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By Xin Zhiming (China Daily)
Updated: 2007-07-27 17:06

It's a consensus that the public has preferred to save rather than spend because it anticipates long-term spending pressure from the country's restructuring of its pension, health and education systems.

China needs to raise labor wages and increase provision of such public services as education and healthcare to enhance people's spending propensity, Zhuang told China Daily.

The social security network must also be improved, which will also get people more active in consumption, Zhuang said.

Related readings:  Central bank raises interest rates, cuts interest income tax  Survey: Rising food prices upset consumers  Report: Liquidity high but manageable  Special bond issue won't seriously impact liquidity Securitization to help China reduce excessive liquidity

From a global perspective, Li from CASS said that the low savings rate of developed countries has led to the trade deficit of these countries and the surpluses in Asian economies. The US has kept the dollar weak and, as a result, international markets have been awash with dollars.

Japan has seen a large-scale capital outflow into other countries. In Europe, statistics show the capital outflow is also on the rise as euro gets strong. It has also contributed to the global liquidity boom, Li said. And most of the capital has flown into Asia, including China, Li added.

Regarding capital inflow, Li suggested the holders of China's foreign exchange should be diversified, allowing individuals and enterprises to hold more of the reserves.

Although the central bank can sterilize foreign capital through issuing bills, raising the banks' reserve requirement ratio or conducting currency swaps, they can ease the pressure only temporarily, Li said.

Reforming the foreign exchange reserve management regime and allowing individuals and enterprises to hold more foreign exchanges would reduce the pressure on policymakers as they would need to sterilize much less foreign currencies.

To thwart speculative money inflows, Xia Bin and Chen Daofu from the Development Research Center suggested that policymakers should allow more volatile yuan trading, making the currency's long-term trends unpredictable.

"Authorities should allow the yuan to rise in a mixed tempo, sometimes slowly and sometimes quickly, to completely break the possibility for the market to predict the yuan's appreciation," they said in the report.

China also needs to raise its interest rate, because hot money holders not only want to benefit from a revalued yuan, but profit from the rising prices of assets. "The rising asset prices are closely related to our low interest rate," the economists said.

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