(Bloomberg Opinion) -- Chinese are, in the popular imagination as well as some economic statistics, inveterate savers. According to the International Monetary Fund, the Chinese savings rate stood at an astonishing 46 percent in 2016, compared to a global average around 25 percent. Chinese planners have long sought to bring that ratio down in order to promote consumption and ease the economy’s overreliance on investment. If only Chinese would shop more, the thinking goes, China wouldn’t need to rely on smokestack factories and boondoggle infrastructure projects to drive growth.
There’s one problem with this theory, though: Chinese may not have as much money to spend as the headline numbers would indicate.
For one thing, the official savings rate includes government-mandated social-security contributions. Other government surveys show that Chinese households only save about 29 percent of their actual income. After accounting for the fact that Chinese household income is equal to 44 percent of GDP — compared to 70 percent to 80 percent in other countries — that suggests Chinese are saving closer to 13 percent of GDP, which would be less than a third of the headline national savings rate. Even if the situation isn’t quite so dire, it seems clear that households have less socked away than one might think.
Secondly, most of those savings aren’t available for immediate consumption. Despite the mandated contributions, China’s safety net is relatively thin; it includes minimal unemployment insurance and health and retirement benefits — a source of constant grumbling. Many families have set aside money to cover the gap. According to a 2013 study in the Journal of Development Economics, preemptive savings by households accounts for as much as two-thirds of the total in China.
This is entirely rational, as the volatility or risk associated with household income in China has increased in recent decades. One recent study found that the risk of permanent income shocks to Chinese households shot up after the late 1990s, as millions of migrants moved from the countryside to cities and state-owned enterprises began scaling back their guarantees of lifetime employment. While many urban residents have enjoyed soaring standards of living, millions of less-educated and unskilled workers have suffered painful income shocks from economic restructuring.
In fact, Chinese have less money to spend than some peers around the world who save much less. While Mexico had a post-2000 savings rate of only 21 percent — less than half of China’s, according to Credit Suisse — it boasted wealth per adult of nearly $23,000 in 2016, compared to China’s $27,000. Malaysians and Russians had slightly higher levels of non-financial wealth than Chinese did, and Brazilians just a bit less — all while recording significantly lower savings rates. That’s all the more remarkable considering their economies also had measurably slower growth rates than China at the time, or were stagnating entirely.
To make matters worse, more than 80 percent of Chinese household wealth is held in land and real estate. Only about 10 percent is held in financial assets, mostly bank products such as checking and savings accounts. In order to consume, then, Chinese have had to go into debt. According to official data, Chinese households now have a debt-to-household-income level of 112 percent, with debt rising 20 percent annually. That’s higher than in the supposedly profligate U.S. and Japan.
A lower-than-expected savings rate implies two specific problems. First, as long as China continues to depend on investment to power its economy, planners will struggle to find the savings flow to fund growth. Slow deposit growth from falling savings, combined with high loan growth, is already pushing loan-to-deposit ratios near 75 percent. This will inevitably strain bank capacity.
Second, Chinese households clearly have much less ability to weather an economic downturn or drive domestic demand than is widely believed. Unless the government can strengthen the safety net and find a way to cool an overheated property market, consumers simply won’t be able to pick up the slack in a slowing Chinese economy. Both tasks are going to be difficult: China’s state pensions tab, for one, is growing at 12 percent annually as the population rapidly ages.
Recent tax cuts should help boost consumer spending somewhat. But the government is going to have to do much more if it wants to wean the economy off a reliance on savings that, increasingly, aren’t there.
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