CHINA has asked its commercial banks to cap rates offered on some deposits from next week onwards, in its latest move to lower lenders’ funding costs to support the world’s second-largest economy.

The four biggest state-owned banks, including Industrial and Commercial Bank of China, can offer up to 10 basis points above the benchmark rates on so-called agreement and call deposits, while other lenders have been told to cap the ceiling at 20 basis points, according to a notice seen by Bloomberg News.

The change would imply a drop of 40 to 55 basis points from previous ceilings on such deposits, said Guotai Junan Securities. The move, following recent rounds of deposit rate cuts in early May and last year, would further alleviate pressure on banks as they strive to balance shrinking margins and government directives to beef up lending support to the economy.

The notice, which takes effect from next Monday (May 15), was communicated through the nation’s interest-rate self-disciplinary mechanism overseen by the central bank. Reuters reported on the move earlier.

The CSI 300 Financials Index rose as much as 1.5 per cent in early trading on Thursday, extending this year’s gain to 6.9 per cent.

China’s commercial banks have had some leeway in setting their own rates since the central bank scrapped direct control in 2005. The People’s Bank of China, however, maintains substantial sway by setting a ceiling and floor for rates through the interest-rate self-disciplinary body.

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The latest adjustment will effectively lower rates on agreement and call deposits at medium and small banks, China Merchants Securities analyst Liao Zhiming wrote in a Thursday report, adding that the impact will be relatively limited on big lenders. The highest rate for agreement deposits would be 1.25 per cent for the four biggest banks, and 1.35 per cent for other lenders after the move, as indicated by the note.

Guotai Junan said the overall impact is likely to be limited as most lenders’ current rate offerings remain below the new caps.

Chinese banks are under pressure to maintain profitability as their earnings are weighed down by falling rates and a government push to provide cheap loans to small businesses and homebuyers. BLOOMBERG