TALKING TURKEY Why Templeton is overweight on emerging markets PAGE 13

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Sisterly advice from Betty PAGE 13

SUNDAY MORNING POST MAY 6, 2007

Obsession with saving remains anobstacle for investors in retail sector

Thrift culture
still rules on
the mainland......................................................
Jacob Leibenluft
Despite all the supposed virtues offrugality, few people have many nicethings to say about the mainland’senthusiasm for saving.
For the central government, thecountry’s overall savings rate – which
now stands at about 50 per cent of itsgross domestic product – has inhibited the mainland’s evolution into a
more mature, consumption-based
economy. For the retail sector and its
growing cast of investors, that thrift
presents a major obstacle to unlocking the potential buying power ofmainland consumers. For Beijing’s
main trading partners, a decline insavings would provide an easy fix to
its huge current account surplus.
Yet even as the calls for a spendthrift mainland have grown louder,the nation’s savings deposits havetopped 16 trillion yuan while consumption has dropped as a percentage of the overall economy. Three recent papers by some of the top experts on the mainland’s economy
suggest a significant fall in the savings
rate is unlikely anytime soon.
“The high savings rate is not a
temporary problem,” says Sun Lijian,an economics professor at Fudan
University. “It is a structural problem.”
In a historical sense, the mainland’s penchant for savings is a relatively new phenomenon. Until economic reforms began in 1978, household savings stood at only about 5 percent of disposable income; by themid-1990s, that figure had climbed to
30 per cent, and was widely credited
for helping fuel the country’s rapid
growth. Household savings havesince dipped slightly, to about 25 percent, but still remain significantly
higher than those of virtually anyother country in the world.
That the mainland has a high savings rate is in itself unremarkable.
When countries experience rapid

economic growth, their savings rates
tend to go up because it takes time forspending to catch up with income.
Likewise, the same economic restructuring that set the stage for themainland’s boom added an elementof financial uncertainty for individuals. As state-owned companies
grew leaner – cutting jobs and trimming the social safety net – families
increased their “precautionary” savings to prepare for the possible costsof unemployment, sickness or retirement. But one paper suggests thateven taking account of the mainland’s economic transformation overthe past three decades, its savings
rate is still exceptional. Using a rangeof cross-country variables, WorldBank economist Louis Kuijs estimated in a 2006 paper that the main-

The high savings rate
is not a temporary
problem. It is a
structural problem......................................................
Sun Lijian, economics professor
at Fudan University
land’s savings rate was about 12 percent higher than its basic economic
conditions would predict.
Dr Kuijs says families explain only
some of the discrepancy. Even as
household savings rates have steadied as a percentage of GDP, Dr Kuijs
notes, business and government savings have skyrocketed.
The mainland’s reliance on industry is one explanation: industrial
enterprises invest more than companies in the service sector or agriculture, so their savings rates tend to behigher, Dr Kuijs says. Since mainland
enterprises seldom pay dividends,
high profits in recent years have beenploughed back into the companies,
further boosting corporate savings.

Super savers
Comparable rates of savings (% of GDP)
ChinaUSJapanS Korea

India

Total domestic

41.7

14.3

25.5

31.0

28.3

Household

16.0

4.8

8.2

4.5

22.0

Business

20.0

10.3

19.4

14.8

4.8

Government

5.7

-0.9

0.3

-2.2

1.5

Data for China is for 2005, for India 2004 and for other countries 2002
SMP GRAPHICSOURCE: KUIJS (2006)

Shanghai’s middle class may be embracing consumption, but mainlanders
overall are savers not spenders. Photo: Bloomberg

The central government has also
shown a tendency to boost savings bykeeping spending relatively low andtransferring significant sums of money to state-owned enterprises.
Until recently, however, conventional wisdom suggested that it might
only be a matter of time before themainland’s savings rate – both at anational and household level –moved into line with that of othercountries. Sustained economic
growth would eventually give households the confidence to spend without worrying about financial disaster.
As the mainland aged, the savings
rate would inevitably drop, as theageing population drew down on
their nest eggs to pay for health careand retirement.
But Eswar Prasad, a former China
division chief at the International
Monetary Fund who now teaches atCornell, says recent history suggests a
more complicated picture.
Standard economic models for
how individuals spend and save overthe course of their lives – the so-called“life-cycle hypothesis” – contend thatspending patterns follow an “inverted-U” shape. When workers areyoung, they spend a lot relative towhat they earn, often borrowing
against future income through mortgages and other loans. As they getolder, they start saving in preparation
for retirement. Finally, as they leave
the workforce, they start spending
much more of their income.
On the mainland, data on household behaviour shows a different story, Dr Prasad says. Without easy access to credit, youngsters save at highrates. Older workers are particularly
frugal as they prepare for retirement,
but even some retireesare still saving,
Dr Prasad finds in research with IMF
economist Marcos Chamon.
Eventually, Dr Prasad says, themainland’s demographics may pushsavings down. But middle-aged
workers – born just before the onechild policy was enacted – are both sonumerous and so inclined to savethat a shift is unlikely to come anytime soon.
“Just in terms of sheer numbers,
they could keep the savings rate higher for the next decade or decade and ahalf,” he says.
In another paper, Charles Yuji
Horioka and Junmin Wan, two economists at the Osaka University, challenge the idea that demographics
play a large role in determining savings. Yet they come to a similar conclusion: the mainland will keep saving, largely because households
don’t change behaviour quickly.
“Even if China’s household savingrate declines, it won’t decline all that
rapidly,” Dr Horioka says. “Most people are expecting income growth toremain high, and moreover, there’s astrong persistence effect preventing
the saving rate from changing toodramatically.”
For those counting on a consumption boom, all three papers still
provide some reason for hope, noting
policy changes could lay the groundwork for an eventual savings decline.
The first step, they all agree, is astrengthening of the social welfare
system – a move that would both lower government savings and encourage consumers to spend more.
The experts also point to a wide
range of necessary financial reforms
that would reduce both enterpriseand household savings, from encouraging companies to pay dividends toincreasing access to loans.
Dr Kuijs estimates that these reforms – combined with growth in theservices sector – could lower themainland’s savings rate by as muchas 18 per cent over time.
However, Dr Kuijs points out thatthose policies would lower investment, too – meaning the impact on
the current account surplus would besmaller. And even if Beijing is committed to those policies, Dr Kuijs concedes that the changes in the savings
rate would only occur over a long period of time.

By giving internet-connected computers to clients, Tony Espina was able to cut the floor space Goldride Securities rents by two thirds. Photo: David Wong

How hi-tech broker takes on giants......................................................
Enoch Yiu
For many small brokerages, the key
to survival in the land of giants has
been personal contact. But to Tony
Espina, who runs the city’s leaststaffed firm, it has been his deftness
in incorporating technology into hisbusiness.
When the Hang Seng Index
launched the AMS/3 system in 2000,
enabling internet trading from any
computer, it was viewed by many as amajor threat to the independent brokerages, who rely on walk-in business.
Instead of fretting, Mr Espina gave
internet-connected computers to hisclients, discouraging them fromcoming to his office to trade. The result is that 50 per cent of the trades
handled by his firm, Goldride Securities, now comes online; that has
allowed Mr Espina to cut the floor
space he rents by two-thirds to 1,000
sq ft. “This saves me HK$170,000 inrental payments a month,” he said.
He, his five dealers and one administrative assistant are now able toexecute five times as many trades as
they did in 1997 for the firm’s 1,200 clients from its HK$85,000-a-monthoffice in Jardine House, Central, hesaid. While he wouldn’t reveal thetotal trade volume he handled, hesaid some large clients turned overabout HK$20 million a day, whilesmaller ones traded only several
thousand dollars.

Small World“I could execute trades faster than
big banks like HSBC as I have a smaller number of clients, which means
my clients do not need to queue for
too long to have their orders executed,” said Mr Espina, who is alsochairman of the Hong Kong Stockbrokers Association.
In fact, computers served as thefuel for Mr Espina’s professional success. Trained as an accountant andcomputer programmer in the 1960s
in Queensland, Australia, he worked
for the now-defunct, big-five firm Arthur Andersen, becoming a partner
in 1982, before moving to Deloitte
Touche Tomatsu as a partner incharge of consulting in 1986.
While it would have been easy for
him to earn more than HK$2 million
a year in that capacity, Mr Espina
pined to be his own boss. It is an attribute he credits to his Philippine
father, who runs his own business exporting toys from Hong Kong toSouth America.
Mr Espina opted to become a broker after helping the Hong Kong stock
exchange set up its securities settlement system, CCASS, in 1989 – aproject that brought the affable consultant into contact with brokers.
One getting out of the business soldhim a brokerage licence and thethen-requisite seat on the exchange
for HK$400,000, and Mr Espina wasoff on his professional journey.
Dipping into his savings, hetopped up the licence cost with about
HK$4 million to meet capital requirements, to renovate a 400 sq ft office inthe newly opened Pacific Place Twoin 1990 and to hire two employees.
His old friends and clients in the accounting and computing professionals were the first clients, who then referred their friends. To attract people
off the street, he also shared aground-floor shop in Temple Street,Jordan.
“We can never compete with advertising campaigns or big distribu-

Many small brokers
do not like to invest in
new technology andthat limits theirexpansion......................................................
Tony Espina, managing director ofGoldride Securities
tion networks of banks or large brokers. But we can compete with better
personal service,” he said.
One other area in which he does
not compete is price. He still charges
0.25 per cent per trade – the mini-

mum fee, abolished in 2003 – andmaintains that his clients are keener
to get their trades executed rapidly
than on how much it might cost.
For staffing, he pays fixed salaries
rather than commissions, to discourage his brokers from churning trades,burning relationships in the process.
“I prefer to selectively serve highquality clients,” he said.
Rental expense is another area hecarefully controls. With businessgrowing, he closed the Temple Streetshop when the rent rose in 1994 andconsolidated his office in Jardine
House.
Business has been good to him.
He said he earned more as a broker
than he did as an accountant.
An extra windfall was the 800,000
shares in Hong Kong Exchanges andClearing he received during the 2000
merger of the city’s exchanges, now
valued at almost HK$60 million.
“Being small does not mean you
cannot compete. What’s importantis, one must change with the times,”
he said. “Many small brokers do not
like to invest in new technology andthat limits their expansion.
“In the 1980s, when the exchange
introduced telephone trading, somebrokers still demanded that clients go
to their offices to trade. The same
happened to the new generation.
Youngsters like to do everything withcomputers or the internet. If the brokers did not offer such technology, it
would be hard for them to catch up.”