Starting in 2024, major state-owned banks in China have consecutively lowered their deposit interest rates for the third time, with the latest reduction occurring in October of this yearThis decline marks a significant shift for large state banks as they bid farewell to the “2 era” of interest ratesMany scholars have responded positively, suggesting that the interest rates for term deposits should continue decreasing until they reach zeroThey cite examples from developed nations like Japan and South Korea, which adopted zero interest rate policies during periods of economic deflation.

The reasons compelling banks to lower deposit interest rates stem from two main factorsFirstly, with considerable downward economic pressure, banks aim to spur domestic consumption and investment demand through these rate cuts, hoping to stabilize the economy

Secondly, there has been a notable influx of deposits into banks while the demand for loans continues to decline, creating immense pressure on banks to lendAs such, lowering deposit rates will help reduce financing costs for businesses and homebuyers, potentially encouraging them to take on loans and restore confidence in the economy.

Internationally, various countries, including Japan, South Korea, and some Western nations, have employed zero interest rate policies during deflationary periods, but the outcomes have often been less than promisingJapan, in particular, has maintained a zero interest rate policy for an extended periodYet, consumer spending and investment demand remain subduedThis raises an inevitable question: What would happen if China’s term deposit interest rates were to drop to zero?

Firstly, it’s likely that consumer demand would experience an alarming decline

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This can be understood from two perspectivesOn one hand, numerous individuals rely on the interest earned from bank deposits to supplement their household incomesA reduction to minimal or nonexistent interest would inevitably mean less money available for consumptionConsequently, many people, losing their interest income and plagued by a lack of confidence in the future, may not only refrain from unleashing a consumer boom but might contribute to an ongoing decrease in demand.

On the other hand, dropping the deposit interest rates to zero could signal dire economic times ahead, discouraging consumers from indulging in extravagant spending or incurring debtMany individuals might conclude that, with money becoming harder to earn, the prudent course of action would be to save whatever they can in anticipation of future uncertainties, rather than to splurge.

Secondly, should banks lower their deposit interest rates to zero, it’s plausible that the renminbi (RMB) exchange rate would experience a protracted adjustment trend

The reasoning is straightforward: if deposit interest rates in other countries remain significantly higher than those domestically, an interest rate of zero in China may incite a mass exodus of capital, as investors swap their renminbi for dollars and move their wealth overseasThis scenario becomes particularly worrisome in the context of an already depreciating renminbiThe stability of the currency could be adversely affected by persistently low deposit rates, undermining the boat of internationalization.

Thirdly, even if the deposit rates are zero, many savers might still choose to keep their money in the bankHowever, should the rates turn negative, depositors would likely withdraw their savings, opting instead to stash cash in home safes rather than using it for investment or consumption purposesThis is grounded in a psychological aspect; people save not just out of habit but as a cushion against life’s uncertainties—such as unforeseen unemployment, illness, or retirement costs

To expect consumers to pull out already scarce savings for spending or investment without alleviating these significant pressures is unrealistic.

Fourthly, while a zero interest rate could potentially nudge some individuals to withdraw their savings and redirect their funds into investment vehicles such as bank wealth management products, mutual funds, stocks, or real estate in pursuit of higher returns, the realities of an inflationary environment and associated risks could lead many to suffer lossesIn more volatile economic conditions, the perceived safety of a zero-interest bank deposit might become more attractivePeople may reason that while their bank deposits may not earn interest, at least the principal amount remains intact, a far better outcome than risking a significant loss elsewhere.

In conclusion, a shift of China’s term deposit interest rates to zero would likely result in diminished consumer demand; a portion of bank savings could flow out; depreciation of the renminbi would likely persist; and many savers would continue choosing to keep their money in banks