The People's Bank of China, in its latest Financial Stability Report, indicated that interest rate marketization reform has entered a deep-water zone, necessitating a better role for the interest rate self-disciplinary mechanism, and establishing "comprehensive returns cannot be negative" as the pricing floor for each loan transaction. The central bank's report asserts that significant progress has been made in interest rate marketization reform in recent years, with administrative controls on interest rates having been lifted, and a market-oriented interest rate formation and transmission mechanism largely established, meaning the goal of "letting go" has been basically achieved. However, the tasks of "effective formation" and "efficient adjustment" remain challenging and have a long way to go. Since the Loan Prime Rate (LPR) reform, factors such as insufficient bank pricing capability and "involution-style" competition have led to a noticeable decline in loan rates that significantly exceeds the drop in policy rates, while the decrease in deposit rates has been markedly lower than that of policy rates. The central bank believes this has, to some extent, caused a narrowing of banks' net interest margins and a decline in profitability, which is detrimental to the stable operation of banks and their sustainable support for the real economy, and also hampers the optimal allocation of financial resources. Data from the National Financial Regulatory Administration shows that by the end of the third quarter of 2005, the net interest margin of commercial banks stood at 1.42%, remaining stable quarter-on-quarter. Although it decreased by 11 basis points year-on-year, it ended the previous trend of continuous narrowing. Analyzing by bank type, interest margins in the third quarter showed a differentiated pattern of "one rising, one falling, and many remaining flat." Specifically, the net interest margin of joint-stock commercial banks slightly increased by 1 basis point to 1.56% compared to the previous quarter; the net interest margin of private banks was 3.83%, down 8 basis points quarter-on-quarter; the net interest margins of large state-owned commercial banks, city commercial banks, and rural commercial banks were maintained at 1.31%, 1.37%, and 1.58% respectively, all unchanged from the second quarter, yet all at historically low levels. By the end of the third quarter of 2005, the non-performing loan balance of commercial banks reached 3.5 trillion yuan, an increase of 88.3 billion yuan from the end of the previous quarter; the non-performing loan ratio was 1.52%, a slight increase of 0.03 percentage points from the end of the previous quarter. Among them, the non-performing loan ratios for large state-owned banks, city commercial banks, rural commercial banks, and private banks were 1.22%, 1.84%, 2.82%, and 1.83% respectively, rising by 0.01, 0.08, 0.05, and 0.08 percentage points compared to the end of the first half of the year, while the ratio for joint-stock banks remained unchanged from the end of the first half. From this perspective, an inverted situation has emerged between the non-performing loan ratio and net interest margin. Although a simple comparison between the two cannot be made, it nonetheless reflects a real pressure on the banking industry's operations. This author believes this is a natural trend exhibited by commercial banks in interest rate pricing amid increasing economic downward pressure. Initially, commercial bank loan rates decreased following LPR cuts, while deposit rate reductions were smaller. However, in the last two years, LPR cuts have been modest, yet the decline in deposit rates has accelerated. Consequently, since around mid-year, net interest margins have stabilized. Certainly, regulatory oversight by the central bank has played a crucial role. For instance, in April 2024, the central bank urged banks to improve their internal interest rate pricing management, rectify违规 manual interest subsidies, and address arbitrage from idle fund circulation. In July 2024, the central bank guided the interest rate self-disciplinary mechanism to establish and improve a linked adjustment mechanism for deposit rates, encouraging and guiding local legal-person financial institutions to promptly follow the deposit rate adjustments of state-owned banks and major joint-stock banks. Subsequently, large state-owned banks took the lead in initiating multiple rounds of deposit rate cuts, which were followed by local small and medium-sized banks. Furthermore, banks were required to introduce "interest rate adjustment fallback clauses" in deposit service agreements. Finally, non-bank financial institutions were required to set interest rates for interbank demand deposits reasonably by referencing the excess reserve rate or the 7-day reverse repo rate; pricing behavior for early withdrawal of non-bank interbank time deposits was standardized to prevent the "demand-depositization" of time deposits. These measures have reduced disorderly competition in the deposit market, curbed idle fund circulation, and effectively lowered the liability costs for commercial banks. On the lending side, recent years have seen efforts to promote batch adjustments of existing mortgage rates to levels near newly issued mortgage rates, and pilot programs for explicitly stating the comprehensive financing cost of enterprise loans. These measures have effectively addressed some unreasonable and non-compliant practices in loan pricing, facilitating the transmission of monetary policy. However, as economic downward pressure intensifies and effective loan demand remains insufficient, the corporate loan market has become a buyer's market. Banks must form deep partnerships with enterprises. While loan rates are declining, banks might seek compensation through ancillary business revenues such as corporate payroll services, settlement businesses, or even custody services for funds raised post-IPO. If not, corporate clients who do not generate non-interest income may be lost, a consequence bank relationship managers cannot afford. The principle that comprehensive loan returns must not be negative requires banks to comprehensively consider factors such as funding costs, operational costs, risk costs, and capital return requirements when issuing loans, avoiding negative comprehensive returns. Although it does not mandate that every single loan must be profitable, it undoubtedly places higher demands on the pricing capabilities of the banking industry. Amid increasing competitive pressure in the banking sector and insufficient loan demand, how can pricing capability be enhanced? Essentially, pricing capability is primarily service capability—it reflects a bank's comprehensive and differentiated services. For example, the five key areas currently advocated by regulators—green finance,科技金融,普惠金融, pension finance, and digital finance—represent the core competitive advantages for commercial banks to enhance their pricing power during an economic downturn. Banks that deeply cultivate these areas will be able to remain invincible in the future. Some banks, for instance, are deeply involved in pension finance, digital finance, and科技金融, making early inroads in these fields, forming deep client partnerships, enhancing comprehensive service capabilities, reducing service costs, and gaining a first-mover advantage in these blue ocean areas, thereby strengthening their service capability. Banks with weak pricing capabilities may face client attrition while simultaneously struggling to deploy loans, suffering a double loss. The competition in the banking industry is now entering a phase of direct and intense confrontation.
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