Pg. 133

Recent growth in Japan’s net capital outflows has resulted primarily from a

falling domestic investment rate rather than a higher saving rate. Between

1995 and 2004, Japan’s domestic saving rate fell from 30 percent to 28percent

of GDP. During this same period, Japan’s domestic investment rate fell from

28 percent to 24 percent of GDP. This widening gap between saving and

investment—Japan’s excess supply of saving—led to higher net capital

outflows and a corresponding rise in its current account surplus. Japan’s

current account surplus rose from 2.1 percent of GDP in 1995 to 2.5 percent

of GDP in 2000 to 3.7 percent of GDP in 2004.

Pg. 134

With $103 billion in net capital outflows, Germany was the world’s second

largest net capital exporter in 2004. Between 1990 and 2000, Germany

received total net foreign capital inflows of $175 billion. Between 2001 and

2004, in contrast, Germany experienced net capital outflows of more than

$200 billion. Germany’s rising net capital outflows have been mirrored by its

rising current account surpluses. Between 2001 and 2004, Germany’s current

account surplus rose from 0.2 percent to 3.8 percent of GDP.

Like Japan, Germany’s rising saving surpluses and net capital outflows have

stemmed from a falling rate of domestic investment rather than a rising rate

of domestic saving. At 21 percent of GDP, Germany’s saving rate has been

broadly stable over most of the past decade (though it did rise from 2003 to



Pg. 135

With $69 billion in net outflows, China was the world’s third largest net

capital exporter in 2004. China’s role as a net capital exporter may seem

surprising given the large foreign investment inflows it experiences. While

China does receive substantial foreign investment, it experiences even larger

capital outflows due to foreign reserve accumulation by its central bank that

results from its foreign exchange regime. As China’s reserves have risen in

recent years, its capital account balance has moved toward larger deficits and

its current account toward larger surpluses. In 2004, China’s current account

surplus was equivalent to 4 percent of GDP (note that in December 2005,

China increased the estimate of its 2004 GDP, which is likely to reduce the

size of this current account surplus relative to GDP). Current projections

indicate China’s current account surplus is likely to have exceeded 6 percent

of GDP in 2005.

China’s reserves have increased due to its rising current account surpluses,

net private capital inflows, and tightly managed pegged exchange rate system.

China first adopted its currency peg in 1994, linking its currency (the

renminbi) to the U.S. dollar at a rate of 8.3 renminbi-per-dollar. To maintain

this peg, China’s central bank has purchased large amounts of foreign

currency assets in recent years to prevent its currency from appreciating. Even

after modifying its exchange rate peg in July of 2005, however, (linking the

renminbi to a basket of currencies rather than the U.S. dollar alone) China’s

foreign reserves have continued to rise. By the end of 2005, China’s foreign

reserve level exceeded $800 billion and may rise to $900-$1000 billion by the

end of 2006. Between 2000 and 2005, China’s foreign reserves increased by

more than $600 billion.

In terms of its saving and investment balance, China’s net capital outflows

have resulted primarily from a rising saving rate. While China’s rate of

domestic investment has also been rising (projected 46 percent of GDP in

2005 prior to its GDP revision), its saving rate has risen even more rapidly.

At roughly 52 percent of GDP, China’s saving rate is the highest in the world.