In China in 2013, the average household-savings rate—which is the percent of a household’s income that goes into savings—was about 25 percent. China’s figure dwarfs Japan’s 0.7 percent household-savings rate, the U.K.’s 3.1 percent, South Korea’s 5.2 percent, and the United States’ 6.6 percent.
One possible explanation for this outsized rate is that it was driven by China’s one-child policy—implemented in the 1980s and loosened roughly thirty years later. The theory posits that the law weakened the “family safety net,” thereby spurring households to save.
“Some people have suggested that in the absence of a formal safety net, people use their family as their safety net,” explains Efraim Benmelech, a finance professor at Kellogg. “That is, when parents have many kids, they know that they can rely on their kids in the future. In China, once you could only have one child, there was a limit to that reliance, so people had to save more.”
To explore whether the one-child policy has spurred savings, or whether something else is at work, Benmelech and Scott R. Baker, an associate professor at Kellogg, teamed up with coauthors Zhishu Yang of Tsinghua University in Beijing and Qi Zhang of Shanghai Jiao Tong University.
They explored this by linking granular household-financial-transaction data from a large Chinese bank—data that had never before been available to researchers—to administrative records detailing births, marriages, and other information.
Their findings suggest that the emergence of the one-child policy did not, in fact, spur more saving among Chinese households. To the contrary: once the restriction was loosened to a two-child maximum in 2014, families actually started saving more—particularly when they were planning for a baby. Instead, saving seemed to be more directly tied to financial forces, like income volatility, income growth, and access to consumer credit.
“There’s always a question of how important culture is in economic activity—and while culture is important, it was interesting to see that culture was not as important based on our evaluation as other, more neoclassical economic forces,” Benmelech says.
Linking Financial Patterns to Life Events
Baker and Benmelech explain that their research was only possible because of their unprecedented access to the detailed transaction data from a bank in Inner Mongolia—which they secured thanks to their coauthors, Yang and Zhang.
The dataset included eight years of transaction details, spanning 2010 to 2017, from the bank’s nearly 1.8 million retail customers. These details offered a granular view of the growth and volatility of household income over the time period, as well as customers’ access to credit. They were able to dive even deeper into how households’ spending and saving patterns shifted around major life events by linking a subset of the bank’s customers to administrative records of marriages and births.
To determine whether the one-child policy indeed encouraged more household-level savings in China, the researchers examined how savings patterns changed when the law began to relax in 2014. Specifically, they looked for differences in savings rates between families who could legally bear another child after 2014, either because they had no children or just had one, and those who could not, either because they already had two children—thanks to allowances for certain subsets of the population—or because they were likely beyond child-bearing age.
Real Reasons to Save
They found that as the one-child policy relaxed into a two-child policy, savings rates didn’t fall but in fact increased—particularly for the households that were now able to increase their family’s size.
What’s more, they observed that the households that increased their savings the most after the policy change were the most likely to go on to have additional children.
“Given the costs of raising additional children,” the authors write, “these estimates would imply that the imposition of the one-child policy may have in fact depressed savings, at least in the short term, because households did not need to save for additional child-related expenditures.” In other words, additional children appeared less likely to be viewed as an insurance policy and more likely to be considered an expense—and a reason to save aggressively.
The factors that were most predictive of a household’s propensity to save are financial ones—very much in line with savings patterns across countries in the West. Households that had experienced extreme income fluctuations saved more, as did those with higher incomes, while those with more access to consumer credit to smooth financial shocks saved less.
An Approaching Convergence
The researchers conclude that China’s outsized savings rate likely has little to do with laws about family size and more to do with the income gains its population has made in recent decades and the fluctuations in those incomes.
This suggests that as the country’s economy develops, and its long run of growth slows, its aggregate savings and spending patterns are likely to start to look more like those in the U.S and Europe.
When a population has substantial money parked in savings, it enables the government and its citizens to purchase investment assets from around the world—a large swath of which tend to be U.S. bonds. The increased demand for these bonds drives down U.S. interest rates.
While China has long had an outsized role in global savings markets, convergence in income and income growth to Western levels may drive a decline in this role, the researchers explain.
“A lot of what’s driving the behaviors we’re seeing seems to be very similar to what we see in the West,” Baker says. “As their income levels and growth levels converge with those in the West, and access to credit expands, we may see consumption increasing and savings decreasing. And this has ramifications outside of China.”
