(b) Rapid growth of household savings affects consumer demand to

34
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Reforms in China’s Monetary Policy
savings can only be made by storing cash or goods. The financial industry has 
not only provided certain interest to depositors and thus increased the liquid-
ity of savings but it has also reduced the inefficiency of scattered savings” 
(Luo, 2000). Since 1998, China experienced insufficient effective demand, 
and economists believed that the high growth rate of urban and rural resi-
dents’ savings reflected the insufficient consumer demand (Wu, 1999). It is 
necessary to use the savings deposits and turn them into consumption and 
investment (Yu, 1999). So he judged that with income tax levied on the inter-
est income from savings deposits, part of the savings deposits may be diverted 
to the consumer market and other investment destinations so that economic 
growth can be promoted through increasing consumption and investment 
(Liu, 2000). This is a typical example showing all the way from concept to 
analysis and then to policy recommendation. 
Increase of savings deposits will not reduce consumption. The approach 
of the above points of view believes that the residents’ disposable income 
has two destinations—savings and consumption. Saving deposits are the 
form of savings. Residents will deposit the material gain they earned in 
the real economy into the bank, and thus savings deposits are created. But 
as stated above, money is created by banks, and the real economy cannot 
create money or savings deposits. Consumption and savings are flows in 
economics, whereas money is stock, and the money stock is to support the 
flows of consumption and savings. In practice, as a form of money, savings 
deposits maintain flows at a high speed. Cash or corporate deposits and sav-
ings deposits are converted to each other. Saving deposits have the advan-
tage of interest rate, and also banks offer good banking services so it is very 
convenient for clients to deposit and withdraw money. Therefore residents 
mainly hold money as savings deposits, and only carry a small amount of 
cash. If they need to a large amount of money, they can withdraw cash at 
any time. Due to the same reason, sellers of goods have no motivation to 
hold a large amount of cash, and they usually deposit the cash immediately 
after they received it. Therefore, even if residents increase their consump-
tion, the cash-holding ratio of residents as a whole will not significantly 
increase over a long term. Increase in savings deposits suggests the increase 
of money held by residents, which contributes to growing consumption, 
instead of reducing consumption. Moreover, consumption will not cause 
the savings deposits to disappear. If a resident uses savings deposits for 
consumption, he or she has converted his savings deposits into consumer 
goods. But for the others, such behavior increases savings deposits or cash 
or corporate deposits. In general, the money will not disappear, nor can it 
be turned into other commodities. Similarly, residents making other forms 
of investments such as buying shares will not reduce the total amount of 

Monetary Theory
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money. The amount of money will not decrease unless banks recover the 
loans. The proportion of savings deposits in the money depends on the 
distribution of social wealth among individuals and enterprises as well as 
the proportion of cash held by individuals.

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