Why the Chinese Save

Contrary to conventional wisdom, China's high savings rate has everything to do with policy and institutions. Culture, not so much.


Sheldon Garon, who teaches in both the history and East Asian studies departments at Princeton, is a leading scholar of Japan. But his timely new book, Beyond Our Means: Why America Spends While the World Saves (Princeton University Press; all rights reserved) takes on an issue that’s also important to contemporary policymakers in transition economies: Why some countries save far more of their income than others.

The received wisdom, heavily influenced by the experience of Japan and the east Asian Tigers, is that families’ decisions about savings are generally driven by cultural values derived from Confucian teachings and are thus largely beyond the reach of government policy. So countries on the cusp of development that lack the savings bug – for example, Mexico and South Africa — must either import large amounts of capital or make do with lower rates of investment. But in this excerpt, which focuses on China, Garon suggests that savings behavior is far more subject to deliberate government manipulation than is generally understood. – Peter Passell


To be sure, many East and Southeast Asian societies appear culturally disposed toward thrift. But I question the timelessness and uniqueness of so-called Asian values regarding saving and consumption.

As heretical as it may sound, the widespread “urge to save” in Asian economies has less to do with their shared “Asianness,” and may be more related to their common adoption of savings promotion practices from other countries.

Although European colonial powers introduced some of the methods, the primary catalyst has been Japan and its historic efforts to increase national savings. Before 1945, Japanese imposed the "Japanese model" on their colonies and occupied territories. More recently, Asian nations consciously emulated the policies underlying postwar Japan’s economic miracle.

Following World War II, international organizations and economists advised developing nations to “mobilize domestic savings” to finance growth. By the 1960s, Japan emerged as the poster child in this international campaign. Led by the influential planner Okita Saburo and his Japan Economic Research Center, Japanese economists touted high saving rates and low consumption to explain the nation’s rapid growth—and “its implications for developing countries.”

After the yen sharply appreciated against the U.S. dollar in 1985–87, Japanese officials became outright missionaries for the cause. As Japanese businesses heavily invested in Southeast Asian production, representatives of the government confidently counseled Southeast Asian states to mobilize household savings. Japan’s Postal Savings Bureau played a leading role, funding yearly meetings of Asian government savings bank officials. Japanese bureaucrats would lecture counterparts on the virtues of the nation’s postal savings system, citing its historical success in establishing the “idea of saving in the minds of the people.” The state’s promotion of saving, they asserted, had proved invaluable to curbing inflation, accumulating capital, and stabilizing society at large.

Similarly the Bank of Japan sponsored working seminars on “savings promotion,” which brought together central bank officials from Asia and the Pacific. These meetings marked one more chapter in the little-known story of learning from the Japanese experience among emerging Asian economies—including South Korea, Singapore, Malaysia, and China.

Savings in China

Fears of excessive saving by an Asian giant are nothing new. Two and a half decades ago, Japan’s high saving rates and alleged under-consumption became a flashpoint in international relations. American commentators worried about the loss of national sovereignty as Japanese savings flowed into huge purchases of U.S. Treasury bonds and bills.

At a certain point the media lost interest in the story, even though the Japanese government remained the number one foreign investor in Treasury securities until recently. Today, of course, U.S. complaints single out the Chinese for over-saving (typically framed in terms of China’s policy of keeping its currency exchange rate low). A spate of recent books sounds the alarm about Americans’ reliance on Chinese savings to finance their addiction to consumer and mortgage credit.

No one can say for sure how much the Chinese people save. Data based on national income is incomplete; nor does it accord with international standards. The most credible estimate places China’s household saving rate for 2007 at nearly 26 percent. This is extraordinarily high, although in line with rates in Japan, South Korea and Italy in previous decades.

Common explanations of why Chinese save have been less than satisfying. Most popular are invocations of “culture” — just as we’ve seen elsewhere in Asia. More often than not, Chinese leaders trace the nation’s thriftiness back to Confucian values. Compared to Americans who became accustomed to overspending, observed the official China Daily, the Chinese people have developed a “tradition of savings since ancient times.” Zhou Xiaochuan, governor of China’s central bank, recently defended his country’s high saving rate as in large part the product of Confucianism, which values thrift, self-discipline, moderation, and an aversion to extravagance.

There is something rather forced about these claims. Back in the 1960s, Chairman Mao Zedong denounced Confucius as a “stinking corpse.” Only in the last 20 years has the Chinese Community Party conveniently rediscovered the sage’s age-old influence on popular behavior. Ironically, the inspiration came primarily from abroad, from Confucian revivalists in Singapore and Taiwan and from Westerners who write about the development of “Confucian capitalism” in Japan and the rest of East Asia.

Cultural explanations are all the more dubious when we consider the following: Not so long ago, the Chinese people were terrible savers. Under Maoism from 1952 to 1978, household saving rates did not exceed 2 or 3 percent and often sunk to less than 1 percent. If Chinese saved at impressive rates thereafter, surely other factors rank higher than Confucianism.

Another explanation favored by American economists and journalists is that Chinese save excessively in the absence of adequate welfare programs. It is an argument sustained by constant repetition, and little evidence. This analysis comes complete with its own policy recommendation. In the words of the influential economist Stephen Roach, China should build an institutionalized safety net necessary to temper the “fear-driven precautionary saving that inhibits the development of a more dynamic consumer culture.”

Uncertainty, it is true, may motivate people to save, but so do many other factors. The correlation between high saving and inadequate social benefits is a weak one, globally. Scores of poor nations provide little in the way of social welfare, yet their saving rates are minuscule. Among advanced economies, high-saving nations in continental Europe all provide comprehensive welfare benefits. Americans, who aside from the elderly lack sturdy safety nets, conversely saved little in recent decades.

There are, however, better explanations. In China, household saving rates have risen in tandem with rapid economic growth. We have observed this pattern in Asia’s other success stories, as well as in Western Europe after World War II. Following Mao’s death and the advent of Deng Xiaoping in 1978, the party-state fundamentally transformed the Communist economy into one based on global trade, foreign investment, and the partial embrace of market principles. The Chinese economy leaped into high growth, the GDP surging 10 percent annually from 1980 to the present. As elsewhere, household savings rose as consumption lagged behind increases in incomes.

Second, Chinese save more because of poor access to credit. Saving tends to be inversely related to borrowing. American journalists glory in the story of Chinese conspicuous consumption and the spread of credit cards. Most of these “credit cards” are, in fact, debit cards tied to bank accounts. Only a small fraction offer revolving credit. The heavily regulated banks have been miserly in extending consumer credit, and they generally require stiff down payments before lending money to homebuyers.

This is in sharp contrast to the United States, but not so different from several Asian and European countries where consumer and housing credit is subject to significant regulation. In a fast growing economy like China’s, people want to buy cars and other durables, but in lieu of easy credit they need to save in order to consume.

Curiously, few observers consider the possibility that the Chinese party-state might have had a hand in directly encouraging popular saving. Indeed, China represents one of the most compelling cases of the efficacy of aggressive savings promotion.

Under Maoist rule, Chinese households saved almost nothing. They had little money, it is true, but they also lacked safe, convenient banking facilities. In the three years following the Communist Revolution of 1949, the regime eliminated all public and private banks, transferring their assets to the central People’s Bank of China. The dissolved banks included the Republic of China’s fledgling postal savings bank, established in 1919. Although families under Maoism may have saved by hoarding goods and a little cash, they had little incentive to save in lieu of accessible institutions for small savings.

All this changed in the wake of the regime’s decision to reform and open the Chinese economy in 1978. Leaders recognized the pressing need to mobilize domestic savings to remedy capital shortages. One year later the state established the Agricultural Bank of China, the Bank of China, and the People’s Construction Bank of China. The creation of the Industrial and Commercial Bank of China in 1983 completed the formation of what today constitute the four big state-owned commercial banks.

The year 1986 ushered in the next phase, the relentless pursuit of small savers nationwide. The Agricultural Bank and the Industrial and Commercial Bank set up nearly 30,000 new branches that year. The Agricultural Bank alone doubled the number of its branches, reaching villagers who likely had never before had a savings account.

Institutions bear heavily on savings behavior. In 1986, savings deposits increased at a faster clip than at any time since the founding of the People’s Republic of China. It was not simply that branches opened and customers streamed in. Bank employees ran nationally coordinated campaigns to persuade the locals to entrust their savings to the new institutions. Including its joint savings projects with the authorities, associations, and cooperatives, in 1991 the Industrial and Commercial Bank claimed one million staff members engaged in “savings mobilization.”

Joining the big banks in 1986 was the new—or rather improved—Chinese postal savings system. For all the recent insistence on Chinese exceptionalism, officials methodically emulated the savings-promotion policies of Japan and other thriving Asian economies.

Once the regime committed itself to reviving postal savings, Chinese bureaucrats visited Japan’s Postal Savings Bureau and Central Council for Savings Promotion. Cooperative relationships between savings officials of the two nations developed. During the 1990s, Japan’s Ministry of Posts and Telecommunications assisted the Chinese in computerizing the postal savings system. Officials from the People’s Bank of China, moreover, actively participated in the Bank of Japan’s meetings for Asian central bankers, reporting on Chinese programs to boost savings deposits.

Postal savings became immensely popular among Chinese for much the same reasons we have seen elsewhere. In many rural and remote areas of China, it is one of the few institutions that serve small savers. The number of branches mushroomed from less than 2,500 in 1986 to 37,000 in 2009. Its popularity also rested on more than two decades of promotional campaigns by postal employees and the local authorities.

As a share of total deposits, postal savings appears small compared to deposits the four big state-owned commercial banks—only 8.1 percent in 2002. But of course we’re talking about the world’s largest country. The number of households with postal accounts that year came to a mind-boggling 104 million.

Chinese leaders today speak less openly about their efforts to promote saving. Instead, officials increasingly pledge to stimulate consumption as a vital prop of the Chinese economy. As in Singapore, the party-state recognizes that its continued legitimacy depends on improvements in the people’s material lives. In view of decreased demand from sluggish Western economies, the planners are also aware that domestic consumers may need to buy more if the Chinese economy is to continue high growth.

However, the Communist Party’s pronouncements on consumption have their tactical side. They aim to reassure American observers, many of whom take any pledge as evidence that China will soon embrace an American-style consumer society.

Unquestionably consumption is rising in China, yet the Asian giant will likely remain a high-saving society for many years to come. The consumption levels enjoyed by Westerners, Japanese, Koreans, and Singaporeans are well beyond the reach of hundreds of millions of Chinese. Consumption as a share of GDP stands at 35–36 percent, half that of the United States. Contrary to many media stories, China’s high growth relies overwhelmingly on investment, exports, and government consumption — and relatively little on domestic consumption.

Finally, the regime has a powerful stake in promoting household saving for the foreseeable future. Chinese authorities learned a great deal from the Japanese and Singaporean models, in which the state manages and invests large pools of small savings. The Chinese government similarly captures the people’s savings at low cost from the state-owned banks and postal savings system. This capital finances companies and infrastructure at home. It also flows into the Singaporean-style sovereign wealth fund that China invests strategically in such things as U.S. Treasury securities and the exploitation of African minerals.

China, the newest savings superpower, now enjoys influence in international relations it could scarcely imagine three decades ago. When then-Treasury Secretary Henry Paulson blamed the China’s “superabundant savings” for causing a global credit bubble, the Chinese turned the tables just as the Japanese had done 20 years earlier. The United States, declared Premier Wen Jiabao, should be held most accountable for the global economic crisis. America had pursued an “unsustainable model of development characterized by prolonged low savings and high consumption,” the “blind pursuit of profit,” and “the failure of financial supervision.”

Make no mistake about it. Chinese leaders have few plans to jettison the policies of savings promotion that have served them so well.

Sheldon Garon is the Nissan Professor in Japanese Studies at Princeton University.