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What Makes Mr. Zhang Save?
by
Michael Pettis
Untitled Document
Why are the Chinese such legendary savers? The
answers shed light on why that habit is about to change.
In the annals of thrift, few feats rival the accomplishments of China, Japan,
and other East Asian nations during the past 30 years. China’s
workers and institutions now bank some $2.5 trillion a year, just over half
their total income, while their Asian counterparts put away nearly as much,
creating a vast pool of savings that has transformed the global economy.
While the sons and daughters of the middle class and the rich throng
China’s many malls to window-shop, their poorer peers, as well as
their parents and grandparents, still salt away a large share of their
weekly paychecks.
The easiest and probably most widely accepted
explanation for what looks like extraordinary self-discipline is
the power of Confucian culture. That explanation makes a certain
sense—East Asian immigrants in the United States are also
famously thrifty—yet there is not as much to it as one
might think. For much of China’s history, the Confucian culture was
actually considered inimical to both the accrual of savings and rapid
economic growth. As far back as the fifth century bc, critics bewailed the
laziness and spendthrift ways of the Confucians. The philosopher Mozi (ca.
470–ca. 391 BC) complained that the Confucian
turns his back on what is basic by refusing to work,
and contents himself with laziness and arrogance. . . . In the summer he
begs for grain, but once the harvest is in, he goes chasing after big
funerals. All his children follow him there, to eat and drink their fill.
If he can manage a few of these, it will be enough to get by. . . . When a
wealthy family requires a funeral, he is delighted. “Here,” he
says gleefully, “is the spring from which food and clothing
flow!”
Two and a half millennia later, in the 1950s and early
’60s, many Western sociologists and economists agreed with Mozi. The
puzzle then was to explain East Asia’s desperate and seemingly
invincible poverty. Drawing on Max Weber’s portrait of the building
blocks of capitalism in The Protestant Ethic
and the Spirit of Capitalism (1905), they
confidently explained that Confucian notions of family, morality, and
prestige made the systematic creation of wealth through business and
technological innovation almost impossible in East Asia. Confucian spending
patterns, especially the expensive rites and burial customs associated with
ancestor worship, also made it difficult for Chinese households to
accumulate enough wealth to fund capitalist enterprises.
Yet by the 1980s, when Japan and the Asian Tigers were
suddenly riding high, analysts had no difficulty arguing that it was
precisely the Confucian characteristics of these societies that explained
their success. Confucian ideals of harmony between government and business
interests and Confucian concerns with honesty, probity, and
responsibility—like Quaker beliefs in 18th-century
England—had created the foundation for a thriving business
culture. Then came the 1997–98 Asian financial crisis. The old
arguments about the handicaps of Confucian culture, especially the
contention that “harmony” is often little more than a euphemism
for corruption, made a temporary comeback.
Confucianism, in other words, is too flexible an
explanation for Asian development if it can account for poverty as easily
as it explains wealth. And it is very clear that other factors play a major
role in making the Chinese and other East Asians such prodigious savers.
Some of these factors are beyond the direct influence of policymakers. It
is an established pattern in most poor countries that begin experiencing
rapid economic growth that spending on furniture, clothing, motorbikes,
televisions, and other consumer goods rarely grows as quickly as income.
The surplus goes into savings. That is precisely what has happened in
China, where savings have risen from 20 percent of the gross domestic
product in 1981 to more than 50 percent today. (In recent years, the most
rapid growth has not been in household savings but in corporate
savings.)
Demographic trends are another more-or-less
intractable influence on savings. Since the mid-1970s, China’s
working-age population has grown at a much faster pace than its
population as a whole. In effect, this at least partially explains why
production has increased faster than Chinese society’s ability to
absorb what it produces. The result: The savings rate has increased.
But this demographic trend will reverse in the next four or five years, as
the smaller cohorts created by China’s one-child policy come to the
fore and the country’s working-age population begins
to contract much more rapidly than the total population. As this happens,
Chinese consumption should begin to catch up with and perhaps even outpace
Chinese production.
It is also often said that the Chinese save so much
because a big bank account is the only insurance they have against medical
disasters, periods of unemployment, and retirement needs. The government
has publicly stated its urgent desire to provide a medical safety net, but
for now Chinese families are on their own when it comes to covering medical
bills, and the popular press is full of horror stories of bedridden
patients forced to leave hospitals when their payment accounts, which
patients typically must open at hospitals before being admitted, run out of
money. But there are limits to this explanation. Many other developing
countries with spindly social safety nets have low savings rates, while
Japan in the 1980s had strong supports and very high savings rates at the
same time. Although China’s leaders claim to be eager to create a
social safety net, even if they succeed it will be many years before
ordinary people trust the system enough to reduce their savings
commensurately.
In addition to all these
difficult-to-control factors that influence thrift, there
are significant policies that governments in East Asia have explicitly or
implicitly designed to constrain consumption and boost savings. These
policies, many of them directly or indirectly related to industry and
trade, have probably had a much bigger impact on savings than many
observers recognize. This is because any policy that causes production to
grow faster than consumption must necessarily also boost the trade surplus
and the domestic savings rate.
For example, the People’s Bank of China, whose
responsibilities include setting base lending and deposit rates for all the
institutions in the banking system, has kept interest rates much lower than
what we would normally expect of countries at China’s stage of
development. The goal has been to provide cheap capital for investment in
domestic manufacturing, and the government has succeeded so well that, not
surprisingly, it has fostered the misallocation of capital on a huge scale.
China’s banks are weighed down with bad loans they never would have
made if capital wasn’t so abundant. The need to protect bank profits
from these mistakes has given regulators strong incentives to guarantee
those profits by keeping the rates available to depositors even lower than
the low corporate lending rates.
As a result, China’s Joe Sixpack—call him
Mr. Zhang—earns tiny returns on his savings. Demand deposits are
currently capped at 0.36 percent a year, while three-month CDs
return a measly 1.71 percent. For the past several years rates have been at
best just a few percentage points more, even as inflation peaked at more
than eight percent.
In the United States, people tend to save less when
interest rates are low. A decline in rates usually goes hand in hand with
an upswing in real estate, stocks, and other investments, making Americans
feel richer and less inclined to check off a hefty 401(k) paycheck
deduction.
But in China and many other Asian countries, low rates
seem to have the opposite effect. One reason is that few Chinese have the
financial wherewithal to make stock or real estate investments (and the
Chinese stock market is minuscule relative to the economy), and so most
people must keep their savings in bank accounts, where they eke out meager
gains. Low interest rates don’t simply make Chinese savers feel
poorer; given the large amount of bank savings, interest income is a
significant fraction of total household income, so low or even negative
real interest rates (after the effect of inflation is deducted) make them
poorer in fact. Thus, even as low-interest-rate policies slow consumption
growth, they boost production by subsidizing loans to manufacturers. The
result: a burgeoning trade surplus and soaring savings.
There are other trade- or industry-related
policies that affect savings. China and many other East Asian countries are
well known for keeping the value of their currencies low in order to
promote exports, but these policies also have the effect of increasing
savings. If the Chinese yuan is undervalued by 30 percent, as many
economists believe, this has the same effect on prices as, for instance,
increasing the cost of an $89.99 Samsung mobile phone to $119.99. No wonder
Chinese consumers are wary of imports. The high cost of imported goods
lowers the real value of household income and so reduces the incentive to
buy consumer goods. It also boosts production by making exporters more
profitable. As production outpaces consumption, the savings rate, which is
the difference between the two, rises.
In general, we tend mistakenly to assume that only
exchange-rate and tariff policies are trade-related
policies, but in fact any policy that affects the gap between what is
produced locally and what is consumed locally is implicitly a trade policy
and also implicitly affects the savings rate. In that sense, the whole
Asian development model can be seen as one whose policies are aimed
directly at boosting savings and channeling them into investment.
This model is about to
undergo serious change, and with it we can expect Asian savings rates to
decline sharply. For the past 30 years, this model has been very successful
in creating the conditions for rapid economic growth in the East Asian
countries, but the consequences for the rest of the world have not been
completely benign. It is a fact of economic life that when one part of the
world produces more than it consumes, another part of the world must do the
opposite. If this does not occur, the world must adjust, usually through a
slowdown in growth. The high and rising savings rates that are
encouraged in Asia, in other words, require that another part of the world
experience low and declining savings rates.
For the past three decades, and especially since the
turn of the 21st century, the United States has played the role of chief
global consumer. American savings rates declined precipitously as those in
Asia rose, and although economists argue ferociously about which change
caused the other, no one doubts they are linked. That ineluctable
connection is the reason why all of our assumptions about Asian savings
rates are likely soon to be rendered obsolete.
One of the main causes of the current global economic
crisis was the frenzied and unsustainable borrowing of Americans eager to
continue their consumption binge. Now U.S. households must repair their
tattered balance sheets. This they can do only by cutting back on
consumption and saving more. But as American savings rates rise (which they
have already done to a remarkable degree in just the past few months),
there must be an offsetting adjustment elsewhere in the global economy.
Americans simply are not going to be buying as many goodies as they once
did.
That “elsewhere” is very likely to be
Asia. In China and other Asian nations, savings will decrease as people
either spend more of their money on goods and services or suffer a decline
in income as industries that once exported goods to free-spending
Americans shrink. The most likely outcome is a combination of the two. The
streams of unemployed workers heading back to their home villages from the
shuttered factories of Wenzhou and Guangzhou suggest that without an
almost impossibly large boost in Chinese consumption, factories
will stay closed for many more years.
No matter which path Asia follows over the longer
term, the change in U.S. household behavior spells the end of the
development model that has for several decades defined the policies of
rapidly growing East Asian countries. If China makes the transition
successfully, a decade from now we will be asking ourselves not why the
Chinese save so much, but how people in such a poor country can afford the
BMWs, fancy clothes, and Napa Valley wines they buy with such abandon. If
China does not make a successful transition, Chinese consumers won’t
be spending much, not because of their impossibly high savings rates but
because of their country’s very slow economic growth. Either
way, we are about to see a change in the legendary savings habit.
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Michael
Pettis is a finance professor at Peking University and a senior associate at the Carnegie Endowment for International Peace.
Reprinted from Summer
2009 Wilson Quarterly
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