Summary of Key Points
Recently, the deposit market has shown a contradictory phenomenon of both increases and decreases in interest rates. On one hand, small and medium-sized banks in regions such as Henan, Zhejiang, and Yunnan have continuously lowered the interest rates on 3-year and 5-year deposits (in some cases, the 5-year rate even became lower than the 3-year rate, creating an inversion). On the other hand, the four major state-owned banks have restarted the issuance of 5-year large-denomination certificates of deposit, which had been suspended for nearly a year. Some rural and town banks in Hubei and Guangdong have raised deposit rates, with some increasing by up to 33 basis points at a time. This divergence reflects the structural adjustments made by banks under the dual pressures of narrowed profit margins (low net interest margins) and the competition for deposits, highlighting the differences in their funding costs, customer bases, and business strategies.
Detailed Explanation
1. Mainstream Rate Cuts: Banks' Profits Are Thin, So Lowering Rates Is a Last Resort
Banks earn money primarily through the "interest margin" — the difference between the interest they charge on loans and the interest they pay to depositors. This margin has been shrinking significantly; in the first quarter of 2026, the net interest margin of commercial banks dropped to a record low of 1.4%, and for the major state-owned banks, it was only 1.29%. In simple terms, banks are struggling to cover their costs.
As a result, many small and medium-sized banks have chosen to lower deposit rates. For example, several banks in Zhejiang reduced the interest rates on certain products by up to 20 basis points in July, while rural banks in Henan and Yunnan even made the 5-year rate lower than the 3-year rate. This is not out of malice but a attempt to reduce interest payments to depositors and preserve some profit.
2. Local Rate Hikes: Small and Medium-Sized Banks Fear Losing Deposits, So They Raise Rates to Retain Customers
Why do some small and medium-sized banks raise rates? Because the major banks have restarted the issuance of 5-year large-denomination certificates of deposit, attracting their customers. Although the interest rates on these certificates are not particularly high (for instance, 1.6% for 5-year certificates issued by ICBC), the brand credibility of the major banks is high, and many depositors are willing to transfer their money there (a phenomenon known as a "siphon effect"). For example, the Zaoyang Rural Bank in Hubei raised the interest rates on six products, and the Wuhua Huimin Rural Bank in Guangdong increased the 3-year rate by 33 basis points. These smaller banks have to offer higher rates to retain local customers who are sensitive to interest changes.
3. Major Banks Restarting 5-Year Certificates of Deposit: Not to Compete for Deposits, but to Stabilize Funds
The major banks are not trying to steal deposits from small and medium-sized banks; instead, they are addressing two issues:
- Dealing with the Deposit Maturity Wave: Many deposits will mature this year, and if depositors withdraw all their money, banks may face a shortage of long-term funds.
- Matching Long-Term Loans: A large portion of the loans issued by banks are for more than 5 years (such as mortgages), and these require long-term deposits to match. If there is a mismatch between the maturity of loans and deposits, it can lead to financial problems.
Moreover, the major banks issue these certificates in limited quantities, which helps stabilize their long-term funding while controlling interest costs and preventing further pressure on profits.
4. The Root of the Divergence: Significant Differences Between Major and Small/Medium-Sized Banks
The reasons for the contrasting strategies are due to the fundamental differences between the two types of banks:
- Funding Costs: Major banks have access to low-cost current deposits (such as corporate accounts and salary cards), allowing them to issue long-term certificates occasionally. Small and medium-sized banks, lacking this advantage, rely on higher rates to attract deposits, which increases their costs and makes them more sensitive to rate changes.
- Customer Structures: Major banks have a large customer base with high trust, so depositors are less likely to move elsewhere. Small and medium-sized banks depend mainly on local customers who are very sensitive to interest rates; when major banks offer higher rates, these customers may switch.
- Profit Models: Major banks now generate income from various sources, including wealth management services (selling funds and financial products). Small and medium-sized banks rely primarily on loans, and higher deposit rates can squeeze their profit margins, forcing them to raise rates periodically.
5. Future Trends: The Divergence Will Continue, but Local Rate Hikes Are Unlikely to Become the Norm
Experts predict that this pattern of mixed interest rate movements will continue, but it will not lead to a general increase in rates across the industry:
- Major Banks: They will issue 5-year certificates in limited quantities and adjust them based on loan demand and profit conditions.
- Small and Medium-Sized Banks: Local rate hikes are temporary; the pressure on net interest margins is too high, and long-term high-rate deposits could result in greater losses. In the long run, they need to shift their focus from relying on high rates to attract deposits to developing local businesses and services (such as providing settlement accounts for local enterprises and residents) to reduce costs.
In summary, banks are making these adjustments to balance profit preservation with deposit retention. Ordinary depositors can choose based on their needs: those seeking safety can opt for major banks' large-denomination certificates of deposit, while those looking for higher rates can consider short-term products from local small and medium-sized banks, but they should be aware of the associated risks.
(The translation maintains the original Markdown structure, using clear and natural language suitable for financial journalism, adapting expressions to the target audience's cultural and reading habits, and ensuring the accuracy and consistency of financial terminology.)