits were reduced from 2.25%, 2.70%, and 3.30% to 1.90%, 2.10%, and 2.35%. Likewise, the Zhenping Rural Commercial Bank announced an increase in fixed deposit rates effective from January 7 to March 31, with the one-year rate set to rise to 2.10% and the two-year rate to 2.35%.

These shifts have led to a recurring situation where deposit rates from banks begin to slant downward, resulting in instances of what is known as ‘rate inversion.’ According to Dong Ximiao, a chief researcher at Zhaolian, a typical feature observed in the current market is that the interest rate on five-year deposits is lower than—or at least equal to—the rates for three-year depositsSome large banks and joint-stock banks are offering three-year fixed deposit rates as high as 3.15%, while the five-year rates lag at just 2.75%. Moreover, certain institutions have established parity between their three and five-year rates, both sitting at 2.75%.

As highlighted by Zhu Keli, a standing member of the Chinese Information Association and founder of the National Research Institute for New Economy, the adjustable nature of funds is heavily influenced by supply and demand dynamics

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During the period surrounding the end of the year and the Lunar New Year, several factors, including year-end bonuses and heightened consumer expenditures, can significantly tighten liquidity, thereby pushing short-term deposit rates higherMeanwhile, long-term fixed deposit rates tend to be lower due to longer commitment periods and lower liquidity, leading to the observed inversions.

Dong has emphasized that this recent trend of inverted deposit rates signifies a perceptible banking sentiment regarding the future trajectory of deposit ratesBanks appear to be strategically cutting back on the absorption of longer-term deposits, anticipating a downward trend in deposit rates over the mid to long termWhile the presence of five-year deposits remains minimal, the overall impact of such inversions on the stability of bank deposits is likely to be limited.

Top financial analyst Gu Huaiyu noted that as year-end approaches, liquidity tightness often emerges

Some banks face substantial pressures to expand their liabilitiesCurrently, the rates for one-year certificates of deposit from state-owned joint-stock banks hover around 2.4%, only slightly below the one-year Medium-term Lending Facility rate at 2.50%, reflecting added motivation for banks to increase deposit rates in order to bolster their financing resources.

Additionally, the first quarter is typically a crucial period for bank lending activity, with the six-month national stock transfer interest rates showing a sharp decline to around 1.8%. These trends indicate considerable pressure on banks to continue lending as the new year begins.

Gu also indicated that the situation might stabilize following the introduction of one trillion yuan in reserve requirement ratio cuts on February 5, 2024, easing some pressure on year-end liquidity and reducing the likelihood of continued deposit rate inversions.

Even so, temporary fluctuations in cross-year funding have not detracted from the overall downward trend for deposit interest rates

Dong underlined that as China’s macroeconomic recovery gains traction and corporate financing demands pick up, banks will likely ramp up their lending and deposit acquisition efforts, leading to potential stability in residential deposit rates in the near futureNevertheless, it remains clear that the downward trajectory of risk-free interest rates in the Chinese market is a long-term trend.

For the average resident, as the allocation of assets becomes heavier in the categories of medium and long-term deposits or cash management products, returns could potentially declineIt is crucial for investors to strike a careful balance between risk and returns, taking into account their individual risk tolerance and investment needs while ensuring a diversified portfolio approach.

In light of the fluctuations across equity and bond markets, deposits remain a key focus for many investors looking to manage their financial assets

Dong emphasized that, with capital markets undergoing repeated turbulence and significant fluctuations in the net values of stocks, funds, and financial products, individuals have shown a marked decline in risk appetite, opting instead for increased savings.

Moreover, as deposit interest rates persistently decline, individuals seem to be modifying their asset allocation strategiesAnalyst Liu Yinping from Rong360 Digital Technology Research Institute stressed that with the current investment environment presenting challenges, alongside an unfavorable housing market outlook and a weak stock market, conservative investment behaviors are becoming more prevalentConsequently, investments in low-risk deposit accounts, insurance, and financial products are gaining favor.

Zhu has pointed out that as the Lunar New Year approaches, investors’ demand for financial asset allocation has increasingly leaned towards liquidity and security

In the deposit sphere, there's a noted preference for short-term products with higher interest ratesFor financial products, investors are gravitating toward mid to low-risk options that offer flexible terms.

The positioning of wealth management products is expected to emerge as a focal point for individual investors’ asset allocations in 2024. Dong indicates that since the beginning of the year, the overall rate of financial products showing negative net value has started to decline, and the market has witnessed a recovery in scaleNumerous wealth management products related to fixed income have continued to experience heightened returns, demonstrating a sustained performance above a month and a half.

Furthermore, with deposit rates trending downward and improved expectations among residents, the superior returns associated with financial products compared to fixed deposits are becoming increasingly apparent

This will enhance the appeal of these products as more residents seek to channel savings into better-performing options.

The recent reports from Citic Securities suggest that further reductions in deposit rates might occur in 2024, consequently enhancing the comparative edge of wealth management products, which could yield results above those of three-year fixed depositsAnticipated growth in the wealth management market is set to push figures back over the 30 trillion yuan mark by the second half of 2024, primarily driven by competitive enhancements led by state-owned banks.

Zhu notes that insurance products are garnering attention from a growing number of investorsIn his view, there is a noteworthy shift toward balanced asset allocation to mitigate risksModern individuals are increasingly embracing diversification and personalization in their investment portfolios, demonstrating a greater openness to new types of investment products and strategies.

Liu emphasizes that in recent years, the focus of wealth management companies has swung towards low-volatility, stable growth strategies, resulting in a significant uptick in the availability of low-risk products

High-liquidity products such as cash management offerings, cash-enhanced items, and those with seven-day minimum holding periods are enjoying increasing popularity.

Zhu has also remarked that to effectively meet investor allocation demands, financial institutions need to pay closer attention to market segmentation and the diverse needs of customers, introducing a broader array of products aimed at differing risk appetites and investment goals.

Ultimately, Dong Ximiao believes that in light of market volatility and the varied demands of investors, a delicate equilibrium between safety, returns, and liquidity will pose a long-term challenge for banks and wealth management firms alikeThus, in 2024, these institutions ought to accelerate efforts in attracting and nurturing specialized talents while bolstering analytical capabilities regarding macroeconomic conditions and financial market trends