In 2012, China became the world's champion saver with a gross national savings amounting to 53 per cent of GDP. More than half of the nation's savings are accumulated by the corporate sector and government but that still leaves a very high rate of savings in the hands of households, which put aside 38 per cent of their income for a rainy day. Why is this necessary?

Three reasons are China's poor welfare system, its inadequate pension scheme, and the threat of high inflation. Welfare support from the government is too meagre for the poor and too trivial for the rich. China's pension scheme is not comprehensive: only 31 per cent of migrant workers are covered, as a result of China's 'Hukou' system, which discourages them from settling in cities. Rural dwellers are not yet covered.

Even for urban residents, investment returns of the basic pension fund are too low to support the elderly. Families are forced to accumulate their own savings for health, self-insurance and old age. For ordinary Chinese who want to beat inflation, investment opportunities are rather limited. Neither China's volatile stock market, nor its sky-rocketing house prices provide risk-free returns. Putting one's saving in the bank makes little sense since the bank's deposit rate is lower than the inflation rate. There is no easy way for individuals to hold long-term government bonds, which are restricted to institutional investors.

Government plans revealed at the National People's Congress in March are a cheering signal of reform. It suggested that excess revenues from state-owned enterprises could be used as an additional financing source for individual pension schemes by 2020.

Still, comprehensive reform of China's pension and social welfare system is essential to support an ageing population. A diversified range of fixed-income products is vital for pension funds to acquire long-term financing. Meanwhile, barriers on overseas investment should be lifted to allow domestic capital the chance to seek long-term investment opportunities abroad.

Helena Huang is research assistant at the Chatham House International Economics Programme

 

Asia News & Current Events in Asia [...]

NEWS & CURRENT EVENTS

WORLD | AFRICA | ASIA | EUROPE | LATIN AMERICA | MIDDLE EAST | UNITED STATES | ECONOMICS | EDUCATION | ENVIRONMENT | FOREIGN POLICY | POLITICS

© Tribune Media Services, Inc. "China's Bulging Piggy Banks"

China's Bulging Piggy Banks | International Current Events & World News