China's national saving rate rose rapidly in the 2000s after declining through the late
1990s. These dynamics are not readily explained by the precautionary motive, the institutional
distribution of income, or reform related processes in general. Rather, we find a compelling
explanation lies with GDP growth fluctuations and demographic shifts. We estimate a vector
autoregressive model for the period 1978-2008, then generate in-sample simulations that
successfully replicate the 2000s run-up in the saving rate. Our out of sample forecasts show the
saving rate dropping in the 2010s as the dependent share falls and GDP growth moderates.1
Many explanations for China’s high rate of national saving have been proposed, and any
or all of them may hold some measure of truth. But the phenomenon of Chinese saving as it has
attracted attention in relation to global imbalances is about more than just a high rate of saving.
Only with a very rapid increase in China’s saving rate in the 2000s did saving diverge from
domestic investment to yield a ballooning trade surplus and a massive accumulation of foreign
reserves. Prior to this, through the late 1990s, China’s saving rate was actually declining. To
explain the imbalances that erupted in the mid-2000s then, a theory of Chinese saving behavior
must account for a sudden, sharp rise in the saving rate.
In section 1, we outline alternative theories of Chinese saving behavior and argue against
those based on the precautionary motive or distortions in the market mechanism. We contend
instead, in section 2, that the dependent share in the population and the growth rate of GDP offer
the best prospects for explaining observed movements in the saving rate. We compile data series
for these variables for the period 1978-2008 in section 3. We then present results in section 4
from estimation of a vector autoregressive (VARX) model that treats the saving rate and GDP
growth as endogenous variables and the dependent share as exogenous. The model is shown to
perform well in explaining the 2000s increase in the saving rate. Section 5 applies the model to
simulate paths for the saving rate under alternative assumptions regarding growth and
demographics. Section 6 concludes by noting that the momentum is shifting toward a decline in
the saving rate in years to come as the dependent share turns upward and GDP growth moderates.
This bodes well for a rebalancing of the economy.