For this reason, I don't think the consumption stimulus plan will pay off as expected. If we adopt radical policies to lower the savings rate by imposing overly generous social welfare, it will exert negative impact on China whose per-capita income has not reached a high enough level of prosperity.

Double-edged sword

China's high savings rate has allowed it to maintain a high growth rate and low inflation rate. In the future, it will continue to help China fend off foreign financial impacts. Like a double-edged sword, however, the price increase in assets brought by the high savings rate will frequent the Chinese economy, which will constitute the biggest challenge for policy makers in coming years.

In response, China's policy makers should focus their efforts on the following aspects:

First, reducing the leverage ratio and preventing systematic risks.

In the next few years, asset price control will be the top task of policy makers wishing to control the consumer price index and promote economic growth. But the fact is that the traditional monetary tool is no longer suitable to control the asset price increase. Currently, we should attach greater importance to alleviating systematic risks in the event that the asset-price bubble pops. Against a low leverage rate, the asset price slump will result in a significantly decreased loss.

In this sense, reducing the leverage ratio should be an important goal that economic policy strives to achieve. To this end, we need to implement stricter regulations on housing loan mortgages, margin trading in the stock market, and bank capital adequacy.

Moreover, it is also important to fend off one-way gambles on the renminbi exchange rate since strong expectations for renminbi appreciation will cause an inflow of hot money. To this end, we need to impose tougher controls over open capital accounts and encourage capital outflow while restricting capital inflow.

Meeting domestic depositors' demands for overseas financial assets, China should open international capital accounts by approving investments by qualified domestic institutional investors and qualified domestic retail investors, which will also help slow the increase in foreign exchange reserves held by the central bank. At the same time, control over the capital inflow should remain or be cancelled gradually in case this inflow will make the asset price surge even worse.

Second, loosening price controls and developing the capital market.

To bring macro and systematic risks under control, China should further advance reforms in its structural adjustment. Although high savings are conducive to maintaining high growth and low inflation, we should make sure that the capital is properly allocated. To this end, China should not delay efforts to loosen interest rates, as well as energy and other resource pricing policies.

At the same time, the Chinese Govern-ment should also accelerate the development of the domestic capital market, including the stock and bond market, to meet the increasing demand for speculative investment.