Meanwhile, China s savings rate remains stubbornly high.

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

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.

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

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.

Its savings rate has been distressingly low for decades.

In fact, the household savings rate continues to rise.

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.

A country s overall consumption rate is, of course, the flip side of its savings rate.

An economy s current account is the difference between its investment rate and its 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.

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.

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.

In the case of China, a key part of its 12th five year plan is to shift income to the household sector, where the savings rate is high but still lower than the corporate rate.

The Asia Pacific region has the highest savings rate in the world, although intercountry variations in savings rates have been noticed.

Moreover, as Japan s society ages, the household savings rate will decrease dramatically.

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

Second, it could absorb excess German savings by letting unemployment rise as local manufacturers fired workers (because rising unemployment forces down the savings rate).

In other words, savings rates in Spain and other deficit countries in Europe had to drop once policy distortions forced up Germany s savings rate.

SMEs and households with net savings stand to gain the most from interest rate liberalization.

Moreover, India has the highest household savings rate in Asia, at 32 of disposable income.

By contrast, China had a fixed investment rate of 41.7 of GDP and a savings rate of 51.9 , reflected in a large surplus.

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.

Another implication of this view is that the steep rise in savings in China is largely driven by a rise in the savings rate of middle aged Chinese (rather than a fall in the borrowing rate of the young).

While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40 , struggles to get its people to consume more.

Conversely, the fall in savings in the US is largely due to higher borrowing by the young (rather than a fall in middle aged Americans savings rate).

In 2007, the United States had a savings rate of 14.6 of GDP, but an investment rate of 19.6 , generating a current account deficit.

As a result, the household savings rate has risen from zero to 4 of disposable income.

The very high rate of teen pregnancy has resulted in an equally high maternal mortality rate among young women.

America s household savings rate was at levels not seen since the Great Depression, either negative or zero.

So bringing the savings rate down is necessary if domestic and external balances are to be achieved.

Of course, some worried about the collapse of the household savings rate, but few were overly concerned.

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.

Of course, China s savings rate will also decline, but Japan s experience since the 1980 s demonstrates how a sharp fall in investment can generate large and persistent current account surpluses, even when the savings rate is falling and the currency is appreciating.

She also expressed concern that despite the high literacy rate, the fertility rate, at 4.3, remained high and the contraceptive prevalence rate, 33 per cent in 1999, was low.

But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.

In 1988, the household savings rate in China and the United States was roughly equal, at about 5 .

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

BEIJING China s national savings rate has been very high in recent years, amounting to 52 of GDP in 2008 (the most recent year for which statistics are available), and is often blamed for today s global imbalances.

And the rest of the world? A global savings glut would suggest that rebalancing the world economy requires policies to boost America s savings rate and to increase non US households consumption.