Unleashed bank deposits misused in Chinese economy

Chinese bank deposits in the trillions of renminbi were vitalized to leave the banking system last month but the money has not yet been well-used in the real economy.  

Chinese banks lost deposits totaling 3.92 trillion yuan (US$542 billion) in the single month of April 2024 after they were ordered by regulators to stop their long-term practice of offering extra interest to depositors. 

New renminbi deposits plummeted 51% to 7.32 trillion yuan in the first four months of 2024 from 14.93 trillion yuan in the same period of last year, the People’s Bank of China (PBoC) said on May 11.

At the same time, new renminbi loans fell by 10% to 10.19 trillion yuan from 11.32 trillion yuan for the same period.

Some research reports commented on those worse-than-expected figures but they were removed from social media. 

Bloomberg reported that at least seven research reports from Chinese securities firms that had been posted to WeChat by analysts were unavailable for viewing on Monday. It said the social media platform received complaints about unspecified violations of rules governing public accounts. 

The report said the incident highlighted the increasing difficulty of getting reliable economic information in China. 

Where’s the money?

According to the PBoC’s benchmark, mainland Chinese banks can offer interest no higher than 1.45% on one-year deposits. 

Some economists said the low deposit rate had given people a strong incentive to withdraw their deposits from banks to either buy wealth management products for an average 4% yield or repay mortgage loans to save a 4.9% cost. 

Ming Ming, chief economist at CITIC Securities, said the decline of yuan deposits in April was caused by Chinese banks’ new policy of offering no additional interest to depositors. He said many people used their money to buy wealth management products.

He said seasonal factors also played a role in the decline as new deposits usually grow slower or fall in April and July after Chinese banks chase their targets in March and June. 

Over the past two years, Chinese banks have been fighting for deposits as the PBoC has kept slashing deposit rates to stimulate the economy. 

Banks lured depositors with “manual interest subsidies.” Such a practice was originally designed to allow banks to pay their clients extra interest as a compensation after their services were disrupted by computing errors.   

The Self-Disciplinary Mechanism for the Pricing of Market-Oriented Interest Rates, a PBoC-led task force established in 2013, on April 8 ordered Chinese banks to completely stop this practice by the end of April.  

It said all banks must cease paying extra interest on top of the PBoC’s benchmark even if they have already promised their clients.

It said the practice caused irrational competition among banks, disrupted market order and failed to create a favorable interest rate environment to support real economic development. 

Weak credit demand

This past Saturday, the PBoC said that China’s aggregate financing to the real economy (AFRE) or total social financing, one of the key indicators of China’s credit demand, was 12.73 trillion yuan in the first four months of this year, down 3.04 trillion yuan from the same period of last year.

The AFRE was 12.93 trillion yuan in the first quarter. It means that the figure declined by 200 billion yuan in April, the first drop since 2005. 

Due to the bad credit data, onshore renminbi weakened to 7.2347 per US dollar on Monday, down 101 basis points from last Friday and also the lowest in two weeks. 

Using the US Census algorithm on the Eviews econometrics platform, Asia Times found that China’s AFRE figures in April, which look extremely weak before seasonal adjustment, are one standard error below the linear trend regression line. In short, they are on the weak side but within normal parameters. And they are likely a result of weak lending into the property sector.

A research report published by Minsheng Securities said the ban of the “manual interest subsidies” practice has so far been unable to achieve its expected results of stimulating the economy. It said China’s AFRE will hopefully regain growth momentum if the recent easing of property rules starts showing effects.  

Since May 9, a dozen second-tier cities such as Hangzhou, Xian and Fosan have separately announced their decisions to cancel their property purchase limits. These announcements helped boost property stocks.

Shares of Shimao Group Holdings have gained 133% to close at HK$1.05 (13.4 US cents) on Monday from last May 8. Shares of China Aoyuan have doubled to 26 HK cents.

Read: Hong Kong exports rebound despite Sino-US trade war

 Follow Jeff Pao on X: @jeffpao3

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