By Chen Changsheng, Department of Macroeconomic Research, the DRC

High savings rate is an important factor to support China's high investment and high growth. At the same time, an unduly high savings rate can cause insufficient consumption, which has also become a prominent problem affecting the growth of China's domestic demand. When China tries to spur domestic demand and ensure growth, it can hardly work out targeted policies if it proceeds from the aggregate perspective of high savings. Instead, it should analyze the structural features of personal savings, and identify which sectors, what mass groups and people of what ages are increasing savings and what are their motivations.

I. The Structure of Income Distribution Shows High Savings Rate in Recent Years Was Mainly Attributed to Higher Corporate and Government Savings While Rate of Personal Savings Only Went Up by a Narrow Margin

The changes to the fund flow table which can best reflect the structure of national income distribution indicate that China's national savings rate rose from 40.29% in 1992 to 47.45% in 2005 (China began to compile fund flow table in 1992, and the table has been issued rather late due to statistical and compilation reasons. The latest year for fund flow table is 2005). The structure of primary distribution indicates: first, the proportion of labor pay related to added value has been on the decline, at 62% in 1993, 47% in 2004 and slightly higher in 2005; second, although personal savings rate also went up slightly, its proportion in total savings has been dropping and those of enterprises and government departments have been visibly rising and posting higher contribution rates (Table 1). In particular, corporate savings rate has become tangibly higher.

The result of secondary distribution indicates that there have been no major changes in the personal income received from primary distribution when compared with their disposable income. Accordingly, there have been no tangible improvements in the state of the income of the residents sector. The income adjustment was mainly expressed in the shift of corporate income to the income of government departments (Table 2). Meanwhile, China's Gini Coefficient continued to rise, from 0.35 in 1990 to 0.45 in 2005 and further to 0.48 in 2007. This indicates that the secondary distribution has neither quantitatively improved the income of the residents sector nor structurally narrowed the gap in income distribution. It only, to some extent, contained the widening income gap. More of the savings of government departments have been turned into government investments and support to the development of state-owned enterprises.

Table 1 National Savings and Contribution Rates by Sectors (%)

Source: Based on the 14 fund flow tables (1992~2005) published by China. As the figures are rounded off, the addition of the contribution rates of three major sectors is not necessarily 100%.

Table 2 Changes to Disposable Income of Residents and Government after Secondary Distribution

Therefore, the rise in China's savings rate in recent years was mainly attributed to increased corporate and government savings. Personal consumption was relatively insufficient, mainly due to a fall in personal income rather than a rise in personal savings.

II. The Urban-Rural Structure Shows that Rural Personal Savings Rate Has Been Falling and the Rise in Personal Savings Rate Was Mainly Attributed to Rise in Urban Personal Savings Rate.

As the fund flow table is unable to reflect the state of the internal structure of each sector, we must draw on the data from the urban and rural sample survey system to identify the difference in the savings behaviors of different resident groups. The changes in the urban and rural personal savings rates indicate that before 1999, the changes in the urban and rural personal savings rates were in the same direction. During the 1980~1989 and 1997~1999 periods, the savings rate of the rural residents was visibly higher than that of the urban residents. But during the 1990~1996 period, the savings rate of the urban residents was higher than that of the rural residents. These changes were consistent with the price changes in the same periods. As the income level of the rural residents was rather low, their savings behavior was more sensitive to price changes. When prices were rising, their savings rate dropped more. The situation with urban residents was different. Their savings rate was relatively higher when prices were hiking.

What is worth noting is that the rural and urban personal savings rates changed in opposite directions after 1999. The rural savings rate has been on the decline in recent years after peaking at 28.6% in 1999. In the meantime, the urban savings rate has been rising steadily and outpaced the rural savings rate in 2005. We can draw the same conclusion on the basis of different income family grouping (Table 3). The savings rate for the five groups of the urban residents (both high-income and low-income families) has been gradually rising over the past decade or so. On the contrary, the savings rate for the five groups of the rural residents (both high-income and low-income families) has been falling since 1999.

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