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Is China's One-child Policy To Blame For The Subprime Mess?

Declining lending standards, greedy bankers, short-sighted consumers, slow-moving regulators, low interest rates, and the securitization process have all at one time or another been blamed for the subprime crisis.

And to that list we can now add China's one-child policy.

A number of economists and public officials, including former Treasury Secretary Henry Paulson, have pointed to rising global imbalances as playing a seminal role in the creation of a global credit bubble. Americans were able to borrow at low, low rates thanks to foreign purchases of public- and private-sector securities by high saving rate countries like China, which has an eye-popping rate of 50 percent and is the largest holder of U.S. Treasuries with almost $800 billion worth, or about 24 percent of its GDP.

But why did the Chinese choose to save rather than spend their earnings in the first place?

A big part of that answer, argue Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI in a new working paper, is China's one-child policy, which sent the country's sex ratio from 107 boys per 100 girls in 1980 to the current imbalance of 120 boys per 100 girls. That means that by 2005, there were about 40 million men who could not "mathematically get married due to a shortage of women," write the researchers.

The reason a shortage of women would cause an increase in savings is not clear. In order to compete for wives, a shortage could cause men and families with sons to save more in order to signal their wealth to potential brides. On the other hand, these groups might also spend more money on status goods like expensive clothes and cars to achieve the same end. However, the researchers find that across different provinces across China between 1978-2006, "local savings rates are systematically and positively correlated with local sex ratios."

Wei and Zhang also look at household surveys taken in rural counties and find that bank account balances and apartment sizes (a proxy for past savings) are associated with local sex ratios, meaning that areas with larger gender imbalances tend to save more. The researchers estimate that up to half the growth in China's savings rate can be attributed to its rising sex ratio. Interestingly, South Korea has also seen a rise in both its sex ratio and savings rate in recent decades.

--Zubin Jelveh