On April 20, at a sub-forum of the Boao Forum for Asia 2021 Annual Conference, Li Bo, deputy governor of China’s central bank, said, “Although the current scale of China’s savings is already large, a large amount is concentrated in banks and real estate, the structure is not healthy enough, and some of the savings should be attracted to pension accounts.”
Searing domestic eyes are united on residents’ savings …… (web photo)
Defusing pension risk?
Another searing gaze ……
The weight of a savings
April 15, the central bank working paper said to deal with China’s demographic transition, to be highly vigilant and prevent the trend of savings rate falling too quickly, to clearly to recognize that consumption is never a source of growth, to pay attention to investment. April 19, the Ministry of Commerce said: “the work of promoting consumption needs to be further strengthened.”
At the end of 2020, the SFC said: Promote the transformation of residents’ savings to investment. at the end of 2020, the People’s Daily published an article: Vigorously increase the proportion of direct financing and play the role of capital market hub.
Consumption, real investment, stock market, housing, pension …… resolve economic risks, resolve debt risks, resolve asset price risks, resolve pension risks …… layers of heavy pressure.
Two savings deflated
Resident savings is the little leek under the heavy pressure of the slate. But as long as someone fertilizes the leek, it can always carry the crop after crop of harvest.
How to fertilize savings? Someone borrowing debt is fertilizing savings. Why is China’s savings rate still high when the entire population buys houses, overspends, 500 million people have no savings, and 600 million people earn less than 1,000 a month? The problem lies in debt.
Statistically, the savings rate of residents = total savings of residents / disposable income of residents.
After 2008, due to real estate leverage, the rate of indebtedness of Chinese residents suddenly soared. One person’s expenditure is another person’s income, and macro debt becomes macro income and becomes savings.
Obviously, both total resident savings and resident disposable income are inflated by debt leverage. When the numerator denominator is inflated at the same time, the savings rate data are overstated.
In the first quarter of 2008, resident loans were RMB 5,299 billion and resident deposits were RMB 1,907.24 billion, with debt accounting for only 27.8% of deposits; in the first quarter of 2021, resident loans were RMB 649,837 billion and household deposits were RMB 9,927.76 billion, with debt accounting for 65.5% of deposits.
The debt-to-deposit ratio increases by 236% and the debt leverage affects the savings rate data is significantly overestimated.
The real savings rate of residents will surface during the deleveraging phase.
Three false fat is difficult to stop the decline
Buying houses is the destination of residents’ savings, and leveraging is the coming direction of residents’ savings; buying houses and leveraging is the reason for the deflated savings rate. It is the cause of buying houses and leverage is the result of the fat savings rate. But even if it is a fat figure, the savings rate is still falling inertia.
Total domestic savings in China since 2008 (web image)
As the aging society deepens and some residents need to consume their savings for retirement, the savings rate will inertially decline. The decline (or turn negative) in real interest rates is also a major factor affecting the decline in the savings rate.
There are three options for consumption.
1) immediate consumption
2) Delayed plus consumption (investment)
3) Defer reduced consumption (also investment).
Time has a value, i.e., wealth increases in value over time. This also determines that the third option is generally not chosen.
If you earn $10, $5 is spent immediately, leaving $5 in savings. This $5 in savings can then be turned into an investment. If the investment is profitable, you can spend even more in the future. Expressed in monetary terms, this is interest-bearing (real interest rate) savings. Interest-bearing is an incentive to save, and only when future consumption has better results than present consumption is it consistent with the common sense that time has value and saving behavior increases. But when there is a negative real interest rate, time has no value, deferred consumption decreases rather than increases, and saving becomes a penalty.
With low (negative) real interest rates and an aging population, it will be difficult to avoid an inertial decline in the savings rate ……
Demographics of China in 1950, 2019 and expected 2050
IV Savings, also the source of inflation
There are roughly 3 structures of savings returns.
1) from a purely physical point of view, disregarding the paper money factor. For example, planting food, planting the uneaten food (savings) into the soil, harvesting more food, the growth part minus labor, risk, depreciation, etc., what is left is the contribution of seeds (savings) to growth (return), which is a kind of real interest rate. By increasing (saving) capital inputs, output will increase, but there is an upper limit to this growth in returns, and the upper limit can only increase as technology grows (e.g., research into higher yielding seeds). This determines that more investment is not better, and investment beyond the technology ceiling will have the problem of delayed reduced consumption (current investment of 5, future harvest of only 3), and perennial high-intensity investment is a complete waste.
2) Consider the paper money factor, in terms of the physical market. If the physical field of paper money increases, the value of paper money will fall relative to the physical (inflation), holding physical than holding paper money gains, the market will rush to buy physical, selling paper money, forcing paper yields to increase to (physical interest rate + nominal interest rate), inflation will affect paper yields rise.
3) Consider the paper money factor, in terms of financial idling. Seeds are planted to grow, not sprinkled to grow. But paper money does not drive an equal amount of seeds to be thrown down, and there is a lot of paper money that is idling. It may take three dollars of paper money to drive one seed to be cast (leaving 2 idle), which means that the return on one seed has to pay interest to three paper money. Idling affects the yield of the note to fall, but the room for bill growth is infinite and the fall in yield can and can only be compensated for by leveraging, which in turn stimulates more money to idle.
If there is no idling and one share of paper money can drive the same fraction of seeds cast down, the paper money rate will only be consistent with the physical rate and interest rates will not be affected by the central bank. The central bank’s interest rate cut will not affect the market interest rate.
Central bank interest rate cuts must be accompanied by increased leverage to achieve, there is high leverage to have low interest rates; in turn, if the funds are restricted idle (deleveraging pressure), the market will automatically raise interest rates.
When paper money is idling in the financial market, it is not flowing into the real world. For the vast majority of residents, real inflation is very low and does not have speculative value, while the lack of channels to raise the bar (real estate is the easiest channel for the public to raise the bar) prevents them from making up for the drop in yield by raising the bar with paper money, so residents can only save by speculating in real estate or saving in banks. This is the typical characteristic of Chinese residents’ savings. It is also these savings in the bank, attracting a lot of tiger eyes. But when nominal interest rates fall towards zero, even higher debt leverage idling cannot compensate for falling yields, and paper money will inevitably flow into the real world, affecting inflation upwards. This is when resident savings can hold down inflation without leverage, thus pushing up inflation.
Resident savings, too, are the most dangerous source of inflation.
The Wailing of Five Savings
China’s disposable income (as a percentage of GDP) is notably low, at 44%, compared to over 70% in the U.S. Weak income is not enough to carry so much weight. But savings are amplified by debt, and savings amplified by debt are also savings, and it is savings that will solve the problem. As long as the residents can continue to leverage, the residents of savings can bear the heavy burden, the problem can be masked.
But this will repeatedly overdraw the potential of residents’ savings. There are always two sides to the story. When leveraging, savings can defuse risk; when deleveraging, savings can also create risk.
When leveraging, leveraged savings is the source of domestic demand, is the root of investment, is (pension, stock market, etc.) the smallest cost of risk resolution; deleveraging, leveraged savings is the biggest source of inflation risk contagion, savings deleveraging is the biggest cause of long-term economic depression.
Will those burning eyes see savings wailing?
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