Chinese foreign reserves are said to hit the trillion dollar mark in the next few days. Coincidentally, we are currently digging deep in the national saving models in our international finance class. If someone has just won a lottery, he should go out and spend lavishly. According to permanent income hypothesis, Chinese people should not have such a high saving rate because their economy is expected to grow substantially. The paradox can be partly explained by habit formation which says people won't go straight from a miser to a spendthrift overnight. Overlapping generation models can also explain such a phenomena. Young people save for their retirement while the old spend all their savings. For the coexisting two generations, if the young have much more income to save than the savings the old have to spend, the aggregate economy will have a growing saving rate at the same time of astonishing economic growth.
Well, the myth is solved in a way, but how do the Chinese officials do with the savings? Not long ago, they spent some of the foreign reserves to bail out the big four state banks. Not a smart move, I would say. Chinese people save money as a measure of self-insurance in case of disasters and the bureacrats in the People's Republic just used people's hard-earned money to save their own ass? The problems with state banks are more complicated than a couple of capital injections can handle. It is good to see that ICBC, one of the big four state banks, pulled a world-record IPO lately. After all, whoever bought the shares were out of their free will. It is a fair game to take away gamblers' bets, but please leave the savings alone because we know in China the road ahead is pretty bumpy.
(Picture: China Daily News)
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