China's soaring individual savings deposits is not only a symbol of its expanding economic might, but more importantly, a source of investment and purchasing power that needs to be further tapped.

Will current individual savings go more towards investment and consumption?

It only took nine months for private household savings to go from 7 trillion yuan (US$847.4 billion) to the 8 trillion (US$967.3 billion) mark in May.

And the latest figure shows that the momentum hasn't dropped one bit, with the figure reaching 8.2 trillion yuan (US$992.7 million) by the end of June.

What makes the figure more noteworthy is that compared with the situation in 1999, interest rates and prices are at all-time lows.

The National Bureau of Statistics announced last week that the resident consumer price index (CPI) posted a negative growth rate of 0.8 percent in June, compared with the same month last year.

Meanwhile, time deposits had reached 5.549 trillion yuan (US$671.79 billion), about 65 percent of the total, by the end of May.

Experts attribute the rapid accumulation of savings to China's saving tradition and immature capital market.

He Lipin, director of the Finance Department at Beijing Normal University, noted that Chinese people have long preferred to save than spend.

"But the unprecedented growth rate of household savings in the first half of this year also reflects that there are few investment channels other than banks for individuals," he said.

Compared with the annual growth rate of 14.7 percent last year, the year-on-year percentage growth rates of private savings for the first six months of this year were 12.6, 16, 15.2, 16.2, 17.6 and 17.4 respectively.

While savings grew at a rapid pace, the stock market suffered from a confidence crisis and worries over a government state share sell-off plan. Dropping stock prices forced investors to either withdraw from the market or adopt a wait-and-see attitude.

Even after the stock market's recent rally, following the government's announcement of the cancellation of the state share sell-off plan late in June, it is still susceptible to rumors.

Furthermore, the government did not expand its fiscal stimulus package this year. The amount of treasury bonds issued this year equals that of last year. Thus, savings were not diverted into the bond market.

As savings continue to grow, banks also find it more and more difficult to pump funds into the production sector.

According to the latest figures from the central bank, total outstanding deposits reached 15.8 trillion yuan (US$1.91 trillion) in June while total outstanding loans reached 12.1 trillion yuan (US$1.46 trillion).

This is obviously a sad story for private businesses, as their thirst for funds can hardly be assuaged.

The reasoning behind the banks' insufficient lending to the private sector is complicated. Many big companies, among the high-quality clients to banks, are suffering from overcapacity and overproduction. This means they have no strong demand for loans right now.

On the other hand, since the national credit rating system has not taken shape and the insurance industry is still immature, lending to fund-thirsty small and medium-sized enterprises is still quite risky.

So even further interest cuts may not be enough to discourage depositors and push banks to lend cheap credit to Chinese firms.

Li Yang, director of the Finance Research Center with the Chinese Academy of Social Sciences, recently warned that the low interests rate of treasury bonds has already been distorted and if there is no adjustment in financial policies, interest cuts will only backfire.

Professor He Lipin said another interest rate cut will be unlikely. "After eight consecutive cuts, the current interest rate level has left little leeway for the efficacy of another cut."

Besides, while low interest rates may function well on the investment side of the economy, they will also reduce the interest income of savers.

At present, it seems that the government intends to use low interest rates to encourage individual and organizational investors to enter the stock market.

However, there is still great uncertainty about the long-term effectiveness of such an approach.

If the interest rates are slashed down to near zero, households will naturally anticipate future rises in interest rates, which will result in weak stock prices and capital losses. With such expectations, they will refrain from rushing into the stock market.

A more practical and effective way may lie in further structural reforms.

At present, excessive savings is largely a problem exacerbated by the perceived need for education, medical service and retirement.

A poll conducted by the central bank, the People's Bank of China, at the end of last year revealed that the top incentives for individual saving are education, retirement and housing. Education was the top reason for 19 percent of those polled and 13 percent of those surveyed cited old age as their top concern.

Thus, moving ahead with pension and medical insurance reforms would free up savings and result in people's stronger desire for spending.

Also, structural reforms in other sectors will inevitably improve performance and accountability.

The way to make individual savers reduce their liquidity in banks is to help them build their confidence in other investment channels.

He Lipin also urged for more aggressive bank reforms to improve banks' ability to convert savings into loans.

He pointed out the silver lining of such massive saving growth: "For China's commercial banks, such a huge sum of deposits and savings will gain them a stronghold in the upcoming competition with international financial institutions."

With soaring savings, it is unlikely domestic banks will encounter a liquidity problem. They can take this opportunity to lower their rate of bad debts. Thus, the growth in savings provides them with a precious buffer period before home RMB service is fully opened to foreign banks.

( July 29, 2002)