SHANGHAI: Smaller Chinese banks that have raised deposit rates higher than their large rivals may be rewarded with a short-term inflow of money, but are unlikely to break the trend of investors parking cash in big banks and high-yielding “shadow bank” products.

At least eight small- and mid-sized lenders raised their one-year deposit rates to the 3.3 per cent maximum on Saturday after the central bank unexpectedly cut interest rates for the first time in over two years to help support the economy.

Mid-sized banks are suffering more than big lenders from soured loans and a profit slowdown, and are keen to maintain their deposits.

“Smaller banks have more difficulty getting deposits,” said Edmond Law, a banking analyst at UOB Kay Hian (Hong Kong) Ltd. “The key is the large banks have enough deposits, so they have no urgency to do so.”

Some of the country’s top banks, such as Industrial and Commercial Bank of China Ltd, have only lifted their key deposit rate to 3pc, giving smaller peers an opening.

But analysts said that will only bring short-term relief, until the larger rivals eventually follow suit.

Smaller and mid-sized lenders could potentially bring more competition to China’s banking sector, which is dominated by a state-owned “big four”. But they are finding it hard to compete with the burgeoning shadow finance industry.

Increased competition: Bank deposits overall have been falling due to competition from online money-market funds that offer higher investment returns.

The banks’ rise in deposit rates will do little to change this trend as yield differentials remain significant, analysts said. For example, Yu’e Bao, an internet investment product offered by Alibaba Group Holding Ltd, offers an annualised return of 4.07pc.

“Yu’e Bao’s interest is much higher than at banks, so even with the rate increase, movement from Yu’e Bao to banks is not really possible,” said Jiahe Chen, chief strategist at Cinda Securities.

China’s wealth management sector has exploded in recent years, hitting around 12.8 trillion yuan ($2.06tr) — around 11pc of bank deposits — by the end of May, state media reported.

Published in Dawn, November 25th , 2014