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.

Savings, consumption and investment, as well as external balance

Comments on Mohamed Ariff “Asia’s obligations in the new order”, 28/04/2010, http://www.eastasiaforum.org/2010/04/28/asias-obligations-in-the-new-order/

Statements like the following are misleading and unhelpful, because they ignore the role investment in the saving equation:
"East Asia needs to consume more and save less, just as the US needs to consume less and save more, which means that the US and East Asia need to export more and import more, respectively."

It is highly questionable and likely to be illogic and pointless to force any person to consume more and save less, if that person has pursued his own welfare and be optimal in terms of decisions on saving, consumption AS WELL AS investment.

The so called external imbalances are not necessarily caused by savings, or consumption, because investment can play a balancing role, in another word, can "rebalance" the external "imbalance", without affecting internal savings and consumption.

It is a simple matter of analysis, isn't it?

A need for a world investment organisation

Comments on Maaike Okano-Heijmans and Frans-Paul van der Putten “Europe needs to screen Chinese investment”, 18 /08/2009, http://www.eastasiaforum.org/2009/08/18/europe-needs-to-screen-chinese-investment/

It seems there is a fairly urgent need to have an international or world organisation to facilitate and oversee international capital flows or cross-border or foreign investment, given the magnitude and importance of capital movement internationally at present and into the future, and the likely increasing disputes or impediment or protections that affect the efficient allocation of global financial and physical capital resources.

There should be a set of agreed principles that govern international capital flows. The principles should be non-discriminatory in nature. National security may be a legitimate reason for some government intervention, but the rules governing it needs to be spelt out clearly and that should not be used as an excuse for discrimination at will by governments or politicians either economically, politically or racially.

There should be an international agreement on international investment and capital flows. One additional advantage of having an international overseeing organisation is to minimise the potential damages done by big speculative players in the international capital market.

Should different ownership be treated differently, given that all firms are under the regulation of a sovereign country? But it is an interesting and legitimate question and needs to be addressed openly and fairly.

One option for such an international organisation is to broaden the responsibility of and empower the WTO, so it would also serve as a forum for nations to settle disputes in international capital flows. Another option is to restructure the IMF and give it a new mandate on overseeing international capital flows.