Consumers and businesses in China are locking up trillions of yuan in longer-term bank deposits, thereby removing a sizable chunk of money from circulation and putting the economy at risk of the same kind of liquidity trap that crippled Japan’s economy in the 1990s.

The first quarter of this year saw financial institutions issue certificates of deposit (CDs), a type of long-term deposit, worth 5.5 trillion yuan ($766.12 billion), the highest quarterly issuance since the instrument was introduced in 2015.

Domestic investors have flocked to these CDs over the past year in a frantic search for profits as they pull out of the stock market and real estate, two classic investment avenues that now appear perilous due to economic and regulatory issues.

This year, businesses have joined the scramble, adding to the drag on China’s economy because it effectively means that both businesses and people are hoarding cash rather than investing it despite reduced interest rates – a typical liquidity trap that plagued Japan for years beginning in the 1990s.

“Based on Japan’s experience in the 1990s, there is the risk that China is entering a liquidity trap due to the risks of balance-sheet recession,” said Natixis’s chief economist for Asia Pacific Alicia Garcia Herrero.

Analysts observe the same lack of trust in Chinese homes and businesses that existed in Japan in the 1990s. However, there is a significant distinction in China’s situation; neither a deflationary threat nor a lending freeze have occurred yet.

Fan Gang, a well-known economist and former central bank consultant, stated at a seminar in June that China is facing a liquidity trap rather than a deflationary swamp a la Japan.

“It’s like money falling into a black hole, and that’s what we’re in right now, demand from companies and households is not vibrant.”

In an effort to boost economic development after the outbreak, Chinese policymakers have lowered rates and urged banks to increase lending.

However, roughly 180 domestic A-share businesses report investing in CDs in their stock filings for this year.

The demand for CDs was higher than typical, according to a banker managing retail accounts at a state lender, “because who knows if the overall environment could get worse,” she said.

The majority of the consumers, she said, had signed up for 3-year CDs with penalties for early withdrawal, which means the money will be locked up for a long even if others had invested in cash products, which may be redeemed at any moment for urgent use.

The rush to safer wealth management products like CDs and other safer investments undercuts authorities’ efforts to increase demand and consumption through tax cuts and relatively constrained property support policies.

Indus Capital’s Pacific Opportunities Fund manager, Byron Gill, also draws comparisons to Japan’s balance sheet crisis during that nation’s “lost decade.”

“What we can say in the case of China is that a sub-segment of the economy, the property sector, is absolutely in the midst of a balance sheet recession,” Gill says.

“And to the extent that property makes up a quarter of Chinese economic output, it’s not a small deal.”

China has a long history of having high savings rates; in fact, according to estimates from the World Bank, its saves rate as a percentage of GDP is the highest among developed nations.

At the end of June, total household deposits reached a new high of 132.2 trillion yuan ($18.41 trillion), which is more than 30 months’ worth of retail sales. The gain of 12 trillion yuan in the first half of this year was the most in ten years.

Banks sell certificates of deposit (CDs), which are among the safest ways to save money. The interest on a 3-year CDS often hovers around 3%, which is greater than the yield on bank demand deposits.

“With few signs of a recovery in the property sector and an uncertain job outlook, the accumulation of household deposits suggests widespread pessimism among households,” said Betty Wang, senior China economist at ANZ.

Chinese energy drink manufacturer Eastroc Beverage revealed in a filing on July 18 that it had invested in 17-month CDs from Bank of Ningbo and 21-month CDs from China Merchants Bank.

It stated that these expenditures were intended to boost the effectiveness of capital utilisation and boost business revenue.

A Shanghai-based retail investor who only wishes to be identified by her last name Wu said she made 3-year CD investments. “At the moment, I don’t see many investing chances. According to Wu, my stock mutual fund products are still down by over 20%.

The 220 million retail stock investors in China, who account for the majority of daily movements and have a population comparable to that of Brazil, have stayed away this year.

The benchmark Japanese stock market, which has increased about 25% so far this year, is outpacing both the blue-chip CSI 300 Index and the benchmark Shanghai Composite index, which are both well below the pace.

A 50-year-old retail investor from Shanghai who requested anonymity went by the name of John says he invested the majority of his funds in CDs earlier this year.

“I wouldn’t pour money into the stock market any time before I see a clear rising trend,” he said.

(Adapted from Reuters.com)

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