The Main Cause of China’s High Savings: Income Suppression for High Investment

As was suggested in an earlier post, China has an unusual low level of consumption and unusual high level of investment and savings.  The high level of savings is not, as is often assumed, attributable only to an increase in household savings, but to a rise in savings in the corporate and government sectors.  From 2000 to 2008, 80% of the increase in China’s gross national savings took place in the government and corporate sectors, not among households.  (The savings rate data for this post is based on the excellent paper by Guonan Ma and Wang Yi, published by the Bureau of International Settlements last summer.) 

Composition of China’s Gross National Savings (% of GDP)

Source: BIS

Between 2000 and 2008, savings increased from 37.3% of GDP to 52.4%.  This coincided with a steep decline in household consumption’s share of GDP and an intensification of the investment and export driven growth model.  During this period, China’s savings levels soared above the high levels of investment leading to a growing current account surplus from 2000 to 2007 (the current account balance is the difference between savings and investment). 

This dramatic rise in savings thus seems to be directly related to China’s investment and export growth model.  As Michael Pettis noted in his paper, China has had a policy of suppressing household income in order to increase the savings of the government and corporate sectors in order to finance high levels of investment.   Over the past decade, households’ share of national income has declined by 10%.  This is largely due to wages falling behind gains in productivity and periodic negative real interest rates that have suppressed interest income for Chinese households (high inflation and low deposit rates have created negative real returns for Chinese savers recently, as well as in 2007-08).  See graphs below. 

As a result of government policy, both government and corporate savings have increased at a faster rate than household savings.  Higher government savings is responsible for about half of the increase in gross savings since 2000.  Government tax revenue, particularly at the central government level, has grown tremendously as a percent of GDP, while government expenditure has been concentrated in investment rather than consumption.  The flip side of higher government income is relatively lower incomes for households.

The case is similar in the corporate sector.  The corporate sector has been enormously profitable during the past decade.  Some economists have attributed high corporate savings to poor corporate governance, but it appears that the vast increase in corporate savings has been as a result of both high corporate profitability and the ability of corporations to retain earnings rather than pay them out to their shareholders as dividends.  Citizens, both directly and through the government, are not enjoying the economic benefits of higher corporate profits.  The government, as a major shareholder of many Chinese firms, should receive more of the income generated by the corporate sector that they could then use to decrease the tax burden on citizens or increase consumption.  It is important to note in the graph below that the corporations that are labeled “other” include joint venture enterprises between the government and the private sector.  In other words wholly state owned enterprises and partly state owned enterprises account for a significant increase in the rise in profitability of Chinese firms.  Corporations have been allowed to retain earnings to finance high levels of investment rather than pay out dividends to shareholders and wages to their workers.

Source: BIS
2 Units are as a percent of GDP.

In short, there is a common thread to the rising savings rates of corporations and the government.  Suppressed incomes for households have shown up as increased savings for corporations and the government. This savings has been used to finance very high levels of investment across the economy, particularly since 2000.  To reduce China’s savings, it will not only be necessary to bolster the social safety net of the citizens in order to reduce precautionary household savings, but the government should allow a greater portion of national income to go to households, so that they have the ability to decide whether to save or spend.  When household incomes catch up with overall growth, they will probably start consuming more and gross national savings will fall.