The traditional Chinese model of economic growth required the U.S. and a few other countries to be consumers of first and last resort, spending more than their income and running ever-larger trade deficits—so that China could be the producer of first and last resort, spending less than its income and building ever-larger trade surpluses. That model is now challenged, if not altogether broken, because the excessive accumulation of private and public debt and deficit by the U.S. has forced a painful deleveraging: the overindebted U.S. consumer needs to spend and consume less, import less, and save more to reduce debt. Indeed, as the U.S. trade deficit shrinks, the Chinese trade surplus has been sharply shrinking, too.
How has China been able to maintain its high—8 percent–plus—growth despite the collapse of its net exports? It did not do it by reducing its saving and consuming more; rather, it has boosted further fixed investment in real estate (commercial and residential), in infrastructure (roads, airports, bullet trains), and in manufacturing capacity, which already suffers from a glut. Fixed investment in China is now close to 50 percent of GDP.
But no country can be so productive that it can take, every year, half its GDP and reinvest it into more capital stock without eventually ending up with a huge excess capacity and a mountain of bad loans. Thus, China needs to radically change its growth model from net exports and investment to reduced saving and more consumption. There are, however, many structural reasons why the Chinese save too much and consume too little. (Consumption in China is 36 percent of GDP, about half of what it is in the U.S. and in emerging economies like India and Brazil.)
First, the Chinese save a lot because their social-security benefits are puny—a paltry $150 per citizen over a lifetime after retirement—and they need savings for old age.
Second, they also save because they want their children to attend private school and because public health care is poor, requiring a buffer for sick times.
Third, there is little of a social safety net in China now that the “iron rice bowl” system of cradle-to-grave public services has broken down. Now you need a buffer of precautionary savings in case you lose your job.
Fourth, the demographic consequences of the one-child policy have increased the need for savings for old age. The old social-security model of China—children taking care of old parents—is breaking down because of urbanization and the weight of the burden, with one child often having to take care of two parents and four grandparents.
Fifth, Chinese financial markets for household borrowing—to finance home purchases via mortgage debt and consumption via credit cards and personal loans—are underdeveloped, limiting consumption growth.
Sixth, the system of legal restrictions for migrant rural workers in the cities nudges them to save to manage financial insecurity. Conversely, rural farmers with few public services need to save to deal with uncertain and volatile income.
Seventh, the average citizen in China doesn’t save more than one in Hong Kong, Singapore, or East Asia: they are all Confucian savers, and tend to salt away a third of after-tax income. A big difference, however, is that a whopping 25 percent of savings in China is in the form of the retained earnings of the corporate sector, mostly state-owned enterprises (SOEs). In most private economies, those firms’ profits would become dividends that would increase household income and thus consumption. In China, they become retained profits that go into more capital accumulation and excess capacity. The Chinese policy of an undervalued currency and low cost of capital for public firms (and thus low return to savings for households) has implied a massive transfer of income from households (that thus can’t spend) to SOEs (that thus overinvest). Short of privatizing the SOEs or massively taxing their profits and transferring that income to households, savings will remain too high, consumption too low, and investment excessive. Yet the SOEs are politically powerful while households are impotent, so reform could prove a major challenge.
Clearly China needs to radically change its broken growth model in the direction of reduced exports, investment and savings, and increased consumption. But there are structural—and cultural—reasons why the Chinese save so much and consume so little. Radical policy reforms may take more than a generation to rebalance the Chinese economy toward a more sustainable growth model.
Roubini is chairman of Roubini Global Economics, professor at the Stern School of Business at NYU, and coauthor of Crisis Economics (Penguin, 2010).