Summary of Key Points
The deposit market in July 2026 exhibited a trend of overall decline with some counter-trends: interest rates on most deposit terms (for both regular and large-denomination certificates of deposit) continued to fall, but the 5-year rate showed an upward reversal. To cope with the pressure of attracting deposits, small and medium-sized banks (rural and private banks) raised their medium- and long-term deposit rates, leading to a divergence from larger banks. The issuance of 5-year large-denomination certificates of deposit resumed, albeit with limited quantities. Overall, the yield on structured deposits decreased, but the highest expected returns for city commercial banks and foreign-funded banks increased. Banks are struggling to find a balance between reducing costs and retaining customers, as the downward trend in interest rates continues.
1. Most Term Rates Decline, Except for the 5-Year Rate
In July, interest rates on regular deposits across all terms from 3 months to 3 years decreased (for example, the 1-year rate dropped from 1.265% to 1.263%), while the 5-year rate rose slightly by 0.7 basis points (0.007%, which means earning an additional 7 cents on a deposit of 10,000 yuan per year). The situation was even more pronounced for large-denomination certificates of deposit: rates on all terms except the 5-year decreased significantly (by 10.45 basis points), while the 5-year rate increased by 2 basis points.
Why did the 5-year rate rise? On one hand, some banks sought to attract long-term depositors by locking in their funds. On the other hand, small and medium-sized banks focused on the 5-year term because long-term deposits provide stable liabilities, and they had to offer higher interest rates to compete for customers.
2. Small and Medium-Sized Banks Take the Opposite Approach
The medium- and long-term deposit rates of rural and private banks not only did not decline but increased. The reasons are straightforward:
- Inherent Disadvantages: These banks have smaller brands and fewer branches, resulting in a limited customer base.
- Large Banks Draw Away Customers: After large banks lowered their interest rates, customers became more sensitive to returns and would compare rates before depositing their money with other banks (given the perceived safety of larger institutions).
- High Interest Rates as a Survival Strategy: To retain deposits and maintain liquidity (to lend funds), these banks had to raise their medium- and long-term rates, even if it meant higher costs—similar to how small shops offer additional discounts to attract business.
3. Resumption of 5-Year Large-Denomination Certificates of Deposit
The issuance of 5-year large-denomination certificates of deposit, which had been suspended earlier (due to higher thresholds and interest rates), resumed, but only in limited quantities. This reflects the banks' dilemma:
- Customer Needs: Some customers prefer long-term, stable returns, and 5-year certificates of deposit meet this need.
- Cost Control: Higher 5-year rates increase the banks' liability costs (given that loan interest rates are also declining). Therefore, banks can only issue a small amount to retain customers without incurring excessive costs. Additionally, the overall yield on large-denomination certificates of deposit is decreasing, and the gap with government bond yields is narrowing, indicating that banks are trying to reduce their expenses as much as possible.
4. Structured Deposits: Overall Yield Declines, but City Commercial Banks and Foreign-Funded Banks See Higher Returns
Structured deposits offer variable returns linked to factors such as exchange rates, gold, or stocks. Although the overall average yield decreased in July, there were two exceptions:
- City Commercial Banks: The highest expected return rose to 2.18% (a 5-basis-point increase).
- Foreign-Funded Banks: The highest expected return rose to 4.42% (a 9-basis-point increase).
Why did these banks see higher returns? Structured deposits offer the potential for higher returns, attracting customers who are more risk-tolerant and interested in potentially higher returns, such as young investors who might be willing to take on greater volatility.
5. Banks' Balancing Act: Reducing Costs While Retaining Customers
Banks are facing the pressure of narrowing interest rate spreads (the profit margin between loan and deposit rates decreasing):
- Large Banks: They can afford to lower their rates because of their strong brands and large customer bases, with less concern about customer loss; their focus is on reducing costs.
- Small and Medium-Sized Banks: They cannot afford to lower rates and must raise them to prevent customer outflows.
- Resumption of 5-Year Certificates of Deposit: This strategy aims to attract long-term depositors while keeping costs under control.
In summary, the overall trend is a decline in interest rates, but banks adjust their policies based on their circumstances. Large banks focus on reducing costs, while small and medium-sized banks try to retain customers by offering higher interest rates. Ultimately, all banks are striving to survive in this competitive environment.
Does this analysis make the complex changes in interest rates more understandable? The core message is that banks are constantly balancing between cost reduction and customer retention, with small and medium-sized banks facing greater challenges as they rely on higher interest rates to compete.