Saving a

Top Priority for

Chinese…But Why?
Understanding the
motivations behind China’s
high savings rate
October 2010
Overview
China’s consistently high savings rate has raised a fair amount of international and
academic interest.
Economic theory based on Forward Looking Models suggest that countries experiencing
strong GDP growth should see a drop in savings rate as people are better able to predict
their future incomes.
China’s savings rate, on the other hand, has continued to remain high despite its remarkable
GDP growth. A popular explanation is that China’s legendary savings habit is influenced by
the Confucian values of thrift and frugality.
But does this theory apply in the present day? Nielsen seeks to understand the strength
of this hypothesis and explores non-cultural factors which may have a role in explaining
China’s high savings rate.

Some Facts:
Exhibit 1: Savings as a % of GDP: China, Sigapore and Malaysia the highest
Forecasted to close 2010 at nearly 50%
of GDP, China’s national savings rate 50
is one of the highest in the region and
substantially higher than developed 40
economies like those of the United States
30
and the United Kingdom. Despite the
great economic growth over the past 20
decade, the savings rate only increased.
10

0
PH NZ PK AU JP SL HK TW VN ID TH IN KR SG MA CH

2010f 2011f
Source: CEIC, HSBC

Copyright © 2010 The Nielsen Company. 2

National savings is the sum of household,
corporate and government savings Exhibit 2: Gross Domestic Savings Rate (% of GDP)
(fiscal revenue). Based on the limited
data available, it is interesting to note
that household savings was the largest 60
component prior to 1999. Thereafter,
corporate savings caught up and came 50
on par, and has played an equally
important role in contributing to China’s
high savings rate, due mostly to better 40
productivity and efficiency of private
enterprises in the post-reform era.
30
Household savings on the other hand
showed a slight decline in the 20
mid-1990’s and has since stabilized
at around 16% of GDP. (Exhibit 3)
10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US UK China
Source: World Bank

Exhibit 3: China Savings Rate by Components (% of GDP)

25

20

15

10

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Household Corporate Government

Savings Savings Savings
Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs, I on China Savings

3 Copyright © 2010 The Nielsen Company.

Even recognizing the significance of
corporate savings,the high-levels Exhibit 4: Gross Domestic Savings Rate (% of GDP)
of household savings (see exhibit 4)
warrants further attention. 50
Household Corporate Goverment
Nielsen’s Consumer Confidence Survey Savings Savings Savings
reveals that savings sentiment continues
40
to be strong among different consumer
groups, even in the present day (rural
areas have less surplus hence report
30
lower intention).

20

10

0
China-2003 U.S.-2002 Japan-2002 Korea-2002 Mexico-2001
Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs, I on China Savings

Exhibit 5: Those Mentioning Intention to Put Their Surplus in Savings

High Income 70
Mid Income 69
Low Income 43
60+ 41
50-59 49
40-49 53
30-39 63
<30 63
Rural Areas 46
Tier 4 63
Tier 3 66
Tier 2 63
Tier 1 63
National 56
0 10 20 30 40 50 60 70 80

Source: Nielsen CCI Survey 2010

Copyright © 2010 The Nielsen Company. 4

So Why Do Chinese Households Save So Much?
An Age Structure that
Exhibit 6: Prime Saver’s (20–49 years) Share in Population
Favors Savings
Since the late 1980’s, China’s demographics 50
have favored the younger, working group,
defined by economists as Prime Savers
(20-49 yrs). Typically this group displays 40
a higher propensity to save as it has to
finance a variety of life-stage needs:
• Younger households (20-34) 30
need to build homes and %
purchase durables
20
• Older populations (around mid-40s)
need to save for their childrens’
education as well as for their 10
own retirements.

These factors explain the high savings rate

0
to 2015, after which the rate is expected 1985 1995 2005 2015 2025 2035 2045
to drop as these groups get older and
Source: Paper on Determinants of Household Savings by Marcos Chamon and Eswar Prasad/IMF
graduate to become Non-Prime Savers
(50+ yrs). With retirement setting in,
both earning and savings capacity will
drop and these households will start
Exhibit 7: Luxury Apparel Retailers–Store Location Share by Cities–2009
living off their accumulated funds.

100
Cultural Frugality –
Remembering Confucius
Much has been written about China’s 80
legendary savings habit built upon the
Confucian values of frugality, self-
60
discipline, taking zhong zhong or the
Middle Ground (low-key) and living
within one’s means. A modest lifestyle
40
and avoidance of debt were natural
outcomes of this value system, and
offered a ready explanation of why
20
Chinese were such strong savers.

0
Armani Burberry Cerrutti 1881 Dunhill Gucci Salvatore
Faragamo
Key Cities Other Cities
Source: Li and Fung Research Centre China Distribution and Trading, Issue 63, December 2009

5 Copyright © 2010 The Nielsen Company.

However, the argument that frugal living
is a ‘cultural constant’ weakens if we
look at the proliferation of luxury stores
catering to China’s small but growing
nouveau riche and younger segments
willing to spurge on luxury brands.
McKinsey’s 2008 Wealth Survey reported
1.6 million high net worth individuals
in China with an annual income of RMB
25,000+ who are willing to spend. This
figure is expected to grow to four million
by 2015, ranking China fourth globally
as a luxury market. Boston Consulting’s
“Coming of Age” study reported that
China will take 29% share of the global
luxury market by 2015.
The increasing appetite for luxury brands
of the newly affluent and younger
populations has prompted foreign luxury
retailers to expand their footprint to
capture this growing potential. In 2009,
it was reported that more than half of
branded apparel retailers had expanded
their footprint beyond key cities.
Aversion to Debt and Risk:
Myth or Reality?
“Do not go into debt” is a strong traditional
sentiment in China and many East Asian
countries. In 2008-2009, Nielsen’s
Personal Finance Monitor reported
that 73% of home owners did not take
mortgage loans; 95% of car owners
bought cars from their own savings, and;
more than two-thirds (68%) of credit
card holders claimed to pay their entire
outstanding balance every month.
Exhibit 8: Incidence of Loans and Revolving Credit
Loan Incidence
Home
Morgage Loan
No 73%
Yes 27%
Base 4655 home owners
Incidence of Revolving Credit on Credit Card
Credit Card Monthly Payback
Pay In Full
Partial Payment
Minimum Payment
Not Sure
Base
Source: Nielsen Personal Finance Monitor in 18 cities, 2008-2009
But is this sentiment changing?
There are signs, however, that this aversion
to debt is slowly changing. Take for
example consumer response to auto loan
schemes offered during October’s Golden
Week in 2009. Auto dealers were offering
initial down payments and monthly
principal payback at a zero percent interest
rate. This had a significant impact on car
sales of certain models, as quoted by car
dealers in the media:
“Before this policy, 8 to 10 percent of
consumers chose to take out loans to
buy cars. But now the proportion is
more than one-third,” stated Jiao Miao,
Sales Manager, Guangzhou Toyota
Motor Co. Ltd.
“When we cooperated with banks,
the volume of autos paid for by loans
accounted for only 3 percent of our total
Credit Card Installment
Car Loan
Purchase Scheme
95% 86%
5% 14%
2327 car owners 3191 credit card owners
% mentions
68%
8%
4%
20%
3191 credit card owners
sales. But that same figure has climbed to
8 percent,” said Hao Qianglin, Manager
of Wuhu Anqi Auto Sales Co.
Another illustrative example of changing
attitudes toward risk occurred in 2007,
when students, with no personal earning
capacity, were joining pensioners,
housewives and people from all walks of
life during the famous stock market frenzy.
Reuters reported 300,000 new stock
accounts opened every day for five days in
a row in May of that year, and the price of
many stocks quadrupled in an 18 month
period. (May 25, 2007, Reuters report).
As incomes grow and attractive loan
schemes and investment opportunities
present themselves, Chinese are keen
to avail themselves of them, proof that
the explanation for high savings intention
due to cultural factors may not be telling
the full story.
Copyright © 2010 The Nielsen Company. 6
 Exhibit 9: Comparative Cost Index

Jay John
Age 23 years old Age 23 years old
Graduate Graduate
Executive, MNC, Shanghai Executive, MNC, USA
Current Salary: RMB 7500/month Current Salary: $5000/month
Cost Index Cost Index
Cost (RMB) Cost ($$)
(Expense/Salary) (Expense/Salary)
College 400,000 53x College 100,000 20x
Wedding Expenses 140,000 19x Wedding Expenses 10,000 2x
House Value 2 million 266x House Value 200,000 40x
Mortgage Down Payment 600,000 80x Mortgage Down Payment 50,000 10x
Car 94,000 13x Car 25,000 5x
Future Medical 6 people: Self, Wife, Future Medical
2 people: Self, Wife,
and Old Age costs Own Parents, Wife’s Parents and Old Age costs
Source: The Nielsen Company

What Does Mr. Jay Have

Exhibit 10: Assessing The Sources of Funds For Their Lifestage Needs
to Save for?
Nielsen conducted in-depth interviews 100
with first jobbers in China and the United
States to get a deeper look at their saving
80
needs and how they are likely to fund
these expenses.
60
A comparative cost index was developed
reflecting multiples of their current salary
needed to pay off different life-stage 40
expenses such as weddings, the purchase
of a house, children’s education, purchase 20
of durables, health and old age expenses.
(see Exhibit 9 above).
0
John Jay John Jay John Jay John Jay John Jay John Jay
House Wedding Car College Medical Pension/
Education Expenses Old Age
Expenses

Parents Savings Personal Savings Loans Govt/Private Plan

Source: Nielsen Quantitative Research

7 Copyright © 2010 The Nielsen Company.

Clearly, Mr. Jay has a lot
of saving to do!
• High property prices in China
require Jay to have adequate
liquidity early in life. Moving into
one’s own apartment is an important
first step for marriage, and saving
needs to begin much longer in
advance before the actual wedding.
Jay’s parents and perhaps the brides’
side will also contribute as well.
• Chinese weddings can be lavish
and the groom’s family bears the
cost. Jay has to ‘technically’ save
19 times his salary against John at
3 times. Jay’s parents will also
support the wedding expenses.
• In the future, when both John and
Jay have a child, public education
is available till middle school in
China and high school in the US.
Jay will need to save for high school
and college education using his
personal savings. In the US,
availability of long-term student
loans at flexible rates reduces the
need for immediate liquidity, which
Jay needs to plan for as student
loans are yet not popular in China.
• Caring for elderly parents is a strong
tradition in China. Born in the era
following the One Child Policy, Jay
will in later years be saving for
medical and old age costs for six
people(himself and his wife, his own
parents and his wife’s parents). Much
of course depends on their parents’
own past savings and their ability to
support themselves independently.
Exhibit 11: Household Assets Breakdown
%
100
90
80
70
60
50
40
30
20
10
0
US-2007 Japan-2007 France-2007 Canada-2007 China-2007 US-1972
Currency and deposits Bonds and others Stocks
Pensions and Insurance Real Estate
Source: Professor Jiming Ha, CCI, Heading for Balanced Growth Paper at Nielsen CCI seminar, May 2010
While government investment in social Keeping savings in cash and bank
security and healthcare has increased deposits at low interest rates, buying
over time, China’s social security funds three to four properties as investments
are still much lower than those in are the most popular ways of keeping
developed economies. Standing at RMB surplus income. Both are seen to be
1000 per capita, this represents 2% of outcomes of the precautionary savings
the country’s total household wealth motive, offering greater psychological
(see Exhibit 11), well below the US level assurance to Chinese consumers than
of 20% (Source: Professor Ha, Heading investing in stocks and bonds.
for Balanced Growth Paper at Nielsen CCI
seminar, 2010). Precautionary savings
to cover for medical and post-retirement
expenses remain an important factor in
explaining China’s high savings rates.
Copyright © 2010 The Nielsen Company. 8
Conclusion:
The argument that China’s high savings rates can be attributed to a handed-down
tradition of thrift and frugality loses strength if we look at the spending behavior of
affluent Chinese today. When a certain income threshold is reached, Chinese are as
big spenders as they are savers.

While more studies are necessary to quantify the correlation between savings rate
and the explanatory factors such as culture, Nielsen believes that demographics, high
costs of certain life-stage expenses, the precautionary savings motive and existing
loan and credit environments play a stronger role in explaining the savings rate as
opposed to the frugality theory.

Exhibit 12: Strength of Factors Explaining High Savings Rate Today

A Qualitative Assessment

Cultural Frugality and Debt Aversion

High Share of Prime Savers In Population

Current costs of certain life-stage expenses

(education, housing, weddings)

Government support on Social Security and education

Limited availability of attractive loan schemes to fund

life-stage expenses

Limited options to channel savings out of cash and

bank deposits

STRONG WEAK

We believe that once increased government spending on soft infrastructure such

as education, health and pensions starts having an impact, combined with
diversification of the financial markets in favor of more medium risk products
and changing demographics will lessen the importance of precautionary savings
in China and overall savings rates will be more in line with developed economies.

Copyright © 2010 The Nielsen Company. All rights reserved.

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