China’s large deposit reserves hinder recovery.

China’s Savings Mountain Hinders Post-Pandemic Growth

China’s efforts to boost its economy by encouraging spending are being hindered by depositors who are hesitant to invest in anything but the safest options. The latest move to cut top deposit rates has only led to a rush into other deposit products and government debt, indicating that caution runs deep. Despite expectations that savings would pour back into stocks and consumption once virus controls were lifted, term deposits have swelled, making it unlikely to happen.

The Numbers

• Total yuan deposits stood at a near-record 274 trillion yuan ($40 trillion) at the end of April, dwarfing the market capitalisation of the mainland stock market, which is 84 trillion yuan, and gross domestic product, at 121 trillion yuan.
• Personal deposits are also at a record, and PBOC data showed fixed-term deposits, which can offer as little as 1%, are growing particularly fast.
• They rose 8.9% from January to March at large-sized banks to 25 trillion yuan and were up 11.1% at smaller lenders.

The trigger for the surge in savings is unclear, but with the property market wobbly in the wake of a crackdown on over-leveraged developers and momentum ebbing from the stock market, depositors say they are willing to sacrifice returns for safety. China has historically had high savings rates as a proportion of GDP, the highest by far among large economies according to the World Bank. However, when combined with capital controls preventing investment abroad and below-expectations loan growth at home, it reflects weak domestic consumption and is a sign that money is not easily finding its way to productive enterprises.

The Challenge

Official data this week showing soft imports and deepening deflation in producer prices underscored the challenge. Benchmark 10-year Chinese government bond yields fell to a six-month low of 2.694% on Thursday. “The problem for consumption recovery is a loss of confidence due to the now scrapped zero-COVID policy and the property market problem,” said Chi Lo, senior investment strategist at BNP Paribas Asset Management in Hong Kong. “Although these two biggest drags on the economy have been addressed, confidence will only recover slowly – confidence would not come back like switching an on/off switch.”