China's move to reduce its benchmark lending and deposit rates also weighed on investors.
China announced its interest rate cut for both interbank lending and deposit rates to 6.31% and 3.25%, respectively, effective Friday.
It cannot relax its grip on lending and deposit rates and it cannot direct the banks to begin another round of lending to restart faltering growth.
The government currently sets a floor on lending rates and a ceiling on deposit rates, allowing banks to easily profit from the gap between the two, but hurting Chinese savers.
Ye Linfeng, a researcher with Cnbenefit, said that China's smaller banks, which typically started issuing wealth-management products later than the major banks, are trying to bolster their fee income out of concern that the central bank's efforts to liberalize interest rates will increasingly eat into the fixed margin between deposit and lending rates they have traditionally relied on to turn a profit.
The big four state banks are insolvent, and the government wants to nurse them to recovery with the help of a big spread between deposit and lending rates a trick used by both America and Japan when their banking systems got into a pickle.
If banks were to compete by offering higher deposit and lower lending rates, they would reduce their income and therefore face liquidity risks.
The government continues to set a ceiling on deposit rates and a floor on lending rates.
Beginning in the late 1990s and continuing for much of the past decade, bank regulators repaired bank balance sheets in part by using government resources to recapitalize the banks and in part by setting deposit rates much lower than lending rates.
Beijing has to drop deposit rates when it cuts lending rates to maintain bank margins, and that is in fact what the central bank did on Thursday, reducing the benchmark one-year rate for deposits by 25 basis points.
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Since deposit rates are, by law, low, and the spread between them and lending rates quite large, the growth has been enormously lucrative.
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