RANDS AND SENSE
“Made in China” might have a notorious legacy, but one thing that’s made in China is not to be scoffed at: their culture of saving. Last year, China accounted for about a quarter of the world’s gross national savings, with a personal savings rate of 25%. China has one of the world’s highest national savings rates: 46% of gross domestic product. To put this into perspective, studies show that South Africa’s national savings rate is about 16.5%, while Afghanistan has the lowest savings rate in the world: -11%.
- The savings level in China is mainly bolstered by household savings, which account for about one-half of China’s savings. The intriguing part of this lies in the motives and factors driving the savings culture.
- China’s poor save more than those who are better off in South Africa. According to an International Monetary Fund study, Chinese households save more at any income decile compared with other countries, but the gap is largest for the poor. In most countries, the savings rate for the bottom 10% to 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 the 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 health care, 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 underdeveloped, borrowing in China is difficult. Although consumers, particularly the young, are adapting quickly to credit cards, they don’t accrue much debt or allow it to spiral out of control. In fact, savings rates for 25 to 40-year-olds are as high as, or higher than, those among middle-aged members of the population, despite the increase in credit-card use among this demographic.
- Less financial support from the government. Over time, the Chinese government has gradually shifted the burden of providing an income in retirement to households, spurring many people to save even more towards funding their retirement. A lack of safeguards, such as social security and unemployment benefits, have 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 cities often do not carry any cash, because everything is set up with mobile payment facilities.
From these observations, we can summarise the following lessons that can be learnt from the Chinese savings culture:
- Whether the economy is good or bad, keep your savings levels consistent.
- Save towards large purchases (such as a deposit on a home and your child’s education) 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 to spend 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 benefit from compound interest.
(Shaun Ruiters is the executive of business development at PPS Investments.)