Why Do Chinese Save?

My apologies, but once again I have been too busy traveling to post as often as I would like. I am currently in Malaga, in southern Spain, in my family’s home, where incidentally I can see first-hand the consequences of the global economic crisis. After enjoying for nearly a decade the spectacular results of the Eurozone’s monetary policy (excessively loose for Spain) and the accompanying surge in real estate prices, Spain has been one of the worst hit countries and it is pretty grim here. Unemployment here is way up, there are very few people on the beach or in the shops and restaurants, in spite of some of the most beautiful weather I have seen in a long time, and the TV news is filled with scenes of politicians from the two main political parties making angry and at times pretty nasty comments about each other (nastier than usual, that is). The only good news, of course, at any rate for Barcelona fans like me, was the beautiful game Barcelona played two days ago to take the European championship. Later Friday I will go to Barcelona to meet up with my favorite band, Beijing’s Carsick Cars, who are slotted to perform at 9 p.m. on Friday at the Primavera Sound Festival, along with the likes of Neil Young, Sonic Youth, and dozens of great bands and performers.

I have been thinking and writing recently about Chinese savings rates, and although later I will post the piece I am writing on the subject for the Wilson Quarterly, I thought in this post I would very briefly lay out some of the issues that I think have affected savings rates here. I know one of the most common answers to the question “Why do Chinese save so much?” has always been the cultural reason: Chinese households save a significant part of their income because the Confucian culture is predisposed towards high savings rates, but I find the reasoning a tad circular.

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.

I think there are a lot of other reasons that have affected Chinese savings rates, and I want to set down a few of them, partly to help me think this through and partly, by encouraging comments, to take advantage of the huge resource that is the community of people who read this blog and contribute discussion. I have divided the reasons, not always very neatly, into three sets:

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.

Policy causes

• 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.

I am not sure if there is any over-arching reason for high savings in China, but generally I would argue that policies aimed at generating high levels of investment and at running trade surpluses must also, by definition, cause high levels of savings. In that sense the policies associated with the so-called Asian development model are policies that implicitly or explicitly cause high savings rate. if this is true, as I have written elsewhere, high Asian savings rates my be threatened in the future by rising savings rates in the US, since in the aggregate consumption and production must balance. The US trade deficits required for the success of high-savings policies in China may no longer exist.

Comments

[Sober Realist:]

Mike,
In addition to what you listed, Chinese saves and will continue to because:

1.) Their 4-2-1 demographic problem caused by the one child policy requires that they do so.
www.google.com/search?...=

2.) FEAR (summed up best by the following comment of an American currently living and working in China):
"Chinese people understand that reality(social unpheaval) relative to the dictatorial structure of the regime under which they live here..... Chinese people understand Chinese history a la the 14 dynasties preceding the CCP. All 14 are considered by those whom I talk and study with to be dictatorships that repeated patterns of social-economic dysfunction that eventually resulted with demise.


Mike, read my instablog on China's prospects for developing the internal consumption aspect of it's economy. Can a communist regime running a centrally-planned quasi-capitalist command economy make the difficult structural changes needed to transition toward greater internal consumption? I don't think it can without major political changes.

"If the government can overcome these challenges, can the world expect a China that resembles the consumer-driven United States? Unlikely, says Dr. Ming Wan, Director of Global Affairs at George Mason University. He argues that, “The Chinese government says that it wants to boost consumer spending to reduce its dependence on exports and has made some efforts. But fundamentally, the Chinese government still follows an export-led strategy. China will not follow America’s consumption-driven growth model. It is similar to Japan and Germany in that all three are saving countries.”

May 31 05:55 PM

[Nathaniel C:]

The Chinese save because it is the smart thing to do. We americans have been brainwashed into believing that you can borrow from the future to pay for useless trinkets today like Plasma screen TV's, etc. But finally Americans are starting to save again which is a good thing. They cannot rely on the government to provide for them (e.g social security) in their old age.

May 31 06:24 PM

[Cesar Valencia:]

Michael,
Very nice article, but I believe you've read too much into the situation. The real reason Chinese people save that much money is because they want to be insured. This is not only true of the Chinese, but true about the emerging wealthy population from developing countries. People will want a safety net in case of sickness, in case they want to send their kids to study abroad, in case they want to buy a home or in case they want to retire. Since in many parts of the world low inflation, low interest rates, a functioning public health sector, free good public education system, and social security are either non existent or inefficient, individuals will protect themselves by saving.
This is a basic financial decision, they postpone consumption in the present to guarantee the satisfaction of their needs in the future. I know this because I have the same background. The only reason I could come to get my postgraduate degree in the states was because my parents saved enough.

May 31 07:24 PM

[Michael Pettis:]

Cesar, of course people save for insurance purposes, and especially the poor, but that does not explain why some poor people save more than other equally poor people. If it were just insurance there would be a lot of countries that save more than China, whereas no large country, and perhaps no small country either, saves as much of its income as does China. There must be also be other reasons.

Jun 01 05:07 AM

[hcm:]

What are the savings rate for Chinese in the US? Canada? Australia? Hong Kong? England?

I believe the further away you get from the mainland and the more stable the political and economic system, you will find a lower savings rate.

Jun 01 08:46 AM

[cjchua:]

I think people who are not in the group tend to try to put some kind of structure into a certain trait of the group to explain certain phenomenon, from the outsiders' point of view. THis works we want to believe in psychiatry so it must work in socioloy as well. In this case, the group is not just the CHinese. Look at the Japanese and the Koreans and the Vietnamese, the Taiwanese, the Singaporeans. You talk about "Confucianism" but the term is probably a sound bite or it can be treated as another term for the phenomenon of "high savings rate". Conversely, now look at the societies in Asia that do not share this common trait: the Filipinos, the Indonesians, the non-CHinese/non-Indian (I assume Indians too share the trait, I am not sure) of Malaysia. Now maybe it is really the ancient Chinese teachings that are at work here - teachings that got exported to Korea, Japan, Vietnam, etc. So all the talk about one-child poicy, low interest rate, low exchange rate, lack of bank loans etc are non-sequiturs. Even before these "factors" became true today, they have been savers. I think if we approach it from an anthropological and cultural view, we may uncover the reason. Will Chinese lose this trait? Possibly, but not because of the reasons you cite, but because of western influence of "spend now, pay later" culture and the proselytization (or the seductive cosumerism) westerners make. After all, culture change albeit over a long period of time.

Jun 01 09:49 AM

[4Annie:]

In mainland China, where typically you have 3 generations of family living in high rise 500 sf flats there simply isn't the space to put things necessary to support American style consumption. Many familys yet are living in single row houses without running water or sewers (honey pots line the doorways in the alleys). Clothing is hand washed and hung on lines , outside the windows to dry-called Chinese "welcoming flags". When I was there 6 years ago many goods were sold in Friendship stores open only to foreigners. I'm sure much has changed, but then the new high rise flats for sale were astronomically high compared to average monthly salaries. Education for children & books was expensive also. Children culturally are expected to support their parents in old age.

Jun 01 09:53 AM

[MrZack888:]

China puts up massive protectionist tariffs on its burgeoning growing yet vulnerable industrial manufacturing sectors. It's to protect domestic markets, something the US should look into. stupid deregulations.

Jun 01 01:35 PM

[jayminho:]

amem!

Jun 01 03:28 PM

[RiskReturnO...:]

To understand Chinese consumer spending / savings behavior, one needs to break down the total country level figures in a segmented way.

China's 1.4 Billion people is not homogeneous. The best way to think about China is to take the top 300MM people and compare it to US and Eurozone. Then, take the bottom 1.1B and apply frontier market dynamics (e.g., bottom of India, Africa, etc).

For example, with the top 300 MM people, you can then segmented into affluent, upper middle, lower middle, and lower demographic. The spending and savings behavior are completely different among the various groups here. The top 20% (60MM) behave no different than US, Europe, and developed Asia consumers. The next 40% middle class (120MM) behave like the upper segment in Mexico and Brazil, and lower segment in US. The bottom 20% (60MM) behave like the middle class in Mexico / Brazil.

Consumer spending and savings patterns "gets more Americanized" the higher the demographic group. So, it's only a matter of time when the demographic mix shift and economic growth starts to stimulate consumer spending and reduce savings rate. (Looking at Taiwan and Hong Kong as proxy, you can see that these two countries / regions are the "end state" of China's consumer development).

Jun 01 04:01 PM

[RiskReturnO...:]

Chinese in US save less (spend more) than Chinese in China, but save more (spend less) than rest of population in US ... you can see this in the performance of US banks targetting Chinese-American population (they have much lower loss rates due to the "conservative" nature of Chinese-American borrowers).

Taiwan and Hong Kong have much higher spending rates (& lower savings rates) .... they even had their credit card / lending crisis few years back from overspending ... Hong Kong in 2002-3, Taiwan in 2005-6 ... so it's no the race / ethnic origin that drives spending / savings pattern, but the economic development and financial market structure!

Taiwan and Hong Kong are vibrant capitalist economies where people feel comfortable spending money believe "they can always make more money."


On Jun 01 08:46 AM hcm wrote:

>
> What are the savings rate for Chinese in the US? Canada? Australia?
> Hong Kong? England?
>
> I believe the further away you get from the mainland and the more
> stable the political and economic system, you will find a lower savings
> rate.

Jun 01 04:08 PM

[coreopsis:]

Funny, these are the same arguments used against 'excessive' savings in Japan during its heyday. Thus, we have another superficial analysis from someone who is supposedly stationed in Beijing. -- your off the mark conclusions are doubtless not very popular at BeiDa. Perhaps a course or two in sociology and history of Confucian societies might have helped Pettis to write more cogently about factors that have been observed for over a century by others. Again, he's the last to know...thank you, cjchua, for trying to educate him.

Jun 01 06:42 PM

[Observer45:]

Strange for a guy who is not a Chinese and someone who has not lived long in China is talking about reasons why the Chinese save - as if he knows! The Chinese save because culturally they do it. Not just in China, but for instance in South East Asia where they are reasonably well protected by retirement funds run by the state (EPF in Malaysia and CPF in Singapore). Just as a poor Chinese family would resort to borrowing money to put their child through school as opposed to borrowing to buy a plasma TV. Give it whatever sociological definition you want, but they do it. Plain and simple.

Jun 02 12:53 AM

[cjchua:]

But he will refuse to learn and use the outsider looking in "objectively" as an argument. I once wrote an NYT reporter regarding his comments why he was treated as an outsider by the Chinese in CHina, calling him a lao-wai. In his reply, he stuck to his view despite my desire to give him some consolation. He claimed he spoke Chinese and in an irrelevant aside said he spoke Japanese as well. They come to learn a bit of this language and that language and they claim then to know, even the soul and heart of the people. As Lao Tzu says, he who says he knows does not know, if he knows he will not say so. I lived in America for years and years and can claim to be one. We are so shallow at times it is pathetic.


On Jun 01 06:42 PM coreopsis wrote:

> Funny, these are the same arguments used against 'excessive' savings
> in Japan during its heyday. Thus, we have another superficial analysis
> from someone who is supposedly stationed in Beijing. -- your off
> the mark conclusions are doubtless not very popular at BeiDa. Perhaps
> a course or two in sociology and history of Confucian societies might
> have helped Pettis to write more cogently about factors that have
> been observed for over a century by others. Again, he's the last
> to know...thank you, cjchua, for trying to educate him.

Jun 04 10:05 AM