Chat with AIExam 5: Consumption and Savings in China and the United States
A major theme in corporate finance is that when firms have "excess" cash they should pay it out to their shareholders.
a. What are the interpretations/implications of this concept for China's dividend policy and national savings and consumption?
b. How might Chinese firms' excess cash holdings lead to greater consumption even if dividends do not increase? Hint: Who is another major stakeholder in a company other than shareholders?
(30) 
Verifieda. Clearly, many Chinese firms are very profitable. If they paid these profits as dividends or share repurchases to shareholders or outside partners, greater consumption would be allowed for.
b. In effect, we could "nip" excess savings (profits) "in the bud" by paying workers more. Their consumption would rise in tandem with higher wages and national savings would fall.
Discuss whether decreased uncertainty about the future will cause the Chinese to save more or to save less. Rely on the discussion about the precautionary motive and the substitution effect.
(35) VerifiedPrecautionary motive suggests that less uncertainty would cause us to save less. Substitution effect suggests that we "live for tomorrow" since tomorrow is more certain (the certainty equivalent of tomorrow's consumption is greater). Since the precautionary motive has been an overarching theme in China's history and culture, one would guess that the precautionary motive would dominate and savings would be less.
Why are savings not the likely path for China to increase its citizens' standard of living in the long run? Using a Solow approach, what then is the likely path for long-run sustainable improvements in China's standard of living?
(36) VerifiedSavings is an unlikely path at many levels. Firstly, as discussed in the chapter, it is set to decline for a variety of reasons. Secondly, savings is channeled into investment but China already overinvests-it may be falling into the Singapore trap of too much investment, low returns, and a low steady-state level of consumption. Thirdly, just as in the case of a company, the more savings (retained earnings) the greater the potential for waste (including corrupt use of funds). Last (but not least) China is probably not on the path to an optimal level of consumption at the steady state (as discussed in the chapter-it needs to save less, thereby aiming for a new target steady state with lower savings).
Since the labor force is shrinking, the only real path for China to maintain solid growth rates in the coming years is technological progress.
Select some theories that we discussed and explain what will happen to China's consumption and savings in the coming years. Be specific about which theory you are using.
(30) Pick one of the theories of dividend policy in Table 5.6 and discuss why you think it is more relevant to China than this book suggests.
(32) Estimate the impact on China's overall savings rate if the dividend payout ratio (PR) rises in China to U.S. levels.
(34) In terms of its impact on savings:
a. Discuss which are more relevant for China: liquidity constraints or borrowing constraints.
b. Discuss which is more relevant (liquidity or borrowing constraints) for each of these activities:
(36) Explain why China's savings rate is so high and why the United States savings rate is so low.
(40) Are symbiotic savings important in the United States? Explain what factors make them important in China.
(36) Go to FRED (the Federal Reserve Economic Database), and using the relationship, National Savings − National Investment = Current Account Balance, determine China's savings as a share of GDP over the past decades. Hint: Use the data in FRED for China's "Gross Capital Formation."
(34) 
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