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China's Consumption Problem
Summary:The government is launching needed financial sector reform to improve the efficiency of China’s banks, but it isn’t enough. The government must unleash the “caged tiger” of Chinese consumers by relieving their worries over healthcare, education, retirement and housing.


By the EO Editorial Board
Issue 637, Sept 16, 2013
News, page 1
Translated by Zhu Na
Original article:

When former Chief Economist and Senior Vice President of the World Bank Justin Yifu Lin was recently asked how he invests his money, he said that he puts it all in a bank term deposit. “The money is still growing when I sleep at night,” he quipped. “I don’t have to worry.”

Most Chinese make the same choice. Data released by People’s Bank of China showed that as of August this year, Chinese bank savings had exceeded 43 trillion yuan for three consecutive months, with per capita savings at more than 30,000 yuan.

Chinese have the world’s highest household savings rate at more than 50 percent, compared to the global average of 20 percent. Lin says that investment is the main engine for China’s economic growth. So if following this theory, a relatively high savings rate is needed to provide enough support for investment.

But this is far from the best choice. The increase in savings shows that people have more or less shared in the dividends from economic growth. And even though wealth distribution is still inclined toward government and enterprises, the situation is changing. But we believe that ordinary people putting so much money in the bank demonstrates that they have a lot of worries.

In recent years, China experienced up to 24 months when inflation far outpaced interest rates, meaning that people who parked their money in banks actually watched it lose purchasing power.

Soon, China is expected to launch a deposit insurance system that will guarantee a depositor’s money is safe, even if their bank fails. People in China have rarely worried about a U.S.-style banking collapse, since it’s understood that the government will step in and save financial institutions before they fail. This system has been relatively stable, but it’s led to risky loans by banks and has led investors seeking higher returns to China’s vast shadow banking industry.  

The deposit insurance system is expected to make banks more competitive, more cautious about the loans they give and more inclined to offer high interest rates in order to attract customers (if interest rate control is indeed liberalized). However, it also means poorly run banks may be allowed to fail. Considering how risky the debts of some banks are, people may no longer be able to sleep at night assured that their bank deposits are “growing.”

So what other options do we have for our money besides banks? Chinese stocks lost 43 percent of their value from 2009 to 2013 and housing purchase restrictions have made real estate a less attractive option for investment. This is why wealth has started to flow back into the banks.

A survey on urban depositors by the Central Bank conducted in the second quarter of this year showed that 46.2 percent of depositors preferred to save more. Only 18.1 percent said they preferred to consume more with their earnings.  

Of course, this is not the best choice, but it is the most realistic choice. 

China’s household savings are often regarded as a “caged tiger.” After the 1998 Asian Financial Crisis, talk began of trying to “chase the tiger out of its cage.” Then during the 2008 World Financial Crisis, promoting the growth of consumption was again held up as a way to rescue the economy. However, in both cases the tiger stayed in its cage, becoming fatter and fatter and never showing its power.

Even back in 1998, analysts explained that these savings were caged because of the “three mountains” Chinese worry about: education, healthcare and retirement.

These old problems still haven’t been effectively solved, and new problems like the pressure of buying a home have been added. People worry if they don’t save enough, they won’t have money to cope with these worries.

As consumers, if we don’t have to worry so much about the future, then we can spend money without worry and can peacefully enjoy life. The government has rightly chosen not to stimulate the economy through massive investment as it did after the 2008 financial crisis, and instead is relying more on financial reform. But this is still isn’t enough. The most important thing the government can do is relieve people’s uncertainty over whether they’ll have health care, education, social security and housing.



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