There are two different views of Savings and Investment. The first one is call Keynesian, or National Accounts view and another one is call the Monetarist view. The "Keynesian" is applying to the real physical macroeconomic activity and the "Monetarist" view is basically applied to money and banking. Both of them are slightly different in term of definitions which will result diverse discussions about disparate subject.
For Keynesians, it is start with accounting definitions, Where Savings=Investment. Therefore, it prefers to italicize the non-productive (zero sum) nature of all vehicles by which savings finally ends up as capital. However, Monetarists prefers to concentrate on how savings converted to money balances.
On the point of view of Keynesian sense, whatever is remain after total income in spent on expenditure of goods and services are call savings. Furthermore, what is spent on goods and services that are not 'consumed' but are durable are call investment.
In a Monetarist sense, savings is the total rate at which units of account exceed expenditures, and are accumulated as unit of account balances with financial channel or acquired as currency. The rate at which financial channel and others expend on items aim to turn up to be capital that promptly creates value is call investment.
ISSUE
The issue for our assignment is the domestic savings and economic growth relationship in China. We are going to talk how this journal examines the relationship between the growth of domestic savings and economic growth in China. The method that the authors use is causality test cover the whole country and four selected representative provinces for the period of 1995-2004.
The neoclassical growth model, also known as the Solow-swan growth model growth model proposed that by raising saving and investment rate for developing countries with low capital stock will gain the access to more rapid growth compared with developed countries. Hence, developing countries economic growth can be provoked by high savings rates. Considering the potentially positive effect of savings, most of the developing countries especially those who are in the Third World intend to boost their savings rate in favour of push up their growth rates, particularly in their real gross domestic production (GDP). The concept that a country's high savings rate could raise the amount of creditable capital available that the theoretical structure of these policies based on will accordingly aspire the aggregate investment and then ultimately attain the covet economic development. Lin suggested that the development of a country is basically counted on its ability to manoeuvre the necessary savings to finance capital formation in order to increase a nation's productivity. The analogy conventional comments about the high savings provided to high economic growth were also documented by Japelli and Pagano.
Friedman reported that although the world's economy devastate by depression and dull performance but China was able to stand out with its frequently maintained high economic growth. For the past 30 years, China's economy keeping growing headlong with an annual real GDP growth rate of 8%.The explosion in household savings accompanied by this high growth rate has reached an imposing level in lately years. After the economic revolution in the year 1978, China has gone through a hasty economic development. For the last two decades, the GDP of China has an average growth of 9.6 per cent. The China's GDP have been increasing from RMB 7.8 trillion to RMB 13.6 during 1998 until 2003 and even achieved RMB 18.2 trillion in 2005.
Besides that, the total domestic savings also having a quicken increase. China becomes the first and leading country in Asia because the saving rate had preserved at 40 per cent of GDP since 1990. Various types of savings have been deliberated in the article, including national savings, HHS (House Holds Saving) and EPS (Earning per Share) or corporate savings. By following to the national accounting system, savings are clarified as disposable income prohibiting consumption spending. Therefore, if want to form the national savings, the national disposable income must minus national consumption; the HHS equals to household disposable income prohibiting household consumption while the EPS equals to enterprise disposable income minus company consumption. Savings deposits are the most vital and generally acknowledged type of domestic savings in China. HHS has become the most significant part of the domestic savings due to gigantic population in China. Besides HHS, EPS also enriched to about half (48.7 per cent) of the total domestic savings for the previous 50 years. The private sector firms' great profitability is due to the high RPS rate.
The discussion about the influence of high savings on the economy is well-liked topic in China. The majority of the economists think that a high savings rate is a booster for great economic growth and a signal of healthy growth of the financial sector. High saving deposits provide sufficient capital resources that ensure the pliable mobility and ready availability of capital and so by extension, assure the stability of the banking industry. Moreover, high savings could provide high investment in turn, which is a main contributing element to the economic growth of a nation.
However, the side effect high saving rates cannot be eliminated from the discussion too. Some researchers consider a view that less development of financial markets weakens the investment demand and surges the savings growth instead. Due to the correlation smaller scale per se, comparatively less sophisticated and complicated money market instruments and operations and a contemptible variety of financial instruments, options and mechanisms in the market, banks in China have restricted ways to avail their huge amount of savings besides furnishing traditional loans. Compare with far more developed countries, China has a hard situation to change or transform savings into investments efficiently and effectively. Hence, banks in China may experience a greater risk as a result. In addition, the development of consumption is slowed down by excessive savings. In other word, the excessive savings will slump down the improvement of living standards in China.
This journal appraises the relationship between domestic savings growth and economic growth in China. Approaching from the currently available article; this study is inspecting two types of domestic savings: HHS and EPS. This journal is using the data of the whole country of China and four representative provinces.
