Even though in a recent PBoC posting Governor Zhou himself discussed the importance of culture as an explanation of high Chinese savings, I am not comfortable with this as an explanation. Savings rates have varied very much within individual cultures over time, and the Chinese have not exempted themselves from this variation. Although there may very well be such a thing as a cultural predisposition towards savings — after all I think Asian-American households tend to have, on average, higher savings rates than other American households — cultural explanations are fairly muddled when it comes to predictions. For example fifty years ago it was widely understood that the very Confucianism that today supposedly fosters high savings rates nonetheless was the cause of the deep and persistent poverty that characterized east Asian countries at the time.
Using the framework developed in Max Weber’s The Protestant Ethic and the Spirit of Capitalism, in which Weber argued that religion and social customs at least partially explain why various countries in the West and elsewhere had experienced very different levels of economic development, sociologists and many economists argued that unlike the particular characteristics of European and North American Protestantism which set the stage for the development of the institutions that would lead to capitalist processes of wealth creation, Confucian notions of family, morality and prestige made the systematic creation of wealth through business and technological innovation almost impossible in east Asia. They argued that Confucian spending patterns, especially regarding ancestor worship, also made it difficult for Chinese households to accumulate sufficient wealth to fund capitalist enterprises.
And yet thirty years later, when the economic success of Japan and the Asian Tigers seemed unstoppable, sociologists had no difficulty in arguing that it was precisely their Confucian characteristics, and how these were reflected in the creation of family businesses and cooperative government, financial and business structures, that explained Asian success (at least until the 1997-98 crisis, when the old arguments, about how difficult it was for Confucian cultures ever to succeed economically beyond some minimum level, made a temporary resurgence). Even ancestor worship was forgotten as a cause of the systematic misallocation of savings. Confucianism as an explanation for Asian development, in other words, turned out to be a little too flexible to be useful, since it could with equal vigor explain both the inevitability of Asia’s failure to develop as well the inevitability of Asia’s success.
Demographic causes
-
Declining dependency ratios, especially via decline in the number of young people. From the mid-1970s to roughly the middle of the next decade we know that China’s dependency ratio has contracted sharply. A much larger share of the population is of working age today than thirty years ago. Besides being a great source of rapid growth, I think this fact creates a bias towards savings since I think of working population as a proxy for production and total population as a proxy for consumption. This means that with China’s working population growing so much faster than total population (a process which will be reversed over the next three or four decades) Chinese production has grown much faster than Chinese consumption. The difference, of course, is the savings rate.
Structural causes
-
Lack of social safety net. With a risky health care system, no social safety net, and limited ability to borrow, Chinese households have to self-insure. This means they save on average much more than they need on average to cover these costs.
-
Rapid growth in wealth. When per capita wealth grows very quickly, it may take a while for people to change their consumption behavior as quickly, so growth in consumption lags growth in wealth. Of course the difference between the two is the rising savings rate.
-
The generation of “little emperors.” I have heard not-always-satisfactory arguments that households save a huge amount because of the one-child policy — they are essentially spoiled, the argument goes, and parents will sharply limit their own consumption in order to provide everything for their only child. I am ambivalent about this explanation, but I do think the maturing of the one-child generations may have an impact on future savings. They are much more likely, it seems to me, to spend money on themselves, although this argument may be a little too glib.
-
Lack of consumer credit. Without easy availability of consumer credit, households who want to borrow to purchase big-ticket items have little choice but to save today for a future purchases.
-
Low exchange rates. The reasoning and causality are unclear, but there is evidence that countries with artificially low exchange rates tend to have high savings rates, perhaps because low exchange rates reduce real wages.
-
Low interest rates. We also have a lot of evidence that low interest rates create higher savings rates in countries like China. This claim generates a lot of confusion, and I am often asked how this can possibly be true when the opposite is true in the West. My guess is that it occurs because of both portfolio effects and income effects. For the former, because Chinese don’t save in the form of stocks, bonds and real state, but rather in the form of bank deposits, declining interest rates do not increase the value of their savings portfolio, but actually reduces it. This is why reducing interest rates causes savings in the West to decline (Westerners feel richer) whereas it causes savings to increase in China (Chinese feel poorer). For the latter effects, with interest income such a large part of total income, low interest rates are similar to low wage rates in their impact on consumption.
-
Policies aimed at running trade surpluses. This is generally a catch-all and must be true by definition. A trade surplus occurs when production exceeds consumption, so any policy aimed at growing production faster than consumption is also implicitly aimed at raising the savings share of income.
-
Policies aimed at running fiscal surpluses. Of course this contributes by creating government savings.
-
Policies aimed at forcing profitability in SOEs via interest rates and other policies. Another catch-all for policies that drive up corporate savings.
[...] Read the rest of this great post here [...]
Mike,
One should not only look at the saving rate in China, but also the saving rates in rest of East Asia or even the Asians in US and EU. If Asians have the similar saving rates across the board, then many of your reasons would rather be false.
Another item you might consider is differences in ideas about the definition of “saving.” Many of the comments I read seem to imply that “saving” means only cash saving. However, many people in the US think that obtaining fixed or very long lived assets is a form of “saving.” Prime examples are purchase of a house or property or permanent improvements to land.
If I am renting and then plunk down a lot of money to purchase a home hat over the long term will reduce my net housing expenditure and provide a capital asset that I can sell in the future (e. g. to fund retirement or childrens education) is that defined as: A) consumption, B) investment; or C) savings. If I own a farm and make permanent or long lived improvements that increase the value of my property is that savings, consumption, or investment?
I think that on average, attitudes on this subject may be significantly different in China versus the US. Many people I know do not like to keep a lot of savings in cash because of effects of inflation and taxes.
The same could be said for governments. If the government of China were to take (borrow) the net cash savings of individuals and businesses and spend them on permanent improvements to the country that benefit the people would that be saving (negative), investment, or consumption?
The wide wealth gap is another reason for “high saving rate”. The wealthy Chinese really have no way to spend majority of their money. When you have billions coming in a year, you can’t help but to have a huge bank account or investment portfolio, while those living close to or under the poverty line will have zero balance, or less. Since majority of wealth are in the hands of the wealthy, and majority of which are staying put or channeled to savings/investment, you have a high proportion of income in savings, in average.
While I was also thinking abt high saving rate in China. after reading this. i also agree that the high saving rate is more structural. Although personally i still think that the popular of Confusion Culture in China will prevent China from negative saving rate like US. Thanks for your comprehensive discussion.
For demographic causes, I don’t know how the dependency ratio really affect the saving rate without seeing statistics in other countries. I think the better argument is the generation model. Just as people who lived through the Great Depression (a crisis) feel higher insecurity and tends to save more, middle age Chinese who lived through the cultural revolution (a crisis) would exhibit the same tendencies.
I think the “Rapid growth in Wealth” is the another (or the same) reason for high saving rate in China. If you are used to a low standard of living, you don’t necessary feel much of an urge attain a higher level. There’s also the community effect, if none of your friends having a more comfortable life style, you won’t get jealous and strive for more.
Inequity also increases the saving rates in indirect ways. Low local wages provide heighten level of consumption at low cost for the urban population. For example, would you find $80US (Y550) an hour auto mechanic in China?
These are a couple of other issues that I think could be playing a major role in the high Chinese savings rates.
The 1 for 4 Policy combined with lack of a retirement system (Social Security or pension):
I believe that the one child policy greatly affects the savings rates of Chinese. China is lacking the retirement savings plans that are abundant in the West. Instead, historically when a Chinese couple gets older and stops working they have been taken care of by their children (specifically their son’s and their wives) and this was not an issue because they had many kids who could share this responsibility. However, the one child policy means that one child will have to take care of two parents and two grandparents (1 for 4) in their old age. This is even worse if the couple has a girl, since it is custom that she take care of her husbands family.
I believe that Chinese high savings rates have always been largely a result of uncertainty in retirement. Yet, while the lack of pension or social security benefits has always been a factor of high savings rates, I believe that the relatively new one child policy makes it more important now than ever for Chinese to save.
Healthcare:
As you mentioned, I believe the Chinese healthcare system (or lack there of) is a major contributing factor to China’s high savings rates. Just consider these facts:
o The Chinese government only shoulders 20% of healthcare costs.
o Since 1985, healthcare costs per capita have on avg. increased 10% faster than CPI.
o Cost of avg. hospital stay is around 30% of urban and 90% of rural annual incomes.
o Hospitals can charge a 15% margin on medicine, which has lead to over subscription of meds. In some cases drug sales account for 50% of hospitals’ total revenue.
If this was the case in the US, I would be saving too.
Lack of Asset Appreciation:
Not as sure about this one but:
Chinese lack of land ownership could be a big reason for the high savings rates. In the West high consumption rates (i.e. low savings rates) were largely a result of real estate appreciation. Lack of land ownership could also hinder China from moving to a consumption society in the future.
P.S. I have never been to China, although I have done a good amount of research, so this is admittedly an outsider’s view and might be off base.
My understanding, via Brad Setser’s blog, is that the wage share of national income in China has fallen over the last decade from 50% to 40%, and that household savings rate has not changed significantly. That would point to policy changes, I think.
As to why household savings is consistently high relative to other countries, I would lean toward a credit availability explanation. We are seeing a great natural experiment in just that in the US right now.
Link here:
http://blogs.cfr.org/setser/2008/11/26/if-you-only-read-one-thing-on-china-this-fall-%E2%80%A6/
Mike:
It is easy to conjecture about answers to the very interesting question you raise. There may be some truth in all those you suggest. The key issue is which is the most important. To discover what is distinctive about the savings habits of savers in China (or is it Asia?) I think you will need to look more widely around the world.
First, as a general principle, the empirical evidence suggests that household savings tend to rise in line with fast economic growth. Look what happened in India after growth took off in 2004. I am told that Calla Wiemer has brought together a number of studies showing that this relationship holds true in many emerging economies. I think China is not far out line with other NIEs.
Second. I am unsure of the basis for the widespread assertion (now practically the conventional wisdom) that weak or non-existent social safety nets produce high household savings and, conversely, that more of the former will encourage less of the latter. Has this supposed linkage ever actually been tested and proved conclusively to be correct? If so, by whom and in which countries? Or is it mostly hypothesis.
Third, some of the world’s biggest, richest and most advanced economies, with extensive social security systems, also have high household savings. Germany is one. Japan another, at least until the ravages of deflation started forcing households to run down savings to finance their budgets. France also has a high household savings rate, similar to Germany’s, according to OECD data (worth a look on the website, if you haven’t seen them).
One characteristic these countries have in common is that all have, within living memory, seen their economies and societies devastated by war and the collapse of civil order. In China’s case, of course, it was civil war and the cultural revolution, preceded by half a century of violent warlordism. Pure conjecture, of course, but could it be such events encourage a “precautionary” bias in favour building up nesteggs, just in case the same thing happens again?
Conversely, many of the big spenders – the US, the UK, Australia – have longed enjoyed a sense of security, even invulnerability. Does that reduce the urge to save? Of course, their low/negative savings rates are a relatively recent phenomenon (now rapidly starting to reverse). But the downward trend since the 1980s is undeniable, however one defines savings – an issue you quite rightly highlight.
I don’t think a shortage of options for household spending by China’s affluent city dwellers has anything to do with savings patterns. There are vast opportunities to fritter money away on consumer baubles – just look at the mushrooming in the past few years of upmarket shopping malls and Ferrari and Rolls-Royce dealerships. When Chinese people get wealthy, they love to flaunt it as much as anyone.
Finally, of course, the really big contributors to China’s savings in recent years have not been households but companies, as booming profits have gone untaxed and SoEs spared the bother of paying dividends. Now that profits are coming down with a thud (and government has become a net dissaver) it will be interesting to see what happens to the national savings rate.
Do keep us posted as your project advances – it is really interesting.
Best,
Guy
When does ‘saving’ become the word used for ‘frugal’? Ask any retailer who has multi-ethnic customers: The Chinese customers pay particularly close attention to the receipt for their purchase, and watch closely the moves of the cashier. The Chinese ‘save’ because frugality is a sociological norm, perhaps grounded in Confucius’ regard of spendthrifts as not representing a ‘nobel’ character.
What a great piece! Viewpoints are well rounded and solid with a unique perspective from an excellent economist.
Similarly, I disassociate myself from the argument that culture sows the seed of the high China’s savings rates. In the last 20 years, China has savings rates fluctuating 25 per cent, whilst OECD countries 14.8 per cent and the U.S. less than 0. Zhou (PBoC) publicly claims that the huge contrast of savings rates between China and America attributes to the difference of Eastern and Western culture. However, this is not necessarily the case. Culture itself cannot excellently explain the phenomenon of Japan around March 2007. Japanese genetically has the same culture as China does—husband their resources and capital. Yet, in 2007, Japanese had a fairly lower savings rate and they consumed relatively more. Culture is only an excuse or rhetoric by governors or misperceptions of laypersons of economics. Otherwise, it is hard to understand why from 1950s to 1970s, the China’s savings ratios were merely 5 per cent, almost the same level as western countries’ rates. Of course, Japanese case and Chinese case unfolded here are only two of the cascades of opponent argument against the cultural explanation of Zhou.
I agree with professor’s standpoints. In addition, however, rests on Ricardian model, I boldly assume that citizens’ rationality and anticipation is also a reason that China saves much. Since Chinese governments invest more abroad and spend much more money on, for instance, military modernization, Chinese government expenditures/purchases skyrocket. This may result in the shrink or even government deficit. In order to have sufficient money to finance the future projects planned by government already, government might raise the tax from the people. Scientific and rational citizens such as many of my Chinese friends who study economics have anticipated this potential government behavior (increase in taxes and equivalent effect). Hence, they save a deluge of money in the banking accounts.
Last but not least, concerning savings issue, rookies and students of economics had best refer to some classic theories including Adam Smith’s consumption theory, Milton Friedman’s permanent income hypothesis, and Franco Modigliani’s life-cycle hypothesis.
Surely, theory is merely on paper. In actuality, macroeconomics and microeconomics are much more complicated. It is a long way for me to read, learn, and grasp what did, are, and will post here.
Thank you, Michael!
The elders are saving a lot because of they have to 1) pay their medicals; 2)prepare for their retirement days and 3) to finance their kids’ lifestyle and educations … The “little emperors” generation is indeed living off their parents … and it’s very much considered as “norm” and acceptable by the culture of the society. This new generation is very much part of the rising demend for western/luxuxry goods (they prefer western brands) … the Q is how long this cycle can go on with elders paying for their kids’ consumption?
Prof. Pettis,
I am not sure if you would feel comfortable in doing so or not, but I think that your arguments could be strengthened if you gave an explanation as to the reasons WHY Governor Zhou / other officials have made these claims about “cultural savings”. I am sure many of us have our own opinions on this, but as feedback to your writings so far, I believe it would help.
What do these claims help to explain in terms of past / future policy from the PBOC / government?
Why did Governor Zhou choose the time he did to publish these theories on the PBOC website? (Especially in light of the financial crisis at the time and opposing theories being spoken elsewhere) etc.
I would be very interested to hear your opinions on these matters.
I can tell you why Australia’s savings rate is so low. That might shed some light on why China’s is so high.
Australia is a homeowner society, but houses are very expensive, so people take out large mortgages relative to their income. The deposit requirements are not high (10%), and many people rely on parents, relatives, or government handouts to get a deposit. So people in their 20s are not noticeably frugal UNTIL they take out a mortgage. The population is increasing, and household size is decreasing, so household formation is high (lots of new mortgages). And it’s a stable society, so people don’t plan for disruption.
Marginal tax rates are high, well over 50%. And the top tax rate kicks in at a low level – only $150,000. Bank deposits are taxed at the full rate. But interest on debt is tax-deductible, and capital gains on property and shares are lightly taxed.
How many of these factors apply in China?
The world does not have a saving issue, but instead an over consumption issue. Rather than analyze the reason behind high savings, we should analyze the reason behind NEGATIVE savings. Take the “high” rate of saving in China, Germany, Japan, etc. as the norm, and then the real issue is to explain what causes Americans and Brits to spend so much.
Chinese history is series of wars and uncertainties. Not only culturally saving as a form of self protection, the converse of saving is debt, which is written in Chinese character as a person’s responsibility, is preached.
Debt, as a person’s responsibility, is evolved in the societal complimentary behavior for otherwise the wars and uncertainties would have destroy the Chinese nation and its culture.
I see debt as a behavior can only come from a stable society.
No Name. I think you are missing the interconnectivity of the nations you mention in terms of current and capital account.
The high savings rate countries you mention are the trade surplus countries. Surplus requires a deficit, high savings in 3 countries requires a balancing factor elsewhere. International economics is not a morality play.
Quote: “We also have a lot of evidence that low interest rates create higher savings rates in countries like China.”
Can you provide sources for reference? (i.e. empirical studies)
Quote: “This claim generates a lot of confusion, and I am often asked how this can possibly be true when the opposite is true in the West.”
Is the opposite true in “the West”? As previous commenters have already mentioned, “the West” is far from monolithical, and things observed in the US rarely hold in Germany, France or Italy.
Quote: “Chinese don’t save in the form of stocks, bonds and real state”
They don’t? You are surely aware that buying real estate for investment purposes and playing the stock market are extremely common among upper middle class Chinese, right?
Quote: “This is why reducing interest rates causes savings in the West to decline (Westerners feel richer)”
Maybe Americans feel richer. But the idea that declining interest-rates make you feel richer would be totally alien to “normal” German people (i.e. non-economists).
Quote: “with interest income such a large part of total income, low interest rates are similar to low wage rates in their impact on consumption.”
Is interest income “a large part of total income”? How do you define “large”?
You make a lot of interesting points – thanks for sharing them with the world!
As regards the saving rate and the lack of health insurance (and other social security systems) in China, I found something interesting on the Far Eastern Economic Review blog:
“It’s often asserted that China’s high savings rate is due to households putting aside money for retirement, education and health care emergencies. If only the government would provide a social safety net providing these services, the high savings rate could be dramatically reduced, right? Wrong. In fact, Chinese households do not save all that much – as MIT professor Yasheng Huang has written, China’s household savings rate is lower than India’s. The main sources of the high savings rate are the corporate and government sectors of the economy.”
http://www.feer.com/tales/?p=1624
What’s your take on this?
The personal wealth of the Chinese has had it strongest growth within the last 6 years.
This increase in personal wealth mainly came from a raise in the real estate market. In the early 90s there was very little income to save from and no one really owned their own homes, so the personal cash saving rate was high.
The question is, now that people own their homes and have been given a more legal definition of owning something -are the saving rates going up or down?
I don’t know, but it would seem that the highest % jump in household saving rates was between 1999 and 2000 (From Marcos Chamon/Eswar Prasad. Why Are Saving Rates of Urban Households in China Rising?) just around the time of the structural changes in the SOEs, and then it seems the raise in saving rates flatten out after 2000 with a small increase every year until 2005. This means household saving rates are not rising as fast as before and I would guess that they start going down or flatting out around 2015, because of a change in polities (stimulation of consumption) and the higher numbers of homeowners. The demographics might help too.
It is also worth noticing, that the average Chinese household were contributing less to Gross Domestic Savings as a Percentage of GDP in 2005 then in 1991, while the SOEs were contributing more. This could be a side effect of trade and currencies policies from 2002 and forward.
I don’t think there is any cultural or historical reason for the higher saving rates in Chinese households, this is a matter of policies.
Another thing. How about government officials, SOE managers, entrepreneurs and other rich people who have their doubts about China’s political and social stability and transfer their wealth abroad? Does that count as saving too? (What I mean is what Minxin Pei, in “China’s Trapped Transition”, describes as “new exit options”.)
I think Oliver’s point is related to mine, and the World Bank study. And again, high corporate savings is much harder to square with any cultural explanation.
And No Name, of course, both overly high savings rates and overly low savings rates are unstable and therefore to be avoided. But one can not exist without the other. The Chinese rate of savings without exports would have long ago pointed to a depresion.
@Oliver Engelen: A little googling produced this:
“Looking first at the level of the saving rate, the saving rates of all three categories of households fluctuated in the 15.78-30.34% range and the saving rates of urban, rural, and all households averaged 26.0%, 26.5%, and 25.5%, respectively, during the 1995-2004 period (see Table 3).”
Ref.: http://www.frbsf.org/publications/economics/papers/2007/wp07-28bk.pdf
I wouldn’t qualify this as a low household savings rate. Since the Chinese savings rate is about 50% of GDP, households account for about half according to this data (admitedly 5 years old).
On Michael’s more general point, I agree that the cultural argument is a bit of a cop-out, although as Guy de Jonquieres and other commentors have pointed out, many of the standard explanations, e.g. absence of a social safety net, have their own problems, epecially in comparative context.
i believe that economics is an often understated influence on culture. my chinese students oocasionally tell me that china is becoming more western, to which i reply that the west used to be much more chinese than it is now, and the reason is economic development. it may be a bridge too far, but i then suggest that in many ways chinese and western youth belong to one culture, and the real foreigners are our grandparents. it’s a good way to get people thinking anyway.
michael’s latest blog entry reminded me of a 2008 nytimes article i read about the introduction of credit cards into turkey. it also touches on south korea, while we’re on the topic of confucian heritage cultures and saving.
http://www.nytimes.com/2008/08/10/business/worldbusiness/10card.html?pagewanted=1&_r=1#
Some write that it is up to government and corporate savings that Chinese trade surplus is so big.
I can second that:
According to http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?channelid=1175&record=58
In 2008
Household savings 4.8 trn yuan
Corporate savings 2 trn yuan
Loan growth 4.8 trn yuan
Trade surplus 290 bn dollar = 2 bn yuan.
The numbers add up nicely: trade surplus = All savings – all loans.
What I dont understand is how the hell they could make 17,2 trn yuan fixed asset investment from a loan growth of 4.8 trn, while corporate savings were 2 trn???
“Wrong. In fact, Chinese households do not save all that much – as MIT professor Yasheng Huang has written, China’s household savings rate is lower than India’s.”
Huang Yasheng seems to have more aficionados than he actually deserves. I, though, have never regarded his “findings” as words of wisdom, and the above sentence only gives my skepticism an additional boost.
China’s household savings rate IS by any means HIGH. It is true that India’s household savings rate is higher, but if we keep in mind that India’s rate is the highest and China’s is the 2nd highest of all OECD countries, it becomes obvious that Chinese household do have high savings by international standards. So Huang Yasheng’s statement is outright wrong.
“The main sources of the high savings rate are the corporate and government sectors of the economy.”
Nobody has ever said otherwise, as this result is a direct consequence of an mercantilist and export-centered economy. But this is totally irrelevant since it provides no explanation on why Chinese households save so much, which is the key topic of this posting.
Prof. Pettis,
It is a privilege to watch as you and your colleagues struggle to understand what is happening. Thank you for your insights.
Will the dollar hold its value, or suffer a large devaluation? Crudely speaking, this is a race between dollars being created and dollars being destroyed. The US is creating dollars with the Federal Reserve’s “purchase” of $1.25 T of new debt. Dollars were also created in the recent US stock market rally. Dollars are destroyed when dollar-denominated assets lose value. US real estate, the non-stock value of US corporations, derivatives that become worthless, and non-performing loans all destroy dollars. The slowing of circulation of money in the US economy also effectively destroys dollars.
In the last six months, many more dollars have been destroyed than created. It is not surprising that the remaining liquid dollars have “risen in value”.
If the US economy recovers, the dollar-destroying process will cease. What about the dollar creation process? Because of a large deficit and debt, the US will be unable to stop creating new dollars. Inflation will be a very likely result.
Please comment on the balance of dollars created vs destroyed, and whether this is meaningful.
Thomas: “the West” is far from monolithical, and things observed in the US rarely hold in Germany, France or Italy.
TR: besides being totally obvious this is not a very useful point, especially since even within those countries it would be obvious to point out that there are differences. It seems to me that since Pettis is very clearly talking about savings rates, and since savings rates in the west are easily much lower than in China, it is perfectly legitimate to discuss differences between China and the “West.”
Thomas: “You are surely aware that buying real estate for investment purposes and playing the stock market are extremely common among upper middle class Chinese.”
TR: Although it may well be true that some Chinese do indeed have stock and real estate holdings (and by the way, some “Westerners” don’t), the main point is to compare overall patterns in those countries, and it is very obvious that Chinese are far, far, less likely to have these kinds of portfolios than are Westerners.
No offense but your whole comment seems to be uselessly nitpicking. Just because every member of a group does not conform to the average behavior of a group does not invalidate group comparisons. And if I can respond for the professor, it is perfectly obvious that “large” means “big enough on average to affect behavior.” And since you are so determined to get proof, where is your proof that “normal” German people do not respond to interest rates in the way that Pettis says. Many people, including the ECB, seem to believe that they do.
Let me pick out two ideas from above comments: there are “differences in ideas about the definition of ‘saving’” (G. Stegen), and “The main sources of the high savings rate are the corporate and government sectors of the economy” (Oliver Engelen quoting Yasheng Huang). James Fallows has reported that the “savings” Huang describes is imposed by state-owned banks to implement exchange rate policy. And let me throw this into the mix: when Greenspan speaks of a “global savings glut” to excuse his behavior, he is obfuscating — the real issue was not “savings” however defined but demand for AAA-rated USD-denominated paper.
If the question is household and consumer behavior in China, I think it could be better framed in terms of consumption rather than saving: How much, and to what ends, do households in China spend on consumption? What happens to the balance of income? What roles do debt, insurance and pensions play in household finance? How do Chinese consumers conceive of saving and investing, and how does their behavior compare? I would like to see a chart-heavy report that breaks down consumption vs income by demographic and geographic factors.
It’s been reported that a large part of China’s industrial workforce is young women who migrate from the interior to coastal manufacturing centers. They work long hours, live in dormitories, and return to their hometowns after some years. I suspect that the analog for men is the construction industry. Building up a large bank account would be the main objective for these people, and they reportedly number in the tens of millions.
From my own experience in Japan, mid-80s to mid-90s, measures to discourage consumption and encourage bank savings were many and striking in the early days. Over the course of ten years, as the economy experienced a towering boom and cataclysmic bust, some of these were modified or abandoned.
The one that caused me the most personal irritation, being young and single, was that ATMs were shut down on Friday afternoon and not re-opened until Monday morning. Almost no-one had a checking account or credit card, and virtually all consumer transactions were in cash. No ATM, no cash, no spending. After the economy went over a cliff in the early 90s, the ATMs were quickly freed up 24/7 and card transactions became much more common, so it became much easier to spend.
PS are you more into the Beatles or the Stones? This video of Shiller and Taleb recalls that eternal question. I think it would be well worth the 30 minutes of your life for anyone who would bother to read this comment. Cheers!
http://www.newyorker.com/video?videoID=22785404001
Dear Mr. Pettis and worthwhile contributors,
I like to eat at buffets and now I know that I like to read in buffet fashion. You threw out all these possible reasons why the Chinese save more than Americans and we are free to pick those ideas that interest us or upset us. I know that the interactive nature of the internet is well documented but I’m enjoying my experience here- so there you go.
Here’s another perspective to throw on your plate, folks. As has been suggested, the real data about spending can be masked in how we account for it.
I cannot help but take the perspective that everything is happening at the same time. America is facing the perceived need of central governance and China feels the need to build capital. Isn’t the world becoming homogenized? What is the value, in this climate of decision making, in seperating nations that are interdependent. What goes on in China affects the rest of the world and vice- versa, right?
I also enjoyed another blog that disputed the value in referencing cultural stereotypes such as: Western culture is individualistic; Eastern culture is collectivist. More about this can be found here: http://www.gotoofareast.com/toblog/?p=553
In general, everyone has more in common than not, don’t they?
Dragonbay:
*Do* “Chinese households save so much”? That’s the question. And what do you mean when you say “so much”?
“Wrong. In fact, Chinese households do not save all that much – as MIT professor Yasheng Huang has written, China’s household savings rate is lower than India’s.” Please mind the source – the “Travellers’ Tales” blog. Yasheng Huang’s statement is quite obviously not “outright wrong”. But neither is this whole sentence from the FEER blog. In fact, you’re admitting that both are perfectly correct.
Since when have China and India been OECD countries?
Anyhow. I don’t quite see how you come to judge how many “aficionados” Prof. Huang “deserves” …
Alain: Thanks a lot for your googling efforts! Very useful stuff.
Another number: the total savings of enterprises 16.4 trn yuan (USD 2.4 trn) at the end of 2008 are roughly equal to the international reserves of China! It may be a coincidence though.
I still cannot find how the chinese fixed asset investment is financed.
Corporate profits are reported less than 3 trn, FDI less than 1 trn, net loan growth less than 3 trn. IPOs neglibible.
Thats less than 7 trn. Fixed asset investment 17.2 trn.
What makes up the missing 10 trn?
Central and provincial budget spending total is only 6 trn and it only partially goes into investments…
Does anyone know the answer?
Quote TR: “It seems to me that since Pettis is very clearly talking about savings rates, and since savings rates in the west are easily much lower than in China, it is perfectly legitimate to discuss differences between China and the West.”
Michael is claiming that in China, lower interest-rates lead to more savings, whereas in “the West” they lead to higher savings. No evidence whatsoever has been presented to support this claim, except for saying that “there is lots of evidence”.
I do agree that in the US, such a relationship is usually assumed to hold, what with house-prices and stock-prices being assumed to react positively to lower interest-rates, thereby making people feel richer.
But I repeat: Germans certainly do not think that way, because they use mortgages in a different way, and they are far less likely to invest in equities. And as far as I can tell, the same holds true for the French and the Italians.
Quote: “where is your proof that normal German people do not respond to interest rates in the way that Pettis says. Many people, including the ECB, seem to believe that they do.”
My point is that German savers are probably more similar to Chinese savers than to American savers. In particular, they certainly put most of their savings into bank deposits and treasury bonds, just like the Chinese seem to do.
Oh, and who says the ECB expects savings to drop when interest-rates drop? I don’t know what the ECB thinks, but German economists don’t normally make any such assumption. In Germany, the transmission mechanism of interest-rate changes is traditionally viewed as working via investments.
Quote: “No offense but your whole comment seems to be uselessly nitpicking”
May I ask what your nationality is? I am German and my wife is Chinese. And in my impression, Michael as an American frequently generalizes “American” to mean “Western”, and while this may hold true for some aspects, in other aspects I strongly disagree from my perspective as a non-American. The point is not to do “useless nitpicking”. The point is to provide Michael with other perspectives.
Sorry, typo:
My first sentence is supposed to read:
“Michael is claiming that in China, lower interest-rates lead to more savings, whereas in the West they lead to lower savings”
Professor Pettis: a fascinating discussion.
From the various postings, it seems that “theory” does a poor job in “explaining” savings behaviour in the same country over time because the socio-political parameters are quite variable.
Cross-country comparisons (China vs India) are even more shaky because Institutions and Culture do count — even though their influence is hard to isolate and measure empirically.
One could consider that during the early Mao days — the “model” was a fixed price, quantity driven Central planning system — whose prime aim was to mobilise savings to propel industrial take-off.
The post-1978 model looks more like a variant of the Asian Developmental model — low wages, a hard exchange rate peg at a low undervalued value. This export-investment led model of growth is also a form of “forced savings” which is apparently palatable to “Asian culture” (inter generation transfers). Despite several generations of reform abd rapid income growth, old habits take generations to change.
It would be interesting to check out longitudinal data to see how the advent of better access to higher education and property rights is changing attitudes? Does this data exist?
PS: for those who assign culture to the trash bin — you only have to see the different style of comments on this Blog ! For example, Thomas’ constant demand for minute details and empirical proof about any and everything — may reflect his culture? My own culture is that there are many things we don’t and will never know. regards James
@Lemiwinks
Fixed Asset Investments are gross of depreciation. So depreciation would be another source of financing.
Furthermore, some of fixed asset investments is presumably government spending financed directly out of the government’s budget.
Quote James: “For example, Thomas’ constant demand for minute details and empirical proof about any and everything — may reflect his culture?”
That may indeed be the case.
It may also have something to do with being an economist who specialized in some of the points discussed here, and therefore assigns more importance to aspects that other readers consider “minute details” from their point of view.
Getting back to a more fundamental point:
Quote Michael: “Chinese don’t save in the form of stocks, bonds and real state, but rather in the form of bank deposits”
Are there actually any international comparison studies that allow us to make this sort of sweeping statement? (i.e. the Chinese put much more money into bank deposits than people elsewhere)
On one hand, I tend to agree that the Chinese seem to put a lot of money into bank deposits.
But on the other hand, when I talk to Chinese colleagues or to my wife’s friends and family, I always get the impression all they are interested in investment-wise is the stock market and of course apartments (preferably several of them).
I suppose middle- and upper-middle-class urban Chinese are not representative for the whole population. But then, they earn so much more per-capita than rural folks and migrant workers, so I would assume they make up a very substantial portion of overall household savings.
(And by the way: Would you classify “life insurance” as similar to “bank deposits”? Because life insurance premiums sure suck up a lot of money as well.)
@Thomas
Even if we assume half of total government spending (central and provincial) goes into FAI, it is still only 3 trn yuan, leaving yet another 7 trn yuan FAI financing unaccounted for.
Would depreciation be so big? (Half of all FAI, quarter of GDP)
I dont think so. I think it is probably hidden corporate profits behind that are somehow allowed (or incented) to be written down as costs if they are used for FAI.
It might even be a government policy to urge FAI this way?
So in fact Chinese companies seem to be massively profitable, their margins are above 50%. They invest nearly half of their revenue , borrowing only marginally.
@ Oliver Engelen:
China and India are so-called “enhanced engagement countries” in the OECD.
Michael’s initial posting has solicited some very interesting and thought-provoking comments except for the statements by Huang Yasheng that you quoted. It doesn’t matter if the statements were taken out of context or not. His first statement is outright wrong (I don’t know how one can come to another conclusion), and his second is irrelevant for this discussion.
I am not criticizing you, Oliver. But I do think that I have the right to state which “experts” I regard as knowledgable and which others I view as charlatans. I’ve read a lot from Huang, and he’s among the latter.
Sorry for going off-topic…let’s revert to the discussion again.
So I believe because FAI is higher than gross exports or consumption and much higher than total government spending, there must be a multiplicator effect of the export revenues and the government spending that levers the fixed asset investment.
Seemingly any fall in exports must be quicly substituted with government spending in order to keep up the dynamics in the investment spending.
So my answer is to why Chinese are saving so much is that corporate profits are retained and not allowed to be redistributed into the society via wages, dividend or government intervention or even financial intermediation (companies lending to consumers).
Corporate profits are mainly used for financing FAI and net export.
Whatever the broader population do in terms of personal savings is irrelevant.
Prof Pettis,
I think if you look at the opposite, you may get an idea as to why Asians ‘save’ so much.. why do westerners spend and borrow so much?
There has certainly been a ‘live for today’ attitude in the west for a long time now and that has manifested itself in the spending attitudes of young westerners. Young adults taking on credit card debt for instance in the UK is at alarmingly high levels. The mindset typically varies from, i can pay that back over the next few months to someone is giving me free money! Essentially (as so many ads tell us) buy now, pay later!
Next, look at the purchases that the western world makes with this borrowed money. Everything ranging from holidays to household appliances, to cars and houses. In comparison to most Chinese (or even Indian) households, i’d guesstimate that 90% of these are non-essential purchases. (By non-essential, you have to remember that most of these households are on or near the poverty line). Microwaves, blenders, dvd players, LCD/plasma tvs all non-essential and what i call luxury goods. With people preferring to buy fresh produce each day, even a refrigerator can be considered non-essential. The same with washing machines.
Someone mentioned asset purchases as the western ‘savings’ model. Fair enough as long as the asset price doesn’t change negatively. When have we seen that happen? In addition to this, I’m not sure that many Chinese people would qualify for mortgages or credit cards because of their credit worthiness. I have no idea about the rules for applying for these in China, but i imagine that the percentage of the working population qualifying as credit worthy is very small (less than 10% i’d guess).
Also, i think a high majority or Chinese cannot understand why one would take on debt. I’ll borrow now and pay that back later with interest. For families who can ill afford purchases, they’d rather wait until they have saved that money and make the cash payment. (eg with interest etc, why pay $104 for something worth $100? In a country where $4 might be a days wage it is a significant amount)
Apart from subsistence purchases, I believe that P Pettis is correct in identifying a lack of social security net as one of the other main reasons. To have no-one to rely on but yourself and family encourages a high savings rate. The ‘rainy day’ scenario.
As an aside, to previous posters: by high savings rate, i don’t think anyone defines this as an absolute monetary value. It is usually defined as a percentage of income. (Hence why it’s called rate rather than value).
I think the Confucian culture has been destroyed by the government during 1966-1976, so I don’t think this have much to do for the high saving rate.
I think the reason for high saving is we Chinese don’t have good products to invest on: so much cheating and government supervision, no credit system, no protection for common investor.
What happened to the substantive debate about balance of payments and overcapacity in the Chinese manufacturing sector? Too politically sensitive right now, so we have to talk about Chinese household savings?
The fact that the Chinese government has offloaded a lot of the expenses of education on the general public may also be to blame. Education now ranks as the largest consumption category for Chinese households in part because the central government does so little to finance education.
As always a fine post and comments! I truly enjoy reading this blog.
2 ideas to add to the mix.
1) What actually defined “Confucianism” has changed Dynasty by Dynasty and has even changed within the confines of a single dynasty. So to say Chinese savings is a part of Confucian culture is a very broad based and non-exact statement. Which part of Confucian culture? Which version or definition of Confucian culture?
2) My experience in interviewing Chinese of all age groups has been that most of reasons listed by Mike in the commentary are correct. The only idea I see missing is that most Chinese have a lack of trust in the ability of the Chinese Government to provide for its citizens in the future, whether for health care, jobs, social safety nets, etc. Saving and owning your home outright is a more trustworthy path.
Chan-Lee James thank you for your post. Culture creates our perception of the world and how we filter information.
Thomas, if the professor does not mind my saying I think he is actually half American and half French and grew up in Spain, so my guess is that he is more sophisticated about nationality issues than the rest of us. I am Peruvian, a place where I believe Mr. Pettis also spent many years of his youth.
For all your insistence on proof, you do not provide much yourself. When I ask what is your proof that Germans respond differently, you say “My point is that German savers are probably more similar to Chinese savers than to American savers. In particular, they certainly put most of their savings into bank deposits and treasury bonds, just like the Chinese seem to do.”
This, as you must agree, is not exactly proof of anything. It is simply a restatement of your original assertion. You also have an impression that Chinese put a lot of their money in the stock markets, and so disagree with the professor’s comments that most Chinese do not invest in stocks, but since the free float in China is only around 20-30% of GDP, and tends to be concentrated among the very rich, it should be clear that most Chinese do not in fact invest in stocks.
I finally got back yesterday, so I apologize for not having responded to the great comments here. Yes TR, I am indeed half French and half American and mostly brought up in Spain, although, as you note in my youth I also spent four years in Peru, mostly in the Amazonas (how did you know that?) as well as a several years in Pakistan and Morocco. I did not live in the US until I went to college, in New York.
As long as we are on the subject let me make a partial digression. I come from an almost comically multi-cultural background. Besides family differences and the widely diverging places in which I grew up, I spent all of my career in international finance, mostly Latin America until I moved to China seven years ago, and of my three brothers, one lives in Nigeria and is married to a Brazilian, one lives in Spain and is married to a Persian, and one lives in New Zealand and is married to a Japanese. Of my two nieces, one is Muslim and the other will be taking her holy communion next year.
This may be why I am more skeptical than others about the explanatory power of culture. Let me generalize ferociously. I have noticed that among my few equally multi-cultural friends we tend generally to be less impressed by the power of cultural explanations than others are – perhaps because we are a little more blasé about cultural differences. I also notice that those who are most impressed by the power of cultural explanations tend to be those who were brought up in a predominantly mono-cultural background but who then “went” multi-cultural later in life. I have no idea if the experience affected their beliefs or if their predispositions affected their subsequent experiences. I have done no scientific studies to verify these generalizations, but base them only on my experiences.
This is not to say that I do not believe that there are cultural differences and that these differences affect behavior. Of course I do, but I just do not trust the predictive power of culture to explain behavior. What usually happens, it seems to me, is that people who have grown up in one culture and then moved to another notice that behavior is different, and they notice that the culture is also different, and so they make simple connections and use one to explain the other.
But I think when you have moved around from culture to culture as a kid, you tend to believe that although people may behave differently from culture to culture, this behavior often reflects institutional or structural issues that are not necessarily embedded in the culture, and that these issues affect everyone in similar ways, whether or not they share a culture. That is at least partly why I prefer to see high Chinese savings as reflecting policy choices at least as much as something endemic to Chinese culture.
[...] Was geht in China ab? Why do Chinese save? __________________ Die G7 bringen Billionen zur Rettung des Finanzsystems auf. Gleichzeitig [...]
Thomas and others who regularly ask me for citations and research suggestions, if I have the information readily available I am happy to pass it on, but I do not have time to dig up research and provide it. Much of this is likely to be available on Chinese or international websites, or in investment research reports, and can easily be found. Sorry, but I cannot respond even to a small fraction of the requests I get for information.
Fatbrick, you say “If Asians have the similar saving rates across the board, then many of your reasons would rather be false.” Not necessarily. If all Asians have high savings rates while following radically dissimilar policies and with very different institutional structures, then my arguments might be false. If they have near-identical development models, then that would actually strengthen my argument. I believe they do.
Duoist, you may be comparing apples and oranges. If you look at the behavior in shops of ordinary Chinese compared to rich foreign bankers or tourists, it may seem that Chinese are more likely to “pay particularly close attention to the receipt for their purchase, and watch closely the moves of the cashier,” but I am pretty sure that in other countries people who are relatively poorer do the same. I was just in Spain last week and at the butcher shop I noticed that Spanish shoppers were just as careful about checking weights and scanning the final bill as you say Chinese customers are.
No name, I am not sure I agree. The world as a whole has a problem with excess savings right now. In the past the “excess savings” and “excess consumption” problems were both true, but for different parts of the world.
Guy, thanks for posting your comments. I know that Calla Weiner has often made that argument and I think hers is a pretty convincing one. My only worry is that, as I understand, many of her cases come from rapidly developing Asian countries that all followed a roughly similar development model – what I have elsewhere generalized as the Asian development model. In that case we might be confusing the relationship between rapid growth and high savings with something lese that is more policy directed. Still, her argument is intuitively satisfying.
I am not sure whether or not the argument “that weak or non-existent social safety nets produce high household savings” has been rigorously tested, but it seems to me that at least in China people when asked why they save so much have often made that answer. This isn’t proof, but it is suggestive, although as your German and French examples indicate, we need to think about this a lot more. Perhaps historical memory is as important as you (and several others) say – also one of the arguments advanced for the relatively high savings of American who lived through the 1930s. Needless to say, if this is correct the transition from the generation that lived through the Cultural Revolution to the “little emperors” could have a significant impact on Chinese savings.
At any rate the case of Japan, as you and Wuhan point out, shows how high savings cultures can quickly become low savings cultures when external conditions change.
OGT, yes you are right. A big part of China’s high and rising savings rate has been high and rising corporate savings, which do not easily square with cultural arguments, as you point out. The whole argument is complicated by the fact that most, if not all, corporate profits may be accounted for by subsidized interest rates, which effectively means that corporate savings are simply confiscated household savings. The fact that much Chinese growth, as Columbia professor David Beim pointed out in a speech yesterday, is “fake” growth, caused by policy lending by banks that will never be collected, and that banks lend out Chinese savings, to really get this right we need to consider how NPLs and low interest rates affect our understanding of real savings rates in China.
Vamm, if you are suggesting that many of the things Chinese consider “Chinese” as opposed to “Western”, simply reflect the fact that Chinese is behind in economic development, then I agree. This is true about musical taste, eating habits, and many other things. To take a very simple and common example, I am often told here that extended families are “Chinese”, whereas nuclear families are “Western”, and as the Chinese increasingly move from the former to the latter, China is becoming more “Westernized” and losing its culture.
Of course this is simply not true. Extended family relationships are not Chinese at all but rather are typical of nearly every predominantly rural culture in history, including the US and Europe up to the 19th and early 20th centuries. What we now call “nuclear” families are not especially Western but rather are the kinds of family structures we always find in urban and middle class countries, so it is not that China is becoming more Western so much as China is becoming more urban and modern.
Thomas, actually what I said is that many people have trouble understanding why lowering interest rates in China cause consumption to decline, when they do the opposite in the West. My discussion is about the effect of interest rates in China, not in the West. I haven’t done a study of every country that might be defined as part of the West, and for all I know your comments on Germany and France may very well be correct (notwithstanding the little evidence provided), but for the sake of this discussion let us simply define the West as the place where lowering interest rates causes savings to decline, so that we can focus on the main issue, which is whether or not lowering interest rates in China cause consumption to decline, and if so why. As for your next point, although clearly there are some Chinese who invest in the stock and real estate markets, given the very small relative size of the free float in China and the limited incomes for most Chinese, and the high share of savings, I think its pretty safe to say that Chinese save little in the form of stocks and real estate. Generalizing from the behavior of a few middle-class friends would be less useful than checking the PBoC and National Bureau of Statistics data.
Lemiwinks, as you point out corporate profits and savings are a very important part of the savings puzzle. We need to think about these a lot more and to understand how they are generated (i.e. are they the normal profits from economic activity or are there significant direct or indirect subsidies?), why they are retained, and several other “structural” issues.
Ken C, I think it is dangerous to assume that “Westerners” love to borrow and spend. Whenever a financial system has to accommodate itself to excess liquidity, it does so by taking on increasingly risky lending. As long as some part of the population is willing to engage in binge borrowing, total savings rates will decline.
Let us assume, for example, that suddenly everyone in China who needed to borrow and spend money was able to do so with almost no restriction. Would Chinese household borrowings go up? Almost certainly, not because all Chinese suddenly decide to borrow but rather because some Chinese who were previously not able to borrow – perhaps because they had no income – would take advantage and start borrowing “foolishly” to spend foolishly. This would cause China’s savings rates to decline, even though most prudent Chinese did not change their behavior. Aggregate numbers only tell us about average behavior, and not necessarily about the behavior of average people.
Dylan, I am glad you point that out. It seems to me that much discussion about the “Confucian” nature of Chinese culture makes some big assumptions about Chinese culture. The Cultural Revolution altered Chinese culture a great deal.
Professor Pettis, I know you lived in Peru as a youth because our former Prime Minister, PPK, who you know well, once told me this.
Bajie, you ask “What happened to the substantive debate about balance of payments and overcapacity in the Chinese manufacturing sector? Too politically sensitive right now, so we have to talk about Chinese household savings?’
Actually I have received no political pressure on any of my discussions, but it should be clear that a discussion of Chinese savings rates is also a discussion about trade, overcapacity and the balance of payments. Anything that affects the gap between production and consumption affects trade and the balance of payments, and of course any discussion about China’s high savings rate is also a discussion about China’s low consumption rate.
Great post and comments. I agree with Michael that culture is over hyped. Most of the time, people’s behavior are carried out as a result of evaluation of reality and all the available options rather then as a result of Culture. Culture only serves as a justification and explanation afterwards.
10 years ago most Chinese people do not borrow from banks. But today an average home buyer will borrow millions. Would you say that Chinese culture has changed a great deal during the last decade?
Also as an anecdote evidence why Chinese people do not spend, recently my sister who work in a city successfully borrowed 500K RMB from a bank to buy a small apartment on a monthly income of only 8K RMB. While the same amount of money would support my other relatives who were all farmers to grow 200 Chinese mu of apple tree for 3 years until harvest and the annual profit would be 1 million RMB per year afterwards. Even with this kind of return, it is not even imaginable for them to borrow the needed money from banks. Chinese people, most of them if you count all the farmers, do not have the options to borrow. We have to save rather then want to save.
While the debate of why Chinese save is going on in this blog. Another Chinese upper middle class is struggling for all the options for his son’s education, starting from kindergarten(please search “Worry about Yifan’s Education – Part II” for his article, I was not able to paste URL links in the comments). All the choices he had is deeply affected by how scanty the good education resource is and how little social safety net we have in China. It is another anecdote evidence of how pragmatic social problems rather than culture determine people’s behavior.
Quote Michael: “so that we can focus on the main issue, which is whether or not lowering interest rates in China cause consumption to decline, and if so why”
Yes, I think that’s the main point I potentially take issue with.
I am not saying you are wrong. All I am saying is that this is not self-evident, and that I am not aware of any empirical evidence that backs up your claim.
Of course I cannot offer evidence to prove the contrary, but since it’s you making this particular claim (whereas I’m more or less agnostic about it), I think it would be a lot more convincing if such evidence could be provided.
Quote Michael: “Generalizing from the behavior of a few middle-class friends would be less useful than checking the PBoC and National Bureau of Statistics data.”
I agree that anecdotal evidence isn’t worth much. But I am not aware that PBoc and NBoS provide any useful data to resolve the questions we are discussing here.
In any case, I certainly don’t disagree that compared to the US, the Chinese are much more geared towards bank deposits.
Quote TR: “You disagree with the professor’s comments that most Chinese do not invest in stocks, but since the free float in China is only around 20-30% of GDP, and tends to be concentrated among the very rich, it should be clear that most Chinese do not in fact invest in stocks.”
I fully agree that most Chinese do not invest in stocks and real estate.
But since China is a country where wealth is very unequally distributed, it is enough if a comparatively small percentage of the population (i.e. upper middle-class and upper class) invests a large proportion of their savings in stocks and real estate.
By the way, a free-float of 20-30 % of GDP is certainly very little compared to the US. But AFAIK, it is higher than in Germany, France and Italy, so it sounds substantial to me. My personal cultural bias? Maybe.
Quote Michael: “many people have trouble understanding why lowering interest rates in China cause consumption to decline, when they do the opposite in the West”
This is a chicken-and-egg sort of problem:
- Do people save a lot because interest-rates are low?
- Or are interest-rates low because people save a lot, and there are not enough profitable investments to channel all those savings to, meaning that real returns are low, and there adequate equilibrium interest-rates need to be low as well.
Or similarly:
- Does consumption decline because interest-rates go down?
- Or is it consumption that declines first (for whatever reason), thereby leading to lack of demand, thereby causing policymakers to reduce interest-rates to stimulate borrowing?
I don’t have the answer, but I’m more inclined to see low interest-rates as effect rather than cause.
@Lemiwinks
Why are you saying that China’s overall fixed asset investment was 17.2 tr RMB in 2008?
According to the NBoS website, it was only 14.8 tr RMB.
@Michael
since we are discussing savings decisions made by PRC Chinese people, one way of approaching the issue is by asking these people about their savings motives (there don’t seem to be many PRC Chinese on this blog, or if there are, they aren’t very vocal).
I obviously can’t do a representative empirical study here and now, but I can provide you with a shred of anecdotal evidence:
I just told my wife (who has an MBA from a good Chinese university and is therefore reasonably economics-literate) about this discussion and asked for her opinion. The following is a brief summary:
———————
Me: “Some people argue that Chinese households would save significantly less money if interest-rates were higher.”
She: “That sounds weird. Why?”
Me: “The argument goes like this: If you earn more interest, you need to save less to attain your goals, because the higher interest helps you get there more easily.”
She: “That’s way too theoretical. You economists always develop all those crazy theories that have nothing to do with reality.”
Me: “Well, but it does sound logical, no? If you disagree, then what do you think motivates Chinese people to save?”
She: “That’s the way we’ve been brought up, and that’s our history: Don’t spend everything now. Save it for the future. There is no instant gratification in Chinese culture. The more you can save, the better. Because hard times may come again, and because you need to invest as much as you can into your childrens’ future. Chinese people are still poor. They need to save lots and lots to become richer. Isn’t it obvious?”
Me: “But can’t you also afford to spend more money right away if you earn higher interst on your savings?”
She: “But who thinks that way? We Chinese certainly don’t. Or maybe some economists do, but not normal people.”
————————
Anecdotal evidence, sure. But why don’t you ask your students the same kind of questions when you get back to the classroom in Beijing?
@Lemiwinks
Actually, NBoS gives us a breakdown of “source of funding” for every year up to 2007. It’s in the 2008 Statistics China Yearbook (on their website).
For the 15 tr fixed investments made in 2007, the breakdown is as follows:
77 % “self-raising funds”
15 % “domestic loans”
4 % “state budget”
3 % “foreign investments”
But the absolute numbers are rather confusing:
The yearbook says overall fixed asset investments were 15 tr. But if I go to a separate page (monthly data for year to December), it’s suddenly only 11.7 tr for exactly the same data set. Possibly subsequent revisions that were not corrected in all tables? No idea.
This probably also “explains” why you found different numbers for 2008 than I did. We looked at the same source, but used different pages.
Chinese statistics can be supremely confusing…
Hi Thomas,
please take a look at the link I provided in my first comment “Statistical Communique of….”. The figure is stated there.
The 14.8 trn figure is the urban only FAI. I dont know why they split all figures into urban and rural…
Thomas: the evidence you are looking for is in an article by nicholas lardy about a year ago; try Peterson Int. Economics institute website.
[...] post on the high savings rate of Chinese by M Pettis. Notable excerpt “I would argue that policies [...]
Thomas,
The cause and effect of interest rates on savings is factored by liquidity and debt.
The velocity of money is effected by the debt to equity ratio or interest rates.
People are inclined to save more when their debt to equity ratio increases or when interest rates increase.
Consumption is effected by the velocity of money
If low interest rates increase the velocity of money, then a lower savings rate is the effect – therefore low interest rates are the cause or the seed planted to lower the saving rate.
On the other hand if the circulation of money is in decline while low interest rates are ineffective, then a higher savings rate is the cause
- therefore low interest rates are the effect of higher savings rates as monetary easing is a reaction to this effect until the saver rejects monetary policy by not holding its treasuries causing interest rates to rise, in this scenario higher savings rates are effected by an uncomfortably high debt to equity ratio.
If lowering interest rates in China cause consumption to decline, I would suspect the velocity of money is driving up the cost of food, shelter and energy. The average Chinese consumer is then being taxed by the extreme inequalities of wealth. If consumption declined prior to lowering interest rates then this would not be a fair statement.
Currently the US is in a precarious position, there’s too much excess capacity and declining consumer demand to drive sustainable inflation any time soon. The circulation of money is still in decline, regardless of all the Fed’s efforts to boost the money supply, yet a rather large concentration of wealth is triggering inflation in stocks and commodities passing the higher costs of food and energy on the back of the average American consumer. When the top 2% own the majority of stocks, bonds and real estate, I just don’t see how debt strapped US households will revive consumption growth anytime soon.
Why do Chinese save money?
Because the Cultural Revolution sucked. Hard.
@Lemiwinks
Unfortunately, your link is broken and leads to a page showing average prices for 50 foodstuffs. Frequently happens with links to NBoS pages.
The 14.8 tr number I quoted is called “nationwide total”, and makes no reference to being urban only.
Go to monthly data, enter “2008, December”, and click on fixed investments. (Tried to include the link, but it gives me a totally weird page name which probably doesn’t work when copied here)
@Qingdao
Thanks for pointing me to the Peterson Institute Website. Some interesting articles on there. But as far as I could figure out, none of those articles deals with the question if higher real interest rates can be expected to lead to a significant drop in China’s household savings.
Quote stoneweapon: “People are inclined to save more … when interest rates increase”
Actually, Michael is claiming the opposite (at least that’s how I understand him): He believes that Chinese people save less when interest rates increase, because they feel richer (due to the higher interest income).
The way I see it, there are two opposing effects when interest-rates go up:
- You feel richer, and can afford to spend more right away (as Michael argues)
- Saving becomes more lucrative and therefore more attractive(as you argue)
Therefore, the outcome is not self-evident, and the question becomes an empirical one. Which is unfortunately very hard to pin down, because you can’t do a controlled experiment involving Chinese real interest-rates and household savings decisions.
Thomas, I am sure your wife learned a lot in her MBA course, but in my experience (I also teach economics here in China, although not at a prestigious school), that may only mean that she has learned the standard American answers to most economics questions, since that is mostly what they learn here. All the textbooks are written by Americans and usually use the US as the default model, and the most prestigious professors usually studied in the US or UK, so it is far more likely for an economics student to answer an economics question in the same way that an American would than for an “ordinary” Chinese. By the way, this is not uniquely Chinese. Many studies suggest that economics students in the US and Europe are also more likely to answer economic questions based on what they were taught in their economics courses rather than based on their own experiences.
But I do know that Pettis asks his students these kinds of questions all the time and often discusses them on his blog, and I remember that not long ago he wrote about this. I checked, and on his November 27th entry he gets the exact opposite answer from his student that your wife gave.
PS I don’t have a citation, but I have many times heard discussions about the “puzzle” of Chinese savers’ “inverted” response to interest rate cuts. Your wife mauy find it to be a weird claim, but quite a few economists here seem to accept it.
@JohnZ
I agree with your comment.
Checked Michael’s old blog entry you mentioned and found this passage:
“In the end this is not a theoretical argument but a purely empirical one. The impact a rate cut will have on household savings is whatever it turns out to be, but for now we can’t predict with much certainty its impact on boosting consumption. If any of my blog readers know of useful studies on the subject, I would appreciate a citation or link.”
I completely agree. That’s exactly the point I was trying to make (that it’s an empirical question, and to my – possibly incomplete – knowledge, no conclusive empirical results exist).
Dear Michael,
Interesting posting, but regarding cultural differences: please consider that, besides perhaps being blasé about cultural differences as a result of abundance, a multi-cultural background is a cultural background too.
Multi-cultural people tend to get along especially well with other multi-cultural people because they share a common culture. One of the basic elements of this culture is to belittle (the effects of) cultural differences.
best,
Marnix
Off topic; nothing to add to why one person saves and another doesn’t. But I was surprised with your mention of returning from Spain on perhaps the very same day I did where I also have been visiting family in Castilla-Leon. While I was away I was thinking more about the social consequences of economic policy than of economics itself.
Empty restaurants in Malaga echo the devastation of the Castillian countryside. Those small towns that I knew have been depopulated in a process that began well before this recent economic downturn. 50 years ago this area was almost completely subsistence farming. Today those still farming subsist on European Union subsidies. My friend Moreno told me he has become a ward of the state. And they aren’t making it now either. They are chained to a life they don’t want. And that creates resentment as those of us who were forced to leave are now seen as outsiders.
On the other hand the wine has gotten better.
Thomas: Policy brief: 08 – 8; Financial repression in China.
Hi Thomas,
it seems like they index the news relative to the top article, thats why whenever they add a new one, the old links are shifted.
But anyways the Statistical Communique I was referring to was issued on 26th of Feb 2009, you can easily find it by date.
Let me quote the relevant line on FAI:
“The completed investment in fixed assets of the country in 2008 was 17,229.1 billion yuan, up by 25.5 percent over the previous year. Of the total investment, that in urban areas was 14,816.7 billon yuan, up by 26.1 percent; and that in rural areas reached 2,412.4 billion yuan, up by 21.5 percent.”
That might be a permalink:
http://www.chinadaily.com.cn/china/2009-02/27/content_7521441.htm
Michael:Pardon my ignorant. The word “bubble” is being used very often in the financial world. Is there such a thing as “saving bubble”?
Mike,
I enjoyed reading your articles. I’d like to add up an obeservation.
As a Chinese residing mostly in the US and traveling around the world, I think that Chinese tend to be more willing to forego short term pleasure for long term benefits, and that we tend to save more. The root cause could be culture or history related.
My Chinese friends tend to spend propotionally more on house ownership and other investments which have the potential to grow in value, while their comsuption for daily life and leisure is relatively low.
I don’t believe we have sufficient high-quality data out of China to do much more than speculate. But I have always disliked the “excess savings” argument, as it implies that consumers in China are doing something economically irrational. When economists imply a large population is involved in non-economic activity, it usually means “we really don’t know what is going on”.
But, if we assume excess-savings, it implies under-consumption. This can be due to two factors: 1) nothing to buy, 2) preference to remain in cash.
To some extent the first factor appears to have some weight. With the economy being structured for export (no one believes that excess-savings are due to internal productive profits, do they?), the bulk of the population (not the coast nor Beijing), do not need the products they produce.
How much electronics or toys designed for Western tastes does the interior of the country need? Indeed, most of the spending in the interior of the country has been capital investment and infrastructure – which is not going to come from peasant/farmer “excess savings”, but corporate and trading profit and government policy choices. Off the top of my head, I think of apparel as an export industry that can be transformed quickly. Perhaps there are other industry segments, but this leads us to the second factor.
Preference for cash can have many underlying causes. I think we underestimate the degree to which the countryside engages in barter or other non-cash transactions (the equivalent of commercial paper). The “cultural” explanation could very well be the effects of communist rule through the creation of small industrial cooperatives and other economic entities, as well as the power of local communities. It doesn’t take a large percentage of consumption to be provided by non-cash transactions to result in cash piling up as real incomes increase.
The pressure we hear from the West telling China they have an “excess savings” problem is probably code for “get rid of those communal structures and lets have a real free market out where the promised 1 billion consumers are”. I can imagine why China might find that insulting.
If I recall correctly, the share of household saving has been declining in recent years, along with the wage share of GDP, with these differences made up by corporate China. Nevertheless, Chinese households are prolific savers, ever at the low ends of the income scale. However, when generalizations are made about how much Chinese households save, perhaps we should also make them about the amount that they gamble: don’t forget that trillions of yuan of wealth (yes, most of it notional, but as trades set pricing levels they are backed by cash transactions) that evaporated in the crash of the Chinese stock market, the first time, and the second time. There are savers, and there are gamblers, too.
[...] been geared for exports. It seems unclear at this point. Michael Pettis also has a post regarding ‘Why do Chinese save?’ He lists most of the conventional explanations, plus a few others that aren’t commonly [...]
@Lemiwinks
It does appear that all the monthly fixed investment data on the NBoS website is for urban areas only, even though it isn’t stated on the website (at least not in the English version).
By the way: Another thing that I haven’t quite managed to figure out is the exact distinction between “fixed investment” and “gross capital formation” (in the national accounts terminology). There does appear to be quite a significant disconnect between the two (fixed investment is higher, and lately, it has been growing much faster).
@Qingdao
read the article you mentioned.
The main argument made by Lardy appears to be that real interest rates paid to depositors have declined sharply from 2002 to 2008, and have become negative in 2008 due to high inflation (he mentions 4.14 % one-year deposit rate in Q1 2008, compared to 8 % inflation).
I would argue that early to mid 2008 was a special situation caused by the rapid run up in commodity prices, i.e. the world was facing a supply shock, and it was particularly severe for China, which uses a lot of commodities as a percentage of GDP.
It is not uncommon that negative supply shocks lead to low or negative real-interest rates for a limited period of time (negative supply shocks have a contractionary effect, and increasing nominal rates accordingly only serves to exacerbate this contractionary effect).
I do remember that – for example – Thai interest-rates were far below inflation throughout 2008 as well, probably more so than China’s interest-rates.
And as a member of a Chinese/German household, I also remember discussing with my wife in early 2008 if we should move money from Euro-deposits into RMB-deposits, because Euro interest-rates at the time were lower than RMB interest-rates. Euro-inflation was also lower (probably because the Euro-economy is less commodity-intensive), but that doesn’t really matter for an investor, as long as there is no expectation for the RMB to depreciate (which appeared unlikely at the time due to the essentially one-off nature of the higher inflation in China; in fact, the RMB appreciated against the Euro).
Looking at things from a mid-2009 perspective, real interest-rates for Chinese savers are doing ok: Consumer price inflation is negative, whereas deposit rates have been lowered, but are obviously still positive.
With a standard analysis ready for any country, Mr. Michael can make an assessment of a crisis on the moon.
Porfiro, your comment seems pretty bitter and way off the mark. Have you actually read the piece? It seems pretty China-specific to me.
Not to mention, as most financial historians know, a financial crisis on the moon would probably resemble financial crises on the earth anyway since they all have the same characteristics. Pettis has one of the best financial crises models out there, although I bet he would say its just Minsky’s model appropriated by him.
[...] Whence Chinese Savings: various possible causes, including health care costs. [...]
I’m not an economist, but a plain businessperson employing over 30 quite well paid Chinese staff (all over RMB10k per month) who are mostly in their 20s and 30s. In our offices we often discuss personal finances. To be frank I see no great signs of significant personal savings among this group, especially cash bank deposits. Many hold mortgages, quite a few received large downpayments from their parents, and most have the usual spend, spend attitude of most young people in the West at this age. The only real difference I can identify is that few have any non-mortgage debt (cars, personal loans, credit cards). Perhaps bank deposit savings are mostly held by an older age group or rural households or people much richer.
Chris,
What is your opinion on this article?
http://www.telegraph.co.uk/news/worldnews/asia/china/3234686/China-more-communist-than-20-years-ago.html
Something never discussed here is the speculative value of the renminbi.
Given the fact that the US is putting pressure on China to change its currency policy and let market forces determine the value its currency, could this be a valid reason for the high savings rate, especially for corporate and government sectors who are well informed.
For example, take notice of the H-share premium to A-shares, just liquidity?
As a Brit with a wife who is Chinese I have also had this discussion with members of her family and friends, who all live in Beijing and Shanghai. They represent the urban section of Chinese society and range from lower than average incomes to “new rich” status.
They all, without exception, save a surprisingly large proportion of their incomes. When asked about this the answer is always the same, there is no social safety net in China and one just doesn’t know what might happen. In other words it is a response to a basic survival insecurity.
My own feeling is that the reasons put forward by another contributor here (Guy de Jonquieres) probably has a huge influence on the whole savings mentality and that is that within living memory there was a complete social collapse and that has left a significant mark on the Chinese psyche.
Ron Rothammer
[...] Reading that article makes me glad that Chinese people are disciplined enough to have such high savings rates. [...]
From my experiences. Asians in general save more as a safety net in case of crisis where they may lose their jobs or be seriously injured. Regardless of where they live. It is a value that Asian parents drill into their children. To always be prepared for the worse, and to not indulge in such things as impulse spending and think in terms of long term benefits rather then short term happiness.
Not to mention use of credit cards is looked down upon by many Asians who believe it is better to save and buy anything wanted or needed with cash rather then impulse spend and use money that the family does not have thus possibly putting the family into debt which many prefer to avoid.
There however is a negative trend. Many people of the younger generation are starting to fallow western trends of impulse spending and instant gratification as will as the use of credit cards. Which is a big correlation. The higher use of credit cards usually mean lower saving rates for individuals. Hopefully this trend will stop.
You might consider compulsory saving for homes. In 1998 China introduced Housing Provident Funds to encourage saving for purchasing homes. Employees contribute 5% of their wages and employers contribute a matching amount. The money can be withdrawn only for the purchase of a home which can then be financed at reduced rates. Participation is required for all
employees of government and state-owned enterprises. It is voluntary in the private sector. In 2004, 80 million workers were enrolled with $76 billion saved. This vehicle is essential for the middle class to accumulate the 20% down payment required for purchasing a home.
I think you are taking the wrong approach. Look at why North Americans (in general) save so little and are so immersed in a culture of consumerism and spending (and then they carry a debt that not even their grandchildren can pay).
It is really good that the Chinese save. Much better than western countries. Problem is that it now appears that they are copying a western tradition which was a primary cause of the financial crisis – property speculation.