Saving and Investment

By Jia Wei Yacheng Tang

Peixin Liu

The saving situation The investment situation The relationship between saving an

d investment

Saving

Macroeconomic concept:

Y=C+I+G+NX

In IS-LM model,I=S

savingGovernment saving

Enterprise saving

Household saving

Rapid development of economy

The blue bar means amount of GDP The red line means the growth rate of GDP

• The red bar means the amount of household saving ( in yuan)

• The blue line means the saving rate• Up to 2004, resident saving in china has reached 14705.4

billion keeping 16.4% growth rate.

01000000000000

20000000000003000000000000

40000000000005000000000000

60000000000007000000000000

8000000000000

0.005.0010.0015.0020.0025.0030.0035.0040.0045.00

Why does resident saving in china increase so quickly?

The reason(1)

Undoubtedly, rapidly increas of households’ income is the precondition of high saving rate.

Per Capita Annual Income and Engle Coefficient of Urban and Rural Households

　 　 　 　 　 　

Per Capita Annual Net Per Capita Annual

Disposable

Income of Rural HouseholdsIncome of Urban

HouseholdsEngle Coefficient of Engle Coefficient of

Year Rural Households Urban Households

Value (yuan) Index Value (yuan) Index (%) (%)

　 　

1991 708.6 317.4 1700.6 212.4 57.6 53.8

1992 784.0 336.2 2026.6 232.9 57.6 53.0

1993 921.6 346.9 2577.4 255.1 58.1 50.3

1994 1221.0 364.4 3496.2 276.8 58.9 50.0

1995 1577.7 383.7 4283.0 290.3 58.6 50.1

1996 1926.1 418.2 4838.9 301.6 56.3 48.8

1997 2090.1 437.4 5160.3 311.9 55.1 46.6

1998 2162.0 456.2 5425.1 329.9 53.4 44.7

1999 2210.3 473.5 5854.0 360.6 52.6 42.1

2000 2253.4 483.5 6280.0 383.7 49.1 39.4

2001 2366.4 503.8 6859.6 416.3 47.7 38.2

2002 2475.6 528.0 7702.8 472.1 46.2 37.7

2003 2622.2 550.7 8472.2 514.6 45.6 37.1

2004 2936.4 588.1 9421.6 554.2 47.2 37.7

Reason(2) Traditional Ideology and Saving Culture

Affected by culture and custom Confucianism ( 儒家思想 ) China is a county with high frequent

wars and natural disasters in history

The reason(3) Uncertainty towards the future during

the economic reform makes people save more

1. the reform of SOE, state owned enterprises.2. the social welfare system reform 3. education industrialization

Reason(4)

Huge amount of saving is kept at the banking system because lacks of investment opportunity.

INVESTMENT INVESTMENT REVIEW INVESTMENT COMPOSITIONS INVESTMENT STRUCTURE INCREAMENTAL CAPITAL-OUTPUT RATIO

HISTORICAL INVESTMENTINVESTMENT

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Yea

r

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

YEAR

% O

F G

DP

INVESTMENT COMPOSITONSAVING INVESTMENT

INVESTMENT COMPOSITONForeign Direct Investment (FDI)

Source: The Chinese Economy, 2006.

INVESTMENT STRUCTURE

Most Chinese domestic investment is fixed investment including machinery, residential building, etc…

And these investments are very high.

SOURCE OF FDI

Source: The Chinese Economy, 2006

The unique relationship in Chinese economy

The reason --- SOE

The result

Our suggestion

Relationship between saving and investment

Many scholars already analyze the relationship between saving and investment, such as Feldstein and Horioka （ 1980 ） ,Sinha (2000) and A.Corbin （ 2001 ） .

But we can not apply their theory and models in our analysis because of the unique situation in China.

The reason

In Canada Bank of Canada monetary policy

Companies make the investment decisions by themselves

In China People’s Bank monetary policy

Companies

State Owned Enterprises major player

controlled by the government

Private company make their own decisions

Only small percentages

What is SOE?

General situations: build from planning economy period

Dominated the whole economy

Characters : huge companies, in heavy industries

& losing profit

Company structure: workers and managers

surplus workers and officials

Debt of SOE

0.00

10000.00

20000.00

30000.00

40000.00

50000.00

60000.00

70000.00

1998 1999 2000 2001 2002 2003 2004

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Unit:100 million Yuan

The total asset of SOE and the share of SOE in all enterprises

0.00

50000.00

100000.00

150000.00

200000.00

250000.00

1998 1999 2000 2001 2002 2003 2004

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Unit:100 million Yuan

In 2004, the total investment in fixed asset is 70477 billion and SOE takes 49.7%

The company structure

workers

Managers

Surplus workers

Officials

Why does SOE get the investment every year ?

When the SOE lost profit, the official in SOE borrow money from SOB. (from their political power and “guanxi”)

In the second year, the SOE ask for a bigger loan from another SOB to cover the old loans and new loss.

Third year, another bigger loan to cover the old one and new loss.

The circle of capital

SOE SOB SAVING

When the money from saving into SOB, most of them become the capital for SOE and then disappear.

NPL

Bank nonperforming loans to total in %

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004

PR Chi naHong KongJ apanKorea

What is the result?

A higher ICOR

The overheat economy

The financial crisis

The first generation effect

05

1015202530354045

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

J apankorea

If the first generation effect happens 15 yrs later

SOE SOB SAVING

Bankrupt (huge NPL)

Financial crisis

Our suggestion

In short run, the central bank should pay more attention to the overheated economy and control it efficiently. The government should enhance the productivity in SOE and reform SOE.

In the long run, the government should reform the financial system, including the huge nonperformance loans and the ownership problems of SOB, ASAP.