Chinese Economy Saving Part 1

National National Net Saving Private Public Current account (Sp-I)+SG Components of Saving National Private Household Business (corporate retained earnings) Public Government (SG =T-G) National Net Saving Current account (Sp-I)+SG National Income Accounts GDP=C+I+G+NX GNP=C+I+G+NX+FI=C+SP+T CA=NX+FI=SP +(T-G)=SP +SG

Why Do We Care about Saving?

Guonan Ma and Wang Yi , “China’s high saving rate: myth and reality” BIS working paper High Savers: China, Singapore Previously high savers: Japan, Korea Germany and Italy—not bad Anglo Saxon Countries (UK, US) Low savers. Well, Australia’s saving rate is higher.

National Saving Rate (percentage of GDP) Saving ratio S/Y in China (and India) on sustained rise. Japan and Korea-time shifted and overlayed sampling their high saving days

Consumption ratio (C/Y) as Percentage of GDP Consumption ratio declining in China (India too, but this is a course on China) Consumption ratios in Japan and Korea were declining but then stabilized. Do you see any parallels in your lives? Can you tell a story whereby this sort of pattern might make sense? Might there be some structural issue that causes the consumption share to fall—something that we as economists might be cause for concern? During years of heavy and rapid investment (like when you’re in college), your consumption declines. You live in a smaller place, food is maybe not as good as mom’s. Cause for concern: declining labor’s share of income.

Declining Labor Share of GDP Wages are 80% of Chinese household disposal income. Possible reasons: Lagging labour-intensive service sector Difficult financing conditions for small firms Shrinking net interest income

Capital Formation (Investment)

Current Account China’s current account surplus is mostly with the United States. It’s trade with Europe is roughly balanced.

China, Japan and India

China and USA

Graph 3 Comparison of various components of saving rates across countries. Corporate saving rates in China not abnormally high. Their calculations of household saving for China seem low—remember these are ratios to GDP, not disposable income

Corporate Saving Financial Frictions Large SOEs have best access to bank finance Small and private firms generally need retained earnings to invest

Guo and Yi’s Household Saving Rate for China

Hypotheses about Saving Structural transformation (Lewis Model) The guys in agriculture are living at subsistence level and have nothing to save As they move to industrial sector, they have something so save. Any problem with this story?

Hypotheses about Saving Habit persistence in utility U(c-h) where h is habit stock SOE downsizing and privatization (precautionary motive) Increased income risk Loss of range of benefits (pension, education, medical)

Hypotheses about Saving Demographic changes Smaller family sizes (one child policy) means more resources can be saved. Reduced old-age support from children. Family system: kids support parents who bequeath house and other assets upon death Demographic dividend Private home ownership Rural people always owned houses Urban people began to own in early 1990s. 85% own. They need to come up with 50% down payment.

Life-Cycle Effects and Demographics Modigliani and Cao (2004) Nobel Prize winner Developed the life-cycle theory An early piece of research by major western economists to work on China

Fertility rate (From Modigliani and Cao)

E/M: Employed to Minors

Saving rate and long-term income growth rate

Stylized Life-Cycle Model of Saving and Consumption Mid to late career people do the saving. Large number of these guys now. S/Y = (Ny Sy)/Y+ (Nm Sm)/Y+(No So)/Y

Empirical Analylsis Run saving rate regression on long-term growth, dependency ratio, transitory growth rate, inflation, 1/Y. Inflation should lower saving (make you want to spend now). Coefficient on inflation doesn’t seem to make sense. Other estimates seem to make sense.