1 Saving a Top Priority for Chinese But Why? Understanding the motivations behind China s high savings rate October 1
2 Overview China s consistently high savings rate has raised a fair amount of international and academic interest. Economic theory based on Forward Looking Models suggest that countries experiencing strong GDP growth should see a drop in savings rate as people are better able to predict their future incomes. China s savings rate, on the other hand, has continued to remain high despite its remarkable GDP growth. A popular explanation is that China s legendary savings habit is influenced by the Confucian values of thrift and frugality. But does this theory apply in the present day? Nielsen seeks to understand the strength of this hypothesis and explores non-cultural factors which may have a role in explaining China s high savings rate. Some Facts: Forecasted to close 1 at nearly 5% of GDP, China s national savings rate is one of the highest in the region and substantially higher than developed economies like those of the United States and the United Kingdom. Despite the great economic growth over the past decade, the savings rate only increased. Exhibit 1: as a % of GDP: China, Sigapore and Malaysia the highest PH NZ PK AU JP SL HK TW VN ID TH IN KR SG MA CH 1f 11f Source: CEIC, HSBC Copyright 1 The Nielsen Company. 2
3 National savings is the sum of household, corporate and government savings (fiscal revenue). Based on the limited data available, it is interesting to note that household savings was the largest component prior to Thereafter, corporate savings caught up and came on par, and has played an equally important role in contributing to China s high savings rate, due mostly to better productivity and efficiency of private enterprises in the post-reform era. Household savings on the other hand showed a slight decline in the mid-199 s and has since stabilized at around 16% of GDP. (Exhibit 3) Exhibit 2: Gross Domestic Rate (% of GDP) US UK China Source: World Bank 25 Exhibit 3: China Rate by Components (% of GDP) Household Corporate Government Source: World Bank Paper no on Investment and Saving in China by Louis Kuijs, I on China 3 Copyright 1 The Nielsen Company.
4 Even recognizing the significance of corporate savings,the high-levels of household savings (see exhibit 4) warrants further attention. Nielsen s Consumer Confidence Survey reveals that savings sentiment continues to be strong among different consumer groups, even in the present day (rural areas have less surplus hence report lower intention). Exhibit 4: Gross Domestic Rate (% of GDP) Household Corporate Goverment 1 China-3 U.S.-2 Japan-2 Korea-2 Mexico-1 Source: World Bank Paper no on Investment and Saving in China by Louis Kuijs, I on China Exhibit 5: Those Mentioning Intention to Put Their Surplus in High Income 7 Mid Income 69 Low Income <3 Rural Areas 46 Tier 4 Tier 3 66 Tier 2 Tier 1 National Source: Nielsen CCI Survey 1 Copyright 1 The Nielsen Company. 4
5 So Why Do Chinese Households Save So Much? An Age Structure that Favors Exhibit 6: Prime Saver s ( 49 years) Share in Population Since the late 198 s, China s demographics have favored the younger, working group, defined by economists as Prime Savers (-49 yrs). Typically this group displays a higher propensity to save as it has to finance a variety of life-stage needs: Younger households (-34) need to build homes and purchase durables Older populations (around mid-4s) need to save for their childrens education as well as for their own retirements. % These factors explain the high savings rate to 15, after which the rate is expected to drop as these groups get older and graduate to become Non-Prime Savers (5+ yrs). With retirement setting in, both earning and savings capacity will drop and these households will start living off their accumulated funds. Cultural Frugality Remembering Confucius Much has been written about China s legendary savings habit built upon the Confucian values of frugality, selfdiscipline, taking zhong zhong or the Middle Ground (low-key) and living within one s means. A modest lifestyle and avoidance of debt were natural outcomes of this value system, and offered a ready explanation of why Chinese were such strong savers Source: Paper on Determinants of Household by Marcos Chamon and Eswar Prasad/IMF Exhibit 7: Luxury Apparel Retailers Store Location Share by Cities Armani Burberry Cerrutti 1881 Dunhill Gucci Salvatore Faragamo Key Cities Other Cities Source: Li and Fung Research Centre China Distribution and Trading, Issue, December 9 5 Copyright 1 The Nielsen Company.
6 However, the argument that frugal living is a cultural constant weakens if we look at the proliferation of luxury stores catering to China s small but growing nouveau riche and younger segments willing to spurge on luxury brands. McKinsey s 8 Wealth Survey reported 1.6 million high net worth individuals in China with an annual income of RMB 25,+ who are willing to spend. This figure is expected to grow to four million by 15, ranking China fourth globally as a luxury market. Boston Consulting s Coming of Age study reported that China will take 29% share of the global luxury market by 15. The increasing appetite for luxury brands of the newly affluent and younger populations has prompted foreign luxury retailers to expand their footprint to capture this growing potential. In 9, it was reported that more than half of branded apparel retailers had expanded their footprint beyond key cities. Aversion to Debt and Risk: Myth or Reality? Do not go into debt is a strong traditional sentiment in China and many East Asian countries. In 8-9, Nielsen s Personal Finance Monitor reported that 73% of home owners did not take mortgage loans; 95% of car owners bought cars from their own savings, and; more than two-thirds (68%) of credit card holders claimed to pay their entire outstanding balance every month. Exhibit 8: Incidence of Loans and Revolving Credit Loan Incidence Home Morgage Loan But is this sentiment changing? There are signs, however, that this aversion to debt is slowly changing. Take for example consumer response to auto loan schemes offered during October s Golden Week in 9. Auto dealers were offering initial down payments and monthly principal payback at a zero percent interest rate. This had a significant impact on car sales of certain models, as quoted by car dealers in the media: Before this policy, 8 to 1 percent of consumers chose to take out loans to buy cars. But now the proportion is more than one-third, stated Jiao Miao, Sales Manager, Guangzhou Toyota Motor Co. Ltd. When we cooperated with banks, the volume of autos paid for by loans accounted for only 3 percent of our total Car Loan Credit Card Installment Purchase Scheme No 73% 95% 86% Yes 27% 5% 14% Base 4655 home owners 2327 car owners 3191 credit card owners Incidence of Revolving Credit on Credit Card Credit Card Monthly Payback % mentions Pay In Full 68% Partial Payment 8% Minimum Payment 4% Not Sure % Base Source: Nielsen Personal Finance Monitor in 18 cities, credit card owners sales. But that same figure has climbed to 8 percent, said Hao Qianglin, Manager of Wuhu Anqi Auto Sales Co. Another illustrative example of changing attitudes toward risk occurred in 7, when students, with no personal earning capacity, were joining pensioners, housewives and people from all walks of life during the famous stock market frenzy. Reuters reported 3, new stock accounts opened every day for five days in a row in May of that year, and the price of many stocks quadrupled in an 18 month period. (May 25, 7, Reuters report). As incomes grow and attractive loan schemes and investment opportunities present themselves, Chinese are keen to avail themselves of them, proof that the explanation for high savings intention due to cultural factors may not be telling the full story. Copyright 1 The Nielsen Company. 6
7 Exhibit 9: Comparative Cost Index Age 23 years old Graduate Executive, MNC, Shanghai Current Salary: RMB 75/month Cost (RMB) Cost Index (Expense/Salary) College 4, 53x Wedding Expenses 14, 19x House Value 2 million 266x Mortgage Down Payment 6, 8x Car 94, 13x Future Medical and Old Age costs 6 people: Self, Wife, Own Parents, Wife s Parents Age 23 years old Graduate Executive, MNC, USA Current Salary: $5/month Cost ($$) Cost Index (Expense/Salary) College 1, x Wedding Expenses 1, 2x House Value, 4x Mortgage Down Payment 5, 1x Car 25, 5x Future Medical and Old Age costs 2 people: Self, Wife, Source: The Nielsen Company What Does Mr. Have to Save for? Exhibit 1: Assessing The Sources of Funds For Their Lifestage Needs Nielsen conducted in-depth interviews with first jobbers in China and the United States to get a deeper look at their saving needs and how they are likely to fund these expenses. A comparative cost index was developed reflecting multiples of their current salary needed to pay off different life-stage expenses such as weddings, the purchase of a house, children s education, purchase of durables, health and old age expenses. (see Exhibit 9 above) House Wedding Car College Education Medical Expenses Pension/ Old Age Expenses Parents Personal Loans Govt/Private Plan Source: Nielsen Quantitative Research 7 Copyright 1 The Nielsen Company.
8 Clearly, Mr. has a lot of saving to do! High property prices in China require to have adequate liquidity early in life. Moving into one s own apartment is an important first step for marriage, and saving needs to begin much longer in advance before the actual wedding. s parents and perhaps the brides side will also contribute as well. Chinese weddings can be lavish and the groom s family bears the cost. has to technically save 19 times his salary against at 3 times. s parents will also support the wedding expenses. In the future, when both and have a child, public education is available till middle school in China and high school in the US. will need to save for high school and college education using his personal savings. In the US, availability of long-term student loans at flexible rates reduces the need for immediate liquidity, which needs to plan for as student loans are yet not popular in China. Caring for elderly parents is a strong tradition in China. Born in the era following the One Child Policy, will in later years be saving for medical and old age costs for six people(himself and his wife, his own parents and his wife s parents). Much of course depends on their parents own past savings and their ability to support themselves independently. Exhibit 11: Household Assets Breakdown % US-7 Japan-7 France-7 Canada-7 China-7 US-1972 While government investment in social security and healthcare has increased over time, China s social security funds are still much lower than those in developed economies. Standing at RMB 1 per capita, this represents 2% of the country s total household wealth (see Exhibit 11), well below the US level of % (Source: Professor Ha, Heading for Balanced Growth Paper at Nielsen CCI seminar, 1). Precautionary savings to cover for medical and post-retirement expenses remain an important factor in explaining China s high savings rates. Currency and deposits Bonds and others Stocks Pensions and Insurance Real Estate Source: Professor Jiming Ha, CCI, Heading for Balanced Growth Paper at Nielsen CCI seminar, May 1 Keeping savings in cash and bank deposits at low interest rates, buying three to four properties as investments are the most popular ways of keeping surplus income. Both are seen to be outcomes of the precautionary savings motive, offering greater psychological assurance to Chinese consumers than investing in stocks and bonds. Copyright 1 The Nielsen Company. 8
9 Conclusion: The argument that China s high savings rates can be attributed to a handed-down tradition of thrift and frugality loses strength if we look at the spending behavior of affluent Chinese today. When a certain income threshold is reached, Chinese are as big spenders as they are savers. While more studies are necessary to quantify the correlation between savings rate and the explanatory factors such as culture, Nielsen believes that demographics, high costs of certain life-stage expenses, the precautionary savings motive and existing loan and credit environments play a stronger role in explaining the savings rate as opposed to the frugality theory. Exhibit 12: Strength of Factors Explaining High Rate Today A Qualitative Assessment Cultural Frugality and Debt Aversion High Share of Prime Savers In Population Current costs of certain life-stage expenses (education, housing, weddings) Government support on Social Security and education Limited availability of attractive loan schemes to fund life-stage expenses Limited options to channel savings out of cash and bank deposits STRONG WEAK We believe that once increased government spending on soft infrastructure such as education, health and pensions starts having an impact, combined with diversification of the financial markets in favor of more medium risk products and changing demographics will lessen the importance of precautionary savings in China and overall savings rates will be more in line with developed economies. Copyright 1 The Nielsen Company. All rights reserved. Produced in the U.S.A. Nielsen and the Nielsen logo are trademarks 9 Copyright or registered 1 trademarks The Nielsen of CZT/ACN Company. Trademarks, L.L.C.
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