Democracy Lab

Why the Chinese Save

Contrary to conventional wisdom, China's high savings rate has everything to do with policy and institutions. Culture, not so much.

Sheldon Garon, who teaches in both the history and East Asian studies departments at Princeton, is a leading scholar of Japan. But his timely new book, Beyond Our Means: Why America Spends While the World Saves (Princeton University Press; all rights reserved) takes on an issue that’s also important to contemporary policymakers in transition economies: Why some countries save far more of their income than others.

The received wisdom, heavily influenced by the experience of Japan and the east Asian Tigers, is that families’ decisions about savings are generally driven by cultural values derived from Confucian teachings and are thus largely beyond the reach of government policy. So countries on the cusp of development that lack the savings bug – for example, Mexico and South Africa -- must either import large amounts of capital or make do with lower rates of investment. But in this excerpt, which focuses on China, Garon suggests that savings behavior is far more subject to deliberate government manipulation than is generally understood. – Peter Passell


To be sure, many East and Southeast Asian societies appear culturally disposed toward thrift. But I question the timelessness and uniqueness of so-called Asian values regarding saving and consumption.

As heretical as it may sound, the widespread “urge to save” in Asian economies has less to do with their shared “Asianness,” and may be more related to their common adoption of savings promotion practices from other countries.

Although European colonial powers introduced some of the methods, the primary catalyst has been Japan and its historic efforts to increase national savings. Before 1945, Japanese imposed the "Japanese model" on their colonies and occupied territories. More recently, Asian nations consciously emulated the policies underlying postwar Japan’s economic miracle.

Following World War II, international organizations and economists advised developing nations to “mobilize domestic savings” to finance growth. By the 1960s, Japan emerged as the poster child in this international campaign. Led by the influential planner Okita Saburo and his Japan Economic Research Center, Japanese economists touted high saving rates and low consumption to explain the nation’s rapid growth—and “its implications for developing countries.”

After the yen sharply appreciated against the U.S. dollar in 1985–87, Japanese officials became outright missionaries for the cause. As Japanese businesses heavily invested in Southeast Asian production, representatives of the government confidently counseled Southeast Asian states to mobilize household savings. Japan’s Postal Savings Bureau played a leading role, funding yearly meetings of Asian government savings bank officials. Japanese bureaucrats would lecture counterparts on the virtues of the nation’s postal savings system, citing its historical success in establishing the “idea of saving in the minds of the people.” The state’s promotion of saving, they asserted, had proved invaluable to curbing inflation, accumulating capital, and stabilizing society at large.

Similarly the Bank of Japan sponsored working seminars on “savings promotion,” which brought together central bank officials from Asia and the Pacific. These meetings marked one more chapter in the little-known story of learning from the Japanese experience among emerging Asian economies—including South Korea, Singapore, Malaysia, and China.

Savings in China

Fears of excessive saving by an Asian giant are nothing new. Two and a half decades ago, Japan’s high saving rates and alleged under-consumption became a flashpoint in international relations. American commentators worried about the loss of national sovereignty as Japanese savings flowed into huge purchases of U.S. Treasury bonds and bills.

At a certain point the media lost interest in the story, even though the Japanese government remained the number one foreign investor in Treasury securities until recently. Today, of course, U.S. complaints single out the Chinese for over-saving (typically framed in terms of China’s policy of keeping its currency exchange rate low). A spate of recent books sounds the alarm about Americans’ reliance on Chinese savings to finance their addiction to consumer and mortgage credit.

No one can say for sure how much the Chinese people save. Data based on national income is incomplete; nor does it accord with international standards. The most credible estimate places China’s household saving rate for 2007 at nearly 26 percent. This is extraordinarily high, although in line with rates in Japan, South Korea and Italy in previous decades.

Common explanations of why Chinese save have been less than satisfying. Most popular are invocations of “culture” -- just as we’ve seen elsewhere in Asia. More often than not, Chinese leaders trace the nation’s thriftiness back to Confucian values. Compared to Americans who became accustomed to overspending, observed the official China Daily, the Chinese people have developed a “tradition of savings since ancient times.” Zhou Xiaochuan, governor of China’s central bank, recently defended his country’s high saving rate as in large part the product of Confucianism, which values thrift, self-discipline, moderation, and an aversion to extravagance.

There is something rather forced about these claims. Back in the 1960s, Chairman Mao Zedong denounced Confucius as a “stinking corpse.” Only in the last 20 years has the Chinese Community Party conveniently rediscovered the sage’s age-old influence on popular behavior. Ironically, the inspiration came primarily from abroad, from Confucian revivalists in Singapore and Taiwan and from Westerners who write about the development of “Confucian capitalism” in Japan and the rest of East Asia.

Cultural explanations are all the more dubious when we consider the following: Not so long ago, the Chinese people were terrible savers. Under Maoism from 1952 to 1978, household saving rates did not exceed 2 or 3 percent and often sunk to less than 1 percent. If Chinese saved at impressive rates thereafter, surely other factors rank higher than Confucianism.

Another explanation favored by American economists and journalists is that Chinese save excessively in the absence of adequate welfare programs. It is an argument sustained by constant repetition, and little evidence. This analysis comes complete with its own policy recommendation. In the words of the influential economist Stephen Roach, China should build an institutionalized safety net necessary to temper the “fear-driven precautionary saving that inhibits the development of a more dynamic consumer culture.”

Uncertainty, it is true, may motivate people to save, but so do many other factors. The correlation between high saving and inadequate social benefits is a weak one, globally. Scores of poor nations provide little in the way of social welfare, yet their saving rates are minuscule. Among advanced economies, high-saving nations in continental Europe all provide comprehensive welfare benefits. Americans, who aside from the elderly lack sturdy safety nets, conversely saved little in recent decades.

There are, however, better explanations. In China, household saving rates have risen in tandem with rapid economic growth. We have observed this pattern in Asia’s other success stories, as well as in Western Europe after World War II. Following Mao’s death and the advent of Deng Xiaoping in 1978, the party-state fundamentally transformed the Communist economy into one based on global trade, foreign investment, and the partial embrace of market principles. The Chinese economy leaped into high growth, the GDP surging 10 percent annually from 1980 to the present. As elsewhere, household savings rose as consumption lagged behind increases in incomes.

Second, Chinese save more because of poor access to credit. Saving tends to be inversely related to borrowing. American journalists glory in the story of Chinese conspicuous consumption and the spread of credit cards. Most of these “credit cards” are, in fact, debit cards tied to bank accounts. Only a small fraction offer revolving credit. The heavily regulated banks have been miserly in extending consumer credit, and they generally require stiff down payments before lending money to homebuyers.

This is in sharp contrast to the United States, but not so different from several Asian and European countries where consumer and housing credit is subject to significant regulation. In a fast growing economy like China’s, people want to buy cars and other durables, but in lieu of easy credit they need to save in order to consume.

Curiously, few observers consider the possibility that the Chinese party-state might have had a hand in directly encouraging popular saving. Indeed, China represents one of the most compelling cases of the efficacy of aggressive savings promotion.

Under Maoist rule, Chinese households saved almost nothing. They had little money, it is true, but they also lacked safe, convenient banking facilities. In the three years following the Communist Revolution of 1949, the regime eliminated all public and private banks, transferring their assets to the central People’s Bank of China. The dissolved banks included the Republic of China’s fledgling postal savings bank, established in 1919. Although families under Maoism may have saved by hoarding goods and a little cash, they had little incentive to save in lieu of accessible institutions for small savings.

All this changed in the wake of the regime’s decision to reform and open the Chinese economy in 1978. Leaders recognized the pressing need to mobilize domestic savings to remedy capital shortages. One year later the state established the Agricultural Bank of China, the Bank of China, and the People’s Construction Bank of China. The creation of the Industrial and Commercial Bank of China in 1983 completed the formation of what today constitute the four big state-owned commercial banks.

The year 1986 ushered in the next phase, the relentless pursuit of small savers nationwide. The Agricultural Bank and the Industrial and Commercial Bank set up nearly 30,000 new branches that year. The Agricultural Bank alone doubled the number of its branches, reaching villagers who likely had never before had a savings account.

Institutions bear heavily on savings behavior. In 1986, savings deposits increased at a faster clip than at any time since the founding of the People’s Republic of China. It was not simply that branches opened and customers streamed in. Bank employees ran nationally coordinated campaigns to persuade the locals to entrust their savings to the new institutions. Including its joint savings projects with the authorities, associations, and cooperatives, in 1991 the Industrial and Commercial Bank claimed one million staff members engaged in “savings mobilization.”

Joining the big banks in 1986 was the new—or rather improved—Chinese postal savings system. For all the recent insistence on Chinese exceptionalism, officials methodically emulated the savings-promotion policies of Japan and other thriving Asian economies.

Once the regime committed itself to reviving postal savings, Chinese bureaucrats visited Japan’s Postal Savings Bureau and Central Council for Savings Promotion. Cooperative relationships between savings officials of the two nations developed. During the 1990s, Japan’s Ministry of Posts and Telecommunications assisted the Chinese in computerizing the postal savings system. Officials from the People’s Bank of China, moreover, actively participated in the Bank of Japan’s meetings for Asian central bankers, reporting on Chinese programs to boost savings deposits.

Postal savings became immensely popular among Chinese for much the same reasons we have seen elsewhere. In many rural and remote areas of China, it is one of the few institutions that serve small savers. The number of branches mushroomed from less than 2,500 in 1986 to 37,000 in 2009. Its popularity also rested on more than two decades of promotional campaigns by postal employees and the local authorities.

As a share of total deposits, postal savings appears small compared to deposits the four big state-owned commercial banks—only 8.1 percent in 2002. But of course we’re talking about the world’s largest country. The number of households with postal accounts that year came to a mind-boggling 104 million.

Chinese leaders today speak less openly about their efforts to promote saving. Instead, officials increasingly pledge to stimulate consumption as a vital prop of the Chinese economy. As in Singapore, the party-state recognizes that its continued legitimacy depends on improvements in the people’s material lives. In view of decreased demand from sluggish Western economies, the planners are also aware that domestic consumers may need to buy more if the Chinese economy is to continue high growth.

However, the Communist Party’s pronouncements on consumption have their tactical side. They aim to reassure American observers, many of whom take any pledge as evidence that China will soon embrace an American-style consumer society.

Unquestionably consumption is rising in China, yet the Asian giant will likely remain a high-saving society for many years to come. The consumption levels enjoyed by Westerners, Japanese, Koreans, and Singaporeans are well beyond the reach of hundreds of millions of Chinese. Consumption as a share of GDP stands at 35–36 percent, half that of the United States. Contrary to many media stories, China’s high growth relies overwhelmingly on investment, exports, and government consumption -- and relatively little on domestic consumption.

Finally, the regime has a powerful stake in promoting household saving for the foreseeable future. Chinese authorities learned a great deal from the Japanese and Singaporean models, in which the state manages and invests large pools of small savings. The Chinese government similarly captures the people’s savings at low cost from the state-owned banks and postal savings system. This capital finances companies and infrastructure at home. It also flows into the Singaporean-style sovereign wealth fund that China invests strategically in such things as U.S. Treasury securities and the exploitation of African minerals.

China, the newest savings superpower, now enjoys influence in international relations it could scarcely imagine three decades ago. When then-Treasury Secretary Henry Paulson blamed the China’s “superabundant savings” for causing a global credit bubble, the Chinese turned the tables just as the Japanese had done 20 years earlier. The United States, declared Premier Wen Jiabao, should be held most accountable for the global economic crisis. America had pursued an “unsustainable model of development characterized by prolonged low savings and high consumption,” the “blind pursuit of profit,” and “the failure of financial supervision.”

Make no mistake about it. Chinese leaders have few plans to jettison the policies of savings promotion that have served them so well.



A Secure, Undisclosed Location

In his latest book, "Warriors of God," Nicholas Blanford goes searching for one of Hezbollah's secret war bunkers, constructed mere feet from the Israeli border.

The latest bout of speculation over an Israeli or U.S.-led attack on Iran's nuclear facilities shows that the notion of another conflict between Hezbollah and Israel is never far away -- and both sides are aware that the next war promises to be of a magnitude that will dwarf the 2006 conflict. In the decade and a half that I have been following Hezbollah's military evolution, it was the secret underground bunkers built in southern Lebanon between 2000 and 2006 that underlined to me more than anything else the militant Lebanese Shiite group's single-minded dedication to pursuing its struggle against Israel.

These bunkers -- some of which I discovered and explored a few months after the 2006 war between Hezbollah and Israel -- were far more sophisticated than I or anyone else had expected, and the skill and patience in constructing them deep inside the hills of south Lebanon without anyone noticing was remarkable.

The 2006 war ended inconclusively, and Hezbollah and Israel are preparing for another war that neither side seeks but both suspect is probably inevitable. Hezbollah military sources tell me that new underground facilities have been constructed in Lebanon's rugged mountains since 2006, larger than before and more elaborate. Recruitment and training continues in hidden camps in Lebanon's Bekaa Valley and in Iran. New battle plans have been drawn up and new weapons systems delivered.

For now, the anticipated level of destruction in both Lebanon and Israel has acted as a form of deterrence -- but none of the drivers that led to war in 2006 have been resolved, and the "balance of terror" between Hezbollah and Israel remains inherently unstable.

As Hezbollah Secretary-General Sheikh Hassan Nasrallah said on Nov. 11, on the occasion of the party's Martyrs' Day: "Lebanon -- through its army, people and resistance -- has become strong, but that doesn't mean that we should not remain vigilant. This resistance has always been vigilant." 


ALMA SHAAB, SOUTH LEBANONThe dirt track wound through blossom-scented orange orchards before entering a narrow valley flanked by an impenetrable-looking mantle of bushes and small trees. Lizards and snakes slithered from under our feet, but we kept a wary eye open for unexploded cluster bombs left over from repeated Israeli artillery strikes on the western end of the valley during the month-long war between Hezbollah and Israel seven months earlier.

Every few seconds I glanced at the electronic arrow on my handheld global positioning system that was directing us toward what I hoped would be the entrance to one of Hezbollah's secret wartime underground bunkers. Since the end of the war, finding and exploring a Hezbollah bunker had become a near obsession, ever since I had been given a tantalizing hint shortly after the August cease-fire at what Hezbollah had covertly and skillfully constructed between 2000 and 2006.

Before the war, no one had imagined that Hezbollah was installing such an extravagant military infrastructure in the border district. Their visible activities generally consisted of establishing a number of observation posts along the Blue Line that eventually reached between twenty-five and thirty, stretching from the chalk cliffs of Ras Naqoura on the coast in the west to the lofty limestone mountains of the Shebaa Farms in the east. Hezbollah also placed off- limits several stretches of rugged hills and valleys in the border district.

The entrances were guarded by armed and uniformed fighters. Local farmers and even UNIFIL peacekeepers [members of the U.N. Interim Force in Lebanon, which is charged with keeping in the peace along the Israel-Lebanon border] were denied access to some of these "security pockets." One valley, a deep ravine of limestone cliffs and caves that slashed through the western sector like a giant ax stroke, was marked as a no-fly zone on the maps used by UNIFIL's Italian air wing.

In August 2002, Hezbollah took over a hillside overlooking the coast outside Naqoura, the location of UNIFIL's headquarters. A narrow lane wound up the hill, ending at a small UNIFIL observation post at the long-disappeared farmstead of Labboune. It was a popular spot for tourists, as the ridge granted a grandstand view of western Galilee down the coast to Haifa and Mount Carmel, twenty- five miles to the south.

After Hezbollah seized the Labboune hillside for its own purposes, only UNIFIL was allowed to use the lane to reach its observation post. Shortly after the hillside was sealed off, I drove up the lane to see what would happen. About halfway up I spotted several fighters in the dense brush crouched beside a large object smothered in camouflage netting, possibly an antiaircraft gun. They scowled at me as I passed by and evidently alerted some of their colleagues by radio, as there was a small reception committee waiting for me beside the road as I returned to Naqoura.

"This is a military zone. You can't come here anymore," one of them chided me.

Two months later, a convoy of American diplomats from the U.S. embassy in Beirut ran into a similar problem when they were intercepted by armed Hezbollah men while en route to the Labboune viewing point, unaware that the hillside was no longer accessible. With the Hezbollah men refusing to allow the diplomatic convoy to proceed, the embassy's security team called off the planned tour of the Blue Line and headed back to Beirut.

As the motorcade drove north out of Naqoura along the coastal road, they were joined by two carloads of armed Hezbollah men, who wove between the convoy vehicles. The U.S. embassy and the State Department lodged formal complaints with the Lebanese government, but it was the last time diplomats attempted to peer into Israel from Labboune.

It was unclear to us exactly what Hezbollah was up to inside these security pockets, although clues hinting at clandestine activity emerged from time to time. In early June 2002, residents of two small villages at the foot of the Shebaa Farms hills were kept awake at night by the sound of dynamite explosions emanating from a remote wadi near an abandoned farmstead. The peak of Hezbollah's construction activities appears to have been in 2003, when UNIFIL was recording "sustained explosions" numbering as many as twenty-five at a time, all in remote wadis and hillsides.

But it was only following the August 14 cease-fire ending the month-long war in 2006 that the astonishing scale of Hezbollah's underground network of bunkers and firing positions in the southern border district came to light.

For example, the Labboune hillside, which was covered in thick brush and small evergreen oaks, was the source of almost constant rocket fire by Hezbollah throughout the war, from the first day until shortly before the 8am cease-fire on August 14. The Israeli military attempted to stanch the flow of rockets with air strikes, cluster bombs, and artillery shells packed with phosphorus, but the Katyusha fire was relentless. After the cease-fire, Israeli soldiers deployed onto the hill and discovered an elaborate bunker and artillery firing system sunk into solid rock some 120 feet deep and spread over an area three-quarters of a square mile. The bunkers included firing positions, ammunition storage facilities, operations rooms, dormitories, medical facilities, lighting and ventilation, and kitchens and bathrooms with latrines and hot and cold running water- sufficient to allow dozens of fighters to live underground for weeks without need for resupply.

A day after the bunker was dynamited by the Israelis, I visited the site with Lorenzo Cremonesi, a correspondent for Italy's Corriere della Sera newspaper. We gingerly followed a caterpillar track into the old minefield running on the Lebanese side of the border fence. All that remained of the bunker was a field of churned earth and slabs of yard- thick reinforced concrete poking out of the ground like broken teeth.

Yet the most extraordinary discovery was not that Hezbollah had built the bunker beneath a minefield, but that the bunker began just a hundred yards from, and within full view of, the UNIFIL observation post on the border. It was only fifty yards from the lane used by UNIFIL traffic each day. The bunker was also in full view of an Israeli border position some four hundred yards to the west on the other side of the fence. How was it possible for Hezbollah to construct such a large facility with neither UNIFIL nor the Israelis having any idea of its existence?

"We never saw them build anything," a UNIFIL officer told me. "They must have brought the cement in by the spoonful."

Spiders and Claustrophobia

The sight of the dynamited ruins at Labboune inspired me to find an intact bunker. Although the border district was littered with newly abandoned bunkers, finding them was difficult and hazardous given their remote locations, the presence of unexploded munitions, and the superbly camouflaged entrances, some of them covered by hollow fiberglass "rocks" similar to those used to hide IEDs.

After several false leads, I acquired a set of map coordinates marking the locations of Hezbollah bunkers and rocket firing posts near the village of Alma Shaab. Punching the coordinates into a handheld GPS device, I headed into a former Hezbollah security pocket accompanied by Ghaith Abdul-Ahad, an intrepid war correspondent for The Guardian and a photographer for the Getty agency.

We had walked along the track at the bottom of the valley for about ten minutes when the arrow on the GPS began to rotate to the right. We left the track and, once beneath the canopy of dense foliage, noticed numerous thin trails made by Hezbollah militants crisscrossing the hillside. Steps of rock-hard sandbags helped overcome the steeper sections. We scanned the footpath carefully, not only for cluster bombs but also for possible booby traps. Hezbollah had rigged some simple IEDs consisting of trip wires attached to blocks of TNT around some of their old positions to deter snoopers

After a five-minute climb, my GPS informed us that we had reached our destination. But there was no bunker entrance to be seen, just outcrops of rock, thickets of thorn bushes, scrub oak, and tree roots snaking across the bedrock beneath a carpet of dead leaves and dried twigs. Thinking the GPS must be off by a few feet, I moved away to examine the surrounding area for the entrance. But it was Ghaith who found it.

He was tapping the ground with a stick when he struck something metallic and hollow-sounding. Together we brushed away the leaves and twigs to reveal a square matte black metal lid with two handles. Dragging the heavy lid to one side exposed a narrow steel-lined shaft that dropped vertically about fifteen feet into the bedrock. Dank, musty air rose from the gloom. It had taken seven months to finally discover one of Hezbollah's war bunkers; but any exhilaration was dampened by the dread of claustrophobia.

"If we have to crawl when we're down there, I can't do it," Ghaith said.