Much attention has been directed toward China’s high savings rate. Not only is the savings rate disproportionately high compared to virtually any other country, but it directly impacts China’s current account surplus and the U.S. consumer deficit. When national savings exceeds investment, the excess savings shows up in China’s current account surplus.
The prolonged period of low global interest rates has been attributed in large part to this surplus, and with the surplus come pros and cons. “In the context of the current crisis, the long period of low interest rates was linked to excessive risk-taking behavior in U.S. markets, especially where regulation has been lax or inadequate,” Professor Shang-Jin Wei says. “The upside is that with low interest rates comes a lower cost of capital, which is good for investment.”
Given its far-reaching effects, both private sector analysts and policy makers have attempted to trace the causes of China’s high savings rate and to predict how long it will last. Some have attributed the savings primarily to Chinese corporations rather than households. Others point to a precautionary savings motive: because Chinese people are worried about costs of healthcare, education and old-age pensions and are unsure about how much these costs might change over time, they respond by saving more. Other explanations point to habit formation or financial development.
“But these explanations do not tell the whole story, and possibly are not the most important part of the story,” says Wei. Instead, Wei hypothesized that an important social phenomenon is the primary driver of the high savings rate: for the last few decades China has experienced a significant imbalance between the number of male and female children born to its citizens.
There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up. Three factors conspire to produce the imbalance. First, Chinese parents often prefer sons. Second, it has become increasingly inexpensive for even a relatively poor farmer to afford the $12 Ultrasound B, the most common technology used for learning the gender of a fetus.
Third, and perhaps most importantly, China’s stringent family planning policy limits the number of children a couple can have. The policy allows most couples to have only one child. But in some regions, if a couple’s first child is a daughter, the state permits the couple to have another child. Families with one daughter that become pregnant with another daughter are more likely to terminate the second pregnancy in hopes of producing a son later on. (India, Korea, Vietnam and Singapore also have sex ratio imbalances that favor male children despite the absence of these stringent family planning policies. It might be that in these countries people voluntarily want to restrict the number of children they have, and still prefer sons and have access to inexpensive selective abortions. The sex ratio imbalance is high in these countries but not as extreme as in China.)
“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”
Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”
The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance. “It’s a very high ratio of savings to income,” Wei says. “The comparable savings rate in the United States would be 2 or 3 percent before the crisis, and about 6 percent since the crisis.”
Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.
“While the conventional explanations for the high savings rate all play a role, they are not as important as people previously thought,” Wei says. “People had noticed the sex ratio imbalance as a social problem. Sociologists and other social scientists had looked at the phenomenon but had not looked at it in relation to the high Chinese savings rate.”
As economists and policy makers have looked with concern to the large Chinese current account surplus and large U.S. current account deficit, or global imbalances, much of their discussion has focused on changing exchange rate policy.
There are global economic implications if China continues to save at such a high rate, and Wei’s research highlights a connection between social policy, saving behavior and current account balances.
“Exchange rates might be part of the solution, but our work suggests they might not be the most important part,” Wei says. Because sex ratio imbalances that skew toward males are viewed as evidence of a society’s tendency to discriminate against women, it calls attention to the status of women and women’s rights. And China is not the only country where the sex ratio dynamic needs attention. “The effect of sex ratio imbalance on savings is not unique to China,” he says. “Many other countries with significant sex ratio imbalances also have relatively high current account balances.
“None of the discussion about global imbalances has brought family planning policy or women’s rights to the table, because people do not see these issues as related to economic policy,” Wei says. “Our research suggests that this is a serious omission. You can only implement the right policy when you get the diagnosis correct, and fruitful policy dialogue has to include discussion on these issues.”
Shang-Jin Wei is the N.T. Wang Professor of Chinese Business and Economy in the Finance and Economics Division and director of the Jerome A. Chazen Institute of International Business at Columbia Business School.