China’s latest monetary statistics could suggest that there is some easing as loans growth surprises on the upside. But it contained one real shocker: household deposits fell by RMB727 billion.
This has happened before, as deposits shift out of banks deposits to wealth management products. Those products are off balance sheet, and most probably outside of the money supply measures as the People’s Bank of China has admitted before:
China’s financial innovation has been growing, thus there has been more diversified products available for households. At the start of this year, there has been a huge growth in banks’ off-balance sheet wealth management products, which is outside of the regular deposits. The M2 money supply does not include these off-balance sheet products as part of the measurement, thus the M2 being reported has underestimated the money supply growth. In order to understand the actually financial condition, we are looking at including these off-balance sheet products and developing a new M2+ measures.
Tao Wang of UBS agrees that this huge drop is down to wealth management products again (emphasis mine):
Contrary to the upside surprise in bank lending, M2 growth slowed further in October, dropping to 12.9% y/y. As bank lending accelerated, deposits dropped by 200 billion in October due to a 730 billion drop in household deposits. Similar to what happened in Apr and Jul after the quarter-end supervision check, household deposits went off the balance sheet again to wealth management product, after returning to balance sheet in late September (household deposits rose by 990 billion in September). This suggests that: (1) against the backdrop of negative real interest, bank deposits remain very unattractive to household; (2) banks continued to play the game of moving deposits on- and off- balance sheet, regardless of the increased regulation. Thanks to the noticeable growth of corporate lending, corporate deposits grew marginally by 86bn in October while fiscal deposits jumped 419bn. Going forward, we expect that M2 growth may rebound somewhat as the result of further relax of bank credit and faster disbursement of fiscal funding at year end.
But the most puzzling part isn’t that it dropped, but the rate of drop, as Wei Yao of Société Générale said, that this fall in household deposits is “the biggest monthly decline in the history”. Zhiwei Zhang of Nomura, though, is less alarmed, as he believes that besides the flight to wealth management products, household deposits tend to drop in October, so this is partly seasonal:
The decline of household deposits is partly seasonal – in the past ten years, there were eight instances in October when household deposits declined. The flow to wealth management products may also have contributed.