Text/Liao Zhiming, researcher at the Institute of International Monetary Research, Chinese University
This article first discusses the problem that the mainland has entered the era of low interest rates, and the interest rate may further decline, and then takes Japan as an example to analyze the evolution of the country's wealth management business in the era of low interest rates, and further analyzes the opportunities and challenges faced by the wealth management industry in the mainland under the low interest rate, and believes that the wealth management industry in the mainland will have different development opportunities in the short, medium and long-term, and long-term stages.
The mainland has entered an era of low interest rates, and interest rates may fall further
Bond yields have fallen to historic lows. Since 2010, as economic growth has shifted, yields on various types of bonds on the mainland have trended downward, as shown in Figure 1, the yield on 10-year government bonds fell to 2.3% in March 2024 from 3.6% in early 2010, while the yield on 30-year government bonds gradually fell to 2.5% from 4.2%. In recent years, credit spreads in the bond market have declined significantly, and term spreads have compressed significantly. Especially in the past five years, bond yields have fallen sharply.
Deposit rates continue to fall. Since the beginning of 2022, major commercial banks in mainland China have lowered their deposit interest rates four times, and the long-term time deposit interest rates of large state-owned banks and joint-stock banks have entered the "2.0" era. Taking Bank of China as an example, from August 2011 to May 2012, the listed interest rate of five-year lump sum deposit and withdrawal time deposit was as high as 5.5%, and since then, the listed deposit interest rate has started a long downward period. At the end of October 2015, the listed interest rate of the five-year lump sum deposit and withdrawal time deposit of the Bank of China fell to 2.75% and remained stable in the following years, and since 2022, it has fallen sharply again, from 2.75% at the beginning of 2022 to 2.0% at the end of 2023. We expect deposit rates to move further down in the future.
With the shift in economic growth, the yields of various types of bonds have fallen to historical lows, the yield of 10-year treasury bonds may have fallen to 2.3%, the deposit interest rates of major commercial banks have been continuously reduced, and the deposit interest rates have hit a record low, and the current five-year lump sum deposit and withdrawal time deposit interest rate of large state-owned banks is only 2.0%. It can be said that the mainland has entered an era of low interest rates.
Economic output is a function of labor, capital and total factor productivity (TFP), population is an important factor affecting the potential growth rate of the economy, and it is also the main medium- and long-term factor affecting the trend of interest rates. Regions with declining populations and high ageing populations were previously the most negative interest rates in the world, such as Japan and many European countries. From a global perspective, lower interest rates are inevitable in the medium to long term.
Demographic changes are more consistent with long-term interest rates. Population aging affects economic development in many ways, aging will reduce the labor force participation rate, and the decline of the labor force will have a negative impact on economic growth. After entering the aging stage, the increase in the dependency ratio will increase the burden of the working population to support the non-working population, and will also bring about a decline in the number of working people. Population decline will have a profound impact on most industries by suppressing aggregate demand and reducing the incentive for businesses to invest. In Japan, the U.S., and Germany, the 10-year yield has been more consistent with the ratio of the working population to the elderly population. Societies with a high proportion of young people have higher potential economic growth and stronger demand for financing, which increases interest rates.
With the decline of the total population, the decline of the working population is accelerating, and the downward trend of interest rates is difficult to reverse. China's labor force peaked in 2013 and its total population in 2021. In the past 10 years, the number of births in China has declined rapidly, from more than 16 million in 2015 to 9.02 million in 2023. Since China's total fertility rate is lower than Japan's, China's population decline may exceed Japan's in the future.
Due to historical changes in demographics and numbers, the potential growth rate of the economy is likely to decline, and aggregate domestic demand needs to be boosted by lower interest rates. Referring to the trend of Japan's government bond yield from 1990 to 2003, we expect that the mainland 10-year government bond yield may move towards 1.5% in 2028 and fall below 1% in 2035. In the medium to long term, unless there is a big inflation, the long-term downward trend of interest rates is relatively clear.
Take Japan as an example, the evolution of wealth management business in the era of low interest rates
Japan has been in an era of extremely low interest rates for an extended period of time. In the three decades since the bursting of Japan's real estate bubble in 1990, Japan's 10-year government bond yield has been on a long-term downward spiral. Between 1990 and 2003, the yield on 10-year Japanese government bonds fell from a high of 7.8% to 0.5%, and then rose slightly as the economy recovered slightly due to the effects of the Koizumi government's reforms. After the 2008 financial crisis, Japan's 10-year government bond yield began a downward cycle of more than 10 years, falling from 2.0% to -0.2% in August 2019. In February 2016, Japan implemented a negative interest rate policy, that is, the interest rate on the excess reserve deposit of commercial deposits held by the central bank was -0.1%. Since 2020, Japan's 10-year government bond yield has risen due to rising inflation. In March 2024, the Bank of Japan announced that it would withdraw from the negative interest rate policy, raising the policy rate from -0.1% to a range of 0~0.1%, while ending the yield curve control policy and stopping the purchase of exchange-traded funds (ETFs) and real estate investment trusts.
Japan's labor force peaked in 1995 and its total population in 2010. After the total population began to decline in 2010, the decline in the number of people in the labor force accelerated. Since 2019, the decline in Japan's total population has widened significantly. Demographically, we expect Japan to remain in an era of low or very low interest rates for a long time.
Low interest rates affect residents' asset allocation. As shown in Table 1, as of the end of September 2023, Japanese residents had about 2,121 trillion yen in financial assets, mainly invested in cash and deposits, insurance and annuities, of which cash and deposits accounted for 52.5%. In contrast, in the first quarter of 2023, U.S. residents held $114 trillion in financial assets, with 39.4% invested in equity assets, in addition, insurance and annuities accounted for 28.6%, and funds held 11.9%. Due to the low yields on Japanese bonds, Japanese residents hold a high proportion of cash and deposits, and a low proportion of investment funds and bonds. Despite near-zero interest rates on deposits, the proportion of cash and deposits held by Japanese residents is significantly higher due to the low rate of return on other assets. As Japanese residents mainly hold deposits, the development of wealth management business is more challenging......
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Article source丨Tsinghua Financial Review, Issue 125, April 2024
This article is edited by Wang Mao
Editor-in-charge丨Ding Kaiyan, Lan Yinfan
Preliminary trial丨Xu Lanying
Final Review丨Zhang Wei
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