By: Henrique Schneider

The average savings rate in China is over 30 percent – that is above-average measured by any global average. In other words, a third of the income of a household does not flow back in the economy but stays blocked in a bank-account or somewhere else. Many, including the Chinese government, see this as a problem. But is it?

Three quick questions: Why do Chinese save? How do they save? And what does that mean?

Why save?

There are a number of factors explaining why Chinese save. Three are the most important. First, since there is no welfare-state and an underdeveloped insurance market, Chinese families have to take planning into their own hands: retirement, education, taking care of one’s parents and preparing for the unknown unknowns of life.

Then again, historically, culturally and due to experience, many Chinese don’t completely trust government policies. No one can say if the next expropriation is looming behind a party-plenary…or if the next wave of inflation lurks behind a currency-decision.

Thirdly, there is also precautionary savings. Chinese households live in liquidity constraints since it is very difficult for them to get a credit line in a banking institution. Therefore, precautionary savings are important for unexpected expenses that cannot be met by temporary indebtedness.

How to save?

Now comes the difficult question. Wealthy Chinese with family ties or other connections abroad usually try to invest some of their money in Europe and North America; usually after passing through Hong Kong. This is part of portfolio-diversification and a flight into politically secure regions. Middle-class Chinese diversify domestically. In order to escape inflation, they put their money into real-estate. The idea is, if prices rise, the value of buildings, condos, and apartments rise too. In order to maintain liquidity and ensure some longer-term profit, they either leave their money in banking accounts – high liquidity – or invest in what has been called the “shadow bank” system – high profits.

“Shadow banks” are in their majority reputable institutions offering investment vehicles that banks don’t. These vehicles aren’t mostly anything out of the exceptional. Mostly, they are investment funds. But since they are not regulated as banks, they are often veiled as something sinister. The point is: Chinese banks only offer some very simple services and are often steered politically. This makes most of their investments low-yielding and therefore unattractive for savers.

The fourth possibility is stock market investment. This is rather a new opening and was incentivized by government. The same government that wants to keep “shadow banking” in check because their volatility wants people to invest in shares and stock options. What happened? As by mid-2016 stock markets oscillated, people panicked. Most importantly, government panicked closing the markets and therefore sending a negative signal to potential investors, especially to the small savers.

What does this mean?

Chinese policymakers say their country must end its reliance on investment in factories and infrastructure for growth and rebalance to a more consumption-driven economy. This also means that they want people to save less. But it is the savings of today that determine the consumption of the future. High rates of household-savings make an economy more stable.

How to combine the high-rate of household savings and the further development of the economy? The answer is to let households save, but offer real possibilities to save. For example by de-politicizing banks, by allowing investment vehicles and by letting small investors act in the stock market. For all of this to happen, risk and rewards must be aligned. And that means allowing for and embracing risks. Easier said than done.

Henrique Schneider is chief economist of the Swiss Federation of Small and Medium Enterprises (sgv). He can be reached at hschneider@gmx.ch