The People's Bank of China's recent decision to slash the interest
rate on postal savings deposits will hopefully help alleviate some
persistent problems in the financial sector, but will create
short-term difficulties for the postal savings system, analysts
said.
The nation's central bank brought the interest rate on funds the
postal savings system redeposits at it after August 1 down to 1.89
per cent, equal to that on reserves financial institutions deposit
at the central bank, from the previous rate of 4.131 percent, it
said last week.
That long-awaited decision will probably force new deposits
accepted at China's around 20,000 postal savings outlets after
August 1 into the market, but the bulk of outstanding postal
deposits, estimated at 800 billion yuan (US$96 billion), will
remain on the central bank's books, said a bank official who
preferred not to be named.
"We have yet to calculate that number (deposits taken after
August 1)," he said. "But if it's 800 billion yuan for more than a
decade, just one month won't have generated much (deposits)."
In 1986, China's postal system started to accept savings
deposits from residents as part of the government's efforts to
withdraw excess cash from circulation amid inflationary worries.
Such deposits were redeposited at the central bank.
In 1990, the central bank gave the postal savings system greater
autonomy over the business and started to pay an interest rate for
the redeposited funds that is much higher than that for
corresponding regular deposits, both as an encouragement and a
compensation for the cost of building more outlets.
An unexpected consequence of that reform, analysts say, was the
frenzied enthusiasm generated at China's postal savings outlets,
which are widely scattered across the nation's vast rural areas, to
collect savings deposits.
Such efforts noticeably reduced funding sources for rural credit
cooperatives, which became the main rural lenders after major
commercial banks withdrew from the countryside in recent years to
refocus on the big cities.
"And the result is that funds in the rural areas dried up," said
Li Ruoyu, an analyst with the State Information Center (SIC).
Li said another defect of the redepositing mechanism of postal
savings is that it restricts the central bank's leeway with
monetary policy as it has to re-lend the postal deposits,
subsequently enlarging base money, the so-called "high energy
currency" that amplifies money supply at a far greater pace.
And such deposits have long been a heavy burden on the central
bank. Even if it lends all the funds to commercial banks at the
highest relending rate -- 3.24 percent -- the interest spread will
translate into 7 billion yuan (US$840 million) in annual
losses.
Now the hefty interest rate reduction is expected to help solve
all such problems, analysts said, but it will presumably deal a
heavy blow to the postal savings system although it won at the same
time the right to invest postal savings in a number of ways other
than making loans.
"Postal savings account for about one-third of incomes at the
postal system. The contribution to profits is even bigger," said
Yang Hairong, a professor with the Beijing University of
Post and Telecommunications.
The share of income from the postal savings business grew to
35.65 percent of the total postal income last year, compared with
24.6 percent in 1998, statistics indicated.
Officials from the China Postal Savings and Remittance Bureau
(CPSRB), which oversees postal savings operations, were not
available for comment.
Due to the overwhelming importance of the postal savings
business to the postal system, efforts to correct the interest rate
problem have long met strong resistance. A widely expected plan to
create a postal funds bureau to take over postal savings operations
was killed last year.
It is still unknown to what extent the postal system can
compensate the huge loss in interest incomes from its investment
returns, but the prospect looks gloomy given the low level of
yields currently in the interbank market, the major investment
venue the central bank has approved.
"They are making preparations but have not come in yet," said a
fund manager at a major Chinese commercial bank.
The manager said the arrival of postal savings funds will help
alleviate the thirst for funds in the money market, although not in
any significant way, because liquidity is fairly tight as the
central bank's decision to raise banks' required reserves -- to 7
percent from 6 percent previously?-- took effect
yesterday.
Li from the SIC also cautioned about problems that may arise
from regulatory overlapping. The CPSRB is under the administration
of the State Postal Bureau, but its investments are supervised by
the China Banking Regulatory Commission.
(China Daily September 22, 2003)
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