Regularization of deposits
In February 2024, the proportion of residents' fixed deposits in residents' deposits reached 72.1%, a new high since data became available in December 2004. As for the fixed-term deposits, the consensus in the market is that the demand for precautionary savings after the epidemic has boosted household savings. Overseas experience also shows that asset price adjustment and precautionary demand may increase residents' willingness to save. However, there are two peculiarities of the mainland's fixed-term deposits: first, after 2021, residents' consumption propensity fluctuated at a low level and did not decline further, but the fixed-term deposits continued; second, the increase in overseas precautionary savings was often accompanied by a decrease in the fixed deposit ratio, which may reflect the increase in liquidity demand, while the fixed deposit ratio in the mainland is rising.
This peculiarity may come from two aspects: First, the pursuit of scale and the emphasis on general deposits have brought about competition among institutions to attract deposits, so that the interest rate of fixed deposits has shown a strong rigidity. Therefore, to a certain extent, there is a pattern of "asset shortage" and rigid deposit interest rates in the market. Second, the interest rate of fixed deposits changes slower than the interest rate of the financial market, and in the expectation of the overall interest rate decline, the interest rate of longer-term deposits is higher, attracting residents to lock in higher interest income through fixed deposit products.
In order to smooth the transmission of monetary policy and reduce the financing cost of the real economy, the following measures can be considered to ease the trend of deposit regularization: First, flatten the deposit interest rate curve. This can be achieved by adjusting the upper limit of the deposit interest rate or asymmetrically lowering the long-term limited deposit and listing interest rate. The second is to simplify the benchmark interest rate of deposits. The current benchmark deposit interest rate (except for current tenors) only includes 5 levels of 3 months, 6 months, 1 year, 2 years, and 3 years, which can be moderately simplified. The third is to further reduce the reserve requirement ratio and release low-cost medium and long-term funds. Fourth, it is necessary to appropriately dilute quantitative targets such as the growth rate of money and credit, guide the scale of financial institutions to grow moderately, and maintain healthy competition in the deposit market.
Since 2020, the pricing mechanism of deposit interest rates has undergone two adjustments: first, in June 2021, the PBOC guided the self-discipline upper limit of the deposit interest rate to be determined by adding points, and second, in April 2022, the member banks of the PBOC's self-discipline mechanism on interest rates adjusted the deposit interest rate with reference to the bond market interest rate represented by the 10-year treasury bond yield and the loan market interest rate represented by the 1-year LPR. By February 2024, the listed interest rates of 1-year, 2-year, 3-year and 5-year time deposits will decrease by 8.1bp, 48.7bp, 73.7bp and 67.5bp respectively compared with January 2020.
Despite the decline in the interest rates of fixed deposits of all maturities, the proportion of resident time deposits in deposits continued to rise, rising from 63.5% in January 2020 to 72.1% in February 2024. Why does the proportion of residents' fixed deposits remain high, and what measures can be taken to alleviate the continued rise in the proportion of fixed deposits? This article will analyze the above two issues.
1. Why is the proportion of residents' fixed deposits still high?
However, international experience shows that a high willingness to save does not mean that the willingness to save increases, and the phenomenon of rising proportion of fixed deposits in mainland China is particular.
1.1 Overseas experience of precautionary savings for residents
Studies have shown that income uncertainty, unexpected changes in wealth, and the availability of credit may lead to an increase in residents' willingness to save. According to the IMF's work report released in September 2012, in the 45 years from the second quarter of 1966 to the first quarter of 2011, changes in the supply of credit, household wealth shocks, and income uncertainty due to unemployment risks were all important factors driving changes in household savings in the United States. In particular, the continued expansion of credit supply between the early 80s and 2007 of the 20th century, as well as the increase in net wealth due to higher asset values, encouraged households to reduce the amount of savings in their disposable income. At the same time, in the case of the bursts of the information technology and credit bubbles in 2001 and 2007, fluctuations in net wealth and income uncertainty can explain cyclical fluctuations in personal savings. 1
The real-world experience of the United States, Japan, and South Korea has also verified the above conclusion. From the perspective of the United States, in recent years, the U.S. stock market has experienced three major declines: first, the information technology bubble at the beginning of the 21st century, the monthly average of the Nasdaq index decreased from 4,803 points in March 2000 to 1,242 points in October 2002; second, the 2008 financial crisis, the monthly average value of the Nasdaq index decreased from 2,780 points in October 2007 to 1,432 points in March 2009; and the third is that from 2021 to 2022, the monthly average value of the Nasdaq index decreased from 15,815 points in November 2021 to 10,801 points in October 2022。
Normally, the decline in the stock market is also accompanied by the weakening of the U.S. economy and the labor market, and residents' willingness to save has increased to varying degrees. In the information technology bubble of the early twenty-first century, the one-year moving average of the United States personal savings rate rose from 4.1 per cent in April 2000 to 5.6 per cent in December 2002. As the stock market and employment improved, the one-year moving average of the personal savings rate fell back below 3.0 per cent from August 2005 to May 2008. In the midst of the 2008 financial crisis, the one-year moving average of the personal savings rate rose again to 5.8 per cent in October 2009. The downturn in the job market after the pandemic in 2020 did not fully coincide with the correction in the stock market, with the U.S. employment rate falling to a minimum of 51.2% in April 2020 and the one-year moving average of the personal savings rate reaching a maximum of 17.8% in March 2021, likely reflecting the impact of policies such as U.S. cash subsidies. Despite the correction of the Nasdaq index from 2021 to 2022, the U.S. employment rate has remained above 60.0% since July 2022, and with the recovery of the job market and the depletion of excess savings, the personal savings rate has fallen overall, and in December 2022, the one-year moving average of the personal savings rate fell back to 3.3%.
From Japan's point of view, in recent years, the Japanese stock market has experienced two major declines: one is that in the 90s of the 20th century, the monthly average of the Nikkei 225 index fell from 38,130 points in December 1989 to 7,909 points in April 2003, and the second is the 2008 financial crisis, the monthly average value of the Nikkei 225 index fell from 18,001 points in June 2007 to 7,695 points in February 2009. Due to the availability of data, it is impossible to observe the changes in residents' willingness to save before and after the bursting of the bubble in the 90s of the 20th century. After the 2008 financial crisis, Japanese residents' willingness to save increased. From 2001 to the end of 2006, the one-year moving average of Japan's household savings rate remained low below 15.0 percent. During the 2008 financial crisis, the one-year moving average of the household savings rate rose from 12.9% in July 2008 to 14.9% in January 2009.
From the perspective of South Korea, in recent years, the Korean stock market has experienced four major declines: first, the 1998 Asian financial crisis, the monthly average of the KOSPI index was 999 points in October 1995 and the lowest fell to 312 points in September 1998, the second is the 2008 financial crisis, the monthly average of the KOSPI index was 2005 points in October 2007 and the lowest fell to 1074 points in November 2008, the third is from 2017 to 2020, the monthly average of the KOSPI index was 2534 points in November 2017 and the lowest in March 2020 was 1787 points, and the fourth is from 2021 to 2022, the monthly average of the KOSPI index decreased from 3,259 points in June 2021 to 2,230 points in October 2022. Due to the availability of data, it is impossible to observe the changes in the willingness of Korean households to save before and after the 1998 Asian financial crisis. Since 2004, South Korea's household savings rate has risen significantly during the stock market decline. In 2006, the one-year moving average of the household savings rate in South Korea as a whole ranged from 22.0% to 23.0%. During the 2008 financial crisis, the one-year moving average of South Korea's household savings rate reached 24.9 percent in March 2009. The 1-year moving average of South Korea's household savings rate fluctuated from 27.4% in December 2019 to 33.3% in June 2022 after a short interval between the downward trend from 2017 to 2020 and 2021 to 2022. The KOSPI index has since rebounded, and in December 2023, the one-year moving average of South Korea's household savings rate fell back to 29.6%.
1.2 The peculiarity of the increase in Chinese household savings
The situation on the mainland is both similar and different from overseas. The similarity lies in the fact that precautionary savings due to income uncertainty have led to a preference for deposits. The proportion of fixed deposits of mainland residents is closely related to the employment situation. It can be noted that after the 2008 financial crisis, the proportion of fixed deposits of Chinese residents rose to more than 65%, and as the employment situation improved, the minimum of fixed deposits of residents fell to 59.1% in January 2011. Since then, until 2020, the employment level is more consistent with the trend of the proportion of residents' fixed deposits. Since 2020, the proportion of residents' fixed deposits has risen beyond the scope of employment.
The special point is that, first, since 2021, residents' consumption tendency has been generally stable, and since 2023, the fluctuation of the urban surveyed unemployment rate has fallen, but the proportion of fixed deposits is still rising, which once again shows that the increase in the proportion of fixed deposits has exceeded the scope that can be explained by precautionary savings. From June 2021 to December 2023, the per capita consumption expenditure of urban residents in China's per capita disposable income fluctuated slightly in the range of 59.0% to 61.0%, while the proportion of residents' fixed deposits rose from 66.4% to 71.5% from June 2021 to December 2023, showing a clear upward trend.
Second, the precautionary savings of overseas residents are mainly manifested in a decline in their willingness to consume, while the proportion of time deposits is usually declining.
In the United States, the proportion of U.S. household fixed deposits tends to decline during the stock market correction and economic downturn. In the bursting of the information technology bubble at the beginning of the 21st century, the share of household time deposits bottomed slightly earlier than the stock market, falling to a low of 61.4% in December 2001. During the 2008 financial crisis, the share of household fixed deposits fell to 67.6% in March 2009, almost in line with the monthly average of the Nasdaq index. During the pullback from 2021 to 2022, the share of US household fixed deposits fell from 61.3% in December 2021 to 57.1% in September 2022 during the same time period.
In Japan, the proportion of fixed deposits of Japanese residents has been on a downward trend since data began in April 1998, reaching 72.6% in April 1994 and falling to 26.5% in February 2024.
In South Korea, the overall level of fixed deposits in South Korea has always been at a high level, accounting for more than 80% of household fixed deposits since 1995. During the correction of the Korean stock market, the proportion of residents' fixed deposits varied, and in some cases, the proportion of residents' fixed deposits also declined during the stock market correction. The share of fixed deposits in South Korean households has fallen since reaching 93.1% in July 2012, and has continued to decline in two corrections from 2017 to 2020 and from 2021 to 2022, reaching a minimum of 80.4% in June 2022.
However, the situation is different in China, especially in the post-pandemic stock market correction, where the monthly average of the CSI 300 Index began to decline from reaching 5,559 points in February 2021 to a low of 3,291 points in January 2024. From February 2021 to January 2024, the proportion of fixed deposits of Chinese residents increased from 65.8% to 71.6%.
What is the reason for the high proportion of fixed deposits among Chinese residents?
First, under the competition of deposit scale of financial institutions, the high interest rate of fixed deposits makes residents with low risk appetite more inclined to time deposit products. Since 2009, we can note that loans have generally grown faster than deposits. In the context of maintaining the steady growth of social finance and credit and promoting the stable GDP growth of the financial industry, financial institutions have certain scale demands. When the demand for financing slows, financial institutions may still collect savings for reasons such as stabilizing the scale. The Monetary Policy Implementation Report for the fourth quarter of 2019 pointed out that banks, especially small and medium-sized banks, have a strong impulse to attract deposits at high interest rates due to the preconceived notions of banks such as "deposit-based banking" and the pursuit of scale, as well as the fact that some regulatory indicators also pay more attention to general deposits. As a result, the deposit rate is more rigid than the lending rate.
The adjustment of overseas fixed deposit rates seems to be more flexible. In Japan, for example, since October 1994, interest rates other than demand deposit rates have been liberalized, and deposit and loan interest rates have fluctuated greatly from month to month. From October 1994 to September 1995 (the last interest rate cut before the Asian financial crisis), the Bank of Japan cut the discount rate by 125bp, while Japan's 6-month to 1-year fixed deposit rate fell by 151bp, and the 1-2 year fixed deposit rate fell by 169bp, which was larger than the policy rate.
In addition, the reduction of low-risk investment channels after the net value of wealth management products is also one of the reasons for the regularization of deposits. Since 2018, the trend of fixed-term deposits has gradually deepened, indicating that the new asset management regulations have broken the reduction of principal-protected products after the redemption of deposits, resulting in the return of deposits to the balance sheet, driving the proportion of fixed deposits to continue to rise.
Second, there is a mismatch between the current deposit and loan interest rate pricing mechanism, and the current deposit interest rate curve is steeper than that of loans. The term structure of the deposit interest rate curve is more complex than that of the loan interest rate curve, which makes the adjustment of the deposit listing rate more complicated. From the perspective of banks' adjustment of deposit and loan interest rates, the loan interest rate usually follows the LPR adjustment, with only 1-year and 5-year tenors, while the adjustment of time deposit interest rates includes 6 tranches of 3-month, 6-month, 1-year, 2-year, 3-year and 5-year (although the benchmark interest rate for 5-year deposits has been cancelled, 5-year fixed deposits still exist). In February 2024, the 5-year LPR was 50.0bp higher than the 1-year LPR, and the 3-year and 5-year deposit rates were 62.3bp and 58.8bp higher than the 1-year deposit rates, respectively, and the deposit rate listing curve was relatively steep. In anticipation of the decline in overall interest rates, the interest rate of longer-term deposits is still high, which may cause residents' funds to flow into longer-term limited deposit products and lock in higher interest income.
2. How to deal with the regularization of deposits?
Although the policy department has guided the deposit interest rate to decline through various measures since 2020 to reduce the financing cost of the real economy, the regularization of deposits has weakened the effect of the deposit rate reduction to a certain extent. In order to cope with the regularization of deposits, the following measures can be considered.
The first is to flatten the deposit interest rate curve. At present, the interest rate curve of deposit listing is relatively steep, and it is necessary to reduce the interest rate of long-term time deposit by a greater margin, which can be achieved by adjusting the upper limit of deposit interest rate or asymmetrically lowering the long-term limited deposit interest rate. Since October 2015, the benchmark interest rate for deposits in mainland China has not been adjusted, and the adjustment of the listed interest rate of deposits mainly relies on the self-discipline mechanism of interest rates. We can note that under the self-discipline mechanism, although the longer-term limited deposit rate has been significantly lowered, taking the 3-year fixed deposit rate as an example, the 3-year fixed deposit rate has fallen by 99.6bp from May 2021 to December 2023, but the overall curve is still relatively steep. In order to guide the downward trend of longer-term fixed deposit interest rates, the upper limit of the benchmark deposit interest rate can be lowered on the basis of the asymmetric reduction of the long-term limited deposit interest rate, such as a more substantial reduction of the benchmark interest rate for deposits with a maturity of more than one year, or a larger reduction in the increase range of the upper limit of the interest rate with a maturity of more than one year, so that the upper limit of the deposit interest rate can be more effectively constrained and flatten the deposit interest rate curve.
The second is to adjust the benchmark interest rate of deposits. The benchmark interest rate bracket for deposits can be simplified and incorporated into the management of shorter maturities. The benchmark deposit rate (except for demand tenors) includes 5 levels of 3 months, 6 months, 1 year, 2 years and 3 years, which can be moderately simplified, such as merging 2 years or 3 years into shorter term management.
The third is to further reduce the reserve requirement ratio and provide long-term low-cost funds to reduce the pressure on the debt side of financial institutions. After the RRR cut in February, the statutory reserve ratio of large banks was 10.0%, and the weighted reserve ratio of financial institutions was 7.0%, and there is still some room for reduction.
Fourth, it is necessary to appropriately dilute quantitative targets such as the growth rate of money and credit, further promote the transformation of credit from extension growth to connotative development, guide the scale of financial institutions to grow moderately, and maintain healthy competition in the deposit market. The Monetary Policy Implementation Report for the fourth quarter of 2023 pointed out that in the stage of high-quality development, economic development should not only be judged by economic growth, but also by financial support.
Bibliography:
1.Christopher, C., S. Jiri & S. Martin: Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects, IMF Working Paper, 2012, WP/12/219
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