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THE BRIEF: What's behind high household net deposits, Consumer confidence, Business conditions, PBOC urban depositor survey
Trying to make sense of things
2022 was an awful year for property developers in China. With covid lockdowns in the spring and fall, years worth of credit tightening to the industry and policies to limit real estate speculation finally came to a head. The second order consequences were a major drop in Local Government funding (previously covered here and here). Add on the testing requirements, which were 99.9% (guesstimate) funded by local governments, and China's fiscal health going into 2023 is looking dire.
Chinese households are “cashed up”, with record high rise in net deposit growth through Nov 2022. We show below that abnormally high net deposits is linked to the housing slump. We imagine cash from second/third+ home sales not being reinvested back into the housing market. There are potentially several reasons why cash sits in savings deposits, here are three:
1/ Xi Jinping’s policy of “homes are for living, not speculation” manifesting in restrictions on second, third home-purchases (2017 Party Congress).
2/ A lack of attractive investment alternatives, especially with similar characteristics: physical assets, zero minority control risks, protected by property ownership rights, leverageable.
3/ A loss of confidence for both businesses and consumers about the future limiting investment. Seen by the confidence and conditions surveys’ results below.
We’d like to take a moment and send our thoughts and prayers to the elderly in China, who are having a very difficult time with Covid.
I. What’s behind high household net deposits?
China’s household bank deposits are extremely high. See this fantastic chart of Net New Deposits from Plenum Research.
BofA Global Research had a disaggregated chart last month, showing new deposits and new loans separately. Deposits are up and loans are way down.
We compare rolling 12 month home sales with net deposits (deposits minus loans) below. We believe it indicates cash received from home sales are not being reinvested into the housing market.
If we are right—that home sales are causing high net deposits—then the argument high deposits represents pent-up consumption demand is weakened. It is more likely cashing up (out of an illiquid asset) due to a lack of confidence about the future.
Note: Housing is considered an investment good for Chinese households. As of Q1’2018 almost 70% of home buys were second or third homes. The significance here is all those people with a second/third+ home are unable to utilize lower mortgage rates for first home buyers. (Not to mention the issues around the chain of people waiting for someone to buy their current home so they can buy their next home.)
The aggregate household deposit (CNY 117 Trillion, +16.8 T yoy) and loan (CNY 74.7 Trillion, +4.0 T yoy) appear to show deleveraging and balance sheet strength. We’d caution that aggregate figures mask wealth and income inequality, as seen below for incomes.
However, multiple factors have damaged the balance sheets of some households, leaving them with uncertain or reduced income on top of the pressure from mortgages, children’s education, and care for the elderly. The pandemic is just one of the causes. Even after Covid, the recovery of their consumption will still be slow.
II. Consumer Confidence & Business Conditions
Consumer confidence turned further negative in November, marking a new low for the survey’s history. This was the month covid cases were rising and a mismatch between new looser covid zero policies and implementation was causing a lot of confusion.
The CKGB business conditions index (monthly) saw an uptick from Nov survey. From their report (PDF):
Albeit small, the possibility of improvement gives hope that company leaders are turning more optimistic about the upcoming six months of doing business in China.
III. PBOC Urban Depositor Survey
This data looks grim. Please note that Spring Festival occurs in January this year, a holiday where economic activity drops for the country as a whole. The positive is this frees up two months in Q1 for economic activity to recover. In short, this survey may look very different for Q1’23!
Current income sentiment continues downward trend in Q4 (top panel). Current employment sentiment high a new low of 33.1 in Q4 (bottom panel), supporting the “cashing up” thesis from section 1.
Turning to house price expectations. We see a decline in the percent of respondents expecting home prices to increase (blue bars) going back to Q2’18.
Here’s another look at the decline in bullish sentiment. In Q2’18 there were 4.3 people who expected home prices to rise for every person who expected them to fall. In Q4’20 this ratio fell to 0.76. (HT to Michael Pettis)
As of November, 61.8% of respondents expect to increase savings deposits (+3.7pp m/m), while 15.5% expect to increase investment (-3.7pp m/m). Another sign of weak confidence in the future. Respondents who expect to consume more remains below pre-Covid levels.
Next, we chart the categories on which respondents expect to spend more. From Q2’18 to Q4’22 (Q2’18 not charted), categories with an increase in respondents were Healthcare (+24%), Social, cultural, recreational (+9%). Categories with a decline were Tourism (-59%), House purchase (-30%), and Big-ticket items (-12%).
Here are the quarterly respondent percentages going back to Q2’18.
Tourism declined immediately in Q1’20 when Covid hit China. Tourism is likely to see the biggest rebound in 2023-24 and international tourism will benefit from a strengthening CNY.
More than 1-in-4 people have consistently expected to spend more on education.
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