0. Chinese Economy Saving Part 1

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

2. Why Do We Care about Saving?

3. 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.

4. 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

5. 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.

6. 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

7. Capital Formation (Investment)

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

9. China, Japan and India

10. China and USA

13. 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

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

15. Guo and Yi’s Household Saving Rate for China

16. 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?

17. 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)

18. 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.

19. 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

20. Fertility rate (From Modigliani and Cao)

22. E/M: Employed to Minors

23. Saving rate and long-term income growth rate

24. 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

25. 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.