The growing diversion of Chinese households' savings out of the banking system this year will help improve the funding effectiveness of the economy and reduce burdens on the banks, the National Bureau of Statistics (NBS) said Tuesday.

But abrupt diversions may have bad consequences for the economy, as they threaten to reinforce an already-sharp slowdown in money and bank loan growth that may undermine economic growth, it said.

The growth in Chinese households' bank savings, which had been fairly rapid in recent years, has been slowing its pace during the past four months.

Outstanding savings deposits rose by 14.2 percent on a year-on-year basis in the first seven months of this year to 12.1 trillion yuan (US$1.45 trillion), the slowest growth rate in the past 28 months, the NBS said.

"If this trend continues, this year will likely end up as a turning point for the 10-year-old high growth of savings deposits," the bureau said in an article on its website Tuesday.

A negative real interest rate environment has been a key reason for the persistent slowdown in bank savings growth, it said.

China announced eight interest rate cuts since 1996 in an effort to kick-start domestic demand, which brought interest rates down by 78.4 percent to historical lows. Real interest rates slid into negative territory in October last year as prices accelerated, prompting inflationary worries and calls for an interest rate rise.

The real one-year deposit rate stands at minus 3.72 percent currently, the NBS said.

Low interest rates, coupled with a rebound in the stock market especially in the first four months of this year, have amplified the diversion of funds from bank savings accounts, it said.

This year's growing private spending, driven by the need to upgrade consumer durables like TVs, as well as surging property prices, have helped the diversion.

The NBS also noted the increasingly active lending among private companies this year was among the reasons for the savings diversion.

Analysts have said that the liquidity difficulties many private firms are experiencing are partly due to the State's efforts to contain loan growth.

They have also been pushing companies into private lending markets.

Senior government officials have expressed worries about the growing savings diversion from banks earlier this year, saying the phenomenon "deserves special attention."

The situation has been one reason for the slowdown in China's monetary growth and a persistent decline in banks' excess reserves, a key barometer for their lending capacity, and may continue to weigh down money and credit growth, the NBS said.

The Chinese authorities have taken a slew of measures, including land controls and requiring banks to set aside more reserves, this year to curb the rapid fixed investment and loan growth that has fuelled worries about the economy being overheated.

But the slowdown in loan growth during the past few months was more abrupt than expected, which has prompted concerns that economic growth may be slowed down in an unwanted manner.

To prevent the savings diversion from eroding economic growth, the NBS recommended increasing the issuance of Treasury bonds to help channel funds to where they are needed.

It also said market-oriented reform of the interest rate regime needs to be accelerated, so that banks can have greater freedom to raise interest rates and keep more funds in bank accounts.

(China Daily September 1, 2004)