Chinese Savers Keeping Their Country Solvent
Question: Who in the world would put their life savings in a technically insolvent banking system that routinely makes loans to hopelessly inefficient companies that have virtually no chance of ever repaying the money?
Answer: Millions and millions and millions of Chinese.
In a recent report on China, the World Bank identified household savings as “China’s real economic miracle.” Since China began its economic reforms two decades ago, the report observed, wage earners have saved money in banks at a rate rarely seen in world history--averaging more than 37% of this country’s gross domestic product.
As a result, in a trend that worries some, the financial fate of the world’s most populous country now depends greatly on the nest eggs of common folk like Tianjin restaurant manager Li Jinglun, who said he puts 35% of his income in the bank.
“Chinese people save a lot for medical care, for their children’s education, for a house they want to buy and because there are not many other places for them to put their money,” said Li, deputy manager of the humorously named but very popular Goubuli (“Dog Wouldn’t Touch It”) chain of restaurants.
Standing in line at a Bank of China branch in Shanghai on a recent afternoon was retired engineer Zhu Zhenyi, 62. His son, who lives in the United States, had sent Zhu and his wife $200 to spend. Instead, Zhu was depositing it in a foreign-currency savings account at the bank. “We told our son we spent the money,” he said. “Actually, we are saving it for him. He earns a nice salary in America. But who knows? Someday he may need some emergency money.”
Since 1988, household savings deposits in China have skyrocketed from 416 billion yuan ($50 billion) to more than 3.9 trillion yuan ($481 billion). In 1988, household savings accounted for 45% of all deposits in state banks. This year, the figure is more than 60%.
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The remarkable savings habits of the Chinese--even more impressive than those of their thrifty Asian neighbors the Japanese and South Koreans--are much trumpeted by the Beijing government and foreign economists as a positive attribute of China’s economy.
“A rapidly growing amount of individual savings deposits is both a result of a sustained and rapid development of the Chinese economy and a driving force for further economic growth,” Li Yang, director of the Financial Research Center of the Chinese Academy of Social Sciences, said in an interview with official Chinese newspapers.
But the banking system’s increasing dependence on personal savings, other experts say, has set the country up for a potentially disastrous run on main state banks. “If ever the government’s willingness to stand behind the state banks came into question,” warned the London-based Economist Intelligence Unit newsletter, “financial panic would ensue.”
Fear of China’s millions of savers withdrawing their money was an underlying reason behind the ruling Communist Party’s recent push to restructure and eliminate most of the country’s 305,000 state-owned enterprises. They have been the main bad-loan drain on the banking system.
But in doing this, the government finds itself in a risky situation. “They are stuck either way,” said Nicholas Lardy, an economist with the Brookings Institution in Washington. “Either they have a lot of people unemployed in the state-owned enterprises or they have a lot of people at huge risk of losing their life savings.”
The problem is not that traditionally conservative, thrifty Chinese families bank so much of their money--one of China’s great economic advantages, if not its salvation. The trouble lies in what banks do with the savings: A huge percentage of the money is distributed as “policy loans” to struggling, decrepit, state-owned industries.
These “loans” are not investments in enterprises but are wages for workers and subsidies for their health and housing costs. And the World Bank reports that half of China’s more than 100,000 state industries lost money last year.
Decisions to make loans are made not based on risk or investment return but on political or social grounds. Much lending is thus closer to a form of state subsidy that is drawn from the savings of the Chinese.
The World Bank estimates that the bad-debt load of the country’s four main banks is more than 22% of their lending--enough to give the institutions a negative net worth. The country’s largest bank, Industrial & Commercial Bank of China, is a behemoth with more than 500,000 employees. The bank recently reported that one of its regional branches in Sichuan province had a bad-debt load amounting to 80% of its loan portfolio.
Economists estimate that the banking system’s bad loans total 15% to 30% of China’s gross domestic product. In contrast, the bad loans involved in the American savings and loan crisis totaled 2% of the U.S. gross domestic product. Bad loans in the Japanese banking crisis totaled 10% of Japan’s GDP.
In an examination of the numbers, two questions come to mind: Why do the Chinese save so much money? And why do they keep plunging the money into banks that are so obviously poorly managed?
The answer to the first question is partly cultural. No matter what the political system in power, Chinese have maintained a high savings rate. “Being thrifty and diligent is our Chinese virtue,” retired engineer Zhu explained as he stood in line at the Shanghai bank.
The Beijing-based Horizon polling agency recently conducted an extensive survey in five cities about Chinese investment preferences. In one question, the polling agency asked, “If someone handed you 500,000 yuan [$60,000], what would you do with it?”
About 40% of respondents said they would use the money for housing. But the next highest number, 14%, said they would bank that sum. Almost 70% of those interviewed listed savings as their preferred investment.
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Another reason for the high savings rate is that, in the Chinese financial system, there are few other attractive investment options. In 1981, the government began to sell treasury and other bonds. But by 1995, these investments totaled less than one-tenth the amount of household savings.
The market for bonds issued by state-owned enterprises and investment firms--launched in 1986--is even smaller, totaling less than $5 billion.
Likewise, much attention has been paid to China’s lively Shanghai and Shenzhen stock exchanges. But studies show that the total market value of all 323 listed companies in 1995, again, was only about one-tenth the amount of household savings.
In short, these investment options are not large enough to absorb the huge sums now in Chinese savings accounts.
Further, many Chinese, finding themselves with a little extra money for the first time after decades of political turmoil, view the volatile stock market as too risky for their hard-earned money. The Chinese who invest in the market tend to be those who have lost other sources of income and are gambling for a windfall.
Five years ago, Yu Haiming--36, a boyish, round-faced Tianjin resident--was laid off from No. 4 Sock Unit of the Tianjin Textile Factory. His wife, who worked in the bedsheet unit, was also laid off. While working, the couple had managed to save the equivalent of $7,000 and bought a small apartment. Since then, Yu said as he stood before the Southerners Stock Exchange Ltd. branch in the commercial district of Tianjin, 60 miles southeast of Beijing, they have played the market; their savings, however, have declined to less than $3,000.
“If things get worse,” Yu said, gazing up at the electronic trading board, “I am prepared to sell my apartment. Obviously, I would rather have a job.”
As to why the Chinese continue to deposit their savings in essentially insolvent banks, there are two commonly offered explanations.
The first is that many Chinese simply do not know about their banks’ precarious state. “Ordinary Chinese people seldom think about these kinds of questions,” said Tianjin restaurant manager Li.
The main reason, however, is that most Chinese do not believe--with some justification--that the government would let state banks fail. “I think it boils down to some combination of faith in the government and ignorance about what the real situation is,” Brookings Institution economist Lardy said.
China, Lardy pointed out, has experienced isolated runs on regional banks but has never faced significant institutional failures; no authorized banking institution in China that accepts public money has failed.
Sitting behind her teller window at the Postal Savings branch in one of Tianjin’s main markets, Lu Baoning said she watches every day as people come with sums ranging from about $5 to more than $1,200.
“The people know that no bank can ever go bankrupt,” Lu said, “so they never worry about where their money goes.”
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Anthony Kuhn of The Times’ Beijing Bureau and Bao Lei of the Shanghai Bureau contributed to this report.
