Consumption and Savings in China and the United States

China has the highest savings rate in the world, currently estimated at over 50 percent of GDP.1 ­China’s­share­of­GDP­saved­exceeds­even­that­of­some­of­its­high-saving­neighbors­such­as­South­ Korea­ (32­ percent)­ and­ Japan­ (22­ percent);­ and­ vastly­ surpasses­ the­United­ States­ (16­ percent,­ pre-crisis).­Figure­5.1­shows­China’s­consistently­high­national­savings­rate­over­the­past­four­decades­and­how­it­has­increased­to­even­higher­levels­over­the­last­decade.­Since­savings­is­the­absence­ of­consumption,­we­will­take­dual­perspectives­on­China’s­high­savings­rate­or­low­rate­of­consumption.­The­earlier­sentence­could­just­as­correctly­have­been­written­to­say:­China­has­the­lowest­rate­ of­consumption­among­the­world’s­major­economies.­As­a­share­of­GDP,­Chinese­consumption­has­ been­only­around­36­percent­over­the­past­decade-a­rate­far­below­the­global­average­of­61­percent­ and­the­U.S.­average­of­over­70­percent.­(See­Figure­5.2­for­Chinese­household­consumption­share­ compared­to­the­United­States.)­Household­consumption­rates­in­the­United­States­and­China­were­ approximately­equal­in­the­early­1970s,­then­diverged­in­the­years­to­follow.­Note­that­those­earlier­ years of high consumption rates for China are typical for most early stage emerging economies in which­incomes­are­low­and­just­sufficient­to­support­subsistence­consumption. Today,­China’s­high­level­of­savings­ is­a­key driver for other salient features of its economy,

such­as­its­current­account­balance­and­rapid­economic­growth.­Beyond­China’s­borders,­its­high­ savings­rate­has­implications­for­global­imbalances­on­current­and­capital­accounts­in­the­balance­of­ payments, world interest rates, and inflation and commodity prices. It is therefore very important to understand­the­factors­behind­China’s­high­savings­rate­and­how­those­factors­are­likely­to­evolve­ in­the­coming­years.­Examining­China’s­savings­rate­will­also­allow­us­to­look­at­the­role­that­credit­ markets, corporate governance, and demographic factors (just to name a few) come to play.