Will Changes in Consumption, Investment, the Social Safety Net, or the Exchange Rate Reduce Saving in China Anytime Soon?
The Economist reports on China's high saving rate, nerly 50% of GDP, and the prospects for change in the near future. While saving has slowed recently, investment has slowed even faster leading to a more rapid accumulation of saving. There are solutions to the saving imbalance in China, Chinese consumers could increase consumption and reduce saving, domestic investment could pick up, social safety nets could be improved, or the yuan could be revalued, but according to this analysis, the prospects for a quick adjustment in any of these factors do not look promising:
The frugal giant, by Minton Beddoes, The Economist: ...[T]he world ... is still waiting for a big Chinese consumption boom. ... the Chinese are spending a lot more than they used to. ... But Chinese saving is growing even more rapidly. Since 2000, the country's overall saving rate-already the world's highest by far-has risen sharply, to nearly 50% of GDP (see chart). Even though China is investing at the staggering rate of 46% of GDP, it is still running a net saving surplus, and that surplus is still growing... and shows no signs of stopping.
...China's capacity for thrift has long perplexed economists... What is going on? Household saving is the easiest to make sense of. First, Chinese households have not changed their consumption patterns fast enough to keep up with the huge rise in their incomes. ... a large part of China's growing income has been going to the relatively small share of the population living in coastal areas. Richer people save more than poorer ones. ... Moreover, the one-child policy has made it harder for people to rely on their children as a source of support in old age, further encouraging thrift. ... A further incentive to saving is the weakness of social safety nets. Under the old economic regime many Chinese workers could count on health and pension benefits from state enterprises (the "iron rice bowl"). No longer. ... Pension coverage is low ... Health care is also getting more expensive. ... Education, too, requires deep pockets ... The relative lack of credit is another factor... consumer credit is still in its infancy. ... Like the Japanese in the 1960s, the Chinese need to save a lot because they find it hard to borrow.
And save a lot they do. Chinese household saving, at around 25% of disposable income, is astonishingly high ... But ... they were not responsible for the sharp rise in national thrift since 2000. ...China's household saving rate has been more or less steady since 2000 (see chart). The recent rise in national saving was led by ... the corporate sector. ... China's firms are now bigger savers than its households. But unlike their peers in the rest of the world, they are investing their surpluses... That splurge may well prove unsustainable. Profit growth has slowed sharply over the past year ... Slower profit growth means less corporate saving, but investment seems to be slowing even faster ... the pace of China's investment is likely to fall over the medium term...
What happens to China's national saving surplus will depend on whether China's households will save less and spend more, thus becoming the engine of the domestic economy. The example of Japan is sobering. Although Japanese households now save much less than they used to, their country never really made the shift from export-led to consumer-led growth. ... China, however, is different in important ways. Its economy is already much more open than Japan's ever was. ... And ... China seems to be shifting away from an undervalued currency far more quickly than Japan did. ... but this is likely to take several years. Although American policymakers may be clamouring for a rapid rise in the yuan, there is no sign in Beijing that the government plans anything of the sort. ... A government that depends on rapid economic growth to legitimise itself will not want to risk instability with a sudden rise in the currency, so a much stronger yuan seems an unlikely route to a quick reduction in China's saving surpluses. ... Redirecting an economy as big as China's towards domestic consumption takes time. China's saving surpluses will not last forever, but nor will they disappear overnight. And trying to move too fast can be disastrous, as the mess in Asia's other emerging markets shows.