China's consumers and companies are tying up trillions of yuan in longer-dated deposits with banks, effectively taking a vast pool of money out of circulation.

Latest official data shows financial institutions issued 5.5 trillion yuan (US$766.12 billion) worth of long-term deposits known as certificates of deposit (CD) in the first quarter of this year - the largest such quarterly issuance since the product was introduced in 2015.

Domestic investors have rushed into these CDs over the past year in a desperate search for returns as they withdraw from real estate and the stock market, both traditional investment options now looking treacherous because of regulatory and economic problems.

Companies have joined the scramble this year, adding to the drag on China's economy as it effectively means both businesses and households are hoarding cash rather than investing it, despite lower interest rates - a liquidity trap that plagued Japan for years beginning in the 1990s.

"Based on Japan’s experience in the 1990s, there is the risk that China is entering a liquidity trap due to the risks of balance-sheet recession," said Natixis's chief economist for Asia Pacific Alicia Garcia Herrero.

Analysts see the same lack of confidence in today's Chinese households and companies that Japan grappled with in the 1990s. But in China's case there is a key difference; there is no deflationary threat yet, nor have banks switched off lending.

Fan Gang, a prominent economist and former adviser to the central bank, told a forum in June that China faces a liquidity trap but not a Japan-style deflationary morass.

"It's like money falling into a black hole, and that's what we're in right now, demand from companies and households is not vibrant."

China's policymakers have cut rates and encouraged banks to lend more in efforts to revive economic growth after the pandemic.

Yet about 180 domestic A-share companies say in their stock filings that they have invested in CDs this year.

China has a long history of savings rates being high - according to World Bank estimates the savings rate to GDP is the highest among large economies.

Total household deposits were at a record 132.2 trillion yuan ($18.41 trillion), equivalent to more than 30 months of retail sales, at the end of June, and up by 12 trillion yuan in the first half of this year - the biggest increase in a decade.

Certificates of deposit (CDs) are issued by banks and considered one of the safest savings options, with yields of 3-year CDS usually hovering around 3%, higher than those on bank demand deposits.

"With few signs of a recovery in the property sector and an uncertain job outlook, the accumulation of household deposits suggests widespread pessimism among households," said Betty Wang, senior China economist at ANZ. (Reuters)