China Should Channel Savers to Stocks, Away From Banks, PBOC Adviser Says

China should channel its high level of savings from banks to the stock market in order to avoid risks to the financial system and further develop the capital markets, according to central bank adviser Li Daokui.

“China’s bank savings remain at a very high level,” Li said in an interview with the overseas edition of People’s Daily. “There could be potential risks for the banks and the nation’s whole financial system if there happens to be a large number of withdrawals suddenly.”

When asked where that capital should be transferred to, he said, “China should develop capital markets and expand the stock market. Through the stock market’s expansion, we can gradually channel money out.” He also said that China should allow more funds to be invested overseas.

The nation’s household deposits jumped the most in seven months in September, even after accelerating inflation reduced real returns to negative for savers. Stock investors opened fewer accounts to trade equities last week as the benchmark index fell 5.3 percent in November on concern government efforts to tame inflation will hurt earnings.

Consumer prices jumped 4.4 percent in October, the fastest in two years, and above the government’s full-year target of 3 percent. The central bank on Oct. 19 raised interest rates for the first time since 2007, with the benchmark one-year lending rate increasing by a quarter of a percentage point to 5.56 percent and the deposit rate by the same amount to 2.5 percent.

Photographer: Nelson Ching/Bloomberg

People's Bank of China Adviser Li Daokui speaking at the World Economic Forum Annual Meeting of the New Champions in Tianjin, China. Close

People's Bank of China Adviser Li Daokui speaking at the World Economic Forum Annual... Read More

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Photographer: Nelson Ching/Bloomberg

People's Bank of China Adviser Li Daokui speaking at the World Economic Forum Annual Meeting of the New Champions in Tianjin, China.

Negative Returns

“Investors are seeking to ensure gains or at least maintain the value of their money,” said Shen Nan, a strategist at Changjiang Securities Co. in Shanghai. “The negative deposit rate due to inflation and restricted property investment makes the stock market a significant channel for investors seeking capital returns.”

The nation’s savings ratio stood at 54 percent of gross domestic product in 2008, the highest among major economies in the world, according to data compiled by the World Bank. Only Libya, Kuwait and Azerbaijan rank higher.

Household deposits increased 1.04 trillion yuan ($156 billion) in September, the biggest rise in seven months, to 29.9 trillion yuan. China’s current household savings exceeded the combined gross domestic product of Brazil, India and Russia, according to Bloomberg data.

Saving money has been a cultural touchstone for the Chinese since the government dismantled the so-called iron rice bowl of lifelong job security following economic reforms in the 1990s.

China Valuations

Even with last month’s decline, the Shanghai Composite Index has rebounded 21 percent since reaching this year’s low on July 5 on expectations central banks around the world will inject more cash into their economies to boost growth.

The measure trades at 18.5 times reported earnings and offers a dividend yield of 1.45, compared with a price-earnings ratio of 15.1 and dividend yield of 1.9 for the Standard and Poor’s 500 Index.

Investors opened 388,107 accounts during the week ended Nov. 26, a drop from 436,396 accounts the previous week. Individual investors comprise 99 percent of the nation’s 150 million trading accounts.

Soaring Chinese real estate prices have prompted analysts including former Morgan Stanley economist Andy Xie to call the nation’s asset markets a bubble that will burst once the government curbs credit. China is “on a treadmill to hell,” with growth driven by the “heroin of property development,” hedge fund manager James Chanos said in April.

As a central bank adviser, Li’s concern is with financial stability rather than returns for investors. He said in October that China could agree to a U.S. proposal for setting current- account targets, a view that was contradicted days later by the government. Li said last month that China can consider selling U.S. Treasuries as compensation for losses caused by the Federal Reserve’s decision to purchase $600 billion of bonds to pump money into the American economy.

--Irene Shen. With assistance from Luo Jun, Chua Kong Ho and Huang Zhe. Editors: Allen Wan, Greg Turk

To contact Bloomberg News staff for this story: Irene Shen in Shanghai at +86-21-6104-3049 or ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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