People's Bank of China statistics for the first half of 2013 show that RMB deposits reached 100.91 trillion yuan (US$16.44 trillion), breaking the hundred trillion mark for the first time.

Under normal conditions, the figure would be indicative of robust economic health; but in the current economic situation, where many businesses are experiencing difficulties, it is a definite red flag.

Banks' main source of income is the difference between the interest paid for savings and the interest earned for outstanding loans. As a result, the increased level of deposits at a time of economic uncertainty puts more strain on banks, as they will incur losses if they fail to distribute the money through loans in a timely fashion.

The problem is that banks are not willing to lend money to enterprises operating in the real economy at a time when the real economy is underperforming and has a high loan risk. In such conditions, banks will prioritize loans to government financing vehicles and large enterprises and inject money into them through various channels. This analysis is borne out by the large number of under-construction or newly-built communal facilities, such as subways.

The real economy will be hit increasingly hard by this unbalanced credit resource allocation.

Another inherent risk which comes with banks distributing capital through various, non-standard channels is that of inflation. It has long been said that bank deposits are like a caged tiger and may trigger high inflation unless appropriate measures are taken.

To date, thanks to the country's rapid economic development and high employment, inflation is under control and rising bank deposits have not seriously impacted economic and social development or people's daily life. But, what kind of impact could it have during much tougher economic times?

It is also worth noting that household saving deposits reached 44.17 trillion yuan (US$7.195 trillion), which accounts for almost 50 percent of total deposits. Per capital savings reached 34,000 yuan (US$ 5,539) and unless an effective investment channel can be found for them, such high levels of deposits represent a genuine risk.

In an apropos comment on the current situation, renowned economist Lin Yifu said: "The poor deposit their money in banks, which is actually subsiding the rich.” I won't comment on this, as I have not fully investigated it. What is certain, though, is that people are lacking sufficient investment channels and their savings could depreciate under heavy inflationary pressure. Such a situation will obviously do nothing for social stability and harmony.

Another problem with bank deposits is that they are, in large part, comprised of money which has been temporarily transferred from other sources such as financial products and stocks. Deposits made by enterprises include a high proportion of non-regular deposits, including derived deposit and deposit reserve. These deposits are illusory and could lead to serious problems unless banking regulations are changed to address them.

The fact that deposits have exceeded 100 trillion yuan is a sign of both economic improvement and that people's living standard has improved. The risk comes when we only reflect on the success of this phenomenon and fail to consider the potential dangers.

Strictly speaking, taking into account the figures detailing China's economic development and people's income, the country's banking system is not capable of exceeding 100 trillion yuan in deposits. The situation is extremely risky and could result in a crisis if the lack of investment channels negatively impacts on China's economic and social development.

The author is a news commentator.

This article was translated by Lu Na. The original unabridged version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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