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

Abstract

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 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.