Why do the Chinese save so much?

by on January 25, 2010 at 1:10 pm in Economics | Permalink

Yes, it's Eric Barker day.  Here is another entry from Eric's blog.  We all know that there are many more men in China than women and here is what that equilibrium looks like:

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”

The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance. “It’s a very high ratio of savings to income,” Wei says. “The comparable savings rate in the United States would be 2 or 3 percent before the crisis, and about 6 percent since the crisis.”

Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.

The original source is here.  You'll note, by the way, that low wages and a high savings rate are the fundamental reasons for global imbalances, not Chinese currency policy.  If this is true, one implication is that the Chinese attempt to cut population leads indirectly to those global imbalances.  If you "fear China" (whatever that means), the current imbalances might be better than the relevant alternatives, namely a China with high and growing population and all the environmental problems which that involves.

There's plenty of talk from people wanting to make China "do it right" but only rarely do those discussions recognize all the constraints which China is laboring under.

Philo January 25, 2010 at 1:44 pm

China has a 30% household savings rate; the U.S. rate is 6%. That’s a *difference*; why call it an “imbalance” (which sounds negative)? (Similarly for other economic differences between China and the U.S.)

david January 25, 2010 at 2:02 pm

@Arun

The same entry notes that “India, Korea, Vietnam and Singapore also have sex ratio imbalances that favor male children despite the absence of these stringent family planning policies”.

In fact, modern Singapore and Korea explicitly encourage more children. Doesn’t seem to be fixing the gender ratio imbalance. It’s not so much the pressure to cut population than mass cultural preferences in favor of male children.

E. Barandiaran January 25, 2010 at 2:45 pm

Tyler,
First, let me say that the data on savings that Wei and Zhang use in their NBER WP 15093 are consistent with my estimates of savings for the mid-1990s. My estimates were part of a larger work on China’s flows of funds (as you may know this is the only way to find consistency between national accounts and other data). This is important because some people used to claim that household savings in China during the 1990s were much lower than my estimates and Wei&Zhang’s estimates.
Second, in addition to having a high saving ratio, Chinese households have been investing their savings mainly in the state banks and between 15-25% of this investment has been transferred as bank reserves to the People’s Bank of China. In turn, and as part of the policies of January 1, 1994, the People’s Bank of China has been using the bank reserves to accumulate international reserves. In other words, for more than a decade, Chinese households have been investing abroad over 5% of their income.
Third, because of that investment abroad, it is wrong to argue that PBC (China’s central bank) has kept the Chinese currency at an artificially low rate. Today R. Samuelson in his WP column again argues that China follows this mercantilist policy. Samuelson is wrong: if Chinese households were free to invest their savings anywhere, they could invest even more than 5% of their income abroad. And if they had been doing that, the Chinese currency would have been trading at a lower rate in the past 15 years. I know that I must take into account other possible changes but the point is that to argue that China is not applying a mercantilist policy (whatever this means in today global economy). They have to invest their savings somewhere, and as much as there is a large inflow of FDI into China, it’s not surprising that the Chinese invest their savings abroad.
Fourth, you say in your post
“You’ll note, by the way, that low wages and a high savings rate are the fundamental reasons for global imbalances, not Chinese currency policy. If this is true, one implication is that the Chinese attempt to cut population leads indirectly to those global imbalances. If you “fear China” 9whatever that means), the current imbalances might be better than the relevant alternatives, namely a China with high and growing population and all the environmental problems which that involves.”
The paragraph reads as if you were saying that it’s not China’s mercantilist policy but China’s Malthusian policy the ultimate cause of what you call global imbalances. Maybe high savings are an unintended consequence of the one-child policy but certainly low wages are not a consequence of such a policy. Anyway, what are the imbalances? Are we going to call savings an imbalance between income and consumption? at what level–household, country, world? Are we going to call the accumulation of some assets, real and financial assets, an imbalance? The idea of imbalance comes from one of the many weaknesses of macroeconomic theory–to think in terms of countries for which we have national accounts and balance of payments statistics, as well as other data.

bcg January 25, 2010 at 3:18 pm

Geoge McCandless: But how does that explain “…but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.† ?

Don the libertarian Democrat January 25, 2010 at 4:23 pm

This debate reminds me of a couple of NY Time’s posts:

http://norris.blogs.nytimes.com/2009/06/22/why-do-chinese-save-boys-want-to-marry/

And:

http://economix.blogs.nytimes.com/2008/12/17/fear-the-reason-the-chinese-save-so-much/

I have to admit that I find the second more convincing.

anon January 25, 2010 at 5:24 pm

Why do the Chinese save so much?

All the Chinese people I know are “frugal”, i.e., cheap as hell.

Try negotiating with a Chinese person. They have a LOT more patience than you do….

Purely anecdotal.

MikeB January 25, 2010 at 7:18 pm

Here is some support for the view that males are preferred as a retirement source of income:
In China’s highly patriarchal society, which curiously lacks a developed social security system to provide adequately for retirees and the aged, many Chinese parents prefer to have a son, especially if the family is limited to only one child. Sex-selective abortions have increased with the availability of ultrasound technology. Most of the Chinese parents who abandon their daughters do so in order to be able to try again for a son who they know will take care of them when they get old. Girls invariably marry and move to the husband’s family where the wife is required by tradition to take care of her husband’s parents, not her own. Because of this cultural phenomenon, some Chinese parents view a girl child simply as a financial burden without much benefit.
The article is here: http://works.bepress.com/susan_tiefenbrun/2/

Cyrus January 25, 2010 at 7:47 pm

As far as old-age caretakers are concerned, my impression is that it was traditionally unmarried daughters, and daughters-in-law, hence a preference for marriageable sons.

Ricardo January 25, 2010 at 11:23 pm

I thought it was the case that a good part of the savings is foreign currency earnings which firms are forced to save by the central bank. Does anyone else recall that or have a reference?

I’m not sure to what extent firms are “forced” to save foreign currency earnings. This is a symptom rather than the underlying cause, though. Chinese people are free to buy imported goods if they want to but choose not to and save their money instead. This means foreign currency earned through exports (and interest payments or dividends on foreign investments) continues to pile up.

It’s called an “imbalance” since even in booming China people are saving money faster than it can be profitably invested in the country. So the money gets recycled through international financial markets into low-yielding foreign investments that are not always welcome by recipient countries.

Greg January 26, 2010 at 12:21 am

Que? I’d have thought a desperate single man would spend it all on expensive displays of bravado and/or gifts to gain attention… Seems backwards to me.

mobile January 26, 2010 at 1:00 am

What are the savings rates like in Alaska?

The mining boomtowns of the Old West were prone to both excessive sex ratios and profligate behavior.

babar January 26, 2010 at 6:31 am

@andrew: my guess is that in the US, consumer credit and insurance are used where savings would be used in China.

Sammler January 27, 2010 at 5:28 am

“You’ll note, by the way, that low wages and a high savings rate are the fundamental reasons for global imbalances, not Chinese currency policy.”

This is a “180-degree” analysis — it goes halfway and ends up pointing in exactly the wrong direction. Chinese currency policy lowers wages (USD-denominated and real) in order to increase employment and enable the culture of savings. So the alleged “fundamental reasons” are themselves reinforced by the currency policy.

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