According to official data from the Chinese mainland, residents’ deposits in China decreased by more than 1 trillion RMB in July, while deposits in non-bank financial institutions increased by more than 2 trillion RMB during the same period, sparking discussions about the phenomenon known as “deposit relocation.” Experts have analyzed the reasons behind this trend and the potential consequences that may arise.
It was revealed by the People’s Bank of China last week that in July this year, resident deposits decreased by 1.11 trillion RMB, and corporate deposits also decreased by 1.46 trillion RMB. At the same time, deposits in non-bank financial institutions, including securities account margins, increased by 2.14 trillion RMB.
In a report, China Merchants Securities analyzed that with deposit interest rates continuously declining this year and improvements in stock market profitability, residents’ deposits are gradually flowing toward the capital market to seek higher returns, indicating a trend of increasing activity in residents’ investment behavior.
The current one-year fixed deposit interest rate at China’s six largest state-owned banks (Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Postal Savings Bank of China, and Bank of Communications) is 0.95%.
Although the average annualized return on bank wealth management platforms is 2.12%, 2.23 times the deposit interest rate, reports from institutions like Guosen Securities have shown that the scale of bank wealth management remained flat at the end of July, with no significant growth.
Bloomberg stated that with declining financial product yields and diminishing returns on real estate investments, the Chinese stock market is expected to become an important channel to accommodate residents’ asset allocations.
Data from the Shanghai Stock Exchange revealed that approximately 1.96 million new A-share investor accounts were opened in July, marking a consecutive monthly increase for the second month. A-share margin balance reached a 10-year high of approximately 2.09 trillion RMB, and daily stock market turnover remained above 2 trillion RMB.
On August 18th, the Chinese stock market saw a rise, with the Shanghai Composite Index (SHCI) returning above 3,700 points, reaching a 10-year high.
Niu Chunbao, the Chairman of Shanghai Wanji Asset, mentioned that there is a possibility of more deposits flowing into the stock market in the future.
According to data from Bloomberg, Chinese residents’ deposit scale is currently about 1.7 times the market value of the Shanghai and Shenzhen stock market, indicating significant potential for deposit relocation.
The People’s Bank of China’s statistics report in January this year indicated that by the end of 2024, the total balance of residents’ deposits in China reached 151.25 trillion RMB.
In response to the large influx of residents’ deposits into the stock market, Professor Xie Tian from the Darla Moore School of Business at the University of South Carolina expressed to Epoch Times that the size of Chinese residents’ savings is too large, posing as a “headache” for the Chinese Communist government because “the money just sits there and doesn’t generate wealth.”
He mentioned that the Chinese government may use public opinion guidance or deceptive means to “make people think about taking their savings out,” suggesting that the decrease in monthly resident deposits by 1.1 trillion RMB could have led people towards investing in the stock market, real estate, or elsewhere, particularly when deposit interest rates drop. In such a scenario, people may consider investing elsewhere.
“When faced with an economic downturn, there’s no need to invest in the stock market unless you are a big player or have insider information on the Chinese government’s policy direction,” remarked Xie Tian, emphasizing the importance of preserving capital and being cautious, particularly for regular individuals.
Bloomberg reports that economic activity in China slowed across the board in July, indicating that the stock market rally lacked fundamental support.
Fang Jiazhong, an economics professor at National Taiwan University, highlighted that if the stock market rises too high, systemic risks may arise, and there is a danger of a significant downturn if stock prices deviate too far from fundamentals.
Given the economic slack in China, while the stock market appears buoyant, Fang Jiazhong pointed out that the disconnect between the stock market and economic fundamentals indicates deep state intervention by the Chinese Communist Party to showcase a “trophy achievement.”
Fang emphasized that the risk of severe financial consequences, bankruptcies of individuals, companies, and financial institutions could manifest if the stock market experiences a significant collapse, warning investors to be vigilant of such possibilities.
Amid China’s monetary tightening, the stock market’s upward trajectory is concerning as it drifts further away from fundamentals, heightening the risk of a substantial market collapse and its potential fallout on the financial system.
Fang Jiazhong concluded that deflation is a vicious circle that is challenging to break out from, highlighting the difficulty of steering the economy back onto a growth trajectory once deflation sets in.