One of the surprising consequences resulting from the global financial crisis is how Asian savings now grab news headlines worldwide. The reason is that the high savings rates in Asia, and the macroeconomic imbalances they cause, are seen by some experts as one of the triggers of the crisis.
While savings in most Western industrialized countries range between 12% (US) and 26% (Germany) of the respective nation’s GDP, those in Asia often exceed this. Hong Kong, South Korea and Indonesia save more than 30% of their respective GDPs, while – incredibly – the rate in China is in excess of 50%. This includes savings made by households, companies and government (
From a macroeconomic perspective, a surplus in savings over investments equals a surplus in exports over imports. Export-oriented Asian economies have achieved substantial current account surpluses. China alone had a surplus of $440 billion in 2008. As this money was mainly invested in the US, some commentators argue it helped fuel the bubble.
Much macroeconomic discussion now revolves around how these imbalances can be decreased. Increasing consumption in Asia – particularly in China – is seen as critical to achieving this. Yet, high savings is understandable behavior in a country where social security systems are yet to be fully established.
PRECAUTION: A DECISIVE CULTURAL FACTOR
To a certain extent, Asian savings are guided by cultural norms and habits. People still behave according to traditional patterns, even if circumstances – in this case rising incomes – have changed. One of the most decisive factors, however, is precaution. Given relatively inadequate health care and pension systems, people save to be economically prepared for retirement and the expenditures that it entails.
It comes as no surprise that the savings rate in Chinese households rose from 17% of disposable income in 1995 to an astonishing 28% in 2008. This was a period that saw sweeping changes to Chinese social security. During the 1990s, substantial reforms of state-owned enterprises saw the “iron rice bowl” – a system in which enterprises provided social security for employees – crumble.
Yet, no nationwide social security replaced the “bowl.” Old-age provisions as well as the cost of children’s education came to be seen as a personal responsibility and this inspired the high savings rate. Even though China has been working to establish social security for the past 15 years, full coverage is far from being realized.
In the past 40 years,the population in Asia has doubled to around four billion people. High fertility rates were the original drivers, but this has changed dramatically, as the example of South Korea shows.
In the 1960s, a South Korean woman gave birth to an average of six children. Today, the fertility rate is 1.2. At the same time, life expectancy has risen thanks to reduced child mortality, better nutrition and access to medical treatment. Since the 1970s, South Koreans have added almost 20 years to the national life expectancy, which is now almost 80 years. Other Asian countries have experienced similar developments.
Low fertility rates and an ever-growing life expectancy are giving Asian countries an increasingly older median age. According to United Nations estimates, the median age in South Korea currently stands at 38 years. In 2050 it will be 54. Hong Kong and Singapore are in similar situations.
China may start out younger by comparison, but the Chinese median age will increase from 34 to 45 years within the same time frame. The working-age population as a share of the total population will peak this year according to a study by the International Monetary Fund (IMF) and will fall continuously in the following years. Aging Asia is a developing issue in the short term, not the mid-term.
Realizing this, many Asian emerging markets have recently introduced or expanded their public pension systems. These public pensions will become an important component of retirement income for retirees, but they will not become a dominant pillar as the demographics mean they will pose too great a burden on younger generations.
Consequently, funded, especially occupational pensions, and personal savings will be crucial for the retirement income security of Asian citizens. This makes it likely that Asians will continue to save their money at a high rate. Long-term savings are a key not only to individual financial security, but are also relevant for the national and possibly even the world economy. Asian savings will continue to play a crucial role in all three environments. The intriguing question is how savings and investment behavior will change as Asia’s wealth continues to grow.