Index > Briefing
Sunday, May 14, 2023
A Look at the Adjustment of China's Macro Policy through Household Deposit Trend
Wei Hongxu

Recent data from the People’s Bank of China (PBoC) reveals that in April 2023, RMB loans increased by RMB 718.8 billion, marking a year-on-year rise of RMB 64.9 billion. However, this increase fell significantly below expectations and was an infrequent occurrence in recent years. According to China Industrial Securities’ macroeconomic statistics, the growth in new residential loans in April was the weakest since 2012, lower than that of April 2022, with both long-term and short-term loans exhibiting weakness. The cumulative increase in new long-term residential loans for the first four months of this year is the lowest since 2015, lower even than in 2022. Simultaneously, RMB deposits decreased by RMB 460.9 billion in April, marking a year-on-year decrease of RMB 552.4 billion. Among these, household deposits decreased by RMB 1.2 trillion, representing a year-on-year decline of RMB 496.8 billion and the first negative year-on-year change since February 2022.

This overall decline in the growth of credit and deposit scale can be attributed to the reduction in household deposits and loans. This situation has sparked considerable debate, questioning why credit contraction occurred in April despite the better-than-expected economic growth in the first quarter. Researchers at ANBOUND believe that this reflects the structural imbalances in the ongoing economic recovery, where the overall improvement in expectations still requires more time for stabilization.

In general understanding, the decrease in household deposits is likely attributed to various factors such as consumption, housing expenditures, and investments. Currently, due to a lack of detailed data, there is no convincing explanation for the significant decline in household deposits in April. From various perspectives, including the analysis by researchers at ANBOUND, it is argued that the decrease in household deposits is not primarily driven by increased consumption expenditure. ANBOUND’s researchers provide several reasons to support this view. Firstly, the continued decline in inflation during April suggests weak overall consumer demand, which contradicts the significant reduction in household deposits. Secondly, the decline in household deposits and short-term consumer loans indicates limited available funds for consumption, aligning with the decline in major consumer goods like automobiles over a certain period. Thirdly, the simultaneous decrease in deposits and long-term residential loans suggests that some deposits might have been used for early loan repayment, leading to a contraction in the balance sheet. Additionally, some Securities research institutions propose that the decline in household deposits in April could be linked to the expansion of investment products such as wealth management and the recovery of the stock market. This implies that, in the face of decreasing deposit rates, a portion of the deposits is being redirected toward wealth management, investment, and other areas. The increase in deposits in non-banking financial institutions (with a year-on-year increase of RMB 291.2 billion) may indicate a corresponding situation.

However, researchers at ANBOUND are not overly concerned about whether the decline in deposits indicates a further slowdown in economic growth. It should be noted that due to the base effect, the second-quarter economic growth may appear better in numerical terms than the first quarter. Additionally, consumption recovery often lags behind investment recovery. The recent decline in household deposits and weak loan demand can actually be seen as a reflection of investment leading the way. Some analyses suggest that the current focus of households is on repairing their balance sheets, which is reflected in their preference for debt repayment as an investment mode. This is related to the sluggish real estate market, which has caused a decline in property values, as well as the decline in household income and unstable expectations due to the COVID-19 pandemic. The recovery of future consumer demand will still require continuous income accumulation by households and a stable employment situation.

While household loans are still declining, short-term loans have increased by RMB 60.1 billion, though long-term loans have decreased by RMB 84.2 billion compared to last year. This indicates an improvement in the demand for consumption-related loans, yet at the same time, the overall decline in credit is primarily driven by the continued decrease in long-term loans associated with the real estate sector. This, in turn, highlights the significant role that a stable real estate market plays in economic stability and consumption recovery. Additionally, in April, corporate loans increased by RMB 683.9 billion, a year-on-year increase of approximately RMB 105.5 billion. Among them, short-term loans decreased by RMB 109.9 billion, long-term loans increased by RMB 666.9 billion, and bill financing increased by RMB 128 billion. Year-on-year changes were approximately +RMB 84.9 billion, +RMB 401.7 billion, and -RMB 386.8 billion, respectively. Non-bank loans increased by RMB 213.4 billion, a year-on-year increase of approximately RMB 75.5 billion. The significant increase in long-term loans for enterprises can be attributed to the close relationship with investment growth in sectors such as infrastructure and technological innovation. Although short-term loans for enterprises are still declining, the rate of reduction has slowed down, indicating a recovery in their day-to-day operations to a certain extent. Overall, the credit data suggests that the economic recovery is still in an ongoing process. As previously mentioned by ANBOUND, this recovery is gradual and not characterized by a significant rebound. The instability observed in this economic recovery is mainly attributed to the structural imbalances present in the current financial and economic landscape. As it stands, the overall economy of China requires time to recover and regain vitality gradually.

From a policy effectiveness standpoint, the significant increase in long-term corporate credit indicates the impact of measures aimed at promoting effective investment. However, this credit growth driven by policy has exhibited a fluctuating pattern, lacking sustainability due to unstable expectations. Moreover, the spillover effects on consumption recovery take time to materialize, leading to a current mismatch between consumption and investment. The market's concerns about the decline in household deposits reflect a lack of confidence in policy stability and continuity. In the context of declining investment efficiency, stimulating investment by small and medium-sized enterprises becomes increasingly challenging, which also weakens the indirect impact on consumption. Therefore, ANBOUND’s researchers suggest lowering policy interest rates at an appropriate time to convey more positive policy signals. On the one hand, as inflation in China continues to decrease, the real interest rate level in the country is actually rising relative to nominal rates. Reducing nominal interest rates can help maintain stability in real interest rates and lower the overall cost of social financing. On the other hand, the significance of interest rate cuts does not solely depend on the magnitude; it can be achieved through precise adjustments as well. This approach has a more direct effect on improving expectations, demonstrating confidence in policy support for the economy, and enhancing policy inclusiveness.

Final analysis conclusion:

The substantial decline in household deposits in April is a reflection of the structural imbalance in the ongoing economic recovery in China, with consumption recovering at a slower pace compared to investment. It is apparent that for the country, achieving a full-fledged economic recovery will still take time. The market's concerns in response to this situation also indicate a lack of confidence in the stability and continuity of policies. Therefore, it would be crucial for Chinese policymakers to consider timely and moderate reductions in policy interest rates to send stronger signals of positive messages, strengthen the foundation of economic recovery, and foster confidence in both policies and economic prospects.

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