In recent years, China's total current account surplus and capital account surplus has continuously exceeded $100 billion. Without a doubt, the international payments imbalance has highlighted some problems that have occurred in China's domestic economic development.
In terms of the relationship between the internal and external economy, external trade balance is equal to a country's net savings: savings-investment = export-import. In an open economy, a country can accumulate capital reserve by itself, or can increase savings through acquiring foreign wealth. Therefore, the current account surplus is also frequently called foreign net investment in international economics. In an open economy, there are two sources of: domestic investment and foreign investment. The successive foreign trade surplus of China has highlighted the problem of the relative superabundance in savings.
A high savings rate is not bad in itself. The underlying reason of savings surplus is the inefficient investment and financing system and the poor profitability of micro-economic entities. At present, major problems in the investment and financing system are: underdevelopment of capital markets (including stock and bond markets, venture capital markets, private markets, etc.); high proportion of indirect financing, inefficient operation of banks as entities of indirect financing, high rate of non-performing assets, weak monitoring capacity to enterprises; inadequate protection on the interests of investors, cultural deficiency in equity right and creditor's right, etc. As a result, the transformed cost of savings to investment is very high but the efficiency is poor. Deficient investment distribution between sectors and companies leads to poor allocation of resources.
At the same time, microeconomic profitability is low. Particularly, long-term loss of a considerable proportion of state-owned enterprises makes it difficult to turn investment into high-quality output, therefore leading to fruitless investment and lower average rate of return on the investment. Profitability and survival ability of enterprises not only affect investment desires and transformation of savings to investment, but also determine the quality and sustainability of economic growth. A blocked and inefficient domestic investment and financial system as well as an incompetent micro-economy, has blocked part of the savings and made it impossible for this to be transformed into investments. Some savings, according to willingness of the owners, are "not expected" to be transformed to credit and investment. The result is the emergence of a relative surplus of domestic savings, such surplus has been demonstrated in the balance-of-payments surplus in China's current account for many years.
In order to cope with the issue of continued balance-of-payments surplus, relevant Chinese departments have made a lot of positive response that has produced marked effects. However, due to the special structural features of the reasons that led to the "double-surplus" of international payment, a package of measurements including structural reform are to be taken so as to effectively ease the "double-surplus". These mainly include:
Firstly, full use of domestic savings should be made and investment and financing systems reform should be sped up. International experience shows that the improvement of international competitiveness is not on foreign capital. In the final analysis, it relies on domestic savings and capital. To speed up the investment and financing systems reform, efforts should be made to strengthen the support of financial systems to economic entities, and explore how to set up effective channels to transform savings to investments, how to implement effective allocation of resources between regions, industries and corporations, and, how to promote economic growth of the entities. At the same time, attentions should be paid to continuously improve the profitability of state-owned enterprises, to vigorously promote the innovation in institution, technology and management based on the reform of state-owned asset management and the requirements of the modern enterprise system, and to improve the corporate governance structure.
Secondly, the concept of foreign capital application should be renovated and the quality of foreign capital utilization should be improved. Given the high saving rate of the country, China does not need foreign capital if only presenting financial analysis. Judging from the overall amount, the proportion of foreign investment in fixed assets is only less than 5%. Its direct stimulating effect on economic growth is limited. The use of foreign capital should be motivated to make up for the inadequate investment and domestic technological gap. However, in practice, there is some disorder in certain areas of foreign investment application: in impractical attraction of foreign investment and disregard to cost, blind introduction to preferential policies, or even treating the issue of foreign capital application as a political task. As a result, the majority of the foreign capital introduced by this means has become a sheer substitute for domestic savings, and eventually intensified the excess of domestic resources. This is a waste of national resources.
Thirdly, consumption and improve consumption concepts should be promoted. Currently, the key point is to support and encourage service consumption such as housing, cars, education, tourism, culture and sports, telecommunications, etc. Efforts should be made to improve the convenience and scale of consumption loans and encourage advanced consumption.
Moreover, in institutional arrangements, efforts should be made to further reduce import tariffs and non-tariff barriers, and in a systematic and planned manner to reduce the constraints on capital outflow. China is the beneficiary of trade liberalization. She needs to further curtail tariff and non-tariff barriers to facilitate imports. Import growth is conducive to competition introduction and long-term economic growth. At the same time, financial subsidies on exports should be further cut down, for instance by abolishing financial interest and further lowering export tax rebates rate, so as to ease external pressures, reduce financial burden for enterprises, mark down production costs, and improve operating mechanism. Additionally, efforts should be made to steadily advance convertible capital account and promote rational two-way fund flows. Measures should be taken to support overseas portfolio investment by insurance institutions and social security funds, and to enhance the momentum of support to follow-up financing of overseas investment enterprises.
By People's Daily Online; the author is a researcher at the Institute of Finance of the People's University of China