Saving_Box__Pig_Shape_.jpgAtavistic it may be, but one of the unifying characteristics of Chinese society is its propensity to save.

That's handy if you are a retail bank as it it gives you easy access to a plentiful source of money to lend. But its not such good news for the global economy and, more specifically, for businesses whose prosperity depends on Chinese consumer spending.

To understand the Chinese consumer a bit better, Michael Petis, professor at Peking University's Guanghua School of Management, has posted this fascinating insight that goes a long way to help explain Chinese savings habits.

It is often said that Confucius is to blame for China's high savings rates. While acknowledging that the Confucian culture predisposes people to high savings rates, Petis argues that this is not the whole story and cites other factors.

First, there is China's declining dependency ratio, which means a much larger percentage of the population is working than before. With the working population growing faster than the population as a whole, he argues that production has grown faster than consumption, with the result that what cannot be consumed gets saved.

Some of that saving may be earmarked for a particular purchase and the lack of consumer credit means that Chinese will typically save up to buy a big-ticket item. But much of it is simply “saving for a rainy day”.

Then there is China's rapid growth in wealth, which means that people simply do not yet have the “spend, spend, spend” mentality so prevalent in the west. So they need role models or, failing that, TV adverts to show them how to not feel guilty about spending money.

Petis also mentions China's rudimentary social security system, which encourages people to “self insure” their future.

One of the most interesting explanations and one that I previously had not given much thought is China's low interest rates.

Indebted households in the west welcome low interest rates and western governments have often exploited that by keeping interest rates low to reduce mortgage and loan payments. That helps consumption and creates a favourable business climate, which in turn feeds through to equity markets and people's pensions. Low interest rates in the west make people wealthier.

In China the opposite is true. Because China is nation of savers, low interest rates on deposit accounts reduce investment income, which for some households can be a substantial part of their total income. If people feel poor, they are less likely to consume.

Petis argues that the policies that China has put in place to generate high levels of investment and trade surpluses by definition require high levels of saving. In other words, high levels of savings are here to stay in China.


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