August 1, 2022

Chart of the Week: Rising cash demand a sign of jitters among the Chinese public

by Fathom Consulting.

When fears mount about the stability of the banking system, the general public will often rapidly switch their bank deposits into cash (currency), in what is typically referred to as a ‘bank run’. The most famous bank runs occurred during the US Great Depression, while the UK experienced a notable run on one of its banks, Northern Rock, as recently as 2007. Large surges in the quantity of currency in circulation nationally, or a sharp rise in the currency-to-deposit (C-D) ratio, have historically been key indicators of banking crises.

In China, where the public still nurtures some penchant for hoarding cash during uncertain times, there was quite a large spike in cash demand at the onset of the pandemic in 2020. Demand for cash is rising again this year — most likely triggered by the large outbreak in virus cases in Q1 and Q2 — and currency in circulation is currently growing by 14% on a twelve-month basis. Concerns about the safety of bank deposits have recently led to highly-publicised protests in the provinces of Henan and Anhui, where several small, rural banks would not allow customers to withdraw their money. This has occurred at the same time as a growing boycott of mortgage payments by buyers waiting to take possession of their unfinished homes, which has further increased jitters around the housing market and banking system. With the economy and the all-important property sector struggling, the risk is increasing of problems with China’s banking sector. It will certainly be worthwhile watching the public’s demand for cash closely, for signs of any incipient banking panic.

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