saving and investment by jia wei yacheng tang peixin liu
TRANSCRIPT
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.