ABSTRACT
Many factors may contribute to China’s rapid growth, but the most important one is China’s high saving rate in the past four decades. This chapter shows that because workers are precautionary savers or buffer-stock savers, low interest rates together with reduced social welfare and job security raise national saving rates. According to the Solow-Swan model or the Harold-Domar model, high saving rates will lead to rapid economic growth before an economy reaches its steady states. Since interest rates decreed by China’s central bank were far below the marginal product of capital (MPK), entrepreneurs and firms invest as much as they could, which underlies China’s rapid growth. Because of China’s high saving rates, its increased output has to be exported for market clearance. Therefore, exchange rate control has been practiced to keep the exchange rate of domestic currency at low levels to maintain the competitiveness of goods made in China, which results in a huge foreign exchange reserve. Since artificially low interest rates will lead to overcapacity caused by overinvestment and high saving rates could promote economic growth only before an economy reaches its steady state, China’s rapid growth cannot be sustained when its GDP per capita approaches those of developed countries.
