China’s High Savings: Drivers, Prospects, and Policies1
- China has one of the highest national savings in the world, which are at the heart of its external/internal imbalances. High savings fuel excessive investment when kept domestically and generate large global imbalances when they flow abroad.
- High national savings today mostly emanate from the household sector. Corporate savings used to be the main driver in the early 2000s, partly reflecting an undervalued exchange rate, but have now gradually converged to the global average.
- High and rising household savings mainly resulted from the one-child policy-induced demographic changes and the breakdown of the social safety net during the transition from a planned to a market economy. Housing reform and rising income inequality also contributed to the increase in savings.
- Going forward, demographic changes will put downward pressure on national savings. Policy efforts to strengthen the social safety net and reduce income inequality are also needed to reduce savings further and faster and to boost consumption.
1. China has one of the highest levels of national savings in the world. Historically, national savings have been high since the 1980s, at around 35–40 percent of GDP. After China’s integration into the global trading system with WTO entry in 2001, savings surged to peak at 52 percent of GDP in 2008. Since the Global Financial Crisis (GFC), they have gradually come down to 46 percent in 2016. However, despite the moderation, China still stands out with one of the world’s highest savings rates, compared to the global average of around 25 percent of GDP.
National Savings Rate (2016)
2. High savings are at the heart of China’s external and internal imbalances. While insufficient national savings can pose financing constraints for economic development, excessive savings can also distort the economic structure and contribute to unsustainable growth. In the pre-GFC period, excess savings in China manifested in large external imbalances. The current account surplus surged to 9 percent of GDP in 2007, contributing to the global “savings glut” and low global interest rates. On the other hand, excessive savings when kept domestically are often intermediated through the financial system and can fuel a credit-based investment boom. After the GFC, while China’s external imbalance declined (with the current account surplus down to 2 percent of GDP), it morphed into a growing internal imbalance. Savings have financed excessive investment with falling efficiency, resulting in slower economic growth and a rapid build-up of debt.
Rotation from External to Internal Imbalance
Sources: CEIC Data Company Ltd; and IMF staff calculations.
3. High savings also depress household consumption and lower welfare. The flip side of high savings is low consumption. Despite the rebalancing efforts in recent years, China remains a global outlier in its demand structure, with the investment ratio elevated at 44 percent of GDP, while private consumption accounts for only 39 percent of GDP (compared to the global average of around 60 percent). In other words, households have inadequately benefited from economic development. While households could potentially depress current consumption in return for higher consumption in the future via investment, the resulting excess investment beyond the economy’s absorption capacity risks leading to negative returns and large defaults, hence lowering current and future household welfare.
Slowly Switching from Investment to Consumption
Source: World Economic Outlook and IMF staff calculations.
4. The composition of national savings in China has changed over time, and households are now the main driver. Globally, while national savings (in percent of GDP) have been broadly stable in the past three decades, there has been a substantial compositional shift from households to corporates. Against this backdrop, the evolution of sectoral savings in China has shown a different pattern, with the gap today largely reflecting households:
- Households: Household savings in China have trended up since the early 1990s, only moderating slightly in recent years. In contrast, globally, household savings have been on a downward trend since 1980s. The diverging trend has led to an increasing gap between China and the rest of the world. At 23 percent of GDP, China’s household savings today are 15 percentage points higher than the global average.
- Corporates: Corporate savings were relatively low and in line with the global average in the 1990s, but surged in the 2000s resulting in an increasingly large gap compared to other countries. After the GFC, this gap narrowed significantly, reflecting both the decline in China’s corporate savings and the rise elsewhere. Currently, while China’s corporate savings are still modestly higher than the global average, the gap is much narrower than for household savings.
- Government: fiscal savings have been volatile over time, and on average only a small part of national savings. The level was similar as in other countries in the past, but in recent years, China’s fiscal savings have been higher than the global average, reflecting low current spending, at the expense of very high capital spending.
National Saving Rate
Sources: Flow of funds, IMF staff estimates.
Sources: CEIC and Chen et al (2017)
B. Household Savings
5. From the late 1970s, savings increased dramatically amid massive structural transformation. The surge in household savings can be characterized in three phases:
- The first phase was in the 1980s, following the introduction of the one-child policy and the decollectivization of agriculture in rural areas. The savings rate rose from 5 to 20 percent of disposable income (although with a temporary dip in the late 80s due to policy instability and growth falling sharply).
- The second stage was in the 1990s, after Deng’s southern tour reaffirmed China’s policy to reform and open-up. SOE reform took centerstage and was accompanied by the breakdown of the social safety net, leading to savings rising further to 25 percent of disposable income.
- The third stage was after China’s WTO entry in 2001, when savings rose further to 30 percent of disposable income amid an export-driven boom. Notably, since 2010, household savings have plateaued and gradually started to decline.
Household Saving Rate
Sources: Household Survey and Modigliani and Cao (2004)
Against this background, we analyze the following potential drivers of household savings: demographic changes, social safety net, income inequality, housing reforms and financial repression.
6. Demographic changes account for about half of the rise in household savings. The one-child policy, introduced in late 1970s, has led to a rapid decline of the fertility rate from 6 to below 2 and resulted in an extremely low youth dependence ratio in China given its income level. Such demographic changes have increased household savings via two channels: a) less spending on children on the expenditure side; b) higher precautionary savings for retirement as fewer children imply less old-age support, which is the main source of livelihood for the elderly in China. Using the over-lapping generations model developed by Curtis et al (2015), we find that demographics alone can explain about half of the increase in the savings rate, holding income growth and interest rates constant. Adding income and interest rates, the full model can explain the broad savings trend, except for the 1980s and 1990s, likely reflecting increased precautionary savings with the gradual dismantling of the social safety net.
Youth Dependence Ratio and GDP Per Capita
Sources: United Nations; and Penn World Table.
Household savings rate: model, historical data
Sources: Following Curtis and others (2017), CEIC, staff estimates.
Social Safety Net
7. The economic transition of the 1980s/90s led to the breakdown of the social safety net and rising savings, a trend that recent policy efforts have aimed to reverse. The transition to a more market-based economy in the 1980s and 1990s has led to the dismantling of the social safety net in both rural and urban areas, with much reduced coverage and lower benefits. For example, the health care coverage of urban workers declined by 17 percentage points between 1990 and 2000, and the average replacement rate for urban workers (pension benefits in percent of wages) dropped sharply from close to 80 percent to below 50 percent. In recent years, significant policy efforts have been made to rebuild the social safety net, including the introduction of new rural health care and pension schemes and the basic pension scheme for non-working urban residents. Notwithstanding these policy efforts, government spending in these areas remains below international standards. In addition, access to health care remains an issue for migrant workers, reflecting the slow progress on “Hukou reform”.
8. Our analysis finds that higher social spending significantly reduces household savings, with differing impacts in urban and rural areas, suggesting targeted policy focus. We study the role of precautionary motives by looking at regional variation in government spending on education, health and social security. Using cross-sectional analysis for the 287 prefectural municipalities, we find a significant positive relationship between social spending and urban and rural consumption.
- For urban households, social security spending has a stronger relationship with consumption than other types of social spending, with a 1 percent increase associated with a 0.06–0.08 percent increase in household spending. Assessing this impact at the medians for these variables, suggest an 80 yuan increase in social security spending (about 10 percent of median monthly social security per capita) increases consumption by 90 yuan.
- For rural households, in contrast, government spending on health care is even more effective, with a 1 percent increase raising rural consumption by 0.11 to 0.19 percent. Assessing at the medians suggests a 50 yuan increase in health spending per capita (about 10 percent of the median monthly healthcare spending per capita) would increase rural consumption by between 70 and 120 yuan.
- The difference in results between urban and rural areas may reflect that the healthcare system is largely in place in urban areas, but still needs to improve significantly in terms of access and benefits in rural areas. And pensions may be less of an issue in rural areas, reflecting self-sufficient agriculture, but a bigger concern for urban households, reflecting persistent increases in living expenses. Such differentiated effects also call for better targeting of social spending in both urban and rural areas.
9. Income inequality translates into savings inequality. Income inequality has worsened substantially in China over the past decades, with the Gini index rising from 0.3 in the 1980s to about 0.5 in 2010, though it has moderated in recent years (Jain-Chandra et al 2017). Income inequality is associated with significant savings inequality. Based on Chinese Household Income Survey (CHIP) data, the difference between the saving rates of the richest and the poorest decile is often as large as 20 percentage points, reflecting the different propensity to consume. For example, in 2013, the top earners saved close to 50 percent of their income, while households in the bottom 10 percent saved about 20 percent.
Urban Household Saving Rate by Income Percentile
Average Household Saving Rate by Income Percentile
Source: Luxembourg Income Study (LIS), and Chinese Household Income Project (CHIP).
10. Chinese households save more at any income decile compared to other countries, but the gap is largest for the poor. In many countries, the savings rate for the bottom 10–20 percent is often negative, reflecting substantial social transfers, while in China, the savings rate is positive and quite high at 20 percent. This likely reflects the lack of social transfers, inadequate progressivity in taxation, and the limited social safety net.
11. Housing ownership increased dramatically after the housing reform of the 1990s. Two major housing reforms in the past three decades have transformed China’s housing market. The 1988 reforms fostered the privatization of housing, and much of the stock of rental housing was sold to SOE workers at low prices; the 1998 reforms ended enterprise-supplied housing and moved to comprehensive market-based housing provision (Man 2011). After the reforms, housing ownership surged from 20 percent in 1988 to 90 percent in 2007, and has been stable since then.
Rising homeownership and Saving Rate
Sources: Various waves of CHIP survey.
12. Micro-level regressions show that the overall impact of household ownership on savings was positive in earlier years and turned negative in recent years. Prior to the housing reform in 1995, there was no systematic difference in the savings rates between tenants and home owners. After the reform, home owners started to save more than tenants, as shown in the 2002 and 2007 surveys. However, this trend reversed by 2013, with home owners saving marginally less than tenants. These patterns are confirmed by household level regressions, which control for other micro characteristics of households (such as age, sex, education, occupation, income, household size, etc). This likely reflects that the mortgage effect dominated in the early years for home owners, while with the booming housing market, the wealth effect has reduced home owners’ savings rate. Tenants’ savings rate continued to be higher reflecting the need to save for down payments.
Save Rate by Home Ownership
Sources: Various waves of CHIP survey.
13. Financial repression has become less relevant with interest rate liberalization. The “target saving” hypothesis suggests that depressed deposit rates could lead to higher household savings. Nabar (2013) finds that a 1 percent interest rate decline increases the household savings rate by about 0.5 percentage point. We find that even such a small quantitative effect disappears once cross-region income differences are controlled for in the regression. In addition, with rapid interest rate liberalization, and the proliferation of non-deposit financial products with much higher yields, financial repression is no longer a major driver of household savings today.
Overall, the analysis in this section suggests that rising household savings were largely a result of demographic changes, rising incomes and widening inequality, and breakdown of the social safety net, while housing reforms also contributed. It is difficult to pin down the contribution of each factor, as they often interact and reinforce each other, and some of these factors have started reversing in recent years (including rebuilding the social safety net and slight moderation in income inequality). Nonetheless, the chart here provides an illustrative assessment of the relative importance of various factors.
Contribution to Household Savings Increase
Sources: IMF Staff Estimates.
C. Corporate Savings
14. The corporate savings rate surged in the early 2000s, but moderated after the GFC. In line with macro data, firm-level data shows a significant increase in the gross corporate savings rate amid the export boom after WTO entry2. The rate moderated after the GFC as the economy slowed and the exchange rate gradually moved in line with fundamentals. The net savings rate (which is gross savings minus investment as a ratio to assets) was negative throughout last decade, reflecting high investment in China. As a result, in contrast to some other east-Asian countries, the corporate sector in China is not a driver of the current account surplus.
Sources: Flow of Funds, WIND database.
15. Corporate savings in China today are comparable to other countries. Firm-level analysis suggests that corporate savings ratios in China, in both gross and net terms, are comparable to those in the rest of the world. The median gross saving ratio is about 4 percent of assets in China, slightly lower than the 5–6 percent in the rest of the world. The net savings ratio is about −0.01 percent, also lower than global average of 0 – 0.1 percent.
Corporate Saving Rate
16. SOEs have lower gross savings, but higher net savings compared to private firms. We study the role of ownership in corporate savings using firm-level regressions. After controlling for corporate size, Tobin’s q ratios, the impact of sectors and other macro variables (as well as time dummies), we find that Chinese SOEs tend to save less in gross terms, reflecting their low operating efficiency and profits, but more in net terms reflecting their lower investment ratios compared to private firms.
Corporate Savings Ratios: SOEs vs. Private Companies
17. The level of the exchange rate played an important role in driving high corporate savings before the GFC. Regression analysis shows a significant impact of the exchange rate on corporate savings, and such an impact tends to be even larger in the tradable sector. During 2005–2008, the RMB was assessed to be undervalued, which contributed to the export boom and large corporate savings, especially for the export-oriented private sector. In recent years, however, as the RMB has gradually moved in line with equilibrium, the excessive savings of the export sector have largely been unwound.
D. Government Savings
18. Government savings have stabilized since 2008 at around 5 percent of GDP, but varied significantly before then. Since 2000, fiscal savings have been on a steady upward trend and peaked near 6 percent in 2008. After the GFC, fiscal savings have moderated and stabilized at around 5 percent in recent years.
19. In a cross-country context, China’s higher government savings mostly reflects lower current expenditure. Chinese government savings in 2014, at 5.6 percent of GDP, were among the highest in major economies. This reflects mostly lower government consumption, while fiscal revenues are broadly in line with other countries. The relatively low government consumption is mainly driven by the following factors:
- More focus on public investment than public services. China stands out with one of the highest government investment to GDP ratios of 4 percent on-budget and 12 percent including off-budget investment. Hence, despite a large augmented fiscal deficit of 10 percent in 2014, fiscal savings remain higher than other countries, resulting from the skewed composition of spending towards investment.
- Lower social spending. Despite a significant increase in past years, China still has lower social spending compared to other emerging markets, especially on public education, public health and social assistance. Further strengthening of the social safety net would bring social spending more in line with peers.
- Early stage of social security system. Reflecting the changing demographic structure, the social security system used to be an engine for savings through the 1990s and early 2000s, turning into deficit in 2013 as payments outpaced contributions. However, it is still at an early stage compared to most advanced economies, reflecting a relatively low old-age dependency ratio. Envisaged rapid ageing will put significant pressure on pension spending (expected to rise from 5 percent of GDP in 2015 to 10 percent in 2050).
Government gross savings for major economies and other select asian economies in 2014
E. The Role of the State and Policy Recommendations
20. Policy-induced structural changes have played a pivotal role in driving China’s exceptionally high savings and low consumption. While high and rising savings are often observed in economies during growth take offs, the unique policy settings and changing economic structure have played an important role in shaping China’s high savings
- The one-child policy implemented in the late 70s had dramatically reduced the fertility rate and raised the savings rate.
- The transition during the 1990s from a planned economy to a market economy dismantled the social safety net and led to higher precautionary savings by households.
- In the 2000s, WTO entry led to an export-oriented growth surge, with a significant rise in corporate savings, partly owing to an undervalued exchange rate.
- High government savings due to comparatively weak social spending and excessive investment.
- Housing reform and rapidly rising housing prices led to an increasing need for households to save for either down payment or making mortgage payments.
- In addition, rising income inequality, partly attributable to limited income redistribution, led to higher savings as more income goes to the richer households with higher propensity to save.
More broadly, given the high household savings rate (as measured in percent of disposable income), the falling household share of national income further depressed household consumption, with the consumption-to-GDP ratio falling sharply in early 2000. A less skewed distribution of the benefits of growth between the state and households, including providing the private sector greater income earning opportunities, will remain essential to boosting household consumption.
21. Policy efforts to lower savings should focus on strengthening the social safety net, reducing income inequality, and raising household incomes. Specific measures include the following:
- Making income tax more progressive and more family-friendly. The current tax structure is regressive, especially for the very poor. While the personal income tax has a relatively high exemption threshold, the flat nominal amount of social contribution at the bottom puts a heavy burden on poor households, with an effective tax rate higher than 40 percent. There could also be tax allowance based on family size to boost fertility, which would help reduce savings by increasing dependents as well as boost future labor force.
- Increasing social transfers to poor households. As shown in earlier analysis, the gap in household savings is notably larger for poor households. In many countries, the bottom-income earners tend to have negative savings rates, reflecting various social transfers. This calls for further increase in social assistance spending in China, more in line with international norms.
- Increasing expenditure on health care, pensions and education. While the government has made substantial progress on this front, further effort is needed. As shown in previous analysis, higher health care and pension spending have a significant impact on increasing consumption and reducing precautionary household savings. In addition, continued Hukou reform is needed to make sure that migrant workers have the same access to the social safety net. While spending on education does not appear to have a direct impact on household savings, it would help reduce income inequality in the future by providing equal education access to the poor.
- Increasing general spending on public services. While the government’s focus on public investment in the past has built comparatively strong infrastructure in China, it is increasingly important to focus more on “soft infrastructure”, in terms of policy frameworks and the delivery of public services, which also requires higher spending to attract talent and addressing staffing shortages in various agencies.
- Higher social spending could be financed by larger dividend payments or asset transfers from SOEs. Bringing the SOE dividend payment ratio to the announced target of 30 percent could increase budget revenues by about 1 percent of GDP per year, which could fund higher social spending. In addition, transferring SOE shares to social security funds could help address the projected large actuarial imbalance of the system.
- Improving access to formal financing of private firms. The government should remove the “implicit guarantee” for SOEs and redirect credit to more efficient users in the private sector. With improved financing access, private firms will rely less on internal savings for investment.
- Service sector liberalization. Providing the private and foreign sectors access to restricted service sectors would boost productivity and enhance income-earning opportunities and consumption of households.
Comparison of Average Tax Wedge by Income Level
Sources: CEIC, IMF FAD Expenditure Assessment Tool and IMF staff estimates.
F. Prospects for Savings
22. Rapid aging and further strengthening of the social safety net would substantially reduce household savings. Going forward, China is expected to experience rapid aging, with the old-age dependency ratio rising from 15 in 2015 to 50 in 2050. Model simulations show that the projected demographic changes would reduce the households savings rate (in percent of disposable income) by 6 percentage points by 2030. In addition, with continued strengthening of the social safety net (assuming that government budget health expenditure-to-GDP ratio increases from 1.8 percent in 2016 to 2.5 percent by 2022), household savings, in percent of GDP, are forecast to fall by 3 percentage points by 2022. Changing consumer behavior of younger cohorts and slower wage growth may result in a faster decline in household savings rate.
Household savings rate: Projection sensitivity to demographic assumptions
Sources: CEIC, staff estimates.
23. National savings are expected to fall driven mostly by households and the government. Lower household and fiscal savings are expected to reduce overall national savings by about 4 percentage points by 2022. Corporate savings are likely to fall moderately, reflecting falling capital returns as growth slows and rising labor intensity of output as the economy shifts more towards services and the labor share of income rises.
National Saving Rate to Fall
Sources: Flow of funds, IMF staff estimates and projections.
24. A proactive scenario with higher social spending and less income inequality would lead to a faster decline in savings and higher consumption. Policies to increase on-budget healthcare spending to 3.1 percent of GDP by 2022 (compared to 2.5 percent in the baseline), and moderately reduce the income share of the top 10 percent via income redistribution to those at the bottom, would reduce household savings by 5 percent of GDP by 2022 (compared to 3 percent in the baseline) as household consumption would be boosted by an extra 2 percent of GDP.
Household Saving Rate to Fall — Proactive
Source: IMF staff estimates and projections.
Bayoumi, T., Tong, H. and S.Wei,2010, “The Chinese Corporate Savings Puzzle: A Firm-Level Cross-Country Perspective,” NBER Working Paper 16342
Chen, P., Karabarbounis, L. and B.Neiman,2017, “The Global Rise of Corporate Saving,” NBER Working Paper 23133
ChadwickC.Curtis, C., S.Lugauer, N.Mark,2015, “Demographic Patterns and Household Saving in China”, American Economic Journal: Macroeconomics, 7(2): 58–94.
Jain-Chandra, S, N.Khor, R.Mano, J.Schauer, P.Wingender, J.Zhuang,2017, “Inequality in China - Trends, Drivers and Policy Remedies”, IMF Working Paper forthcoming.
Nabar, M.,2011, “Targets, Interest Rates, and Household Saving in Urban China”, IMF Working Paper 2011/223
Prepared by Longmei Zhang, drawing on a forthcoming IMF working paper by Longmei Zhang, Ray Brooks, Ding Ding, Haiyan Ding, Hui He, Jing Lu and Mano Rui. Tlek Zeinullayev provided research assistance.