Why Is The Chinese Saving Rate So High?: Guonan Ma and Wang Yi

Why is the Chinese Saving Rate so High?
Why is the Chinese Saving Rate

so High?
Guonan Ma and Wang Yi
Introduction
Chinas saving rate has been puzzlingly high. The nation saves half of
its GDP and its marginal propensity to save approached 60% during the
2000s, when its per capita GDP was only US$3,500 or one-tenth of the
OECD average (ADB 2009; IMF 2009; Zhou 2009). Such a saving rate
may have important implications both for Chinas own internal and external balance.
This article has three aims: to highlight the stylised facts of Chinese saving; to review the debate over factors shaping the saving dynamics, both
across sectors and over time; and to explore its medium-term outlook and
policy implications. Our critical review combines an international comparison of gross national saving and a breakdown of this aggregate by the
components of household, corporate and government saving. We hope to
take stock of the progress in understanding Chinese saving behaviour, put
the debate in perspective and shed new light on the trends in, and forces
behind, high Chinese saving.
The main findings of the article are as follows.
First, Chinas saving rate is high by historical experience, international
standards and model predictions, and has also been rising over time,
especially in the 2000s.
Guonan Ma is a senior
economist at the Representative
Office for Asia and the Pacific of
the Bank for International
Settlements (BIS)
Wang Yi currently serves as the

deputy director general of the
Statistics Department at the
Peoples Bank of China (PBC)
WORLD ECONOMICS Vol. 12 No. 1 JanuaryMarch 2011
Second, saving by each of the three sectors is also high but not exceptional. What sets China apart from the rest of the world is that it ranks
near the top globally across all three components.
Third, three major but underappreciated factors have been key: (i) major
institutional reforms including corporate restructuring, pension reform
and the spread of private home ownership; (ii) a marked Lewis-model
transformation process as labour left the subsistence sector where its
marginal product was less than its average wage; and (iii) a compressed
demographic transition, with a prospective rapid ageing process.
Fourth, our evidence questions the proposition that distortions and subsidies have been the principal causes of Chinas rising corporate profits
or high saving rate.
Fifth, adjusting for the effect of inflation and leverage alters the time
path and sectoral dynamics of Chinas corporate saving. Our inflationadjusted numbers suggest that most of the smaller increase in corporate
saving took place in the 2000s and not in the 1990s as appears from
the raw data.
While structural factors point to a likely peak in the Chinese saving
rate in the medium term, policy measures can contribute to the transition
to more balanced domestic demand. Nevertheless, much awaits further
exploration about the puzzle of high Chinese saving.
The article is organised as follows. The next section highlights the stylised facts about Chinas saving rate and provides a broader backdrop. After
that, we examine saving of the corporate, household and government
sectors respectively. We next outline three structural factors and several
policy measures shaping the medium-term outlook for the Chinese saving
rate, before the final section concludes.
Stylised facts of and a backdrop to Chinese saving

This section highlights the most salient stylised facts of Chinese saving
and provides a broad backdrop to its evolution. The purpose of the latter
is to draw attention to some of the under-appreciated structural and institutional factors shaping high Chinese saving.
2
Six stylised facts

At least six salient features of the Chinese saving rate are worth highlighting. First, the Chinese aggregate saving rate is high by international standards. It exceeded 53% of GDP in 2008, far above all the OECD economies
and overtaking Singapore, which has traditionally been among the highest
savers globally (Table 1).
Second, the Chinese saving rate is high relative to predictions by models
based on cross-country panel data. China is often identified as a clear outlier with a saving rate one-quarter higher than might have been predicted
(Kuijs 2006; Ferrucci 2007; Park & Shin 2009). In other words, Chinas
saving/GDP ratio of 53% in 2008 could be 1013 percentage points above
what might be inferred from the empirical studies.
Table 1: Gross national saving an international perspective, as a percentage of GDP

1990
1992
1995
2000
2005
2006
2007
2008
China
39.2
38.8
42.1
36.8
51.2
54.1
54.1
54.3
China
35.6
36.4
38.1
37.3
48.2
49.5
51.8
53.2
India
23.0
21.4
24.5
23.8
34.3
35.8
37.6
33.6
Japan
33.2
33.2
29.3
27.5
26.8
26.9
27.0
...
Korea
37.7
36.9
36.2
33.6
32.7
31.2
30.6
31.9
Mexico
23.6
18.6
21.1
23.8
23.3
25.5
...
...
Singapore
43.6
45.8
49.3
46.9
48.7
49.9
51.7
48.3
Australia
18.6
18.0
18.7
19.7
21.6
21.8
22.5
...
Canada
17.3
13.4
18.3
23.6
23.8
24.4
23.7
...
France
20.8
19.6
19.1
21.6
18.5
19.3
19.9
18.9
Germany
25.3
22.3
21.0
20.2
22.2
23.9
25.9
26.0
Italy
20.8
19.1
22.0
20.6
19.5
19.6
20.0
18.2
Switzerland
33.1
28.6
29.6
34.7
36.9
35.5
31.2
...
United
Kingdom
16.4
14.3
15.9
15.0
14.6
14.2
15.6
...
United States 15.3
14.2
15.5
17.7
14.6
15.8
14.0
12.1
Notes
For China, the first row is gross national saving estimated using expenditure-based GDP, while the second row shows estimates using
production-based GDP. The latter one is consistent with the flow-of-funds statistics to be employed hereafter unless otherwise
specified.
Sources: Asian Development Bank (ADB); National Bureau of Statistics of China (NBS); OECD; authors own estimates
Figure 1: Gross national saving as a percentage of GDP

China1
China and other Asian economies

55
55
Expenditure-based
Production-based
50
45
35
40
25
35
0
Japan (195581)
Korea (197096)
China
India
45
15
1984
1988
1992
1996
2000
2004
2008
1982
1987
1992
1997
2002
2007
1 Gross national saving is estimated using production-based GDP, unless otherwise specified.
Sources: National Bureau of Statistics of China (NBS); authors own estimates.
Third, Chinese gross national saving is not only high but has also generally been rising over time, from 30% of GDP in the early 1980s to above
50% of GDP of late (Figure 1). Therefore, the marginal propensity to save
reached 54% over the period 19822008.
Fourth, Chinas saving rate has evolved in three distinct phases first, a
steady increase from 3035% of GDP to 4045% between 1982 and 1994,
then a decline to around 37% by 2000 and, finally, a resurgence thereafter
to reach over 50% (Figure 1). During this last phase, Chinas saving rate on
average went up 2 percentage points of GDP per year, implying a marginal
propensity to save of 60%.
Fifth, such a rapid rise in the saving rate is rare, but by no means unique
to China. Fast-growing Asian economies in their transition phases experienced similar upswings (Figure 1). Japans aggregate saving/GDP ratio rose
by 15percentage points during 195570, and Koreas increased from 16% to
40% between 1983 and 2000. Within one decade, Indias saving rate registered a rise of 10percentage points of GDP, reaching 38% by 2008.
Sixth, the Chinese household, corporate and government sectors each
have added to the rise in gross national saving. In terms of each individual
component, Chinas saving is high but not exceptional. As a share of
GDP, Chinas corporate saving at best rivals Japans, its household saving
is below Indias, and its government saving is less than Koreas (Figure
2). What distinguishes China from other countries is that its three saving
components have all ranked near their global tops, resulting in an exceptionally high aggregate saving rate.
4
Figure 2: Gross national saving, by sector1 as a percentage of GDP

Chinas gross national saving, 19922008
60
200507 average, by market2

60
Household
Corporate
Government
50
40
Household
Corporate
Government
50
40
30
30
20
20
10
10
0
92
94
96
98
00
02
04
06
08
US
TW
PH
FR
DE
JP
KR
IN
CN
1 Gross national saving = corporate saving + household saving + government saving.

2 CN = China; DE = Germany; FR = France; IN = India, JP = Japan; KR = Korea; PH = Philippines; TW = Chinese Taipei; US = United States.
Sources: Asian Development Bank (ADB); NBS; OECD; authors own estimates
A backdrop to Chinese saving behaviour

Before getting into detailed breakdowns of gross national saving, we first
sketch some major forces influencing the Chinese economy. Two sets of
such forces may have been important but often neglected in understanding the saving behaviour of Chinas three savers: (i) major structural and
demographic trends; and (ii) key institutional changes.
Three structural forces
First, the Chinese economy has experienced rapid structural changes,
as its agriculture share in GDP fell from 30% to 10% during 19802008
(Table 2). Second, underpinning this transformation has been the largescale ruralurban labour migration and urbanisation the agriculture
share of the total employment shrank from 70% to 40%. Third, Chinas
demographic transition has been
compressed, owing to the one- Chinas labour supply grew
child policy. Chinas dependence strongly but is expected to slow
dropped from 68% to 38% in two sharply after 2015.
decades, lifting the working-age
share of the population from 60% to 74%. Thus, Chinas labour supply
grew strongly but is expected to slow sharply after 2015.
These three structural forces interacted to sustain a large-scale labour
migration from farm to factory, a process best summarised as the Lewis
dualism model (Lewis 1954). In this model, the modern sector with rising
productivity draws surplus labour from the traditional sector at a relatively
Table 2: A backdrop changes in the Chinese economies

Primary
sector
Manufacturing
Construction
Services
Percentage of GDP
1980
1990
2000
2008
30.2
27.1
15.1
10.7
43.9
36.7
40.4
41.1
4.3
4.6
5.6
5.4
21.6
31.5
39.0
41.8
Agricultural
employment
Percentage
of total
employment
68.7
60.1
50.0
39.6
WorkingUrban
age
population
population
Percentage of total
population
19.4
26.4
36.2
45.7
59.7
66.7
68.4
74.3
Sources: NBS; authors own estimates
low wage rate. It predicts a rising profit share in income, accelerated capital accumulation and faster economic growth during the transformation
process, therefore implying a higher saving rate. This process, while not
unique, could have been more accentuated in Chinas case because of
its compressed demographic transition and a larger pool of surplus rural
labour cumulated over the three decades prior to the early 1980s, thus in
part helping to explain its recent high saving rate.
Three key institutional factors
First, between 1995 and 2005, China went through its toughest corporate
restructuring, with large-scale labour retrenchment. The employment at
Figure 3: State employment and residential floor space in China
40
Urban state and collective employment
Per capita residential floor space2

Urban
Rural
30
State and collective employment % total (lhs) 200

Total employment (rhs)1
150
20
100
20
10
50
10
87
89
91
93
95
97
99
01
03
07
40
30
85 87 89 91 93 95 97 99 01 03 07 09
1 In millions of persons.
2 In square metres.
6
state companies was halved (Figure 3). Such corporate restructuring tends
to directly boost corporate efficiency and reduce job security, lifting both
corporate and household saving.
Second, the 1997 pension reform transformed the previous pay-as-yougo system to a partially funded three-pillar scheme. The new scheme
reduced pension benefits, increased contributions and introduced prefunded individual pension accounts.1 This change may take place out of
concerns over rising pressure on public retirement schemes in anticipation
of rapid population ageing, and thus may have induced additional saving,
the so-called second demographic dividend. Therefore, reduced pension
wealth and anticipated acceleration of population ageing could both lift
the current saving rate in China.
The third institutional reform relates to private home ownership.
Starting from the late 1990s, state firms no longer provide housing for
employees, while the government introduced private home ownership
and real estate market, which interacted with the second demographic
dividend to provide additional incentives to build up pension assets.
Chinas home ownership exceeds 85% today, as Chinas physical assets
of residential housing per capita more than doubled during 19852008
(Figure 3). The implied housing investment is enormous. Thus surging
demand for housing assets has been another driver for both high economic
growth and high saving in China.
Contributions to gross national saving

To decipher the puzzle of high Chinese saving, we examine the breakdown of Chinas gross national saving by its components: corporate, household and government saving (Kuijs 2006; Li & Yin 2007; Wiemer 2008;
Jha, Prasad & Terada-Hagiwra 2009). This approach allows us to trace the
changing contributions to the Chinese aggregate saving by different sectors, taking advantage of the following simple framework.
S Si
S Y
=
= i i , S = Si and Y = Yi , i = e , h or g
Y
Y
Yi Y
(1)
1 For Chinas pension system, see Feldstein (1998); Song and Yang (2010); and Herd, Hu and Cohen (2010).
where Y and S are gross national disposable income and gross national
saving, respectively; and subscripts e, h and g denote the corporate (enterprise), household or government sector, respectively. Equation (1) says
that the sector is contribution to the aggregate saving rate (Si/Y) depends
on two factors: its income share in the economy (Yi/Y) and its average propensity to save from its own income (Si/Yi). Our discussion will be based
on Chinas flow-of-funds statistics, which provide the breakdowns of gross
national income and saving by sector, but start only from 1992.
Three observations of Chinas saving composition are worth highlighting upfront (Table 3). First, the household sector is the largest saver in
China today, followed by the corporate sector. Second, firms and government have contributed the most to the rise in the aggregate saving rate
since 1992, accounting for more than four-fifths of the 17-percentage-point
rise in Chinas saving/GDP ratio. Third, the year 2000 appears to be a
turning point when aggregate Chinese saving as a share of GDP started
its relentless climb of 16 percentage points. Half of this hike so far in the
2000s has come from the government sector.
Corporate saving
Chinas corporate saving doubled from 12% of GDP in 1992 to a peak of
24% in 2004, but has since fallen back to 19% in 2008, when Chinas current account surplus surged (Table3). Over the 16-year period 19922008,
it contributed some 40% of the increase in Chinese aggregate saving, but
its role has diminished somewhat since the mid-2000s.
Following standard national income accounting, gross corporate saving
= depreciation + retained earnings = depreciation + net earnings dividend payouts. By convention, the corporate sectors average propensity
to save is 100% (i.e. Se = Ye). We discuss these three components in turn:
depreciation, dividend payout and corporate profits.
Depreciation as a share of GDP has probably risen during the 1990s
and 2000s because of a higher capital stock and newer vintages of capital.
Given the rapid paces of industrialisation and capital accumulation discussed previously, the capital stock per worker in the industrial sector at
least doubled during 200008. According to Bai, Hsieh and Qian (2006),
Chinas capital stock as a ratio to GDP rose from 130% to 170% between
the early 1990s and the mid-2000s.
8
Table 3: Contributions to Chinas national gross saving, by sector, as a

percentage of GDP
National gross saving
Corporate
Household
(1)
(2)
11.7
20.3
15.7
18.2
14.5
21.7
16.0
19.6
13.5
19.9
13.0
21.4
13.3
21.1
14.6
19.9
16.5
17.5
17.4
16.6
18.0
17.2
18.3
18.3
23.5
18.5
20.4
21.5
18.8
21.7
18.8
22.2
18.8
23.4
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Memo: changes
19922008
7.1
19921999
4.7
20002008
2.3
MPS: 9208 1.00
3.1
-2.7
5.9
0.41
Adjusted saving
Corporate
Household
Government
(3)
4.4
4.1
3.2
2.5
3.7
4.0
3.3
2.6
3.3
4.2
5.1
7.0
4.6
6.4
8.9
10.8
11.0
Total
(1)+(2)+(3)
36.4
38.0
39.4
38.1
37.1
38.4
37.7
37.1
37.3
38.2
40.3
43.6
46.6
48.2
49.5
51.8
53.2
15.6
21.4
21.1
21.0
16.9
14.8
13.4
14.1
16.6
18.1
18.5
18.9
24.9
21.7
19.8
20.0
21.0
16.4
12.5
15.1
14.6
16.5
19.6
20.9
20.4
17.4
15.9
16.8
17.7
17.0
20.2
20.8
21.0
20.4
6.6
-1.1
7.7
0.46
16.8
0.9
15.9
0.54
5.9
1.1
4.4
1.00
4.3
1.0
3.0
0.40
Notes
The adjusted corporate saving is corporate saving allowing for the erosion in real corporate debt arising from inflation, which is approximated as a product of expected inflation and net corporate debt. Expected inflation is measured by the two-year moving average
of the GDP deflator. Net corporate debt is estimated as corporate loans less the sum of corporate deposits and half of the currency
in circulation. Corporate loans are taken as the sum of short-, medium- and long-term loans minus loans to the households. The
household loans before 2000 are computed backwards by the 2000 outstanding level and the flow-of-funds statistics. The adjusted
household saving is calculated on the assumption that adjustments in corporate saving are fully accommodated by household saving.
MPS stands for marginal propensity to save.
More controversial have been the various theories about the retained
corporate earnings (net earnings minus dividend payout). For a given
level of corporate profits, low dividend payments by Chinese firms could
help lift help earning retained at firms and can be attributable to two pos-
Figure 4: Corporate sectors cash balance and industrial profit

and sales in China (per cent)
Cash balance1
Industrial profit and sales2
Cash/sales (lhs)
Cash/assets (lhs)
Cash/GDP (rhs)
22.5
20.0
15.0
12.5
1
02
03
04
05
06
07
08
200
Profit/GDP (lhs)
Profit/sales (lhs)
Sales/GDP (rhs)
4 9
17.5
10.0
12
150
100
50
0 0
99
00
01
02 03
04 05
06 07 08
1 Based on a sample of 1333 Chinese companies listed in China and Hong Kong SAR; in per cent.
2 Profit and sales of industrial enterprises with annual sales of above RMB5 million from the principal business.
Sources: Credit Suisse; NBS; authors own estimates
sible reasons: financial underdevelopment and poor corporate governance

(ADB 2009; IMF 2009; Jha et al. 2009).
First, limited access to external finance could force firms to hoard cash
to hedge uncertainties or to use internal funds to finance expansion. Yet
Chinas financial system remains underdeveloped but has advanced in
recent years (Ma 2007). Moreover, Chinese companies seem to have
hoarded less, not more, cash at firm level, qualifying the precautionary
corporate saving (Figure 4).
Second, poor corporate governance may also result in low dividend
payments. However, there is little evidence to suggest that the dividend
behaviour of listed Chinese firms differs systematically from those in
the rest of the world (Zhang 2008; Bayoumi, Tong & Wei 2009). Indeed,
Bayoumi et al. (2009) find that the dividend payout ratio averages 16% for
Chinese listed firms compared to less than 13% for those from the rest of
the world.
In our view, blaming poor corporate governance could risk barking
up the wrong tree, given an official policy that state companies were
not required to pay dividends to the government, which was first introduced in the late 1990s when most state firms were loss-making. As
they become more profitable after painful restructuring, this policy may
indeed add to retained earnings, since the bulk of the dividend payouts
by listed Chinese state companies might have gone to their non-listed
parent holding companies (direct majority shareholders) instead of the
10
government (the ultimate owner) and thus is retained within the corporate sector.
An even more controversial issue is the apparently higher corporate
profits (Figure 4). Many explanations have been advanced (Bai et al. 2006;
Dollar & Wei 2006; Hofman & Kuijs 2008). We first group these arguments under two broad hypotheses, then review their pros and cons, and
finally examine in particular the roles of exchange rate and interest rate.
One hypothesis argues that high Chinese corporate saving, and indeed
fast economic growth, is mostly the consequence of government distortions designed to subsidise the corporate sector in order to promote growth
and exports. Two particular arguments are advanced under this hypothesis
(Tyers & Lu 2008; ADB 2009; Jha et al. 2009). First, monopolies boost the
corporate profits of many state firms. Second, subsidies and factor price
distortions (such as financial repression, subsidies for energy inputs and
cheap land) inflate corporate earnings, again benefiting state firms. In
short, Chinas rapid economic growth and high saving rate are principally
a function of distortions and subsidies.
An alternative hypothesis emphasises the broader structural forces and
institutional reforms examined above as the more important factors boosting corporate saving. First, efficiency gains from corporate restructuring
and an expanding indigenous private sector have intensified competition,
raised productivity and helped drive fast economic growth, deliver cost
saving and lift corporate profits. Second, accentuated by a compressed
demographic transition and a large pool of surplus rural labour, the prolonged Chinese ruralurban labour migration has capped wage growth,
thus also boosting corporate profits.2
These two hypotheses are not mutually exclusive and may well coexist.
While the truth probably lies somewhere in between, a more interesting
question is which set of forces matters more in shaping Chinese corporate
saving, whether the identified distortions have become more significant
over time so as to help explain the higher corporate saving rate, and if the
evidence confirms the main predictions of these two hypotheses.
A central prediction of the distortion-and-subsidy hypothesis is that, as
the principal beneficiary, state companies should be the major driver of
the higher corporate profits, because they are more likely to enjoy greater
2 For details of the debate over whether China reaches a so-called Lewis turning point, whereby the pool of
surplus labour starts drying up, see Garnaut (2006), Cai(2007), and Zhang, Yang and Wang (2010).
11
Figure 5: Chinas industrial profit and market share as a percentage of GDP

Industrial profit, by sector
Industrial turnover
200
State controlled1
Foreign-invested2
Other3
10
8
120
80
40
2
0
State controlled1
Foreign-invested2
Other3
160
99
00
01
02
03
04
05
06
07
08
99
00
01
02
03
04
05
06
07
08
1 State-controlled enterprises.
2 Foreign, Chinese Taipei or Hong Kong SAR invested and controlled enterprises operating in China.
3 All the rest, including non-state controlled joint shareholding companies, collectives, private companies and other joint ventures.
market power, receive more government subsidies and gain from easier
access to cheaper credit. Yet, in reality, it has been Chinas less advantaged
local non-state firms that have been gaining both market and profit shares
(Figure 5). The share of local private firms in Chinas industrial profits
more than doubled from 20% to 43% during the 2000s, despite facing
more restricted access to external finance and higher funding cost (Ma &
Wang 2010). This casts doubt on the distortion-and-subsidy hypothesis,
and favours the hypothesis of efficiency gains.3 Since most privatised state
firms were initially loss-making, tend to achieve some cost saving and
have added to market competition, an expanding private sector, either out
of greenfield investment or privatisation, generally enhances corporate
efficiency.
The other evidence on the two hypotheses in interpreting Chinas
higher corporate saving seems mixed and indicates varying magnitudes of
influence on both corporate and national saving.
The effect of energy subsidies or resource taxes on Chinas overall corporate profitability is ambiguous. Given China as a growing net energy
importer, energy subsidies may indeed weaken the countrys current
3 Song, Storesletten and Fzilibotti (2009) suggest that the high-productivity and credit-constrained firms finance
investment by internal saving and thus tend to generate high corporate saving while maintaining high return to capital
by attracting more resources to themselves. This interesting insight differs importantly from the proposition that high
corporate profit and saving come mostly from state-sponsored subsidies and distortions.
12
account balance. Similarly, low government royalties may inflate profits

of resources industries and mostly benefit big state resources companies. Yet, little is known about the net effect on both overall corporate
saving and national saving.
Turning to the role of market power in lifting corporate saving, although
a case can be made for the presence of oligopolistic power in the
Chinese banking industry, for instance, the market share of the big
state-controlled banks has fallen over time. And Chinas 2001 WTO
accession should introduce greater global competition. Thus, oligopolistic rents may wane relative to GDP. Indeed, the profit margins of
the Chinese manufacturing sector could come under pressure, in part
because of oligopolistic arrangements in the international oil and iron
ore markets.
Limited access to credit by small enterprises may weaken demand for
labour, giving rise to additional downward pressure on wages, and thus
boosting the profit share in income (Aziz & Cui 2007). But this factor,
too, should not be overstated, as financing problems facing small firms
in China may be no better or worse relative to other economies with
high or low corporate saving.
Entry barriers and higher tax burdens could indeed disadvantage the
labour-intensive service sector, possibly resulting in excessive expansion of the more capital-intensive manufacturing sector and hence a
higher profit share of income at the expense of labour (Guo & NDiaye
2010).
Finally, we explore the controversial roles of both the exchange rate and
interest rate. Regarding the exchange rate, one view is that an undervalued renminbi boosts relative competitiveness and thus corporate profits in
the manufacturing sector, which often results in current account surpluses
(Turner 1988; Eichengreen 2006; Goldstein & Lardy 2009). Another view
suggests a minor and uncertain role for the exchange rate in the Chinese
saving and current account balance (Chinn & Wei 2008; Cheung, Chinn
& Fujii 2009; Ma & Zhou 2009), as Chinas real effective exchange rate
strengthened vis--vis major emerging market currencies in 19922008
(Figure 6).
Next, interest rates could play a major role in lifting corporate profits.
Between 1992 and 2007, net interest payments by the non-financial cor-
13
Figure 6: Real effective exchange rate and saving

Chinas real effective exchange rate and saving
80
Real effective exchange rate1

140
Real effective exchange rate (rhs)

National saving (lhs)2
Corporate saving (lhs)2
60
120
40
100
20
80
94
96
98
00
02
04
China
Other emerging economies3
06
08
60
94 95 96 97 98 99 01 02 03 04 05 07 08 09
1 19942008 = 100.
2 As a percentage of GDP.
3 Simple average of the real effective exchange rates of ten major emerging economies (Argentina, Brazil, Chile, India, Indonesia, Korea, Malaysia, Mexico,
Thailand and Turkey).
Sources: NBS; BIS; authors own estimates
porate sector more than halved as a share of GDP, singlehandedly contributing to 30% of the rise in corporate saving (Figure 7). While one may
attribute this mostly to financial repression that depresses funding costs of,
and subsidises to, Chinese (state) firms, we think that corporate deleveraging and inflation volatility could be greater forces behind the declining net
corporate interest payments (Figure 7).
First, the net corporate debts the difference between corporate loans
and deposits as a share of GDP more than halved between 1992 and
2008, reducing net corporate interest payments at any given interest rate.
Second, as argued by Modigliani and Cohn (1979), in times of high inflation, a large part of the interest payments represents inflation premium
Figure 7: Inflation, interest payment and corporate saving in China
30
As a percentage of GDP
In per cent
20
25
Corporate saving (lhs)

6 60
Net interest payments (lhs)
5 50
20
4 40
12
15
3 30
10
2 20
1 10
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Net corporate debt1/GDP (lhs)

Expected inflation2 (rhs)
93
95
97
99
01
03
05
07
16
09
1 The difference between corporate loans on the one hand and corporate deposit and cash held by the corporate sector on the other.
2 Two-year moving average of GDP deflator.
Sources: NBS; Peoples Bank of China (PBC); authors own estimates
14
compensating creditors for the reduction of their real debt claims, and thus
should be considered repayments of the loan principal. Hence corporate
profits may be understated in high-inflation years, and vice versa in times
of deflation. China swung from double-digit inflation in the early 1990s to
outright deflation in the late 1990s, giving rise to a big gap between the
economic and reported accounting profits. Our preliminary estimation of
this gap shows that corporate profits are understated in the high-inflation
years of 199296 and overstated in the deflationary years of 19982000
(Table 3).
In sum, it is no easy task to identify the precise roles of the aforementioned factors in driving high corporate saving. While distortions and subsidies might inflate earnings at state companies and for some industries,
they were unlikely to have been the primary factor lifting Chinas gross
corporate saving. On balance, we tend to think that corporate restructuring, privatisation, slower wage growth owing to a large pool of surplus rural
labour and big swings in inflation are more important factors influencing
the evolving corporate saving during this episode.
Household saving
The household sector is the largest saver in China, but its saving fell from
20% of GDP in 1992 to a low of 16% in 2001 before staging a marked
comeback to 23% by 2008 (see Table 3 and Figure 2). During the 1992
2008 period, the household sector contributed only 3 percentage points of
the 17-percentage point rise in the nations aggregate saving rate.
This modest contribution has been the consequence of two competing
influences: a 10-percentage-point decline in the household share in gross
national disposable income and a 10-percentage-point rise in the average
propensity to save from household disposable income (Table4). Both have
weighed down Chinas private consumption share in GDP (Aziz & Cui
2007; Guo & NDiaye 2010). We discuss these two forces in turn.
The big drop in the household share in gross national disposable income
over the 19922008 period can be attributable to a fall in the labour share
in national income, and a decline in both investment income and net
income transfers for the household sector.
It is, first and foremost, the consequence of a declining labour share in the
economy, as the decline in the labour share accounts for some 60% of the
observed decline in the household income share between 1992 and 2007.
15
The sluggish Chinese wage growth until the late 2000s may have been the
combined outcome of the aforementioned structural and institutional forces
along the Lewis dualism transition, as well as other factors such as a lagging
service sector and difficult financing conditions for small firms.
Net interest income as a share of GDP halved during 19922007,
accounting for a quarter of the decline in the household income share.
As the household sector is a net creditor, much of the high net interest
income in the mid-1990s is simply the inflation premium required to
compensate the household depositors for the real depreciation of their
bank deposits. Hence household disposable income is overstated for highinflation years and understated for deflation years. Another reason for the
falling net interest income is the rising household debt in the past decade,
to be discussed below.
A third factor is reduced net transfers, mostly because of the increased
contributions required to fund the large future pension benefits and
other welfare obligations related to the expected population ageing (see
above). Social welfare contributions made by the household sector tripled
between 1992 and 2007, from 1.4% of GDP to 4.2%.
Despite this drop in household income share, household saving still
managed to rise as a share of GDP, owing to the much higher personal
saving propensity, which rose by 10 percentage points, mostly during the
2000s (Table 4). The high and rising household saving propensity has
been a subject of intense research, grouped here in four broad sets of
interpretation.
First, as life-cycle, permanent-income and habit-formation hypotheses
suggest, interactions among economic growth, income level and demographic changes may influence the personal saving rate. As mentioned
previously, a sharp decline in the Chinese youth dependency rate and
the expected rapid ageing of population might have interacted with high
growth and saving/consumption habit persistence, contributing to a higher
personal saving propensity. A related factor is the much flatter earning
profile over the life cycle in recent years, which in part helps explain a
high average household saving rate that displays a U-shaped pattern across
cohorts.4 Nevertheless, these forces by themselves can explain only part of
the high household saving rate in the 2000s.
4 For more details, see Modigliani and Cao (2004), Horioka and Wan (2008), Chamon and Prasad (2008), Wei
and Zhang (2009), Ma and Zhou (2009), and Songand Yang (2010).
16
Table 4: Disposable income and saving propensity in China, as a

percentage of GDP

Disposable income share
Corporate
Household
Average propensity to save
Adjusted
Government
corporate
Adjusted
household
Household
Adjusted
household
Government
1992
11.7
68.3
20.0
15.5
64.5
29.5
25.4
22.0
1993
15.7
64.6
19.7
21.4
59.0
28.1
21.2
21.0
1994
14.5
67.0
18.5
21.1
60.4
32.4
25.0
17.1
1995
16.0
67.2
16.5
21.3
62.1
29.6
23.8
15.5
1996
13.5
68.4
17.9
17.1
65.0
29.4
25.7
20.7
1997
13.0
68.6
18.3
14.9
66.8
31.4
29.6
21.9
1998
13.3
68.4
18.1
13.6
68.3
31.2
31.1
18.3
1999
14.6
67.2
18.1
14.2
67.7
29.8
30.3
14.7
2000
16.5
64.2
19.2
16.7
64.1
27.5
27.3
17.2
2001
17.4
62.0
20.5
18.3
61.2
27.0
26.1
20.8
2002
18.0
61.0
21.0
18.5
60.5
28.3
27.7
24.2
2003
18.3
59.8
22.0
18.8
59.2
30.4
29.8
31.4
2004
23.5
57.8
18.9
24.7
56.4
31.6
29.9
24.0
2005
20.4
59.4
20.5
21.3
58.1
35.6
34.2
30.4
2006
18.8
58.7
22.8
19.5
57.8
36.4
35.4
38.6
2007
18.8
57.5
24.1
19.7
56.3
37.9
36.6
44.2
2008
18.8
57.6
23.9
20.6
55.5
39.9
36.1
45.3
Note: See note to Table 3.

Second, precautionary saving motives also help explain the higher

personal saving rate. As discussed above, the large-scale corporate restructuring and downsizing increased both income and expenditure uncertainties for households, thus reinforcing the precautionary motives to save
(Blanchard & Giavazzi 2005; Chamon & Prasad 2008).
Third, liquidity or borrowing constraint could force consumers to save
more out of income. But loans to Chinese households have jumped to 15%
of total outstanding bank loans from less than 1% in the late 1990s (Figure
8). Moreover, the household balance sheet seems quite liquid, suggesting,
at least in aggregate, relative ease of consumption smoothing in China. In
17
Figure 8: Household loans and debt in China (in per cent)

Household loans
4,000
14
Household loans (lhs)

Househould loans/total bank
loans (rhs)
1
3,000
12
10
2,000
8
1,000
0
6
00
01
02
03
04
05
06
07
08 4
Household debt
As a percentage of:
GDP
25
Household disposable income
Household net worth
20
30
15
10
5
0 00
01
02
03
04
05
06
07
08
1 In billions of renminbi.
Sources: Credit Suisse; NBS; PBC; authors own estimates
other words, consumer credit availability is unlikely to be an important

cause behind the rising personal saving propensity in the 2000s.
Finally, motives to achieve desired asset levels may have strengthened
on the back of major institutional changes. We discussed two such examples above. One is the 1997 pension reform that led to reduced pension
wealth, and thus might have lifted the current household saving rate
(Feng, He & Sato 2009). Another is the introduction of private home
ownership, which has triggered significant demand for housing assets, also
boosting household saving.
Government saving
Among the three Chinese savers, the government has been the smallest
but an outsized contributor to the rise in gross national saving. As a share
of GDP, its saving more than doubled, from less than 5% in 1992 to 11%
in 2008 (Table 3). Indeed, between 2000 and 2008, it contributed half of
the 16-percentage-point rise in Chinas saving/GDP ratio.
The surge in government saving reflects a combination of higher
government disposable income and steady government consumption
(Table 4). The government share in income first declined from 20% to
16% in the first half of the 1990s, before recovering steadily to 24% by
2008. Meanwhile, government consumption has averaged about 15% of
GDP. Thus rising income and stable consumption resulted in higher government saving and more government investment, especially in the 2000s.
Its marginal propensity to save exceeded 50% in the 2000s, compared to
below 20% in the 1990s.
18
Figure 9: Government revenue/income and expenditure/consumption in China

as a percentage of GDP
25.0
22.5
Revenues and disposable income

Government revenues1
Government disposable income2
Expenditures and consumption

25.0
22.5
20.0
20.0
17.5
17.5
15.0
15.0
12.5
12.5
10.0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
10.0
Government expenditures1
Government consumption2
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
1 Based on the fiscal and budgetary statistics, including both budgetary and extra-budgetary revenues and expenditure.
2 Based on the flow-of-funds statistics.
Over the years, government disposable income tends to closely track

government revenues (Figure 9).5 Chinas government revenues fluctuated around 40% of GDP in the late 1970s, but dropped throughout the
1980s and early 1990s to only 15%. The rising government disposable
income since the mid-1990s has been the combined consequence of high
economic growth, the 1994 tax reform, increased land sales and greater
social welfare contributions from both the corporate and household sectors.
Government consumption and expenditure, however, diverged noticeably from each other, especially in the 2000s. Government consumption has
been more stable over time, at some 15% of GDP; but total expenditure
swung from 11%12% of GDP in the 1990s to 18%20% lately (Figure 9).
The gap between the two is mainly investment undertaken by government. Therefore, much of the government income gain has been invested
and saved rather than consumed.
Two questions follow. First, is government consumption too low? By
international standards, Chinas government consumption of 15% of GDP
is not low: it is above the average of the emerging market economies of
13% but below the OECD mean of 20% (Figure 9). Second, why does
the Chinese government save and invest but not consume most of its
incremental income? At least three explanations can be advanced all
5 Government revenue and expenditure, based on fiscal and budgetary statistics, are conceptually distinct from
government disposable income and consumption based on the flow-of-funds statistics.
19
Figure 10: Government consumption and social welfare funds as a

percentage of GDP
Government consumption in Asia (average 200507)
15.0
12.5
10.0
7.5
5.0
2.5
0.0
Balances of welfare funds in China

National social security fund1
National social insurance funds2
KR
CN
MY
TH
IN
SG
PH
HK
ID
01
02
03
04
05
06
07
08
09
1 Only covers the net assets directly managed by the central government.
2 Balances pooled and managed at both the national and provincial levels in China.
Sources: IMF; NBS; the National Social Welfare Fund of China
three seem to have contributed to the rise in government saving during

the 2000s.
First, the 1997 pension reform prompted increased pension contributions by the corporate and household sectors (see above). These
contributions are parked under various pension funds administered by
the government and thus treated
There is an innate tendency as a source to the government
to invest more rather than to disposable income. These funds
provide additional public services have been invested in financial
for a given rise of government and physical assets at home or
revenues. abroad. As a ratio to GDP, the net
asset balances of Chinas various
social welfare and pension funds tripled between 2001 and 2009 (Figure
10), suggesting that the rise in government saving could in part relate to
the build-up of pension assets.
Second, local Chinese government officials have incentives to start new
investment projects, as promotions have mainly been determined by economic growth in their jurisdictions. Hence there is an innate tendency to
invest more rather than to provide additional public services for a given
rise in government revenues. Nevertheless, once the stock of public
facilities and infrastructure has sufficiently built up, this will potentially
encourage and enable the government to expand provision of social services in due course.
20
Third, there is a so-called federal fiscal imbalance issue in China: while

a rising share of fiscal revenues is appropriated by the central government,
the lions share of the social expenditure burden remains on the shoulders
of the less well-funded local governments. Transfers through central government are considered far from adequate, thus constraining social spending and government consumption.
In sum, higher government saving has been attributable to both rising
government income and steady government consumption. The resultant
higher government saving propensity in the 2000s may relate to a combination of three factors: the need to accumulate pension assets in anticipation of rapid population ageing; the incentives for local governments to
invest rather than provide public services; and a large burden of social
spending on the local governments under funding pressures.
Medium-term outlook and policy implications

The medium-term trends in Chinas saving rate matter to both the global
and Chinese economies. Given an outlook of a weak global recovery and
Chinas already high rate of domestic capital formation, private consumption is likely to play a greater role in sustaining a high rate of Chinese
growth. One key challenge for Chinese policymakers is thus to maintain
robust internal demand while rebalancing the economy more towards
consumption in the coming decades. Of the structural factors discussed
previously, three may influence this transition.
First, the large-scale labour retrenchment observed during 19952008
has by and large been behind us. Going forward, such one-off efficiency
gains and cost saving for the corporate sector are likely to be more limited,
and the associated income and expenditure uncertainties of the Chinese
households less pronounced. This will dampen private saving by both the
household and corporate sectors.
Second, China is projected to enter a phase of accelerated population
ageing within a decade, as its working-age population will stop growing
by 2015 and start shrinking afterwards. Slower growth of the labour force,
possibly along with a declining household saving rate and a slower pace of
corporate investment spending, is likely to result in lower potential output
growth unless productivity picks up sufficiently.
21
Third, the ruralurban labour migration away from agriculture is

likely to continue in the years ahead. But as fast economic growth and
strong labour-intensive exports have been absorbing more rural surplus
labour for 25 years, there may be some early and tentative signs that
China could get closer to the Lewis turning point. This may be a harbinger of a rise in the labour share of income, lower corporate saving
and a greater role of personal consumption in Chinas internal demand
profile in future.
Taken together, a key implication is that Chinas aggregate saving rate
may remain high for a few more years, but should plateau before long and
ease off noticeably from the current 53% over the next ten years. The
marked U-shaped experience of Chinas saving rate between 1982 and
2008 (Figure 1) also suggests that the prospective Chinese saving rate
could fall meaningfully in the years ahead.
During this process, policy can play a useful role in assisting the transition to a more balanced growth model, though there is unlikely to be a
single magic bullet. At least three complementary sets of policy options
can be mentioned. First, deregulations that facilitate ruralurban migration, support small firms and reduce entry barriers to the services sector
may help job creation, ease downward pressure on wages and stabilise
the labour income share. They also support resource reallocation to nontradable sectors, while supporting domestic consumer demand.
A strengthened social safety net is another option, since the current
public welfare system remains fragmented and its coverage is limited.
But as a state-welfare solution, however, a poorly designed social welfare
system could backfire. These risks include the questionable sustainability of a social welfare scheme and its unintended side-effects on current
employment, saving and consumption decisions.
A third group of policy measures may aim to improve financing and
incentives for the increased provision of social and public services. These
include transfers of listed state company shares to the national pension
fund, higher dividend payout by state firms, an enhanced role on the part
of the central government in funding social spending, and rebalancing
the promotion standards for government officials, to encourage provision
of public services.
22
Conclusion
This paper critically surveys the stylised facts and explanations about
Chinas gross national saving, and its corporate, household and government components. All three sectors have added substantially to Chinas
high and rising saving rate, especially during the 2000s. What distinguishes
China from the rest of the world is its combination of three high savers,
making Chinas aggregate saving rate exceptionally high. Moreover, over
the past three decades, Chinese saving has experienced at least three distinct phases. As such, no single theory or model can elegantly decipher the
puzzle of high Chinese saving.
Acknowledgements
The views expressed here are those of the authors only and do not necessarily reflect those of the BIS or the PBC. We wish to thank many, particularly Claudio Borio, Ben Cohen, Andy Filardo, Robert McCauley, Thomas
Rawski and Philip Turner for their comments, and Lillie Lam for her able
assistance. Any errors are ours.
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26

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