The global dimensions of saving in China

1. The global dimensions of saving in China Luis Servén TheWorld Bank Rio de Janeiro, March 2011

2. Plan • China’s saving and global imbalances • What drives saving in China? • Prospects: has saving peaked yet? • Summary

3. Global imbalances • China runs the world’s biggest current account surplus – in excess of 0.5% of global GDP since 2005 • In recent years, it has accounted for half or more of the U.S. overall deficit • As a result, it has amassed a huge stock of foreign reserves – bigger than that of all industrial countries combined

4. Current account imbalances(% of world GDP) Source: IMF (WEO forecastfor 2010)

5. U.S. bilateral current account balances(U.S. $ bn) Source: Bureau of EconomicAnalysis

6. Foreign reserves(U.S. $ bn) Source: IFS

7. Foreign reserves(% of short-term external debt) China’s reserve stock is 10 times biggerthanits short-termliabilities

8. Global imbalances China: saving, investment and the current account (percent of GDP) Source: WDI What accounts for China’s large – and rising – current account surpluses?

9. Global imbalances China: saving, investment and the current account (percent of GDP) Source: WDI What accounts for China’s large – and rising – current account surpluses?

10. Global imbalances Gross domestic investment (percent of GDP) • It’s not low investment: relative to GDP, it is among the highest in the world, and it has been on the rise in the 2000s

11. Global imbalances Gross National Saving (percent of GDP) Source: WDI Itisthatsavingisevenhigher: it has risenbysome 15% of GDP since 2000, toexceed 50% of GDP at present

12. Global imbalances Gross National Saving (percent of GDP) Source: WDI

13. Global imbalances BRICs: Gross National Saving (percent of GDP) Source: WDI

14. Global imbalances Total consumption (percent of GDP) • Equivalently, China’s consumption share of GDP is very low (and has declined abruptly since 2000) Source: WDI

15. Global imbalances Total consumption (percent of GDP) Source: WDI

16. Global imbalances BRICs: Total consumption (percent of GDP) Source: WDI

17. Saving in China Significant global rebalancing must include a decline in China’s saving (a rise in C/Y) • But who is doing the saving? Source: basedonKuijs (2006)

18. Saving in China Source: basedonKuijs (2006)

19. Emerging Asia: composition of national saving (% of GDP)

20. Saving in ChinaHousehold, enterprise and government shares of total income Source: Yang, Zhang and Zou 2011 (NBS data)

21. Government

22. Saving in China • Why has governmentsavingrisen? • Risinggovernmentincomerelativeto GDP • Risingtaxcollection • Decline in transferspaid – including social welfare, social insurance… • bigpart of theincomerise: closeto 4% of GDP since late 90s • Declininggovernmentconsumptionrelativeto GDP • As percent of governmentincome, therise in governmentsavingiseven more significant

23. Saving in China China: government saving Note: governmentdisposableincome = valueadded + taxes + propertyincome + net transfers – wages Source: NBS data Source: basedonKuijs (2006)

24. Households

25. Saving in China Relativetodisposableincome, householdsaving has alsorisen more steeplythanrelativeto GDP – becauseincome has declinedrelativeto GDP

26. Saving in China Note: grosssavingfor China and the U.K.; net savingfortherest. Source: OECD and NBS

27. Saving in China Note: grosssavingfor China, France, and Spain; net savingfortherest. Source: OECD and NBS

28. Household saving • Why is it so high – and rising? • Natural explanation: life-cycle saving with rapid income growth • The young save more during working age than the old dis-save after the end of their working life. • As a result, aggregate saving rises with faster income growth. • This is surely at work in China’s saving rise

29. Household saving In addition, demographic change also plays a major role in China’s household saving rise Saving rate and proportion of working-age population

30. Household saving • Children are a major source of support in old age – a close substitute for tangible assets • e.g., in China 40% of all transfer income received by parents comes from eldest child • Other things equal, a reduction in fertility must raise saving • Shift in populationpolicy (“onechild”, 1972): • decline in householdsize (by 1 onaverage) • muchhighersavingratesforhouseholdsclosetoretirement – especiallyiftheyhaveonly 1 daughter • Bycloseto 25% of disposableincome (Banerjee et al 2010)

31. Household saving: population policies I Population policies have led to a significant decline in household size Household size (relative to 1967) Year of birth of eldest child Source: Banerjee, Meng and Qiang (2010)

32. Household saving: population policies I Households affected by population policies exhibit significantly higher saving Household saving Year of birth of eldest child Source: Banerjee, Meng and Qiang (2010)

33. Household saving • A different demographic mechanism: under one-child, preference for sons boosts the male/female ratio • China’s ratio is far above biological averages • Biological ratio at birth: 1.06. China’s: 1.20 in 2005; 1.24 in 2007. About 25 million ‘excess males’ age < 25. • ‘Competitive saving’: households with a son raise saving to improve his ‘marriage market’ chances • Evidence that saving is higher in regions with more skewed sex ratios (Wei and Zhang 2009) • Also, households with a son save more in such regions • Quantitatively important effect in rural areas

35. Household saving • These ingredients go some way to explain rising household saving. But numerical calculations show they are not enough. • Anotherhint: life-cycleageprofiles of savingshouldbehump-shaped – rise and peakduringworkinglife, and then decline • RecentChinese data show a verydifferentpattern

36. Household saving Age profile of saving in the simple life-cycle model Saving / dissaving A retirement death B Age The faster income growth, the more the area in A (positive saving) exceeds the area in B (dis-saving)

37. Household saving Saving by age of household head China 2005 Source: Prasad (2009)

38. Household saving Something else is going on – what is it? • Rising income uncertainty from rapid structural change under fast growth • Weak(-ening) social protection system decline in public provision of pensions, education, health, housing… Theytendtohavemutuallyreinforcingeffectsonsaving -- especiallywithunderdevelopedfinancialmarkets

39. Household saving • Income uncertainty • Sectoral shifts and labor reallocation following China’s pro-market reforms likely imply a significant rise in (idiosyncratic) income risk • E.g., clearevidence of higherfrequency of workertransitionstounemployement in the 2000s • Likelybiggereffectwithfastergrowth – more churning • Withweakunemploymentinsurance, thispromptshigherprecautionarysaving (i.e., self-insurance) – especiallyforyoungworkerswithoutassets. • Quantitativelythiseffectappearssignificant in China

40. Source: Chamon, Liu and Prasad (2010)

41. Household saving • Weak / declining social protection • Pension reform: weakening of the old SOE-based public retirement system • decline in replacement ratios -- from 80% under old system to some 60% for those retiring after 1997 • Individuals are left to bear much of retirement risk • Quantitativelyimportanteffectonsaving -- especiallyforhouseholdsclosetoretirement (by up to 8% of theirincome) • Decliningpublicprovision of health, education, housing • Young householdssave more foreducation, housingpurchases • Olderhouseholdsraisetheirprecautionarysavingtoself-insureagainsthealthrisks

42. Household saving • These ingredients have mutually reinforcing effects • E.g., the weak social protection system encourages precautionary saving further when there is reduced intra-household risk sharing (due to one-child policy) • Theeffects are alsostrongerwithrestrictedaccesstoborrowing (e.g., foreducation, housingpurchases, adverse income shocks)

43. Enterprises

44. Enterprise saving • In China itisfarabovetheinternationalnorm Source: Porter (2010)

45. Enterprise saving After declining in the 1990s, earnings retention has risen back to 90% Source: NBS data

46. Enterprise saving • Why is it so high? • Fewer studies than for household saving • Corporate governance: • SOEs under no obligation to distribute dividends • Financial market underdevelopment • Only large and connected firms (esp. SOEs) have easy access to credit – now changing? • Retained earnings are by far the biggest source of investment financing

47. Source: Porter (2010)

48. Enterprise saving • Household-firm saving offset is weak in China (while close to 100% in rich countries) • No big dividends for households to spend • Hard for individuals to borrow against firm wealth • Limited access to outside financing may force firm owners to save extra to self-insure against idiosyncratic investment risk (Sandri 2010). • Hence an increase in investment following pro-market reform may imply an even bigger increase in saving • Blur between household and enterprise saving

49. Prospects for saving

50. Prospects for saving • There are good reasons to think that China’s saving rate may have peaked • New requirements that SOEs distribute dividends (since 2008) • Rising trend for wages (e.g., large minimum wage increases in many provinces in 2010) will erode enterprises’ share of total income • Development of financial markets will reduce firms’ resort to retained earnings in anticipation of investment opportunities