China’s high savings conundrum
21 November 2017
Chinese household and gross national savings have been so high for so long that they often don’t receive the attention they deserve. At approximately 45% of GDP, Chinese national savings are high enough that despite a historically high investment share of GDP, China still runs a current account surplus. It is especially surprising given China’s domestic policy mix. According to the IMF, China’s policy mix – a fiscal deficit of approximately 10% of GDP and excessive credit growth – would be consistent with a current account deficit of between 4 and 6% of GDP, not the 2% surplus it currently has. As experienced by other emerging market countries with surging fiscal spending and domestic credit growth, investment generally outstrips savings, resulting in a current account deficit.
While much of the international focus is on China’s debt, the consequences of China’s high saving rate receive relatively less attention. After all, if China were to bring its fiscal deficit to more sustainable levels or reduce its credit growth and investment spending to more viable levels, the result (without a corresponding drop in savings) would be a current account surplus in the range of 4 to 5% of GDP. Certainly this would result in untenable global imbalances, not to mention a further deterioration in the US-China relationship. So why is China different? Why, despite domestic policies which would normally result in significant external deficits, are Chinese national savings so high that China still runs a trade surplus? And what should be done about it?
Demographic shifts and an insufficient social safety net are the two reasons most commonly cited for China’s high saving rate. Indeed, they both offer partial explanations, but neither can fully explain why China saves so much. The demographic explanation can be boiled down as such: more workers and increasingly higher incomes meant more savings. This has undoubtedly had an impact (see Chart 10), but does not fully explain China’s high persistent gross national savings. The other reason given is that China’s insufficient social safety net meant households needed to save more in order to pay for future healthcare, retirement, senior care and education expenses. Interestingly, China has increased social spending from approximately 2% of GDP in 2000 to nearly 10% in 2016 (see Chart 11). Although the household saving rate rose as social spending went up in the 2000s, it has begun to fall since 2010 -- either the increase in spending was initially not enough to lessen the worries about future expenses, or the precautionary savings argument is less important than demographics. While household savings may continue to trend downward on these two forces, the other element is persistent non-household savings. This leads to the third potential explanation - what if some of the fiscal and credit expansion have not been not spent, but rather saved, especially by local governments and SOEs? While this would imply that rates of investment (and thus growth) have been overstated, it would also partially explain why China can run large fiscal deficits and rapid credit growth while maintaining a surplus. Additionally, it could also explain why recent tightening has scarcely impacted growth. Regardless of the causes, the future trend is clear – as China ages, spends more on social programs and tightens credit policy– this mix should continue to decrease the saving rate.