Many views have been expressed in recent months that one of the causes of the present crisis is that the Asians (read Chinese) save more and spend less. Because they save more, the world is awash with capital and the poor Americans have been forced to consume more to absorb all this stuff sloshing around. No less a person than Hank Paulson said something like this. I’ve read a lot of articles where the Chinese are urged to save less and spend more. Even the Chinese are picking up this refrain – Zhou Xiaochuan, the governor of the People's Bank of China, has implied that the Chinese should save less.
The wisdom is that if the Chinese save less, they will spend more and drive up demand for products and services, which can help the world come out of recession. I find this an alarming advice.
Put yourself in the shoes of an average Chinese citizen. There have been 20m jobs lost in the recent few months (yes the number is right and not a typo – twenty million). You have no guarantee that your job will be safe. Property prices have plunged. Social security, while pretty good by developing country standards, is still a cause for concern. The society is aging, caused in part, by the single child policy. The bitter taste of high inflation has been experienced just 4 quarters ago. In these circumstances what would you do – withdraw your savings and splurge on consumption ? Only a complete idiot would do that.
In any case, who says the Chinese aren’t spending. Domestic retail growth grew by 21.8% in 2008, up from 16.8% in 2007. Even in December, when the chill winds of recession were blowing, retail sales grew by 19%. Walk down Tianhe Lu, the computer market in Guangzhou on a Saturday – there’s no standing space and you are likely to get trampled on. Its a similar story down any shopping street in China. Recession; What Recession ?
The “problem” is that the Chinese savings rate is “high”. In China, the percentage of savings in a person’s disposable income, has hovered between 30% and 40%. In America this is 0%. Debt levels in Chinese households is very low. This is being viewed as a scope to increase Chinese domestic consumption.
The breathtaking economic growth in China actually enables the Chinese to save more and spend more. Its not one or the other – prosperity can ensure that both rise and to hell with the percentages between the two.
But what do the Chinese do with these savings. They invest. China’s massive investments over the years have come from the high savings rates of its citizens. Isn’t that a good thing ? Where will the capital for the world’s investments come from – it will come from surpluses created somewhere. As different nations have different characteristics and different competitive advantages, there would be some countries that will generate capital and some that will consume capital. Capital flows are ubiquitous around the world – so capital easily flows from where it is created to where it is consumed. There is the issue of whether exchange rates truly reflect the demand and supply of the currency, but that’s a different argument to saying spend more and save less.
The only argument against high savings would be if the Chinese did not invest. If they dug a hole in their backyard and buried their renminbis. There's no evidence of that happening !
The wisdom is that if the Chinese save less, they will spend more and drive up demand for products and services, which can help the world come out of recession. I find this an alarming advice.
Put yourself in the shoes of an average Chinese citizen. There have been 20m jobs lost in the recent few months (yes the number is right and not a typo – twenty million). You have no guarantee that your job will be safe. Property prices have plunged. Social security, while pretty good by developing country standards, is still a cause for concern. The society is aging, caused in part, by the single child policy. The bitter taste of high inflation has been experienced just 4 quarters ago. In these circumstances what would you do – withdraw your savings and splurge on consumption ? Only a complete idiot would do that.
In any case, who says the Chinese aren’t spending. Domestic retail growth grew by 21.8% in 2008, up from 16.8% in 2007. Even in December, when the chill winds of recession were blowing, retail sales grew by 19%. Walk down Tianhe Lu, the computer market in Guangzhou on a Saturday – there’s no standing space and you are likely to get trampled on. Its a similar story down any shopping street in China. Recession; What Recession ?
The “problem” is that the Chinese savings rate is “high”. In China, the percentage of savings in a person’s disposable income, has hovered between 30% and 40%. In America this is 0%. Debt levels in Chinese households is very low. This is being viewed as a scope to increase Chinese domestic consumption.
The breathtaking economic growth in China actually enables the Chinese to save more and spend more. Its not one or the other – prosperity can ensure that both rise and to hell with the percentages between the two.
But what do the Chinese do with these savings. They invest. China’s massive investments over the years have come from the high savings rates of its citizens. Isn’t that a good thing ? Where will the capital for the world’s investments come from – it will come from surpluses created somewhere. As different nations have different characteristics and different competitive advantages, there would be some countries that will generate capital and some that will consume capital. Capital flows are ubiquitous around the world – so capital easily flows from where it is created to where it is consumed. There is the issue of whether exchange rates truly reflect the demand and supply of the currency, but that’s a different argument to saying spend more and save less.
The only argument against high savings would be if the Chinese did not invest. If they dug a hole in their backyard and buried their renminbis. There's no evidence of that happening !
Health Warning : I am not an economist and have no pretension to being an expert on this subject. All opinions in this post will be childishly naive to an economist and perhaps more relevant to an average reader !
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9 comments:
Very insightful :-) Liked the dry and slightly ironical tone and tenor as well !
Good that Priya forwarded your blog link to me. Didn't know that you were on a sabbatical. Are you back in India now ?
Ajay
Hi Ajay , great to see your comment and thanks for visiting. I am still in China - getting trampled on Tianhe Lu in Guangzhoun was a real experience !
Where no high growth possible, "private virtue becomes public vice" (as Krugman wrote recently. Again - not being an economist - the issue is one of a short-term measure that will provide a consumption "surge" that drives the economy. This is the principle behind (part of) the Obama plan. There is talk in the UK of a "savings tax" to prevent the Mrs Watanabe syndrome that afflicted Japan in the 90s. But as you say, China is no danger of doing that - people want to get rich, lots of people are still poor, and last time I looked (admittedly in the early 90s) there is still a zeal to build and grow and occupy one's rightful place in the world.
Yes indeed Ravi - Mrs Chen is very different from Mrs Watanabe and Mrs Smith.
Hi Ramesh, it's great to read your blog. Maybe it is better than having the MBA classes which i planeed to..haha~ I will come and visit this quite often afterwards coz it is a learning pool for me --Simon told me that if you want to be a manager in the future you need to think the way the manager thinks!
PS: Carol, tony and I were planning to meet you this weekend, but I was told that you will go back to India for some days. I won't miss it when you are back!
Corrine^_^
Hi Corrine, Kung Hei Fat Choy. See you in a couple of weeks.
Good one Ramesh. Totally agree with the Tianhe Lu experience and all other shopping places that I have been to in China. Recession or no recession, china sells and buys voraciously.
Very interesting topic!
Few years ago, one of my American friends told me that she sold out her car to pay for credit card. As a Chinese, I could not understand it, how can she owe so much money which she can not afford, she has to sell her car just for return the money. Usually for something I really want it but I can not afford it, the first thing I need to do is to save the money until I got enough saving. For an American, I guess they will first to buy it by using credit card. Imaging what will happen if they lost the job and without any income……hehe…the same theory for financial crisis started from ………
But we have changed a lot in past 15 to 20 years, now we borrow money from bank for an apartment/house...probably this is only one reason for us to use furture income...
Hi CC. Yes there is change happening with the younger generation, but still the sense of responsibility on debt is far higher than in the western world.
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