Central bank: deposits 'diverted to stocks'

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Central bank: deposits 'diverted to stocks'
By Xin Zhiming and Wang Zhenghua (China Daily)
Updated: 2007-05-14 06:58


Reduced bank deposits by Chinese households suggest that a large amount of money is being invested in the capital market, according to the central bank.

Household deposits decreased by 167.4 billion yuan ($21.7 billion) in April. In contrast, they increased by 60.6 billion yuan ($7.9 billion) at the same time last year, the People's Bank of China said on its website yesterday.

The high growth rate of M1 a narrow measure of money supply that includes cash and demand deposits plus diminishing household deposits suggests Chinese households are keeping money on tap for investment in the capital market. The red-hot stock market has grown by more than 50 percent this year after doubling last year.

Stock mania is sweeping the country despite warnings of a speculative bubble but small investors are rushing to pull out money from bank savings accounts and deposits to pump them into the share market.

Some are even mortgaging their houses or dipping into retirement savings to feed the frenzy.

Economists say the government should take steps to moderate the price surge or risk a sharp fall that could hurt millions of small investors.

\"This is a very critical time. If policy adjustments take place now, the market can still have sustainable development,\" Hong Liang, a Goldman Sachs economist, told Associated Press. \"The longer they wait, the harder the eventual landing will be.\"

Enthusiasm for stocks is fueled in part by a lack of other attractive investments and low interest rates.

Some have made fortunes in the booming real estate market, but the government is cracking down on speculation to rein in soaring housing costs.

On Friday, the government announced it will raise the amount that Chinese banks are allowed to invest in stocks abroad, possibly diverting some of the money pouring into domestic markets. But economists said the amounts involved will be too small to affect the country's money flows.

Regulators have also discussed raising interest rates on bank savings to make them more attractive and creating other new investment options but have announced no timetable. There has also been some talk of imposing a capital gains tax to cool off speculation.

The securities watchdog on Friday urged stock exchanges, securities dealers and other authorities to educate investors about the risks of stock market trading.

The institutions must make investors understand that stock markets are risky and they should be cautious in entering, especially those who use all their savings or pawn their apartments for loans to invest in stocks, the notice by the China Securities Regulatory Commission (CSRC) said.

Saying that the number of \"irregularities\" in the stock market was rising, the CSRC also told listed companies, securities dealers and other related institutions to release accurate, authentic, complete and timely information.


Agencies contributed to the story