The value of China's national savings has reached half of the gross domestic product. No other country in the world puts aside such vast wealth, and it is not only thanks to the philosophy of Confucius. Over the past decade, the growth of savings has systematically outpaced that of investment – which already accounts for a large share of GDP compared to the rest of the world. This has led to excessive current account surpluses and pressure on the yuan that Washington never fails to notice.
A recent analysis by the Bank of Italy fits into the fervent debate on global imbalances. The study starts from a review of the life cycle model, according to which man (oeconomicus) saves money during his working life and then consumes the accumulated wealth in the second phase in which he no longer receives income from work. The study by Riccardo Cristadoro and Daniela Marconi, both researchers at the Via Nazionale institute, shows how the aggregate analysis of savings is not able to capture the important differences between rich and poor provinces and between urban and rural households.
The first step they take is a rationalization of the life cycle model (in the wake of the paper by Modigliani and Cao of 2004): the younger generations, in their saving phase, are much richer than the older generations, who instead just consume. And this is in itself a cause of the increase, more substantial in recent years, in the aggregate savings rate.
But above all the two scholars focus on the differences between countryside and city. Analyzing the data regionally, we realize that demographic factors, at the basis of the theory of the life cycle, play a marginal role in household savings choices. According to recent data, in fact, the increase in private savings occurred mainly among urban households, while in rural areas the situation remained almost unchanged.
This is explained in several ways. First there is a difference in wages between urban and rural areas of more than 3 to 1 – and this gap will continue to expand as urbanization increases. Furthermore, in the last 30 years, China has undergone major reforms in the social security systems following the opening to the market economy. If before the workers of the cities were mostly employed in state enterprises and therefore it was Beijing that ensured their livelihood in old age, today, about 60% of workers in urban areas are employed by private companies – and therefore have to rely on their own means to secure a pension. Plus these workers they mostly emigrated from the countryside where it is customary and traditional for children to take care of their parents when they reach an advanced age – and therefore constantly send part of their income to rural areas. Add in the liquidity constraints they face due to banks' reluctance to lend, and it becomes clear why urban workers save more.
According to Cristadori and Marconi, in recent years an excessive level of aggregate savings has been reached which needs to be rebalanced. The proposed policies envisage increasing the uniformity of the provision of social and welfare services throughout the territory, the regularization of migrants and a reform of the financial system which favors access to credit by families.
Attachments: Bank of Italy – Household savings in China.pdf
