China's savings drop but spending not seen
By Kevin Yao
BEIJING (Reuters): China's avid savers have tucked away less of their money in the bank over the past two months, but there is little evidence they are spending enough to ease two years of stubborn deflation, analysts said on Wednesday.
The government has tried nearly everything to persuade people to spend, including most recently a 20 percent tax on new bank savings.
But analysts said savers pulling money out of banks may have invested in stocks, bonds and insurance rather than buying consumer goods.
"We cannot equate a decline in bank savings to a rise in consumer spending," said Qu Hongbin, senior economist at the Bank of China International Research Ltd in Hong Kong.
"Less savings does not mean ordinary people no longer save money. They may have invested through channels, such as state debt or stocks," he said.
Personal bank savings totaled 5.919 trillion yuan (US$714.9 billion) at the end of November, down eight billion yuan from the end of October, according to official data.
The November decline followed a fall of nine billion yuan in October, which economists said was caused mainly by sharply reduced interest earnings after a series of rate cuts.
The declines bucked a trend in which most Chinese have opted to save more and spend less as economic reforms throw millions out of jobs and pare back socialist perks in education, health care and housing.
Personal savings rose by a staggering 761.5 billion yuan in 1998 to 5.34 trillion yuan, or 67 percent of the gross domestic product, giving China one of the highest savings rates in the world.
To spur growth and ease nagging deflation, Beijing cut interest rates seven times since May 1996, which has trimmed the one-year fixed deposit rate to 2.25 percent from 9.18 percent.
The flat tax on bank interest income imposed from Nov. 1 effectively trimmed deposit rates again.
Interest earned from stock accounts and treasury bonds are not subject to the new tax.
Some people, fed up with the minimal earnings from bank interest, may simply be keeping their cash at home, economists said.
"When interest rates are lowered to a certain level, people will keep more cash at home rather than putting it in banks," said Sheng Hong of the Beijing Unirule Institute of Economics.
"This will have no impact on consumption," he said of the mattress-stuffing trend.
Consumption was unlikely to stage a strong recovery "while most people are still facing job uncertainties and are pessimistic about their future incomes", Qu said.
China entered its 25th month of stubborn deflation in October when the benchmark retail price index slipped a year-on-year 2.6 percent.
November figures are due out on Wednesday and economists polled by Reuters predict a 2.5 percent price fall.
Economists said stalling personal savings could put some pressure on state commercial banks burdened by mounting bad debts.
"A high level of bad loans means that they need new deposits to maintain their liquidity," Qu said. "A decline in the net inflow of savings could create some pressures on the banks."
Analysts said the scope for another bank deposit rate cut in the near future was limited.
"If there is another interest rate cut, it can only be a cut in lending rates," Qu said. The one-year lending rate now stands at 5.85 percent.