Illustration: Luo Xuan/GT
The topic of China's high national savings rate has recently again attracted public attention. The country's gross savings rate reached 45.7 percent at the end of 2018, still ranking first in the world.
For many years, the high savings rate has been regarded as a reflection of China's relatively low consumption, as well as a lack of inherent economic dynamism, an imperfect social security system and limited investment channels for residents. However, given the current macroeconomic situation, there should be a new perspective on this old problem.
For any economy, the national savings rate is a crucial indicator. Only when consumption is lower than production and the surplus is saved can a national financial system have the funds to invest in medium- and long-term investment projects, particularly infrastructure and large-scale heavy industrial equipment.
Everyone can benefit from a high savings rate. China's high-speed railways, modern airports, ports and expressways across complex terrain are all infrastructure construction projects that need high investment.
Funds for these projects come from the growing savings of residents. Some come directly in the form of loans, while others are indirectly injected via programs such as commercial banks purchasing infrastructure bonds. This means that China does not need to borrow capital from developed countries, which is something that many developing countries envy.
Developing countries often lack multi-level direct fund-raising systems, and small and medium-sized enterprises (SMEs) can only rely on informal financing channels and national savings capital to raise funds.
Moreover, no country can bring down the difficulty and high costs faced by SMEs when raising funds through indirect financing represented by commercial banks. Therefore, abundant private savings are the main source of capital for Chinese businesses that are innovative and entrepreneurial.
In the context of the current, complicated and changeable world economic situation and the China-US trade war, it is a blessing for China's economy that the domestic savings rate has not experienced an overly sharp drop.
It shows that people's financial situation is still healthy and that their consumption potential is huge, which is undoubtedly important when stabilizing the confidence of Chinese and foreign investors.
In the stock market, shares in consumption-related firms and health companies have repeatedly reached new highs, because investors value the prospects of wealth accumulation and a higher quality of life.
A high savings rate is needed for infrastructure construction, a healthy financial system and consumption potential, but the phenomenon of high-income people saving more and lower-income people borrowing more still needs attention.
Savings funds do not flow to housing mortgages and consumer loans in China. But in recent years, many Chinese residents have been burdened with excessive loan pressure due to the high housing prices in some Chinese cities, and they are more sensitive to the loan interest rate, thus making the People's Bank of China more cautious when setting the benchmark interest rate.
The leverage level of currency credit expansion is closely related to the benchmark interest rate both at home and abroad.
The central bank stimulates the economy through low or even negative interest rates. However, it is not ordinary people who benefit the most, but the governments, enterprises and individuals who are able to obtain loans.
Take the US Federal Reserve (Fed) as an example. Though the savings rate of US citizens has picked up recently, it is still only about 8 percent - far lower than that of China. The Fed is forced to maintain ultra-low interest rates to protect the currency leverage, which makes the debt-ridden federal government happy, but at the same time aggravates the domestic gap between the rich and the poor. Lessons drawn from the US show that the debt levels of governments, enterprises and individuals all have a reasonable range, and that the high debts incurred during economic development should not take monetary policy hostage; otherwise it will worsen the unreasonable distribution of social wealth.
Therefore, China should not pursue negative interest rates. High leverage and the unfair distribution of wealth it causes, rather than a high savings rate, would be a big problem. The measures China has adhered to are helping deal with the excessive debts at all levels of government and in state-owned enterprises.The author is chief economist with China Securities JT Fund and an Academic Committee Member with the Pangoal Institution. [email protected]