Savings and Growth in China

China saves an extraordinary share of its GDP; moreover, this share has been growing steadily over the last two decades. More puzzling, however, is the persistence of this savings behavior in the face of the high rate of growth of the economy – a rate that shows no sign of abating. A standard neoclassical model would not predict such a relationship between the two variables, and would in fact predict the opposite: good future prospects should encourage borrowing today. To address the connection between savings and growth, the literature has frequently turned to the lifecycle model. I follow this tradition and employ a modified version of the lifecycle model in which human capital levels are closely tied to the year the individual enters the market. In a lifecycle model with no labor market frictions, individuals behave in a forward looking manner and aggregate net savings will decline with imminent growth: each agent forecasts high future earnings and will thus tend to borrow in his youth while he is earning low wages. The ∗I wish to acknowledge the contributions to this draft by Andy Atkeson, Lee Ohanian, and participants in the UCLA Macroeconomics Proseminar. All errors are my own. Comments welcome at [email protected]