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As inflation hits pockets, Chinese choose to save, invest
Updated: 2004-04-04 10:49

A low interest rate paralleled with inflation has not changed the habit of Doctor Huang from Beijing Railways Hospital to deposit his money into a nearby bank.

He was seen Saturday afternoon joining a queue at a Bank of China office in western Beijing, holding a passbook while waiting for a clerk to accept his notes. "If I do not make deposits, I would lose more," Huang said.

"Anyway, money is safe in banks," he added.

"I often hear some people complain in the hall, but customers are as many as before," said Xu Lingyan, an accountant of the office.

The Chinese have become accustomed to bank savings, and more and more choose to save, but they are now living in a new " negative interest rate" era, last witnessed nearly eight years ago.

The actual one-year interest rate for Renminbi (RMB) deposits at banks stood at -1.6 percent after deducting goods price hikes and taxes levied on interest income in the first month of the year.

And the rate was still in negative territory in the following month.

China's central bank sets the same interest rates for deposits of different terms at all commercial banks among other savings institutions.

Since 1996 the central bank had lowered rates eight times in a row, which was, however, neglected by the country's "staunch savers". RMB deposits nationwide continued to reach new records before mounting to 11 trillion yuan (US$1.3 trillion) by the end of February, a nearly 20 percent surge on a yearly basis.


Another method of investment, the stock market, in China is still far from having the number of shareholders enjoyed by developed countries.

Most Chinese stockholders had a bitter experience: The composite index of the Shanghai stock exchange, one of the country's two bourses, plummeted from a high of 2,245 points to a low of 1,307 points in the past three years.

Lack of trust in brokerages and market manipulation have made people lose much of their confidence in the market. Street gossip about the stock market was seldom heard.

But on February 1, China's State Council issued its latest - and also strategic - document on promoting the stability and development of the laggard capital markets.

The State Council has vowed to make non-traded shares - representing as much as two-thirds of the stock market capitalization - of listed companies tradable, but urged the protection of investors' interests, especially those of individual investors, while addressing this issue.

Though investors still fear any concrete plan to dispose of those shares will significantly undercut the value of their existing holdings, the document includes some other initiatives that helped to prop up the market - at least for now.

The central government said it would promote the setting up of a long-expected second board and establish a multi-layer capital market system, which will include corporate bonds and futures products. It plans to regulate the operation and governance of listed companies in various ways including putting in place improved management systems for share issues.

Some remain cautious.

"To buy shares now is like 'committing suicide' since the prices have rallied in recent days, accumulating too many risks," said Fan Wenwei, a manager from Great Wall Securities Company.

"I have emptied out all my stock holdings and start to seek other investment channels," he said.


A Mr. Yuan working with a Beijing-based newspaper recently bought two funds + one invested in tourism service and the other in securities market + before he goes to work overseas.

"I am unwilling to see my deposits sit and shrink in value at banks," he said.

A number of well-performing funds recorded annual return ratios leaping to as much as 10 to 20 percent in 2003, hitting many in the eye including those having little know-how of the fund market.

China has now 30-odd fund management firms and nearly 100 funds. In February, China Construction Bank issued the first domestic " break-even fund", whose principals would be "safe" as guaranteed by companies with ample strength.

A manager of the fund said the so-called Yinhua Break-even Fund sold well because the Chinese have a tradition of being frugal and are reluctant to seek profits in the face of risks.

The nation's treasury bonds are also favored on the back of their zero risk but higher returns than bank savings.

The Ministry of Finance will issue new book-entry bonds totaling 110 billion yuan (US$13.3 billion) from April 1 to May 31 with three-year ones bearing an annual interest rate of 2.52 percent, and 2.83 percent for a five-year term.

The rates are both above the 1.98 percent yield from one-year bank deposits and additionally, income from the bonds is not taxed.

Some put money into purchases of new apartments while other investors turn to gold goods.

A central bank report said earlier that China's consumer price index (CPI), the most widely watched barometer on inflation, should be reined in at about 3 percent this year, although the "spill-over" factor from 2003 alone would bring the index a 2.2 percent rise.

Decision-makers have worries about raising the bank interest rates, according to analysts.

A major engine for China's economic growth should be consumer demand and an interest rate hike is nonetheless damaging to consumption growth. More "hot money" will flow into China to take advantage of the interest gaps between the RMB and the US dollar if the People's Bank of China announces rate hikes prior to the US Federal Reserve, they note.

"If the virtually negative interest rates stay put, financial institutions with foresight will work to tap more products for investors," said a People's Bank expert.

"Ordinary people should not put all their eggs in the same basket," he suggested.

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