the importance of private companies has increased. Private companies tend to be more profitable, having higher rates of return on assets in the same industry (Zhang (2004)). The share of SOEs and collectively-owned companies in total investment has declined from around 80 percent in the early 1990s to 50 percent in 2004 (NBS, Statistical Yearbook). Second, as part of the restructuring, SOEs have transferred much of the social responsibilities they previously held to the state, whereas many SOEs have also improved their core profitability. As a result, the proportion of SOEs making losses has fallen from 25 percent in 1999 to an estimated 8 percent in 2004, and centrally managed SOEs made (post depreciation) profits of RMB 600 billion in 2005. More generally, in recent decades an increasingly large section of China’s corporate sector has been able to combine first world prices (through exports) with third world labor costs.

Is it possible that a “corporate veil” means that the distinction between corporate and household sector saving is artificial and does not mean much? If all households own shares and if incentives and decisions of firms are well-aligned with the interest of households, it may not matter much whether saving is done by firms or households. Such a situation may describe the relationship between small firms and their owners, and there are concerns that this may affect the data on the composition of saving in India. However, this characterization does in general not describe China well. Shareholdership is not very widespread, and corporate governance of larger firms is such that firms’ decisions and interests are often not aligned with those of households or, in case of SOEs, the state.

# **_Government_**

High government saving has been the result of a growth-oriented economic policy emphasizing investment. When China’s government finances were under severe strain in the early 1990s, government consumption was reduced to the minimum. As revenues increased rapidly from the mid-1990s onwards, a significant part of the new revenues was used to finance investment. Currently, government revenues and total government expenditure, as a share of GDP, is not low anymore, compared to other countries at a similar level of development. However, the composition stands out. Government consumption is relatively low in China. While there is little difference in direct government investment with other countries, large capital transfers to—state-owned— enterprises distinguish China from other countries. These transfers mean that government saving and government capital spending (including those capital transfers) are substantially higher than is suggested by the headline fiscal data. In summary:

- China’s high saving rate, compared to other countries, is as much driven by high saving of enterprises and the government as by high household saving **.**

- Investment by households and direct investment by the government has been relatively steady at levels comparable to other countries.

- Investment by the enterprise sector distinguishes China from other countries, and shows most of the variation over time. In recent years, the differential ranged between 14 (Korea) and 23 (US) percentage points of GDP.

- High enterprise investment is financed partly by a sizeable excess of saving over investment of households, which is channeled via the banking system. Household

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