MAJOR DEPOSITOR: A Xiamen resident deposits money at a bank. China's savings ratio score was 46 percent in 2008, much higher than the global average

China's high savings rate has long been considered a barrier to sustainable economic development. According to the People's Bank of China, China's savings ratio stood at 46 percent in 2009, much higher than the United States, Japan, the European Union and other major developed countries.

The Chinese Government has been taking measures to stimulate consumption by lowering the savings ratio. Whether such efforts will pay off has yet to be seen. Wang Qing, Morgan Stanley's chief economist in China, offered his insights into the matter in the Beijing-based weekly Business Watch magazine. Edited excerpts follow:

While the government has been busy trying to motivate people to spend, focusing its efforts on cutting an unnecessarily high savings rate, we have all but turned a blind eye to the benefits of saving. Abundant savings provide rich pools of capital for the rapid growth in domestic investment. In turn, high investment ensures faster economic development. It has been widely acknowledged that when other conditions remain unchanged, high economic growth propelled by high domestic savings usually leads to deflation, rather than inflation.

Generally speaking, a society with a high savings ratio will not suffer from inflation for long, since the abundant capital supply will swiftly find its way into the economy through investment.

China's national savings accounted for 55 percent of its gross domestic product (GDP), with household savings making up 19 percent, government savings 11 percent and enterprise savings 25 percent.

As we all know, national savings can only be used toward domestic tangible assets like investment in fixed assets in China, obtaining ownership of overseas tangible assets through mergers and acquisitions, and limiting ownership of overseas financial assets. Because of the control over capital accounts, Chinese people cannot invest in overseas assets freely. For this reason, 70 percent of China's overseas financial assets are in the form of foreign exchange reserves held by the central bank.

On the one hand, high foreign exchange reserves have caused an increase in liquidity and a rising demand for financial investment. Conversely, China has not forged an advanced capital market or enough securities-focused products for investment—85 percent of financial operations are conducted by the banking system in China, while the securities market constitutes only 10 percent. An ever lesser percent is reserved for the bond market.

The imbalanced relationship between supply and demand in China's capital market has resulted in the overestimation of its stock value. As the primary means of financial investment, China's stock market, although small and relatively weak, has been loaded with too many investments. This overabundance easily bred speculation of potential bubbles rather than acting to prevent them, especially when investors are running rampant over speculative investment.

Whether we admit it or not, the price increase in assets will hover over the Chinese economy for a long time to come.

China's unique one-child policy also contributed to the country's high savings rate—reducing the overall population to be raised by each family while artificially speeding up the aging rate caused by a reduction in the younger population. Even though there is a smaller population to support, people are still saving money they would have otherwise spent.

What is more, personal consumption habits will not be changed overnight. Although average household income has increased dramatically along with overall economic development, the Chinese people's consumption behaviors have stayed the same for several decades. When asked to make a diagnosis of China's high savings rate, experts and scholars all referred to cultural factors, namely the entrenched consumption behavior and the unique intergenerational gap.