China at Risk of Liquidity Trap Due to Rising Household Savings: Ren Zeping

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One of China’s leading economists says its economy could be vulnerable to a liquidity trap induced by an ongoing rise in household savings in the wake of the Covid pandemic, which is frustrating efforts by Beijing to expand domestic demand and increase consumption’s share of national GDP.

In recent opinion piece, Chinese economist Ren Zeping (任泽平) highlighted an ongoing rise in household savings levels in 2023, despite the abrupt removal of Covid-related lockdown measures towards the end of last year.

“Since the start of this year, the level of household deposits and savings has continued to rise in general, and the high savings of the household sector has become a major destination for the flow of money,” Ren wrote.

“[This] is a classic ‘liquidity trap’, reflecting a decline in the willingness of households to spend in the current period and a tendency towards precautionary saving.”

Household savings in China continue to rise in 2023

According to Ren, this rise in household savings is embodied by several widespread phenomena:

  1. The total volume of household deposits has risen rapidly, while excess savings are less affected by the reduction of bank deposit rates. In the first quarter, new deposits totalled 9.8 trillion yuan, equivalent to 55.5% of new deposits in 2022.
  2. The savings rate of households has risen since 2010, and this trend has yet to see signs of a turnaround.
  3. There is a clear trend of a rising preference for fixed-term deposits amongst households. In April 2023, time deposits accounted for 71.2% of deposits, the highest level in the past ten years.
  4. Incomes are diverging amongst households, and the willingness of young people to save is increasing.

While household deposits in China fell by 1.2 trillion yuan in April, Ren says this is not evidence of increasing consumption, but was instead primarily due to a shift from bank deposits towards wealth management products (WMPs).

Ren says that instead of unleashing a surge in domestic consumption as originally anticipated, the end of Covid lockdown measures in China has instead been accompanied by heightened risk-aversion amongst Chinese households, leading to a rise in precautionary savings.

“The phenomenon of increased precautionary savings warrants attention. The continuous shrinking of household risk appetites is not conducive to boosting consumption and investment…[it] reduces market vitality, leads to the formation of currency deposits and leads to the vicious circle of a ‘liquidity trap’.

“Although the economy is gradually recovering, households are still in the stage of lingering fear, and household risk preferences have declined.

“There are still uncertainties as to the speed of economic recovery. Household income recovery is insufficient and leverage is high. Generally, expectations for future income and expenditure growth have fallen, leverage is actively being reduced, and precautionary savings are increasing.”

In addition to the Covid pandemic, a range of other economic factors have contributed to this heightened sense of risk aversion amongst Chinese households, including the real estate downturn, losses sustained on wealth management products, as well as the impact of geopolitical tensions.

Ren Zeping calls for stronger fiscal and monetary measures

Ren outlined a slew of policy measures to help alleviate the lingering risk-aversion of Chinese households and spur domestic consumption.

“In order to drive a return to normal state of precautionary savings and prevent potential liquidity trap risks, it is especially necessary to raise expectations and reduce burdens,” Ren wrote, highlighting measures that include:.

  1. Expand domestic demand and implement fiscal and monetary policies. “Since the start of this year, a series of policy opinions have sought to accelerate economic recovery through ‘aerial refueling’ and preventing insufficient domestic demand from hampering recovery. [We must] do an effective job with policy expectation management mechanisms, strengthen the policy communication mechanism, guide market players to form expectations consistent with policy goals, focus on improving employment and growth, and continue to optimize the market-based business environment.
  2. Accelerate the development of the home rental and purchasing system. “High housing costs are still the main ‘reservoir’ for the excess savings of households….[we should ] accelerate the establishment of a housing system with multiple supply types, multiple channels for guarantee, and simultaneous rent-purchase mechanisms, to further reduce the role of real estate as a savings reservoir and promote social equity.”
  3. Increase the supply of public services and use special expenditures to reduce the burden of education and childcare. “The first meeting of the 20th Central Finance and Economics Committee raised the issue of supporting Chinese-style modernization with high-quality population development. Only by maintaining a moderate fertility level and population size, reducing the burden of childrearing and education on families and building a fertility-friendly society can we reduce the long-term high savings expectations of the general population.”
  4. Improve social security policies to alleviate household concerns about retirement. “The balance of pensions in the United States is 150% of GDP, while in China it’s only about 10%. We should accelerate the promotion of national social security planning, effectively solve the problems of pensions and medical treatment, reduce general concerns about consumption and investment and reduce precautionary savings.”
  5. Boost confidence and further release unleash consumption and investment potential. “From the perspective of income, the key is to boost the confidence of enterprises, especially the confidence of the real economy and the platform economy, which are the main solutions for employment.”