Chinese People’s Dilemma: Saving or Investing after Deposit Rate Cuts

December 24, 2023

On December 22nd, the Industrial and Commercial Bank of China (ICBC), China Construction Bank, and other state-owned major banks announced another reduction in deposit interest rates. The deposit rates, which were already at their lowest level in over 70 years, reached even lower historical records. For ordinary Chinese people who prefer savings, the question of whether or not to deposit money has become a huge dilemma. If they don’t deposit money, where else can they put their money?

According to the latest notices from several state-owned major banks, the new deposit interest rates took effect on December 22nd, with a general decrease of 10-25 basis points for terms ranging from one year to three years. Based on the latest benchmark rates, the one-year deposit rate is 1.45%, the three-year rate is 1.95%, and the five-year rate is 2.0%. Thus, the deposit benchmark rates in China are now all below 2%. For ordinary people, the returns from savings accounts have become increasingly meager.

Since September of last year, state-owned major banks have initiated a series of reductions in deposit interest rates. With this latest round of rate cuts, deposit rates have been lowered four times. In the first half of this year, deposit rates in China hit a new low in over 70 years since the founding of the country. Subsequently, rates continued to decrease, and the trend of deposit rates has been one of constantly reaching new lows.

The main reason why domestic banks keep reducing deposit rates is the continuous decline in lending rates. To lower operating costs for the real economy, China’s Loan Prime Rate (LPR) has been on a downward trend. For banks, lending rates represent income, while deposit rates represent costs. After income decreases, banks must also reduce costs; otherwise, their profit margins will be squeezed. Therefore, banks have implemented four consecutive reductions in deposit rates since last year, bringing deposit rates in China to historic lows.

In addition to the operational factors at the bank level, the deeper reason for banks reducing deposit rates is that regulators hope to moderately decrease the savings rate. It can encourage people to withdraw their deposited funds from banks and stimulate more consumption, thereby driving economic growth.

Looking at the details of the bank’s reduction in deposit rates, it is evident that the intention to squeeze out savings is clear. In this round of rate cuts, the longer the term of the deposit, the greater the rate reduction. The reason is that after previous rate reductions, many people chose long-term deposits, such as three-year or even five-year terms, which offered interest rates of over 3% last year. Locking in these relatively higher rates for three or five years became the main strategy for the general public to counter the decline in rates.

Despite the continuous decrease in deposit rates, the savings balance of the general public has not only not decreased but has also been growing rapidly. In 2022, China’s residents had a record-breaking increase in new savings, reaching 18 trillion yuan, an 80% increase compared to the previous year. In the first half of this year, residents’ RMB deposits continued to grow significantly.

As the savings of the general public continue to grow, the bank’s rate cuts become more targeted, with greater reductions for longer-term deposits. For example, one-year deposits were reduced by 10 basis points, while three-year and five-year deposits were reduced by 25 basis points.

Chinese people have a long-standing preference for savings. The primary purpose of saving money for the general public is not to earn interest on deposits but rather as a precautionary measure. In the context of limited overall social security coverage in China, people want to save as much money as possible to prepare for unforeseen future needs. Especially after experiencing the uncertainties brought about by the three-year-long pandemic, many people have a heightened sense of future uncertainties and risks. As a result, many individuals have started unprecedented precautionary savings, leading to a substantial increase in savings balances last year and this year.

So, if deposit interest rates are lowered, can savings be squeezed out of banks and into the consumer market? It’s probably difficult. The consumption confidence and enthusiasm of ordinary people mainly depend on their existing income level and their expectations for future income. If there is strong confidence in future income and the expectation that their income will continue to increase, many people can freely spend even if they don’t have much money in their bank accounts. They may even dare to spend beyond their means because they have enough confidence in their future income and know that it will cover their current expenses.

However, if there is no confidence in future income growth, even if there is a lot of money lying in bank accounts, people are reluctant to spend it freely. This money is reserved for future retirement and unexpected expenses in daily life.

After multiple rounds of interest rate cuts since last year, although current deposit interest rates have reached historic lows, it does not mean that rates have hit rock bottom. In 2024, deposit interest rates will highly likely continue to decrease. Firstly, because there is still significant pressure to stabilize economic growth, lowering interest rates remains an important measure to stimulate the economy. Both the real economy and the troubled real estate sector require low-interest rates to be supported.

At the same time, China’s Consumer Price Index (CPI) has been running at a low level, with a year-on-year negative growth of 0.5% in November. This is the seventh negative growth this year. The continued decline or even negative growth of the CPI also provides room for further interest rate cuts. For ordinary people, as we approach 2024, they need to mentally prepare for further decreases in deposit interest rates.

As deposit rates continue to decline, it becomes increasingly challenging to invest, manage your money, and keep and grow your assets. The investment channels in the current market are limited. The stock market falls below 3000 points. The real estate market is in winter. Even low-risk bank wealth management products cannot guarantee capital preservation or returns. In the absence of more efficient investment channels, for the average borrower, early mortgage payments are still the best way to manage wealth. The average interest rate for housing loans in China is currently around 4.3%, while the five-year deposit interest rate is only 2%, and other bank wealth management products are less than 3%. It is difficult to find an investment product that can outperform the mortgage interest rate.

Apart from early mortgage repayment, more people will still choose to deposit money in banks because not everyone needs to repay a mortgage. More importantly, most people need to reserve a certain amount of funds to prevent various unexpected risks. So, even if deposit interest rates become lower, many people still have to deposit their money in banks because they don’t have other options. For many common people, depositing money in banks is still an instinctive decision.


Xie Jiu
Editor of Sanlian Lifeweek Magazine
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