Jon Krause

Balancing China’s High Savings

When a developing country has a high savings rate as a result of structural factors, as China does, the best strategy is not to reduce savings through 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.

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.

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