Friday, May 29, 2009

Why the Chinese Save - Not Just about a Confucian Ethic

As US Treasury Secretary Timothy Geithner heads off to "urge China to shop not save" (WSJ), Michael Pettis from China Financial Markets has an interesting look at why the Chinese save, and concludes with a warning:

I am not sure if there is any over-arching reason for high savings in China, but generally I would argue that policies aimed at generating high levels of investment and at running trade surpluses must also, by definition, cause high levels of savings. In that sense the policies associated with the so-called Asian development model are policies that implicitly or explicitly cause high savings rate. if this is true, as I have written elsewhere, high Asian savings rates my be threatened in the future by rising savings rates in the US, since in the aggregate consumption and production must balance. The US trade deficits required for the success of high-savings policies in China may no longer exist.
He breaks it down into demographic, structural and policy causes. While I think a number of them seem reasonable, in particular the lack of a social safety net rings particularly true. With the questionable practices of hospitals, the innumerable unforeseen events, and the lack of a strong healthcare insurance alternatives, it isn't surprising that people here would save more than average.

I'm somewhat uncomfortable with the idea that savings is a cultural trait as I seem to recall a study of the behaviour of second generation immigrants and savings but can't find it at the moment. Looking for other incentives for savings seems, at least to me, to be more reasonable. The expectation however, no matter the reason, that the Chinese people, would all of a sudden start spending (or investing in dollar denominated assets) in one of the worst global recessions in recent memory, based on the exhortations the US seems to be a foolish one at best.

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