Chinese people reluctantly step into an age of negative interest rate

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Last updated at: (Beijing Time) Tuesday, April 06, 2004

Chinese people reluctantly step into an age of negative interest rate

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"I may lose more if I don't put the money into the bank.," said Huang a doctor with Beijing Railway Hospital, to a reporter as he was queuing at an outlet of Bank of China to make a deposit. He said he knew the interest rate was very low and prices were escalating, yet saving money has become a hobby of him. "It is safer to put money in the bank."

"Complaints are heard every now and then in the hall. But clients keeps on coming." said Xu Lingyan, an accountant at the outlet.

The saving-loving Chinese people have now reluctantly stepped into an age of actual negative interest rate. Some economists have been warning of a possible inflation since last year. The one-year term deposit interest rate in January, after deducting inflation factor and interest tax, was minus 1.6 percent. The figure in February was still negative.

Nevertheless, up to the end of February according to the central bank RMB deposit balance nationwide was 11 trillion yuan - up 20 percent over a year before. Since 1996 People's Bank of China has lowered its interest rate for eight consecutive times. However RMB savings balance has kept on hitting a new high.

Experts point out that the lack of investment opportunities and a secured feeling make the Chinese people seem to favor savings. As the actual negative interest rate age is coming, is this behavior going to change? It depends.

In the last three years the Chinese stock market has experienced a period of agony: Shanghai SE Composite Index plummeted from the high 2245 down to 1307. Enlisted companies engaged in forgery; intermediary institutions lost credit; and major shareholders manipulated the market etc. The result of all these was that the stock market underwent an unprecedented credit crisis. People in the streets seemed to have lost enthusiasm in talking about the stock market.

On February 1 Opinions of the State Council On Promoting the Opening Up and Stable Development of Capital Market was released. It has vigorously pushed ahead the healthy development and marketization reform of stock market in the form of a central government document. "Policy factor" brought about a hundred-point jump in Shanghai SE Composite Index. Those aiming at "gold rush" increased in number in the stock market.

There are still many prudent people in the booming stock market. "The stock market has jumped so much accumulating enough risks. It's like committing "suicide" to choose to enter it at this moment." said Fan Wenwei, business manager with Great Wall Securities Corporation. "We've already emptied our portfolio and are looking for other investment opportunities."

Buying treasury bonds is regarded as the "most secured and most simple" investment option. Of the more than 100 billion yuan certificate treasury bonds that China's Ministry of Finance will issue this month and next month, interest rate for 3-year notes is at 2.52 percent and 5-year bonds interest rate at 2.83 percent. Treasury bonds as a safe means for investment has an interest rate higher than the 1.98 percent interest rate of one-year term deposit and is exempted from interest tax.

Fund is no longer a new concept for ordinary people. The number of Chinese fund management companies has grown to more than 300 and there are about 100 funds in China. Seeing that some funds have a 20 percent return rate, more and more people feel itchy to have a try. Mr. Yuan, who works in a medium in Beijing, put his money in a tourism service fund and a securities market fund before leaving to work abroad. "Leave my money "shrinking in value" at the bank, I am not willing to do that." said Mr. Yuan.

China's first principal-secured fund - Yinhua Principal-secured and Value-added Fund is now in hot sale in the market. Some strong sureties ensured the "security of its principal". Chinese have the tradition of being hardworking and thrifty. They are not inclined to going in for returns by exposing to risks." said Wang Lixin, vice manager-general of Yinhua Funds Management Corporation.

Some are investing their money in real property in cities with rising housing price. Some are resorting to the old metal king - gold.

In the last eight years China has for the first time witnessed an actual negative interest rate. The central bank said, even without any other inflation factors the deferred effect of last year would make consumer price index to increase by 2.2 percent this year with the yearly inflation rate to be controlled at about 3 percent.

Although interest rate increase is good for preventing inflation, analysts believe that the decision-makers of the Chinese finance bear some apprehensions. Consumption is the engine for the growth of Chinese economy and the raising of interest rate goes against the macro-policy of consumption growth and international "hot money" is flowing into China due to the expectation of RMB appreciation. Under this circumstance should People's Bank of China raise its interest rate before the US Federal Reserve does it will instigate the interest arbitrage of international capitals in China.

"In an age of negative interest rate financing institutions with farsightedness would continuously introduce new investment products and people shouldn't 'put all their eggs in one basket'" said an expert with People's Bank of China.

By People's Daily Online

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