Seventh, the average citizen in China doesn't save more than one in Hong Kong, Singapore, or East Asia: they are all Confucian savers, and tend to salt away a third of after-tax income. A big difference, however, is that a whopping 25% of savings in China is in the form of the retained earnings of the corporate sector, mostly state-owned enterprises (SOEs). In most private economies, those firms' profits would become dividends that would increase household income and thus consumption. In China, they become retained profits that go into more capital accumulation and excess capacity. The Chinese policy of an undervalued currency and low cost of capital for public firms (and thus low return to savings for households) has implied a massive transfer of income from households (that thus can't spend) to SOEs (that thus overinvest). Short of privatizing the SOEs or massively taxing their profits and transferring that income to households, savings will remain too high, consumption too low, and investment excessive. Yet the SOEs are politically powerful while households are impotent, so reform could prove a major challenge.
Clearly China needs to radically change its broken growth model in the direction of reduced exports, investment and savings, and increased consumption. But there are structural -- and cultural -- reasons why the Chinese save so much and consume so little. Radical policy reforms may take more than a generation to rebalance the Chinese economy toward a more sustainable growth model.
Roubini is chairman of Roubini Global Economics, professor at the Stern School of Business at NYU, and coauthor of Crisis Economics (Penguin, 2010).