Q: China has lowered the RMB deposit interest rate eight
times since 1996, but residents' savings have still grown at a rate
of more than 1 trillion yuan (US$120.92 billion) annually. What is
the reason behind this growth? How will the government encourage
residents to invest or consume?
A: In the late 1980s and early 1990s, the savings of Chinese
urban and rural residents were once considered a "caged tiger." The
government always worried that this tiger would affect market
prices, lead to inflation, and harm social and economic development
once it came out of the cage. From May 1, 1996 to February 2002,
the RMB deposit interest rate decreased eight times. The interest
rate for one-year deposits fell to 1.98 percent, the lowest rate
since 1949.
However, more than eight years have passed since then. The
"caged tiger" hasn't escaped. On the contrary, it still lurks in
its cage. Urban and rural residents' savings has snowballed from
3.85 trillion yuan (US$465.54 billion) in 1996 to 12.6 trillion
yuan (US$1.52 trillion) in 2004, making China's savings rate second
highest in the world, only after Japan.
The main reason for continual growth in the savings deposits of
Chinese urban and rural residents is the steady increase of
residents' income. Especially after the mid-1990s, when consumption
grew at a high speed, Households were nearly saturated with
essential durable consumables, restricting the transfer from
savings to consumption.
Second, the Chinese tradition of keeping expenses within the
limits of income, and the need to provide for elderly family
members, children's education and in case of serious diseases have
compelled residents to increase savings. Currently, among
residents' savings deposits, preventive savings hold the bulk. As
long as the deposit interest rate is acceptable and no extremely
special situations appear, residents won't withdraw their
deposits.
Third, China's financial market develops slowly when there is no
secure and stable channel for urban and rural residents to invest
money in. The present investing channels are of low return but of
high risk. Having few alternatives, residents have to let their
meager savings flow into the banking system. Under China's present
situation, depositing money in banks is a low-return activity, but
at least it's safe.
Fourth, although the securities and insurance markets have
developed quickly, products with good security, fluidity and
profitability are still in short supply. Chinese residents are
enthusiastic in subscribing for treasury bond, indicating there is
a great demand for investments in treasury bonds that are
comparatively safe and with an interest rate higher than bank
deposits. If some investors temporarily withdraw their investments
in treasury bonds, they will still put the money into savings, as
there is no other good way to invest. They have to wait for another
chance to reinvest.
To encourage Chinese urban and rural residents to transfer
preventive savings to investment savings, the country is
facilitating the reform of social security, establishing a social
security system covering the whole society, including all laborers,
and easing residents' uncertain expectations of future income, to
reduce the amount of preventive savings. Meanwhile, a higher
education loan system and education insurance will be established,
promoting new kinds of education savings deposits and developing
funds that have the function of inflation-adjusted savings
deposits.
Residents in the city of Fuzhou, Fujian
Province, are in a Bank of China branch. Individual bank deposits
in China ranked second in the world in 2004, next only to
Japan.
