The year 2018 can be considered a pivotal moment for the allocation of financial assets in the household sector in China. Prior to 2018, a topic that garnered significant market attention was the "relocation" of residents' deposits. In pursuit of higher and more market-oriented returns, the proportion of residents' deposits in their asset allocation continuously declined, while the share allocated to wealth management, asset management products, and other financial instruments noticeably increased. However, after 2018, there was a resurgence of high growth in residents' deposits, especially from 2020 to 2022 when there was a significant surge. This actually reflects not so much an increase in "excess savings" among residents, but rather the process of residents' deposits "returning home," indicating a significant change in the wealth allocation structure of households. As the adjustment pressures in the real estate market gradually became apparent, the cost-effectiveness of financial products such as wealth management and asset management has gradually decreased, leading to a substantial increase in the proportion of residents' deposits.

Looking ahead, we believe that the direction of residents' allocation towards financial products such as deposits, insurance, money market funds, government bonds, and overseas funds is likely to continue. Equity assets also present structural investment opportunities, especially for high-quality targets with supported or even increasing performance. However, we must also pay attention to changes in policy. China's economy has tremendous long-term potential. If monetary policy becomes more accommodative at a faster pace, and "broad" fiscal policy actively supports overall demand with significant force, residents' expectations for the economy may change, leading to certain shifts in the allocation structure and strategies of major asset classes.

Advertisement

1. From Real Estate to Financial Assets

Since 2015, the proportion of non-financial assets in the allocation of Chinese residents has been on a downward trend. The share of non-financial assets in residents' annual savings dropped from over 60% to 33% in 2022. Although after 2015, the real estate market experienced a noticeable uptick, this may be due to a more active new housing market while the proportion of second-hand housing transactions was declining, leading to an overall decrease in the proportion of real estate in residents' savings. Since 2021, as the real estate market further cooled down, the proportion of non-financial assets in residents' asset allocation continued to decrease. Concurrently, after 2015, the share of financial assets in the annual savings of Chinese residents has significantly increased.

Looking at the trends in the real estate market for 2023 and 2024, it is expected that the proportion of Chinese residents' savings allocated to real estate may still be declining. Drawing on the experiences of other economies and the adjustment pressures in the real estate market, it is anticipated that the trend of residents allocating more towards financial assets may continue.

2. From Deposits "Moving Out" to Deposits "Returning Home"

What is the trend in the structure of financial assets allocated by Chinese residents? Before 2018, the overall trend was for deposits to "move out." The proportion of deposits in residents' asset allocation kept decreasing, leading to a noticeable increase in the proportion allocated to financial assets such as wealth management, asset management products, and trusts. This phenomenon of deposits "moving" to other financial assets occurred because the underlying assets of these financial products, such as wealth management, asset management products, and trusts, were mostly directly or indirectly related to the real estate market. When the real estate market was in an upward cycle, these assets could offer relatively higher returns. Meanwhile, the marketization level of deposit interest rates was not high enough, significantly lower than the interest rates of other financial products, making it a natural process for residents' deposits to "move" towards other financial assets.

However, after 2018, the process of residents' deposits "returning home" began in China. This was due to the continuous downward pressure faced by the real estate market after 2018, with the returns on real estate-related financial products becoming increasingly lower and the risks increasing. Since 2018, there has been a rise in the occurrence of asset management product defaults. Gradually, the cost-effectiveness of deposits has been improving. As a result, after 2018, residents' deposits began to experience a trend of high growth, with the share of deposits in the utilization of residents' financial assets rapidly increasing from 41% in 2017 to nearly 80% in 2022. Since 2023, although the growth rate of deposits has slowed down, it remains at a high level.So, the high growth in residents' savings from 2020 to 2022 was not primarily due to excess savings. We also published a special calculation at the beginning of 2023, indicating that during the pandemic, residents did not have too much excess savings. The high growth in residents' savings was mainly due to significant changes in the structure of residents' wealth allocation.

3

Resident Assets: What is the trend in allocation?

Looking ahead, we believe that deposits and insurance will still be important directions for the allocation of financial assets among Chinese residents. Deposits have always occupied a dominant position in the financial asset allocation of Chinese residents. Against the current background of low inflation expectations and unresolved real estate issues, we believe that the financial asset allocation of the resident sector will still be mainly in deposits. Although the nominal interest rate on deposits has fallen to a historically low level, it is important to consider the level of inflation; the real return on deposits is not low. In addition, the allocation of residents' assets in insurance has also maintained a stable increase, and insurance financial products are also an important direction for the allocation of residents' financial assets.

From the perspective of relative price effects, the cost-effectiveness of money market funds and quasi-money financial products may become more prominent. In the past few years, the trend of long-term deposits by residents has been quite obvious, especially the higher returns that medium and long-term deposits can provide in a low-interest-rate environment. However, in the last two years, the speed of interest rate cuts on deposits has significantly accelerated, especially for medium and long-term deposits; while the interest rate cuts in the interbank market have been relatively slower. Therefore, compared with deposits, the cost-effectiveness of money market funds and quasi-money financial products will be relatively higher, and they can also provide a good return rate under good liquidity conditions. Looking ahead, we expect that the speed of interest rate cuts on deposits may continue to be faster than that of the interbank market, and the proportion of residents' allocation to money market funds and quasi-money financial products may continue to increase.

At the same time, medium and long-term government bond products and quasi-bond products may also be important directions for residents' asset allocation. Because medium and long-term government bonds can provide higher interest returns, and under the condition of low inflation levels, medium and long-term government bonds may also provide certain capital gains (of course, this also requires attention to the risk of interest rate adjustments brought about by economic recovery). Among them, bond ETFs may also be a potential direction for residents' asset allocation, especially as these products have the advantages of convenient trading and low fees, and the scale of these products has been increasing significantly in the past two years.

Overseas funds may also undertake part of the residents' major asset allocation. In the past two years, the scale of QDII fund products has been significantly increasing, pursuing the preservation and appreciation of assets, and hedging exchange rate risks, which may promote residents to diversify their wealth allocation more.

In addition, equity assets also have structural investment opportunities, especially focusing on high-quality targets with supported performance and even growth.

However, major asset allocation also needs to pay attention to risks. In terms of external risks, it is necessary to focus on changes in international relations and geopolitical risks, and to pay attention to the risks of cyclical downturns in overseas economies. Domestically, it is necessary to pay attention to the impact of marginal changes in China's economy on the trend of major assets. In the long term, China's economy has tremendous potential and contains many potential investment opportunities. If the domestic economy recovers strongly, it is necessary to pay attention to the adjustment risks of bond and quasi-bond assets. To focus on the recovery of the economy, the key is to observe the strength of monetary and fiscal policies, if monetary policy is more relaxed at a faster speed, and at the same time, the broad fiscal policy actively supports total demand with great strength, the structure and strategy of major asset allocation will change.