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Reduce savings ratio

(China Daily)
Updated: 2009-03-26 07:46

While the international community is still digesting his proposal for a super-sovereign reserve currency to reshape the world monetary order, Zhou Xiaochuan, China's central bank governor, has also offered some insight on the country's high savings rate.

The implication of a new global currency to replace the currently dominant US dollar will surely draw much attention, but Mr Zhou's analysis on the causes of China's high savings may deserve more hearing, especially from domestic policymakers.

China's savings rate increased from 37.5 percent in 1998 to 49.9 percent in 2007. As a result, the domestic savings climbed while its current account surplus and foreign exchange reserves rocketed.

The Chinese central banker identified long-term factors such as tradition, culture, family structures, demographics and the shortcomings of the social security system all have reinforced Chinese people's propensity to save.

More importantly, he explicitly pointed out that, among the residential, corporate and the government sectors, the rate of corporate savings to China's gross domestic product was high when compared to other countries.

Starting in 2002, the country's savings ratio began to surge, with steadily rising residential savings and remarkable increases in corporate savings. During the period, the ratio of the corporate sector's disposable income to national disposable income increased from 13 percent to 22.5 percent, while the share of government disposable income increased by only 2 percentage points.

If that is the case, Chinese policymakers should think twice about the measures they have adopted to shore up domestic consumption.

With a clear policy intention to reduce the savings ratio, China has made boosting domestic demand and encouraging consumption a top priority since 2005.

Now, the worsening global growth outlook and slowing economic growth at home have persuaded Chinese policymakers to do everything in their power to urge consumers to spend more.

But since Chinese consumers are not really as rich as the country's high savings ratio suggests, policymakers should focus on either making them richer or compelling domestic companies to invest more.

To absorb the increasing capacity of Chinese enterprises while the world economy is in recession, robust growth of domestic consumption is a must.

Given the importance of a booming housing market to the country's economic recovery, a recent proposal for the amendment of the law on land administration shows that related policymakers are yet to come to grips with the necessity of generating greater consumption.

By suggesting the automatic renewal of 70-year leases on purchased property instead of outright ownership, the proposal has aroused fear among house owners that their posterity will be slugged renewal fees.

The uncertainty surrounding this issue is heightening consumers' sense of insecurity, making savings rates increasingly unlikely to fall any time soon.

(China Daily 03/26/2009 page8)