A bear market, soaring real estate prices, and an inflation rate that is outpacing the nation’s interest rate on savings are all contributing to a growing quandary facing Chinese citizens regarding what to do with their hard-earned cash.
Chinese people are traditionally savers. The country has the world’s largest savings at US$7.2 billion and only Libya, Kuwait, and Azerbaijan can claim a higher savings ratio of GDP than China’s 54 percent, according to the World Bank. But all that money stashed safely in the bank, hidden underneath the mattress, or squirreled away deep within some godforsaken recess is losing its value.
Year on year consumer prices in China rose 2.8 percent in April and a recent Bloomberg survey of 18 leading economists forecasted the country’s inflation rate to climb by 3.4 percent this year. In comparison, China’s one-year interest rate on savings is at 2.25 percent.
While the government may help alleviate some of these inflationary woes by reverting back to the pre-crisis currency agenda that saw a fairly steady appreciation of the yuan, the situation is prompting many Chinese to explore other financial alternatives. They will find out there aren’t many. China’s regulations essentially limit the investment options of its citizens to either domestic equities or real estate, both of which are a tough sell of late.
The Shanghai Composite Index is in the midst of its second bear market in the last nine months with the bourse dropping more than 25 percent since a peak on Nov. 23 of last year. Furthermore, investing in equities is a bit too foreign and complicated for some Chinese. Many view it as too risky, which shouldn’t come as a surprise given the market’s recent performance and the country’s penchant for precautionary savings.
Investment in real estate isn’t a realistic investment option for many Chinese either at the moment, with already exorbitant prices only getting more expensive. Despite the government’s recent attempts to cool the housing market through curbing mortgage loans and increasing banks’ reserve requirements, real estate prices in 70 of China’s largest cities rose by another 12.8 percent last month. With a minimum down-payment of 20 percent for first-time buyers, this essentially puts buying an apartment out of reach for many of China’s white-collar workers.
Skyrocketing real estate prices in Shanghai have forced Chen Jing, a 27-year-old hotel marketing professional, to alter her plans to buy an apartment in the city after saving for several years. Instead of leaving her money in the bank and waiting for housing prices in Shanghai to come down, Chen, a native of Zhejiang Province, has instead decided to purchase an apartment back in her hometown of Taizhou.
“I think I will buy an apartment shortly, even though it is still pretty expensive, ” Chen said. “I can’t afford it all by myself, so I plan to buy an apartment with my brother back in my hometown. An apartment there is at least three times cheaper than buying a place in Shanghai. ”
Despite the recent state of China’s equities, real estate market, and inflation, most experts believe that some of these areas, if not all, will experience dramatic improvements before the end of the year. J. P. Morgan predicts China’s stocks to bounce back more than 40 percent this year, Citigroup estimates real estate prices in China will experience a 20 percent drop, and many experts across the board anticipate a revaluation of the yuan within the next few months.
This article was written by Christian Fleming for the website, 2point6billion.com.The news is contributed to by Dezan Shira & Associates who have been for over 20 years.
2point6billion is published by the publishing house, Asia Briefing.