Savings, investments and industrialisation/urbanisation versus external balance

Comments on Michael Pettis “Ten signals to watch as the world resets”, 19/02/2013, http://www.businessspectator.com.au/bs.nsf/Article/China-rebalancing-growth-markets-GDP-trade-pd20130219-52RAQ?OpenDocument

I am not too sure how much finance Professor Michael Pettis understands economics, even the basic economic principles.

China is still industrialising and urbanising. It's level of per capita income is very low compared to industrialised countries. It has more than half of its population, probably more 700 million, still live in rural villages. There are a lot of infrastructures that need to be built to facilitate its industrialisation and urbanisation.

Naturally, that needs investments, huge investments over many years.

It is against this background that Professor argues the following highly questionable points:

"China must bring both its savings rate and its investment rate down sharply. If it can bring savings down faster than investment, China is probably rebalancing in the right way, and this should show up as strong growth and a declining trade surplus."

Without savings and investments, how could China industrialise and urbanise?

This is where some academics just simply follows some popular topical sayings and prescribe non-sense ideas.

Given its needs for investments, the sensible policy is to channel its savings to investments in infrastructure and urban constructions to accommodate the transfer of hundreds of millions of rural people to urbanised living.

Professor is understndably worried more about so called external balance. But that should not necessarily require a cut of both savings and investments. As long as savings are balanced by investments, external trade should also be balanced.

That is probably economics 101 and even a finance professor should understand that.

Apparently Professor Pettis does not appear to.

This is also why many Chinese university students are so disappointed with their professors and lectures.

Now we can see some of the reasons why that is the case.