2013-09-18

Chinese Still Won't Spend; Gold Buying Slows As Prices Fall

Demographics are becoming a problem for China as well. The aging population would rather save than spend.

China's Consumption Problem
When former Chief Economist and Senior Vice President of the World Bank Justin Yifu Lin was recently asked how he invests his money, he said that he puts it all in a bank term deposit. “The money is still growing when I sleep at night,” he quipped. “I don’t have to worry.”

Most Chinese make the same choice. Data released by People’s Bank of China showed that as of August this year, Chinese bank savings had exceeded 43 trillion yuan for three consecutive months, with per capita savings at more than 30,000 yuan.
Consider this stat in light of the fact that China experienced a cash crunch in June. Everyone is trying to save, yet small and medium sized companies are starved for capital. A massive proportion of capital has been misallocated in the state run sector.

Why are savings up right now?
The deposit insurance system is expected to make banks more competitive, more cautious about the loans they give and more inclined to offer high interest rates in order to attract customers (if interest rate control is indeed liberalized). However, it also means poorly run banks may be allowed to fail. Considering how risky the debts of some banks are, people may no longer be able to sleep at night assured that their bank deposits are “growing.”

So what other options do we have for our money besides banks? Chinese stocks lost 43 percent of their value from 2009 to 2013 and housing purchase restrictions have made real estate a less attractive option for investment. This is why wealth has started to flow back into the banks.
Think about that paragraph. American banks aren't cautious with their lending and savers are cautious where they put their money because of FDIC. If having deposit insurance makes banks more concerned about failure, thinking the government can let them fail and protect depositors at the same time, imagine how risky their lending is today.

Although the article doesn't mention it, gold is also down nearly 30 percent off its highs. Gold replaced stocks and real estate when the government cracked down in 2011, but with gold well off its highs, investors are sticking cash in the bank. Gold prices are finally coming down though. Gold is above it's lows from June, but gold sellers are charging nearly 10 percent less today than they were in June.

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