China should channel its high level of savings from banks to the stock market

China should channel its high level of savings from banks to the stock market in order to avoid risks to the financial system and further develop capital markets, according to central bank adviser Li Daokui.

"Savings Bank of China remain at a very high level," Li said in an interview with the overseas edition of People's Daily. "There may be potential risks for banks and the nation's entire financial system if it fails to be a large number of withdrawals at once."

When asked where the capital should be transferred to, he said, "China must develop capital markets and expand the stock market. Through the expansion of the stock market, which gradually can channel the money out . He also said that China should allow more funds to be invested abroad.

Household deposits in the nation rose the most in seven months in September, even after acceleration in inflation reduces the negative real returns for savers. Stock investors opened accounts with less stock trading last week as the benchmark index fell 5.3 percent in November on concern government efforts to control inflation hurt earnings.

Consumer prices rose 4.4 percent in October, the fastest in two years, exceeding the target for the year the government 3 percent. The central bank on Oct. 19 raised interest rates for the first time since 2007, with a benchmark interest rate a year increase in quarter-percentage point to 5.56 percent and the deposit rate by the same amount to 2.5 percent.

Negative income

"Investors are trying to guarantee profits or at least maintain the value of their money," said Shen Nan, a strategist at Changjiang Securities Co. in Shanghai. "The negative deposit rate due to inflation and restricted property investment causes the stock market an important channel for investors seeking returns on capital."

terms of saving the nation stood at 54 percent of gross domestic product in 2008, the highest among major economies, according to data compiled by the World Bank. Only Libya, Kuwait and Azerbaijan superior.

Household deposits increased 1.04 trillion yuan ($ 156 million) in September, the biggest gain in seven months, to 29.9 trillion yuan. China's current savings exceeded the combined gross domestic product of Brazil, India and Russia.

Saving money has been a culture for the Chinese since the government dismantled the iron circle of rice called job security for life after the economic reforms in the 1990's.

China Ratings

Even with the fall of last month, the Shanghai Composite Index has rebounded 21 percent since reaching this year under the 5 July on expectations central banks worldwide will inject more money into their economies to boost growth.

The measure trades at 18.5 times reported earnings and offers a dividend yield of 1.45, compared with a price-earnings ratio of 15.1 and dividend yield of 1.9 per 500 for Standard and Poor's.

Investors opened 388,107 accounts during the week ended Nov. 26, down from 436,396 the previous week accounts. Individual investors comprise 99 percent of the accounts of the trading nation of 150 million.

Increase in Chinese real estate prices have led analysts like former Morgan Stanley economist Andy Xie to call the markets of the nation's asset bubble that will burst once the government credit curbs. China is "in a tape to hell", with growth driven by the "heroine of real estate development, fund manager James Chanos coverage, said in April.

As a central bank adviser, Li concern is the financial stability rather than profits for investors. He said in October that China would accept a U.S. proposal setting targets for the current account, a view that is contradicted days later by the government. Li said last month that China may consider selling U.S. Treasury bonds as compensation for losses caused by the decision of the Federal Reserve purchase of $ 600 billion of bonds to pump money into the U.S. economy.