Why do the Chinese save so much?

I do not have much to say on this one, besides the fact that its a question I had never really investigated until I read this blog entry. From Michael Pettis:

Demographic causes

• Declining dependency ratios, especially via decline in the number of young people. From the mid-1970s to roughly the middle of the next decade we know that China’s dependency ratio has contracted sharply. A much larger share of the population is of working age today than thirty years ago. Besides being a great source of rapid growth, I think this fact creates a bias towards savings since I think of working population as a proxy for production and total population as a proxy for consumption. This means that with China’s working population growing so much faster than total population (a process which will be reversed over the next three or four decades) Chinese production has grown much faster than Chinese consumption. The difference, of course, is the savings rate.

Structural causes

• Lack of social safety net. With a risky health care system, no social safety net, and limited ability to borrow, Chinese households have to self-insure. This means they save on average much more than they need on average to cover these costs.
• Rapid growth in wealth. When per capita wealth grows very quickly, it may take a while for people to change their consumption behavior as quickly, so growth in consumption lags growth in wealth. Of course the difference between the two is the rising savings rate.
• The generation of “little emperors.” I have heard not-always-satisfactory arguments that households save a huge amount because of the one-child policy — they are essentially spoiled, the argument goes, and parents will sharply limit their own consumption in order to provide everything for their only child. I am ambivalent about this explanation, but I do think the maturing of the one-child generations may have an impact on future savings. They are much more likely, it seems to me, to spend money on themselves, although this argument may be a little too glib.
• Lack of consumer credit. Without easy availability of consumer credit, households who want to borrow to purchase big-ticket items have little choice but to save today for a future purchases.

Policy causes

• Low exchange rates. The reasoning and causality are unclear, but there is evidence that countries with artificially low exchange rates tend to have high savings rates, perhaps because low exchange rates reduce real wages.
• Low interest rates. We also have a lot of evidence that low interest rates create higher savings rates in countries like China. This claim generates a lot of confusion, and I am often asked how this can possibly be true when the opposite is true in the West. My guess is that it occurs because of both portfolio effects and income effects. For the former, because Chinese don’t save in the form of stocks, bonds and real state, but rather in the form of bank deposits, declining interest rates do not increase the value of their savings portfolio, but actually reduces it. This is why reducing interest rates causes savings in the West to decline (Westerners feel richer) whereas it causes savings to increase in China (Chinese feel poorer). For the latter effects, with interest income such a large part of total income, low interest rates are similar to low wage rates in their impact on consumption.
• Policies aimed at running trade surpluses. This is generally a catch-all and must be true by definition. A trade surplus occurs when production exceeds consumption, so any policy aimed at growing production faster than consumption is also implicitly aimed at raising the savings share of income.
• Policies aimed at running fiscal surpluses. Of course this contributes by creating government savings.
• Policies aimed at forcing profitability in SOEs via interest rates and other policies. Another catch-all for policies that drive up corporate savings.

I am not sure if there is any over-arching reason for high savings in China, but generally I would argue that policies aimed at generating high levels of investment and at running trade surpluses must also, by definition, cause high levels of savings. In that sense the policies associated with the so-called Asian development model are policies that implicitly or explicitly cause high savings rate. if this is true, as I have written elsewhere, high Asian savings rates my be threatened in the future by rising savings rates in the US, since in the aggregate consumption and production must balance. The US trade deficits required for the success of high-savings policies in China may no longer exist.