(Yicai) Sept. 20 -- Chinese commercial banks are lowering their interest rates on US dollar deposits after the US Federal Reserve cut interest rates for the first time in four years, and the trend is likely to continue, industry insiders told Yicai.

Lenders have taken preemptive measures by lowering their interest rates, said Yang Haiping, a researcher at the Securities and Futures Research Institute of Central University of Finance and Economics. The move is in response to market expectations of an impending round of rate cuts in the US, based on the Fed's monetary policy statements.

The Fed went ahead with a much anticipated reduction yesterday, trimming the benchmark rate by 50 basis points, or half a percentage point, and lowering the target range for federal funds, which is a key overnight borrowing rate, to 4.75 percent from 5 percent.

Reducing interest payments is a crucial factor driving Chinese commercial banks to lower the yields on US dollar deposits, Yang said. It also helps maintain the competitiveness of their US dollar deposit products and prevents significant deposit outflows.

Even before the Fed's rate reduction, many Chinese banks had already started to lower their US dollar deposit rates. It is now hard to find a bank that offers deposit rates above 5 percent, even though this was common before..

“Our urban bank trimmed its interest rates on US dollar deposits in August,” an insider told Yicai. "After the 50 basis point cut, we anticipate further reductions in bank US dollar deposit rates."

China’s US dollar deposit yields typically move in tandem with the Fed's benchmark rate, and the degree of adjustment has become increasingly aligned in recent years, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating. The recent trimming of the interest rates on US dollar deposits is mainly a response to the September rate cut.

However, in the short term, US dollar deposit rates are still attractive. "From an asset allocation perspective, one or two rate cuts won't significantly alter the relatively high level of US dollar interest rates,” a wealth management expert told Yicai. From an investment standpoint, the US dollar remains attractive, and US dollar holders shouldn't rush to sell based solely on this rate cut."

The Fed is likely to continue to cut rates next year to maintain policy rates at a restrictive level, Wang said. This suggests that China’s US dollar deposit yields may remain relatively high in the short term, retaining some appeal for investors.

Exchange rate fluctuations are another crucial factor to consider when investing in US dollar deposits, said Xue Hongyan, deputy director of the Stellar Financial Research Institute. As expectations of more Fed rate cuts strengthen, US market interest rates are on a downward trend, and the greenback has slightly depreciated against the Chinese yuan. This could lead to potential exchange rate losses for Chinese investors putting their money in US dollar deposits or buying US dollar wealth management products.

Editor: Kim Taylor