China's savings rate to rise further next year

At a recent forum, experts said that the imbalance between consumption, investment and exports is likely to persist in 2007 and the government should increase the supply of public goods to stimulate and encourage consumption.

Guests:

Zhao Xijun, Deputy Director of the Institute of Finance and Securities at Renmin University of China.

Zhang Biqiong, head of the International Finance Department of the Central University of Finance and Economics.

Wang Songqi, Deputy Director of the Financial Research Center at the Chinese Academy of Social Sciences.

The sustained growth of China's domestic savings rate has made a feature of the problem of uneven economic development. Three respected academics, Zhao Xijun, Zhang Biqiong and Wang Songqi came together to discuss the issue.

Savings rate may continue to increase next year

Q: What is the relationship between the increasing savings rate and economic imbalance?

Zhao Xijun: China's savings rate may continue to increase next year, but the speed of growth may slow. If we cannot find a way to stimulate the domestic consumer market and promote the transformation of savings into investment in the domestic financial market, then the uneven development of consumption, investment and exports will persist, or even worse, intensify.

Zhang Biqiong: Uneven development is one of the characteristics of the Chinese economy. In some areas the imbalance may grow. In some areas the gap may shrink, such as between urban and rural areas and the surplus of international balance of payments.

Wang Songqi: China's economic structural imbalances can be divided into two main categories. Firstly, many low value-added industries and redundant constructions have absorbed and consumed an excessive amount of economic resources. Secondly, the banking system has an excess liquidity and the country's foreign exchange reserves are too great.

High savings rate weakens potential for economic development

Q: What are the negative effects of a long-term high savings rate?

Zhao Xijun: For quite a long time, investment and exports have been the driving forces in China's economic growth. While domestic consumption was compressed, the gap between labor income and the benefits of capital was widening. Under pressure, residents chose to save a part of their income in banks. As a result domestic capital was not effectively used; the trade surplus grew and increased external pressure, and the enormous amount of foreign exchange reserves posed a huge investment risk.

Zhang Biqiong: The high savings rate has a complex impact on China. The negative effect is that in the long term, high saving rates will reduce the speed and weaken the potential of economic development. The government holds a lot of foreign exchange assets and with the devaluation of foreign exchange and the decline in the rate of foreign currency earnings, the actual value of these assets is decreasing. The domestic economy will have to rely on foreign markets, and foreign trade friction is going to increase.

Wang Songqi: At present, seventy percent of China's economy is dependant on the outside world. Its over-dependence on foreign demand and investment could potentially threaten the capacity of the country to achieve sustained economic growth. Of this there is no doubt.

Demands cannot be met

Q: Why did this happen?

Zhao Xijun: In terms of the structure of consumer demand and supply, the market, which is still in a period of transition in China, does not fully reflect changes in the relationship between the supply and demand of the market. Enterprises cannot fully adapt to the changes in consumer demands, causing tension in the supply of some commodities and a surplus of others. If consumer demands are not fully satisfied, people would have to postpone making a purchase, converting some of their purchasing power in a deposit. The underdeveloped financial and investment market blocks some investment channels of individuals and enterprises. A lot of wealth can't be converted to capital and invested in production. Furthermore, flaws in the social security system have increased the tendency of people to save their money in banks rather than it. Finally, a large trade surplus and huge foreign exchange reserves have lead to the release of a huge amount of money causing excess liquidity. However, the liquidity is restricted to within the banks due to limited investment channels. In this situation, the savings rate becomes high.

Zhang Biqiong: Given the inferior financing channels in the market, enterprises usually choose to increase their savings for safety and to ensure they meet the demand for operational liquidity, make a profit and avoid risks. Decreasing investment opportunities, declining margins of benefit ratio, an inefficient credit system and significant investment risks are all contributing to the high savings mentality of businesses.

Wang Songqi: Construction of a new social security system is not yet complete. Sensitive to reforms in health care, education, housing and more, the majority of people prefer to save as a precautionary measure. This has led to relatively slow growth of consumer demand.

Business deposits remain high

Q: What can be done to lower the savings rate and promote consumption?

Zhao Xijun: There is a special phenomenon in China. On the one hand, many small and medium-sized enterprises have difficulties financing; but they also have significant bank deposits. To resolve this contradiction, we need to promote the construction of financial markets and expand investment and financing channels. As long as there is scope within the national financial capability, we can begin increasing consumption by raising wages, welfare or subsidies; increasing fiscal expenditure on public goods and ensuring better public services to keep the prices of these services within an affordable range and to further stimulate consumption; and setting up a security system by increasing fiscal expenditure to eliminate consumer concerns and encourage consumption.

Zhang Biqiong: The government should increase expenditure on the construction of a social security system and social credit system foster favorable public expectation of the future security system and expenditure liquidity. It should also strengthen the investment and financing system, improve the investment and financing mechanism and the financial markets to ensure that business feel optimistic about future investment.

Wang Songqi: The only way to resolve the problem of ineffective funds is to broaden the scope of investment. Under the premise of improving the conditions and means of financial supervision, China needs to become more financially liberated and create more investment platforms to attract investment from the banking and insurance sectors by promoting diversity and multi-level construction of the capital market.

By People's Daily Online