Chinese savings rates are very high and increasing, which have allowed the current paradoxical situation that an emerging economy is massively lending to industrialized economies, in particular to the most advanced, the United States. But why is this savings rate so high? While the popular opinion seems to be that Chinese households just cannot consume fast enough given the very high growth rates of their incomes, closer inspection of household level data reveals a very different picture.
Take for example Jin Feng, Lixin He and Hiroshi Sato, who find that changes in the pension system can explain all of the increase in the savings rate from 17% in 1995 to 23% in 2004. The pension system has been reformed to become less generous, prompting households to compensate with their own savings. Add to this that precautionary savings is not only motivated by retirement, but also by the fact that economic uncertainty has significantly increased with the liberalization of labor markets, you have the perfect storm for a massive increase of savings rates as household try to reach an acceptable buffer stock. Public appeals for them to consume more will do nothing.
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