"As you know, China today is running substantial trade and current account surpluses," he said. "These external surpluses are caused in part by China's remarkably high saving rate. Because China's national saving rate is even higher than its rate of domestic investment, the country has excess funds to lend in the global capital market; it follows from the balance-of-payments accounts that China's net lending abroad (or its acquisition of foreign assets) equals the country's current account surplus. A large portion of this lending finances foreigners' purchases of Chinese net exports (the trade surplus). High household saving and the corresponding low level of consumption in China contribute to the trade surplus by depressing the demand for imports and by forcing domestic firms to look abroad for markets."

A defective strategy

While trying to persuade China to expand domestic demand, the United States sees great value in urging China to open the door wider to U.S. financial service providers. Apparently, the United States hopes to resolve its current account deficit with China by expanding the export of financial services to China. However, a more important reason is that it believes the development of financial services is essential to increasing China's consumption. Financial reforms that increase the access of households to mortgages, private insurance and other forms of consumer finance would also support higher rates of consumption, Bernanke said in his speech.

For all these arguments, the U.S. reasoning is flawed. First of all, despite the fact that household consumption in China was only 38 percent of gross domestic product in 2005, compared with 60 percent in India, as Bernanke pointed out, which country has a higher level of absolute consumption is obvious. Moreover, the growth of China's domestic consumption is not low in absolute terms, only to be overshadowed by breakneck growth of investment and exports. According to statistics based on China's First National Economic Census, from 2000 to 2005, the retail value of China's consumer goods totaled about 3.91 trillion yuan, 4.31 trillion yuan, 4.81 trillion yuan, 5.25 trillion yuan, 5.95 trillion yuan, and 6.72 trillion yuan, up 9.7 percent, 10.1 percent, 11.8 percent, 9.1 percent, 13.3 percent and 12.9 percent respectively year on year. Statistics from China's National Bureau of Statistics show that the number reached 6.89 trillion yuan in the first 11 months of last year, marking an increase of 13.6 percent over the same period the previous year. The growth rates are obviously higher than those of developed countries including the United States.

Also, it is may be unreasonable and potentially risky to reduce China's saving rate by liberalizing the financial sector and further opening the financial service market to the United States. The thinking behind that strategy is that Chinese households and corporations are eager to save because they can hardly finance their consumption and investment given the poor performance of the financial sector. If efficient U.S. financial institutions are allowed to operate in China, they will no longer need to save for unexpected events. This thinking has some serious drawbacks. As a matter of fact, some foreign financial institutions just want to make easy profits by purchasing the stocks of their Chinese counterparts with no intension of helping them improve their internal governance. Even if we only consider the Chinese subsidiaries of U.S. financial institutions, it still misses a few key points.

The primary reason for Chinese households' high saving rate is not the financing inconveniences but the limited purchasing power of the majority of Chinese consumers resulting from the yawning income gap and the absence of a social safety net. A large number of workers were laid off from state-owned enterprises across the country a few years ago. Similar cases still happen from time to time in some places. With a pessimistic outlook on the future, many Chinese choose to put money in their deposit accounts.

Financial liberation does not help resolve these problems. Like foreign-invested enterprises in other sectors, foreign financial institutions tend to practice "cream skimming," focusing on the more lucrative segment of the business without honoring their social responsibilities. For example, most companies engaged in personal financial services will be ready to serve high-income clients while ignoring low- and middle-income clients, a trend that may fuel the income inequality in China.

The U.S. thinking also underlines the need to lower the saving rate of the Chinese corporate sector by facilitating business financing. In fact, as in other East Asian economies, Chinese firms have a much higher debt-to-equity ratio than European and U.S. ones. After the Asian financial crisis in 1997, the trait was believed to be the root cause of East Asia's financial vulnerability. Other things being equal, facilitating the financing of businesses may worsen the capital structure of China's corporate sector.