China's household deposits recorded the largest drop in a month in May, official statistics showed Tuesday, as people diverted bank savings to the stock market.

Last month, Chinese families' deposits decreased 278.4 billion yuan, the central bank said Tuesday, breaking the record of monthly drop set just in April when household deposits went down 167.4 billion yuan.

Meanwhile, the renminbi deposit balance stood at 36.03 trillion yuan, a year-on-year increase of 14.63 percent, the lowest growth rate since April, 2002.

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Analysts attribute the decline in deposits to the magnetic effect of the country's stock market, which has soared more than 50 percent so far this year even after a major correction in the last two weeks caused by the stamp tax hike.

"The rapid decrease in deposits indicates citizens' enthusiasm in stock investment is still high," said Guo Tianyong of the Central University of Finance and Economics. He expects a slowdown in the decrease in June due to the recent slumps in the stock market.

Shenyin Wanguo Securities analyst Li Huiyong cited two reasons for the drop in deposits. "The return from deposits is too low and the money continues to flow to stocks and funds, or other higher-yield instruments," he said.

Increased consumption during the May Day holiday is also a factor, Li added.

The benchmark one-year deposits currently carry an interest rate of 3.06 percent, below May's inflation rate of 3.4 percent as measured by the consumer price index (CPI), the highest in more than two years. That makes the real interest rate negative, raising the pressure for an interest rate hike.

Interest rates hikes

Interest rate increases are needed to keep bank deposit rates positive in real terms, said Zhou Wangjun, a deputy director in the price department of the National Development Reform Commission.

The possibility for an interest rates hike is increasing, said Li Huiyong of Shenyin Wanguo, citing the high-flying CPI in the last few months. The CPI rose 3.3 percent in March before falling to 3 percent in April, equal to the central bank's target for this year.

Last week, central bank governor Zhou Xiaochuan said he was "closely" monitoring rising food costs and will study May's CPI data before making any interest-rate change.

The central bank has raised interest rates twice this year, with the latest coming on May 19.

As far as the timing of the next rates hike, some analysts expect it to happen before late June as the CPI has been hovering at or above 3 percent for several months.

However, Shenyin Wanguo Securities chief analyst Gui Haoming put the timeframe in July or August. The central bank raised the interest rates just in mid-May and usually will wait some time to see the feedback before making another move, making another rates hike in June unlikely, Gui explained.

Qiu Yanying of TX Investment Consulting Co. echoed Gui's points. Qiu expected the central bank to wait until next month's CPI is released before deciding on further interest rate hikes.

Interest tax

Several analysts called for the abolition of the 20 percent tax on interest accrued from bank deposits. "The adjustment of interest tax should precede an interest rates hike," said Guotai Junan Securities analyst Lin Zhaohui.

The high interest tax rate erodes the effect of interest rate hikes, and thus should be adjusted, he explained.

Abolishing the tax is feasible, according to Ha Jiming, chief economist of China International Capital Corporation.

China raked in 45.9 billion yuan in interest tax last year and the stamp tax hike announced last month is expected to add 280 billion yuan to the government's revenue, thus the canceling of the interest tax would not affect fiscal revenue much, Ha noted.

Stock market

Analysts are divided on the impact of an interest rate rise on the stock market, which is gradually recovering after a series of slumps caused by the stamp tax hike announced on May 29.

The influence on the equity market will be limited, as an interest rates hike was expected, said Gui Haoming.

However, other analysts thought the market is currently at a sensitive period and an increase in interest rates will probably result in wilder fluctuation. They also pointed to the weak performances of banking stocks in the last few days, which they said was caused by the expectation of a rates hike.