Why Do Chinese Save So Much?

My apologies, but once again I have been too busy travelling 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 today 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 Confusion 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.

About Michael Pettis 166 Articles

Affiliation: Peking University

Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups.

Visit: China Financial Markets

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