All the cash in China
All the cash in China
The Chinese are notorious savers; on average, they squirrel away 40% of their earnings, compared to a paltry 5% for Americans. The bigger problem for many Chinese people is where to put all that cash. Despite intermittent efforts to liberalize it, China’s financial industry still bears many of the marks of a planned economy.
One such mark is that the deposit and lending rates of Chinese banks are set by the state, rather than the market. Banks take in the difference between the two rates as profit, ensuring they stay well-capitalized. However, when the inflation rate is higher than the deposit rate (as it was for much of 2011), savers also see the value of their bank deposits steadily erode.
Many Chinese keep their money in the bank, regardless. But those who are younger, better-educated and wealthier tend to experiment with other options. They seek out better returns in property, stocks, bonds and even gold.
I save half of my pension every month and spend the other half on the things my family needs. I always put my savings into my bank account, although my daughter told me I’m losing money since interest rates are less than inflation. Inflation is terrible – the price of food and clothes is soaring – but I still feel that keeping my money in the bank is the best and safest option for me. Many of my friends have invested in the stock market in the past few years and they lost a lot of money. It just puzzles me why so many people are crazy about the stock market, when most of them don’t work in finance and have as little knowledge as I do. As for the real estate market, I’m not satisfied with my apartment now but I don’t have the ability to buy another. I’m a bit worried about the bubbles in real estate as my daughter is going to get married sooner or later. I hope housing won’t be a heavy burden for her.
—Ms Wang, 53, a retiree living on an RMB3,000 (US$472) monthly pension in Shanghai
Nowadays, RMB1,000 (US$157.14) doesn’t buy so much as it did in the past. However, the change hasn’t been big enough to force me to change my savings habits. Inflation is a reality, but life goes on. Looking at basic economics, it’s clear that bank deposit rates are too low. It’s sheer exploitation of people’s wealth, given the consistently high inflation rate – people are suffering from negative interest rates. Since I work in the securities industry, I’m not allowed to participate in stock or bond trading. Nevertheless, I’m pessimistic about both markets. The overall trend is a downward one, and no favorable policies are likely to be announced in the immediate future. Given that, I think it’s a better idea to invest in fixed-income financial products. For beginning investors, it’s wise to buy short-term fixed income products – that makes your cash flow a lot more predictable. Not many Chinese people are enthusiastic about purchasing bonds. You see people get rich overnight through the stock market and property market speculation, but you never see it happen to bond buyers.
—Ms J.J. Li, 26, senior associate at a Shanghai investment bank
Generally, I save 20-30% of my income every month. This is my first year at work so I don’t have much money to invest, although I have a strong interest in it. I started investing in the gold market last year, because like most Chinese, I was losing confidence in the stock market. The gold market also offers much higher yields than the wealth management products offered by the banks. As for inflation, there’s nothing to do but accept it. Banks are raising interest rates but that still takes time to go into effect. I don’t own any stocks or bonds now, and I don’t plan to invest in the stock market anytime soon; it’s too dangerous in my view. As for the real estate market, I believe there are bubbles still, but I can’t tell if the price will keep going up or down – it’s just too difficult to predict.
—Mr Edward Wang, 23, a research executive earning RMB5,000 (US$785) a month in Shanghai
Domestic inflation can’t be stopped at will. If it continues, the only thing we can do is keep working hard to make more money. The entire picture looks pretty bleak: The threshold for investing in the property market is too high for most Chinese, and people lack faith in the stock market and funds. With such low deposit rates, saving in the bank isn’t a good deal either. And why bother to buy bonds? It’s hard to say what will happen in three to five years – based on the current inflation rate, you can’t even ensure that you would break even after five years! Given all of that, I think gold is the best option. It’s a globally recognized asset and preserves its value better than diamonds, silver or jade, which are emerging investment products in China too. I started using about 10% of my yearly salary to buy gold bullion. To me, it’s better to focus on the moment.
—Ms Chen Shujie, 30, a sales representative at Shanghai Shibang Machinery’s Beijing branch
I just returned to China from the UK in September to start my new company, so I don’t have much cash on hand. But before I left China for my studies, I invested nearly half of my savings in the stock market back in 2002. I lost some money, but I’ve kept the rest in the market since. My personal opinion is that China’s stock market will become stronger in the long run. I think lots of people believe that, given the country’s large population and good prospects for business. But the stock market’s regulations and dividend systems still need to develop. Any recovery in the value of the market hinges on how much confidence Chinese citizens have in the government. No one wants to invest if that trust element is missing, no matter how many policies the government enacts. It’s like Britain in 2007, when it was plagued by mad cow disease. The day after the government announced that the disease had been controlled, British people swarmed to butchers to buy beef. China needs to achieve that same thing – when the government says that milk powder is okay to purchase and people follow, that indicates genuine trust exists. China actually has no property market. This is not my original idea – it’s shared by many experts who have spent time abroad. China’s property rights don’t award ultimate ownership, only a 70-year lease from the government. Why would I spend a fortune to rent a house for 70 years?
—Mr Gao Chaofan, 29, the owner of an IT company, Jiaxing Meige