The Misguided Critique of China's High Savings Rate

The diagnosis is wrong. The world economy, especially emerging markets and developing economies, benefits from China’s high saving. A current account surplus is the excess of national saving over domestic investment. The saving is not lost; it is exported abroad in the form of net capital outflows, with an equivalent increase of China’s financial claims on the rest of the world. These claims add to China’s wealth and future national income. The economically relevant question is not whether such a surplus should exist, but whether the net capital outflows finance worthwhile investments. However, the Group of 7 and the International Monetary Fund assume that China saves too much and should consume more. Such a view is arbitrary. China’s consumption grows over time, roughly alongside its rising national income. If the question is whether China should save less, grow less rapidly over time and reduce saving and investment, the answer is no. The IMF speaks of “consumption-led growth in China” as opposed to saving-led and investment-led growth, but this is naive. True, decades ago, John Maynard Keynes wrote about a paradox of thrift, in which a higher saving rate in a closed economy under certain conditions can reduce output and thereby overall saving.