Can China Manage Its Economy?

January 21, 2010

By John D. Van Fleet

In addition to official income levels being lower than actual income (and thereby driving down the actual savings rate as a percentage of this higher income), savings rates vary by age group. While China’s aggregate savings rate is often said to be around 50 percent, a mid-2009 survey conducted by China Market Research concluded that the savings rate of 24 to 32 year old Chinese was virtually zero, and that 25 percent of them were carrying balances on their credit cards. It’s their parents who are doing all the saving-the young have no memory of the Cultural Revolution, or indeed anything other than a booming economy. The same survey revealed an ‘optimism’ rate of 85 percent in the provinces, among the highest demographically and in line with the rural consumption figures cited by China Retail Quarterly and others. The young join the provincial dwellers as among the most optimistic, and so more likely to spend.

Finally, hundreds of billions of US dollars of China’s aggregate savings aren’t individual savings, but government diversion of wealth, a by-product of keeping the currency under control. As James Fallows wrote in The Atlantic in January 2008, ‘Much of China’s national income is ’saved’ almost invisibly and kept in the form of foreign assets.’ So while the official savings rate may be relatively high, the relevant savings rate (of individuals in the ‘consuming’ age groups and areas) is not. And China’s relatively quick recovery from the financial crisis, a recovery driven in part by the stimulus measures, has bolstered the confidence of the young and the provincial even further.

Policies resulting from the 2009 Economic Work Conference, which ended on December 7, suggest that Beijing sees a strong recovery, and will now take steps to manage it. The conference added ‘managing inflation expectations’ to their list of economic objectives, while maintaining a focus on appropriate housing (more for low-income households) and consumption promotion.

China’s most serious challenges are widely reported, most notably the environment, the transition to a truly globalized market economy, and political reform. Managing them will require focused governance and the right tools. With foreign reserves of more than US$1 trillion, an economy that’s leading the world in growth and a population that’s steadily becoming wealthier, Beijing should at least have the economic foundation it needs to craft and apply those tools. Whether the mandarins are successful in doing so remains to be seen, but their collective performance to date is part of the reason why the citizens are relatively optimistic, and increasingly willing to vote with their wallets.