China has a remarkably high savings rate in a typical year–and sometimes its higher than that. In fact, the main reason for China\’s high trade surpluses is that with such a high savings rate, China doesn\’t consume either a lot of imports or domestically produced goods. A reason that China can invest so much, year after year, is that the investment is financed by high savings rates. A standard recommendation for China\’s economy for at least the last 15 years or so is to \”rebalance\” toward being an economy driven by domestic consumption, not by investment.
A team of economists from the IMF--Longmei Zhang, Ray Brooks, Ding Ding, Haiyan Ding, Hui He, Jing Lu, and Rui Mano–discuss these issues and others in \”China’s High Savings: Drivers, Prospects, and Policies,\” written as IMF Working Paper WP/18/277 (December 11, 2018).
\”Household savings in China have been trending up since the early 1990s and peaked at 25 percent in 2010 and moderated slightly in recent years. Globally, household savings have been falling (from 14 percent of GDP in 1980 to about 7 percent today). The diverging trend has led to an increasing gap between China and the rest of the world. At 23 percent of GDP, today China’s household savings are 15 percentage points higher than the global average and constitute the main drivers of higher national savings in China.\”
Why do China\’s households save so much? Some of the likely factors include:
For example, the health care coverage of urban workers declined by 17 percentage points between 1990 and 2000. Furthermore, the average replacement rate for urban workers (pension benefits in percent of wages) dropped sharply from close to 80 percent to below 50 percent (He at al., 2017). Nationwide, individuals have been paying increasingly larger shares of healthcare expenditures out of pocket, rising from 20 percent in 1978 to a peak of 60 percent in 2000. In addition, households also began paying more for education out of their own pocket, rising from 2 percent in 1990 to 13 percent in 2001.
East Asian economies experienced a rapid decline in household savings after the peak. Japan’s household savings rate peaked in 1974 at about 25 percent and has fallen to almost zero. In Korea, household savings peaked in the early 1990s at 27 percent, and are at about 15 percent today. Similarly, household savings in Taiwan POC also fell rapidly after peaking in 1993 at about 30 percent, although they stabilized a decade later at about 20 percent. Household savings in these countries or areas peaked at income levels similar to China’s, suggesting that the stage of development plays an important role in savings dynamics. In addition, microdata suggest that the decline in aggregate household savings in those countries or areas was driven by lower savings rates across all income deciles, although the drop was much more pronounced for low-income households, likely reflecting the improvement in social safety nets. With the aging population and strengthening of the social safety net, China is likely to follow the regional trend.
As China\’s population ages, household savings rates will decline and public pressures for more spending on pensions and health care will rise. Thus, the movement to lower savings rates could be reinforced if China\’s government shifted its pattern of spending from investment-heavy to more consumption-heavy. Here\’s a figure showing public investment as a share of GDP across a number of countries.