MNI: Growing Chinese Savings Seen Hard To Boost Consumption

Chinese households could add to last year’s historically high savings in 2023 should pessimism over future income and house prices continue, despite official hopes that the Covid reopening will spur a consumption boom, advisors and economists told MNI, saying policymakers were likely to lower interest rates and to accelerate fiscal spending to bolster confidence.

Households’ bank deposits jumped by a record CNY17.84 trillion in 2022, making total outstanding household savings equivalent to almost 100% of gross domestic product, the highest ratio ever, as loans to households increased only by CNY3.83 trillion, a record low pace, PBOC data shows.

Since only CNY1.5 trillion of last year’s roughly CNY7 trillion excess savings resulted from weak consumption, the prospects of a boost to consumption this year are relatively limited, said Zhu He, senior fellow at the China Finance 40 Forum. The other CNY5.5 trillion in excess savings came as house buying declined in a weak property market, he said, adding that further declines in property transactions would feed continued fast increase in savings, if not at the same pace as in 2022.

A boost to consumption will be key to government hopes of shoring up growth to what is expected to be a target of around 5.5%, as China winds down zero Covid restrictions.

But gloom over house prices and future prospects for income are restraining spending, said Liu Lei, senior fellow at the National Balance Sheet Research Centre, part of the National Institution for Finance and Development at the China Association of Social Science.

Mortgage loans expanded by less than 10% last year, down from a peak of 38% in 2016, with the slowdown helping to put an end to the increase in household indebtedness over the past two years, he noted, predicting the household leverage ratio would continue to rise, but at a significantly slower rate than pre-2020.

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Redemptions of wealth management products have also fed savings, as the WMP market declined in size last year, following CNY3 trillion expansion in 2021.

Policymakers may need to provide additional monetary and fiscal stimulus in order to boost household confidence and so bolster consumption in line with growth targets, advisors said.

The People’s Bank of China should ease rates for fixed-term deposits, its open market operations and for its medium-term lending facility, said Zhu, adding that a 100bp reduction in policy rates could add at least 1.2% to GDP.

The PBOC is likely to reduce reserve requirement ratio by 100-150bps this year, in a bid to guide down the one-year Loan Prime Rate and then lead a fall at banks’ deposit rate, said Qin Tai, chief analyst at Shenwan Hongyuan Securities. Big state-owned banks last cut fixed-term deposit rates by 10bps last September.

But proactive fiscal policy, funded by a higher public sector deficit, would more effectively to boost private sector’s income and confidence than monetary policy, said Liu. Lower interest rates run the risk of luring households into fueling equity and property market bubbles, as occurred in Japan in the 2000s, he said. They also reduce space for future monetary easing, Liu said.

Over the past two years, China’s household sector has shown signs of “balance sheet recession” with a focus on paying off debt rather than new borrowing, Liu’s research shows.