Balancing China s High Savings

Low savings countries cannot easily adjust without an equivalent adjustment in high savings countries, because their low savings rates may have been caused by high savings abroad.

Meanwhile, China s savings rate remains stubbornly high.

For nearly a decade, capital from high savings countries like Germany flowed to low savings countries like Spain.

Apart from accounting for the global divergence in savings rates, tight credit constraints in China might explain the country s high, and rising, savings rate especially as the large rise in national savings is attributable mostly to household savings.

This was World War II. Do you know why savings was so high?

Without relatively high savings, a developing country like China may never catch up.

Germany (like China) views its high savings and export prowess as virtues, not vices.

All the factors that encourage high growth remain in place low labor costs, education, high savings, improving infrastructure, and rapid urbanization.

China must recognize that high savings will not provide stable growth over the long run.

But domestic savings remain low in the face of persistently high levels of public debt.

The last time China saw such high growth in domestic investment, the savings rate was not as high as it is now.

Those investments will drain most of the country s domestic savings and sustain high demand for imports.

Properly recycled savings, including corporate profits, could go back mainly into high return public or private sector investments.

In fact, any savings realized as the result of high vacancy rates would have been returned to Member States.

The absence of no money down mortgages might be more important than Confucian ethics in explaining China s high savings rate.

Currency appreciation, Japan argued then and China argues now, is unlikely to result in a significant current account adjustment, which requires addressing not only China s high savings rate, but also low savings in the US.

BEIJING Most of the international financial crises that have occurred over the last 200 years were the result of strains created by the recycling of capital from countries with high savings to those with low savings.

The fundamental factors on the Chinese side are high corporate and household savings, together with some distortion of resource utility prices.

Savings

It is not necessarily bad for Asia s traditionally high savings rates to fall after all, consumption typically rises with an aging population.

The Yètè Mali Savings Network or savings and loan cooperative.

If that high level of government borrowing occurs, it will absorb all of the available household savings even at the current elevated level.

Concentrated in coastal China, this model produced an uneven distribution of output and established a unique pattern of high savings and low consumption.

After all, China has high private and public savings, foreign reserves exceeding 3.3 trillion, and great potential for industrial upgrading and infrastructure improvement.

That is equivalent to about five times aid flows and budget savings from debt service relief provided by high income countries in 2002.

A savings rate of 50 of GDP is too high under any circumstances, and household consumption equivalent to 35 of GDP is too low.

Indeed, given a very low savings rate and high fiscal deficit over the past few decades, the US might otherwise have faced economic disaster.

It invested in education and technology, pushed a high savings rate, enacted a strong and effective affirmative action program, and adopted sound macroeconomic policies.

Both the savings shortage and savings glut hypotheses confuse accounting outcomes with causes.

Japan s Savings Crisis

Demand savings accounts

Term savings accounts

a reversal of the country s now rising income inequality lowering the very high savings level relative to investment and thus reducing the current account surplus

Savings could remain high, even as current consumption grows slowly, while the trade balance would be held in check by higher demand for imported capital goods.

Of course, a country must deal with a savings rate that is too high even if it is not necessarily the main cause of external imbalances.

This supply chain is characterized by the dominance of the state owned banks, high domestic savings, relatively under developed financial markets, and a closed capital account.

Second, China s fiscal surplus, growing foreign exchange reserves, and high savings rate have ensured the financial resources needed to maintain adequate investment and sufficiently rapid growth.

Savings rates shot up.

For example, China should use its current high savings to build up the country s infrastructure and speed up urbanization, thereby laying a firmer foundation for future development.

Concentrated in coastal China, this model produced an uneven distribution of output and established a unique pattern of high savings and low consumption. Indeed, China s savings rate of rose steadily following the onset of market reforms, from 38 of GDP in 1978 to 51 in 2007.

Absent the willingness of large developing countries to run trade surpluses and high savings rates relative to investment, the asset bubble in the US leading to a rise in domestic consumption and a fall in the savings rate would have triggered inflation and higher interest rates.

Both bubbles have long since burst, and US households are now dealing with post bubble financial devastation namely, underwater assets, record high debt, and profound shortages of savings.

In Brazil, low savings and various institutional impediments keep interest rates high and investment low, while the educational system does not serve significant parts of the population well.

We have enormous energy savings.