Recently, the Bank of China has lowered deposit rates in an attempt to stimulate consumption and investment, but in the long run, the disadvantages outweigh the benefits. For Chinese people accustomed to saving to guard against risks, this means they will need to save more money to cope with the uncertainties of future life.
To boost consumption, the Chinese Communist Party has adopted a dual strategy of fiscal and monetary policies, but it is difficult to be effective because it avoids deeper obstacles hindering the growth of people’s consumption.
The People’s Bank of China lowered the upper limit of deposit rates last week, and subsequently, various banks announced reductions in deposit rates, hoping to encourage depositors to increase consumption or investment. However, the actual effect has not been as expected.
An employee of an internet company named Miro Chen launched an online survey on social media: “With the decrease in interest rates, will you save or spend?” Out of approximately 5,000 responses, over 80% of people chose saving.
“The result is overwhelmingly one-sided, indicating everyone is very worried,” he told Reuters, and explained why saving money is needed. “I don’t know how much longer my company can last.”
In recent years, the central bank has continuously lowered deposit rates, not only failing to curb the explosive growth of Chinese household savings, but also intensifying concerns about the economy. Due to the lack of a comprehensive social safety net by the Chinese government, people tend to save for retirement or emergencies. The lower the interest rate, the greater the impact on ordinary people.
According to official Chinese data, as of the end of March, the total amount of deposits by Chinese residents exceeded 160 trillion yuan, an increase of 10.3% compared to the same period last year, equivalent to 118% of the domestic Gross Domestic Product (GDP) in 2024. In comparison, national retail sales only increased by 4.6% during the same period.
Reuters reported that Liao Minxiong, a senior economist for the Asia-Pacific region at London’s GlobalData.TS Lombard, said that low interest rates could further reduce income growth for the Chinese population.
“Especially for those born in the 1980s, they may need to save more over the next ten years rather than consume to ensure cash flow after retirement, because low interest rates may continue,” he warned.
Currently, household consumption in China accounts for about 20 percentage points less of GDP compared to the global average. The sharp decline in the real estate market, economic growth slowdown, currency tightening, and persistently high youth unemployment are all putting pressure on the Chinese economy, suppressing consumer spending.
In terms of fiscal policy, Beijing has introduced programs such as appliance and auto replacement, which may promote economic activities in the short term. However, for an economy in China that is heavily reliant on manufacturing in the long run, achieving structural rebalancing is challenging.
The Wall Street Journal reported that at a home appliance store in Haikou, a consumer named Ou said that ordinary Chinese working-class people are very cautious about spending because wages are low and incomes are not increasing.
She welcomed these appliance incentive measures, but she felt that if the TV at home was not broken, no one would buy a new TV just because of a subsidy. Subsequently, she left the store without making any purchases.
In 2024, the Chinese economy heavily relied on exports to achieve a growth target of around 5%. Analysts suggest that with the United States raising tariffs, Beijing is more urgently required to take measures to achieve rebalancing towards domestic demand. The Chinese government is forced to shift towards long-suppressed consumption, but the low interest rate policy may have the opposite effect.
Michael Pettis, a senior fellow at the Carnegie China Center, told Reuters, “In today’s China, as well as in Japan’s financial system in the 1990s, low interest rates do not stimulate consumption.”
He pointed out that like Japan, which has been stuck in economic stagnation for decades, the negative effects of low interest rates on the household sector continue to increase.
Elisabeth Werenskiold, a senior economist at Fathom Consulting, also stated that many Chinese enterprises have long relied on low borrowing costs, leading to entire industries becoming “zombified.”
She noted that cash flow in industries such as construction, aviation, tourism, and computer services in China is not enough to cover interest payments for more than five months. She regards this situation of cash flow being less than five months as being in the “danger zone.”
“This is a bit like taking painkillers,” Werenskiold said. “You can alleviate the pain, but unless you treat the root cause, you have to continue taking painkillers, increasing the risk of side effects.”