In the fall of 2009, I was invited to Beijing by Tsinghua University to present a keynote address at the first China Consumer Finance Forum. I was given the liberty to speak freely about my view of our shared world – understanding household economic behavior. It was a personal honor and it presented an opportunity for this Missouri boy to meet some Chinese leaders in the field of finance. One of the nicest by-products of the trip was to gain access to the first iteration of the Survey of Chinese Consumer Finances, collected by Tsinghua University and funded by Citibank (China) Co., Ltd. The data provide insights into their culture and, upon reflection, clues about our own.
The data were collected from slightly more than 2,000 households residing in fifteen cities within China, all Class-One and Class-Two cities. The data represent the urban Chinese, having greater wealth and income than their rural counterparts. Some characteristics of the sample follow with comparable numbers of the United States from the Survey of Consumer Finances for the year 2007. In China, 73% were married, with 59% being married in the Unites States. Fifty-five percent of the Chinese stopped school with a high-school education or less, while in the United States 46% stopped with a high-school education, or less. The average annual household income in China, converted to dollars, was $10,220, while it is $84,300 in the United States. (The median US income is $47,300.) Average Chinese household assets were found to be $80,619, or about eight times average income, while average household assets in the United States in 2007 were $668,500, also about eight times average income. For the Chinese, the average level of household debts were $1,702, or 17% of average income, while in the United States, average household debt is $114,511, given an average per capita debt of $43,874 with an average household size of 2.61 persons (Whitehouse, M., “Americans Pare Debt”, Wall Street Journal, March 12, 2010).
At face value, the similarities between China and the United States, with respect to relative levels of assets to income, as well as demographics, are remarkable. The level of debt to average income, however, is not. The average US household debt is 136% of household income, compared to 17% for the Chinese. Moreover, if we include federal borrowing, the United States number increases an additional $109,792 per household, to $224,303 per household or 266% of average household income (or, 474% of median household income). We need to ask the question, “Is this sustainable and, if not, what can I do about it?”
What else do we know?
In the Chinese sample, we found that while 85% of the sample owned a home but that only 11% carried a mortgage on that property. In the United States 69% were homeowners in 2007, with 70% of them carrying some debt on the property, either a mortgage or home-equity loan. Some of this is a result of Chinese employer home purchase plans for employees, in an effort to provide housing while limiting indebtedness. In the United States, however, mortgage debt is encouraged through a subsidy in our tax code that, in fact, provides the greatest subsidy to those with the largest mortgage and, typically, highest incomes.
Less than 1% of urban Chinese use consumer loans to purchase consumer goods, while 47% of all US families have installment loans and 46% carry a credit card balance. Admittedly, consumer credit is necessary to smooth our consumption stream – shifting income from high periods to periods where it is relatively low. In fact, a member of the Bank of China confided to me that increasing the borrowing of the younger Chinese is a goal of the Chinese government to enable them “to not be dependent on the west to support our growth”.
Roughly 12% of the Chinese sample owned a car with only 0.7% of the population (6% of the automobile purchasers) borrowing money to purchase a car. In the United States, depending on your source, from 73% to 91% of new car purchases involve financing.
The good news is that, in the United States, credit use is decreasing and savings rates are up. Revolving Credit decreased at an annual rate of 12% in March and nonrevolving credit decreased at an annual rate of 7%. In addition, April of 2010 saw a household savings rate of 3.6%, compared to 3.1% in March, and it has remained over 3% since the fourth quarter of 2008; compared to estimates from 25% to 50% for China. With respect to the question of why China’s saving rate is so high, the answers range from the lack of a social security system, the absence of government provided medical care, a culturally bound ethic in improving the future for their family, and, surprisingly, an excess of males to females. Whatever it is, we westerners should be grateful for Chinese savings, as it is used to loan money to the United States. Thus, allowing us to continue down the road our nation has chosen. Each of us must answer the question, however, as to whether this road leads to our financial success.