Sluggish Income Growth to Continue

Growth of incomes is expected to remain slow in the second half of the year, consolidating a chronic slowdown of personal savings growth.

An anticipated drop in agricultural output, poor profitability of both State-owned and township enterprises, coupled with a possible surge of laid-off workers, would continue to eat into Chinese people's bank savings in the remaining months of the year, economists have warned.

"I see the all-year growth of personal savings at 6 per cent to 8 per cent," Xu Hongyuan, director of the Economic Forecast Department under the State Information Centre, told China Daily. He added that the personal savings rate which would best serve economic growth would be approximately 8per cent to 10 per cent.

"The slow growth of incomes, which is the dominant force that has been driving down bank savings in the first five months, will continue to weigh on savings," he said.

This year, according to the Ministry of Agriculture, China's sown area of autumn grain was substantially reduced heralding a drop in yield.

This, coupled with the poor profitability of the country's once-prosperous township industry, would choke the growth of farmers' savings, Xu said.

The per capita income of Chinese farmers rose by a meagre 9 yuan (US$1.08) in the first quarter of the year, which Xu suspected could still be higher than the real growth. This sluggish income increase has resulted in a major slump of rural savings in the first five months of the year.

On another front, it is probable that the number of laid-off workers will rise this year, as the country's rescue package for its State-owned enterprises enters the final stage, thus drawing a gloomy picture for urban dwellers' incomes.

Besides the weak income growth, a vibrant capital market would continue to strain bank savings, Xu predicted.

"The improving profitability of State-owned enterprises would boost investor confidence in mid-year financial results by listed companies," he explained.

Another tranche of more than 200 billion yuan (US$ 24 billion) Treasury bonds, coming in the pipeline later this year, would also divert bank savings.

Many economists have used the booming capital market, highlighted by the repeatedly hit historic highs of stock indices and increased volume of national debt, to explain the continued slowdown of personal bank savings this year, which dipped into the red in May.

Bank savings by individual Chinese dropped by a surprising 34.1 billion yuan (US$4.1 billion) in May, following a slight growth of 4.4 billion yuan (US$530 million) in April, according to statistics released by the central People's Bank of China.

Economists, who have urged a diversion of bank savings to support domestic demand, attributed a broad array of reasons to the sharp fall while being careful when discussing the dip's implications for the economy.

"There are a lot of reasons, including the bullish stock market, higher interest rates on foreign currencies, the real-name system for bank drawing and the long International Labour Day holiday," said Yan Kun, a researcher at the Financial Research Office under the Chinese Academy of Social Sciences.

Wu Xiaoqiu, senior economist at the Beijing-based Renmin University of China, said the economic impact would be positive if the reduced savings had been diverted to the stock market, upon which the government relies heavily to raise funds for its debt-ridden State-owned enterprises.

"But if a great deal of the reduced savings had been converted into foreign currencies, it might have put some depreciatory pressure on the renminbi," he said.

China raised savings rates for six major foreign currencies on May 29 in response to recent rate hikes in the international market, tempting citizens to withdraw bank deposits to buy US dollars.

Whatever the causes are, bankers worry that a prolonged slowdown of savings would undermine their liquidity.

"If the trend continues for another four or five months, our liquidity may feel the pain," a senior official with the China Construction Bank (CCB), who declined to be named, told China Daily.

The CCB suffered a drop of more than 6 billion yuan (US$720 million) in personal savings in May's retreat, the official said. The total increase of savings in the first five months of this year was more than 40 billion yuan (US$4.8 billion), which was lower than last year.

However, the official said no negative impact on bank liquidity had been detected so far, because of the formerly high liquidity levels and a surge of deposits by securities brokerages, which benefited from the bull market runs and helped counterbalance the drop in personal savings.

"And it will not cause any payment difficulty," he noted.

However, he said the bank is still considering preventive measures, including improving services for brokerages to attract deposits and promoting measures like asset securitization to boost funding resources.

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