China is constantly harangued by the west – and Martin Wolf – for its contribution to the global crisis. On the now-standard line of argument, it saved too much; the savings had to be recycled into western, particularly US, government bonds; and so it helped depress global interest rates, helping to inflate the bubble. Alan Greenspan believes China’s excess savings were enough to explain the entire global housing bubble.
The solution put forward sounds simple: raise consumption, cut savings (particularly by improving social and health services), and allow the currency to appreciate, which will help with both. Barack Obama is now under pressure to label China a currency manipulator, with 130 US congressmen calling for action.
But could the analysis be flawed? A fabulous article in the Economist earlier this month (about imbalances in gender ratios) mentioned that Chinese households save more if they have sons than daughters. Here’s the research, NBER paper 15,093:
as the country experiences a rising sex ratio imbalance, the increased competition in the marriage market has induced the Chinese, especially parents with a son, to postpone consumption in favor of wealth accumulation. The pressure on savings spills over to other households through higher costs of house purchases. Both cross-regional and household-level evidence supports this hypothesis. This factor can potentially account for about half of the actual increase in the household savings rate during 1990-2007.
The research is rather depressing: many Chinese (as well as Indian and other) regions are aborting vast numbers of girls, then finding they have to save more to attract the scarce women to their sons.
It takes a combination of having a son and facing a scarcity of women for families with a son to raise their savings rates.
The effect is most pronounced in rural areas, where the authors estimate half the increase in the savings ratio since 1990 is down to the gender imbalance, while in urban areas it accounts for just over a quarter of the increase. Across the whole of China the savings rate increased from 16.2% in 1990 to 30.2% in 2007, with 14 percentage points, or almost half the increase, due to gender imbalances.
At least part of the now-standard prescription for increased Chinese consumption – a better social safety-net – may, therefore, not achieve its aims. Here’s the IMF’s analysis, from its October 2009 Regional Economic Outlook:
Following the reform of state-owned enterprises (SOEs) in the 1990s, the industry-based social safety net disappeared, limiting the support available to many individuals for their health care, their pensions, and education for their children. Consequently, households had to increase savings significantly to cover their retirement and the risks associated with sickness (Barnett and Brooks, 2009). Household income has also lagged broader economic growth, particularly reflecting (at times) modest wage growth and low investment income, the latter held down by financial repression. Recent government initiatives, however, have sought to strengthen safety nets (reducing the precautionary motives for savings) and boost household disposable income. In particular, the government is expanding health care provision and insurance coverage, increasing pensions, targeted consumption subsidies, and improved funding for rural livelihoods.
Of course, household saving is not the whole story: corporate savings rates are also a big contributor to Chinese saving rates. But as this chart (from the same IMF research) shows, households do make up about half the savings. Perhaps more promotion of women’s (or girl’s) rights in China would make headway in solving global imbalances?