The very high level of Chinese savings is not such good news for China

The very high level of Chinese savings of course enable s China to have a large fiscal deficit and a high investment rate without having an external deficit. Also, China is able to easily finance a sharp increase in government spending if necessary (economic stimulus, a banking crisis, etc.). But at the same time, the v ery high Chinese savings rate has a very destabilising influence on the country’s economy: Due to the excess savings, the equilibrium interest rate is abnormally low; If there are no capital controls, then the abnormally low interest rates in China lead to massive capital outflows, resulting either in a collapse of the currency or a loss of foreign exchange reserves; If there are capital controls, then, at equilibrium, inefficient investments are financed and the debt ratio becomes abnormally high since Chinese savings have to be used in the country . If the Chinese savings rate were lower: Capital controls would be less necessary, or even unnecessary, since the Chinese could diversify their portfolios globally; There would be greater well-being, with more consumption and less inefficient investment.