Covid-Era Savings Are Crucial to China’s Economic Recovery

Large industrial companies and exporters also socked away money. From 2020 to 2022, big industrial companies, many state-owned, added $1.1 trillion in liquid assets on average each year, more than double the $467 billion annual increase in the five years before Covid hit, according to economists at China International Capital Corp., an investment bank.

In the U.S., excess savings—some from government stimulus—quickly coursed through the economy, but many experts wonder whether China will likewise have a big rebound in spending or investment this year. 

Economists from HSBC and Morgan Stanley say the end of China’s strict zero-Covid policies will at minimum fuel a strong recovery in services spending, lifting consumption growth to at least its prepandemic rate of around 8% a year. Initial data from China’s recent Lunar New Year holiday suggest some Chinese consumers are eager to dine out and visit cinemas again.

Other economists feel more skeptical. 

They argue that the savings buildup in China is more a reflection of battered confidence, which is unlikely to be reversed quickly as pains from the pandemic linger. Many Chinese consumers remain nervous because of a depressed housing market and an uncertain jobs picture, which could make them save more and spend less for longer. 

“It is premature to conclude that excess savings accumulated by households will support revenge spending in a persistent way,” said

David Wang,

chief China economist at Credit Suisse. 

A slow consumption rebound in China could reverberate globally, damping sales for such companies as

Nike Inc.,

Starbucks Corp.

and international auto makers, and resulting in lower-than-expected demand for such commodities as copper and nickel. Many businesses are counting on China, which is projected to account for a third of global growth this year as growth in the U.S. and Europe slows, according to the International Monetary Fund. 

Swelling household savings helped push China’s current-account surplus to $417.5 billion last year, the highest level since 2008, underscoring just how entrenched the global trade imbalance has been even as the U.S. and other more-advanced economies attempt to reduce reliance on Chinese imports. 

It isn’t clear exactly how big China’s savings pile is. Many economists, concerned about data quality in China, use different methods for their calculations.

Goldman Sachs says it believes Chinese families accumulated about three trillion yuan, equivalent to roughly $431 billion, in excess savings, or less than 3% of China’s gross domestic product, from 2020 to 2022. Economists from Nomura and UBS put the figures higher, at 6.1 trillion yuan and up to 4.6 trillion yuan, respectively, or about 5% and close to 4% of GDP in 2022. 

While sizable, those figures are lower than in the U.S., where households put away $2.3 trillion in excess savings from 2020 through September 2021, or nearly 10% of GDP in 2021, according to a study published by the Federal Reserve.

A large portion of new deposits accumulated by Chinese households last year was locked up in three-year to five-year deposit instruments, which can’t as easily be converted into spending as short-term deposits can, according to a study by research firm Rhodium Group.

Given that China’s government refrained from handing out checks directly to households during the pandemic, it could take a while before people become more confident in China’s recovery and significantly scale back their saving, said

Tao Wang,

an economist at UBS. 

More relevant to consumers’ spending appetite, economists say, are income growth and the job market, both of which are recovering slowly.

Zhou Changtian, who works at a state-owned publishing house in Shanghai, ended up saving more during the past three years as his family wasn’t able to travel abroad. Even though he isn’t deeply worried about job security, he isn’t keen on splurging, partly because of inflation fears as the economy reopens. 

“It used to cost us 1,000 yuan [about $145] to stock up on meat in the fridge before Covid. Now we have to pay double,” said Mr. Zhou. “I definitely won’t go on a spending spree.” 

Some companies are loosening their purse strings in anticipation of a strong economic recovery. Several industrial companies in China have announced big-ticket projects, including

Ganfeng Lithium

—one of the world’s largest refiners of strategic metal—which last month unveiled a 15 billion yuan ($2.2 billion) investment to build two battery plants in China.

But

Larry Hu,

chief China economist at Macquarie Group, is cautious about whether corporations have strong incentives to spend. He expects overall capital expenditure to stay flat compared with last year, in part because of uncertainty at export-oriented companies as overseas demand has weakened.

Another concern: Even though big companies were able to put away money by delaying investments during the pandemic, many smaller Chinese businesses, lacking deep pockets, had to spend savings to survive. Many are still on the ropes—or wiped out entirely. 

Beijing restaurant operator

Nathan Zhang

said he hasn’t been able to repay food and wine suppliers at a bistro he owns, because it was forced to shut down or banned from offering dine-in services several times under Covid restrictions. Even though those restrictions have ended, Mr. Zhang estimates that he has lost about 10% to 20% of his regular clientele.

 “While we still harbor hope that the worst is behind us, there are still too many uncertainties,” he said.

—Grace Zhu contributed to this article.

Write to Stella Yifan Xie at stella.xie@wsj.com