Chinese bank deposits shrink after PBOC's rate cut
Calls for more vigorous macro-policy mount following disappointing July data. CASS accuses tax system of encouraging tobacco and alcohol sectors.
Our briefing on critical economic and financial developments in China as of Tuesday, 20 August, 2024:
Bank deposits in China contract again as the Chinese central bank drives down interest rates
Calls for more vigorous macro-economic policy mount after China's economic readings for July disappoint.
The Chinese Academy of Social Sciences calls for greater fiscal reform, says consumption taxes currently encourage tobacco, alcohol and gas sectors.
Bank deposits in China resume contraction after Chinese central bank cuts in July
Yuan-denominated deposits contracted 800 billion yuan in July, with both households and enterprises removing deposits after a rate cut from the Chinese central bank.
Household deposits shrank 330 billion yuan, while enterprise deposits contracted 1.78 trillion yuan, according to figures released by the People's Bank of China (PBOC) – which is the Chinese central bank.
Fiscal deposits saw an increase of 645.3 billion yuan, while non-bank financial institutions saw deposits rise 750 billion yuan.
Domestic observers say that the decline in household and enterprise deposits was driven by ongoing declines in the rates offered by banks, after PBOC cut the policy rate in July to help buoy a slowing Chinese economy.
Both of China’s 1-year and 5-year benchmark loan prime rates dropped 10 basis points in July, while PBOC also cut its 7-day reverse repo rate 10 basis points to 1.7%.
Chinese banks are now striving to maintain profitability, as reduced lending rates put greater pressure on net interest margins that were already constrained at the start of the year.
On 25 July, all six of China's big state-owned banks took the lead in reducing demand deposit and fixed deposit rates, with cuts of between 5 to 20 basis points.
Efforts by Chinese regulators to stymie "manual interest rate supplementation" (手工补息) have also exacerbated the decline, by denying banks the ability to apply covert or discretionary increases to deposit rates.
In lieu of bank deposits, Chinese households and enterprises are instead turning to wealth management products (WMPs), which are subject to less stringent regulatory oversight and can offer higher yields.
"Deposit rate declines are driving some funds towards wealth management products, government bonds and other financial products," said Zhou Maohua (周茂华), macro-researcher from Everbright Bank.
"Household and enterprise caution surrounding deposits is thus impacting deposit creation."
Figures from CITIC Securities indicate that in July outstanding bank WMPs posted an on-month rise of 1.78 trillion yuan, to reach 30.30 trillion yuan, exceeding the average value for 2018 - 2023 by 1.69 trillion yuan.
This stands in marked contrast to an on-month decline of 1.12 trillion yuan in June, which brought outstanding bank WMPs to 28.59 trillion yuan.
The problem of households and businesses fleeing bank deposits WMPs also arose earlier in the year, when a rise in Chinese treasury values boosted the yields of bond-backed WMPs.
Wen Bin calls for Beijing to launch stronger macro-economic measures ASAP
Prominent Chinese economist Wen Bin (温彬) has called for Beijing to launch more active macro-economic policies as soon as possible, following the release of a raft of lacklustre economic data in July.
"With the exception of the index of service production and total consumer good retail sales posting a slight year-on-year uptick, other indices are currently still in the process of decline," wrote Wen, chief economist with China Minsheng Bank, in an opinion piece for 21st Century Business Herald.
"This indicates that pressures including insufficient effective demand and weak market confidence are expanding.
"If we want to ensure that the full-year economic growth targets are met, policy must become more active as soon as possible."
At the end of July, prior to the release of the latest raft of monthly data, the Communist Party's Politburo called for "expanding the intensity of macro-economic controls," as well as "strengthening counter-cyclical adjustments" and "accelerating the comprehensive implementation of pre-determined policy measures."
Concerning data points for Wen included:
US-denominated export growth dropping to 7.0% YoY in July from 8.6% in June. "A cooling of the global economy and weak, US inventory replenishment is dragging on Chinese exports," Wen wrote.
Consumer demand diverging, with total retail goods sales rising 2.7% YoY in July, for a lift of 0.7 percentage points compared to June, yet food and beverage consumption growth easing 2.4 percentage points to 3.0%.
An ongoing slowdown in infrastructure investment. Infrastructure investment for January - July grew 4.9% YoY, easing 0.5 percentage points compared to the first half, for the slowest rate since 2022.
The continued bottoming out of the real estate market. Real estate development investment for January - July fell -10.2% compared to the same period last year, for an expansion of 0.1 percentage points compared to the first half.
China's tax system encourages smoking, boozing and gas guzzling: CASS
A leading Chinese tax expert says plans to reform China's fiscal system should focus on changing the intensely concentrated nature of the consumer tax, in tandem with increasing the revenue share of local authorities.
Yang Zhiyong (杨志勇), chair of the Fiscal and Tax Research Centre at the Chinese Academy of Social Sciences (CASS), points out that over 95% of China's consumption tax is derived from cigarettes, alcohol, gas and automobiles.
"Because of this dependence, local government is perhaps encouraged to continue to give support these sectors," Yang said during a lecture on "The Direction and Logic of Fiscal Reform" (财税改革的方向与逻辑) delivered on 28 July.
Yang said the crux of fiscal reforms at present was adjustments to the relationship between the central and local government.
He called for increasing tax revenues for local governments, while also optimising transfer payments from the central government via improved incentivisation and restraint mechanisms.
China's local governments have long borne a disproportionate share of fiscal expenditures, causing many to incur "hidden debt" via investment platforms, or rely on revenues from land transfer fees for funding purposes.