Sinophrenia #3: Too Much Savings

Economic growth. For China to continue growing, consumption is key. But if consumptions slows, the next problems start – company closures and job losses. It can quickly spiral into a vicious spiral – fewer people with jobs lowers demand further, leading to yet more closures and job losses…

 

China is still extremely reliant on demand from outside – the West primarily. Which in turn means they are tied to Western economic cycles. Even more dangerous, the West seems to be stagnating, and its population is getting older. Both of those reasons will likely lead to lower Western consumption in turn translating to lowered demand for Chinese goods.

 

Surely with a population of a billion that is growing richer, China should be able to create domestic demand, right? Aha, but China’s one-child policy creates problems, writes Thomas Orlik in China: the Bubble that Never Pops. With fewer children, parent spend less (yes, most discretionary spending is wrt kids!). Added to that, China doesn’t have a great social security system for illness, or old age. And so:

“Fewer children to rely on in old age meant more need for precautionary saving.”

It gets worse, the one-child policy is leading to an ageing population:

“From 2010 to 2030 China’s labor force is expected to shrink by 67 million workers… as the number of workers fall, wages rise and competitiveness is eroded.”

Not surprisingly then, China has started easing its one-child policy, selectively but increasingly.

 

As China’s government decided to cut loose most state-owned companies (and hold onto just a few mega-sized entities), it resulted in the closing down of a large number of such units. The number of laid off workers with no pensions, or health insurance rose. This became yet another reason for more and more people to increase the amount they saved. Saving for a rainy day became vital.

 

In China, the benefits one is entitled to are tied to one’s place of birth. It’s called the “hukou” system. This has created problems as China has urbanized rapidly:

“(For) millions of migrant workers… when their own children need to enter the school system, or they need support through unemployment, illness or old age, they have to return home.”

With few entitlements in the place they live, those folks inevitably tend to save more and spend less.

 

How to make Chinese citizens spend more money to fuel domestic demand, in enough amounts that can compensate for falling Western demand – that then is another big problem China faces today.