Cover Story: Where Best to Invest in China’s Low-Interest-Rate Era

[para. 1] Li Zhen was surprised when she went to renew her 50,000 yuan fixed deposit as the interest rate had dropped from 4.2% in 2020 to around 1.6% in large state-owned banks. [para. 2] Finding viable investment alternatives has been challenging, with most wealth management products and money market funds offering returns below 2%. [para. 3] Many Chinese residents, like Li, are facing difficulties in deciding where to invest their money due to historically low interest rates, pushing them to seek alternative investment strategies. [para. 4] China's economy is under pressure from low domestic consumption and external uncertainties, leading policymakers to adopt looser monetary policies, resulting in a downward trend in interest rates.

[para. 5] Generally considered the "price of money," interest rates affect consumption, borrowing, and investment costs, making lower rates beneficial for market participants. [para. 6] China’s interest rate system has three levels: policy interest rate directly controlled by the central bank, market benchmark rate influencing asset pricing, and market interest rates faced by consumers and businesses daily. In 2024, the central bank signaled an easing cycle with rate cuts totaling 30 basis points. [para. 7] This trend marks a shift in China's interest rates, reminiscent of the low-rate periods experienced by other major economies after growth.

[para. 8] Low interest rates are expected to persist, necessitating strategic adjustments for individuals and financial institutions. [para. 9] The stock market's decline since 2022 has resulted in losses for investors, increasing their preference for safer, stable-return assets. [para. 10] Financial institutions face challenges like narrower margins and increased competition, with shifts in market preference from money market funds to bond funds, though high returns are tough to achieve. [para. 11] In 2024, to stimulate the economy, benchmark interest rates were cut thrice, leading to drops in yields on savings and investment products.

[para. 12] Investors are seeking higher yields abroad, with U.S. dollar-denominated options gaining popularity amidst exchange rate risks. For example, U.S. dollar deposits in Hong Kong offer rates of 3.4% to 4.5%, according to China Merchants Bank's data. [para. 13] Haitong Securities reported that as rates decline, investors typically pivot toward liquid, safe assets, boosting allocations to cash and deposits. [para. 14] Analysts suggest individual investors consider U.S. dollar products, high-dividend stocks, and gold in China's low-rate environment. [para. 15][para. 17] By the end of 2024, China's mutual fund assets totaled 31.94 trillion yuan, with money market funds losing appeal due to low yields.

[para. 19] Mutual funds have increased their bond investments amidst China's economic sluggishness, with government bonds becoming attractive due to their safety, resulting in a rally in the bond market. [para. 20] Bond yields dropped, marking lows since 2002. [para. 23] Investors are increasingly looking overseas for better returns, mainly investing through the QDII program, with quotas controlled by the State Administration of Foreign Exchange. [para. 24] Mutual recognition funds, popular for their lack of quota restrictions, saw net sales volume in mainland China reach 36.6 billion yuan by September.

[para. 27][para. 29] China's banking sector is facing an era of low rates, margins, and profitability, prompting strategies to lower risk, cut costs, and enhance non-interest income. Banks are seeking higher-yield assets and boosting loans to the real economy. [para. 31] Consolidation among smaller banks is suggested to tackle economic challenges. [para. 32][para. 33] Declines in rates pose significant challenges to the insurance industry, prompting strategies like increased investments in long-term government bonds and enhancing global asset allocations. However, the lack of suitable bonds and limitation of under 2% overseas investments present difficulties.