The saving–growth–inequality triangle in China

China's fast growth is perceived as a major determinant of its savings glut that contributes to global imbalances, but China's income inequality has been largely overlooked as the economy moves rapidly toward the Kuznets curve peak. This paper provides a new explanation for the complex issue of Chinese saving using a structural vector autoregressive (SVAR) model. We find that China's growth is positively affected by saving but has a limited effect on saving, that inequality mainly has a negative impact on growth but has a positive impact on saving, and that inequality is a stronger factor than growth in explaining high saving. Therefore, inequality must be mitigated to lower the high saving rate in China, and growth will be unaffected by lowering both inequality and saving. •We study China's saving by using an SVAR model for the period of 1978–2009.•We examine dynamic interactions among saving, growth, and inequality in China.•China's saving is clearly good for growth but does not respond strongly to growth.•Inequality effects are completely negative on growth but largely positive on saving.•Growth has only less than half the capacity of inequality in explaining China's saving.