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|Does China save too much?|
|Saturday, 16 May 2009 08:25|
China is receiving part of the blame for the global financial crisis. Over the past decade, its current account surplus rose dramatically, feeding the global savings glut which provided the raw material for all the toxic lending and borrowing in the US.
But is China really saving too much? What is the nature of Chinese savings?
In the first place, it should be said that about 60% of China savings is from the corporate sector, rather than being personal savings. And this has been on the rise as the corporate share of national income has increased.
In China, corporate profits have been going up thanks to high economic growth, low interest rates, falling labour costs and rising prices. Also, the underfunding of corporate pensions has encouraged companies to increase their cash holding.
Notwithstanding privatization and marketization, many of China's large enterprises are still state-owned. They benefit from subsidies for land and energy. Some of them also enjoy monpolistic powers which boost their profits. And until recently, state-owned enterprises have not been required to pay dividends. This means that in contrast to most western companies, they can just sit on their profits.
China's underdeveloped financial system has also encouraged retained earnings by companies. The financial system is dominated by state-owned banks which favour certain large firms, providing them with capital at low interest rates. So, most other firms need to retain profits to have a source of funds for investment.
While household savings has declined as a share of total national savings, it has risen as a share of disposable income. China has a rapidly ageing population which is undertaking precautionary saving for retirement. In the move to a market economy, the government chopped support for the education and health sectors. Citizens must now save up for these items which have become very expensive.
So what is the overall assessment? China's corporate savings will no doubt be adversely affected by the financial crisis and fall back somewhat. But China's high savings is partly a reflection of its ageing population, and deficiencies in its financial sector, and corporate and social policies.
More fundamentally, China is still in the midst of both dismantling its former system of central planning and creating the institutions and policies for a well functioning market economy. As this process continues and matures, China's savings behaviour will no doubt normalise. The Chinese government is attempting to achieve growth, stability and transition all at the same time. But Rome was not built in a day.
Asian Development Outlook 2009 -- www.adb.org