Savings help cushion the business cycle as the economy faces hard economic situations (Syden, 2014). To have a sustainable economic growth, there is a need for sustainable resources to support it. That is why savings are needed to finance capital spending. These high savings rate levels have allowed the economy to gain high levels of investment (Horioka & Terada-Hagiwara, 2011). China’s domestic savings rate is one of the highest in the world (Loayza, Schmidt-Hebbel, & Serven, 2000). Inadequate savings would leave the economy vulnerable to shocks in income uncertainty and unexpected rise in prices.

At 52% of the national GDP, China’s domestic savings rate is among the highest in emerging markets inadequate savings leave households vulnerable to shocks in income and rising prices, add burden to government in providing retirement assistance, constrain individuals in accumulating wealth inadequate savings leave households vulnerable to shocks in income and rising prices, add burden to government in providing retirement assistance, constrain individuals in accumulating wealth.

Many factors come into play with regard to how much to spend and how much to ‘keep’ for future spending.

REVIEW LITERATURE

There have been a lot of theoretical and empricical research studies about the relationship of savings on different factors like inflation rate, unemployment rate, and interest rate.

It has been argued that savings are important, and when the economy is hit hard, having money in the bank can ease the problem (Elmerraji, 2010). Saving rates around the world differs widely. (Loayza, Schmidt-Hebbel, & Serven, 2000) stated that China, world’s fastest growing economy, had one of the largest national saving rates in the world. Those at Sub-Saharan Africa save less than 15% of their gross national disposable income while East Asia saves more than 30%. In recent years, saving rates have doubled in East Asia while those in Latin America were stagnated.

What people do not spend after consuming part of their income is called personal savings. People tend to put their savings on bank accounts or partly invested (Piana, 2003). Given a certain income, the decision of consuming a good negatively affects savings. Postponing such consumption would increase savings and in contrast, savings can rise due to negative expectations for future income.

As economic shocks occur on business cycles, households experience hard time in unexpected reduction in income. According to the Life-cycle hypothesis by Milton Freidman, people would eventually save more and minimize consumption to avoid future uncertainty.

(Zaman, Carannate, & Ferra, 2013) In times of economic crisis like the recent financial crisis on 2008, policy measures and uncertainty affects household consumption and saving decisions. In the Spanish economy, after the great recession, there has been an evolution of saving rates (Bande & Riveiro, 2012). The behavior of households has changed after the great recession, through increasing saving rates. Large increase in savings rates is connected to the increased uncertainty in the future (Bande & Riveiro, 2012).