China has tweaked the mechanism to determine the upper limits on banks' deposit rates, leading to a reduction of longer-term funding rates, as competition for stable sources of deposits intensified.

The Self-Disciplinary Mechanism for the Pricing of Market-Oriented Interest Rates, backed by China's central bank, said Monday that it has changed how to determine the ceilings on deposit rates by adding certain basis points to the government-set benchmark rate.

Before this, the upper limits were set by multiplying the benchmark rate.

The body didn't disclose details on the new ceilings, but only said some deposit rates went up as a result, while some were reduced.

"The self-regulatory upper limit of interest rates for short-term time deposits and large-denomination certificates of deposit within half a year has increased, while the upper limit of longer-term deposit rates over one year has decreased," it said in a statement.

The body said the previous way of setting deposit rate ceilings pushed up interest rates of longer-term deposits and intensified "disordered competition" among banks which had tried to lure deposits by raising interest rates.

The tweak also came as Chinese banks face increasing headwinds from a build-up of bad debt and higher funding costs, as they follow the government's orders to aid struggling businesses hit by shocks caused by the coronavirus pandemic. Lower deposit rates could help alleviate the pressure of narrowing net interest margins on lenders, as they follow the government's call to pare back credit growth this year.

Beijing has in theory removed the ceilings on bank deposit rates since 2015, but the government still maintains control of the market by using window guidance and pricing mechanisms to prevent rates from going out of control.

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(END) Dow Jones Newswires

06-21-21 0348ET