One hour’s drive north of Beijing, on the border of Hebei province, is Da Xing, a farming village famous for the sweetness of its melons.
Most of the villagers are involved in agriculture, either helping to farm large plots of wheat or corn or working on smallholdings to grow vegetables and fruit. The centre of the village is a two-lane road, lined with small shops and businesses. It is the kind of village, neither poor nor wealthy – but relatively affluent for a village in the countryside – where you would expect to find conservative families who have set aside money for an uncertain future.
At the same time, its proximity to Beijing means there are remittances from villagers who have left to work in factories – last year, the proportion of urban residents overtook rural residents for the first time; 51.3% of Chinese now live in cities versus 48.7% in the countryside.
The villagers who remain have also seen crop prices rise and taxes cut, and both pensions and medical insurance introduced in recent years. Thus, Da Xing’s inhabitants would be expected to contribute to the much talked-about shift in China’s growth from export-oriented to domestic consumption.
China’s high level of household savings is often said to be unbalancing the global economy: in essence it represents a transfer of spending power from Chinese farmers – who prefer to live below their means in order to have some money put aside – to western consumers.
And although some analysts have enthused about the robust increase in retail sales, which jumped by 17.1% last year and by 18.4% in 2010, compared with single-digit growth at best in developed economies, household consumption as a share of the overall Chinese GDP has fallen. It dropped to 34% in 2011 from 35.1% in 2010 – and from over 50% in 1989, data from the National Bureau of Statistics show.
Between 2000 and 2009, the average household savings rate across the country was 24.6% of a family’s disposable income, according to Heleen Mees, a professor at New York University’s Wagner Graduate School of Public Service.
These savings, placed in the country’s government-run banks, have helped to fund a state-sponsored infrastructure and investment boom over the past two decades.
Some economists predict that Chinese families will begin to spend more in the years ahead as the one-child policy creates an ageing society. The growing cohort of older Chinese will not be working, and will therefore be consumers, rather than savers.
But in Da Xing, there is little anecdotal evidence of high levels of financial savings. Instead, the villagers have invested their money in bricks and mortar.
Du Yajie, who runs the village shop with her husband, is an example. She has two sons – as China’s one-child policy is relaxed for those who live in villages. One son is at university. The other, 10 years old, was playing computer games behind the shop counter.
But her family’s finances are precarious. They pay 10,000 yuan ($1,570) a year in university tuition fees and 2,400 yuan for their son’s food. The annual rent on their shop is 14,400 yuan. With those fixed costs, there is usually no money left over at the end of each month.
However, the Du family has two houses. In 2009 and 2010 they built one for each son, at a total cost of 100,000 yuan.
“Before we built our two homes, more than five years ago, we were saving money,” says Mrs Du. “At one point, when the children were still young, we were managing to save 20,000 yuan a year. That was the most we were ever able to save.”
They decided to invest in property when the local government said it planned to upgrade Da Xing and knock down any old buildings.
“At that time, a lot of people decided to build their own homes. If they didn’t have money they borrowed it. For us it means we no longer have savings but we have homes. I worry about not having money in the future, but we will have to save for our retirement when our children have finished their education. We are lucky. At least my parents and my in-laws are healthy,” she says.
Of the seven families Emerging Markets spoke to in Da Xing, only two could be described as savers, and none as consumers. There is no pool of money waiting to flow into higher consumption because it has all been invested in property.
POST-CRISIS STIMULUS
Data from the National Bureau of Statistics show that residential real estate investment grew by 10.7% in July 2012, 36.3% in July 2011, 34.5% in July 2010 and 8.2% in July 2009 – illustrating how the money from the post-financial crisis stimulus package went straight into real estate.
Part of this money is in what has become known as China’s “ghost towns” – cities built for millions but inhabited by tens of thousands of people – but individual families in rural areas, like those in Da Xing, have also contributed to the boom.
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Men who do not own houses struggle to find brides, especially in the countryside, and many young couples feel they cannot ‘settle’ without home ownership. The boom in the Chinese property market has been a self-fulfilling cycle. With real interest rates in China close to zero, and often negative, and a highly unpredictable stock market, property has proven to be by far the best investment for Chinese families. In turn, the rising market has drawn in more investors.
Recent figures from the South-Western University of Finance and Economics in Sichuan province and the People’s Bank of China suggest that home ownership in rural areas has now reached 94.6%.
“When migrant workers manage to remit money home, this money is used to buy construction materials to build houses,” says Mao Yushi, an 83-year-old economist and winner of the Cato Institute’s Milton Friedman Prize for Advancing Liberty, who has repeatedly warned of the danger that a property bubble poses to the Chinese economy.
“Until last year the government encouraged this by heavily discounting building materials. Lots of people bought materials but not all of them were able to build homes. In the end this was a very bad policy. It has now been stopped,” he says.
Even Da Xing’s poorest families are home owners. Mrs Yi, who came with her husband and two young boys, to Da Xing from Henan province, says they owned a house in their home province.
She takes piece work on the village’s farms, while her husband is a construction worker, and together they earn around 60,000 yuan a year. The family pays 100 yuan a month to live in a small concrete hut, but she says they have little money left over at the end of each month.
Meanwhile, a farmer who was selling coriander and tomatoes and gave her name as Mrs Zhou, says her family earns between 10,000 yuan and 20,000 yuan a year.
“I only save after the autumn harvest, but then most of that money goes into the next season’s harvest. We can save barely anything. The price of fertilizer has doubled in the last few years, and it is harder to sell stuff. Each household in the village grows its own vegetables, so they only buy produce for special occasions,” she says.
However, the Zhou family also owns a home, a 130,000 yuan, 10-room house that shelters her family and her in-laws. “I do not worry too much about getting old. I will think about it later on,” she says.
Mees argues that the rising pool of household savings in China is almost entirely the result of rising incomes and the country’s ageing population. In particular, her data suggests that it is the highest income earners in China who manage to save and that the pool of savings is relatively tightly held, rather than being spread out across the country. In 2009, households in the top income decile were saving 40% of their earnings, but the lowest decile were saving just 4–5%.
HIGH-INCOME SAVERS
“Most savings come from fairly high-income earners in China,” says Mao Yushi. “Just look at the booming consumer markets – for example, luxury goods. That suggests consumption is happening at the top end.”
This means that there is unlikely to be rapid consumption growth outside of China’s main urban areas. Hu Xingdou, an economist at the Beijing Institute of Technology, says incomes were too low in the countryside for a rise in consumption.
“Low consumer spending is the result of two factors: one is a lack of desire to consume and the other is a lack of capability to consume. Chinese people mostly belong to the latter,” he says.
“Chinese incomes are over-stated. A worker has to pay tax and ‘five insurance payments’, which normally accounts for about 45% of his salary. This is about the same percentage for developed countries. But the government does not provide enough welfare and public services to match the payments,” he says.
In Da Xing, there are only a handful of families who dare to spend. One such is the Hans. Mrs Han owns one of the “best houses in the village”, built on a prize 600 square metre plot of land. Her husband is a local official, and her farm vehicle maintenance shop earns 50–60,000 yuan a year in profit. She also earns 40–50,000 yuan by raising fighting grasshoppers. As a result, she and her husband pay around 20,000 yuan a year into their pensions, and can afford to pay another 20,000 yuan a year for their son’s vocational school fees.
“In Da Xing, people spent all their savings or they borrowed money from relatives to build houses. Other families now have no savings. The local government asked some farmers to put 1,000 yuan into pensions recently, but most of them cannot afford to do it,” she says.
Mrs Han’s home is furnished with the latest white goods: she looks like the village’s most conspicuous consumer. But, even she says shopping is a rare treat. “This is a rural area. We do not buy things, certainly not luxuries. We might buy some clothes at Chinese New Year, that is all,” she says.