China's $29 Trillion Ball of Money Rolls to a Long-Ignored Haven

(Bloomberg) -- The new hot thing for Chinese savers is about as old and boring as it gets.

Bank deposits, shunned for years by the nation’s return-hungry masses, are suddenly looking attractive again as higher-yielding investments prove riskier than many had anticipated. China’s household deposits rose in July at the fastest annual rate in a year -- an influx that analysts say may accelerate after the nation’s stock market sank at the quickest pace worldwide, hundreds of peer-to-peer lending platforms shuttered and companies defaulted on their debt at an unprecedented rate.

China's $29 Trillion Ball of Money Rolls to a Long-Ignored Haven

“People around me are all asking the same question: Where is the safe place to put our hard-earned savings?’’ said Anna Teng, a 30-year-old marketing manager in Shanghai who’s been shifting her assets into deposits after losing about 20 percent on her equity investments since May and falling victim to a fraudulent P2P lending platform.

“The time that you could easily earn 10 percent without worrying about risk is gone,’’ Teng said. “What I’m asking for now is to preserve the principal.’’

The rush into deposits by Chinese savers -- whose wealth has swelled to an estimated $29 trillion -- represents both a challenge and a relief for authorities in Beijing. The short-term risk is that money will flood out of higher-yielding assets too quickly, bringing unwanted turbulence to local financial markets that already face pressure from slowing economic growth and an escalating trade war with U.S. President Donald Trump.

Yet in many ways, the changing mindset of savers like Teng is exactly what Chinese policy makers want to see. It suggests that faith in a government backstop for risky investments is fading after an 18-month campaign by regulators to reduce moral hazard and clean up the nation’s freewheeling asset-management industry.

Investors now “understand that a very high yield comes with risk,’’ said Zheng Yuan, deputy head of private banking at ICBC (Asia) Ltd.

That lesson, seen by many analysts as critical to improving the long-term health of China’s financial system, has been painful for savers. The nation’s stock slump has erased $2.4 trillion of market value since late January, while upwards of 4,500 P2P platforms tracked by Yingcan Group have failed -- often leaving nothing behind for investors. This year’s rise in corporate defaults has dragged down prices for domestic junk bonds, sending yields on five-year notes to the highest level since 2015, according to ChinaBond.

Structured Deposits

At the same time, authorities have banned implicit guarantees on $4 trillion of wealth-management products that savers had come to see as higher-yielding, risk-free alternatives to bank deposits. The government has also shut cryptocurrency exchanges, made it more difficult to move money overseas, and introduced buying curbs on real estate -- one of the few asset classes that’s still performing well in China.

Against that backdrop, the meager yields on bank deposits have become increasingly attractive. Chinese households boosted their allocations to deposits by 8.6 percent in the year through July, to the equivalent of $10 trillion, according to the People’s Bank of China. Industrial & Commercial Bank of China Ltd., the nation’s largest lender, saw its total deposits jump by 1.3 trillion yuan ($190 billion) in the first half, the most since 2010.

China’s benchmark deposit rate stands at 1.5 percent, though actual rates vary from 2.5 percent at Bank of China Ltd. to 4.2 percent at Bank of Nanjing Co. Wealth-management products tracked by PY Standard offer an average yield of 4.6 percent, while P2P platforms often advertise double-digit returns.

On top of their plain-vanilla offerings, banks have also tried to appeal to savers’ speculative tendencies by selling so-called structured deposits. The derivative-linked products offer the chance of higher yields (up to a pre-determined cap) if savers bet correctly on the direction of various currencies, commodities, or stock indexes. Cash in structured deposits soared more than 50 percent in the year through July to the equivalent of $1.4 trillion, PBOC figures show.

China's $29 Trillion Ball of Money Rolls to a Long-Ignored Haven

“A lot of the ‘flight to safety’ money will go back to the banks or other traditional financial institutions in the form of deposits or low-risk money-market funds,’’ said Wang Yifeng, a Beijing-based researcher at China Minsheng Banking Corp.

That could change if China’s government decides that short-term economic growth and buoyant financial markets are more important than reducing moral hazard. In a country where government pump-priming has spawned bubbles in everything from stocks to garlic and tea, punters are unlikely to have completely lost their appetite for making a quick buck.

But for now at least, people like Teng are more worried about keeping their funds safe.

“I trust banks and will put more money into them,’’ she said. “I’m done with stocks and P2Ps.’’

©2018 Bloomberg L.P.