High savings may lead to asset bubbles – China

The head of China’s central bank said too many people were saving too much money, which could lead to asset bubbles, adding Beijing had to find a way to promote growth and curb inflation.

China’s national savings rate is one of the highest in the world, standing at about 50 per cent of the gross domestic product (GDP) in 2010 – much higher than developed economies.

“China is an economy with a high savings rate, which may lead to high investments and may cause overheating and overcapacity in some sectors and fuel bubbles,” Zhou Xiaochuan, Gvernor of the People’s Bank of China, said.

“A high savings rate has good aspects, but at the same time there are other aspects we must be vigilant about,” he told a packed hall of government and industry officials at a financial forum in Shanghai.

Chinese households typically keep more than one-fifth of their disposable income in deposits, as they maintain frugal habits and worry over housing, health and education costs in a nation that has poor social welfare.

Mr Zhou said the outlook for the global economic recovery was clearer now than last year but many uncertainties remained.

He added that China needed to take “counter-cycle” policies as its economic cycle was different from that of developed nations.

“We need to find a new balance point where we can promote economic growth and at the same time control inflation,” he said. China’s politically-sensitive consumer inflation rose 5.3 per cent on year in April – a slight easing from a 32 month high of 5.4 per cent in March but well above Beijing’s four percent target for 2011.

The country’s property prices remain buoyant, latest official data shows, with 56 major cities out of 70 tracked seeing an increase in new home prices in April, compared with 49 in March.

To try to fight inflation, authorities have hiked interest rates four times since October and increased the reserve requirement ratio on several occasions, which effectively limits the amount of money lenders can loan out.

Mr Zhou also reiterated China would take a “gradual” approach to making the yuan fully convertible, as Beijing continues to promote the international status of the currency.

“As the cross-border use of yuan develops into a certain stage, it’s natural that there will be a demand for the yuan to turn fully convertible in a gradual and orderly manner,” he said.