Negative interest a headache for bankers
By Chen Yao (Business Weekly)
Updated: 2004-09-19 08:52

China's commercial banks are competing head-to-head to woo depositors as the country's rising inflation is causing de facto negative interest rates, and depositors are eager to withdraw money for other financial assets.

"We are under constant pressure these days from our headquarters to maintain our current deposit bases and attract more deposits by the year's end," Zhang Lin, a sub branch manager of China Minsheng Banking Corp, told China Business Weekly.

A man counts the 100-yuan banknotes he withdrew from a bank in Haian, Jiangsu Province September 12, 2004. De facto negative interest rates compel depositors to withdraw for other financial assets. [newsphoto]

The bank's newly launched wealth management products - including those in foreign currencies featuring returns over 10 per cent - have been welcomed by customers and have helped boost the bank's deposit base, she said.

The private lender has just reported a 70-per-cent rise in net profit for the first half of this year.

Liu Mei, a senior official with the Industrial and Commercial Bank of China's Beijing branch, said in an interview with China Business Weekly that the bank has been reassigning quotas and tightening rules for the bank's sub branch staff members to entice deposits.

"Large commercial banks, as well as small ones, are now facing the same pressure to get depositors to put money in their accounts," Liu said.

The bank is planning to launch a new line of foreign exchange products that will give customers more flexibility to trade while offering high returns and low risks.

"There will probably be fierce competition among commercial lenders to attract depositors' money. All the banks are saying their products could guarantee much higher returns than time deposits," she said.

Latest statistics indicate that residents' deposits at Chinese commercial banks, including those in foreign currencies, increased 1.0387 trillion yuan (US$125.4 billion) in the year's first seven months, 130.9 billion yuan (US$15.818 billion) less than in the same period of last year.

The 14.2-percentage-point growth rate is the lowest since April 2002.

If the current trend of slowing-down deposit growth at commercial banks continues, this year will mark the first time in a decade that the country's rapid growth of bank deposits reaches a turning point, analysts said.

One important reason why the growth of deposits is slowing down is that higher price levels have stimulated domestic demands and encouraged residents to withdraw money from banks and consume, they said.

China's consumer price index (CPI) rose 5.3 per cent year-on-year in July and 3.8 per cent in the first seven months, according to figures from the National Bureau of Statistics.

Figures from the central bank also show sales of consumer goods had a year-on-year growth of 12.8 per cent for the year's first half, or 10.2 per cent after taking inflation into account.

Retail sales of consumer goods rose faster each month from January to July. The total retail sales of consumer goods reached 2.496 trillion yuan (US$354.9 billion) by July, a year-on-year rise of 12.8 per cent.

"This indicates Chinese residents have expanded consumption even when domestic price levels are growing higher," said Zhang Bin, a financial expert with the Chinese Academy of Social Sciences.

"As domestic purchasing power continues to drop, more residents are considering buying durable goods and other financial assets."

A recent survey by the People's Bank of China (PBOC), the central bank, indicates only 32.2 per cent of the surveyed urban citizens chose to save at banks in the year's second quarter, 2.5 percentage points less than those surveyed in the year's first quarter.

China's bond market has been reviving since its slump early this year because more individuals are buying bonds to gain higher returns, Zhang said.

PBOC figures show the country's treasury bonds attracted 122.7 billion yuan (US$14.78 billion) in the first six months, while life insurance products lured 178.8 billion yuan (US$21.54 billion).

"Treasury bonds offer investors higher returns than time deposits, but investors will be inevitably exposed to interest rate risk," Zhang said.

"Despite the high volatility of China's stock market, many Chinese depositors are turning to buy shares to increase returns."

By the end of July, 71.57 million investors had opened accounts in the stock exchanges in Shenzhen and Shanghai, 1.86 million more than the same time last year.

The total account invested in stocks was 35.6 billion yuan (US$4.29 billion) in the year's first half, 11.4 billion yuan (US$1.37 billion) more than the same time last year.

"Many individuals have been accessing the stock market by indirectly buying mutual fund units, which are featuring professional investment management facilities," said Liu Jingde, a senior securities analyst with Beijing Securities Co.

"So mutual funds and other investment products have also been attracting depositors to withdraw money and causing bank deposits to grow slowly."

China's investment funds collected 85 billion yuan (US$10.24 billion) in the first three months of the year, equalling last year's total. By the end of June, the funds witnessed a net increase of 132.4 billion yuan (US$15.95 billion) in the capital they are handling.

China's central bank will probably raise interest rates soon after new macroeconomic figures are released this week.

"The negative real interest rates have fuelled a bubble in the property market," said Yi Xianrong, a senior financial expert with the Chinese Academy of Social Sciences.

The property price index was up 11 per cent year-on-year in July, compared with 5 per cent in 2003.

"Higher interest rates will likely help Chinese banks to establish a footing in the competition with mutual funds and other investment companies to attract depositors' money," he said.

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