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Guest post: China’s disappearing Rmb1,100bn bank deposits
October 7, 2011 5:35 am
by beyondbrics
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By Victor Shih of Northwestern University
In July this year, households and companies withdrew a total of Rmb1,100bn ($172.5bn) from China’s banks, equivalent to 2.5 per cent of GDP. In August, household deposits barely clinged to positive territory at Rmb26bn, despite receiving over Rmb188bn in new loans that month.
Corporate deposits grew a bit more, but were still abnormally low. Although the September numbers are not out yet, Chinese press reports suggest that the deposits in the major state banks declined substantially in the first half of the month. Where did all the money go?
The emerging consensus is that household deposits went to
wealth management products (WMPs) to finance corporations. This makes great sense because households currently face over negative 3 per cent in real interest rates on their deposits, so they have high motivation to reallocate funds to WMPs, which offer higher yields.
If that were the case, though, we would see spikes in firm deposits, but we do not. In August, for example, corporate deposits increased by Rmb371bn, but nearly all of that can be accounted for by the Rmb360bn in new corporate loans. Funds provided by WMPs did not seem to play a role in boosting corporate deposits.
At the very least, we need to account for the Rmb188bn in new loans received by households in August, which did not show up as household deposits. If they used that money to pay companies, then companies should have seen an even higher increase in new deposits. But we don’t see that.
To be sure, government deposits rose by Rmb101bn in August, but again, even if all or most of the Rmb188bn in new loans to households went to pay taxes directly or indirectly, we are still left with Rmb88bn unaccounted for.
In all likelihood, much of the taxes was paid by corporations, so the disappearing household deposits remain largely a mystery.
The disappearance of funds is especially puzzling when we consider that China yet again ran a trade surplus in August ($17bn), which should have pumped Rmb107bn into the system.
Moreover, the PBoC redeemed a total of Rmb163bn in notes to inject liquidity into the system in August. There has also been no further increase in reserve requirement because the new reserve requirement for margin deposits did not apply until September for some banks.
Of course, some people will say that the money is just off-balance sheets, but held in a dark pool of “other assets” in banks. Again, this doesn’t make much sense to me because the supposed goal of WMPs is to finance company spending. Thus, if the money ends up in a company’s account or if the recipient pays another company, we should see a spike in corporate deposits.
Finally, another possibility is that funds have left China altogether, causing an absolute decline in bank deposits. To be sure, this does not seem to be the case at the moment because official bank statistics still show an increase in position in foreign exchange purchase in both July and August, suggesting that banks in China changed more dollars into renminbi than the other way around.
One loophole that has opened recently is that Chinese importers now can pay offshore suppliers using onshore RMB. Where legitimate current account transactions can take place, investors can also use it to move money overseas. So far this year, RMB trade settlement through Hong Kong has exceeded Rmb1,000bn.
If import settlement through Hong Kong was taking place on a large enough scale, substantial amount of onshore deposits may leave China without showing up in the net foreign exchange purchase number, which only reflects onshore exchange of currencies. Of course, even this loophole does not explain the spectacular decline in deposits in recent months.
Although the mystery remains unsolved for the moment, solving the mystery is important for investors who want a sense of where the economy is heading.
If large sums are indeed disappearing into the shadow banking system, then a rapidly rising share of the financial system is beyond the direct control of the government.
If large sums are indeed flowing out of China, we may have the beginning of major, sustained outflows from China.
Victor Shih is associate professor of political science at Northwestern University. You can follow him on Twitter at @vshih2
