Cultural differences in personal savings between China and the US

[bhchao]

What do you think explains the huge difference between China and the US towards personal savings?

The personal savings rate in the US is negative, just under 0% of disposable income. In China, the personal savings rate is about 40% of disposable income.

Are ingrained personal philosophies towards saving for the future a main factor, or is it primarily economic reasons? (ex. making ends meet, level of standard of living compared to the US).

Economists point out that China's personal savings rate will decline as it continues to grow economically, and especially when the younger generation comes of age and takes over. It most likely would decline as more people from the rural class are added into the ranks of the middle class. However I doubt the personal savings rate would ever hit negative as it currently is in the US.

Credit card debt is a major problem in the US. Most Americans seem to live for the present, spending far more than they actually earn.

In China, there seems to be an attitude where saving is not just for one's future, but for the benefit of future generations within your family. (correct me if I'm wrong)

Observers of China's economy say it will slow into recession eventually, as it does in the economic cycles of every industrialized nation. But they say it will be a softer landing in China versus a similar scenario in the US, due to the personal savings rate.

[Xiao Kui]

I've given this question some thought in the past, tho' I haven't thoroughly researched the reasons, but I think that one of the main reasons Chinese save more and Americans spend more is pessimistic vs. optimistic view of the economy, though I think that is changing now that the Chinese economy is booming and hopes are high for future growth.

Still old habits die hard . . .

Credit card debt is a major problem in the US. Most Americans seem to live for the present, spending far more than they actually earn.

I think Americans live for the future more than the present, because they are optimistic abt future financial prospects they borrow from their futures. There are plenty of new opportunities to be found should your finances go sour. There is always the possibility of a higher income, refinancing, a new investment or business opportunity etc.

I think because in the past there were a lot of unexpected economic and political upheavals, famines, natural disasters, etc, that Chinese have learned to save to protect themselves in case of future misfortune. The job market is also a lot tougher in China than the US, so you have to be prepared for the possibility of unemployment.

You mentioned both saving and spending, but another factor to take into account is INVESTING. Though many Americans don't save a large percentage, I would guess that more Americans invest their money than Chinese. Investments, while riskier than savings are made with the future in mind.

I don't know how the situation is now, and with all the new businesses booming in China i'm sure the opportunities for investment are plentiful, but I don't think it's really popular for people to buy stocks - too risky and a low return, accding to a Chinese friend of mine - I haven't really researched it. I think that with regards to providing for the future, Americans are more likely to make an investment, and Chinese to put their money in savings. I think this also has an obvious connection with a positive and negative economic outlook.

Anyway, just a rather uninformed impression i've formed by spending time in China and chatting with Chinese friends, who are still horrified at my lack of personal savings.

[bhchao]

You mentioned both saving and spending, but another factor to take into account is INVESTING. Though many Americans don't save a large percentage, I would guess that more Americans invest their money than Chinese. Investments, while riskier than savings are made with the future in mind.

Yes. You brought up a good point that I overlooked. Also more Americans have the desire to increase their assets and worth value through real estate. That is another form of investment other than stocks, bonds, or mutual funds, and often a much quicker way of increasing one's asset value depending on the fortunes of the property market.

I think because in the past there were a lot of unexpected economic and political upheavals, famines, natural disasters, etc, that Chinese have learned to save to protect themselves in case of future misfortune. The job market is also a lot tougher in China than the US, so you have to be prepared for the possibility of unemployment.

The lack of adequate health care insurance and the need for pension reform in China are probably other key motivators for accumulating savings. In the US, if your company goes bankrupt and you have accrued benefits, your retirement benefits are still guaranteed by the PBGC.

I don't know how the situation is now, and with all the new businesses booming in China i'm sure the opportunities for investment are plentiful, but I don't think it's really popular for people to buy stocks - too risky and a low return, accding to a Chinese friend of mine - I haven't really researched it. I think that with regards to providing for the future, Americans are more likely to make an investment, and Chinese to put their money in savings. I think this also has an obvious connection with a positive and negative economic outlook.

The financing system that supports China's economic growth has loopholes where people can get around to do illegal things. A stronger legal foundation or rule of law would provide more security, in the psychological sense, towards one's savings nest egg.

Americans do tend to be more optimistic in their economic outlook. I think this has some connection with political leadership, although not a strong correlation. For example, Reagan reignited Americans' optimism after the recession of the Carter years, and the economy boomed. The same can be said of Kennedy.

One important fact is that the high rate of domestic savings in China are being used to finance many of Americans' purchasing decisions today.

[shibo77]

I don't know much about finances, but I think it is due to philosophical differences of the majority of the people, and the differences in the monetary exchange system.

China: Planning for a long and prosper life, settle down have a family, and the savings passed to future generations.

United States: People think that they could die tomorrow, and live to the full today, instant gratification, there is little need to save, just swipe the credit card and worry about the bills later.

Personally, when I buy something I make sure that I have enough money, it seems to be common sense to me as I use cash. While people in the United States grew up using credit cards, and when buying something, they only need worry that it is not overly expensive, but can still buy many things for which they haven't the money at that particular moment. This is what I think...

-Shibo

[Quest]

How will the high savings rate affect the impending demographic crisis due to the one-child policy?

[skylee]

Personally, when I buy something I make sure that I have enough money, it seems to be common sense to me as I use cash.

I too always make sure that I have enough money when I buy something, but I hardly pay in cash. I always insist on paying by credit cards (even if it is just lunch at starbucks) so that I can earn bonus points on my credit cards for future gift redemption.

[Elainemoon]

Credit card debt is a major problem in the US. Most Americans seem to live for the present, spending far more than they actually earn.

In China, there seems to be an attitude where saving is not just for one's future, but for the benefit of future generations within your family. (correct me if I'm wrong)

I think you are probably right. In China, the personal savings are not for your own but for the family. You know, Chinese are looking up to the relationships in the family.

And for the credit debt, the young generation in China are becoming the majority of the users in it. I think the difference is Chinese young generation is more of reason, they will think it over before they use the credit card. They will consider whether they can afford it or not.

[bhchao]

Using credit cards for purchases is ok as long as you can easily afford it with cash, cash that you have available as assets like in a bank account, but don't carry it in your pockets at time of purchase. This is also provided that you pay the credit balance in full when the bill comes.

But it is a different story when you use credit cards for non-essential/non-emergency items when you have no money in your checking account to cover it in the first place. After all it's the accumulating interest that kills you, not the original credit card purchase. In the US, if you make one late payment, you could see your annual interest rate jump to a high of 32%.

[Green Pea]

What do you think explains the huge difference between China and the US towards personal savings?

What's the huge difference? 40%? So, 40% of a $2,000 income is $800. If an American makes $40,000, then $800 is 2% of their income.

Americans don't need to save. They already make a lot of money. They're rich. Even factoring in PPP, I don't get the issue. Please explain.

[bhchao]

If an American makes $40,000, then $800 is 2% of their income.

Americans don't need to save. They already make a lot of money. They're rich. Even factoring in PPP, I don't get the issue.

Greenpea, if "richness" is measured by the size of one's income rather than how much of that is put into savings, then why the current debate in the US over reforming Social Security and the poor 401k participation rate? Or how does one explain China's huge foreign currency reserves? If China one day decided to start disowning a large portion of these US-based foreign currency reserves, where are Americans going to get the money to make purchases, given their own poor savings habits compared to the Chinese, whose savings are used as a source of lending to American consumers? I know of people who earn six figure incomes and yet accumulate massive loads of debt.

Considering that traditional pensions are more likely to become extinct in the near future, and Americans don't contribute enough to their 401k, a looming retirement crisis is on the horizon. China at least has a high savings rate to compensate for the government's pension shortfall. Unfortunately the US does not have that luxury.

[Green Pea]

Greenpea, if "richness" is measured by the size of one's income rather than how much of that is put into savings, then why the current debate in the US over reforming Social Security and the poor 401k participation rate?

Politics.

Or how does one explain China's huge foreign currency reserves?

Precious little to invest in.

If China one day decided to start disowning a large portion of these US-based foreign currency reserves, where are Americans going to get the money to make purchases, given their own poor savings habits compared to the Chinese, whose savings are used as a source of lending to American consumers?

Don't worry, they won't. And, if they did, America would bankrupt a country like Argentina or Thailand and take their wealth. Perhaps, they might invade an oil-rich country and help themselves. Also, Americans (and other wealthy countries) have very good habits about creating solid banking, legal, and regulatory systems. China doesn't have that good habit. That's why China buys Treasuries.

Unfortunately the US does not have that luxury.

Yes, it does. It's economy cranks through $40,000 per person. Perhaps you think a 40 horsepower engine is less powerful than a 2 hp engine?

Again, I still don't know what your point is. You start off by talking about cultural perceptions and personal savings rate. Now, you seem to be making a judgment call on the causal relationship to gross domestic savings. Can you clarify?

America's financial house is by no means in perfect order, however, I don't buy the argument that somehow America is in big trouble due to personal savings rate; or that China is somehow in a financially superior position.

[bhchao]

Quote:

Greenpea, if "richness" is measured by the size of one's income rather than how much of that is put into savings, then why the current debate in the US over reforming Social Security and the poor 401k participation rate?

Politics.

Nope. It is also mentioned by industry leaders, especially the retirement benefits and HR consulting industry.

Don't worry, they won't. And, if they did, America would bankrupt a country like Argentina or Thailand and take their wealth. Perhaps, they might invade an oil-rich country and help themselves. Also, Americans (and other wealthy countries) have very good habits about creating solid banking, legal, and regulatory systems. China doesn't have that good habit. That's why China buys Treasuries.

Ah...Pax Americana. America is already China's puppy. If China stops buying treasury securities and funnels its domestic savings into more useful purposes like shoring up the pension system or for national investment, interest rates in the US will rise. And when interest rates rise, affordable lending is reduced. When you can't borrow or don't have enough savings to make purchases, the economy tanks into recession. That is a leverage over the US that China is aware of.

And maybe the only solution out of that scenario is to invade a small oil-rich country like you described.

Already China is moving towards diversifying its foreign currency holdings away from the dollar. That would most likely reduce American demand for Chinese exports. Even if that reduced demand for Chinese exports, domestic and non-US foreign demand for China's exports will be sustained in hot markets like South Korea, Japan, and the EU.

And what would happen when US demand for Chinese exports drop? Very simple. Increased inflation. Given that the US consumerist culture is "spend, spend, spend" (like the phrase "Buy American") combined with the negative savings rate, imagine the effect that would have on the economy. One of the reasons why these was very little inflation during the 90's is because cheap Chinese goods flooded the US market, preventing domestic manufacturers from raising their prices.

Perhaps you think a 40 horsepower engine is less powerful than a 2 hp engine?

A 40 horsepower engine with no oil lube to feed it is worse than a 2 hp engine with plenty of oil lube reserves in supply.

[Green Pea]

Ah...Pax Americana. America is already China's puppy. If China stops buying treasury securities and funnels its domestic savings into more useful purposes like shoring up the pension system or for national investment, interest rates in the US will rise. And when interest rates rise, affordable lending is reduced. When you can't borrow or don't have enough savings to make purchases, the economy tanks into recession. That is a leverage over the US that China is aware of.

Big deal. America goes into recession. That's a normal economic cycle no matter what China does. If they stop buying...if...if...that's a big if. We're all waiting. So, why doesn't China just make your day and sell dollars and bonds? China is more interested in growing it's economy and improving standards of living than trying to send America into economic chaos.

Already China is moving towards diversifying its foreign currency holdings away from the dollar. That would most likely reduce American demand for Chinese exports. Even if that reduced demand for Chinese exports, domestic and non-US foreign demand for China's exports will be sustained in hot markets like South Korea, Japan, and the EU.

Let's hope you're right. Imagine the effect on the Chinese economy and social stability if it doesn't? You really think China is going to upset the apple cart?

And what would happen when US demand for Chinese exports drop? Very simple. Increased inflation. Given that the US consumerist culture is "spend, spend, spend" (like the phrase "Buy American") combined with the negative savings rate, imagine the effect that would have on the economy. One of the reasons why these was very little inflation during the 90's is because cheap Chinese goods flooded the US market, preventing domestic manufacturers from raising their prices.

Again, so what? The American economy is not going to collapse under higher inflation. America will still be rich. And, besides, economies collapse all the time. Look at Thailand, Korea, Indonesia, Malaysia, Mexico, Argentina, Russia, Turkey, and more just in the last ten years. They get recapitalised and start over again.

A 40 horsepower engine with no oil lube to feed it is worse than a 2 hp engine with plenty of oil lube reserves in supply.

Except when the little engines have sold their oil reserves to the big engines and gotten IOUs for it.

[bhchao]

Big deal. America goes into recession. That's a normal economic cycle no matter what China does.

You're wrong. It is true recessions are part of every nation's economic cycle. But that doesn't mean China lacks the leverage to start one should it desire.

If they stop buying...if...if...that's a big if. We're all waiting. So, why doesn't China just make your day and sell dollars and bonds? China is more interested in growing it's economy and improving standards of living than trying to send America into economic chaos.

And when push comes to shove over Taiwan?

The American economy is not going to collapse under higher inflation. America will still be rich. And, besides, economies collapse all the time. Look at Thailand, Korea, Indonesia, Malaysia, Mexico, Argentina, Russia, Turkey, and more just in the last ten years. They get recapitalised and start over again.

Except that all the countries you mentioned don't have the massive twin budget and trade deficits that America does, including an Iraq war that is adding millions of dollars per day to the US national debt, which by the way exposes the ignorance of the following statement: "Perhaps, they might invade an oil-rich country and help themselves."

Higher interest rates and taxes in the long haul to finance these deficits AND Iraq war. I'm sure China has the power to add insult to injury should such a need arise.

Except when the little engines have sold their oil reserves to the big engines and gotten IOUs for it.

So who has the power? The little engines that still run and yet lends to the big engine who doesn't have any oil, or the big engine who needs to rely on the little engine and has to pay back what it borrowed + interest? Default and your credit rating goes down.

China and Japan holds this power.

[Green Pea]

You're wrong. It is true recessions are part of every nation's economic cycle. But that doesn't mean China lacks the leverage to start one should it desire.

And when push comes to shove over Taiwan?

Ok, I get it. China will want to storm Taiwan! America will rise to the rescue! China will dump US assets sending America's economy into depression! China will be ever victorious and teach those Americans to save! You read too many comic books.

The dumping debt strategy is not that realistic. What are your thoughts on --

1. You have to sell them to somebody. Who will buy them? Would you?

2. What price will the bonds be bought at? If a bond trades at 100 and if China wants to sell $500 billion worth of bonds I can imagine there to be no buyers until it's down below 50. Maybe the US will buy them back itself making a nice profit?

3. What if the US Treasury says it will default on them? What will they be worth then? Suddenly, the bonds are worth zero and China holds the bag. Perhaps, China will send itself into depression?

Except that all the countries you mentioned don't have the massive twin budget and trade deficits that America does, including an Iraq war that is adding millions of dollars per day to the US national debt, which by the way exposes the ignorance of the following statement: "Perhaps, they might invade an oil-rich country and help themselves."

Higher interest rates and taxes in the long haul to finance these deficits AND Iraq war. I'm sure China has the power to add insult to injury should such a need arise.

Cost of Iraq War = $1 trillion.

Value of assets acquired = $10-20 trillion.

War profit = $9-19 trillion less interest paid.

With that you can cover the twin deficits easily. What numbers were you using to calculate my ignorance? And, oh, who besides the US and Japan will be buying that oil?

So who has the power? The little engines that still run and yet lends to the big engine who doesn't have any oil, or the big engine who needs to rely on the little engine and has to pay back what it borrowed + interest? Default and your credit rating goes down.

China and Japan holds this power.

No, it doesn't have to pay it back. China (and Japan) own the risk.

Who has the power? Neither and both. It's a system. "Who has the power?" is the really wrong question for the analogy. The issue that you were trying to understand is how America can spend. It can spend due to economic capacity. An average American worker can buy a house, car, and a gas grill because he earns a lot and can finance it. It's not so easy for the average Chinese worker to buy a car with his income. He must save. He can buy an equivalent PPP-Big Mac Index-priced Big Mac, but he can't buy a PPP-priced car. The rich in China can and do. Hopefully, there will be a lot more rich people in China to spend.

[bhchao]

Many aspects of the above post seems quite laughable than to be taken seriously, especially this one:

Ok, I get it. China will want to storm Taiwan! America will rise to the rescue! China will dump US assets sending America's economy into depression! China will be ever victorious and teach those Americans to save! You read too many comic books.

I got the chuckles reading this one. Sounds like gas leak from body? The PLA, let alone the PRC, needs more people like you.

and this one:

Cost of Iraq War = $1 trillion.

Value of assets acquired = $10-20 trillion.

War profit = $9-19 trillion less interest paid.

With that you can cover the twin deficits easily. What numbers were you using to calculate my ignorance? And, oh, who besides the US and Japan will be buying that oil?

Hmm.... your own numbers? So much for budget balancing by the lawmakers. Say goodbye to taxation and fiscal policy. Let's invade a few countries, and you can balance both the twin deficits. Love to see the reaction from lawmakers in Congress when they hear your suggestion.

By the way, invading a country to plunder their assets and seizing it as your own shows low morals. Colonial exploitation at its worst.

Time for the more substantial parts of your post:

What price will the bonds be bought at? If a bond trades at 100 and if China wants to sell $500 billion worth of bonds I can imagine there to be no buyers until it's down below 50. Maybe the US will buy them back itself making a nice profit

Bond buybacks are rare. The US Treasury has not bought back securities since 1972. The last time the US ever contemplated a move was in the late 1990's when there was a federal surplus thanks to the Clinton Administration's fiscal policies. With deficits piling over deficits year after year, a bond buyback is very unlikely.

What if the US Treasury says it will default on them? What will they be worth then? Suddenly, the bonds are worth zero and China holds the bag. Perhaps, China will send itself into depression?

The US Treasury defaulting on its debt when it has the means to pay it off shows lack of respect for the integrity of its system. Just like I am a credit agency, you owe debt to me and you refuse to pay, your credit rating goes down. Not only will it lose China as the biggest lender to affordable financing for homes and autos in the US, and damage the default-free reputation of US treasury securities, it will also send the wrong message to potential buyers of those securities. Saying that someone will quicky fill the huge gap once filled by China is wishful thinking.

And believe me, the long-term negative effects to the US economy far exceeds the long-term negative effects to the Chinese economy. At least China has a high savings rate to cushion itself in times of trouble. The US does not. Without foreign lending to finance affordable rates for homes and autos, inflation goes up. This combined with the massive US consumer credit card debt, downgrading of the government credit rating, AND low savings rate, the US economy falls into a prolonged economic depression.

A US default will only accelerate China's transition into a more demand-oriented economy, as China's leaders are already aware that buying treasury securities is not prudent economic policy (as indicated by its reduced purchases of these securities, and pegging of the yuan away from the dollar into other currency baskets). Millions of Chinese are added to the middle class each year, and with rising wages + savings + low cost of living compared to other countries; the Chinese can stomach adversity.

I'll bet you that by 2060, the population of the Chinese middle class will far exceed the population of the entire US.

Why did the Four Tigers of Asia achieve such phenomenal growth from 1960-1997? Part of the reason is a high rate of savings in all four countries. There was an emphasis on education (sending your children to the best universities), and using one's savings to finance educational attainment and entrepreneurial activity. The high rate of savings means less borrowing from overseas to finance domestic growth. This was especially true in Taiwan.

[imron]

Here's an article in Chinese from the People's Daily discussing the strategic implications of China having all those currency reserves.