Why Chinese Ppl Have Savings

8/8/2019 Why Chinese Ppl Have Savings

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Saving aTop Priority for

ChineseBut Why?Understanding the

motivations behind Chinashigh savings rate

October 2010


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2Copyright 2010 The Nielsen Company.

Some Facts:

Forecasted to close 2010 at nearly 50%

of GDP, Chinas national savings rate

is one of the highest in the region andsubstantially higher than developed

economies like those of the United States

and the United Kingdom. Despite the

great economic growth over the past

decade, the savings rate only increased.

Overview

Chinas consistently high savings rate has raised a fair amount of international andacademic interest.

Economic theory based on Forward Looking Models suggest that countries experiencing

strong GDP growth should see a drop in savings rate as people are better able to predict

their future incomes.

Chinas savings rate, on the other hand, has continued to remain high despite its remarkable

GDP growth. A popular explanation is that Chinas legendary savings habit is inuenced by

the Confucian values of thrift and frugality.But does this theory apply in the present day? Nielsen seeks to understand the strength

of this hypothesis and explores non-cultural factors which may have a role in explaining

Chinas high savings rate.

PH NZ PK AU JP SL HK TW VN ID TH IN KR SG MA CH

2010f 2011f

50

40

30

20

10

0

Exhibit 1: Savings as a % of GDP: China, Sigapore and Malaysia the highest

Source: CEIC, HSBC


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3 Copyright 2010 The Nielsen Company.

National savings is the sum of household,

corporate and government savings

(scal revenue). Based on the limited

data available, it is interesting to note

that household savings was the largest

component prior to 1999. Thereafter,

corporate savings caught up and came

on par, and has played an equally

important role in contributing to Chinas

high savings rate, due mostly to better

productivity and efciency of private

enterprises in the post-reform era.

Household savings on the other hand

showed a slight decline in the

mid-1990s and has since stabilizedat around 16% of GDP. (Exhibit 3)

1999 2000 2001 2002 2003

US UK China

60

50

40

30

0

2004 2005 2006 2007 2008

10

20

Exhibit 2: Gross Domestic Savings Rate (% of GDP)

Source: World Bank

25

20

15

0

5

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

HouseholdSavings

CorporateSavings

GovernmentSavings

Exhibit 3: China Savings Rate by Components (% of GDP)

Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs, I on China Savings


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Even recognizing the signicance of

corporate savings,the high-levels

of household savings (see exhibit 4)

warrants further attention.

Nielsens Consumer Condence Survey

reveals that savings sentiment continues

to be strong among different consumer

groups, even in the present day (rural

areas have less surplus hence report

lower intention).

China-2003 U.S.-2002 Japan-2002 Korea-2002 Mexico-2001

50

40

30

0

10

20

CorporateSavings

GovermentSavings

HouseholdSavings

Exhibit 4: Gross Domestic Savings Rate (% of GDP)

Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs, I on China Savings

0 10 20 30 40 50 60 70 80

National

Tier 1

Tier 2

Tier 3

Tier 4

Rural Areas


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An Age Structure thatFavors Savings

Since the late 1980s, Chinas demographics

have favored the younger, working group,

dened by economists as Prime Savers

(20-49 yrs). Typically this group displays

a higher propensity to save as it has to

nance a variety of life-stage needs:

Younger households (20-34)

need to build homes and

purchase durables

Older populations (around mid-40s)

need to save for their childrens

education as well as for their

own retirements.

These factors explain the high savings rate

to 2015, after which the rate is expected

to drop as these groups get older and

graduate to become Non-Prime Savers

(50+ yrs). With retirement setting in,

both earning and savings capacity will

drop and these households will startliving off their accumulated funds.

Cultural Frugality Remembering Confucius

Much has been written about Chinas

legendary savings habit built upon the

Confucian values of frugality, self-

discipline, taking zhong zhong or the

Middle Ground (low-key) and living

within ones means. A modest lifestyle

and avoidance of debt were natural

outcomes of this value system, and

offered a ready explanation of why

Chinese were such strong savers.

So Why Do Chinese Households Save So Much?

1985 1995 2005 2015 2025 2035

50

40

30

%

0

10

20

2045

Exhibit 6: Prime Savers (2049 years) Share in Population

Source: Paper on Determinants of Household Savings by Marcos Chamon and Eswar Prasad/IMF

Armani Burberry Cerrutti 1881 Dunhill Gucci SalvatoreFaragamo

100

80

60

0

20

40

Other CitiesKey Cities

Exhibit 7: Luxury Apparel RetailersStore Location Share by Cities2009

Source: Li and Fung Research Centre China Distribution and Trading, Issue 63, December 2009


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However, the argument that frugal living

is a cultural constant weakens if we

look at the proliferation of luxury stores

catering to Chinas small but growing

nouveau riche and younger segments

willing to spurge on luxury brands.

McKinseys 2008 Wealth Survey reported

1.6 million high net worth individuals

in China with an annual income of RMB

25,000+ who are willing to spend. This

gure is expected to grow to four million

by 2015, ranking China fourth globally

as a luxury market. Boston Consultings

Coming of Age study reported that

China will take 29% share of the global

luxury market by 2015.

The increasing appetite for luxury brands

of the newly afuent and younger

populations has prompted foreign luxury

retailers to expand their footprint to

capture this growing potential. In 2009,

it was reported that more than half of

branded apparel retailers had expanded

their footprint beyond key cities.

Aversion to Debt and Risk:Myth or Reality?

Do not go into debt is a strong traditional

sentiment in China and many East Asian

countries. In 2008-2009, Nielsens

Personal Finance Monitor reported

that 73% of home owners did not take

mortgage loans; 95% of car owners

bought cars from their own savings, and;

more than two-thirds (68%) of credit

card holders claimed to pay their entire

outstanding balance every month.

But is this sentiment changing?

There are signs, however, that this aversion

to debt is slowly changing. Take for

example consumer response to auto loan

schemes offered during Octobers GoldenWeek in 2009. Auto dealers were offering

initial down payments and monthly

principal payback at a zero percent interest

rate. This had a signicant impact on car

sales of certain models, as quoted by car

dealers in the media:

Before this policy, 8 to 10 percent of

consumers chose to take out loans to

buy cars. But now the proportion is

more than one-third, stated Jiao Miao,

Sales Manager, Guangzhou ToyotaMotor Co. Ltd.

When we cooperated with banks,

the volume of autos paid for by loans

accounted for only 3 percent of our total

Exhibit 8: Incidence of Loans and Revolving Credit

Loan Incidence

HomeMorgage Loan Car Loan

Credit Card InstallmentPurchase Scheme

No 73% 95% 86%

Yes 27% 5% 14%

Base 4655 home owners 2327 car owners 3191 credit card owners

Incidence of Revolving Credit on Credit Card

Credit Card Monthly Payback % mentions

Pay In Full 68%

Partial Payment 8%

Minimum Payment 4%

Not Sure 20%

Base 3191 credit card owners

Source: Nielsen Personal Finance Monitor in 18 cities, 2008-2009

sales. But that same gure has climbed to

8 percent, said Hao Qianglin, Manager

of Wuhu Anqi Auto Sales Co.

Another illustrative example of changing

attitudes toward risk occurred in 2007,

when students, with no personal earning

capacity, were joining pensioners,

housewives and people from all walks of

life during the famous stock market frenzy.

Reuters reported 300,000 new stock

accounts opened every day for ve days in

a row in May of that year, and the price of

many stocks quadrupled in an 18 month

period. (May 25, 2007, Reuters report).

As incomes grow and attractive loan

schemes and investment opportunitiespresent themselves, Chinese are keen

to avail themselves of them, proof that

the explanation for high savings intention

due to cultural factors may not be telling

the full story.


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Exhibit 9: Comparative Cost Index

What Does Mr. Jay Haveto Save for?

Nielsen conducted in-depth interviews

with rst jobbers in China and the United

States to get a deeper look at their saving

needs and how they are likely to fund

these expenses.

A comparative cost index was developed

reecting multiples of their current salary

needed to pay off different life-stage

expenses such as weddings, the purchase

of a house, childrens education, purchase

of durables, health and old age expenses.

(see Exhibit 9 above).

John Jay John Jay John Jay John Jay John JayJohn

House Wedding Car CollegeEducation

MedicalExpenses

Pension/Old AgeExpenses

Jay

100

80

60

0

20

40

LoansParents Savings Personal Savings Govt/Private Plan

Exhibit 10: Assessing The Sources of Funds For Their Lifestage Needs

Source: Nielsen Quantitative Research

Jay

Age 23 years oldGraduateExecutive, MNC, ShanghaiCurrent Salary: RMB 7500/month

Cost (RMB)Cost Index

(Expense/Salary)

College 400,000 53x

Wedding Expenses 140,000 19x

House Value 2 million 266x

Mortgage Down Payment 600,000 80x

Car 94,000 13x

Future Medicaland Old Age costs 6 people: Self, Wife,Own Parents, Wifes Parents

John

Age 23 years oldGraduateExecutive, MNC, USACurrent Salary: $5000/month

Cost ($$)Cost Index

(Expense/Salary)

College 100,000 20x

Wedding Expenses 10,000 2x

House Value 200,000 40x

Mortgage Down Payment 50,000 10x

Car 25,000 5x

Future Medicaland Old Age costs 2 people: Self, Wife,

Source: The Nielsen Company


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The argument that Chinas high savings rates can be attributed to a handed-downtradition of thrift and frugality loses strength if we look at the spending behavior of

afuent Chinese today. When a certain income threshold is reached, Chinese are as

big spenders as they are savers.

While more studies are necessary to quantify the correlation between savings rate

and the explanatory factors such as culture, Nielsen believes that demographics, high

costs of certain life-stage expenses, the precautionary savings motive and existing

loan and credit environments play a stronger role in explaining the savings rate as

opposed to the frugality theory.

Conclusion:

Exhibit 12: Strength of Factors Explaining High Savings Rate TodayA Qualitative Assessment

Cultural Frugality and Debt Aversion

High Share of Prime Savers In Population

Current costs of certain life-stage expenses(education, housing, weddings)

Government support on Social Security and education

Limited availability of attractive loan schemes to fundlife-stage expenses

Limited options to channel savings out of cash andbank deposits

STRONG WEAK

We believe that once increased government spending on soft infrastructure suchas education, health and pensions starts having an impact, combined with

diversication of the nancial markets in favor of more medium risk products

and changing demographics will lessen the importance of precautionary savings

in China and overall savings rates will be more in line with developed economies.

Copyright 2010 The Nielsen Company. All rights reserved.

Produced in the U.S.A. Nielsen and the Nielsen logo are trademarks

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Why Chinese Ppl Have Savings