China's Savings and Current Account Balance: A Demographic Transition Perspective

Chao Zhu
2011 Modern Economy  
In this paper, we build an overlapping generation model to analyze how China's family planning policy affects the demographic structure and the dependency ratios. We also employ the Cointegration Test and Granger Causality Test to examine the relationship between Chinese population dependency ratios and the national savings rate, as well as the relationship between relative productivity differences and the national current account balance. We find that the family planning policy can be
more » ... icy can be sustainable with respect to these metrics. The current account balance reflects the transfer of savings over time and space. We posit that the demographic structure determines the savings transfer over time, while the relative productivity difference determines the savings transfer across the space. This transfer does not change the total welfare calculated on a national or generational basis. Consequently, focusing on improving the consumption rate to boost the economy without consideration of demographic structure transition warrants further serious discussion. Similarly, too much attention to short-term current account surplus or deficit is not productive. 1 People under the age of 18 generally do not have their own income in China. If the college students are counted, the age will be extended to 22. China's retirement age is 60 for men and 55 for women, assuming the same proportion of men and women, the average retirement age is 57.5 years. It is earlier than the retirement age of 65 in most developed countries. So, if the age of 14 and 64 years are the critical points, we are underestimating China's dependency ratio. However, when we study the relationship between the savings (including external and internal savings) and the population dependency ratio, as long as the data are comparable in the sample period, this difference seems not to change the results significantly.
doi:10.4236/me.2011.25089 fatcat:awv6hpmmw5brfbtbaqi745nimy