Encourage spending, not saving

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.

International practice shows that a country's savings rate is very high if it is more than 50 percent of GDP and household consumption is very low if its is below 35 percent of GDP under any given circumstance. China must realize that high savings will weaken its potential for stable growth. It should also realize that its efforts to maintain a stable and relatively rapid economic growth will not bear fruit if it fails to boost domestic consumption.

The export-oriented growth policy has helped China create a huge number of jobs and increased people's incomes. But its long-term dependence on exports has also increased its trade surplus and foreign reserves, which the West claims has triggered global imbalances and was even partly responsible for the global financial crisis.

To reduce its trade surplus, China has adopted some policies, such as lowering import tariffs, withdrawing tax rebates for some export products and taking steps for the gradual appreciation of the yuan. But China needs to make greater efforts to lower its savings rate and extricate itself from the investment- and export-driven growth model and develop itself into a consumption-led economy.

As investment and exports lose steam to drive China's economic growth further, the government's top priority is to boost domestic demand to maintain economic growth. An excessively high savings ratio and households' reluctance to spend will eventually lead to overproduction.

With the launch of a plan to double people's income by 2020 from the 2010 level, as unveiled by the report delivered by former Party chief Hu Jintao to the 18th National Congress of the Communist Party of China, people's incomes are expected to witness a considerable increase in the years to come. However, how to divert their increased incomes to consumption instead of savings accounts will remain a pressing task for decision-makers.

To motivate its people to spend more and lower its current high savings ratio, China should tilt the leverage of national wealth distribution to the people, especially middle- and low-income groups, a move that will help raise their consumption capability. It should also work out a series of practical and effective measures to improve its underdeveloped social security network to reduce people's sense of insecurity and boost their willingness to consume. It is hoped that the government will come up with a set of systematic plans in its upcoming program of income distribution reforms to solve this problem once and for all.

The author is a journalist with China Daily. E-mail: wuyixue@chinadaily.com.cn