China’s very high savings rate is many things to many people—a source of global imbalances for some economists, a sign of financial repression for others, a potent source of growth and a nest egg to make up for the absence of social security for the mass of the Chinese people. In this paper, Guonan Ma and Wang Yi set out to examine all these reasons and come up with reasons why the Chinese save so much.
China’s saving rate has been increasing over the years, reaching a huge 54.3% of gross domestic product (GDP) in 2008. The only country that comes close is Singapore. India’s rising savings rate, a source of pride and joy for our economists, reached a high of 37.6% of GDP in 2007.
The authors examine each of the three sectors that save: households, the corporate sector and the government. The household sector’s share of total income has actually been falling, thanks largely to a declining share of labour in the economy. Yet, despite its lower share, household savings have increased as a percentage of GDP, because of a rise in the propensity to save. The authors say that “Record economic growth, a sharp decline in the Chinese youth dependency rate, the expected rapid ageing of the population and saving/consumption habit persistence all have contributed to a high personal saving propensity.” Moreover, there has been a vast restructuring of the Chinese corporate sector in the last couple of decades, which led to the closing down of several large decrepit state enterprises, with many losing their jobs. This has led to an increase in saving for a rainy day, or what economists call the precautionary motive for saving.
Over the past 15 years, corporate savings have been the most important contributor to the high savings rate. One often-cited reason is that corporate subsidies, including paying very low rates of interest on bank deposits so that lending rates are kept low and keeping the currency undervalued, which boosts exports, have increased corporate savings. The authors do not dismiss these theories, but argue that other factors such as improved efficiency also matter.
Government savings, too, have been high in China. The researchers say that the Chinese government saves rather than spends because “the need to accumulate pension assets in anticipation of rapid population ageing, the incentives for local governments to invest rather than providing public services, and a large burden of social spending on the local governments that have come under increased funding pressures”. They conclude that the evidence casts doubt on the proposition that distortions and subsidies account for China’s rising corporate profits and high saving rate.
What’s more important from the point of view of the rest of the world, however, is whether the Chinese will start consuming more and saving less, which will lead to lower current account surpluses and a more balanced global economy. The authors argue that China’s savings rate is likely to plateau and then fall. One reason is because the corporate restructuring has already been done and large-scale retrenchments are unlikely—so people will save less. Another is a rapidly ageing population, which means the growth in the labour force will slow, leading to lower savings. And the third reason, very interesting in view of recent strikes in China’s factories, is that “there may be some early and tentative signs that China could get closer to the Lewis turning point”. The Lewis turning point is so named after Nobel prize winning economist Arthur Lewis who argued that a developing economy could grow without wage inflation as long as industry could attract surplus workers in agriculture. When it could no longer do so, a turning point was reached and wages started to rise. What happens then? The authors explain: a rise in the labour share of income, lower corporate saving and a greater role of personal consumption in future.
Graphic by Jayachandran/Mint
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