|
| China's dissaving tiger |
| Wei Gu / Feb 20, 2010, 00:45 IST |
|
Inflation-fearing Chinese: In the Chinese year of the tiger, inflation is the beast to worry about. Rapid increases in bank loans could be spurring higher prices. So could a decline in savings by China's fabled hoarders.
One piece of evidence for what economists call "dissaving" is the widening gap between growth in M1, currency in circulation plus demand deposits, and M2, which adds time deposits. When M1 is growing faster than M2, it is usually a sign that money is being moved from savings to current accounts. That has been happening every month since September 2009.
Another measure of the trend is the count of Chinese household savings, compiled by the central bank. The increase of household savings in 2009 was $48 billion less than the previous year, despite a 9.8 per cent increase in real disposable income.
The cash in current accounts is likely to be spent sooner rather than later. That sounds like a good thing for an economy which saves too much. But, right now, the extra cash could help push up prices, both for goods and services and for financial assets such as property and stocks.
M1 growth outpaced M2 in 2007. By early 2008, consumer price inflation spiked up to a 10-year high of 8.7 per cent. If the pattern holds in 2010, inflation could be even higher. In 2007, the largest monthly gap between M2 and M1 growth was roughly 4 percentage points. Last month, the gap was 13 percentage points.
There is an irony in the new inflationary spending. It is spurred on by the fear of inflation. The interest rate on savings accounts is legally limited to 2.25 per cent. Inflation is projected to be 3 per cent this year, according to Reuters polls. So, it makes sense to buy now, rather than get less later. And rising property or pork prices just adds to the incentive to get in early.
The Chinese authorities have been concentrating on regulating the banks. They cannot tell savers what to do, but higher interest rates on savings accounts could lure the dissaving tiger back into its cage.
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
