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Saving and Investment
By Jia Wei
Yacheng Tang
Peixin Liu

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The saving situation
The investment situation
The relationship between saving
investment
and
Saving
Macroeconomic
concept:
Y=C+I+G+NX
In IS-LM model,
I=S
saving
Government 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.
8000000000000
7000000000000
6000000000000
5000000000000
4000000000000
3000000000000
2000000000000
1000000000000
0
70 972 974 976 978 980 982 984 986 988 990 992 994 996 998 000 002 004
9
1 1
1
1 1
1 1
1 1
1 1
1 1
1 1
2
2 2
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
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 Households
Income of Urban
Households
Year
Value (yuan)
Index
Value (yuan)
Index
Engle Coefficient of
Engle Coefficient of
Rural Households
Urban Households
(%)
(%)
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
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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)

1.
2.
3.
Uncertainty towards the future during the
economic reform makes people save more
the reform of SOE, state owned enterprises.
the social welfare system reform
education industrialization
Reason(4)
Huge amount of saving is kept at the
banking system because lacks of
investment opportunity.
INVESTMENT
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
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INVESTMENT REVIEW
INVESTMENT COMPOSITIONS
INVESTMENT STRUCTURE
INCREAMENTAL CAPITAL-OUTPUT RATIO
YEAR
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
Year
% OF GDP
HISTORICAL INVESTMENT
INVESTMENT
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
INVESTMENT COMPOSITON
SAVING  INVESTMENT
INVESTMENT COMPOSITON
Foreign 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
Relationship between saving
and investment
The unique relationship in Chinese economy
The reason --- SOE
The result
Our suggestion
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
Companies
monetary policy
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
70000.00
0.8
60000.00
0.7
0.6
50000.00
0.5
40000.00
0.4
30000.00
0.3
20000.00
0.2
10000.00
0.1
0.00
0
1998
1999
2000
2001
2002
2003
2004
Unit:100 million Yuan
The total asset of SOE and the
share of SOE in all enterprises
250000.00
0.8
0.7
200000.00
0.6
0.5
150000.00
0.4
100000.00
0.3
0.2
50000.00
0.1
0.00
0
1998
1999
2000
2001
2002
2003
2004
In 2004, the total investment in fixed asset is 70477 billion and
SOE takes 49.7%
Unit:100 million Yuan
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
NPL
When the money from saving into SOB,
most of them become the capital for
SOE and then disappear.
Bank nonperforming loans to total in %
35

30
25
PR China
Hong Kong
Japan
Korea
20
15
10
5
0
2000
2001
2002
2003
2004
What is the result?
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A higher ICOR
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The overheat economy
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The financial crisis
The first generation effect
45
40
35
30
25
20
15
10
5
0
0 64 68 72 76 80 84 88 92 96 00 04
6
19 19 19 19 19 19 19 19 19 19 20 20
Japan
korea
If the first generation effect
happens 15 yrs later

SOE
SOB
SAVING
Bankrupt (huge NPL)
Financial crisis
Our suggestion
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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.