Unit 4 Macro: Savings and Investment in China

Saving is the difference between income and consumption. In countries such as China and India, the national savings rate is high in contrast to developed economies.

Chinese savings measured as a share of GDP surged from 37% in 2000 to 53% in 2008 before falling back a little in 2009. What accounts for the high rate of saving?

1. The relative absence of a generous welfare system – the lack of a state-funded safety net encourages a high proportion of precautionary savings. Job insecurity is lower especially in centres of urban manufacturing; access to affordable health care is low. Most of the many millions of Chinese migrants living in urban areas are not enrolled in pension programmes or social security schemes

2. Social and cultural norms driving saving within families – there are strong motives within households to save especially for the cost of educating children which is given high priority

3. Pension reforms – the Chinese government introduced reforms of pensions from 1997 onwards which has forced people to make increased contributions

4. Housing reforms – most state-owned firms in China no longer provide housing for employees. There is incentive to save in provident funds as a means of acquiring home ownership

5. Relatively under-developed personal finance industries – until recently it has been much easier to borrow in the form of consumer credit in developed countries including the UK and the USA. The same is not true in China and India.

6. Demographics – partly as a result of the effects of the one-child policy, the youth-dependency ratio in China has fallen sharply and there is a bulge (for the time being) in the size of the population of lower to middle age. This is a generation, according to the life cycle hypothesis, that tends to save more as a percentage of their disposable income

7. Low dividend payments by Chinese businesses – many firms are highly profitable as a result of their success in exporting. They pay low dividends and retain a large % of earnings. Thus the rise in Chinese corporate savings has added much to the national savings rate as a % of GDP

Savings as a buffer stock:

High saving levels in China have helped to finance strong growth, with low inflation and the buffer of savings has helped these countries adjust to adverse external shocks such as the Global Financial Crisis. The Chinese Government was able to launch a huge fiscal stimulus programme in 2008-09. A rising saving rate also implies a falling consumption share in GDP and hence encourages a highly investment-intensive domestic demand structure. Over the past 10 years, China’s private consumption declined from 47% of GDP to 36%, the lowest among the world’s major economies. They want this to rise

There is now strong pressure from within China to rebalance her economy and rely more on domestic demand (C+I+G) as a source of growth rather than capital investment and exports

With savings in excess of 50% of GDP and investment close to 40% of GDP, the surplus of savings over investment implies that the Chinese economy is running a large current account surplus because standard economic accounting means that surplus savings have to be exported. The last time that Chinese capital investment exceeded national savings was in 1993-94, and during that time China ran a current account deficit. A falling savings rate would indicate China would not be so highly dependent on investment and export growth – it would suggest that domestic consumption was rising in China and so too would imports from other countries – so could a lower savings rate be an important instrument of re-balancing?

What policy measures might help to bring this about?