Luke M. Shimek

Yi Wen

English

Research Papers in Economics

August 2008 InternationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
C
hina is a poor but rapidly developing country; its
per capita, nominal income is about $1,700 (about
1/25 of that of the United States in 2005). Never  -
theless, as a fast-growing country with an average growth
rate of 9.8 percent a year over the past 25 years, China’s
income prospects are bright. Total GDP is predicted to
equal that of the United States by 2032.1 Given such rapid
growth, economic intuition would indicate that China has
little need to save and instead has a strong incentive to
consume today because the fundamental purpose of saving
is to enable future consumption. In other words, Chinese
households may improve their welfare by consuming more
now because they can reasonably expect to be much richer
in the future. Despite this fact, China’s saving rate is one
of the highest in the world. The figure shows that China’s
personal saving rate is about 25 percent and national
saving is roughly 47 percent of GDP (in 2005, compared
with 0.5 percent personal saving and 12 percent national
saving in the United States)—and these savings rates have
increased in recent years.
Why do Chinese households save today to consume
even more in the future? Several factors may con-
tribute to this behavior. First, the economic reform
in China that started in 1978 increased income
uncertainty because many jobs were no longer
government-paid: People save more because they
are more uncertain about their future.
Second, since 1978 the Chinese government
has gradually shifted the burden of retirement
income to households. Hence, increased savings
are needed for retirement, which formerly was
essentially free. This change further increased
the already high personal saving rate.
Third, China’s financial market and banking
system is still underdeveloped and only recently
began to reform. As a result, borrowing for
housing, education, medical care, and other big
expenses is very difficult. Even today, mortgages
require at least a 30 percent down payment, assum-
ing a loan can be obtained. In addition, real estate
prices are very high compared with incomes. In
Beijing and Shanghai, for example, the median price of a
1,000-square-foot apartment is about $100,000 at current
exchange rates. If the average annual income per capita
in Beijing and Shanghai is about $2,000, then the average
Chinese worker needs to save his or her entire annual
income (a 100 percent saving rate) for about 50 years to
buy an apartment. Even if a borrower can obtain a mort-
gage, the 30 percent down payment means a one-time pay-
ment of $30,000—equivalent to about 15 years’ income
(ignoring interest payments). Such high real estate costs
have boosted the savings rate.
Economic theory predicts that the development of
financial market and social insurance programs may
dramatically reduce China’s saving rate (at both household
and national levels). Such a decline in the saving rate may
slow China’s speed of growth because economic growth
is driven partially by domestic investment, which in turn
is financed mostly by domestic saving.
—Luke M. Shimek and Yi Wen
1 The computation assumes that the United States grows at the average post-
war rate.
Why Do Chinese Households Save So Much?
research.stlouisfed.org
0
5
10
15
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25
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35
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
15
20
25
30
35
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45
50 Urban Personal Saving Rate (left axis)
Rural Personal Saving Rate (left axis)
National Personal Saving Rate (right axis)
Percent Percent
SOURCE: China Statistical Yearbook–2006 and authors’ calculations.

Why do Chinese households save so much?

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Why do Chinese households save so much?

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