Seven reasons why the Chinese save, when they really should be spending.
Recommended read. Some good excerpts:
But no country can be so productive that it can take, every year, half its GDP and reinvest it into more capital stock without eventually ending up with a huge excess capacity and a mountain of bad loans. Thus, China needs to radically change its growth model from net exports and investment to reduced saving and more consumption. There are, however, many structural reasons why the Chinese save too much and consume too little. (Consumption in China is 36 percent of GDP, about half of what it is in the U.S. and in emerging economies like [India]
Seventh, the average citizen in China doesn’t save more than one in Hong Kong, Singapore, or East Asia: they are all Confucian savers, and tend to salt away a third of after-tax income. A big difference, however, is that a whopping 25 percent of savings in China is in the form of the retained earnings of the corporate sector, mostly state-owned enterprises (SOEs). In most private economies, those firms’ profits would become dividends that would increase household income and thus consumption. In China, they become retained profits that go into more capital accumulation and excess capacity. The Chinese policy of an undervalued currency and low cost of capital for public firms (and thus low return to savings for households) has implied a massive transfer of income from households (that thus can’t spend) to SOEs (that thus overinvest). Short of privatizing the SOEs or massively taxing their profits and transferring that income to households, savings will remain too high, consumption too low, and investment excessive. Yet the SOEs are politically powerful while households are impotent, so reform could prove a major challenge.
Clearly China needs to radically change its broken growth model in the direction of reduced exports, investment and savings, and increased consumption. But there are structural—and cultural—reasons why the Chinese save so much and consume so little. Radical policy reforms may take more than a generation to rebalance the Chinese economy toward a more sustainable growth model.
Subsidies and directed credit for local companies, buy-American provisions for government agencies and government contractors, currency manipulation, the rules on “conditional market access” and “indigenous innovation” – surely China could hardly complain if we were to pay them the highest compliment by embracing their economic model.
