Daniel Zhang: Watching stocks and doing bonds → Stock-bond reversal - Residents' deposits moving "Three Arrows"

Core Viewpoint

The "saving" and "spending" of Chinese residents' deposits is the core macroeconomic contradiction in recent years—determining the economic cycle, monetary policy, and the relationship between stocks and bonds, which we refer to as the "three arrows." Regarding the relationship of the core indicators of the "three arrows," as long as the trend of residents moving from "excessive saving" to "normal saving" to "spending" does not reverse, we can basically judge that—the worst of the current cycle is passing, the most accommodative monetary policy is passing, and the relative cost-effectiveness of bonds compared to stocks is also passing. Perhaps looking back after some time, this year will be seen as the turning point for major asset classes, where "turning points" often gradually form a consensus over a period.

We believe that in the near future, it is highly likely that there will only be stocks performing like bonds, without a dual bull market for stocks and bonds. Behind the three arrows, we have the following core progressive thinking logic:

1. Residents' deposits are undergoing a change from "excessive saving" to "normal saving" and then to "spending." As long as residents end "excessive saving," whether the money goes to consumption or financial investment, it will improve the economic cycle. Although we still need to expect upward elasticity in the economic cycle and prices, the worst times have passed.

2. The "spending" and shifting of residents' deposits have a pulse-like nature, which may be unstable initially and is likely to lead to unusual movements in non-bank deposits.

3. As "under-allocated" funds, the unusual movements in non-bank deposits could quickly drive up asset prices.

4. From the perspective of policymakers, the faster asset prices rise, the more the financial regulatory authorities have a certain instinct to hedge under the policy requirements of preventing fund idling and promoting the real economy. The smoother the "spending" of residents' deposits, the more difficult it is for monetary policy to tighten or loosen.

5. In 2024, the returns of major asset institutions such as wealth management subsidiaries and insurance will be supported by a bond bull market. In 2025, when the space for further significant declines in bond yields is limited, wealth management subsidiaries and insurance institutions may have the momentum to switch allocations between stocks and bonds to meet their liability-side KPIs.

6. We note that the core indicators of cost-effectiveness and allocation attractiveness of stocks compared to bonds have significantly rebounded. Over the past two years, the trading strategy of being long on bonds and short on stocks may be gradually reversing, and it is necessary to start paying attention to the allocation value of equities compared to bonds.

7. We point out that the reversal of the cost-effectiveness of stocks and bonds in this cycle will occur slightly earlier than in previous economic cycles (the rebound in the Sharpe ratio difference between stocks and bonds has appeared before the macro price and profit elasticity have become clear). The core reason is that the intervention of stable market policies in this round of China's capital market has clearly reduced stock volatility in advance, which means that the risk-adjusted returns of stocks have been raised in advance. This key factor must be objectively recognized by investors.

Report Body

In macro research, grasping the changes in major asset classes is extremely important. The changes in major asset classes under different macro backgrounds have different main contradictions. We believe that the main contradiction of major asset classes in 2025 lies in the liquidity of residents' deposits, that is, the transition of residents' deposits from "saving" to "spending."

Deposits have different economic meanings in different sectors. Enterprises are the production sector; deposits in the hands of enterprises will promote improvements in production investment behavior, thus the old M1 (M0 + unit demand deposits) is a leading indicator of the year-on-year change in PPI and the year-on-year change in industrial product inventory Non-bank institutions are part of the financial sector, and deposits held by non-bank financial institutions indicate a state of "under-allocation" in the non-bank sector, so the growth of new deposits in non-bank institutions is consistent with the financial trends in the equity market; the government is the distribution adjustment department, and deposits in the hands of the government affect its ability to adjust and redistribute; the above three sectors will gradually transfer deposits to the household sector in the economic cycle, where households are the surplus sector. The more deposits accumulate in the hands of households, the more it indicates that households are unwilling to convert current income into intertemporal spending, which means that in the future, the above three sectors will face a dilemma of scarce disposable funds, naturally affecting the efficiency of subsequent economic operations.

From June 2022 to August 2024, the proportion of new household deposits to new M2 has been rising, even surpassing the peak during the subprime mortgage crisis. This indicates that household deposits continue to be in a "saving" state. After September 2024, the proportion of new household deposits to new M2 began to trend downward, indicating that household deposits are entering a "spending" phase.

The change of household deposits from "saving" to "spending" will naturally affect our judgment of macroeconomic logic. Therefore, in December 2024, we released a report titled "Sitting on the 'Volcano' of Household Deposits," alerting the market that due to the "asset shortage" in recent years, households have formed approximately 40 trillion yuan in precautionary deposits. Once household risk appetite recovers, the release of this force will likely dominate the main contradictions in the macro economy. Starting in 2025, based on the clue of household deposits as a "volcano," we will gradually form a series of judgments from the economy to monetary policy, and then to the relationship between stocks and bonds. Here, we have organized our thought process to share and discuss with investors.

I. The "Saving" and "Spending" of Household Deposits, the "Weak" and "Strong" of Economic Circulation

First, in conjunction with the opening discussion, the "saving" and "spending" of household deposits are the most important factors affecting economic circulation. After the pandemic, household deposits continued to grow. From 2016 to 2019, the compound annual growth rate of household deposit stock was about 10.5%, and from 2022 to 2024, the compound annual growth rate of household deposits was about 13.9%. Against the backdrop of stable income growth, the significant increase in household deposit growth naturally means that households have reduced their spending scale. Further research in our report "Sitting on the 'Volcano' of Household Deposits" found that the growth of household deposits is not due to reduced consumption, but rather a reduction in investment spending against the backdrop of weakening housing prices, stock prices, and PPI prices. Therefore, we define this portion of deposits as defensive deposits of households.

The high level of defensive deposits among households is a drag on economic operations. In November 2023, our report "Government Leverage Equals Loose Monetary Policy; Private Leverage is the Expansion of Credit" first proposed the indicator of [the scissors gap of corporate and household deposits]. We believe that when enterprises pay wages or dividends to households, households use that income for investment or consumption If the growth rate of corporate deposits exceeds that of household deposits, it indicates an improvement in the willingness of households to invest and consume, leading to a flow of funds into enterprises and promoting corporate production and investment; however, if the growth rate of corporate deposits falls behind that of household deposits, it means that households are reducing their investment and consumption expenditures, resulting in funds being stagnant in household deposit accounts, which reduces the inflow of funds to enterprises and naturally impacts production and investment activities. Historically, this indicator leads the PMI by about six months and leads the profits of listed companies by about a year, making it an important leading indicator for assessing economic operations. From this perspective, the weak economic cycle over the past two years is precisely due to households accumulating excessive defensive deposits. Funds that should have flowed into enterprises through investment (such as buying houses and investing in the primary market) have been trapped in household deposit accounts, leading to a continued weak economic cycle and a persistently low velocity of money circulation.

The change in 2025 is that the trend of households accumulating defensive deposits seems to have reversed. With the establishment of top-down expectations for "stabilizing asset prices," we have seen the [scissors gap between corporate and household deposits] continuously improve since September 2024, with rising asset prices prompting households to spend their deposits, suggesting that the most pessimistic period for the economic cycle may have passed. As long as households end "excessive saving," whether the money goes to consumption or financial investment, it will improve the economic cycle. Although we still need to expect upward elasticity in the economic cycle and prices, the worst is over.

II. The "Saving" and "Spending" of Household Deposits, and the "Loose" and "Tight" Monetary Policy

Secondly, we find that the "saving" and "spending" of household deposits can influence the attitude of monetary policy. In January 2025, our report "How to Assess the 'Timing' of Monetary Policy" and our March report "The Relocation of Household Deposits and the 'Seesaw' of Central Bank Easing" discussed this logic.

During the accumulation period of household precautionary deposits, household income is more converted into precautionary deposits and less used for consumption and investment activities. If households do not consume or invest, corporate profits and financing scales will inevitably decrease, which will affect their investment and purchasing behaviors, thereby dragging down economic growth. In this context, in order to stabilize economic growth, the necessity for the central bank to increase monetary supply strengthens. The monetary policy orientation becomes moderately loose, stimulating corporate financing by lowering policy interest rates, thereby supporting the real economy and stabilizing financial asset prices;

During the release period of household precautionary deposits, household current income is less converted into deposits and more used for consumption and investment activities. At this time, as households increase consumption and investment, corporate profits or financing scales are expected to rise, leading to increased activity in investment and purchasing behaviors driven by profits, which boosts economic growth and objectively reduces the necessity for central bank easing. Especially if the funds from the relocation of household deposits excessively flow into non-bank institutions, the accumulation of funds in non-bank institutions means that there is serious fund idling. At this time, the central bank will further suppress the decline in funding rates, as excessively low funding rates can lead to leverage, and high leverage can easily inflate asset price bubbles Accumulating systemic risks.

The change in 2025 is that, as residents shift their deposits from "saving" to "spending," the scale of corporate and non-bank deposits continues to rise, profit expectations gradually improve, and the necessity for further monetary easing by the central bank objectively decreases. In the first quarter, driven by the Deepseek main line, the equity market showed an upward trend, during which we observed interbank interest rates continuing to rise, which seems to validate our aforementioned logic. The reason for the relatively loose interbank interest rates in the second quarter is that the current round of resident deposit migration is mainly driven by policy, so in the context of tariff disturbances + the lack of a main line in the equity market in the second quarter, the central bank increased monetary supply to stabilize confidence in the capital market. We understand that once a new trading main line forms in the equity market, interbank interest rates may trend upward again. Overall, in the context of resident deposits beginning to migrate, for the central bank, adjusting the structure of currency held by different sectors (developing direct financing) may be more important than increasing the total monetary supply.

III. The "Saving" and "Spending" of Resident Deposits, the "Same" and "Opposite" of Stock and Bond Relationships

Third, the "saving" and "spending" of resident deposits will affect our judgment on whether to expect a "bull market in both stocks and bonds" or "favor stocks while doing bonds." Our June 2025 report "Favor Stocks While Doing Bonds, Not Favor Bonds While Doing Stocks" focuses on the discussion of stock and bond relationships.

When the "spending" of resident deposits is the main contradiction of liquidity, the major logic of stock and bond trading is the seesaw effect brought by favoring stocks while doing bonds—stocks express risk appetite ➡ risk appetite drives resident deposit migration ➡ resident deposit migration drives non-bank deposits to increase ➡ non-bank deposits have impulsive characteristics ➡ the central bank is vigilant against empty circulation ➡ interbank funds become tight ➡ bonds decline;

When the central bank's monetary easing is the main contradiction of liquidity, the major logic of stock and bond trading is the bull market in both stocks and bonds brought by favoring bonds while doing stocks—significant monetary easing by the central bank ➡ ample interbank liquidity leads to an increase in non-bank deposits ➡ risk-free interest rates decline + non-bank deposits increase ➡ stock valuations and incremental funds double hit, bonds rise in tandem with the easing of funding rates.

2025 is characterized by liquidity easing dominated by the "spending" of resident deposits. Combining our judgment of the "spending" of resident deposits with the "seesaw" of the central bank's monetary policy, we believe that favoring stocks while doing bonds is the main logic at present, and a bull market in both stocks and bonds may only be a small phase. Stocks breaking upward express risk appetite, while bonds are likely to be under pressure; stocks breaking downward express risk appetite, while bonds are likely to rise; when the stock market trend is unclear and presents low-volatility oscillation in a range, bonds also oscillate in a range. At this time, stocks and bonds may follow some high-frequency liquidity operations of the central bank, potentially forming a bull market in both stocks and bonds in a relatively short cycle dimension (weekly, ten-day) So in the context of looking at stocks as bonds, which is the better asset, stocks or bonds? Based on our report from July 2025, "The Value of Allocating to Chinese Stocks Has Opened Up," we believe that in 2025, the allocation value of stocks compared to bonds should be emphasized.

The quality of an asset is not only determined by its absolute return but also by its volatility and drawdown, that is, the Sharpe ratio of the asset. The Sharpe ratio is an indicator that measures the excess return obtained for each unit of risk taken. From 2022 to 2024, bonds were a more cost-effective asset compared to stocks. The underlying reason is that under the pessimistic expectations of "demand contraction, supply shocks, and weakening expectations," the drawdown and volatility of stocks were significantly larger, leading to a noticeable decline in their Sharpe ratio compared to bonds. The change in 2025 is that the cost-effectiveness of stocks compared to bonds has significantly increased. Under the policy tone of "stabilizing the stock market," policies have actively shared the risks of stock assets, limiting the downward expression of risks in the stock market, and greatly reducing the downside volatility and drawdown of stocks, thereby driving the Sharpe ratio of stocks to rise rapidly compared to bonds.

It is particularly noteworthy that since 2025, the difference in Sharpe ratios between stocks and bonds has diverged significantly from the price trends of stocks and bonds over a decade, indicating that the cost-effectiveness and allocation attractiveness of stocks compared to bonds have significantly rebounded, but the price response of stocks and bonds has lagged. Considering the macro conditions (the gradual desensitization of the China-U.S. economic and trade game, stable global demand, significant alleviation of macro risks in China, the imminent release of the main line of the 14th Five-Year Plan, and marginal support for supply-demand balance against involution), it is necessary to start emphasizing the allocation value of equities compared to bonds.

Authors of this article: Zhang Yu, Wen Ruoyu, Source: Yi Yu Zhong De, Original title: "Zhang Yu: Looking at Stocks as Bonds → Stock-Bond Reversal - Research Context of 'Three Arrows' for Household Deposit Migration"

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