The Chinese puzzle

 

                                        Chinese shoppers, look for the blue-light special. Photo: CTGN

                                          

In a few decades, China rose from the ranks of the poorest to the affluent. Its economy burgeoned ninefold from 1990 to 2022 (see Figure 1). One reason for this economic miracle is that the Chinese save like prophets.  Firms and governments borrow these abundant funds to build roads, dams, and factories. This expands China’s capacity to produce and thus its income. China adds far more value in manufacturing, as a share of its economy, than the typical country; see Figure 2.

Adjusting for inflation and changes in exchange rates, China has been the world’s largest economy since 2014.  Yes, I know that you hear from the news media that the US is still the largest economy. American reporters are economic illiterates, led astray by fluctuations in the exchange rate of renminbi per dollar.  These fluctuations have more to do with temporary rises and falls in money supply than with an economy’s long-run ability to produce.

 

Figure 1. China’s gross domestic product, 1990-2022, in 2017 international dollars.

 

Figure 2. Manufacturing value added, as a share of GDP, in China and the world, 2004-2021.

Just how much does China save? Over the long run, the typical Chinese spends just 55 cents of every international dollar earned; see Table 1. She saves the other 45 cents, either voluntarily or as tax payments, which are forced savings. In contrast, Americans spend more than four-fifths of an additional international dollar.  You would think that since Americans are richer than Chinese, they would save more of another dollar, because they have already met their essential needs. But that’s not the case. The Chinese save even more than Kazakhstanis.

(An “international dollar” is an artificial currency that expresses the cost everywhere of buying a good that would cost a dollar in the United States. By controlling for changes in the exchange rate, it expresses the same purchasing power everywhere. We thus avoid the mistake of thinking that an economy has grown in productive capacity merely because its exchange rate has strengthened for a few months.)

 

Table 1. China’s long-run consumption function, 1995-2022

R Square	1.000
Adjusted R Square	1.000
Standard Error	1E+11
Observations	28
ANOVA
	Df	SS	MS	F	Significance F
Regression	1	1.81E+26	1.81E+26	17956.18	0.00
Residual	26	2.62E+23	1.01E+22
Total	27	1.81E+26
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	-6.6E+10	3.61E+10	-1.84	0.078	-1.4E+11	7.9E+09
GDP	0.547	0.004	134.0007	1.87E-38	0.539	0.555

 

Why do the Chinese save so much? Asians in general save in spades, but that hound don’t really hunt. It explains nothing.

Maybe couples must save to raise those famously large families.  In the 1960s, a Chinese woman averaged more than seven births.  That was almost triple the number needed to keep the population from declining; see Figure 3.

But the fertility rate has been falling for decades.  This is thanks largely to China’s draconian policy in the 1970s to allow a couple to raise only one child, to defuse the then-dreaded Population Bomb. China today might like to have that Bomb back. Its population has just stabilized at 1.4 billion, and forecasts say it will even shrink; see Figure 4. In any event, Chinese families are getting smaller, so they don’t need bigger nest eggs.

 

Figure 3. The fertility rate in China, 1960-2021.

 

Figure 4. China’s population, 1960-2022.

 

Again: Why do the Chinese save? Maybe it’s to pay the taxes of a government that has been a Leviathan for centuries. People have gotten into the (forced) habit of saving for the rainy day, in a country where the government seems to rain every day. But even this explanation falls short, because China has been taxing lightly for at least two decades. The ratio of tax revenues to GDP is only about 8%; see Figure 5. The world average is almost double that. So why haven’t the Chinese loosened their belts in response to softer taxes? Maybe spending habits are hard to change. Which, of course, just begs the question.

 

Figure 5. Share of tax revenues in GDP, 2005-2021.

In the short run – up to a year – the Chinese spend slightly more of an international dollar than in the long run, probably out of necessity; see Table 2. But over time, they cut spending by 23 billion international dollars, when controlling for income. The Chinese indeed have a passion to save.

 

Table 2.  Short-run marginal propensity to consume in China, 1995-2022

R Square	1.00
Adjusted R Square	1.00
Standard Error	9.51E+10
Observations	28
ANOVA
	df	SS	MS	F	Significance F
Regression	2	1.81E+26	9.03E+25	9985.716	0.00
Residual	25	2.26E+23	9.05E+21
Total	27	1.81E+26
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	-2.8E+10	3.93E+10	-0.716	0.481	-1.1E+11	5.28E+10
GDP	0.586	0.020	28.982	0.00	0.545	0.628
Time	-2.3E+10	1.16E+10	-1.978	0.059	-4.7E+10	9.48E+08

 

This is not always fortuitous. Central Asia would certainly prefer that the Chinese buy more imports. And the Chinese themselves may suffer from their frugality. For when the world economy slows, the Chinese must provide their own fuel to crank up their GDP engine. If they balk at spending, recovery may slow. In fact, at a hypothetical income of zero, there is no evidence that the Chinese would spend anything (see Table 2), even though they could probably borrow from future taxpayers by selling bonds to be paid off by hiking future taxes. The Chinese puzzle lives on. – Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Notes

For useful comments, I thank but do not implicate Annabel Benson and Mark Kennet. All data are from the World Development Indicators of the World Bank,  worldbank.org

The data in the tables are from the World Bank’s World Development Indicators for 1993 through 2022. GDP is gross domestic product. Time gives the number of years that have passed since 1990, where Time = 1 for 1990. Consumption is personal consumption expenditures. GDP and Consumption are expressed in 2017 and 2015 international dollars, using purchasing power parity.