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The sharpest monthly decline in the country's household bank deposits sends a mixed signal that policymakers should read carefully to better steer the economy.

Household deposits declined by 278.4 billion yuan ($36.2 billion) in May. This was 67 percent greater than the decline of 167.4 billion yuan ($21.8 billion) in April, according to figures released on Tuesday by the People's Bank of China, the central bank.

The background against which China's household deposits have dropped for two consecutive months includes both the ongoing bull market and accelerated consumption.

If diminishing household deposits are mainly a result of Chinese switching from saving to investing in the capital market, policymakers may need to consider measures to reverse the trend.

In spite of the authorities' repeated warnings and efforts to prevent asset bubbles, China's stock market soared more than 60 percent in the first five months of the year, on top of the 130 percent rise in 2006.

Related readings:  Household deposits post biggest monthly drop  Broad measure of money supply falls 16.7%  Inflation hits 27-month high with CPI up 3.4%  Retail sales post fastest growth in 3 years

Meanwhile, individual investors have been opening stock trading accounts by the hundreds of thousands every day, bringing the total number to more than 100 million.

Though a triple hike in the stock stamp tax at the end of last month briefly slowed the market, the recent strong rebound shows that the public's rapidly developed passion for equities is far from over.

Hence, to stop Chinese households from channeling more deposits into the market, the authorities need to speed up efforts to create more investment opportunities.

A hike in the interest rate may be necessary given the country's rising inflation, a factor making bank deposits increasingly unattractive. But it can do little to persuade individual investors away from the red-hot stock market.

However, if the current drop in household deposits is largely related to the country's consumption boom, policymakers should evaluate their measures to boost consumption and focus on the most effective ones.

The latest statistics show that the country's retail sales unexpectedly accelerated at the fastest pace in three years. Last month, retail sales rose 15.9 percent from a year earlier to 715.8 billion yuan ($94 billion) after rising 15.5 percent in April. Its gradual acceleration is crucial to making China's growth balanced and sustainable.

In the absence of clear evidence of a huge wealth effect from the stock market, it seems that the ongoing consumer boom can be a result of raised minimum wages and increased government spending on public welfare. If so, the government should further increase expenditures on public welfare.