Saving a Top Priority for Chinese…But Why?

Understanding the motivations behind China’s high savings rate
October 2010

But does this theory apply in the present day? Nielsen seeks to understand the strength of this hypothesis and explores non-cultural factors which may have a role in explaining China’s high savings rate. Sigapore and Malaysia the highest 50 40 30 20 10 0 PH NZ PK AU JP SL HK TW VN ID 2010f TH IN KR SG MA CH 2011f Source: CEIC. China’s savings rate. A popular explanation is that China’s legendary savings habit is influenced by the Confucian values of thrift and frugality. 2 . Exhibit 1: Savings as a % of GDP: China. Economic theory based on Forward Looking Models suggest that countries experiencing strong GDP growth should see a drop in savings rate as people are better able to predict their future incomes. China’s national savings rate is one of the highest in the region and substantially higher than developed economies like those of the United States and the United Kingdom. the savings rate only increased.Overview China’s consistently high savings rate has raised a fair amount of international and academic interest. on the other hand. has continued to remain high despite its remarkable GDP growth. Some Facts: Forecasted to close 2010 at nearly 50% of GDP. HSBC Copyright © 2010 The Nielsen Company. Despite the great economic growth over the past decade.

.National savings is the sum of household. 41852 on Investment and Saving in China by Louis Kuijs. (Exhibit 3) Exhibit 2: Gross Domestic Savings Rate (% of GDP) 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 US Source: World Bank UK China Exhibit 3: China Savings Rate by Components (% of GDP) 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Household Savings Corporate Savings Government Savings Source: World Bank Paper no. Thereafter. corporate savings caught up and came on par. I on China Savings 3 Copyright © 2010 The Nielsen Company. due mostly to better productivity and efficiency of private enterprises in the post-reform era. Based on the limited data available. corporate and government savings (fiscal revenue). Household savings on the other hand showed a slight decline in the mid-1990’s and has since stabilized at around 16% of GDP. it is interesting to note that household savings was the largest component prior to 1999. and has played an equally important role in contributing to China’s high savings rate.

Exhibit 4: Gross Domestic Savings Rate (% of GDP) 50 Household Savings 40 Corporate Savings Goverment Savings 30 20 10 0 China-2003 U. 4 . even in the present day (rural areas have less surplus hence report lower intention).the high-levels of household savings (see exhibit 4) warrants further attention. I on China Savings Exhibit 5: Those Mentioning Intention to Put Their Surplus in Savings High Income Mid Income Low Income 60+ 50-59 40-49 30-39 <30 Rural Areas Tier 4 Tier 3 Tier 2 Tier 1 National 0 10 20 30 40 50 70 69 43 41 49 53 63 63 46 63 66 63 63 56 60 70 80 Source: Nielsen CCI Survey 2010 Copyright © 2010 The Nielsen Company. Nielsen’s Consumer Confidence Survey reveals that savings sentiment continues to be strong among different consumer groups.Even recognizing the significance of corporate savings.S.-2002 Japan-2002 Korea-2002 Mexico-2001 Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs.

A modest lifestyle and avoidance of debt were natural outcomes of this value system. % 20 Exhibit 6: Prime Saver’s (20–49 years) Share in Population 50 40 30 10 0 1985 1995 2005 2015 2025 2035 2045 Source: Paper on Determinants of Household Savings by Marcos Chamon and Eswar Prasad/IMF Exhibit 7: Luxury Apparel Retailers–Store Location Share by Cities–2009 100 Cultural Frugality – Remembering Confucius Much has been written about China’s legendary savings habit built upon the Confucian values of frugality. Typically this group displays a higher propensity to save as it has to finance a variety of life-stage needs: • Younger households (20-34) need to build homes and purchase durables • Older populations (around mid-40s) need to save for their childrens’ education as well as for their own retirements. With retirement setting in. after which the rate is expected to drop as these groups get older and graduate to become Non-Prime Savers (50+ yrs). December 2009 5 Copyright © 2010 The Nielsen Company. taking zhong zhong or the Middle Ground (low-key) and living within one’s means. selfdiscipline. . 80 60 40 20 0 Armani Burberry Cerrutti 1881 Dunhill Gucci Salvatore Faragamo Key Cities Other Cities Source: Li and Fung Research Centre China Distribution and Trading. and offered a ready explanation of why Chinese were such strong savers. Issue 63. both earning and savings capacity will drop and these households will start living off their accumulated funds. These factors explain the high savings rate to 2015. defined by economists as Prime Savers (20-49 yrs).So Why Do Chinese Households Save So Much? An Age Structure that Favors Savings Since the late 1980’s. working group. China’s demographics have favored the younger.

Ltd. McKinsey’s 2008 Wealth Survey reported 1. But that same figure has climbed to 8 percent.000 new stock accounts opened every day for five days in a row in May of that year. with no personal earning capacity. Another illustrative example of changing attitudes toward risk occurred in 2007.However. Guangzhou Toyota Motor Co. were joining pensioners. and. proof that the explanation for high savings intention due to cultural factors may not be telling the full story. Manager of Wuhu Anqi Auto Sales Co. the volume of autos paid for by loans accounted for only 3 percent of our total sales. Chinese are keen to avail themselves of them. and the price of many stocks quadrupled in an 18 month period. housewives and people from all walks of life during the famous stock market frenzy. 95% of car owners bought cars from their own savings.” stated Jiao Miao. (May 25. that this aversion to debt is slowly changing. “When we cooperated with banks. when students. ranking China fourth globally as a luxury market. Take for example consumer response to auto loan schemes offered during October’s Golden Week in 2009. it was reported that more than half of branded apparel retailers had expanded their footprint beyond key cities. Reuters reported 300.000+ who are willing to spend. Copyright © 2010 The Nielsen Company. This had a significant impact on car sales of certain models. But now the proportion is more than one-third. 2007. as quoted by car dealers in the media: “Before this policy. Nielsen’s Personal Finance Monitor reported that 73% of home owners did not take mortgage loans. however.” said Hao Qianglin. the argument that frugal living is a ‘cultural constant’ weakens if we look at the proliferation of luxury stores catering to China’s small but growing nouveau riche and younger segments willing to spurge on luxury brands. Aversion to Debt and Risk: Myth or Reality? “Do not go into debt” is a strong traditional sentiment in China and many East Asian countries. Sales Manager. 8 to 10 percent of consumers chose to take out loans to buy cars. Reuters report). 6 . In 2008-2009. more than two-thirds (68%) of credit card holders claimed to pay their entire outstanding balance every month. The increasing appetite for luxury brands of the newly affluent and younger populations has prompted foreign luxury retailers to expand their footprint to capture this growing potential. This figure is expected to grow to four million by 2015. Boston Consulting’s “Coming of Age” study reported that China will take 29% share of the global luxury market by 2015. In 2009. Exhibit 8: Incidence of Loans and Revolving Credit Loan Incidence Home Morgage Loan No Yes Base 73% 27% 4655 home owners Car Loan 95% 5% 2327 car owners Credit Card Installment Purchase Scheme 86% 14% 3191 credit card owners Incidence of Revolving Credit on Credit Card Credit Card Monthly Payback Pay In Full Partial Payment Minimum Payment Not Sure Base Source: Nielsen Personal Finance Monitor in 18 cities. Auto dealers were offering initial down payments and monthly principal payback at a zero percent interest rate.6 million high net worth individuals in China with an annual income of RMB 25. 2008-2009 % mentions 68% 8% 4% 20% 3191 credit card owners But is this sentiment changing? There are signs. As incomes grow and attractive loan schemes and investment opportunities present themselves.

000 94. (see Exhibit 9 above).000 140. Wife. .Exhibit 9: Comparative Cost Index Jay Age 23 years old Graduate Executive.000 50. Exhibit 10: Assessing The Sources of Funds For Their Lifestage Needs 100 80 60 40 20 0 John Jay John Jay John Car Jay John Jay John Jay John Jay House Wedding College Education Medical Expenses Pension/ Old Age Expenses Parents Savings Source: Nielsen Quantitative Research Personal Savings Loans Govt/Private Plan 7 Copyright © 2010 The Nielsen Company. Wife’s Parents 2 people: Self. MNC. What Does Mr. Own Parents. purchase of durables.000 25. health and old age expenses.000 200.000 Cost Index (Expense/Salary) 20x 2x 40x 10x 5x Cost Index (Expense/Salary) 53x 19x 266x 80x 13x 400. MNC.000 10. Jay Have to Save for? Nielsen conducted in-depth interviews with first jobbers in China and the United States to get a deeper look at their saving needs and how they are likely to fund these expenses. children’s education. the purchase of a house. Wife. A comparative cost index was developed reflecting multiples of their current salary needed to pay off different life-stage expenses such as weddings. USA Current Salary: $5000/month Cost ($$) College Wedding Expenses House Value Mortgage Down Payment Car Future Medical and Old Age costs 100.000 2 million 600.000 6 people: Self. Shanghai Current Salary: RMB 7500/month Cost (RMB) College Wedding Expenses House Value Mortgage Down Payment Car Future Medical and Old Age costs Source: The Nielsen Company John Age 23 years old Graduate Executive.

Jay will in later years be saving for medical and old age costs for six people(himself and his wife.Clearly. Moving into one’s own apartment is an important first step for marriage. In the US. Mr. May 2010 While government investment in social security and healthcare has increased over time. Jay has to ‘technically’ save 19 times his salary against John at 3 times. Both are seen to be outcomes of the precautionary savings motive. CCI. this represents 2% of the country’s total household wealth (see Exhibit 11). Copyright © 2010 The Nielsen Company. Standing at RMB 1000 per capita. Exhibit 11: Household Assets Breakdown % 100 90 80 70 60 50 40 30 20 10 0 US-2007 Japan-2007 France-2007 Canada-2007 Bonds and others Real Estate China-2007 Stocks US-1972 Currency and deposits Pensions and Insurance Source: Professor Jiming Ha. Heading for Balanced Growth Paper at Nielsen CCI seminar. Much of course depends on their parents’ own past savings and their ability to support themselves independently. Jay will need to save for high school and college education using his personal savings. • Caring for elderly parents is a strong tradition in China. when both John and Jay have a child. China’s social security funds are still much lower than those in developed economies. his own parents and his wife’s parents). Jay has a lot of saving to do! • High property prices in China require Jay to have adequate liquidity early in life. which Jay needs to plan for as student loans are yet not popular in China. buying three to four properties as investments are the most popular ways of keeping surplus income. • In the future. and saving needs to begin much longer in advance before the actual wedding. Keeping savings in cash and bank deposits at low interest rates. Jay’s parents and perhaps the brides’ side will also contribute as well. 2010). 8 . availability of long-term student loans at flexible rates reduces the need for immediate liquidity. offering greater psychological assurance to Chinese consumers than investing in stocks and bonds. Born in the era following the One Child Policy. public education is available till middle school in China and high school in the US. • Chinese weddings can be lavish and the groom’s family bears the cost. Precautionary savings to cover for medical and post-retirement expenses remain an important factor in explaining China’s high savings rates. well below the US level of 20% (Source: Professor Ha. Heading for Balanced Growth Paper at Nielsen CCI seminar. Jay’s parents will also support the wedding expenses.

While more studies are necessary to quantify the correlation between savings rate and the explanatory factors such as culture. Chinese are as big spenders as they are savers. Exhibit 12: Strength of Factors Explaining High Savings Rate Today A Qualitative Assessment Cultural Frugality and Debt Aversion High Share of Prime Savers In Population Current costs of certain life-stage expenses (education. Copyright © 2010 The Nielsen Company. . combined with diversification of the financial markets in favor of more medium risk products and changing demographics will lessen the importance of precautionary savings in China and overall savings rates will be more in line with developed economies. L. When a certain income threshold is reached. 9 Copyright © 2010 The Nielsen Company.S. high costs of certain life-stage expenses. health and pensions starts having an impact. weddings) Government support on Social Security and education Limited availability of attractive loan schemes to fund life-stage expenses Limited options to channel savings out of cash and bank deposits STRONG WEAK We believe that once increased government spending on soft infrastructure such as education. the precautionary savings motive and existing loan and credit environments play a stronger role in explaining the savings rate as opposed to the frugality theory. Nielsen and the Nielsen logo are trademarks or registered trademarks of CZT/ACN Trademarks.C. Produced in the U. Nielsen believes that demographics.A.Conclusion: The argument that China’s high savings rates can be attributed to a handed-down tradition of thrift and frugality loses strength if we look at the spending behavior of affluent Chinese today. All rights reserved.L. housing.

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