Policies may boost savings more than culture
With a rise in US savings putting unbearable pressure on China's low consumption rate, leading to the risk of a collapse in China's ability to export its overcapacity, the question about why Chinese households save so much of their income has become more important than ever.
Everyone seems to know the answer. Chinese households save, many insist, because the Confucian culture encourages saving for the future. Saving is deeply and culturally imbedded in the Chinese psyche.
Others reply: it is because of China's weak employment and health-care safety net. Because they can count on no official assistance, Chinese households must save a significant part of their income for medical emergencies or in case of unemployment.
Still others insist that given the disruptions caused by the disastrous policies of the 1950s, 1960s and 1970s, Chinese have become terribly cautious about the future. They save in order to protect themselves from a dangerous future.
These 'cultural' answers are all easy to understand and very appealing because they seem to make intuitive sense. But they are all unsatisfactory.
Take the Confucian argument. Many 'Confucian' countries seem to have high savings, and even American families of Chinese descent tend to have higher savings rates than the average Americans.
But they forget that most Chinese Americans are recent immigrants, and most immigrants have high savings rates for the first few generations after they arrive in the United States. At any rate Confucianism only became an explanation for high Asian savings and ferocious work ethics after the rapid growth of Asian economies beginning in the 1970s.
Before then, when Confucian countries in Asia suffered from chronic and desperate poverty and low savings rate, sociologists trying to explain Asian incapacity had no problems seeing Confucian culture itself as embedding the wrong kinds of values. Even philosopher Mozi, writing during the Warring States period, complained about the laziness and spendthrift ways of the Confucians. Confucianism, it turns out, can explain everything, from poverty to rapid economic development, from prudent behaviour and high savings to gambling and degeneracy. Such a flexible explanation is no explanation at all.
What about the argument that Chinese save because of a lack of a social safety net? This argument has problems too. If most countries in the world without social safety nets had high levels of savings, and most with robust social safety nets had low savings, this argument would have merit, but even a very casual glance around the world suggests how unlikely this claim is.
The same is true with the 'turbulent recent history' explanation. Many countries in Latin America, eastern Europe and Africa have had even more troubled recent histories, but nonetheless have very low savings rate. In fact, in these countries it is often their history that is blamed for their low savings rates.
Why save for the future when experience has taught you that in a few years hyperinflation, civil war, financial crisis or state theft can wipe you out?
As much as we like intuitively simple and easy-to-understand answers for important questions, it is not always clear that these answers have much validity. It is much better to consider the possibility that government policies may be boosting savings, either directly or indirectly, by acting to constrain consumption or to boost production.
Any policy that boosts production growth faster than consumption necessarily increases the savings rate. This is because everything a country produces is by definition either saved or consumed, and if production grows faster than consumption, savings must necessarily rise.
In that sense the financial system itself may be an important reason for high savings. By forcing deposit and lending rates very low, and so effectively confiscating a large part of Chinese household income to subsidise producers, corporate production is increased while household consumption is constrained, with the result being an increase in savings.
An undervalued exchange rate also effectively acts as a subsidy for producers and a 'tax' on consumption, and not surprisingly countries with undervalued exchange rates typically have high savings rates.
There are many reasons why Chinese save. Certainly cultural and psychological factors matter, but just because these factors are easier to understand does not mean that they are better explanations, especially when these cultural factors seem to explain both one kind of behaviour as well as its opposite.
In fact, every country that has pursued mercantilist policies, including the 'Confucian' Asian Tigers and the decidedly non-Confucian United States until the beginning of the 20th century, has had high savings rates. Perhaps it is these policies, more than the cultural factors, which determine the savings rate.
Michael Pettis is a professor of finance at the Guanghua School of Peking University and a senior associate at the Carnegie Endowment