Why savings rate increased in China despite falling real rates?

Malhar Nabar of IMF looks at this interesting puzzle on Chinese household behavior.

Real interest rates have declined in China during 1996-09 but household savings (HH) as a % of GDP has risen from 19% in 1996 to 30% on 2009. This is a puzzle as one would assume as rates decline savings decline and consumption rises. This is the reason for rate cuts during the 2007 crisis (and previous crisis). In China you get a different behavior of savings rate actually rising.


The paper says Chinese have a target savings rate in mind to finance their needs during retirement. Lack of proper financial system to channelize their savings to be used later. Hence, in case rates go down they feel the need to increase their saving even more. Bank deposits are the main ways by which Chinese save and a lower rate on those deposits pushed people into more savings:

Main findings of paper are:

  • Panel estimates suggest that household savings respond strongly to a change in the real interest rate. A one percentage point increase in the real rate of return on bank deposits lowers the urban household saving rate by 0.6 percentage points.
  • A comparison of the relationship across sub-periods shows that the association is stronger in the later period, 2003–09, relative to the earlier period, 1996–2002. The relationship is robust to the inclusion of variables that proxy for other influences on saving such as life cycle considerations and self-insurance against income volatility.
  • The evidence also indicates that when the return on alternative investment is high (for example when real property price growth is relatively strong), a decline in the real return on bank deposits does not have as negative an impact on household portfolios.
Apart from this, they discuss previous research on growing Chinese savings:

Household saving behavior in China has been the focus of considerable empirical research in recent years. Previous work in this area has mainly analyzed survey data drawn from a sample of Chinese cities or specific rural areas (for example, Banerjee et al. 2010; Chamon and Prasad, 2010; Giles and Yoo, 2007). A smaller literature has looked at developments at the national level (Modigliani and Cao, 2004; Kuijs, 2006) or across provinces (Kraay, 2000; Horioka and Wan, 2007; Wei and Zhang, forthcoming). The rise in saving rates has been variously attributed to demographic changes and life cycle considerations, precautionary saving for self-insurance purposes, household formation and spreading homeownership.

Each of these demographics, precautionary savings etc is discussed in details with many reference papers.

Nice perspective on rising Chinese savings.

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