On Savings Ratio Zhou Xiaochuan   There are no commonly accepted explanations for savings and consumption behaviors in the economics and statistics community. With further transmission of the current financial crisis, discussions on the causes to the crisis intensified. Some believe that the high savings ratio of the East Asia and oil-producing countries is one major cause for the global imbalance and the crisis. This paper attempts to explore the factors that affect savings ratio, and examine the reasons behind the high savings ratios in the East Asian and oil-producing countries and the low savings ratio in the U.S. It also provides a brief description of savings ratio in China and the corresponding adjustment approaches, as well as a set of options for adjusting this ratio. Major views of this paper were discussed at the High Level Conference Hosted by Bank Negara Malaysia on February 10, 2009.   I. Factors affecting savings ratios   The term "savings" in this paper includes domestic savings, current account surplus and foreign reserve. As of now, we have not seen sufficient and solid academic studies illustrating the linkage between the savings ratio and determinant factors, such as the level of wealth as measured by per capita GDP, foreign exchange rate, the development of financial intermediation and capital market, tradition, demographic structure and social security system. While exchange rate is statistically correlated with savings ratio to some degree, the coefficients are generally low and the correlation usually insignificant. It therefore seems that savings ratio can´t be adjusted by simply adjusting exchange rate.   Identifying the factors determining savings ratio is a major policy challenge for all countries. We can only come up with an effective policy tool kit after identifying determining factors for and their impacts on the savings ratio.   II. Causes for high savings ratio in the East Asia and oil-producing countries   Tradition, cultural, family structure, and demographic structure and stage of economic development are the major reasons for high savings ratio in the East Asia. First, the East Asia countries are influenced by Confucianism, which value thrift, self-discipline, zhong yong or Middle Ground (low-key), and anti-extravagancy. Second, we may be able to trace the cultural differences from a large number of textbooks and literature of different countries. For instance, the Latin American countries have similar levels of national wealth as the East Asian countries but lower savings ratios. This can be attributed to the cultural differences in the region, where people have a higher propensity of consumption and tend to quickly use up all their salaries. Third, family tie is strong in the East Asian countries, and families shoulder social responsibilities such as providing for the elderly and bringing up children. Fourth, according to the Life Cycle Hypothesis by Franco Modigliani, more money is saved to meet future pension and healthcare needs as the share of working age population increases. When we study the phases of economic growth, in times of exceptionally high economic growth, most of the incremental income will be saved, resulting in an unusually high savings ratio. China fits in the above-mentioned two conditions for a high savings ratio. Japan and the U.S. can also demonstrate the contribution of these factors in determining savings ratio. Similar to the U.S., Japan is a developed country with high per capita income. The social security systems in the two countries have their respective weaknesses. However, Japan´s savings ratio is much higher than that in the U.S. This can be largely ascribed to cultural, family value and demographic feature in Japan, which are fairly similar to those in other East Asian countries.   Some argue that an inadequate social security system leads to high savings ratio. Though logically sound, this argument lacks adequate empirical support. Moreover, it is based on the assumption that human behaviors are rational and people increase their savings for future healthcare and pension needs. In fact, such an assumption does not necessarily stand.   High savings ratio in oil-producing countries has different reasons. Endowed with rich oil resources that far exceed their normal demand, these countries naturally accumulate their wealth in the form of savings.   The elementary textbooks on economics always start with "supply, demand and prices", which lead the readers to believe that certain prices (e.g., exchange rate and interest rate) can determine the behavior of savings and consumption. However, the fact is that the level of savings ratio is influenced by a wide range of factors, and it can´t be adjusted simply by changing nominal exchange rate. Factors such as national tradition, culture, family structures, demographics and social security system can´t be changed in the short term. As a result, it may take a long time for policies to yield intended impacts.   III. Implications of the Asian financial crisis for savings ratio in the East Asia   Savings in the GDP are composed of resident, corporate and government savings. If total savings exceed domestic investment, the surplus will take the form of foreign reserves. To analyze the drastic increase of imbalance of savings and trade in East Asian countries that emerged after 1997, we need to examine the impact of the Asian financial crisis on savings ratio in these countries.   The high savings ratio and large foreign reserves in the East Asian countries are a result of defensive reactions against predatory speculation. During the Asian Financial Crisis, the rampant speculations of hedge funds caused large capital inflows and subsequent reversal in these countries, which exacerbated their economic woes. People in these countries were shocked, and disgusted by these speculative attacks. Afterwards, many suggested that unregulated predatory speculation caused the crisis, and appropriate international regulation was needed. However, for various considerations, some countries were against such regulations, and failed to see the need to adjust the regulatory frameworks. International organizations also failed to perform their regulatory responsibilities over abnormal cap