It seems necessary that one gains some deeper understanding of the sources of China’s phenomenal economic growth. Apart from all well-founded extant explanations, my recent book Guaranteed Bubble argues for another important yet previously overlooked source: the guarantees provided by the Chinese government.
China is on a path to capital account liberalization. If the renminbi is to become an international reserve currency (e.g. Prasad, 2016), as it has started to and one day will be, China must have an open capital account. But once the capital account is open, the economy will be exposed to gyrations of the global financial cycle (Rey, 2014). This column argues that international credit supply shocks have powerful effects on real and financial variables of the receiving countries, but not all economies are affected similarly, and those that have lower loan-to-value ratios (LTVs) and limits on foreign currency borrowing (FXLs) are less vulnerable. As China lowers controls on capital flows (e.g., Benigno et al., 2016) it should consider tightening domestic macro-prudential policy regulations (e.g., Cesa-Bianchi and Rebucci (2017) to avoid excessive volatility.
China’s household savings rate has been persistently high since the early 1980s despite rapid economic growth and contrary to the predictions of the standard consumption theory. Since China has undergone large structural changes in its transition to a market economy, precautionary savings seem to be a plausible contributing factor to the high savings rate. We use China’s large-scale reform of State-owned Enterprises (SOEs) in the late 1990s as a natural experiment to identify exogenous changes in income uncertainty. We estimate that precautionary savings account for about 40 percent of SOE households’ wealth accumulation from 1995 to 2002.
In this paper, we show that a general equilibrium model that properly captures the risks in old age, the role of family insurance, changes in demographics, and the productivity growth rate is capable of generating changes in the national saving rate in China that mimic the data well. Our findings suggest that the combination of the risks faced by the elderly and the deterioration of family insurance due to the one-child policy may account for approximately half of the increase in the saving rate between 1980 and 2010. We also show that changes in total factor productivity growth account for the fluctuations in the saving rate during this period.
China’s stock market imposes various trading restrictions such as daily price limits and trading suspension rules, which are intended to stabilize the market during turmoil. During China’s stock market crash in the summer of 2015, these trading restrictions made many highly valued stocks non-tradable and consequently caused mutual funds facing redemption pressure or with precautious concerns to sell other tradable stocks, exacerbating their price drops.