China has witnessed negative interest rate rises due to the rapid surge in its consumer price index, or CPI! Covering goods and services from grain to health care, the CPI rose a year-on-year 3.2 percent in January and last December, the highest since April 1997. However, most people still remain loyal to banks. China's total savings reached a formidable 11 trillion yuan by January this year, 19 percent higher than the same period last year. What's behind this phenomenon? 
 
The low local currency interest rate along with high consumer prices didn't change Li Fengqin's habit of depositing money into her bank account every month. A typical office worker, she's got a lot of bills to pay, the biggest being her mortgage payments. Asked why she doesn't invest her money in something with higher yields, she says:
"I know I would lose out by saving money in the bank. But, if I do not put money in the bank, I will lose more. I'm saving, not for earning, but for a stable future. And I can not find many investment channels that are better, or more convenient, than bank deposits."

In fact, she's not alone in having such expectations. But is it a smart choice? The benchmark one-year bank deposit rate stands at 1.98 percent. After deducting the 20 percent tax on interest, the real interest rate is actually a negative 1.6 percent. That means depositors lose 20 billion yuan worth of interest each year from the 11 trillion yuan they have in bank savings!

However, economist Yu Weibin from the Chinese Academy of Social Sciences sees this from a different angle:
"People's personal wealth will shrink due to higher consumer prices, and along with it, their purchasing power. But the negative interest rate is beneficial for the recovery of the country's stock, funds and debt markets, enticing fledging investors to buy shares and invest. Also I think people should save a certain amount of money for large purchases, such as houses, cars, education and health care."

Insiders predict that China's consumer price index will continue to be at a high level over the next several months due to higher grain prices - a major reason for the current high CPI. Although this does not mean the country will face inflation, it does means the interest rate will continue to be negative, which is unfair for ordinary people, because they can't benefit from the country's rapid economic development. It will also have a great impact on people's confidence in the future.

Yu Weibin says the negative interest rate will harm the economy in the long-term, so the government should take measures to prevent big ups-and-downs in the economy.

"Although investment in China continued its strong momentum in 2003, it was concentrated in only a few sectors. And China's capital market is under-developed, with fledging stock and securities markets. We need a regulated and diversified investment environment for ordinary people to make good use of the money in their hands."

Meanwhile, China's monetary policy-makers said earlier that it's unnecessary for the government to use an interest rate hike to adjust market supply and demand. And the government is encouraging private investment by restructuring its financial system, strengthening intermediary institutions and offering favorable policies in terms of finance, taxation, credit and training.

(CRI April 2, 2004)