Chinese people who used to stash their money in banks are taking it out to play the capital markets, leading to a decline in the country's household deposits for the second month in a row.

 

In May 2006, household deposits rose by 17 billion yuan. But this May they plunged by 278 billion yuan after a 167 billion yuan decline in April, according to figures released Tuesday by the People's Bank of China, the central bank.

 

M1, a narrow measure of money supply that includes cash and demand deposits, surged by 19 percent to 13 trillion yuan at the end of May as households kept money on tap for investment in the capital market.

 

In an attempt to burst the speculative bubble on the securities markets, the Ministry of Finance raised stamp tax on securities trading from 0.1 percent to 0.3 percent at the end of May.

 

However, the comparatively low deposit interest rates give people little incentive to put their money in banks, said Tan Yaling, a researcher with the Bank of China.

 

The central bank said in a statement that M2 -- a broad measure of money supply -- grew more slowly than at the end of last year.

 

The central bank hiked the one-year benchmark deposit interest rate by 0.27 percent and the one-year benchmark lending interest rate by 0.18 percent from May 19, after raising both by 0.27 percent in March.

 

In another move to reduce excess liquidity, the central bank raised the required deposit reserve ratio by 0.5 percent from June 5; the fifth raise this year and the eighth since 2006.

 

China's current one-year benchmark deposit interest rate stand sat 3.06 percent, the one-year benchmark lending interest rate is 6.57 percent and the required deposit ratio is 11.5 percent.

 

The central bank withdrew 34 billion yuan from circulation in the first five months, 22 billion yuan less than a year ago, said the statement.

 

Tang Min, chief economist with the Asia Development Bank Mission in China, predicted the excessive fluidity would be alleviated as the effects of the interest rate rise and the required deposit reserve ratio hike begin to kick in.

 

China saw its consumer price index (CPI) rise by 3.4 percent in May, the highest monthly level in more than two years.

 

The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, broke the 4,000-point mark again on Tuesday to close at 4,072.14 after plunging 8.26 percent on June 4.

 

(Xinhua News Agency June 13, 2007)