Chart 6 plots the Felstein-Horioka correlation coefficient alongside an index of financial liberalisation from Obstfeld and Taylor (2004). Between 1930 and 1980, the Feldstein-Horioka coefficient was close to one – a puzzlingly high co-movement between saving and investment. But that pattern has shifted significantly over the past 30 years. Saving and investment correlations are no longer puzzlingly strong. Indeed, just ahead of crisis, saving/investment correlations had fallen to around zero. They are presently at their lowest levels in almost a century. On the face of it, this might point toward a rather benign interpretation of rising global imbalances: they may simply be the mirror image of rising capital liberalisation. This would be a good cholesterol story. Even then, however, there may be risks associated with intermediating large global flows of funds. Gross flows can matter. As experience during 2008 illustrated (Chart 4), sharp reversals of these gross flows can disrupt the functioning of financial systems, in particular banking systems reliant on overseas funding. Large inflows may also cause indigestion problems for small domestic capital markets. The strong upward pressures on asset prices in a number of emerging market economies over the past few months are testament to that. As Chart 5 also shows, most of the rise in global flows over the past decade is accounted for by changes in the saving rates of deficit and surplus countries, rather than in their investment rates. In other words, differential savings behaviour has been the prime mover behind rising global imbalances.
Today, it contributes around a tenth. China has been the mirror image. Having contributed less than 5% in 1980, today China is the single largest source of global saving, contributing around one fifth. It has been argued by some that these trends could simply reflect different cultural attitudes towards saving among US and Chinese citizens. In the US, it is often said that there is a culture of spending rather than saving – neurologically, the impatience gene may be dominant (Haldane (2010)). In China, by contrast, the culture may be biased towards saving rather than spending, with the patience gene dominant. In other words, differences in agents’ rate of time preference, or degree of patience, might account for savings imbalances (Buiter (1981)). 4  BIS Review 174/2010  But a recent survey of time preferences in 45 countries suggests cultural differences are not the full story (Wang, Rieger and Hens (2010)). Asked to choose between a payoff this month and a larger payoff next month, 68% of US students choose to wait; they exhibit patience. Facing the same trade-off, 62% of Chinese students made the same choice. These differences are small. 3 They are also the “wrong way around” to explain imbalances. So if cultural factors are not the explanation, what is? Charts 8 and 9 plot national saving rates in China and the US, broken down on a sectoral basis. There are striking differences in saving behaviour across the government, household and corporate sectors in the two countries.