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. Countries that save too much export too much, according to conventional wisdom, resulting in high trade surpluses and growing foreign-exchange reserves.
But this is not always true. For instance, if I save $100, but at the same time I invest $100 in my factories’ fixed assets; I am “balanced domestically” and not running an export surplus with anyone.
Such an example captures China’s recent economic situation. In late 2009 and in early 2010, China’s savings rate might well have remained at 50% of GDP had its trade surplus not narrowed significantly compared to previous years. Indeed, China recorded a trade deficit in part of this period, as high investment in fixed assets (owing to government stimulus policies enacted in the wake of the global financial crisis) fueled domestic demand for goods in the same way that higher consumer spending would.
Only when a country invests less in fixed assets than the amount that it saves will the “surplus savings” show up in the trade balance. The same logic can be applied to the US economy, but in the opposite way: even if the US wants to consume a lot and does not save, it may not run trade deficits if it does not invest much. It runs a trade deficit only when it invests a lot while simultaneously not limiting consumption.
Savings are, of course, no bad thing. If Americans and Europeans had saved more, they might not have created the global imbalances that fueled the financial crisis, or the worldwide sovereign-debt problems that have since emerged. And savings are particularly good for developing countries. One of the most daunting challenges for poor countries is the need to accumulate investment capital under conditions of low savings without incurring too much foreign debt.
Even for a developing economy with per capita income of $3,000, such as China, building wealth in the middle classes remains a central issue. Spurring faster growth of small- and medium-size enterprises through relatively high investment in physical assets and R&D programs, improved infrastructure, and more rapid urbanization, all of which require a lot of savings to invest, is vital.
In any meaningful international comparison, China’s per capita stock of physical capital is still 8-10 times lower than in advanced countries like the United States and Japan. Without relatively high savings, a developing country like China may never catch up.
If a developing country has high savings (despite efforts to increase current consumption) as a result of structural factors, the best strategy is not to reduce savings through short-run “external shocks,” such as dramatic exchange-rate appreciation, which may kill export industries overnight. Rather, savings should be channeled even more – and more efficiently – to domestic investment in order to avoid large external imbalances.
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. 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.
Moreover, investment in public infrastructure and urban facilities will not create industrial “over-capacity”; instead, it will provide long-term public consumption durables that households and companies will use for years to come. If China continues on this path, its external surplus will decrease further, other conditions being equal.
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. That is certainly the challenge for China in the long run. A savings rate of 50% of GDP is too high under any circumstances, and household consumption equivalent to 35% of GDP is too low.
But this can and should be addressed by domestic policies aimed at bringing about structural change, not by external policies like exchange-rate appreciation. Without domestic structural change, currency appreciation would not only undermine exports, but might also decrease imports, owing to higher unemployment and lower income.
China must recognize that high savings will not provide stable growth over the long run. High domestic investment may for the time being prevent “surplus savings” from creating too much upward pressure on the external balance, but, given trends in China ’s terms of trade, growth without an increase in domestic consumption is unsustainable over the long run.
High investment may cause economic overheating and increase the price of capital goods in the medium term, eventually triggering inflation. So bringing the savings rate down is necessary if domestic and external balances are to be achieved.
Meanwhile, China’s so-called “export-oriented growth policy” itself may not be wrong for a developing country, because international trade in general creates more jobs and brings more income. But if exports continue to grow in the absence of consumption-led import growth, distortions occur and the trade surplus and foreign reserves increase.
China has adopted some policies to reduce its trade surplus, such as lowering import tariffs, withdrawing tax rebates for exported goods, and gradual exchange-rate appreciation. But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.
Fan Gang is Professor of Economics at Beijing University and the Chinese Academy of Social Sciences, Director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China.
Copyright: Project Syndicate, 2010.