China’s high savings rate is expected to fall substantially in coming years as its workforce shrinks, the population ages and social security spending increases, a BIS report shows.
In research published by the Bank for International Settlements on the “myth and reality” of China’s savings rate, Ma Guonan (馬國南) and Wang Yi found that the Asian giant needs its population to spend more in order to sustain rapid economic growth in coming years.
The researchers, who were writing in their personal capacity, also reject claims that Chinese state firms have been benefiting from high savings thanks to exchange rate distortions and subsidies designed to drive economic growth.
They point out that “less advantaged” and more efficient firms have been the ones posting the greatest gains in earnings in recent years, rather than state-owned companies.
China’s gross national savings soared from 39.2 percent of output in 1990 to 53.2 percent in 2008, far higher than the US, which saved just 12.2 percent in 2008.
Even compared to other Asian giants — Japan with 27 percent in 2007 and India with 33.6 percent in 2008 — China’s share of savings as a percentage of GDP is significantly larger.
Nonetheless, the population and social trends that have underpinned China’s growth and savings rates are likely tail off significantly over the next decade, the two researchers said.
The frugal Chinese have come under fire from critics who claim that Beijing fueled a credit bubble in the West by investing these savings abroad, especially in the US.
Chinese holdings in US Treasury bonds reached US$900.2 billion in April, making it the biggest holder of such investments.
In the wake of the global slump, world leaders and economists have been asking China to spend more, rather than pin its economic growth on exports to the West, in order to help address world trade imbalances.
Ma, a BIS economist and Wang, who is from the Chinese central bank, note however that the current savings trend by Chinese households will not last.
The rapidly growing working population in recent years has boosted savings in recent years, Ma and Wang said.
In addition, large-scale corporate restructuring between 1995 and 2005 increased job uncertainty, forcing workers to set aside more money in case they were fired.
The lack of a social safety net also pushed workers to make “precautionary savings.”
Beyond households, government savings have also been increasing in tandem, as more is being set aside to meet pension needs, which are expected to rise significantly as the population ages.
However, these trends are expected to be reversed in coming years.
“It is reasonable to assume that the large-scale labor retrenchment observed during 1995 to 2008 is by and large been behind us,” the researchers said.
China is also expected to enter into a phase of “accelerated population ageing within a decade.”
This means that the workforce will decline, leading to a fall in overall income and therefore savings.
At the same time, infrastructure spending is expected to continue, in order to provide for the ageing population and the urbanization of the country.
“Taken together, a key implication from these medium-term forces is that China’s saving rate is likely to plateau before long and may ease off noticeably from the current 53 percent or even higher levels over the next 10 years,” the researchers said.
“The marked U-shaped experience of China’s saving rate over the past 25 years also suggests that the prospective Chinese saving rate can fall meaningfully in the years ahead,” they added.
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