Deck 5: Consumption and Savings in China and the United States

Question 1

Go to FRED (the Federal Reserve Economic Database), and using the relationship, National Savings − National Investment = Current Account Balance, determine China's savings as a share of GDP over the past decades. Hint: Use the data in FRED for China's "Gross Capital Formation."

Answer 1

See accompanying spreadsheet for calculations underlying estimate:

Question 2

Explain why China's savings rate is so high and why the United States savings rate is so low.

Answer 2

For China, reasons include those as discussed in text:
Demographic, Cultural, Life Cycle, and Precautionary Motives, Credit Constraints, Social Pressure to achieve wealth and a wife, lack of a social safety net, and the paucity of Dividends.
U.S. savings are low for many of the same reasons but with an opposite force. U.S. savings are low primarily due to low personal and government savings. Chinese savings are high because personal, corporate, and government savings are all high.

Question 3

In terms of its impact on savings:
a. Discuss which are more relevant for China: liquidity constraints or borrowing constraints.
b. Discuss which is more relevant (liquidity or borrowing constraints) for each of these activities:

Answer 3

a. The absence of a credit culture (borrowing against the future) and the credit rating mechanisms that would allow one to do so suggest that borrowing constraints are more important. Much of China's wealth is held in a highly liquid form, suggesting that liquidity constraints no longer are binding for many citizens.
b. i. Purchase of a product at Carrefour or Walmart. Liquidity Constraint
ii. Use of a debit card. Liquidity Constraint
iii. Use of a credit card. Borrowing Constraint
iv. Loan (mortgage) for the purchase of a new home. Borrowing Constraint
v. Restrictions/penalties on sale of stock/equity holdings before a specified holding period has expired. Liquidity Constraint

Question 4

Select some theories that we discussed and explain what will happen to China's consumption and savings in the coming years. Be specific about which theory you are using.

Question 5

Discuss whether decreased uncertainty about the future will cause the Chinese to save more or to save less. Rely on the discussion about the precautionary motive and the substitution effect.

Question 6

Estimate the impact on China's overall savings rate if the dividend payout ratio (PR) rises in China to U.S. levels.

Question 7

Pick one of the theories of dividend policy in Table 5.6 and discuss why you think it is more relevant to China than this book suggests.

Question 8

A major theme in corporate finance is that when firms have "excess" cash they should pay it out to their shareholders.
a. What are the interpretations/implications of this concept for China's dividend policy and national savings and consumption?
b. How might Chinese firms' excess cash holdings lead to greater consumption even if dividends do not increase? Hint: Who is another major stakeholder in a company other than shareholders?

Question 9

Why are savings not the likely path for China to increase its citizens' standard of living in the long run? Using a Solow approach, what then is the likely path for long-run sustainable improvements in China's standard of living?

Question 10

Are symbiotic savings important in the United States? Explain what factors make them important in China.