China's four largest State-owned commercial banks by assets, also known as the Big Four, cut their deposit rates on Thursday. It will help ease the pressure of narrowing net interest margins while they continue to lower financing costs of the real economy, experts said.

Industrial and Commercial Bank of China, the largest of the Big Four, cut its rates for deposits with different maturities varying from three months to five years. Its three-year deposit rate, for example, was lowered by 15 basis points. The current rate is 2.6 percent for a three-year deposit of less than 10,000 yuan ($1,432.7) and 3 percent for a three-year deposit with a minimum amount of 10,000 yuan. The other three of the Big Four made roughly the same move.

"The deposit rate cuts signify that banks' cost of funds may drop significantly. Some smaller banks that believe it is necessary to lower deposit rates may take similar actions to those of large banks. This will lead to a decline in the cost of funds of the entire banking sector whose lending rates will also remain fairly low and may decrease further, thus creating more space to reduce the overall financing costs of businesses and better serve the real economy," said Zeng Gang, deputy director-general of the National Institution for Finance & Development.

Since the beginning of this year, Chinese banks have stepped up efforts to surrender part of their profits to support the real economy under regulatory guidance.

The People's Bank of China, the nation's central bank, cut the one-year loan prime rate, a market-based benchmark lending rate, by five basis points to 3.65 percent and the five-year LPR by 15 basis points to 4.3 percent on Aug 22. The PBOC also lowered the one-year interest rate of its medium-term lending facility by 10 basis points to 2.75 percent on Aug 15.

"Following rate cuts by the PBOC, the latest deposit rate cuts by large State-owned commercial banks will drive down the cost of debt and promote a further reduction in lending rates while helping the banks maintain stable net interest margins at the same time," said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co.

"More banks are expected to follow large commercial lenders' steps to cut deposit rates. Different banks may vary in terms of their pace and range of deposit rate adjustments as they have different development strategies, debt capacity and business structures. In general, it is a long-term trend for the Chinese market to see a decline in risk-free interest rates," Dong said.

In addition, deposit rate cuts will also help boost the financing needs of market entities, which may boost credit expansion and is conducive to building a virtuous circle of the economy, said Wen Bin, chief economist at China Minsheng Banking Corp.

Taking a medium and long-term view, the lowering of deposit rates is part of the reform in China's interest rate pricing mechanism, said Zeng with the National Institution for Finance & Development.

"It means changes in deposit rate pricing, which are linked to market-based benchmark rates, will become increasingly frequent. This will improve the operational efficiency of financial institutions and their performance of asset allocation," he said.

Considering that smaller banks may join the Big Four in lowering deposit rates, the latest action will also help small and medium-sized banks maintain steady and sound operations and reduce financial risks, he said.

The economic slowdown, driven by corrections in the property market and business disruptions from the lingering COVID-19 pandemic, will weigh on bank asset quality and profitability for the rest of 2022, said Moody's Investors Service in a report issued on Thursday.

Despite this, Moody's does not expect a significant deterioration in banks' creditworthiness because of substantial buffers that banks have built up in recent years, said the report.