The Roles of Saving, Investment and the Renminbi in Rebalancing the Chinese Economy

C hina's current account surplus widened from the late 1990s, and its private consumption fell to one third of gross domestic product ( GDP ). We examine these domestic and external imbalances from two perspectives: the saving‐investment balance and the effective renminbi exchange rate. C hina's large external surplus has arisen neither from anaemic consumption nor from weak investment but rather from the saved windfalls from favorable demographics, market liberalization, robust restructuring and World Trade Organization ( WTO ) accession. Looking ahead, as these windfalls fade, saving will subside. The exchange rate is already playing a supporting role in rebalancing the Chinese economy, and the real effective exchange rate based on unit labor costs has appreciated very sharply. Prospective savings‐investment and exchange‐rate developments point to a higher consumption share and a narrowing of C hina's current account surplus.