Statistics released by the People's Bank of China, the central bank, say the household savings growth rate has slid consecutively for seven months as of August, reported China Daily Monday.

Although household savings deposits amounted to 11.40 trillion yuan (US$1.37 trillion) by the end of August, its growth rate has plummeted from a monthly 20.5 per cent by the end of January to 15.3 per cent.

Opinions vary as to what has caused the falling growth rate and what impact it will have on the economy and currency policy.

Some researchers have attributed it to the current negative savings interest rate, which they said has stimulated consumers to spending rather than depositing their money in banks.

The diversion of money from deposits to consumption, they said, would spur domestic consumption, contributing to the national economy.

Other scholars, however, maintain that the decreasing savings growth rate is mainly caused by household depositors' changed investment structure.

They said changing investment channels have widened people's choices as to where to put their money.

State bonds and funds, for example, are two new favoured investment tools in the market.

The ballooning numbers of their holders are conducive to raising the percentage of direct financing in society, thus raising financing efficiency, the scholars claimed.

Accurately pinpointing the real factors behind the slumping saving growth rate is crucial to making a sound currency policy in the future.

The income of urban residents and farmers registered an 11.95 per cent and 16.15 per cent increase in the first half of this year, surging by 2.8 per cent and 13 per cent compared with the same period in last year.

Against this backdrop, the declining deposits growth rate can only be explained as the result of householders' dwindling preferences to save money in banks, a phenomenon that dates back to last October, when the savings interest rate became virtually negative due to inflation.

It has been estimated that the declining deposit growth rate in the last seven months has freed up at least 140.6 billion yuan (US$17 billion) that otherwise would have been deposited in banks.

This staggering amount of capital ultimately ends up either as consumption or investment.

From January to August, total social consumption increased by 12.9 per cent in nominal terms compared with the same period last year.

However, deducting the consumer price index, which increased 3.8 per cent between January and August, total social consumption only increased 8.8 per cent in real terms, a figure lower than the average increase rate it recorded from the year of 2000 to 2002.

As such, the contention that the declining deposit growth rate is mainly attributable to householders' growing appetite for consumption is largely unfounded.

With consumption not a main conduit for that freed-up money, the only remaining destination for them is investment.

The negative savings interest rate has made finding other investment options a pressing task for ordinary families.

State bonds and funds, property market and private credit are three main investment channels that experts say common families favour at present.

Investment in stocks, especially in funds, saw an explosive jump earlier this year.

During the first half of this year, investment in funds alone increased by 132.4 billion yuan (US$16 billion), 126.8 billion yuan (US$15 billion) more than the same period last year.

However, as the stock market has tumbled since April 9, fund investments have also suffered, greatly dampening people's enthusiasm for buying them.

Although stocks and funds do attract a considerable amount of investment from residents, it does not constitute a major destination.

Deemed as an investment tool that could bring stable returns, property has become a favoured investment hot spot for households in recent years.

Among all investments made in the real estate sector in the first half of this year, 295.5 billion yuan (US$36 billion) comes from property buyers' down payment, a 94.1 billion yuan (US$11 billion) increase compared with the same period last year, or 46.7 per cent jump.

Breaking it down, most of the down payment property buyers paid developers has been withdrawn from their deposits, implying that property investment is a major drain on the declining deposit growth rate.

Flourishing private borrowing is another factor contributing to the falling deposit growth rate.

Although we have no specific and complete numbers in this field, the scale of private borrowing can still be estimated based on media reports.

The conclusion should sound an alarm bell to policy-makers.

Real estate is a sector the current macrneconomic controls are targeting.

Much of the private borrowing is ending up in some red-hot industries that the government is trying to put the brakes on.

But the negative savings interest rate in real terms has encouraged or spurred on depositors to divert their savings from banks, resulting in many of them finding their way into property and other overheated industries directly or indirectly, a situation that runs counter to the government's ongoing macroeconomic controls measures.

In a word, the current interest rate, which is much lower than that in private borrowing, has engineered the steep fall of the deposits growth rate, which, in turn, has adversely affected the macroeconomic controls.

It is a signal sent by the market that the current interest rate needs to be adjusted promptly.

Long used as an economic policy tool, the administrative act of relying on a credit squeeze by banks to control the economy has lost much of its touch on reality, where a market-dictated tool is badly needed in macroeconomic controls.

As such, the interest rate setting mechanism should pay more attention to market signals.

(China Daily October 18, 2004)