In China in 2013, the average household savings rate, that is, the percentage of a household’s income spent on savings, was around 25%. China’s figure dwarfs the household savings rate of 0.7% in Japan, 3.1% in the UK, 5.2% in South Korea and 6.6% in the US.
One possible explanation for this outsized rate is that it was driven by China’s one-child policy, implemented in the 1980s and relaxed around thirty years later. The theory posits that the law weakened the “family safety net”, thereby inducing households to save.
“Some people have suggested that in the absence of a formal safety net, people use their family as a safety net,” says Efraim Benmelech, professor of finance at Kellogg. “That is to say, when parents have many children, they know they can count on them in the future. In China, once you could only have one child, there was a limit to that addiction, so people had to save more.
To determine whether the one-child policy has boosted savings or something else is at work, Benmelech and Kellogg associate professor Scott R. Baker teamed up with co-authors Zhishu Yang of the Tsinghua University in Beijing and Qi Zhang of Shanghai Jiao. Tong University.
They explored this by linking granular data on household financial transactions from a major Chinese bank – data that had never before been available to researchers – with administrative records detailing births, marriages and other information.
Their findings suggest that the emergence of the one-child policy has not, in fact, further boosted Chinese household savings. On the contrary: once the restriction was eased to a maximum of two children in 2014, families actually started saving more, especially when planning to have a baby. Instead, savings seemed to be more directly related to financial forces, such as income volatility, income growth, and access to consumer credit.
“There is always a question of how important culture is to economic activity – and although culture is important, it was interesting to see that culture was not as important in our assessment as it was. other more neoclassical economic forces,” says Benmelech.
Link financial models to life events
Baker and Benmelech say their research was only possible because of their unprecedented access to detailed transaction data from an Inner Mongolian bank, which they secured through their co-authors, Yang and Zhang.
The dataset included eight years of transaction details, spanning from 2010 to 2017, from nearly 1.8 million of the bank’s retail customers. These details provided a granular view of household income growth and volatility over the period, as well as customer access to credit. They were able to dig even deeper into how household spending and saving patterns evolved around major life events by linking a subset of bank customers to administrative records of marriages and births.
To determine whether the one-child policy actually encouraged greater savings at the household level in China, the researchers looked at how savings patterns changed when the law began to relax in 2014. Specifically, they looked for differences in savings rates between families who could legally support another child after 2014, either because they had no children or had only one, and those who did not. had not, either because they already had two children – thanks to the allowances for certain subsets of the population – or because they were probably past the childbearing age.
Real reasons to save
They found that as the one-child policy evolved into a two-child policy, savings rates did not decline but actually increased, especially for households that were now able to increase the size of their family.
Moreover, they observed that the households that increased their savings the most after the policy change were the most likely to have additional children.
“Given the costs of raising additional children,” the authors write, “these estimates would imply that the imposition of the one-child policy may have actually lowered savings, at least in the short run, because households did not need to save for additional child-related expenses. In other words, additional children seemed less likely to be viewed as an insurance policy and more likely to be viewed as an expense and a reason to save aggressively.
The most predictive factors of a household’s propensity to save are of a financial nature, fully consistent with the savings patterns of Western countries. Households that had experienced extreme fluctuations in income saved more, as did those with higher incomes, while those with more access to consumer credit to smooth out financial shocks saved less.
An imminent convergence
The researchers conclude that China’s outsized savings rate likely has nothing to do with family size laws and more to do with the income gains its population has made in recent decades and fluctuations in these revenues.
This suggests that as the country’s economy expands and its long-term growth slows, its overall saving and spending patterns are likely to start to resemble those of the United States and Europe more closely.
When a population has substantial money placed in savings, it allows the government and its citizens to purchase investment assets around the world, much of which is usually US bonds. The increased demand for these bonds is driving down US interest rates.
While China has long played an outsized role in global savings markets, the convergence of income and income growth toward Western levels could lead to a decline in that role, the researchers say.
“A lot of what drives the behaviors we see seems to be very similar to what we see in the West,” Baker says. “As their income levels and growth levels converge with those of the West and access to credit expands, we could see consumption rise and savings decline. And it has ramifications outside of China.