An alternative explanation for high saving in China: Rising inequality

Abstract

This paper examines potential factors contributing to China's originally high and subsequently rising rate of aggregate saving prior to the global financial crisis. We find strong evidence that the high and rising level of income inequality in China is a significant mover of its savings glut. Behavioral inertia, income growth, industrial structure, and policy orientation (fiscal receipts and real interest rates) are also found to be responsible for high saving that, however, is somewhat alleviated by rising old dependency under population ageing. The policy implication of our findings is that a corrective redistribution of income in favor of the working class is urgently needed for China to boost consumption spending, make economic growth rely less on investment or trade, and help mitigate worsening global imbalances.