Puzzle of High Saving Rate in China - Myth and Reality - Research Paper Example

?Running Header: Puzzle of High Saving Rates in China “Puzzle of High Saving Rate in China: Myth and Reality” Module Semester China is set to take over the American economy in the near future. This statement is being used by economy pundits these days with more frequency than ever before. Over the last decade, China has seen periods of tremendous growth and prosperity. Not only the Gross Domestic Product of the economy increased, but the economy also flourished in terms of per capita income. This means that wealth has been widely distributed and everyone in China enjoyed the benefits of the growth of the Chinese economy. In terms of statistics, China is the largest country in the world in terms of population. Currently, 1.328 or 22% of the total world’s population is living in China. It is ruled by the communist party of China. China has also grown in terms of technology and people in China are generally literate. Looking at the statistics, it can easily be seen that almost 84% of the China’s population is literate. They have good knowledge about how to spend their hard-earned money. As a result, China can be considered as a nation of wise businessmen and investors who always try to get the best out of their money. According to the figure China’s propensity to save is as high as 60%. This means that Chinese people prefer to save more and spend less. This is an eerie phenomenon for such an advanced economy. There are many reasons given for this trend. Among them the most widely accepted reasons were high competition in the marriage market, declining dependency rate in China and increase in income. (Yi, 2010) Among the many eccentric facts that are on display on China, one that caught everyone’s eye was the high saving rates in the Chinese economy. Many economists find it very hard to believe that how such prosperous nation can have so high saving rates. The saving rate in China is greater than every other country in the world and can be directly related to the current account surplus. According to the observation Chinese saving cannot only be attributed to the saving rates of corporation rather households in China have started to save large amount of many as people in China are concerned about cost of healthcare, education and old-age pension. Other economists believe that these high rates of saving are a part of financial behavior or financial attitude development that resulted in the tremendous growth of Chinese economy. Among many cynical reasons, one reason was that the increase in the number of male children born in China has resulted in this trend. The ratio of male to female children in China is around 122 men for every 100 girls. This means that one in every five man cannot find a girl in the marriage market. Hence, in order to give them competitive edge in the marriage market, these people try to save more and build up more wealth so that they can find a wife in the future. This is one f most widely accepted reason of increase in saving rates in China (Wei, 2010). Other reason for growth of saving in China is declining dependency ratio. This means that more people nowadays are working in China and hence since income of people is high they can afford to save more since they do not have to bear the expense of their dependents or people who rely on them. Another reason for this growth in saving rate is the growth of national income and GDP per capital in China. This means that people are earning more than they were earning before and hence this gives them more chances to save their money for future and precautionary motives. Table 1: Comparisons of Saving Rates as percentage of GDP Source: Yi and Ma If we compare China with other countries with other countries we can say that over time it has become far superior to other countries in terms of saving. China’s propensity to save from year 1998 to 2008 has increased from 39% of its GDP to 54.3% of its GDP. This shows a growth of around 15% over this period time. Similarly, Singapore also has a large propensity to save but over a decade its growth in saving has been nothing as compared to China. Singapore’s propensity to save has risen only by 5%. Similarly, India’s propensity to save stands at an impressive 33.6%, which is nothing as compared to China. No western country comes close to China in terms of propensity to save. This leads us to another reason of why China’s propensity to save is so high. As we can see from the table that countries with high saving rates are based in Asia region. Hence, we can also conclude that it is a common practice in this region to save more and hence these countries have a high propensity to save as compared to Western nations. Table-2 below shows us an itemized saving rate in the Chinese economy. It dismisses the claim that growth in China’s saving has been due to high saving rates in the corporate sector. It might be true that there has been a growth in saving rates by the corporate sector, but still the bulk of the savings come from households. These people save money because of precautionary motives and because they want to remain competitive and as a result there is high propensity to save and people end up saving more which has a great positive impact on the Chinese economy. Table 2: Itemized Saving by Sector Source: Yi and Ma Conclusion: It can be concluded from the above discussion, facts and statistics that China has indeed been great in terms of tremendous economic growth. This growth has been achieved by China because of high propensity to save and people struggle to save more to have a competitive edge over others. People also save more because they are unsure about their future and want to save more money for their retirement in order to maintain their standard of living. China’s policy makers also find out that other reasons for China’s growth are saving is high male to female birth ratio, declining dependency ration and increase in national income of China. References: Wei, Shang-Jin. (2010). Why Do The Chinese Save So Much? Retrieved on 22 October 2011. Retrieved from: http://www.forbes.com/2010/02/02/china-saving-marriage-markets-economy-trade.html Yi, Wang and Guonan, Ma. (2010). China’s High Saving Rate: Myth and Reality. Retrieved on 23 October 2011. http://www.cesifogroup.de/portal/page/portal/CFP_CONF/CFP_CONF_VSI/VSI%202010/vsi10_r oc_Cheung/Paper/vsi10_roc_Ma.pdf Read More