The inverted yield curve in China’s savings rates indicates a continuing economic slowdown

Some of China’s largest banks offer a lower interest rate on long-term deposits than on short-term deposits, as the dearth of quality lending opportunities indicates a sustained slowdown in the global economic growth engine.

China’s four largest state lenders, led by the Industrial and Commercial Bank of China, began in June setting the interest rate on three-year deposits up to 40 basis points higher than five-year deposits. Several other national lenders, including China Merchants Bank, have put rates at the same level.

Usually savers get more interest the longer their money is tied up. An inverted yield curve is a closely watched signal for recession risks in the treasury markets.

While China’s Treasury yield curve is normal, officials said the reversal of savings rates indicates that the country’s savers have poor long-term prospects. “We are ready to continue to cool the Chinese economy in the coming years,” said a senior official of one of the country’s four major banks.

The reversal of savings rates followed a surge in bank deposits as Chinese savers rushed to find refuge in their assets and the economic slowdown weighed on personal spending. China’s economy narrowly escaped a downturn in the second quarter, expanding 0.4 percent year on year in the three months to the end of June.

Official data showed that new household deposits grew more than the third year on an annual basis, reaching a record 10.3 trillion renminbi ($1.5 trillion) in the first half of 2022, while individual bank loans fell by more than half over the same period.

“Deposits are gaining in popularity as people’s risk tolerance declines,” said Dong Zhimiao, chief researcher at Merchants Union Consumer Finance in Shenzhen.

The turmoil in China’s real estate market and the slow recovery of infrastructure construction have dampened demand for long-term loans that are supposed to be matched by deposits of similar duration.

Long-term developer loans fell by a quarter in the first half of 2022 from last year after a wave of real estate firms, led by industry leaders including Evergrande, defaulted on debt. Home sales have barely recovered from the government’s crackdown on housing speculation.

Infrastructure construction, another important source of long-term credit, is also lagging as debt-laden local governments, the main backers of roads and bridges, struggle to raise capital.

“The era of intense competition for deposits is over,” said another official at one of the major government lenders. “Our top priority is how to lend money without incurring a pile of bad debt.”

The Industrial and Commercial Bank of China, the country’s largest bank by assets, pays an annual return of 3.15 percent on three-year deposits and 2.75 percent for five years.

As the yield curve inversion points to a further economic slowdown in the coming years, some analysts expect Beijing to loosen credit controls in an attempt to reverse the trend.

The anomaly may disappear as the Chinese central bank implements more stimulus measures, such as cuts to reserve requirements, said Ming Ming, an economist at CITIC Securities.

But a senior Beijing economist at one of the Big Four said the reversal could continue, as Beijing’s non-spreading COVID policy and ongoing housing market turmoil undermine the post-lockdown economic recovery.

“It will take a long time to rebuild confidence in the Chinese economy,” the economist said.