The Chinese “savings glut” is often blamed for many ills of the world: the indebted US consumer, low interest rates and growing national debt in the rich world. We don’t always see a discussion of what drives this savings rate to be so high and why other cultures seem to have a habit of being so diligent in their savings.

I continue to be fascinated by this because I am obsessed with how culture and beliefs affect people’s financial well being and their financial decisions both on a small scale within our everyday lives and on a global scale when whole countries practice the habit of saving. I was extremely lucky to have been brought up in an environment that stressed savings but also risk taking. These components are not often found together. In many cultures, saving is encouraged but risk taking is not. When I say I was given the components to increasing wealth I am being very specific. Mainly that you have to save diligently but you also have to invest. Investing included bonds, the stock market and cash. Investment also meant investing in yourself through education and continuing education throughout your life. I personally added to these further risk taking such as starting a business and real estate.

The Chinese

I find that specific cultural and historical events seem to have a strong influence across generations of different countries as to why saving is important. In the case of the Chinese there were a number of changes in the past 40 years made by the government that had a direct effect on how much people saved.

The first was the reforms of 1978, which loosened the idea of a guaranteed government job and increased uncertainty. These laws also reduced much of the old age pension benefits from the state which put the burden of saving for retirement back in the individual. The other being a banking system where buyers may have to put as much as 30% down for a home where incomes are much lower than the US but prices in many cities are comparable to what we would pay here. For example the average salary in Shanghai is $1,135 but the average home price in the city is $725,000. These prices are likely out of reach of most average people in Shanghai given that someone on the average salary would have to save 100% of their income for 16 years just to have a down payment for the average home, and still couldn’t afford the mortgage if they bought it. The sky high home prices are a consequence of government policy which restricts the savings of mainland Chinese households essentially to real estate. Only the well connected and party insiders have the type of money that allows them to have offshore accounts where they can actually invest overseas and let their money compound, the merely middle class are left to the whims of the pending housing bubble there.

Other studies of China suggest that the former one child policy, which produced an imbalance of men to women there (122 men for every 100 women) may play a role in increased savings of the families with boys. Owning a home is considered a cornerstone of family life and marriage and many feel their sons need to own a home or have the ability to own a home as a precondition to finding a good spouse. Researchers found that families that lived in urban areas with higher proportions of single men had higher savings rates than in other areas which may suggest this idea has some weight.

All this translates to a household savings rate of 36% in China compared to 7.8% in the US. However due to demographics and the anticipated aging of the population in China, the savings rate is expected to decrease in the future. So saving for the Chinese, even if it is multigenerational, may we’ll be a consequence of government policy and demographic trends. The IMF attributes 50% of savings in China recently to demographics alone.

Source: IMF

The Germans

Germany has been through a number of demographic trends in the past 200 years but over that time Germans have been prodigious savers. This seems to permeate the culture there. Children are taught to do their duty and save from a young age. Many children are given savings accounts and educated on the merits of saving. They are encouraged to incorporate habits into their lifestyle that revolve around thrift and delaying gratification. Indeed, it has been noted that the tabloid press even takes advantage of this national psyche of saving. When Europe started to see lower interest rates, Germany’s press focused on how the low rates were stealing from savers rather than in the US press where the lower cost of a mortgage or business loans may have been the focus.

There have been a number of theories as to why Germans are so committed to saving. Some think it is rooted in a Protestant work ethic that emphasizes that delayed gratification and preparation for bad times. Others think it is rooted in a strong sense of national identity and community built from the power of the first savings banks there which helped fund national infrastructure and public services. Indeed even until the very end of WWII in 1944, Germans continued to save even more than they had before the war started. All this saving despite the fact that inflation has wiped out all German savings twice in the 20th century. Once post WWI and again post WWII.

Whatever the reasons, Germans save but they don’t seem to invest heavily and do not use much credit. There is a deep seeded aversion to any form of debt overall in Germany which translates to only 32% of Germans having a credit card and still conducting 80% of transactions in cash. This compares to 53% of Americans with a credit card who conduct 50% of their transactions in cash. Even those last figures surprised me as I assumed an even higher proportion of Americans used electronic means of payments instead of cash.

In terms of investing, Germany’s don’t seem to turn those savings into vehicles for compounding. This could likely be due again, to the national trauma of having the entire stock market wiped out during the last world war and the general aversion to risk. This may be forced to change though as low interest rates push more Germans to invest in the stock market.

The Scots

This stereotype that Scots are cheap has largely disappeared in the US but may well live on in the U.K. It is told that Scotch Tape got its name from when it originally had adhesive only on the edges of the tape. An early user told a 3M salesman to go back to his “Scotch bosses” to put adhesive all over the tape to make it stickier.

Adam Smith, the founder of modern economics was Scottish and ethnic Scots in the US have been shown to disproportionately be prodigious savers and millionaires. Apart from the more modern and recent examples given above for the Chinese and Germans, Scots may have a long inclination tied to saving in their history as well. Scottish and Welsh may have had to have been more resourceful than their English counterparts for some time due to the fact that they inhabited parts of Britain which were harsher and less hospitable than the fertile land occupied by the English. As far back as the 13th and 14th century, Scots were known for fighting the English with pitch forks and scythes as opposed to swords because the population simply couldn’t afford them.

In more modern times many Scots have found business success and been quite frugal the most famous probably being steel magnate Andrew Carnegie.

Others

There are a number of other nationalities and cultures that tend to save at higher rates. The Swiss and Swedish have some of the highest household savings rates. Sweden now is famous for its brands like IKEA that emphasize practical style while the Swiss are known for their banking prowess and having the highest proportion of its citizens being dollar millionaires compared to any other country.

Source: Bloomberg

Again, you can think back to the limited resources of the Swiss and being a landlocked country which forced them to engage in commerce and be ingenious in the use of what they had to make ends meet compared to the countries around them.

One study, which looked at immigrants across 3 generations in the U.K. found there was some loose correlation between the saving rate of the country of origin and the savings rate of immigrant families even after they had been in the U.K. for 3 generations.

Source: Vox EU

These examples show that culture and the specific circumstances of a particular country may have a strong and lasting impression on how habits of saving and investing are passed down to later generations. There is no single answer to why some countries and some cultures save more than others but mimicking the habits and the mentality of those that have been most successful in both earning and saving could be key: an emphasis on literacy, education, practicality, saving, investing and taking risk seem to be constant themes for those countries and cultures that have done well through time.

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