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Increased household deposit doesn't equal more spending & investment, writes senior banker.
Dr. Wang Yongli says China must comprehensively promote reform and opening up and technological innovation on all fronts to improve income expectations and the business environment.
Wang Yongli, Ph.D. in Economics, is the General Manager of China International Futures Co. He previously served in some key posts in Chinese financial institutions, including as Vice President and Executive Director of the Bank of China, one of China’s largest lenders.
Dr. Wang runs a WeChat blog that routinely comments on finance and economics. Pekingnology translated his views on Chinese borrowers’ mortgage boycotts six months ago.
In mid-January 2023, the Chinese central bank published the year-end statistics in finance for 2022. One of them that has made headlines in China is household savings increased by 17.84 trillion yuan in the year that Covid hit China most heavily.
Some economists with Chinese securities firms were then quoted as saying that the increased savings could translate to significant growth in spending and investment. But Dr. Wang cautioned in his WeChat blog that would be much easier said than done.
His blog is very long. For brevity, Pekingnology summarizes it in English here. Please note we didn’t add or change anything.
If you missed the two last Pekingnology newsletters on the Chinese economy
Changes in growth of Household savings & loans deserve attention
Household deposits in domestic and foreign currencies grew by a record-high rate of nearly 18 trillion yuan year-on-year in 2022. This increase, however, is not necessarily a herald of a rebound in investment and consumption. Factors such as societal expectations for future economic growth, employment stability, income growth, and investment returns must also be considered.
Household domestic and foreign currency deposits in China increased by nearly 18 trillion yuan year-on-year, up 8 trillion yuan from the 10 trillion yuan -- the approximate annual growth over the previous three years. This new high growth rate after 2009 may signal a milestone for household domestic and foreign currency deposits.
Several factors influence the growth of deposits in the household sector:
Income growth is the most crucial factor. However, household income, including labor, property, endowment and subsidy income, was hit by the prevailing pandemic, economic downturn, and unstable employment. Despite the government's increased subsidies, income growth in 2022 probably shrank year on year.
Household spending, namely the spending on clothing, food, housing, transportation, education, and medical care, among others, has decreased significantly year-on-year, contributing the most to deposit growth.
Changes in residents’ financial investment, including direct investment, securities, mutual funds, trusts, insurance purchases, etc. Since 2018, the reform of internet financial services and the new regulations for asset management has resulted in a continuous decline of ROI, while the year 2022 witnessed a more severe contraction of financial investment, shrinking by several trillion yuan year on year.
Other factors, such as principal and interest payments, household remittances, the typical increase in household deposits before the Spring Festival and the decline that follows, etc..
Household loans in domestic and foreign currencies registered a mere 3.81 trillion yuan growth year-on-year, about 4 trillion yuan less than 8 trillion yuan (approximately the annual growth over the past three years), representing a record-low growth rate since household loan data were first disclosed in 2007 and hence becoming a serious drag on consumption and economic growth.
Besides, the growth of household loans will have a knock-on effect on household deposits, with loan expansion driving an increase in down payments and reducing the corresponding amount of household deposits and growth in household loan payments, also reducing household deposits. In addition, when there is a higher rate of loan write-offs by banks, it signals a worsening credit environment, leading banks to restrict loan growth or increase loan interest rates to manage risk.
Viewed separately, household deposits in domestic and foreign currencies in 2022 stood at 121.21 trillion yuan. Some people say if China can incentivize 20% of the household sector's domestic and foreign currency deposits for investment and consumption, estimated to be 24 trillion yuan. There is the potential to drive society-wide investment and spending to reach 96-120 trillion yuan based on the 4-5 times leverage ratio, which would substantially boost economic growth. Yet, that is easier said than done.
One should not examine deposits without considering loans, as it is also part of the household's balance sheet. Upon looking at the net deposits by subtracting loans from deposits, net household deposits experienced significant YoY growth in 2022, with the loan-to-deposit ratio declining. This is largely due to the shrinking demands of consumption and loans in the household sector rather than the volatility of income growth. In addition, these demands were further dampened by the weakened expectation of income growth, resulting in serious economic repercussions.
Moreover, household deposits and loans are far from equally distributed as the net deposit sizes across households. They vary significantly. Over 600 million people in China earn less than 1,000 yuan per month and have small household deposits. Without stable jobs and guaranteed income growth, they cannot expand consumption. Among those high-income earners who earn thousands or tens of thousands of yuan per month, many still face debt crises once their jobs become unstable. That scenario prevents them from spending more.
Some high-income earners own high-end assets, but their demands may outgrow the domestic market in that they may focus more on global high-end goods and services, and they have more concerns for the security of their wealth. They may even move their wealth between different countries.
Meanwhile, against the backdrop of economic downturn and negative market and policy changes, more investors and entrepreneurs are struggling with business operations or major losses, some of them may even be reduced to defaults, which negatively impacts the growth in spending and investment.
Thus, the expectations for economic growth, stable jobs, income growth, and investment returns are crucial to whether people will expand investment and consumption. In the event of weakened and even considerably worsening income expectations, investment and consumption will contract, and the circulation of goods and currency will decelerate, furthering the economic downturn, unemployment, and social instability, which leads to a vicious circle. That situation would create enormous difficulties in expanding people's investment and spending. Therefore, China's huge household deposits should not be simply viewed as a herald of a rebound in investment and consumption.
Currently, it should be China’s top priority to reverse the weakened expectations of the people and businesses outside the state sector and the shrinking investment and consumption. Policies to stabilize growth, employment, and prices are a must.
As China lifted its stringent anti-Covid measures, economic and social order has returned to normal after the peak of Covid-infection. Meanwhile, China is facing a more tense and complex global landscape. Foreign demand has shrunk significantly. China must put expanding domestic demands high on the agenda, and comprehensively promote reform and opening up and technological innovation on all fronts to improve income expectation and the business environment - to mobilize investment and consumption in the whole society. (Enditem)
Again, if you missed the two last Pekingnology newsletters on the Chinese economy.