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Wednesday, 11 February 2009
Policy can’t change savings habit overnight: China
China’s central bank chief yesterday played down hopes in the West that a drive by China to save less and spend more might help revive flagging global growth.
Policy can’t change savings habit overnight: China
Reuters 11 February 2009
China’s central bank chief yesterday played down hopes in the West that a drive by China to save less and spend more might help revive flagging global growth.
China’s sky-high savings rate is a function of deep-rooted social and cultural factors that cannot be addressed overnight by economic policies, said Zhou Xiaochuan, the governor of the People’s Bank of China.
Speaking at a central bank conference in Kuala Lumpur, Mr. Zhou acknowledged that China’s domestic savings rate - 49.9 per cent of gross domestic product at the end of 2007 - was too high. But he said that it would take a long time to reduce the rate.
‘If we need to change some policies, it may be a slow process, especially when you want to change national traditions, cultural impacts, family structures and demographics,’ he said.
Washington, in particular, has long urged China to help restore balance to the global economy by taking steps to reduce savings.
Because China does not have a sturdy social safety net, households save about 30 per cent of their disposable incomes to meet out-of-pocket medical and education bills and other expenses. As a result, household consumption has been falling steadily in recent years and accounted for just 35.3 per cent of gross domestic product in 2007, a record low for a major economy in peace-time.
Corporate savings have also ballooned since state-owned firms were largely relieved a decade ago of their obligation to provide cradle-to-grave welfare. State-run companies also pay minimal dividends to the central government.
Premier Wen Jiabao recently rejected as ridiculous the idea that countries such as China with low savings rates should be blamed for the economic imbalances at the root of the global malaise.
But China has been steadily introducing measures to promote consumption. It has extended nationwide, a pilot programme that gives farmers a discount when they buy electrical appliances.
The government approved plans last month to spend 850 billion yuan (S$186 billion) over the next three years to ensure basic health care coverage. And the Commerce Ministry said on Monday that it hopes to create 450,000 jobs this year by providing incentives to open rural stores. As well as seeking to boost consumption in rural areas, Mr. Zhou said that China had been trying to reduce domestic savings by adjusting exchange and interest rates and by developing its financial markets. But he said that it was not realistic to expect immediate results.
He cited the landmark shift to its exchange rate regime in July 2005, when China abandoned a long-standing peg to the dollar, and said that the yuan would be allowed to float within managed bands.
‘We tried to lower excessively high expectations that the exchange rate regime reform would solve these problems,’ he said.
With China saving more than it can invest, it ran a current account surplus that exceeded 7 per cent of GDP last year.
The bulk of those excess savings are recycled into US Treasury bonds and other dollar assets, mainly by the central bank, but Mr. Zhou said that China needed to look at putting some of its money elsewhere. ‘Shouldn’t China consider sending its savings to those places like Africa rather than concentrating too much on the United States?’ he said, without offering a timeframe or specifics.
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Policy can’t change savings habit overnight: China
Reuters
11 February 2009
China’s central bank chief yesterday played down hopes in the West that a drive by China to save less and spend more might help revive flagging global growth.
China’s sky-high savings rate is a function of deep-rooted social and cultural factors that cannot be addressed overnight by economic policies, said Zhou Xiaochuan, the governor of the People’s Bank of China.
Speaking at a central bank conference in Kuala Lumpur, Mr. Zhou acknowledged that China’s domestic savings rate - 49.9 per cent of gross domestic product at the end of 2007 - was too high. But he said that it would take a long time to reduce the rate.
‘If we need to change some policies, it may be a slow process, especially when you want to change national traditions, cultural impacts, family structures and demographics,’ he said.
Washington, in particular, has long urged China to help restore balance to the global economy by taking steps to reduce savings.
Because China does not have a sturdy social safety net, households save about 30 per cent of their disposable incomes to meet out-of-pocket medical and education bills and other expenses. As a result, household consumption has been falling steadily in recent years and accounted for just 35.3 per cent of gross domestic product in 2007, a record low for a major economy in peace-time.
Corporate savings have also ballooned since state-owned firms were largely relieved a decade ago of their obligation to provide cradle-to-grave welfare. State-run companies also pay minimal dividends to the central government.
Premier Wen Jiabao recently rejected as ridiculous the idea that countries such as China with low savings rates should be blamed for the economic imbalances at the root of the global malaise.
But China has been steadily introducing measures to promote consumption. It has extended nationwide, a pilot programme that gives farmers a discount when they buy electrical appliances.
The government approved plans last month to spend 850 billion yuan (S$186 billion) over the next three years to ensure basic health care coverage. And the Commerce Ministry said on Monday that it hopes to create 450,000 jobs this year by providing incentives to open rural stores. As well as seeking to boost consumption in rural areas, Mr. Zhou said that China had been trying to reduce domestic savings by adjusting exchange and interest rates and by developing its financial markets. But he said that it was not realistic to expect immediate results.
He cited the landmark shift to its exchange rate regime in July 2005, when China abandoned a long-standing peg to the dollar, and said that the yuan would be allowed to float within managed bands.
‘We tried to lower excessively high expectations that the exchange rate regime reform would solve these problems,’ he said.
With China saving more than it can invest, it ran a current account surplus that exceeded 7 per cent of GDP last year.
The bulk of those excess savings are recycled into US Treasury bonds and other dollar assets, mainly by the central bank, but Mr. Zhou said that China needed to look at putting some of its money elsewhere. ‘Shouldn’t China consider sending its savings to those places like Africa rather than concentrating too much on the United States?’ he said, without offering a timeframe or specifics.
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