The Roles of Saving, Investment and the Renminbi in Rebalancing the Chinese Economy

China's current account surplus widened from the late 1990s, and its private consumption fell to one third of gross domestic product (GDP). We examine these domestic and external imbalances from two perspectives: the saving‐investment balance and the effective renminbi exchange rate. China's large external surplus has arisen neither from anaemic consumption nor from weak investment but rather from the saved windfalls from favorable demographics, market liberalization, robust restructuring and World Trade Organization (WTO) accession. Looking ahead, as these windfalls fade, saving will subside. The exchange rate is already playing a supporting role in rebalancing the Chinese economy, and the real effective exchange rate based on unit labor costs has appreciated very sharply. Prospective savings‐investment and exchange‐rate developments point to a higher consumption share and a narrowing of China's current account surplus.