Saving and the sex ratio in China

“Much attention has been directed toward China’s high savings rate. Not only is the savings rate disproportionately high compared to virtually any other country, but it directly impacts China’s current account surplus and the U.S. consumer deficit. When national savings exceeds investment, the excess savings shows up in China’s current account surplus.
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Given its far-reaching effects, both private sector analysts and policy makers have attempted to trace the causes of China’s high savings rate and to predict how long it will last. Some have attributed the savings primarily to Chinese corporations rather than households. Others point to a precautionary savings motive: because Chinese people are worried about costs of healthcare, education and old-age pensions and are unsure about how much these costs might change over time, they respond by saving more. Other explanations point to habit formation or financial development.

“But these explanations do not tell the whole story, and possibly are not the most important part of the story,” says Wei. Instead, Wei hypothesized that an important social phenomenon is the primary driver of the high savings rate: for the last few decades China has experienced a significant imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up. Three factors conspire to produce the imbalance. First, Chinese parents often prefer sons. Second, it has become increasingly inexpensive for even a relatively poor farmer to afford the $12 Ultrasound B, the most common technology used for learning the gender of a fetus.

Third, and perhaps most importantly, China’s stringent family planning policy limits the number of children a couple can have. The policy allows most couples to have only one child. But in some regions, if a couple’s first child is a daughter, the state permits the couple to have another child. Families with one daughter that become pregnant with another daughter are more likely to terminate the second pregnancy in hopes of producing a son later on. (India, Korea, Vietnam and Singapore also have sex ratio imbalances that favor male children despite the absence of these stringent family planning policies. It might be that in these countries people voluntarily want to restrict the number of children they have, and still prefer sons and have access to inexpensive selective abortions. The sex ratio imbalance is high in these countries but not as extreme as in China.)

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.””

“Why Do the Chinese Save So Much?”, post on Ideas that Work Blog, Columbia Business School (22 January 2010).

www4.gsb.columbia.edu/ideasatwork/feature/729422/Why+Do+the+Chinese+Save+So+Much%3F


Shang-Jin Wei is the N.T. Wang Professor of Chinese Business and Economy in the Finance and Economics Division at Columbia Business School and director of its Jerome A. Chazen Institute of International Business.


The most powerful forces now shaping the world are those related to demography and among the most significant of the changes taking place relate to fertility. Between 1970 and today, the world population experienced a major and unprecedented reduction in fertility levels, driven mostly by a reduction in fertility in developing countries. During this period, total fertility per woman fell from 4.5 children to 2.6 for the world as a whole, with 2.1 children as the replacement rate.

A number of factors are contributing to the decline in human fertility. Greater contraceptive use, abortion, and changing life styles have certainly affected the average fertility level. But in some countries, such as China, population controls and sex selection are also a important factor driving fertility down. China may be an extreme example of fertility decline, as its fertility has dropped sharply from an average of 5.7 children per woman in 1970 to an average of only 1.7 in 2007, far below the replacement level.

Another demographic change underway in an increasing number of countries is a changing sex ratio at birth. Historically, about 103 to 105 boys were born per 100 girls in almost all countries. Because the mortality of boys is higher than that of girls, the sex ratio moved toward 100 boys per 100 girls over time, reaching parity in many countries in cohorts corresponding to marriageable ages of the 20s and 30s. However, sex selection has moved the world average from 105 boys born per 100 girls in 1970 to 107 in 2010. In the case of China, the change has been much greater, from 107 in the 1970s to 122 today. It is also high in other Asian countries, the Pacific and in South-East Europe.

All this has implications for the United States. The demographic imbalance between men and women is seen by Professor Wei as the primary driver of the high saving rate of China and other Asian countries and the cause of their huge export surpluses. These export surpluses, in turn, correspond to and finance the budget and trade deficits the United States and other countries have recorded in recent years. If the problem of global imbalances is to be addressed, China must import more and the U.S. import less and, what is effectively the same thing, China must save less and the U.S. must save more. But if the high Chinese saving rate is rooted in demographic factors rather than economic factors, the usual economic policy instruments such as changes to exchange rates, relative interest rates, and income and price levels are not going to be effective in bringing about the necessary balance of payments adjustments to restore a balanced world economy.

If Professor Wei is correct, it may very well be much more difficult to eliminate the U.S. balance of payments deficits than we now believe.

Thanks to Tyler Cowen of Marginal Revolution to the point to this article.