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Saving and Investment By Jia Wei Yacheng Tang Peixin Liu.

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1 Saving and Investment By Jia Wei Yacheng Tang Peixin Liu

2 The saving situation The investment situation The relationship between saving and investment

3 Saving Macroeconomic concept: Y=C+I+G+NX In IS-LM model, I=S saving Government saving Enterprise saving Household saving

4 Rapid development of economy The blue bar means amount of GDP The red line means the growth rate of GDP

5 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 billion keeping 16.4% growth rate.

6 Why does resident saving in china increase so quickly?

7 The reason(1) Undoubtedly, rapidly increas of households ’ income is the precondition of high saving rate.

8 Per Capita Annual Income and Engle Coefficient of Urban and Rural Households Per Capita Annual Net Per Capita Annual Disposable Income of Rural Households Income of Urban Households Engle Coefficient of Year Rural HouseholdsUrban Households Value (yuan)IndexValue (yuan)Index (%)

9 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

10 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

11 Reason(4) Huge amount of saving is kept at the banking system because lacks of investment opportunity.

12 INVESTMENT INVESTMENT REVIEW INVESTMENT COMPOSITIONS INVESTMENT STRUCTURE INCREAMENTAL CAPITAL-OUTPUT RATIO

13 HISTORICAL INVESTMENT

14 INVESTMENT COMPOSITON SAVING  INVESTMENT

15 INVESTMENT COMPOSITON Foreign Direct Investment (FDI) Source: The Chinese Economy, 2006.

16 INVESTMENT STRUCTURE Most Chinese domestic investment is fixed investment including machinery, residential building, etc … And these investments are very high.

17 SOURCE OF FDI Source: The Chinese Economy, 2006

18 The unique relationship in Chinese economy The reason --- SOE The result Our suggestion Relationship between saving and investment

19 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.

20 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

21 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

22 Debt of SOE Unit:100 million Yuan

23 The total asset of SOE and the share of SOE in all enterprises Unit:100 million Yuan In 2004, the total investment in fixed asset is billion and SOE takes 49.7%

24 The company structure workers Managers Surplus workers Officials

25 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.

26 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

27 Bank nonperforming loans to total in %

28 What is the result? A higher ICOR The overheat economy The financial crisis

29 The first generation effect

30 If the first generation effect happens 15 yrs later SOE SOB SAVING Bankrupt (huge NPL) Financial crisis

31 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.

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