By Shaun Ruiters, Executive of Business Development at PPS Investments.
While the phrase “made in China” may have a notorious legacy, one thing that is made in China that is not to be scoffed at, is their savings culture. In 2017, China accounted for an estimated quarter of the world’s gross national savings with a personal savings rate of 25% and one of the world’s highest national savings rates (46% of GDP). To put this into perspective, studies show that South Africa’s national savings rate is approximately 16.5%, while Afghanistan has the lowest savings rate globally of -11%.
The savings levels in China are mainly bolstered by household savings, which account for about half of China’s savings. The intriguing part of this lies in the motives and factors driving the savings culture.
The Chinese poor save more than SA’s wealthier counterparts
According to an International Monetary Fund study, Chinese households save more at any income decile compared to other countries, but the gap is largest for the poor. In most countries, the savings rate for the bottom 10%-20% of the income decile is negative (up to -30%), but in China it is positive and quite high at 20%, which is on par with the middle-income deciles in some countries, including South Africa.
When the going gets tough, the Chinese save (even) more
When China transitioned to a more market-driven economy, the income gap widened. Both the wealthy and the poor spend a smaller proportion of their income on necessities and put more money into savings for a rainy day.
Uncertainty about their future caused the Chinese to save even more, with 60% of Chinese households saving for precautionary reasons. Concerns about the rising costs of living, including healthcare, pension and education, further fuel the savings trend. Adding to this, college loans are unheard of in China, as close to 60% of households save for their child’s education.
The credit market is underdeveloped
As the credit market is still underdeveloped, borrowing in China is very difficult. While consumers are adapting quickly to credit cards, particularly among younger consumers, they don’t accrue much debt or allow it to spiral out of control. In fact, savings rates for 25- to 40-year olds were as high as or higher than the middle-aged members of the population, despite the increase in credit card usage among this demographic.
Less financial support from the government
Over time, the Chinese government has gradually shifted the burden of retirement income provision to households, spurring many people to save even more towards funding their retirement. A lack of safeguards like social security and unemployment benefits has also forced Chinese families to plan for their financial future.
Shift towards a predominantly cashless society
Historically, personal savings were kept in cash but China has fast taken to mobile payments. It’s reported that many people in the cities often do not carry any cash at all as everything is set up with mobile payment facilities.
From these observations, we can summarise the following lessons which can be learnt from the Chinese savings culture:
- Whether the economy is good or bad, keep your savings levels consistent.
- Save towards large purchases (deposit on a house, child’s education, etc.) instead of tapping into larger debt amounts.
- Keeping less cash on you or in your account ensures that you live within your means. Transfer your savings into a separate savings account as quickly as possible to reduce the temptation of spending it.
- No matter what your income level, you should save something regularly or when you can.
- Start saving towards larger expenses, such as your child’s wedding, well in advance to allow your money enough time to gain the benefit of compound interest.