Saving a Top Priority for

Chinese…But Why?Understanding the

motivations behind China’s high savings rate

October 2010

2Copyright © 2010 The Nielsen Company.

Some Facts:

Forecasted to close 2010 at nearly 50% of GDP, China’s national savings rate is one of the highest in the region and substantially higher than developed economies like those of the United States and the United Kingdom. Despite the great economic growth over the past decade, the savings rate only increased.

OverviewChina’s consistently high savings rate has raised a fair amount of international and academic interest.

Economic theory based on Forward Looking Models suggest that countries experiencing strong GDP growth should see a drop in savings rate as people are better able to predict their future incomes.

China’s savings rate, on the other hand, has continued to remain high despite its remarkable GDP growth. A popular explanation is that China’s legendary savings habit is influenced by the Confucian values of thrift and frugality.

But does this theory apply in the present day? Nielsen seeks to understand the strength of this hypothesis and explores non-cultural factors which may have a role in explaining China’s high savings rate.

PH NZ PK AU JP SL HK TW VN ID TH IN KR SG MA CH

2010f 2011f

50

40

30

20

10

0

Exhibit 1: Savings as a % of GDP: China, Sigapore and Malaysia the highest

Source: CEIC, HSBC

3 Copyright © 2010 The Nielsen Company.

National savings is the sum of household, corporate and government savings (fiscal revenue). Based on the limited data available, it is interesting to note that household savings was the largest component prior to 1999. Thereafter, corporate savings caught up and came on par, and has played an equally important role in contributing to China’s high savings rate, due mostly to better productivity and efficiency of private enterprises in the post-reform era.

Household savings on the other hand showed a slight decline in the mid-1990’s and has since stabilized at around 16% of GDP. (Exhibit 3)

1999 2000 2001 2002 2003

US UK China

60

50

40

30

02004 2005 2006 2007 2008

10

20

Exhibit 2: Gross Domestic Savings Rate (% of GDP)

Source: World Bank

25

20

15

0

5

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

HouseholdSavings

CorporateSavings

GovernmentSavings

Exhibit 3: China Savings Rate by Components (% of GDP)

Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs, I on China Savings

4Copyright © 2010 The Nielsen Company.

Even recognizing the significance of corporate savings,the high-levels of household savings (see exhibit 4)warrants further attention.

Nielsen’s Consumer Confidence Survey reveals that savings sentiment continues to be strong among different consumer groups, even in the present day (rural areas have less surplus hence report lower intention).

China-2003 U.S.-2002 Japan-2002 Korea-2002 Mexico-2001

50

40

30

0

10

20

CorporateSavings

GovermentSavings

HouseholdSavings

Exhibit 4: Gross Domestic Savings Rate (% of GDP)

Source: World Bank Paper no. 41852 on Investment and Saving in China by Louis Kuijs, I on China Savings

0 10 20 30 40 50 60 70 80

National

Tier 1

Tier 2

Tier 3

Tier 4

Rural Areas

<30

30-39

40-49

50-59

60+

Low Income

Mid Income

High Income 70

69

43

41

49

53

63

63

63

63

66

46

63

56

Exhibit 5: Those Mentioning Intention to Put Their Surplus in Savings

Source: Nielsen CCI Survey 2010

5 Copyright © 2010 The Nielsen Company.

An Age Structure that Favors Savings

Since the late 1980’s, China’s demographics have favored the younger, working group, defined by economists as Prime Savers (20-49 yrs). Typically this group displays a higher propensity to save as it has to finance a variety of life-stage needs:

• Younger households (20-34) need to build homes and purchase durables

• Older populations (around mid-40s) need to save for their childrens’ education as well as for their own retirements.

These factors explain the high savings rate to 2015, after which the rate is expected to drop as these groups get older and graduate to become Non-Prime Savers (50+ yrs). With retirement setting in,both earning and savings capacity will drop and these households will start living off their accumulated funds.

Cultural Frugality – Remembering Confucius

Much has been written about China’s legendary savings habit built upon the Confucian values of frugality, self-discipline, taking zhong zhong or the Middle Ground (low-key) and living within one’s means. A modest lifestyle and avoidance of debt were natural outcomes of this value system, and offered a ready explanation of why Chinese were such strong savers.

So Why Do Chinese Households Save So Much?

1985 1995 2005 2015 2025 2035

50

40

30

%

0

10

20

2045

Exhibit 6: Prime Saver’s (20–49 years) Share in Population

Source: Paper on Determinants of Household Savings by Marcos Chamon and Eswar Prasad/IMF

Armani Burberry Cerrutti 1881 Dunhill Gucci SalvatoreFaragamo

100

80

60

0

20

40

Other CitiesKey Cities

Exhibit 7: Luxury Apparel Retailers–Store Location Share by Cities–2009

Source: Li and Fung Research Centre China Distribution and Trading, Issue 63, December 2009

6Copyright © 2010 The Nielsen Company.

However, the argument that frugal living is a ‘cultural constant’ weakens if we look at the proliferation of luxury stores catering to China’s small but growing nouveau riche and younger segments willing to spurge on luxury brands. McKinsey’s 2008 Wealth Survey reported 1.6 million high net worth individuals in China with an annual income of RMB 25,000+ who are willing to spend. This figure is expected to grow to four million by 2015, ranking China fourth globally as a luxury market. Boston Consulting’s “Coming of Age” study reported that China will take 29% share of the global luxury market by 2015.

The increasing appetite for luxury brands of the newly affluent and younger populations has prompted foreign luxury retailers to expand their footprint to capture this growing potential. In 2009, it was reported that more than half of branded apparel retailers had expanded their footprint beyond key cities.

Aversion to Debt and Risk: Myth or Reality?

“Do not go into debt” is a strong traditional sentiment in China and many East Asian countries. In 2008-2009, Nielsen’s Personal Finance Monitor reported that 73% of home owners did not take mortgage loans; 95% of car owners bought cars from their own savings, and; more than two-thirds (68%) of credit card holders claimed to pay their entire outstanding balance every month.

But is this sentiment changing?

There are signs, however, that this aversion to debt is slowly changing. Take for example consumer response to auto loan schemes offered during October’s Golden Week in 2009. Auto dealers were offering initial down payments and monthly principal payback at a zero percent interest rate. This had a significant impact on car sales of certain models, as quoted by car dealers in the media:

“Before this policy, 8 to 10 percent of consumers chose to take out loans to buy cars. But now the proportion is more than one-third,” stated Jiao Miao,Sales Manager, Guangzhou Toyota Motor Co. Ltd.

“When we cooperated with banks, the volume of autos paid for by loans accounted for only 3 percent of our total

Exhibit 8: Incidence of Loans and Revolving Credit

Loan Incidence

Home Morgage Loan

Car LoanCredit Card Installment

Purchase Scheme

No 73% 95% 86%

Yes 27% 5% 14%

Base 4655 home owners 2327 car owners 3191 credit card owners

Incidence of Revolving Credit on Credit Card

Credit Card Monthly Payback % mentions

Pay In Full 68%

Partial Payment 8%

Minimum Payment 4%

Not Sure 20%

Base 3191 credit card owners

Source: Nielsen Personal Finance Monitor in 18 cities, 2008-2009

sales. But that same figure has climbed to 8 percent,” said Hao Qianglin, Managerof Wuhu Anqi Auto Sales Co.

Another illustrative example of changing attitudes toward risk occurred in 2007, when students, with no personal earning capacity, were joining pensioners, housewives and people from all walks of life during the famous stock market frenzy. Reuters reported 300,000 new stock accounts opened every day for five days in a row in May of that year, and the price of many stocks quadrupled in an 18 month period. (May 25, 2007, Reuters report).

As incomes grow and attractive loan schemes and investment opportunities present themselves, Chinese are keen to avail themselves of them, proof that the explanation for high savings intention due to cultural factors may not be telling the full story.

7 Copyright © 2010 The Nielsen Company.

Exhibit 9: Comparative Cost Index

What Does Mr. Jay Have to Save for?

Nielsen conducted in-depth interviews with first jobbers in China and the United States to get a deeper look at their saving needs and how they are likely to fund these expenses.

A comparative cost index was developed reflecting multiples of their current salary needed to pay off different life-stage expenses such as weddings, the purchase of a house, children’s education, purchase of durables, health and old age expenses. (see Exhibit 9 above).

John JayJohn JayJohn JayJohn JayJohn JayJohn

House Wedding Car CollegeEducation

MedicalExpenses

Pension/Old AgeExpenses

Jay

100

80

60

0

20

40

LoansParents Savings Personal Savings Govt/Private Plan

Exhibit 10: Assessing The Sources of Funds For Their Lifestage Needs

Source: Nielsen Quantitative Research

JayAge 23 years oldGraduateExecutive, MNC, ShanghaiCurrent Salary: RMB 7500/month

Cost (RMB)Cost Index

(Expense/Salary)

College 400,000 53x

Wedding Expenses 140,000 19x

House Value 2 million 266x

Mortgage Down Payment 600,000 80x

Car 94,000 13x

Future Medical and Old Age costs

6 people: Self, Wife, Own Parents, Wife’s Parents

JohnAge 23 years oldGraduateExecutive, MNC, USACurrent Salary: $5000/month

Cost ($$)Cost Index

(Expense/Salary)

College 100,000 20x

Wedding Expenses 10,000 2x

House Value 200,000 40x

Mortgage Down Payment 50,000 10x

Car 25,000 5x

Future Medical and Old Age costs

2 people: Self, Wife,

Source: The Nielsen Company

8Copyright © 2010 The Nielsen Company.

Clearly, Mr. Jay has a lot of saving to do!

• High property prices in China require Jay to have adequate liquidity early in life. Moving into one’s own apartment is an important first step for marriage, and saving needs to begin much longer in advance before the actual wedding. Jay’s parents and perhaps the brides’ side will also contribute as well.

• Chinese weddings can be lavish and the groom’s family bears the cost. Jay has to ‘technically’ save 19 times his salary against John at 3 times. Jay’s parents will also support the wedding expenses.

• In the future, when both John and Jay have a child, public education is available till middle school in China and high school in the US. Jay will need to save for high school and college education using his personal savings. In the US, availability of long-term student loans at flexible rates reduces the need for immediate liquidity, which Jay needs to plan for as student loans are yet not popular in China.

• Caring for elderly parents is a strong tradition in China. Born in the era following the One Child Policy, Jay will in later years be saving for medical and old age costs for six people(himself and his wife, his own parents and his wife’s parents). Much of course depends on their parents’ own past savings and their ability to support themselves independently.

While government investment in social security and healthcare has increased over time, China’s social security funds are still much lower than those in developed economies. Standing at RMB 1000 per capita, this represents 2% of the country’s total household wealth (see Exhibit 11), well below the US level of 20% (Source: Professor Ha, Heading for Balanced Growth Paper at Nielsen CCI seminar, 2010). Precautionary savings to cover for medical and post-retirement expenses remain an important factor in explaining China’s high savings rates.

Keeping savings in cash and bank deposits at low interest rates, buying three to four properties as investments are the most popular ways of keeping surplus income. Both are seen to be outcomes of the precautionary savings motive, offering greater psychological assurance to Chinese consumers than investing in stocks and bonds.

US-2007 Japan-2007 France-2007 Canada-2007 China-2007 US-1972

100

80

70

90

60

50

30

10

0

20

40

%

Currency and deposits Bonds and others Stocks

Pensions and Insurance Real Estate

Exhibit 11: Household Assets Breakdown

Source: Professor Jiming Ha, CCI, Heading for Balanced Growth Paper at Nielsen CCI seminar, May 2010

9 Copyright © 2010 The Nielsen Company.

The argument that China’s high savings rates can be attributed to a handed-down tradition of thrift and frugality loses strength if we look at the spending behavior of affluent Chinese today. When a certain income threshold is reached, Chinese are as big spenders as they are savers.

While more studies are necessary to quantify the correlation between savings rate and the explanatory factors such as culture, Nielsen believes that demographics, high costs of certain life-stage expenses, the precautionary savings motive and existing loan and credit environments play a stronger role in explaining the savings rate as opposed to the frugality theory.

Conclusion:

Exhibit 12: Strength of Factors Explaining High Savings Rate Today A Qualitative Assessment

Cultural Frugality and Debt Aversion

High Share of Prime Savers In Population

Current costs of certain life-stage expenses (education, housing, weddings)

Government support on Social Security and education

Limited availability of attractive loan schemes to fund life-stage expenses

Limited options to channel savings out of cash and bank deposits

STRONG WEAK

We believe that once increased government spending on soft infrastructure such as education, health and pensions starts having an impact, combined with diversification of the financial markets in favor of more medium risk products and changing demographics will lessen the importance of precautionary savings in China and overall savings rates will be more in line with developed economies.

Copyright © 2010 The Nielsen Company. All rights reserved. Produced in the U.S.A. Nielsen and the Nielsen logo are trademarks or registered trademarks of CZT/ACN Trademarks, L.L.C.