The savings rate in China has gone from almost 20 percent of GDP in 1981 to 30 percent in 1988, and currently stands at about 40 percent. Why? Here is what Wing Thye Woo says:
] In discussions on the rise of the savings rate, a common view is that the rise reflects the uncertainty about the future that many state-owned enterprise (SOE) workers feel in the face of widespread privatisation of loss-making SOEs. We find this explanation to be grossly incomplete because there has also been a rise in the rural saving rate even though rural residents have little to fear about the loss of jobs in the state-enterprise sector because none of them are employed there. Based on the work of Liu and Woo (1994) on savings behavior, we conjecture that the desire to invest is an important reason for why the rural sector has increased its savings rate. The most dynamic industrial expansion in China in the 1984-1994 period occurred in the rural areas. Since nonstate firms in the rural areas cannot borrow from the bank*, the only way they could establish themselves was through self-financing, which required the would-be entrepreneurs to save first. In the very first phase of rural industrialization, the amount of capital that was needed to start a factory workshop was very low. After a decade of rapid industrial growth, the Chinese countryside is saturated with labor-intensive enterprises. As competition among rural enterprises is very fierce at the present, it no longer makes economic sense to invest and open the same type of factory workshop. Rural enterprises must therefore move up to the next stage of value added production in order to be more profitable. This new generation of rural enterprises is much more capital-intensive, and thus requires a much larger amount of startup funds. And rural residents have responded to the higher capital requirements by increasing their saving rates.
Since the phenomenon of investment-motivated saving must also be present within the Chinese urban community the usual pessimism-based explanation for the rise in the urban saving rate is only partially correct. In fact, with the steady relaxation of regulations against the establishment of private businesses in the rural and urban areas, the amount of investment-motivated savings in China could only have risen more. To skeptics of our investment motivated savings hypothesis, we want to point out that Jeffrey Williamson (1988), an economic historian, has summed up the historical record of Western Europe and North America as showing that "investment demand seems to have been the driving force behind private saving and accumulation, past and present." [
Ok, this is just a tiny tidbit. You really have to read the the entire paper titeled The Structural Obstacles to Macroeconomic Control in China (pdf). I attended Woo's informative presentation on this topic today at the OeNB (Austrian National Bank). Unfortunately, most journalist have only a handful of tired insights about the booming Chinese economy (eg, driving up oil prices, economic before political liberties, and of course could start WW3 with Taiwan), though there are so many other interesting issues that are worth to be covered.
*'In the mid-1990s when Zhu Rongji decreed the removal of the state bank manager if the ratio of non-performing loans in her bank were to go up two years consecutively. As the mayority of state enterprises were either in the red or just breaking even, the banks became unwilling to lend money to the state-owned enterprises. Lending more to private enterprises was not really a good option, because, one, their legal status was lower than that of state enterprises, and, two, there was no reliable way to assess their balance sheets. The only activity that the banks were happy to allocate their funds to is the purchase of state bonds, i.e., the financing of the goverment deficit.' (p. 9)
] In discussions on the rise of the savings rate, a common view is that the rise reflects the uncertainty about the future that many state-owned enterprise (SOE) workers feel in the face of widespread privatisation of loss-making SOEs. We find this explanation to be grossly incomplete because there has also been a rise in the rural saving rate even though rural residents have little to fear about the loss of jobs in the state-enterprise sector because none of them are employed there. Based on the work of Liu and Woo (1994) on savings behavior, we conjecture that the desire to invest is an important reason for why the rural sector has increased its savings rate. The most dynamic industrial expansion in China in the 1984-1994 period occurred in the rural areas. Since nonstate firms in the rural areas cannot borrow from the bank*, the only way they could establish themselves was through self-financing, which required the would-be entrepreneurs to save first. In the very first phase of rural industrialization, the amount of capital that was needed to start a factory workshop was very low. After a decade of rapid industrial growth, the Chinese countryside is saturated with labor-intensive enterprises. As competition among rural enterprises is very fierce at the present, it no longer makes economic sense to invest and open the same type of factory workshop. Rural enterprises must therefore move up to the next stage of value added production in order to be more profitable. This new generation of rural enterprises is much more capital-intensive, and thus requires a much larger amount of startup funds. And rural residents have responded to the higher capital requirements by increasing their saving rates.
Since the phenomenon of investment-motivated saving must also be present within the Chinese urban community the usual pessimism-based explanation for the rise in the urban saving rate is only partially correct. In fact, with the steady relaxation of regulations against the establishment of private businesses in the rural and urban areas, the amount of investment-motivated savings in China could only have risen more. To skeptics of our investment motivated savings hypothesis, we want to point out that Jeffrey Williamson (1988), an economic historian, has summed up the historical record of Western Europe and North America as showing that "investment demand seems to have been the driving force behind private saving and accumulation, past and present." [
Ok, this is just a tiny tidbit. You really have to read the the entire paper titeled The Structural Obstacles to Macroeconomic Control in China (pdf). I attended Woo's informative presentation on this topic today at the OeNB (Austrian National Bank). Unfortunately, most journalist have only a handful of tired insights about the booming Chinese economy (eg, driving up oil prices, economic before political liberties, and of course could start WW3 with Taiwan), though there are so many other interesting issues that are worth to be covered.
*'In the mid-1990s when Zhu Rongji decreed the removal of the state bank manager if the ratio of non-performing loans in her bank were to go up two years consecutively. As the mayority of state enterprises were either in the red or just breaking even, the banks became unwilling to lend money to the state-owned enterprises. Lending more to private enterprises was not really a good option, because, one, their legal status was lower than that of state enterprises, and, two, there was no reliable way to assess their balance sheets. The only activity that the banks were happy to allocate their funds to is the purchase of state bonds, i.e., the financing of the goverment deficit.' (p. 9)
Mahalanobis - am 2005-04-06 04:30 - Rubrik: economics
