Income up, tax down, but cheer is elusive

First, the glad tidings. Disposable incomes are up. The personal income tax burden will ease next year. So, are Chinese consumers jumping up in joy? Not quite.

Why not? Well, they are bedeviled by perceived uncertainty over future economic growth direction in general and this year's stock market meltdown in particular.

Parking savings in bank deposits does not seem a bright idea, given the 1.5 percent one-year deposit rate since 2015. Having installed an array of financial apps on my smartphone recently, I now realize the alternative investment avenues, which used to generate up to 5 percent in interest, are dimmer too.

They seem blind to some traditions like Christmas season goodies that cheer. They don't seem to understand that Chinese consumers don't like uncertainty.

When that sense of uncertainty appears pervasive, consumers make a beeline for the banks. Deposits surge. When deposits rise, consumption falls. If the economic outlook for the next year weakens, more depositors may be forgiven if/when they consume less.

After all, they have seen onshore stock prices plummet almost 25 percent this year. The search is on for safer, more lucrative investment areas. In times of uncertainty, bank deposits may appear a wise if conservative move. But they end up savaging the allure of some high-risk financial assets.

Central bank data shows the household sector has deposited more money with banks in the third quarter than in the first half of this year. Total deposits outstanding of the household sector stood at 70.05 trillion yuan ($10.1 trillion) by September, up 9 percent year-on-year, compared with a growth rate of 7.8 percent at the end of June.

Chinese consumers expect decent returns on savings, especially when the inflation rate tops 2 percent. But, with the interest rate on one-year deposits being what it is, they are pondering their next move.

More so because the average return on wealth management products fell recently. But financial regulators felt the rapid expansion of shadow banking activities was risky and undesirable, so they reined them in. Consequently, wealth management projects' annualized interest rates declined from around 5 percent last year to 4.3 percent, the lowest level in 18 months.

As a large portion of Chinese households' wealth was locked up in the property market, consumption could not grow faster. Even per-capita income is growing at a steady, not heady, rate. On the other hand, high property prices have pushed up the leverage level in the household sector.

"The sharply rising spending on houses, due to the rising house prices, overdrew Chinese consumers' ability, pushing them to borrow short-term consumption loans to sustain a high-quality lifestyle", the People's Bank of China said in a report that explained the trend.

The PBOC report showed that the leverage level of China's household sector, or the outstanding debt-to-GDP ratio, stood at 49 percent by 2017, lower than the average level of 62.1 percent globally, but higher than 39.8 percent in the emerging markets.

The Ministry of Finance has announced further cuts to individual income tax from next year. It has already raised the tax threshold to 5,000 yuan in monthly income from 3,500 yuan.