Top priority is to boost domestic demand to sustain economic growth while investment and exports are losing steam
As the Chinese leadership seeks to find a way to check the country's economic downturn, it should take measures to spend more of the government's massive savings to facilitate its promised transformation to a consumption-driven economy.
China's aggregate household savings had surpassed 18 trillion yuan ($2.86 trillion) by the end of 2009, with per capita savings of 13,000 yuan, according to official figures. An International Monetary Fund report says China's household savings rate has hovered around 50 percent of GDP in recent years after a significant increase over the past two decades. The National Bureau of Statistics has put the country's household savings at 52 percent of GDP, compared with the world average of 19.7 percent.
Along with households' ever-rising savings ratio is their declining willingness to consume. Responding to a 2011 survey of the People's Bank of China, 85.8 percent of respondents said they were more inclined to save, with only 14.2 percent saying they were willing to spend, the lowest ratio since 1999. A report on the financial condition of China's household, published by the Southwestern University of Finance and Economics in May this year, shows that bank deposits account for 57.75 percent of China's household financial assets.
Aside from the long tradition of Chinese households' frugality, the absence of a well-developed social security network - including pensions, education, healthcare and government-subsidized housing -has motivated households to save more as their incomes have kept declining in the country's economic aggregate.
Savings is not a curse in itself, as was seen after the outbreak of debt crises in the United States and some European countries due to their over-borrowing, over-spending and low savings ratios. It is necessary for a developing country, which does not have sufficient investment funds in the early period of its economic and social development, to maintain a certain level of domestic savings, because it can help it avoid borrowing excessively from other countries to fund its funds-thirsty development.
However, at a time when investment and exports have a declining potential in the context of the global economic recession, China faces the immediate task of bringing down its high domestic savings and diverting some of this huge amount to consumption. This poses a long-term challenge for China in its bid to transform its investment- and export-driven development model into a consumption-led model.
