PER 2015
budget deficit and the intrinsic national debt which has proved problematic for other major economies in recent years, meaning they have been able to survive external shocks to the economy such as the global financial crisis which put a dent in exports and thus hindered domestic demand. In such times, the Chinese government adopted an extensive fiscal expansion, increasing spending on healthcare and public infrastructure, as well as tax cuts in order to jump start the economy. China Gross National Savings, % of GDP 4
This depth in saving then allows investment projects to be readily funded, generating demand side growth in the short term and supply side growth in the long term. As a result of Keynes’ ‘paradox of thrift’, China’s high savings ratios leave much to be desired in terms of household consumption, leading to an investment heavy demand structure which could struggle in times of high business pessimism. Thus, although they might have the answer to economic prosperity, the Chinese now face the challenge of rebalancing their economy and moving towards more domestic demand to fuel growth which can be sustained in the long run. This might be done through lowering the base rate and stimulating domestic demand, assuming confidence levels are high and credit is readily available in the banking sector. This is a viable option for Chinese policy makers as China, with interest rates of 5.10%, are one of the few big names of global economics that have not found themselves in a monetary straight jacket after forcing themselves into a liquidity trap through incessant lowering of the base rate. Although it is not integral, high savings can undoubtedly lead to economic growth in the long term given that the investment environment is apt, capital is allocated in a manner which will maximise productivity and demand side growth is fuelled by a stimulus which can offset the paradoxical fall in consumption that inexorably follows a high savings ratio. This then poses the question; can ‘long run prosperity’ be merely refined to economic growth? Arguably, an economy can never truly prosper in the long run with an immense weight of national debt hanging over them. As a result, nations must thus, questionably, undergo a prolonged period of fiscal tight-fistedness, known as austerity, as they repent their sins. This neoliberal ideology points out that not only must national debt be serviced eventually, limiting public savings for future investment into the domestic economy but also that a high level of debt jades a country’s credit rating. The implications of the latter issue are experienced in the short run, tainting short term
4 https://www.quandl.com/data/ODA/CHN_NGSD_NGDP-China-Gross-National-Savings-of-GDP
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