Media Briefings


  • Published Date: November 2009

High savings need not – and should not – lead to crises, according to Professor Max Corden, writing in the November 2009 Economic Journal. So it is wrong to point the finger at the ‘savings glut’ countries, such as China, for the excessive credit expansion in the United States and elsewhere, which ultimately led to the credit crunch. Rather, he argues, it was the financial intermediation industry failing to do its job properly.

Corden’s notes that in 2007, China’s current account surplus was only just over a fifth of the total surplus of all surplus countries. He also shows that the increase in the surplus – from 3.6% of GDP in 2004 to 7.2% in 2005 and 10% in 2008 – was not a result of deliberate Chinese policy setting out to increase the surplus. Rather, it was a by-product of productivity improvements and of a particular approach to exchange rate management.

The productivity improvements were both in the labour-intensive export sector and in the import-competing heavy industrial sector. The exchange rate policy was to prevent excessive appreciation relative to the US dollar and to stabilise the exchange rate.

Underlying this were two motives: first, to maintain profitability and employment in the export sector; and second, to avoid large policy changes that would lead to speculation. The Chinese prefer to move policies in small steps.

Corden notes the negative aspect of this policy:

‘It surely cannot be in the long-term Chinese interest to accumulate vast amounts of dollar denominated foreign assets (notably US Treasuries) earning a low return and very likely to lose real value relative to the prices of non-dollar goods owing to continued dollar depreciation.’

Corden shows that China was one of a number of ‘savings glut’ countries that have had large current account surpluses, the others including Japan, Germany, the oil exporters, notably Saudi Arabia and Russia, and some smaller European and East Asian economies.

These surpluses led to worldwide credit expansion. Long-term interest rates declined, even though the large US fiscal deficit had some offsetting effect. Notably, there was massive credit expansion in the United States. In many countries, including Britain, Spain and above all the United States, housing booms resulted. Increased spending in many countries, notably the United States, then produced the current account deficits that were required to match the surpluses of the savings glut countries.

Essentially the international equilibrating mechanism operated through the world real interest rate. But in Corden’s view, the world credit crisis was actually created by the failures of the world’s financial intermediation industry, including commercial banks and investment banks. In his view:

‘High savings need not – and should not – lead to crises. It is not unreasonable that in some countries savings exceed investment, for whatever reasons, and in others investment exceeds saving.

‘There is an international capital market and its role is to intermediate between lenders and borrowers, just as such a market intermediates within countries.’

Corden observes that:

‘The fatal flaw has been the invention and use of new financial instruments that have been poorly understood and have created a serious information problem.’

He also notes that:

‘While in the developing country debt crises of the nineteen eighties and nineties, the blame was generally put on the borrowers, this time some would put the blame on
the original lenders – that is, the net savers, especially China.’


Notes for editors: ‘China’s Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances’ by Max Corden is published in the November 2009 issue of the Economic Journal.

Max Corden is professor of economics at the University of Melbourne.

For further information: contact Max Corden via email:; or
Romesh Vaitilingam on 07768-661095 (email: