BIGGEST DEPOSITOR: A bank staff member in Zhengzhou, Henan Province counts a recent deposit. China's savings ratio was 46 percent in 2008, much higher than the global average (XINHUA)

In an attempt to entice consumers to save less and spend more, China has focused on perfecting its social security system, reforming taxation and dividend-sharing proportion between the government and state-owned enterprises. Liu Yuhui, Director of the China Economy Appraisal and Rating Center at the Institute of Finance and Banking, the Chinese Academy of Social Sciences, offered his insights in an Economic Observer article. Edited excerpts follow:

Although complicated, we have found a number of possible reasons for the high savings rate. The imperfect social security network has restrained household consumption as families realize the need to save for unforeseen problems that may arise in the future. In addition, a huge aging population needs to be supported, thus forcing the next generation to save more for their own old age. The income growth as a result of urbanization, industrialization and market reform allows people to earn more, but also save more.

The above-mentioned reasons are true to the fact, but are they the only factors? Most definitely not.

From 1999 to 2007, China's overall savings rate increased by 14.4 percentage points, of which household savings contributed 2.7 percentage points to the increase, from 20.2 percent in 1999 to 22.9 percent in 2007; Government savings contributed 5.4 percentage points, from 2.7 percent in 1999 to 8.1 percent in 2007; And enterprise savings contributed 6.3 percentage points, from 13.7 percent to 20 percent. Government and enterprise deposits have taken up an increasing proportion of the total savings, whereas household savings remained relatively stable. Looking at the bigger picture, the household savings proportion for all savings is decreasing.

For this reason, the Chinese Government has committed itself to investing heavily in rural-urban medical insurance, cutting individual income taxes, and reforming the taxation system to encourage consumption and discourage savings.

But, in my opinion, these measures are not the answer to solving China's high savings rate dilemma. As a matter of fact, all the policies failed to address the vital part of the problem.

We have long acknowledged that heavy investment is the best course of action to propel economic growth, since expanding Chinese household consumption seems to be an impossible goal. With high savings refusing to give way to spending habits, we have to rely on the investment and export sectors. And with exports shrinking as a result of sluggish overseas demand, we can only turn to heavier investment.

Since large deposits made the cost of capital relatively low, the investment impetus remained high. In China, all basic elements and resources essential to economic growth are under the control of the government and state-owned enterprises, allowing them to lower resource prices as much as possible and make the cost of investment even cheaper. Consequently, the government and large state-owned enterprises collect increasing amounts of money. The lack of a redistribution system for company profits to employees or government's revenue to individuals makes government and company savings even higher. With skyrocketing amounts of money in hand, the only way out is re-investment, leading to overcapacity.

As evidence, in the past few years China has witnessed a continuous decrease in the proportion of work payments and household deposits. In 2007, the cost of labor or the total salary paid to employees accounted for 39.74 percent of the gross domestic product (GDP), a decrease of 13.66 percentage points compared to 1997. By contrast, enterprise profits accounted for 31.29 percent of GDP in 2007, 10.06 percentage points higher than 1997.