Fear and face dictate what China does with its money

China saves out of fear, and it spends to show face, and these attitudes — found in the household, in businesses and in government — aren’t changing anytime soon.

The world wants China to spend more and save less, and urges Beijing to allow its currency, the renminbi, to appreciate to increase the nation’s purchasing power. But to understand this culturally sensitive topic, it is worth understanding how Chinese people think about money.

Official statistics show that total savings make up more than 50% of the country’s gross domestic product (GDP), significantly higher than the previous world record held by Japan’s 30% total savings. More remarkably, the enthusiasm for saving prevails from the authoritative central government, from cash-rich state-owned enterprises to low-income migrant workers.

Why? Because the Chinese lack a sense of security. The nation has gone through several wars and a number of periods of social turmoil in the past century. The memory of the economic and moral disruption is still fresh. Also, despite three-decades of fast development, China’s social and economic structures remain largely the same: what was lacking before is still lacking now.

Households
First, let’s look at the household. Chinese households have an average savings rate of nearly 40% of their income, compared with 6% in the US -- that’s telling of their lack of faith in the stability of the future and the reliability of the social-safety net, but it’s also a reflection of the limited opportunities they have for investing their money more productively.

China has boasted admirable economic growth during the past decade, but “household income’s portion of GDP has declined 1% each year over the past 10 years,” said Yifan Hu, chief economist at Citic Securities. “The government should adopt a more efficient way [to spur growth] -- increase wages to boost insufficient consumption, though improving the social-safety net is also needed,” she said.

Although Chinese policymakers have pledged to improve the social welfare system for many years, many residents get less than Rmb100 ($15) a month in healthcare allowance and many prescriptions at hospitals are not covered by the government health plan. Hospitals, of course, don’t take IOUs. Patients have to pay before treatment regardless of their condition. The same applies to education, which is supposed to be free but is actually loaded with various hidden costs.

Westerners might question how the government has gotten away with this. Thank the importance of family ties, which of course is as true in China as in other parts of Asia. Custom makes it almost compulsory for parents to sponsor their grown-up children, especially helping to buy their first home, and children are obliged to foot aging parents’ medical bills. Some are even required to support poorer siblings and relatives. To fulfil those obligations, you have to save.

Some onlookers view this dynamic as limited to lower-wage earners, thinking of it in terms of something domestic helpers from the Philippines or Indonesia do. But Vincent Chan, Credit Suisse’s head of research, points out that higher income earners are similarly inclined to save. Uneven income distribution has had a significant effect on peoples’ psychological outlook toward consumption and savings. There is a fear the money won’t keep rolling in as it is. So if you earn more, you save more. And the government knows this.

Businesses
Chinese companies are thought to have the biggest savings accounts; they also have their rainy-day concerns. In a highly regulated market that is often turned topsy-turvy by unpredictable policy changes, companies need to reserve capital whenever they can to ensure their business development is not disrupted when policies no longer favour the sector they operate in.

China’s businesses have been through a period of ‘capital popcorns’ -- companies’ capital increasing dramatically fast in recent years via fund-raising in the capital markets. Chinese enterprises, particularly large-scale enterprises, benefited from China’s asset prices climbing in recent years. When they have more earnings, they tend to save more,” said Dong Tao, managing director of non-Japan Asia economics at Credit Suisse.

Why don’t the companies make the most of the income and make investments? “There are many restrictions on which areas companies, privately-owned ones in particular, are allowed to invest in. So, Chinese privately-run businesses end up either investing in sectors that attract excessive capital --  in other words, that are over-invested -- or giving it a miss and just squirreling the money away,” Zhou Xiaochuan, the governor of the People’s Bank of China, explained in a recent speech at Beijing University.

Government
Observers often see the Chinese government as the world’s most liquid financial institution and its biggest creditor. China has by far the world’s largest stockpile of foreign reserves, worth $2.6 trillion at the end of September 2010. While foreign governments are fretting about widening deficits, Chinese reserve managers work hard to figure out where to put all the dollars. To diversify its reserves, Beijing agreed in October to buy Greek debt when the country resumes issuing bonds.

At the same time, officials at the nation’s central bank are often quoted as saying that China is still a developing country, and the government goes to the world hat in hand looking for donations every time there is a natural disaster. With that mentality fully entrenched, officials aren’t reinvesting money into programmes that could level the economic playing field for all within the nation -- such as better healthcare or schooling. But that doesn’t mean all officials are blind to these problems.

During a trip to Shenzhen in August, Chinese premier Wen Jiabao said China had to “resolve the issue of the excessive concentration of unrestrained power” and “create conditions for the people to criticise and supervise the government”. He added that China must build a society with “fairness and justness”. Official media were told not to quote his “bold” comments. Wen made similar comments in an interview with CNN, but it was blocked by official media.

The call to spend on more than just infrastructure domestically is sure to come soon, and may be one of the ways China rebalances its books. Or will it? One reason people might not rise up and complain is face.

Saving face
To most Chinese, frugality is considered one of the most prized virtues; however, saving face is just as important.

Given the right opportunity, the Chinese can transform themselves from desperate savers to zealous spenders overnight. They spend to publicly demonstrate status or wealth, such as having an extravagant wedding, a flash car or a luxury watch.

McKinsey & Company’s 2010 survey of China’s consumers found that Chinese shoppers are moving in the direction that emotional considerations increasingly influence purchase decisions. “In particular, the importance of any given purchase’s status value has grown strongly since 2008, especially for aspiring or lower-middle-class consumers, for whom the appearance of success is most significant,” the US consulting firm said.

The status-driven spending is particularly obvious in wealthier areas of the country. “The importance of status as a key buying factor for purchasers is far greater in Shanghai than in the cluster around Wuhan,” McKinsey found in the survey.

That habit is shared by the government. When planning and executing the 2008 Olympic Games, Beijing spent more than $40 billion on new stadiums, infrastructure projects and on cleaning up the capital’s polluted environment. Compare that to what Greece spent on the Olympics in Athens just four years earlier: $16 billion. The Beijing Olympics were the most expensive in history.

The money came from both the government and private sectors but there was no debate in the country concerning the cost, because it was a great opportunity to demonstrate China’s status and achievements in front of the world, and the country needed that.

And so expect savings to continue, with wild bursts of spending on incredibly visible flash things -- from cars and flats to international events. Change won’t truly come until the generation that remembers hardship, loses control of the financial reins. When the next, spoiled generation takes over -- the generation that doesn’t remember the Cultural Revolution or life in a one-bedroom apartment with 10 people -- it may well lose sight of the saving habit that is born out of fear. But it will likely still have the social obligations and the desire to show off, and that conflict will be hard to resolve.

 

This story was first published in the November 2010 issue of FinanceAsia magazine.

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