Photographer: SeongJoon Cho/Bloomberg

The Chinese Can’t Kick Their Savings Habit

Some bank as much as half of their income, suppressing spending

The Nies can afford to spend more. The couple live with their 5-year-old daughter in an apartment they bought in Beijing in 2009, when real estate was more affordable. He teaches English at a local college; she’s a hospital researcher. Together they earn about 20,000 yuan ($3,226) a month. After paying the monthly mortgage of 3,000 yuan, another 3,000 yuan for kindergarten fees, plus household necessities, they have plenty left over.

They could eat out or plan a vacation. Not a chance, says the teacher. To stick with their plan of investing in a fund for his parents’ medical or other needs, preparing for his and his wife’s retirement, and putting away cash for their daughter’s education, the couple are trying to save at least half of their income. “We’re not confident about government policies for the long term. Most Chinese feel insecure, so we try our best to put aside as much as possible,” he says. (Nie asked that only his surname be used: He isn’t authorized by his college to speak to the media.)

Chinese policymakers say their country must end its reliance on investment in factories and infrastructure for growth and rebalance to a more consumption-driven economy. Yet the Nie family is the norm in China, where the average Chinese household socks away about 30 percent of its disposable income, one of the world’s highest rates. The downside of saving so much is that consumption makes up only about 35 percent of gross domestic product. U.S. households save around 5 percent to 6 percent of their income, and consumption accounts for about 75 percent of the economy.

Household, business, and government savings in 2013 as a percentage of GDP

Yet the Chinese keep saving. One reason is to prepare for an uncertain future, often called precautionary savings by economists at the World Bank and the International Monetary Fund. That theory explains why households saved almost nothing in the years before Deng Xiaoping launched reforms in 1978 but put away so much today. “In the central planning period there was almost no reason to save at all. In the city, state enterprises took care of you from cradle to grave, and in the countryside, the collective did the same thing,” says Nelson Mark, director of Asian studies at Notre Dame. “It was only later with state enterprise reforms and downsizing that economic life became more risky for people, and for the first time there was a motive for precautionary savings.”

Beijing has spent billions of dollars improving health care, expanding a pension program, building schools, and hiring teachers in rural China. In theory, that wider net should have made Chinese worry less and spend more, but savings have continued to rise, up about seven percentage points in the last 10 years, notes Andrew Batson, China research director at Beijing-based consulting firm Gavekal Dragonomics.

The rapid growth of China’s economy may offer an explanation for the persistence of savings. Incomes have risen as the economy has grown at near double-digits. Newly affluent Chinese are spending more than they ever did, but their savings are increasing even faster. Japan and South Korea saw similar spikes in household savings during their high-growth years. “When peoples’ incomes go up, spending goes up, but not by as much, because they’re not sure what will happen next or are set in their habits,” says Batson.

China’s population today has a preponderance of working-age people, the group most inclined to save, says Mark. Most adhere to the one-child policy. “Now they’re saying, ‘Gee, no one is going to take care of me when I get old,’ so they’re funding their own retirement,” he says.

Nie is the only son among four children; larger families are more common in rural China, where he grew up. According to tradition, the eldest son is responsible for taking care of his parents when they become too old to farm. Rural pensions, a fraction of those given in cities, are far too small to support retirees. Nie says he and his wife don’t want to burden their daughter when they get old. “That’s why we need to be stingy today.”

“My family is poor. The more I can save, the better,” says Chen Xueliang, 19, a cook in a duck restaurant in Xi’an. Millions of Chinese at the lowest income level have become aware of how far behind they’ve fallen. China must reduce its “staggering” level of income inequality before people stop saving so much, says Gan Li, an economist at Southwestern University of Finance and Economics in Chengdu. According to his research, China’s Gini Coefficient, a measure of income disparity, is 0.61, one of the highest in the world. The richest 5 percent of China’s households save about 70 percent of their incomes and account for half of household savings, Gan estimates. “China can’t move to a consumption-driven economy without solving the problem of extreme inequality,” he says.

The bottom line: Before the opening up of China’s economy, the safety net was so secure that Chinese saved very little.

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