Recent statistics from the People’s Bank of China (http://www.pbc.com.cn) indicate some surprising changes in household savings behaviour during 2001. Chinese families are accumulating bank deposits at a higher rate than ever before, possibly in response to greater economic insecurity. But the time structure of new deposits has shifted dramatically, away from demand deposits and towards time deposits with terms of three months or longer. The move to longer-term savings vehicles may help China’s troubled state-owned banks reduce the risk of largescale deposit runs should confidence in the financial system falter.
As China’s GDP growth decelerated in the late 1990s, the monetary authorities launched a series of interest rate cuts, lowering both the return on savings deposits and the cost of borrowing. Between May 1996 and June 1999, rates were cut seven times, and a new 20 per cent tax on interest income in November 1999 further reduced the real return on savings. The rate cuts have been only modestly successful in propping up growth rates and reversing price deflation. At least until recently, it seemed that they might actually be worsening systemic risk in the banking system, by reducing the attractiveness of long-term savings instruments and promoting a build-up of more volatile demand deposits. With the posttax return on one-year deposits at just 1.8 per cent, the incentive for savers to lock their money up for the longer term had fallen dramatically. Demand deposits accounted for 73.7 per cent of the increase in household savings during 2000. By some estimates, the appeal of demand deposits peaked in the autumn of that year, when they accounted for as much as 85 per cent of new savings deposits.
However, this alarming trend seems to have reversed itself in 2001, even as deposit rates remained low. Growth in total savings during the year was far more evenly balanced than in 2000, with just over half the growth (56.2 per cent) coming from time deposits.
Since the reward for sacrificing liquidity was no higher than in 2000, the shift may reflect a change in consumer sentiment. In the wake of China’s entry into the WTO, some large savers may no longer be holding liquid yuan assets in the hope of changing them into hard currency in advance of a possible devaluation. If the trend is sustained, households’ willingness to make longer-term commitments to the shaky state banks should help the banks reduce the risk of sudden market panics, in which demand deposits flee banks perceived as risky.
However, the appeal of time deposits may come under further pressure if yuan interest rates are cut again. While the People’s Bank has denied rumours of another impending cut, the argument for lower rates seems to be getting stronger. Retail prices began declining again in the final months of 2001, pushing up real interest rates and strengthening the case for monetary stimulus. At the same time, the weakness of China’s domestic A-share equity markets is a source of growing concern as the authorities seek to raise funds through new listings of state shares.