Barclays Capital’s anatomy of China bank deposits

The occasional falls in Chinese bank deposits in the past many months have been quite a concern for some people.  In part that is because the traditional view is that banking deposits are required first for banks to create loans, thus without strong deposits growth, it is hard to imagine strong loan growth (that is part of the reason why we here are expecting cuts in lending rates, but not deposit rates, if the People’s Bank of China decides that cutting interest rates is necessary to stimulate the economy).

The occasional fall in retail deposits are attributed to the growth in the so-called wealth management products which offer higher returns for savers.  Of course, here we are offering (or more precisely, speculating) a somewhat much more sinister explanation for the generally poor deposits growth and loans growth: debt deflation, because deposits and loans are kind of two sides of the same coins.

Whatever the culprit is, Barclays Capital’s May Yan and her team is running a series of reports on China bank deposits (currently at the second part), which attempt to demystify the mysterious banking deposits.


First of all, there is this fiscal deposits, which are basically deposits of the government placed in the banking system (mainly at the People’s Bank of China, and partly at commercial banks).  According to BarCap, this portion accounts for roughly 4% of total deposits.  There are various different functions according of fiscal deposits according to Barclays Capital.  They affects the amount of base currency, accelerate multiplier effect, a tool for monetary policy, and others, and are driven by tax revenue and government expenditure:

Fiscal deposits impact the seasonal pattern of commercial bank deposits. They are primarily government money parked at the central bank (the People’s Bank of China, or PBOC), thus are not part of the money supply. When the government disburses expenditures – usually at quarter-end and year-end – fiscal deposits are transferred into commercial banks causing more base currency to enter monetary circulation and resulting in more M2 deposits. In addition, the PBOC uses the fiscal deposit auction – a unique tool in China – to supplement bank deposits, help lower LDR and increase lending capacity of some banks, especially small banks with a high LDR ratio. In fact, the PBOC and Ministry of Finance (MOF) have recently become more active in using fiscal deposit auctions and year-end fiscal transfers to relieve bank LDR constraints and execute expansionary fiscal policies.

Then, of course, the retail deposit, which many are puzzled by the occasional large drop in the past many months.  Barclays Capital believes that demographic factors (namely, ageing) will slow the growth of retail deposits to single-digit in the long term.  With interest rates liberalisation, they see deposit rates converging to interbank rates in the future.  But for now, they think the reasons for the apparent drain on the retail deposits in short-term are, as mentioned, trusts and wealth management products, real deposit rates, and stock market fluctuation:

Key short-term drivers for deposit growth include inflation, stock market performance and competition from alternative investment products. We believe retail deposit growth in 2012 could rebound to 16%, because: 

– Growth of trust and wealth management products (WMPs) in 2012 and 2013 could slow down slightly because of regulators’ increased control on trusts and WMPs.  
– CPI could remain at a low level – historical data shows that if the CPI maintains at around 3.5%, retail deposit growth will be around 15-16%. In April 2012, total retail deposits increased 15.8% y/y.  
– The stock market is expected to see a moderate rebound – according to the past few years’ records, if stock market capitalisation grows around 25-35%, retail deposit growth could be around 14-17%.

This article originally appeared here: Barclays Capital’s anatomy of China bank deposits
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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