The People's Bank of China (PBOC) recently told banks that they must not set guaranteed rates on structured deposits at more than 150% of the rates on term deposits of the same maturity, two bankers in Shanghai told Reuters.
The curbs on the 10 trillion yuan ($1.46 trillion) business are nationwide, although the rules vary slightly by region, one of the sources said.
The PBOC did not immediately reply to Reuters requests for comment.
Banks in China have been aggressively marketing structured deposits - a hybrid that combines traditional deposits with higher-return investment products - to lure in more funds.
But the yields they promise hurt their profitability, making the banks reluctant to reduce lending rates, which Beijing wants them to do in order to boost an economy that grew 6.1% last year, the slowest in nearly three decades.
"The central bank is now aiming to curb the fundraising cost for banks, so that the corporate borrowing costs can be reduced, too," a Shanghai-based banker who works for a foreign bank said.
The PBOC's instruction followed China's move late last year to strengthen management of structured deposits.
China's one-year benchmark term deposit rate is 1.5%, while some structured deposits with the same maturity marketed returns as high as 4%.
The market is closely watching next Monday's monthly setting of China's new loan benchmark rate. The Loan Prime Rate (LPR), which banks use to determine lending rates for businesses, is closely linked to lenders' own financing cost.
Banks had pushed structured deposits over the past two years after regulators cracked down on risky wealth management products (WMPs), but the high rates they offer have hurt profit margins and threaten asset quality.
Outstanding structured deposit surged by 44% in the two years through November, although they peaked at 11.2 trillion yuan in last February, central bank data shows.
In an apparent move to expand alternative funding sources amid the new curbs, major Chinese lenders are stepping up issuance of negotiable certificates of deposit (NCDs), which are popular short-term debt instruments,
Bank of Communications, China's fifth-biggest lender, has announced plans to issue up to 670 billion yuan worth of NCDs this year via the interbank market, up roughly one-third from last year's issuance.
China Merchants Bank and Industrial Bank Co also expanded their issuance quota for NCDs in 2020.
By Cheng Leng, Samuel Shen and Tony Munroe