In China, factors such as underdeveloped financial markets and fear of large future expenditures due to both economic insecurity and expected inflation cause households to accumulate large savings balances:
High prices are eroding consumer confidence, by Zhang Shunyi, Shanghai Daily: Mounting household savings in China's banks is not necessarily the good thing it seems. According to the People's Bank of China, domestic individual bank deposits... hit 14 trillion yuan (US$1.72 trillion) by the end of 2005. The record-breaking amount of deposits indicates that the Chinese people are much wealthier on the whole. However, rapid accumulation of deposits also shows that people are reluctant to spend as the consumption rate has been on the decline for five consecutive years...
Last year, loans issued by China's banks only accounted for 53 percent of the total money they collected. Part of the other 47 percent was stored in the PBOC as the excess reserve. To make a comparison, loans took up 91 percent of the total a decade ago... Basically, there are two ways to deal with the problem of excessive household savings. One is to further encourage consumer spending thus reduce the deposits. The other, as was mentioned above, is to find more channels, which are profitable and safe, to digest the deposits. Easier said than done.
Both of these two measures require fundamental adjustments in the system of social and banking mechanism. The importance of results brought by these changes can never be understated - it links directly with economic stability. Why are people reluctant to spend? Chinese people are well-known for the habit of hoarding up valuable things. But under the current climate, worry about high prices is perhaps the most cited reason.
"What many people see is the rising price of seeing a doctor or studying in a good school. That makes them feel less safe," said Sun Lijian, a professor at Fudan University's School of Economics. According to a recent survey from Horizon Research, expensive medical services and changes in the pension scheme are listed among the top concerns that trouble Chinese people. If people lose their job, suddenly become ill, want to buy an apartment or hope to deliver better education to their kids, they have to splash out a great deal of money on those things.
The housing price provides a case in point. Even in second-tier cities such as Hangzhou, Wenzhou or Ningbo, people have to save their disposable income for 27 years to buy an 80-square-meter apartment on average. And compared with 1999, the cost of fees for a college student has jumped from 51,000 yuan to 131,000 yuan...
Reducing interest rates to induce people to spend money is difficult. "The PBOC is very prudent about making any more changes to the interest rate. It is nearly impossible to reduce the rate when it already stands at such low a level," said Wu. Perhaps the most important thing to do is to give people confidence about their basic life.
In addition to the measures to enhance economic security, it is also important to develop the financial services industry so that it doesn't take decades of saving to, for example, buy an apartment. In order to reduce its dependence on exports and aid in global rebalancing, China must increase domestic consumption. The "fundamental adjustments in the system of social and banking mechanism" won't happen overnight supporting Bernanke's view that it could be as long as ten years before imbalances are resolved.