Growth and Credit: Why Do the Chinese Keep Saving?

In an article published in The American Economic Review (pdf, 1.06 MB), Keyu Jin, assistant professor at LSE, and Nicolas Coeurdacier and Stéphane Guibaud, professors in the Department of Economics at Sciences Po, focus on the different savings behaviours of American and Chinese households. They draw our attention to the potential impact on the global economy of increased access to credit in emerging countries.

• According to classical theory, the decline in interest rates worldwide should trigger a similar response in saving and borrowing behaviour across all countries. Your research, however, points to a very different conclusion.

In the decades leading up to the 2008 financial crisis, we saw a sharp decline in savings in developed countries, particularly in the United States. While the aggregate private saving rate in the US was close to 25% of GDP in the early 1980’s, it dropped by nearly 10% of GDP over the next thirty years. This downward trend is especially pronounced when we consider US household savings. In contrast, the aggregate saving rate in Asian countries has increased considerably over the same period, by more than 20% of the GDP of these countries.

• Could this divergence be explained by different cultural attitudes towards money? Might the Chinese be more prudent and thrifty and Americans more careless and spendthrift?

On the surface, one could imagine that these differences in savings behaviour reflect cultural differences; that the Chinese are the ‘ants’ in Lafontaine’s well-known fable, and the Americans ‘grasshoppers’. However, such an explanation is countered by the fact that up until the early 1980’s, their saving behaviours were relatively similar; American and Chinese households both saved a little over 10% of their disposable income.

• The rate of household savings in China has grown steadily and right across the board, for people of all ages. Yet this is not quite what standard economic theory would predict.

The increase in household savings in a country that has experienced fast growth for more than thirty years is surprising. The expectation of higher future income should have led Chinese households to save less and borrow more. The data, on the contrary, points to an increase in savings for all age groups, and a particularly sharp rise among the 30- to 50-year age group.

• You suggest that this savings behaviour in China is linked to the weak development of its financial markets. 

We interpret the evolution of Chinese savings as a consequence of the lack of access to credit for Chinese households. Neither the mortgage market nor the consumer credit market is very developed in China. When compared with the US, the differences are striking. Before the crisis, the level of household debt in the US was 95% of GDP, whereas in China it was only 12%. More than one third of the US adult population had taken out a mortgage as opposed to only 5% of the adult population in China.

• According to your research, it is the relative lack of access to credit in China that has pushed global interest rates down and fostered US debt.

The weakness of household credit markets in Asia has produced excess savings worldwide – a “global saving glut”, as Ben Bernanke, former Chairman of the Federal Reserve, coined it. The saving glut is bolstered when China, due to its relatively fast growth, contributes a greater share to worldwide saving. These excess savings provoke a decrease in the global interest rate. Developed countries, and especially the US, have very dynamic credit markets and take advantage of this to borrow at a lower cost. Their interest rates can drop and their consumption can increase precisely as a result of the rise in savings on Asian markets.

• So if China and other emerging countries were to facilitate access to credit, they would be able to stimulate domestic consumption? What impact would this have on advanced economies? 

Of course, the scarcity of access to credit in China cannot last forever. Chinese households will naturally want to reap the benefits of growth and increase their consumption. If credit markets in China were to develop to a level comparable to those of the US, global interest rates would rise, forcing American households to deleverage and encouraging them to save more. This scenario would bring to an end an era marked by high if not excessive levels of debt in developed countries and near-zero interest rates.
 
“Credit Constraints and Growth in a Global Economy”, Nicolas Coeurdacier, Stéphane Guibaud, and Keyu Jin, American Economic Review 2015, 105(9): 2838–2881 (pdf, 1.06 MB)
 
Nicolas Coeurdacier is an associate professor in the Sciences Po Department of Economics. A specialist of international macroeconomics and finance, he is the Principal Investigator (PI) of INFINHET, a project supported by the European Research Council (ERC).

Stéphane Guibaud is an associate professor in the Sciences Po Department of Economics. His research focuses on international finance, asset pricing, dynamic contracting and macroeconomics.

Keyu Jin is a lecturer in economics at the London School of Economics. Her research interests include international macroeconomics, international finance and trade, and the Chinese economy.