Who moved China's huge savings?

UPDATED: 16:55, June 21, 2007

There are several explanations for China's economic achievements, but of all of them, a high rate of savings has been the most important factor.

Generally speaking, economic growth that existed in China, since 1978, mainly resulted from the large influence of production factors. Of course, an inexhaustible supply of labor plays an important role here. If we take a closer look at the formation of capital, we can easily determine that it is the constantly rising level of savings that conceals the defect of low capital efficiency.

In the perspective of some, a high level of savings is quite normal in China and in the entire region of East Asia. To a large extent, people from various walks of life regard the removal of savings as a "boy who cried wolf" scenario. Although they quite often touch upon this topic in their studies and essays, it is always treated as a hypothesis in practice. Then, if an unexpected situation occurs suddenly, everybody will be in an immediate panic.

Latest statistics from the central bank show that household deposits decreased by 278.4 billion Yuan in May, down by another 295.9 billion Yuan from that of the same period last year. This is the biggest monthly drop in household deposits ever. If the reduction in April is added, the net decrease of household deposits in the past two months has reached 445.8 billion Yuan.

When asked the reason for the slowing down of household deposits, the central banks said that, on the one hand, the level of income of urban and rural residents has steadily improved, which increases their motivation to spend money. On the other hand, the prosperity of market capital has attracted increasingly more residents to invest their money in relatively high income stocks, funds, and other investment devices. As a result, many have withdrawn money from banks and given it to security companies in the form of cash deposits.

China's stock market has truly soared in the past two years. In 2006, the Shanghai and Shenzhen stock indexes increased by more than 150%. From January until May of this year, the growth rate reached 50%. It only took eighteen months for the Shanghai Stock Index to hit 2000 points, from 1000 points; from 3000 points to 4000 points, it took just forty-eight trading days.

Related departments have announced a series of measures to burst the bubbling assets. On May 18th, the central bank, for the first time, simultaneously raised the deposit reserve ratio and RMB benchmark interest rates for deposits and loans. This is the eighth time since 2006, and the fifth time in 2007, that the central bank has adjusted the deposit reserve ratio. In addition, it is the fifth adjustment on the benchmark interest rates for deposits and loans since 2004.

However, China's stock market has entered a state of frenzy. On May 21st, the first trading day after the aforementioned policy was introduced, both the Shanghai and Shenzhen stock market opened at 3% lower. Nevertheless, only after half an hour, the strong buying capital quickly recovered lost land and immediately raised the stock market index. In the next few days, because people believed that all the bad news had been received; thereby not having any misgivings on the stock market, the index of the Shanghai and Shenzhen stock market hit a record high successively. It was not until May 30th, when the Ministry of Finance announced increases in the rate of stamp taxes that finally a rare crash in Shenzhen and Shanghai stock market occurred. However, not long after, the index returned to an opening of 4,200 points once again.

Behind the wild rise in the stock market is the influx of individual investors to the market. A report from Shenyin and Wanguo Securities showed that from January to April of this year, the proportion of the market share value of personal holdings in circulation had increased from 52% to 62%. In April alone, there were nearly 250 billion Yuan of stock funds entering the stock market; of which, only about 83 billion Yuan were from institutional investors. Not to mention, a large proportion of institutional funding also comes from individuals.

Perhaps there are several reasons for this problem. For example, it was the trade surplus that led to excess liquidation; the long-term economic growth of China helped promote the growth of listed companies; and equity division reform helped improve the consistency of shareholder interests. However, it cannot be denied that the Chinese stock market has demonstrated a kind of structural bubbling. Based on the performance of listed companies in 2006, the overall average P/E ratio of the Shanghai and Shenzhen stock market is almost 5000%, greatly exceeding the level of major global market. Take the main board market in Hong Kong as an example. It has a higher degree of internationalization: more than 60% of the stocks related to this field have a P/E ratio lower than 2000%. Now, of more than 40 A + H shares, all A-share prices are higher than H-share prices. The average premium of the former exceeded the latter by 120%.

It seems that China has a tradition of a repeated soar in its stock market. Within the past decade or so, each wave of the so-called "major positive factor" has driven a bull market. A lot of individual investors, therefore, have dived into the market to make money. Then, enormous investment has continued to push forward a boom in the stock market. During this process, of course, it is easy to blame the investors for their naivet¨¦ and grotesqueness. However, it should also be understood that if the system, in such considerable provisions itself, is distorted- if, for example, the excessively high savings volume simply does not match with the desperately low stock market value- then people will more likely be infected with the investment fever. This happens because they can neither find alternative investment channels, nor increase their consumption demand. In reality, consumers are still aware of the risks. However, it is very easy for them to "forget" about once they believe they will not be the "last ones to get the baton in the relay race".

By People's Daily Online

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