Too big a nest egg

Strengthening the social security system will help create a better savings-consumption balance

China's high savings rate in the past was linked to its economic growth model at that stage of its development. The demographic dividend and relatively high rate of return on investment inevitably led to a growth model driven by factor accumulation and high ROI-incentivized savings.

However, with the demographic dividend dissipating and a growth model no longer driven by factor accumulation, a high savings rate is no longer an indication of economic growth. On the contrary, it may suppress consumption, which in turn hurts economic growth.

A lower national savings rate may thus reflect a more balanced economic structure.

The decline in government savings has been the major reason behind the shrinking national savings since the peak in 2008. However, a further decline in the national savings rate will mainly rely on a drop in private savings, especially household savings, because of the larger proportion of private sector savings in national savings.

During the 14th Five-Year Plan period (2021-25), household income growth will moderate and cause a decline in the household savings rate, though the rapid population aging and income inequality will tend to raise household savings rate. The corporate savings rate may see a slightly upward trend. With industry giants taking an increasingly larger share in the market, the savings of big companies will drive up overall corporate savings. The uncertainty triggered by the Sino-US economic and trade frictions, the outbreak of the novel coronavirus and other events will incentivize companies to save more in the event of possible operational risks.

The public savings rate will continue to fall, but social security expenditure such as eldercare and healthcare because of aging will continue to grow. Tax and fee cuts and expansionary fiscal policies will continue to bring down the public sector savings rate. A large amount of public expenditure for post-pandemic economic recovery will also reduce public savings.

In 2017, China's private sector savings rate accounted for 92.7 percent of national savings, including 45.4 percentage points representing corporate savings and 47.3 percentage points representing household savings. The rising dependency ratio and a series of structural changes are major determinants for household savings.

While the rapid increase in the elderly population tends to increase the motivation to save, the decrease in the working-age population has a negative impact on the savings rate. That is to say, the effect of the dependency ratio on savings is mixed. And the same can be said of the benefit of savings decline, because consumption will be major constraint and demand-side driver of economic growth, on the one hand, and savings is necessary for capital accumulation, on the other.

In the future, China's dependency ratio will rise sharply with accelerated aging. If we define those aged between 20 and 59 as the working-age population, the dependency ratio will rise from 0.68 in 2020 to 0.88 in 2030. If the working-age is defined as between 20 and 64 by international standards, the dependency ratio will rise from 0.54 to 0.63 over the same period. Changing demographics will probably become the main thrust behind diminishing savings rate in the future.

Demographics apart, there are other factors affecting the household savings rate.

The expected decline in income growth can become an increasingly important factor for the decline in the savings rate. It is thus less likely that wage growth will continue to improve income distribution or sustain a high savings rate. On the other hand, since the rich have low marginal propensity to consume and the poor have a high marginal propensity to consume, income inequality has a positive correlation with savings rate.

Urbanization in China is a significant stimulus not only for job creation and household income growth, but also for consumption, especially as the social safety net and public services cover more migrant workers, which enables predictability in the future, thus boosting consumption.

China is still reforming and improving its social safety net. The content and intensity of the reform will affect the movement of the savings rate under the increasing pressure from the faster aging process.

Although China has made great progress in its social safety net in the past few decades, even more progress is required, since people want a better life as the economy continues to grow. However, the social security in China is far from enough compared with high-income countries. And China's high savings rate largely reflects the inadequacy of its social welfare policies.

With inadequate social security, people need more personal savings in case of uncertainties. Increasing transfer payments to low-income groups and the poor, social security integration and support for public services such as public health, daycare, education, and eldercare will help create a savings-consumption balance that suits economic growth.

Drastic demographic changes will be reflected in the relationship between the savings rate and the consumption rate and will inevitably lead to fluctuations in other related macroeconomic indicators. It is unlikely that China will reverse the aging trend in the near and medium term. Fully liberalizing and encouraging fertility will help create a more balanced demographic structure and reduce the distortion in the savings-consumption relationship in the future.

In addition, adequate financial services need to be provided to small companies and private businesses. The increase in corporate savings rate is to some extent attributable to the difficulty that small companies and private businesses have in accessing official financial services. Offering inclusive financial services will improve capital allocation.

The author is chief expert of the National High-end Think Tank at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.