China's $1.2 Trillion Savings Glut In Focus For Recovery

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by Tyler Durden
Wednesday, Feb 08, 2023 - 05:45 PM

By Ye Xie, Bloomberg Markets Live reporter and strategist

The exact shape of China’s economic recovery depends on how much consumers pull out of the savings they accumulated during the pandemic (also see "What China Savings Mean For World Consumer Firms").

While the jury’s still out, the pattern of post-lockdown saving rates in developed economies suggests that a spend-it-all approach is unlikely among consumers in China.

With slowing exports and sluggish housing investments, consumer spending is expected to be a key driver of economic growth. China bulls point to a record increase of new bank deposits of 8 trillion yuan ($1.2 trillion) last year as the dry powder that could be unleashed to support spending.

In reality, though, the increase in deposits exaggerates the actual size of precautionary savings. Because of market volatility, households moved money from financial investments, such as wealth management products, into bank deposits. A housing crisis reduced home purchases, leaving money in bank accounts. These funds were set aside for investments purposes and won’t necessarily be drawn upon for buying new cars and jewelry.

The change in the saving rate — how much people save from their annual income — relative to the pre-pandemic trend would be a more reliable measure for “excess savings.”

The saving rate increased to 33% in 2022, from about 30% prior to the pandemic, resulting in extra savings of 3 trillion yuan over the past three years, according to Goldman Sachs’s economists, including Maggie Wei and Hui Shan. It represents about 6% of disposable incomes, a fraction of the US’s 13% and the euro-zone’s 15% at the peak.

Source: Goldman Sachs

Should Chinese consumers spend their excess savings, it would lead to an economic boom. The experience from developed market, however, suggests it’s less likely.

Amid broad reopenings, the saving rate in most developed markets simply returned to pre-pandemic levels — without falling below, according to Goldman’s economists. Consumer behavior in Shanghai and Hubei Providence after the reopening from shutdowns shows a similar pattern.

Source: Goldman Sachs

In addition, JPMorgan’s economist Zhu Haibin and his colleagues pointed out that savings are concentrated among high-income families. In a note published last month, they estimated that the excess savings in urban households were almost 10 times of those in rural areas. The uneven distribution means only a portion of these savings could be tapped.

Consumers reducing the saving rate to pre-pandemic levels alone would be enough to keep the economy humming. Goldman Sachs economist expect consumption to rebound 8.5% this year, assuming consumers won’t touch their extra savings.
It requires a revival of animal spirit for consumers to spending their dry power. After three challenging years, it may be a tall order to ask.