Interbank Deposit Rate Self-Discipline Management May Be Upgraded; Is Yuebao's Yield About to Break "1"?

On March 15, Lin Ling checked her Yu’e Bao earnings on Alipay and found that the 7-day annualized yield of a Huixianfu money market fund she holds had dropped to 1.034%, down slightly from 1.039% two days earlier. According to Wind data, on the 12th, the 7-day annualized yield of Yu’e Bao (Tianhong) briefly fell to a historic low of 1%, then rebounded to around 1.03% the next day.

In the view of industry insiders, entering a downward interest rate cycle, the decline in yields of fixed income and cash management products is an inevitable trend. Recently, as discussions around self-regulation of interbank deposit rates intensify, this concern has further increased.

Several banking professionals and securities analysts told Yicai that, with limited room for general deposit rate cuts, patching up the lack of transparency in interbank deposit rate self-regulation will be an important structural measure to reduce banks’ liability costs. Overall, as the policy transmission effect of interest rates improves, the central tendency of money market rates is expected to further decline, putting pressure on yields of funds, wealth management, and other asset management products.

Regulation of interbank deposit rates benefits certificates of deposit and short-term bonds

The continued high growth of non-bank deposits has raised market concerns about arbitrage in interbank deposits. The latest data from the People’s Bank of China shows that in the first two months of this year, non-bank deposits increased by 2.84 trillion yuan, exceeding one trillion yuan year-on-year.

Amid expectations of reserve ratio and interest rate cuts, calls for lowering the relatively less market-driven interbank deposit rates are growing. Recently, there have been reports that the market rate setting self-regulation mechanism intends to strengthen self-discipline management of interbank deposits, including a quantitative constraint on the proportion of high-than-7-day reverse repo OMO policy rate (currently 1.4%) for interbank demand deposits. (See report: “Non-bank deposits increased by 2.8 trillion yuan in the first two months, attention on regulating interbank rates.”)

By the end of 2024, the self-regulation mechanism will include interbank demand deposit pricing into its management system and link it to the bank’s macroprudential assessment (MPA). It also clarifies that if banks and non-bank financial institutions (including non-legal entity products) agree that interbank fixed deposits can be withdrawn early, the early withdrawal rate should generally not exceed the excess reserve rate.

Industry feedback indicates that these regulations will have a clear impact on the volume and price of interbank deposits, but mostly as a one-time effect. Most believe that further reductions in interbank deposit rates are possible and necessary given current business conditions. After the last adjustment, banks faced significant “liability shortage” pressures, and the certificate of deposit market experienced considerable volatility. There are concerns that further tightening of self-regulation could trigger market fluctuations in certificates and bonds again.

Several brokerage estimates suggest that if the proportion of interbank demand deposits exceeding the 7-day reverse repo rate (currently 1.4%) at quarter-end remains below 10-20%, then over 10 trillion yuan of interbank demand deposits may need adjustment after the regulation is implemented.

“With the decline in interbank demand deposit volume, banks may need to issue interbank certificates of deposit to make up for liquidity gaps, especially long-term CDs,” said Wang Xianshuang, Chief Analyst at Guolian Minsheng Securities. He added that as banks convert interbank deposits into CDs, the endogenous instability of interbank funds could increase. Without additional hedging by the central bank, funding rates might rise somewhat. However, in the medium to long term, the central tendency of money market rates is expected to decline.

Looking back at 2024, due to bans on manual interest payments, two rounds of deposit rate cuts, and regulation of interbank deposit rates, some banks increased reliance on interbank CDs amid deposit outflows, with some nearing their quota limits. Many banks temporarily raised their filing limits at year-end. By the second half of 2025, bank liability pressures have eased significantly. Wind data shows that since June last year, except for October when new issuance exceeded maturities, net financing in other months has been negative.

“Affecting the overall impact, I think it won’t be very large. Banks are not short of liabilities,” said a securities analyst. Yang Yewei, Fixed Income Analyst at Guosheng Securities, noted, “In the short term, after the decline in interbank deposit rates, funds will flow into certificates and short-term bonds. But banks currently are not short of liabilities, and with relatively weak loan growth, the outflow of interbank deposits has limited pressure on liabilities, especially for large banks. In the medium term, as rates across the spectrum decline, the relative disadvantage of deposits will quickly diminish.”

Left Dayong, Fixed Income Analyst at Industrial Securities, also believes that even if the tightening policies on interbank regulation are implemented, the resulting deposit outflows are unlikely to be as large as in previous rounds. Currently, banks do not face significant asset-liability gaps, and with the central bank’s continued long-term liquidity injections to support liabilities, the demand for increased issuance of bank CDs should be manageable. Some interbank deposits may shift into CD investments, and short-term pricing pressures for 1-year CDs are expected to be limited.

From both supply and demand perspectives, regulation of interbank deposit rates is likely to be more positive than negative for the certificate and short-term bond markets, with yields expected to further decline. Huatai Securities Chief Fixed Income Analyst Zhang Jiqiang believes that based on the market response after the November 2024 non-bank self-discipline regulation, short-term market sentiment may reflect lower funding costs and slightly increased bond allocations, indirectly boosting long-term and ultra-long-term rates. “By Friday (March 13), the market already showed signs of this, with the overall yield curve moving down about 1 basis point (including certificates).” He also noted that since the spread between certificate rates and funding rates had previously narrowed, and some investors had anticipated this, further declines in certificate rates may be limited.

However, after the implementation of the interbank deposit self-regulation mechanism in December 2024, short-term rates dropped sharply, briefly falling below funding rates. Yang Yewei estimates that if interbank deposit rates decline by about 10 basis points, then the yields on certificates and short-term bonds could also decrease accordingly. For example, the 1-year bank certificate of deposit for joint-stock banks could fall below 1.5%, and AAA-rated 1-year medium-term notes could approach 1.55%.

Returns on cash management products may face further challenges

If interbank deposit rates decline again, banks’ funding costs will decrease, easing interest margin pressures. Meanwhile, yields on funds, wealth management, and other asset management products will face further downward pressure.

Based on current industry estimates, including Yu’e Bao, some cash management and money market fund products’ 7-day annualized yields may soon fall below 1%. “In the rate decline cycle, asset management yields are generally trending downward,” said the analyst. It is difficult for current products to avoid the impact of falling interbank deposit rates.

According to Guosheng Securities, in January this year, large banks and small- and medium-sized banks had non-deposit financial institution deposits of 18.9 trillion yuan and 18.2 trillion yuan respectively, totaling 37 trillion yuan. “If interbank deposit rates are collectively lowered by 10 basis points, it could reduce banks’ interest expenses by about 37 billion yuan annually, impacting liability costs by roughly 1 basis point. Most of these deposits come from wealth management and money market funds. By the end of 2025, wealth management deposits are expected to reach 10.1 trillion yuan, nearly 30% of total interbank deposits. Money market funds and insurance deposits are 4.9 trillion yuan and 3.0 trillion yuan respectively, accounting for over half.” Yang Yewei believes that lowering interbank deposit rates will put pressure on yields of related financial products.

The China Wealth Management Network’s report shows that the average yield of wealth management products last year had fallen to 1.98%. A search reveals that most cash management products (RMB) on the market already have 7-day annualized yields in the “1” range. Money market funds like Yu’e Bao have seen yields drop to even lower levels, hitting a historic low of 1% last Thursday. Lin Ling considered replacing her holdings in money market funds but found that among over 30 available products, the 7-day annualized yields ranged from just 1.001% to as high as 1.2%, with noticeable volatility.

Currently, most cash management and money market funds benchmark their performance against 7-day notice or demand deposit rates. Following the recent deposit rate cuts, the 7-day notice deposit rate of major state banks has fallen to 0.3%, with actual rates around 0.65%; some joint-stock banks’ actual rates can reach up to 0.75%.

A state-owned bank’s mobile banking app shows that among their current cash management products, only one has a 7-day annualized yield above 2%, with most between 1.046% and 1.55%, nearly half below 1.1%. A product sold by a joint-stock bank can reach a 2.8% 7-day annualized yield, but a bank wealth manager told us that yields vary significantly depending on market conditions, asset allocation, duration, and payout timing. “But over time, these tend to smooth out to an average level. Currently, the average yield for such products is around 1.3%,” he said.

“If the yield on interbank demand deposits for wealth management and public funds drops from 1.6% to 1.4%, then the yields of all related products will decrease by about 1.47 basis points, with cash management products dropping by 2.56 basis points; all public funds’ yields will decline by about 1.43 basis points, with money market funds dropping by 3 basis points.” Liu Chengxiang, an analyst at Kaiyuan Securities, noted that because the holdings of interbank demand deposits are similar for wealth management and public funds, the impact will be roughly comparable. Cash management and money market funds, which require high liquidity, have higher proportions of interbank demand deposits and will be most affected. Fixed income products will also see some impact, while bond funds, with lower deposit proportions, will be less affected.

Looking back, after the December 2024 implementation of the interbank deposit self-regulation mechanism, wealth management and money market funds temporarily reduced their deposit holdings and increased bond allocations. As the regulation’s expectations heat up, in the short term, interbank certificates, demand deposits, and bonds with maturities under three years are expected to see increased capital allocation, which the market has already responded to. On March 13, the yield on certificates further declined, with most 1-year AAA-rated interbank certificates dropping below 1.55%, with declines over 1 basis point; in the bond market, interbank key rates diverged, with medium- and long-term government bonds showing more weakness than short-term bonds.

(Note: Lin Ling is a pseudonym.)

(From Yicai)