China’s economy is the second largest in the world. Its economic growth rates have been extremely high, many years climbing into the double digits. It also has high rates of government, corporate, and household savings. In a working paper from the International Monetary Fund (part of the World Bank), Zhang et al. identifies three phases that they contend influenced the savings rate of Chinese households.
- The first phase was in the 1980s, following the introduction of the one-child policy and the de-collectivization of agriculture in rural areas. Beginning in 1976, the one-child policy freed disposable income, and since children traditionally took care of their parents in old age, the one-child policy also incentivized older Chinese to save more. The savings rate rose from 5 to 20 percent of disposable income (albeit with a temporary dip in the late 1980s, possibly due to a GDP growth slow down).
- The second stage was in the 1990s after Deng’s southern tour reaffirmed China’s policy to reform and open-door policy. In addition, the massive layoffs resulting from the state-owned enterprises (SOE) reform in the late 1990s also put downward pressure on wage growth. SOE reform took center stage in this period and was accompanied by the transformation of the social safety net and job security, leading to savings rising to 25 percent of disposable income.
- The third stage came after China entered the World Trade Organization in 2001. Savings rose to 30 percent of disposable income during an export-driven boom. Notably, since 2012, household savings have plateaued and gradually begun to decline (2018).
China’s saving rate was also affected by its conversion from a centrally planned economy to a market economy. This resulted in massive layoffs; 27 million people lost their jobs between 1997 and 2002. Along with these reforms, the social safety net was dismantled, and as a result, Chinese people paid an increasingly larger share of their healthcare costs (from 20% in 1978 to 60% in 2002, although it has declined since then). The layoffs and unexpected health care costs further incentivized the Chinese people to save.
The Chinese economy shows us some of the reasons savings rates can fluctuate from country to country, largely in response to demographic and economic changes. Let’s now take an overview of the reasons individuals and households save.