Why have household savings grown for years in China?

The average Chinese household has been stockpiling money for years, and the phenomenon is causing growing concern in world economic circles. Professor He Ping, vice president of the School of Finance at Renmin University in Beijing accepted an interview on this issue.

Prolonged household savings growth not conducive to stable economic growth

Q: As a reflection of low consumption, how does the rapid growth of household savings impact on long-term and sustained economic growth?

He Ping (He): The impact of overly-fast growth of household savings on macroeconomic development, to some extent, is reflected in the imbalance between saving and consumption. Between 1993 and 2004, the ratio between China's retail sales of consumer goods and savings was in steady decline. During those 12 years, the ratio decreased from 0.830 in 1993 to 0.451 in 2004. If we use the ratio between the volume of retail sales of consumer goods and the amount of money saved to evaluate the ratio between consumption and saving, we can conclude that China's consumption growth is overly slow and that savings are excessive. For the greater part of those 12 years, the growth rate of retail sales of consumer goods was lower than the growth rate of savings. The amount of money saved grew continuously and people consumed little. Excessive saving is bound to slow the growth of consumption and restrict future growth of savings. This pattern is not conducive to the improvement of people's material and cultural living standards or healthy and sustainable economic development.

At present, consumption is contributing less and less to overall GDP and economic growth is more dependent on investment and exports. The contribution rate of investment to GDP growth is increasing.

The last step in the production process, consumption is the realization of the value and utility of consumer goods. The production process is only complete when the products enter the market. In the process of economic growth, over-reliance on investment to stimulate the economy, although this may help achieve a balance between demand and supply in a short time, will eventually lead to an over-supply of consumer goods. This will create an imbalance in the macro-economy as supply outweighs demand. At present, China is producing a surplus. Inadequate consumption and overly-high investment rates threaten the stability of macroeconomic balance in the short term and steady economic growth in the long term.

Household savings growth pressures banks

Q: Why are people choosing to save rather than spend?

He: From a microeconomic perspective, the increase in household savings reflects the deterioration of the financial market and the growing pressure on the banking sector in China.

The savings trend reflects the limited financial assets options. The limited nature of the treasury bond market and the poor performance of the capital market does not encourage people to invest their funds. Substantial bank savings are increasingly putting the banking sector under pressure.

The amount of savings in commercial banks totaled 14 trillion yuan at the end of 2005. The ratio between the deposit-loan balance of RMB and the balance of deposits in financial institutions was very high. For every 100 yuan absorbed by commercial banks, 47 yuan was held up in the inter-bank market or central bank. The reason an excess liquidity has occurred is that the speed of loan circulation is barely able to keep up with the rate of savings growth, therefore creating a huge amount of idle funds. The slackening of the loan growth rate was caused by excess production and inefficient enterprises. Commercial banks invested a large amount of idle funds in the securities market, resulting in a substantial reduction in banks' income, far below their initial investment. Overproduction and the excessive liquidity of banks have resulted in critical challenges for commercial banks. This is bound to have a profound impact on commercial banks' operational efficiency, asset allocation and risk prevention.

Preventive measures lead to savings growth

Q: Why are people saving so much?

He: The Chinese have always been provident and thrifty, with a traditional tendency to save rather than spend their money. However, some problems that became apparent after the establishment of the market economic system have also encouraged people to save.

The absence of a reliable social security system forced people to curb immediate spending. With advances in medicine and social security system reforms, urban residents have had to shoulder extra expenses for medical and endowment insurance which was originally paid by their employers. This significantly increased urban residents' expected expenditure and they are coping by curbing immediate consumption. In rural areas, farmers still focus on family security issues. With the increasing pressure of the aging population and the diminishing size of families, farmers have to save reduce spending on food and other expenses and put money towards endowment funds.

Education system reforms increased the economic burden of education. China's annual fiscal expenditure on education is far below the world average; just 5 percent of GDP goes towards education expenses. There is a serious shortage of funds in primary and secondary schools in some rural areas. These schools are then forced to shift the economic burden to students' families. In urban areas, due to the uneven distribution of educational resources, parents spend quite a lot of money transferring their children to different schools and paying for extra-curricular guidance. The reform of higher education has actually increased costs. As a result, many urban and rural households are unable to afford to send their children to university. Concerned about the high cost of their child's education, many families begin saving well ahead of time.

Housing system reforms have also prompted people to save long-term for housing. After China abolished its welfare housing distribution system in 1998, more and more housing products have been commercialized. The price of real estate has risen rapidly. Given the sluggish housing payment system reform, people have had to spend more on housing. This was a direct effect of the backward performance of the salary system reform, which failed to provide a reasonable income distribution system. Although workers began to earn more, it was not enough to meet the rising cost of housing. People were forced to begin saving long-term and reduce immediate consumption.

The Chinese have very few other choices in terms of investing in financial assets. The way the economy is currently set-up, people are forced to save money.

Many factors contributed to the significant growth of household savings in the early 1990s. This is difficult to explain using the general principles of the flexibility of saving rates.

Distribution system reforms need to happen faster

Q: What countermeasures should be taken to solve the problems?

He: The key to solving these problems is to launch a series of effective measures to help promote growth in consumption, establish a consumption-led economic growth strategy, and curtailing the forces that drive strong saving growth.

China needs to speed up reforms to the income distribution system and increase the earnings of low-income residents in urban and rural areas. Farmers should be relieved of a greater non-tax burden, even after tax cuts. Tax measures should be used to control the excessive growth of the income of some urban residents and measures should be adopted to improve the income of farmers and low-income groups. The social security system needs to be improved so that people feel more confident about the future and trust the systems in place that protect their interests. The nine years of compulsory education should be provided for free, reasonable education fees should be set for education beyond that and fiscal investment in education increased. Universities should receive more funding so that students are not charged excessive fees. The housing security system needs to be improved to protect low-income families and keep a balance between housing demand and supply. More low-rent housing should be made available and more mid-range housing should be available to purchase.

Furthermore, China needs to improve its financial system, build a healthy capital market, and speed up innovation and the development of financial products. To resolve the problem of excess liquidity in the current banking system, China needs to come up with new financial products to connect different markets. China should do everything possible to develop a healthy capital market, and encourage commercial banks to invest in the capital market. Financial management businesses should be developed and commercial banks should operate in new, innovative ways. By absorbing a variety of asset management products, part of the savings growth and deposits can be transferred.

By People's Daily Online