How China Achieved World's Highest Household Savings Rate

CHINA HAS ATTRACTED increasing attention because it is the world's most populous nation and because it has maintained phenomenal rates of economic growth in recent years. For example, the Asian Development Bank now projects that China will attain a growth rate in excess of 9% in 2006 for the fifth consecutive year, thereby serving as the engine of growth in the Asian-Pacific region (Nihon Keizai Shimbun, evening edition of April 6, 2006, page 1).

Moreover, another reason for being interested in China is that China introduced a so-called "one-child policy" in 1979 as a way of controlling population growth. This is an interesting natural experiment that makes fertility largely exogenous and enables us to assess the impact of the age structure of the population on the household saving rate without worrying about endogeneity issues. Moreover, because the one-child policy was applied more leniently to ethnic minorities, the policy also led to substantial variations among provinces in the age structures of their populations, and this will enable us to more sharply estimate the impact of the age structure of the population on the household saving rate.

Yet another noteworthy aspect of China's economy is its high saving rate. China has had by far the highest overall saving rate in the world since at least 2000, and the saving rate has increased even further since 2000--to nearly 50% of GDP. Gross capital formation (investment) is also high in China, but because saving exceeds investment, China has been running a net saving surplus, which translates into a current account surplus, and that surplus has been growing sharply--from 1.9% of GDP in 2000 to 3.6% in 2004 and a remarkable 7.2% in 2005--even though China is investing at a staggering rate of 43-46% of GDP and even though China is still relatively poor. This has made China one of the world's largest capital exporters and has exacerbated trade frictions with the United States and other countries. Moreover, China's net saving surplus shows no signs of abating (The Economist, September 24-30, 2005, "A Survey of the World Economy," page 13). (1) Thus, it is important to understand the determinants of, and future trends in, China's saving rate, and the obvious candidates are the rapid rates of economic growth alluded to earlier and the age structure of the population, which has shown tremendous variation over time as well as over space.