Why Mr. Zhang Saves and Why He's About to Stop

Hint - a Confucian work ethic has nothing to do with it. An perspective on savings in China from the Wilson Center. If they're right, this will ultimately spark radical changes in the world economy in the next few years as some of these trends start to reverse themselves. A few highlights:

• "China’s Joe Sixpack—call him Mr. Zhang—earns tiny returns on his savings. Demand deposits are currently capped at 0.36 percent a year, while three-month CDs return a measly 1.71 percent... even as inflation peaked at more than eight percent. [...] in China and many other Asian countries, low rates seem to have the opposite effect. One reason is that few Chinese have the financial wherewithal to make stock or real estate investments (and the Chinese stock market is minuscule relative to the economy), and so most people must keep their savings in bank accounts, where they eke out meager gains. Low interest rates don’t simply make Chinese savers feel poorer; given the large amount of bank savings, interest income is a significant fraction of total household income, so low or even negative real interest rates (after the effect of inflation is deducted) make them poorer in fact. Thus, even as low-interest-rate policies slow consumption growth, they boost production by subsidizing loans to manufacturers. The result: a burgeoning trade surplus and soaring ­savings.
  
  
• "It is also often said that the Chinese save so much because a big bank account is the only insurance they have against medical disasters, periods of unemployment, and retirement needs. The government has publicly stated its urgent desire to provide a medical safety net, but for now Chinese families are on their own when it comes to covering medical bills, and the popular press is full of horror stories of ­bedridden patients forced to leave hospitals when their payment accounts, which patients typically must open at hospitals before being admitted, run out of money. But there are limits to this explanation. Many other developing countries with spindly social safety nets have low savings rates, while Japan in the 1980s had strong supports and very high savings rates at the same time."
  
  
• "Since the mid-1970s, China’s ­working-­age population has grown at a much faster pace than its population as a whole. In effect, this at least partially explains why production has increased faster than Chinese society’s ability to absorb what it produces. The result: The savings rate has in­creased. But this demographic trend will reverse in the next four or five years, as the smaller cohorts created by China’s one-child policy come to the fore and the country’s ­work­ing-­age population begins to contract much more rapidly than the total population. As this happens, Chinese consumption should begin to catch up with and perhaps even outpace Chinese ­production."