China’s stubborn savers risk precipitating liquidity trap

By Winni Zhou and Rae Wee

SHANGHAI/SINGAPORE (Reuters) -China’s consumers and companies are tying up trillions of yuan in longer-dated deposits with banks, effectively taking a vast pool of money out of circulation and risking the kind of liquidity trap that hobbled Japan’s economy in the 1990s.

Latest official data shows financial institutions issued 5.5 trillion yuan ($766.12 billion) worth of long-term deposits known as certificates of deposit (CD) in the first quarter of this year – the largest such quarterly issuance since the product was introduced in 2015.

Domestic investors have rushed into these CDs over the past year in a desperate search for returns as they withdraw from real estate and the stock market, both traditional investment options now looking treacherous because of regulatory and economic problems.

Companies have joined the scramble this year, adding to the drag on China’s economy as it effectively means both businesses and households are hoarding cash rather than investing it, despite lower interest rates – a classic liquidity trap that plagued Japan for years beginning in the 1990s.

“Based on Japan’s experience in the 1990s, there is the risk that China is entering a liquidity trap due to the risks of balance-sheet recession,” said Natixis’s chief economist for Asia Pacific Alicia Garcia Herrero.

Analysts see the same lack of confidence in today’s Chinese households and companies that Japan grappled with in the 1990s. But in China’s case there is a key difference; there is no deflationary threat yet, nor have banks switched off lending.

Fan Gang, a prominent economist and former adviser to the central bank, told a forum in June that China faces a liquidity trap but not a Japan-style deflationary morass.

“It’s like money falling into a black hole, and that’s what we’re in right now, demand from companies and households is not vibrant.”

China’s policymakers have cut rates and encouraged banks to lend more in efforts to revive economic growth after the pandemic.

Yet about 180 domestic A-share companies say in their stock filings that they have invested in CDs this year.

A banker handling retail accounts at a state lender said there was higher than usual demand for CDs, “because who knows if the broad environment could get worse?” she said.

While some clients had invested in cash products, which can be redeemed at any time for urgent use, most had signed up for 3-year CDs with penalties for early withdrawal, which means the money will be locked away for a while, she said.

The rush for the safety of CDs and other safer wealth management products undermines policymakers’ drive to boost demand and consumption through tax cuts and the relatively restrained property support measures.

Byron Gill, manager of the Pacific Opportunities Fund at U.S.-based Indus Capital, also draws parallels with Japan’s balance sheet recession during the country’s ‘lost decade’.

“What we can say in the case of China is that a sub-segment of the economy, the property sector, is absolutely in the midst of a balance sheet recession,” Gill says.

“And to the extent that property makes up a quarter of Chinese economic output, it’s not a small deal.”


China has a long history of savings rates being high – according to World Bank estimates the savings rate to GDP is the highest among large economies.

Total household deposits were at a record 132.2 trillion yuan ($18.41 trillion), equivalent to more than 30 months of retail sales, at the end of June, and up by 12 trillion yuan in the first half of this year – the biggest increase in a decade.

Certificates of deposit (CDs) are issued by banks and considered one of the safest savings options, with yields of 3-year CDS usually hovering around 3%, higher than those on bank demand deposits.

“With few signs of a recovery in the property sector and an uncertain job outlook, the accumulation of household deposits suggests widespread pessimism among households,” said Betty Wang, senior China economist at ANZ.

Eastroc Beverage, a Chinese energy drink maker, said in a filing on July 18 that it had invested in 21-month CDs at China Merchants Bank and in Bank of Ningbo’s 17-month CDs.

It said such investments were to aimed at enhancing the efficiency of capital utilization and increasing the company’s revenue.

A retail investor in Shanghai, who only wants to go by her last name Wu, said she invested in 3-years CDs. “I don’t see a lot of investment opportunities now. My stock mutual fund products are still down about 20%,” Wu said.

China’s 220 million retail stock investors, equivalent to Brazil’s population and the biggest drivers of daily moves, have kept to the sidelines this year.

The benchmark Shanghai Composite index and the blue-chip CSI 300 Index are far behind the pace of neighbouring Japanese stock market, which has risen nearly 25% so far this year.

A Shanghai-based retail investor in his 50s, who wished to go as John, says he put the majority of his savings in CDs earlier this year.

“I wouldn’t pour money into the stock market any time before I see a clear rising trend,” he said.

($1 = 7.1890 Chinese yuan)

(Reporting by Winni Zhou in Shanghai, and Rae Wee in Singapore; Writing by Vidya Ranganathan;Editing by Shri Navaratnam)