The saving and investment nexus for China: evidence from cointegration tests

Abstract

The saving and investment nexus as postulated by Feldstein and Horioka (FH) ( 1980 Feldstein, MS and Horioka, CY . 1980. Domestic saving and investment capital flows. Economic Journal, 90: 314–29. ) is revisited. The saving investment correlation for China is estimated over the periods 1952–1998 and 1952–1994, the latter culminating in a period of fixed exchange rate regime. Amongst the key results, it is found that saving and investment are correlated for China for both the period of the fixed exchange rate and the entire sample period. With high saving-investment correlation, the results suggest that the Chinese economy is in conformity with the FH hypothesis. This is a valid outcome, for in China capital mobility was fairly restricted over the 1952–1994 period as indicated by the relatively low foreign direct investment.