China Leverage Risks Bypass Super-Saver Households as GDP Slows

China’s campaign to rein in credit growth, a move that’s spread panic among the nation’s automobile dealers as they worry about access to financing, is a side-issue for 27-year-old lawyer Kevin Han.

Han is an archetype of Chinese workers who on average sock away 30.6 percent of their disposable income, amounting to 6.9 trillion yuan ($1.1 trillion) in total household savings in 2012, according to Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. Han’s breakfast is 5 yuan for a cup of soybean milk and a hardboiled egg or a steamed bun. He has a 20-yuan lunch of white rice, with small portions of meat and vegetables, in the cafeteria at his Beijing workplace. He spends about the same for dinner.

Han gets deals buying clothes online, lives in a cheap rental apartment, and takes the subway to work (4 yuan round-trip). Scrimping is a must if he’s to buy his own place. He says he saves about half his monthly take-home pay of 13,000 yuan. “I want to get married and have a child, which will cost lots of money. My parents are not rich. So I have to save everything by myself.”

China’s leaders want these super savers to open their wallets and strengthen an economy forecast to have expanded by 7.5 percent in the second quarter from a year before, down from 7.7 percent in the previous three months, according to the median estimate in a Bloomberg News survey.

Consumption Goal

With increasing overcapacity in steel and cement, rising corporate debt, and a growing challenge with unregulated shadow finance, policy makers are tasked with weaning China off investment-led growth in favor of household consumption that amounts to only 35.7 percent of gross domestic product, behind the 50 percent to 60 percent in counterparts abroad.

Household borrowing amounts to 20 percent of GDP, compared with 48 percent in Taiwan and 79 percent in Malaysia, Standard Charted Plc economists calculate. “Most risks lie in the corporate sector,” with business borrowing amounting to 117 percent of GDP, against 61 percent in Taiwan and 45 percent in Malaysia, the banks’ analysts said in a note this month.

Middle-class Chinese like Han pinch pennies to pay for ever-more costly city apartments and save for their children’s education costs. The working class also hoards yuan. Twenty-six-year-old Sichuan native Wei Yinping, a worker in a Shenzhen watchband factory, worries about paying for medical care if she or her parents become seriously ill.

Health Concern

She saves almost half her monthly salary of 2,500 yuan. Without a hukou, or household registration card, she can’t avail herself of Shenzhen’s public health-care network. “If I had a local hukou, I would have many social security benefits” and not save so much, she says. Wei plans eventually to move back home and take care of her mother.

One reason the Chinese are champion savers is that earning a decent return is so hard. China’s central bank has kept rates low: A one-year deposit rate offers 3 percent, while loans to support investment by free-spending local governments and state companies go for 6 percent. With inflation, Chinese households earn close to nothing on bank deposits.

“Interest-rate policy has limited the ability of households to earn income from their savings, and reduced the pressure on poorly performing companies to improve,” warned Andrew Batson and Joyce Poon, analysts at Beijing-based economic consulting firm GK Dragonomics, in a May report.

The government is taking steps to reform the hukou system. It’s expanding health-care and pension plans so Chinese need not save so much to protect themselves from catastrophe. Regulators are giving banks more flexibility to set market-based interest rates and encouraging lending to the service sector, which is creating jobs. It will take all this and more to unleash Chinese spending power.

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