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Worlds highest savings interest rates


worlds highest savings interest rates

View current APY interest rates for Bank of Hawaii checking accounts, savings accounts, and certificate of deposit (CD) accounts for personal and business. Let Old National help you choose the best savings account for your goals. We offer basic savings, interest savings, CDs, IRAs, savings for kids and more. Most of the macroeconomic analysis in these Lessons, and most practical analysis The world interest rate, r0, is determined in the rest of the world and.

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Worlds highest savings interest rates -

What is an offshore savings account?

An offshore savings account is, simply put, a savings account that is based outside of the UK.

While it might call to mind images of globetrotting millionaires who deposit money with overseas institutions in order to avoid tax, that's not often the case. In fact, they're more likely to be opened by expats and other people working abroad.

Many of UK-based banks and building societies have an offshore arm, for example, Lloyds Bank International Limited and Skipton International.  

You are typically required to invest a minimum of £10, to open an offshore savings account, so these accounts are unlikely to be suitable for first-time savers. 

This guide explains how offshore savings accounts work

 

Do offshore savings accounts pay higher interest rates?

While offshore savings accounts often come with attractive-looking interest rates, these may not be any better than the rate you could get from a top UK-based savings account, so it's inadvisable to opt for an offshore account for the interest rate alone. 

Here are some of the top rates on offer:

Watch out, though. Charges for operating an offshore savings account can eat into your returns, for example, fees for making a withdrawal can be as high as £25 each time.

Make sure you fully check an accounts' terms before you go ahead and open it.

What charges will I pay with an offshore savings account?

One downside to offshore savings accounts are the myriad fees and charges that you can face for the day-to-day running of the account. The most common charges you'll need to look out for include:

  • Withdrawal fees
  • Transfer fees
  • Monthly accounts fees
  • Charges for not maintaining a minimum account balance
  • CHAPS fee (these can vary depending on which currency is used)
  • International payments
  • Cheque clearance charges
  • Document translation charges
  • Agents payments on foreign transactions

Prices will vary between providers; some advertise free withdrawal fees as a major perk, while others will charge a percentage of the amount being withdrawn.

You should check a provider's terms and conditions before opening a savings account to see if the charges suit how you want to use it.

How do I open an offshore savings account?

You can open an offshore savings account in a few easy steps.

1. Find a bank: make sure it offers the kind of offshore savings account that you want, and then apply either online or in-branch - depending on what the bank offers.

2. Send your verification documents: much like opening a UK account, the bank will need to check your identity. You'll usually need things like a certified copy of your passport or driving licence, plus recent bills or bank statements.

3. Get approved: the bank will usually contact you to say your account is open and ready to go.

4. Make your initial deposit: this will usually be done online, but you may also be able to send a cheque. As with UK accounts, minimum initial deposits vary, so you may have to pay anything from £1-£10, in order to activate your account.

5. Start using your account: we explain how to manage an offshore savings account further down the page.

As with any other savings account, it’s important to shop around for the best deal before committing to a particular product.

Banks operating in the Channel Islands, Gibraltar and the Isle of Man feature on price comparison websites such as Moneyfacts and MoneySuperMarket.

How are offshore savings accounts managed?

Managing an offshore account is usually done online, where you transfer money between your UK account.

You can usually make withdrawals online by transferring your money in the overseas account back into your UK account.

Then, when you want to top-up your savings, you can transfer cash from your UK account into your offshore savings account. 

Do I pay tax on offshore savings? 

Yes, you are liable for tax, and interest is paid to you without tax deducted, much like UK-based accounts. 

Ultimately you do have to pay any UK income tax due, although there can be a substantial delay between earning interest and having to pay tax on it.

For example, if interest is paid once a year at the end of April, you could hold the previous year’s interest in your account for up to 20 months. This ‘deferral’ of the income tax payment due on your offshore savings could allow you to earn a small amount of extra interest.

If you use an offshore savings account to evade tax and are caught, you will have to pay HM Revenue & Customs whatever you owe, plus interest and a fine.

Depending on where your offshore savings are based, you may be liable for overseas tax, as well as UK tax. 

It’s important to investigate this before depositing your money, although more than double taxation agreements exist between the UK and other countries to help prevent this situation arising. 

Where this is the case, you should be able to claim UK tax relief on the tax you pay overseas.

Where are most offshore accounts held?

The most common countries that hold offshore savings accounts for UK citizens are:

  • Jersey
  • Guernsey
  • Isle of Man
  • Gibraltar
  • France
  • The Netherlands

Are offshore savings protected? 

Before you open any savings account, it’s vital to ensure you understand how your money would be protected, if at all, in the event of a provider’s collapse. 

Money held in offshore financial institutions is NOT covered by the UK’s Financial Services Compensation Scheme so your cash will not have the same standard of protection it would get if you saved with a bank or building society based in the UK.

The location of the financial institution you choose may not be immediately obvious from its website – but it will affect whether your money is protected if it went bust.

Several popular offshore locations have their own financial compensation schemes so, as in the UK, a proportion of your savings is guaranteed should your account provider go bust.

Here are some examples from some of the most popular countries for offshore savings:

  • Jersey: Jersey Depositor Compensation Scheme (JDCS) covers up to £50, per person, per Jersey Banking Group.
  • Isle of Man: Depositors' Compensation Scheme (DCS) covers up to £50, of net deposits per individual depositor.
  • Guernsey: Guernsey Bank Deposit Protection Scheme (GBDCS) covers up to £50, per individual claimant per institution.
  • Gibraltar: Gibraltar Deposit Guarantee Scheme (GDGS) covers up to €, of qualifying deposits.
  • France: French Deposit Guarantee Scheme (FDGR) covers up to €, per depositor.
  • The Netherlands: Dutch Central Bank's Deposit Guarantee Scheme (DGS) covers up to €, per depositor.

It's worth remembering, however, that each country's depositor protection scheme is only as strong as the economy of that country. 

Here in the UK, the FSCS is backed by the UK government, which is highly unlikely to ever go bust. Smaller economies could be more vulnerable, however.

That's why Which? does not recommend that anyone puts their money into an account that does not have full UK FSCS protection.

In addition, you should investigate the standard of financial regulation in the country you’re considering: are there controls on who can set up a bank and how it is run? You may want to think twice about saving money in a location where there is little regulation in place.

It’s also worth checking whether there is a consumer complaints system in the country where your savings will be held.

Should anything go wrong with your account, it’s important that you’re able to seek redress in a simple manner – and in a way that won’t cost you any extra money.

Offshore savings accounts: your questions answered

Below, we answer some of the most common questions that crop up about offshore savings accounts.

 

Do I have to declare my interest from offshore savings accounts?

 

Yes, you do. If your income is taxed in the UK, you must declare your savings interest as part of your self-assessment tax return - failing to do so could mean a hefty fine from HMRC. 

The good news is, if you qualify for the personal savings allowance, you'll be able to earn up to £1, a year from savings interest before having to pay any tax.

Find out more: personal savings allowance and tax on savings interest

 

Can anyone have an offshore account?

 

Yes - as long as the bank accepts banking applications from the UK, and you are able to verify your identity and address with documents required to open any other bank account. 

Offshore accounts are easier to open in some countries than others - it can depend on the UK's relationship with that country.

Источник: mynewextsetup.us

Topic 5: Saving and Investment in a Small Country

Most of the macroeconomic analysis in these Lessons, and most practical analysis, involves countries that are very small in relation to the rest of the world. Even a large country like the United States will produce a relatively small fraction of the world's output. The essential feature of small-country analysis is that the country is too small to have any significant effect on world saving, world investment, or the world interest rate. World wide shocks impact on the small country but nothing that happens in the small country has any significant effect on the rest of the world.

Figure 1

Suppose that a small country has the investment and savings functions  I I  and  SS  in Figure 1. Both these functions will reflect the institutional conditions in the small country and will typically differ from country to country. The world interest rate,  r0,  is determined in the rest of the world and independent of investment and saving in the small country. In the example shown in Figure 1, the country's investment exceeds its savings with the result that it is a net importer of capitalthat is, is experiencing a net capital inflow.

It can easily be seen in Figure 1 that a rise in the world interest rate will cause the country's investment to decline and its savings to increase, reducing its net import of capital. And a fall in the world interest rate will increase investment, reduce savings and increase the net capital inflow.

Figure 2

A different situation is shown in Figure 2. In this case the country's savings exceed world asset holders' investment in it at the existing world interest rate  r0 so that there is an equilibrium net capital outflow. A fall in the world interest rate will increase investment and reduce savings and thereby reduce the net capital outflow. A rise in the world interest rate will increase savings and reduce investment, increasing the net capital outflow.

Figure 3

We have been letting the small country's interest rate be the same as the world interest rate. This assumes that the risk of investing in the small country is the same as the risk of investing in the rest of the world. Figure 3 and Figure 4 allow for a situation where the small country's economy is a more risky place to invest than the rest-of-world economy. In both cases there is a risk premium which reduces investment. The net capital inflow declines in Figure 3 and the net capital outflow increases in Figure 4. In both situations the domestic interest rate will exceed the world interest rate by a risk premium.

Figure 4

There is, of course, no reason why the risk premium need be positive. The small country might be a less risky place to invest than the rest of the world. This situation is shown in Figure 5 and Figure 6. The negative risk premium increases investment, increasing the net capital inflow in Figure 5 and reducing the net capital outflow in Figure 6.

Figure 5

Figure 6

The previous four figures also show the effects of shifts in world investment toward or away from the small country. A shift of investment toward the country may result from a perceived decline in the riskiness of investing in that country or may be a result of on-going changes in world technology that favour the particular natural resources with which the country is endowed. Correspondingly, a shift of world investment away from the country may result from an increase in perceived risk or from an endowment of resources less favorable to new world technology. In every case, shocks to the level of investment in the small country are completely absorbed by changes in the net inflow or outflow of capital, with no effect on domestic saving. In the cases where changes in risk are involved a positive or negative risk premium will emerge.

It is a straightforward extension of the above analysis to show that changes in savings in the small country will have no effect on that country's investment or output growth (although savings changes will affect the growth of the domestic residents' wealth).

This is shown in Figure 7. In the case examined, an increase in savings reduces the net capital inflow.

Figure 7

Shocks to savings need not always be based on a change in the residents' desired intertemporal allocation of consumption. One can imagine a situation where there is an implicit tax on saving of domestic residents reflecting the government's failure to provide secure property rights. Almost always, however, this sort of institutional breakdown will affect domestic investment even more than domestic saving. History is replete with examples of situations where investment in the domestic economy declines as a result of domestic turmoil or failure to enforce property rights and the government institutes controls over the purchase of foreign assets by domestic residents to prevent domestic savings from being invested abroad instead of in the domestic economy. This type of situation is illustrated in Figure 8. The investment function shifts to the left because, for example, a new government comes to power and adopts policies that will expropriate private property. An equilibrium net capital inflow turns into an equilibrium net capital outflow. The government then uses direct controls over the purchase of foreign assets to prevent domestic savings from going abroad. The actual net capital outflow is restricted at zero. This is equivalent to a tax on domestic savings equal to the difference between the rate of interest received by domestic residents,  r1,  and the world real interest rate.

Figure 8

It is time for a test. As always, think up your own answers before looking at the ones provided.

Question 1
Question 2
Question 3

Choose Another Topic in the Lesson

Источник: mynewextsetup.us

These Countries Offer the Highest Interest Rates Today

With extremely low interest rates in the United States, you won’t get rich by parking your money in a savings account. But in countries with extremely high interest rates, your cash could make a nice chunk of change just sitting in the bank. If you’re thinking about relocating, consider a country where you can earn substantial interest on savings accounts, but make sure to factor in how inflation affects interest rates.

Keep reading to find out which countries have the highest interest rates on savings, see how inflation affects those interest rates, and learn about real interest rates.

Interest Rates Today: The Highest Interest Rates in the World

Checking, savings, money market account and CD interest rates in the United States are low. Consider that the national average interest rate for savings accounts is a mere %, according to the Federal Deposit Insurance Corp.

You might be wondering if rates are better in other countries. The answer is yes — many do offer better savings rates. But there are risks, including unstable governments and economies. Additionally, the FDIC only insures domestic deposits, and some countries have protection that is much less developed. With that in mind, here is a list of countries offering the highest savings interest rates worldwide:

Top 10 Countries With the Highest Savings Interest Rates
RankingCountrySavings Interest Rate
1Kyrgyz Republic%
2Gambia%
3Mexico%
4Brazil%
5South Africa%
6Uganda%
7Bangladesh%
8Zambia%
9Kingdom of Eswatini%
10Seychelles%
Source: International Monetary Fund

Related: What’s the Average Interest Rate for Savings Accounts?

How Inflation Factors Into High Interest Rates

When the price of goods and services rises over time, it’s called inflation. A certain amount is healthy, but high inflation rates are a sign of trouble. The problem occurs when consumers buy instead of save, which contributes to higher inflation and weakens the purchasing power of the dollar. To keep inflation in check and encourage saving, the Federal Reserve will raise interest rates on occasion. To understand the effects of a rate increase, assume, for a moment, that inflation is 3%, but you can get 5% interest by placing your money in a savings or money market account. Under these conditions, you might choose to save instead of spend.

Your “real interest rate” is the interest rate minus the inflation rate. In this case, you would make 2% on your deposited money. Although you earn a 5% annual interest rate, the price of goods and services increases by 3% due to inflation, leaving you with 2%. When looking at savings interest rates, you also need to factor in inflation to understand how much money your deposit will really earn.

How Inflation Affects the Top 10 Highest Interest Rates by Country

The true yield on an interest-bearing account must factor in the country’s inflation and currency. Here are the countries with the world’s highest bank interest rates on savings, with the effects of inflation on those interest rates:

Top 10 Highest Interest Rates After Inflation by Country
RankingCountrySavings Interest RateInflation RateDifference
1Kyrgyz Republic%%%
2Mexico%%%
3Gambia%%%
4Brazil%%%
5Uganda%%%
6South Africa%%%
7Seychelles%%%
8Bangladesh%%%
9Kingdom of Eswatini%%%
10Zambia%%%
Source: International Monetary Fund

Top 10 Highest Real Interest Rates in the World

The real interest rate is the lending interest rate adjusted for inflation, as measured by an index called the gross domestic product deflator. The GDP deflator measures changes in prices. Here are the 10 countries with the highest real interest rates, according to the latest data from the World Bank, released in

Top 10 Highest Real Interest Rates by Country  
RankingCountry Real Interest Rate ()
1Madagascar%
2Brazil%
3Malawi%
4Gambia%
5Rwanda%
6Kyrgyz Republic%
7Burundi%
8Uganda%
9Honduras%
10Sao Tome and Principe%
Source: The World Bank

In the United States, the real interest rate was just % in — approximately 22 times less than Madagascar, the country with the highest real interest rate.

Also See: Investing In Certificates of Deposit — The Ultimate Guide

How the US Banking System Compares

Most countries have central banks responsible for controlling the currency, much like the United States does. They also have both well-established banks and banks that are smaller and newer, similar to U.S. credit unions and small, local banks.

At the higher end of the spectrum, many U.S. banks offer high-yield savings accounts with an APY of more than %. Low interest rates in the United States are an indicator of stability — the highest current interest rates in the world come from highly unstable countries.

In the United States, everything from your mortgage and car loan interest rates to your credit card interest rate is affected by the most basic of interest rates: the federal funds rate. If the federal funds rate rises, all other public and private rates will generally rise, too. This could mean the difference between your money earning interest against inflation in a savings account and your account losing money.

Consider: Are High-Yield Savings Accounts Worth It? Here’s Everything You Need To Know

Proceed at Your Own Risk

Before you roll the dice overseas with dreams of double-digit interest gains, know that the international insurance protection on your deposits is likely not as comprehensive as FDIC deposit insurance. Although foreign central bank interest rates might be higher, American banks protect your money either through FDIC insurance up to a certain amount or, in the case of credit unions, National Credit Union Administration insurance. If you make a savings deposit at an FDIC-insured bank, your deposit is insured up to $, If you bank at a credit union that is insured by NCUA, your funds are insured up to at least $,

As with all investments and bank accounts, especially in developing countries, it’s important to weigh the amount of risk you’re willing to take on versus the return that you can expect. Although it would be great to earn nearly % APY on a savings account, it’s comforting to know that money you keep in American banks is fully protected in the event that your financial institution crumbles.

Keep reading to learn about the different types of deposit accounts that are available.

More Interest Rates

More from GOBankingRates

Ruth Sarreal, Jason Larkins and Cynthia Measom contributed to the reporting for this article.

Savings interest rates were sourced from International Monetary Fund data and are accurate as of July 16, Rates are based on U.S. currency.

Editorial Note: This content is not provided by American Express. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone and have not been endorsed by American Express.

Источник: mynewextsetup.us

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Putting a ceiling on Sub-Saharan Africa's sky-high interest rates

This article was first published in the October international edition of Accounting and Business magazine.

Sub-Saharan Africa has some of the highest interest rates in the world, according to a study last year by mynewextsetup.us Three of the six countries with the world’s highest interest rates are in sub-Saharan Africa. The three are Malawi, Gambia and Ghana, and they reflect the broad picture in the region – and, indeed, the wider African continent – of generally high interest rates.

Interest rates in sub-Saharan Africa are commonly above 20% a year for borrowers, and the spread between lending and borrowing rates is also extremely high (8%%) compared with spreads at commercial banks in other regions of the world. Banks cite a high-risk environment and high inflation as well as financial volatility as explanations for this situation. 

Efforts to cut commercial lending rates so as to encourage startup businesses and to foster growth for small and medium-sized enterprises (SMEs) have not typically been successful in the past.

But in August this year, in an effort to change that, Kenya passed an unprecedented law placing a nationwide ceiling on loan interest rates and a floor on deposit rates for all financial institutions, thereby imposing a form of price control on the banking industry. The move threatens the traditional profit base of the region’s commercial banks because, as the most developed economy in sub-Saharan Africa, Kenya sets the trend. It could mean the same controls will be imposed in other East African countries, especially as the region moves further down the road to monetary union and a common market. 

Kenyan commercial banks have moved quickly to publish a common lower lending rate of % based on the central bank rate. Predictably, entrepreneurs have supported the legislation, more so since some banks have indicated they will apply the rate to loans too. 

But analysts are watching closely. An ill-considered price cap in a relatively open market will often quietly turn it a black market. Some bank collapses in Kenya have highlighted the issue of undeclared deposits and parallel banking in the banking sector where depositors pay to deposit instead of being paid interest because their funds are ‘dirty’. These funds do not even have to be lent onwards. Such distortions, if they are indeed widespread, could mean that these regulations will do little to bring new businesses to the market and encourage SMEs to grow.

What’s more, the regulations do not affect government borrowing. Banks may therefore simply buy more Treasury bills and avoid lending very much to the private sector at all.

It remains to be seen if the interest rate price caps will work in practice for the formal banking sector.

The real problem may be that banks are so risk-averse because they are not strictly local institutions. Many have foreign investors or large depositors. The best alternative for many Africans needing to borrow are the savings and credit societies (Saccos) created to pool people’s savings and share borrowing opportunities between them. 

Saccos are exclusively local and because of their low operational costs can charge effective rates of less than 10% a year. However, they can lend only to individual members of the Sacco, so such loans tend to be for household needs. 

Alnoor Amlani FCCA is an independent consultant based in East Africa

Источник: mynewextsetup.us

China’s Economic Rise: History, Trends, Challenges, and Implications for the United States

China's rise from a poor developing country to a major economic power in about four decades has been spectacular. From (when economic reforms began) to , China's real gross domestic product (GDP) grew at an average annual rate of nearly 10%.1 According to the World Bank, China has "experienced the fastest sustained expansion by a major economy in history—and has lifted more than million people out of poverty."2 China has emerged as a major global economic power. For example, it ranks first in terms of economic size on a purchasing power parity (PPP) basis, value-added manufacturing, merchandise trade, and holder of foreign exchange reserves.

China's rapid economic growth has led to a substantial increase in bilateral commercial ties with the United States. According to U.S. trade data, total trade between the two countries grew from $5 billion in to $ billion in China is currently the United States' largest merchandise trading partner, its third-largest export market, and its largest source of imports. Many U.S. companies have extensive operations in China in order to sell their products in the booming Chinese market and to take advantage of lower-cost labor for export-oriented manufacturing.3 These operations have helped some U.S. firms to remain internationally competitive and have supplied U.S. consumers with a variety of low-cost goods. China's large-scale purchases of U.S. Treasury securities (which totaled $ trillion as of April have enabled the federal government to fund its budget deficits, which help keep U.S. interest rates relatively low.4

However, the emergence of China as a major economic power has raised concern among many U.S. policymakers. Some claim that China uses unfair trade practices (such as an undervalued currency and subsidies given to domestic producers) to flood U.S. markets with low-cost goods, and that such practices threaten American jobs, wages, and living standards. Others contend that China's growing use of industrial policies to promote and protect certain domestic Chinese industries or firms favored by the government, and its failure to take effective action against widespread infringement and theft of U.S. intellectual property rights (IPR) in China, threaten to undermine the competitiveness of U.S. IP-intensive industries. In addition, while China has become a large and growing market for U.S. exports, critics contend that numerous trade and investment barriers limit opportunities for U.S. firms to sell in China, or force them to set up production facilities in China as the price of doing business there.

The Chinese government views a growing economy as vital to maintaining social stability. However, China faces a number of major economic challenges that could dampen future growth, including distortive economic policies that have resulted in overreliance on fixed investment and exports for economic growth (rather than on consumer demand), government support for state-owned firms, a weak banking system, widening income gaps, growing pollution, and the relative lack of the rule of law in China. The Chinese government has acknowledged these problems and has pledged to address them by implementing policies to increase the role of the market in the economy, boost innovation, make consumer spending the driving force of the economy, expand social safety net coverage, encourage the development of less-polluting industries (such as services), and crack down on official government corruption. The ability of the Chinese government to implement such reforms will likely determine whether China can continue to maintain relatively rapid economic growth rates, or will instead begin to experience significantly lower growth rates.

China's growing economic power has led it to become increasingly involved in global economic policies and projects, especially infrastructure development. China's Belt and Road initiative (BRI) represents a grand strategy by China to finance infrastructure throughout Asia, Europe, Africa, and beyond. If successful, China's economic initiatives could significantly expand export and investment markets for China and increase its "soft power" globally.

This report provides background on China's economic rise; describes its current economic structure; identifies the challenges China faces to maintain economic growth; and discusses the challenges, opportunities, and implications of China's economic rise for the United States.

The History of China's Economic Development

China's Economy Prior to Reforms

Prior to , China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. A large share of the country's economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. During the s, all of China's individual household farms were collectivized into large communes. To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the s and s. As a result, by nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises (SOEs), according to centrally planned output targets. Private enterprises and foreign-invested firms were generally barred. A central goal of the Chinese government was to make China's economy relatively self-sufficient. Foreign trade was generally limited to obtaining those goods that could not be made or obtained in China. Such policies created distortions in the economy. Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced (since they were mainly focused on production goals set by the government).

According to Chinese government statistics, China's real GDP grew at an average annual rate of % from to , although the accuracy of these data has been questioned by many analysts, some of whom contend that during this period, Chinese government officials (especially at the subnational levels) often exaggerated production levels for a variety of political reasons. Economist Angus Maddison puts China's actual average annual real GDP growth during this period at about %.5 In addition, China's economy suffered significant economic downturns during the leadership of Chairman Mao Zedong, including during the Great Leap Forward from to (which led to a massive famine and reportedly the deaths of up to 45 million people)6 and the Cultural Revolution from to (which caused widespread political chaos and greatly disrupted the economy). From to , China's per capita GDP on a purchasing power parity (PPP) basis,7 a common measurement of a country's living standards, doubled. However, from to , Chinese living standards fell by %, and from to , they dropped by % (see Figure 1). In addition, the growth in Chinese living standards paled in comparison to those in the West, such as Japan, as indicated in Figure 2.

Figure 1. Chinese Per Capita GDP:

($ billions, PPP basis)

Source:Angus Maddison, Historical, Statistics of the World Economy: AD.

Figure 2. Comparison of Chinese and Japanese Per Capita GDP:

($ billions, PPP basis)

Source: Angus Maddison, Historical, Statistics of the World Economy: AD.

In , (shortly after the death of Chairman Mao in ), the Chinese government decided to break with its Soviet-style economic policies by gradually reforming the economy according to free market principles and opening up trade and investment with the West, in the hope that this would significantly increase economic growth and raise living standards. As Chinese leader Deng Xiaoping, the architect of China's economic reforms, put it: "Black cat, white cat, what does it matter what color the cat is as long as it catches mice?"8

The Introduction of Economic Reforms

Beginning in , China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. In addition, the government established four special economic zones along the coast for the purpose of attracting foreign investment, boosting exports, and importing high technology products into China. Additional reforms, which followed in stages, sought to decentralize economic policymaking in several sectors, especially trade. Economic control of various enterprises was given to provincial and local governments, which were generally allowed to operate and compete on free market principles, rather than under the direction and guidance of state planning. In addition, citizens were encouraged to start their own businesses. Additional coastal regions and cities were designated as open cities and development zones, which allowed them to experiment with free-market reforms and to offer tax and trade incentives to attract foreign investment. In addition, state price controls on a wide range of products were gradually eliminated. Trade liberalization was also a major key to China's economic success. Removing trade barriers encouraged greater competition and attracted FDI inflows. China's gradual implementation of economic reforms sought to identify which policies produced favorable economic outcomes (and which did not) so that they could be implemented in other parts of the country, a process Deng Xiaoping reportedly referred to as "crossing the river by touching the stones."9

China's Economic Growth and Reforms: the Present

Since the introduction of economic reforms, China's economy has grown substantially faster than during the pre-reform period, and, for the most part, has avoided major economic disruptions.10 From to , China's annual real GDP averaged % (see Figure 3). This has meant that on average China has been able to double the size of its economy in real terms every eight years. The global economic slowdown, which began in , had a significant impact on the Chinese economy. China's media reported in early that 20 million migrant workers had returned home after losing their jobs because of the financial crisis and that real GDP growth in the fourth quarter of had fallen to % year-on-year. The Chinese government responded by implementing a $ billion economic stimulus package, aimed largely at funding infrastructure and loosening monetary policies to increase bank lending.11 Such policies enabled China to counter the effects of the sharp global fall in demand for Chinese products. From to , China's real GDP growth averaged %. However, the rate of GDP growth declined slowed for the next six consecutive years, falling from % in to % in Real GDP ticked up to % in , but slowed to % in , (although it rose to % in ). The IMF's April World Economic Outlook projects that China's real GDP growth will slow each year over the next six years, falling to % in (Figure 4).12 Many economists warn that China's economic growth could slow further if the United States and China continue to impose punitive economic measures against each other, such the tariff hikes that have resulted from U.S. action under Section and Chinese retaliation. The Organization for Economic and Cooperation and Development (OECD) projects that increased tariffs on all trade between the United States and China could reduce China's real GDP in by % relative to the OECD's baseline economic projections.13

Figure 3. Chinese Annual Real GDP Growth:

(percentage change)

Figure 4. China's Real Annual GDP Growth: and Projections through

(percentage)

Source: IMF, World Economic Outlook Database, April ,

Causes of China's Economic Growth

Economists generally attribute much of China's rapid economic growth to two main factors: large-scale capital investment (financed by large domestic savings and foreign investment) and rapid productivity growth. These two factors appear to have gone together hand in hand. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for additional investment in the economy.

China has historically maintained a high rate of savings. When reforms were initiated in , domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during this period were generated by the profits of SOEs, which were used by the central government for domestic investment. Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings as well as corporate savings. As a result, China's gross savings as a percentage of GDP is the highest among major economies. The large level of domestic savings has enabled China to support a high level of investment. In fact, China's gross domestic savings levels far exceed its domestic investment levels, which have made China a large net global lender.

Several economists have concluded that productivity gains (i.e., increases in efficiency) have been another major factor in China's rapid economic growth. The improvements to productivity were caused largely by a reallocation of resources to more productive uses, especially in sectors that were formerly heavily controlled by the central government, such as agriculture, trade, and services. For example, agricultural reforms boosted production, freeing workers to pursue employment in the more productive manufacturing sector. China's decentralization of the economy led to the rise of non-state enterprises (such as private firms), which tended to pursue more productive activities than the centrally controlled SOEs and were more market-oriented and more efficient. Additionally, a greater share of the economy (mainly the export sector) was exposed to competitive forces. Local and provincial governments were allowed to establish and operate various enterprises without interference from the government. In addition, FDI in China brought with it new technology and processes that boosted efficiency.

However, as China's technological development begins to converge with major developed countries (i.e., through its adoption of foreign technology), its level of productivity gains, and thus, real GDP growth, could slow significantly from its historic levels unless China becomes a major center for new technology and innovation and/or implements new comprehensive economic reforms. Several developing economies (notably several in Asia and Latin America) experienced rapid economic development and growth during the s and s by implementing some of the same policies that China has utilized to date to develop its economy, such as measures to boost exports and to promote and protect certain industries. However, at some point in their development, some of these countries began to experience economic stagnation (or much slower growth compared to previous levels) over a sustained time, a phenomenon described by economists as the "middle-income trap."14 This means that several developing (low-income) economies were able to transition to a middle-income economy, but because they were unable to sustain high levels of productivity gains (in part, because they could not address structural inefficiencies in the economy), they were unable to transition to a high-income economy.15 China may be at a similar crossroads now. The World Bank classifies development levels of economies using a per capita gross national income (GNI) methodology.16 According to the World Bank, China went from a low-income economy to a low-middle-income economy in , and in , it became an upper-middle-income country. China's per capita GNI (at $8,) was % below the level China would need to obtain to become a high-income economy. The Chinese government projects that China can cross the high-income threshold by It hopes to achieve this largely by making innovation a major source of future economic growth. Skeptics contend that innovation growth in China will be hard to achieve, especially if it is mainly state-driven and imposes new restrictions on foreign firms,

Figure 5. World Bank Measurements of China's Per Capita GNI:

($ U.S.)

Source: World Bank

Notes: Bar in red indicates the level China would need to reach to become a high-income economy.

The Economist Intelligence Unit (EIU) projects that China's real GDP growth will slow considerably over the next several decades, eventually converging on U.S. growth rates by the year (U.S. and Chinese real GDP growth rates are both projected at %). For some years thereafter, EIU projects U.S. GDP growth to be greater than China's (Figure 6).17

Figure 6. U.S. and Chinese Annual Real GDP Growth Rates in and Projections through 

(percentage)

Source:EIU Database (accessed on June 24, ).

The Chinese government has indicated its desire to move away from its current economic model of fast growth at any cost to more "smart" economic growth, which seeks to reduce reliance on energy-intensive and high-polluting industries and rely more on high technology, green energy, and services. China also has indicated it wants to obtain more balanced economic growth. (These issues are discussed in more detail later in the report.)

Measuring the Size of China's Economy

The rapid growth of the Chinese economy has led many analysts to speculate if and when China will overtake the United States as the "world's largest economic power." The "actual" size of China's economy has been a subject of extensive debate among economists. Measured in U.S. dollars using nominal exchange rates, China's GDP in in nominal U.S. dollars was $ trillion, which was % of the size of the U.S. economy, according to estimates made by the IMF. China's per capita GDP in nominal dollars was $9,, which was % of the U.S. per capita level.

Many economists contend that using nominal exchange rates to convert Chinese data (or those of other countries) into U.S. dollars fails to reflect the true size of China's economy and living standards relative to the United States. Nominal exchange rates simply reflect the prices of foreign currencies vis-à-vis the U.S. dollar, and such measurements exclude differences in the prices for goods and services across countries. To illustrate, one U.S. dollar exchanged for local currency in China would buy more goods and services there than it would in the United States. This is because prices for goods and services in China are generally lower than they are in the United States. Conversely, prices for goods and services in Japan are generally higher than they are in the United States (and China). Thus, one dollar exchanged for local Japanese currency would buy fewer goods and services there than it would in the United States. Economists attempt to develop estimates of exchange rates based on their actual purchasing power relative to the dollar in order to make more accurate comparisons of economic data across countries, usually referred to as purchasing power parity (PPP).

The PPP exchange rate increases the (estimated) measurement of China's economy and its per capita GDP. According to the IMF (which uses price surveys conducted by the World Bank), prices for goods and services in China are about half the level they are in the United States. Adjusting for this price differential raises the value of China's GDP from $ trillion (nominal dollars) to $ trillion (on a PPP basis) (see Table 1).18 IMF data indicate that China overtook the United States as the world's largest economy in on a PPP basis.19

China's share of global GDP on a PPP basis rose from % in to an estimated % in , while the U.S. share of global GDP on a PPP basis fell from % to an estimated %.20 This would not be the first time in history that China was the world's largest economy (see text box). China's economic ascendency as the world largest economy has been impressive, especially considering that in , China's GDP on a PPP basis was only one-tenth that of the United States (see

Figure 7). The IMF predicts that by , China's economy will be 56% larger than the U.S. economy on a PPP basis.

Table 1. Comparisons of Chinese, Japanese, and U.S. GDP and Per Capita GDP in Nominal U.S. Dollars and a Purchasing Power Parity Basis:

China

United States

Nominal GDP ($ billions)

GDP in PPP ($ billions)

Nominal Per Capita GDP ($)

Per Capita GDP in PPP ($)

Source:IMF, World Economic Forum.

The Decline and Rise of China's Economy

According to a study by economist Angus Maddison, China was the world's largest economy in , accounting for an estimated % of global GDP. However, foreign and civil wars, internal strife, weak and ineffective governments, natural disasters (some of which were man-made), and distortive economic policies caused China's share of global GDP on a PPP basis to shrink significantly. By , China's share of global GDP had fallen to %, and by , it slid to %. The adoption of economic reforms by China in the late s led to a surge in China's economic growth and helped restore China as a major global economic power.

Source: The Organization for Economic Cooperation and Development, Chinese Economic Performance in the Long Run, , by Angus Maddison,

Figure 7. U.S. and Chinese GDP (PPP Basis) as a Share of Global Total: (%)

Source: IMF, World Economic Outlook, April

The PPP measurement also raises China's nominal per capita GDP (from $9,) to $18,, which was % of the U.S. level. Even with continued rapid economic growth, it would likely take many years for Chinese living standards to approach U.S. levels.

China as the World's Largest Manufacturer

China has emerged as the world's largest manufacturer according to the World Bank. Figure 8 lists estimates of the gross value added of manufacturing in China, the United States, and Japan expressed in U.S. dollars in and Gross value added data reflect the actual value of manufacturing that occurred in the country (i.e., they subtract the value of intermediate inputs and raw materials used in production). In , the value of China's manufacturing on a gross value added basis was % higher than the U.S. level. Manufacturing plays a considerably more important role in the Chinese economy than it does for the United States. In , China's gross valued added manufacturing was equal to % of its GDP, compared to % for the United States.21

Figure 8. Gross Value Added Manufacturing in China, the United States, and Japan: and

($ billions)

Source:The World Bank.

In its Global Manufacturing Competitiveness Index, Deloitte (an international consulting firm) ranked China as the world's most competitive manufacturer (out of 40 countries), based on a survey of global manufacturing executives, while the United States ranked second (it ranked fourth in ). The index found that global executives predicted that the United States would overtake China by to become the world's most competitive economy, largely because of its heavy investment in talent and technology (e.g., high levels of R&D spending and activities, the presence of top-notch universities, and large amounts of venture capital being invested in advanced technologies). On the other hand, while China was expected to remain a major manufacturing power because of its large R&D spending levels, movement toward higher-valued, advanced manufacturing, government policies to promote innovation, and a large pool of graduates in science, technology, engineering and mathematics, it was viewed as facing several challenges, including a slowing economy, a decline in value-added manufacturing and overcapacity in several industries, rising labor costs, and a rapidly aging population. As a result, China was projected to fall to the second-most competitive manufacturer by 22

More broadly, the World Economic Forum (WEF) produces an annual report that assesses and ranks (based on an index) the global competitiveness of a country's entire economy, based on factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can achieve. The WEF's Global Competitive Index ranked China as the world's 28th-most competitive economy (out of economies), while the United States ranked first.23

Changes in China's Wage and Labor Cost Advantages

The decline in China's working age population may have contributed rising wages in China. As indicated in Figure 9, China's average monthly wages (converted into U.S. dollars) in were $55, compared with $32 for Vietnam and $ for Mexico.24 However, in , China's average monthly wages (at $) were % higher than Vietnam's wages ($) and % higher than Mexico's ($). From to , China's average monthly wages rose by %. The American Chamber of Commerce in China (AmCham China) Business Climate survey listed rising labor costs as the second-biggest challenge facing U.S. firms in China (56% of recipients cited them as their largest concern).25Figure 10 shows a comparison of labor costs per unit of production for the countries listed in the previous figure, indexed relative to U.S levels. In , China's unit labor production costs were of U.S. levels and by they rose to % of U.S. levels.26

Figure 9. Average Monthly Wages for China, Mexico and Vietam:

(nominal U.S. dollars)

Source: Economist Intelligence Unit.

Notes:Because data are listed in U.S. dollars rather than local currency, changes to wages may also partially reflect changes to exchange rates with the U.S. dollar. However, such data may reflect average labor costs in dollars that U.S.-invested firms might face in their overseas operations.

Figure Labor Cost Index for China, Mexico, and Vietnam Relative to those in the United States:

(U.S. level =)

Source: Economist Intelligence Unit.

Notes: The labor cost of producing one unit of output, indexed to U.S. levels.

Foreign Direct Investment (FDI) in China

China's trade and investment reforms and incentives led to a surge in FDI beginning in the early s. Such flows have been a major source of China's productivity gains and rapid economic and trade growth. There were reportedly , foreign-invested enterprises (FIEs) registered in China in , employing million workers or % of the urban workforce.27 As indicated in Figure 11, FIEs account for a significant share of China's industrial output. That level rose from % in to a high of % in , but fell to % in 28 In addition, FIEs are responsible for a significant level of China's foreign trade. At their peak, FIEs accounted for % of Chinese exports in and % of imports, but these levels have subsequently fallen, reaching % and %, respectively, in (see Figure 12).

Figure Industrial Output by Foreign-Invested Firms in China as a Share of National Output Total:

(percentage)

Source: Invest in China (mynewextsetup.us) and China's Statistical Yearbook.

Figure Share of Chinese Merchandise Exports and Imports by Foreign-Invested Enterprises in China:

(percentage)

Source: Invest in China (mynewextsetup.us).

The United Nations Conference on Trade and Development (UNCTAD) reports that China has become a both a major recipient of global FDI as well as a major provider of FDI outflows (see Figure 13).29 China's FDI inflows in were $ billion, making it the world's second-largest recipient of FDI after the United States.30 China's FDI outflows have grew rapidly after and exceeded FDI inflows for the first time in China's FDI outflows reached a historic peak of $ billion in , but declined in and , reflecting a crackdown by the Chinese government on investment deemed wasteful and well as greater scrutiny by foreign governments of China's efforts to obtain advanced technology firms and other strategic assets. Still, China was the world's second-largest source of FDI outflows (after Japan).

Figure Estimates of China's Annual FDI Inflows and Outflows:

($ billions)

Source: UNCTAD

Notes: UNCTAD FDI data differ from that reported by China.

The sharp increase in China's global FDI outflows in recent years appears to be largely driven by a number of factors, including Chinese government policies and initiatives to encourage firms to "go global." The government wants to use FDI to gain access to IPR, technology, know-how, famous brands, etc., in order to move Chinese firms up the value-added chain in manufacturing and services, boost domestic innovation and development of Chinese brands, and help Chinese firms (especially SOEs) to become major global competitors.31 China's slowing economy and rising labor costs have also encouraged greater Chinese overseas FDI in order to help firms diversify risk and expand business opportunities beyond the China market, and, in some cases, to relocate less competitive firms from China to low-cost countries. China's Ministry of Foreign Trade (MOFCOM) reports that in , Chinese nonfinancial FDI in BRI countries totaled $ billion, up % over the previous year.32 Additionally, increased FDI outflows may be the result of the Chinese government attempting to diversify its foreign exchange reserve holdings (which totaled $ trillion as of April —by far the world's largest holder). The largest foreign investors in China (based on FDI stock through ) were Hong Kong (% of total),33 the British Virgin Islands (%), Japan (%), Singapore (%), and Germany (%) (see Table 2).

Table 2. Chinese Data on Top Ten Sources of China's FDI Inflows to China:

($ billions and percentage of total)

Country

Estimated Cumulative Utilized
FDI:

Amount

% of Total

Total

2,

Hong Kong

1,

British Virgin Islands

Japan

Singapore

Germany

87

S. Korea

73

U.S.

72

Cayman Islands

49

The Netherlands

37

Taiwan

33

Source:IMF Coordinated Direct Investment Survey.

Factors Driving China's FDI Outflow Strategy

A key aspect of China's economic modernization and growth strategy during the s and s was to attract FDI into China to help boost the development of domestic firms. Investment by Chinese firms abroad was sharply restricted. However, in , China's leaders initiated a new "go global" strategy, which sought to encourage Chinese firms (primarily SOEs) to invest overseas. One key factor driving this investment is China's massive accumulation of foreign exchange reserves. Traditionally, a significant level of those reserves has been invested in relatively safe but low-yielding assets, such as U.S. Treasury securities. On September 29, , the Chinese government officially launched the China Investment Corporation (CIC) in an effort to seek more profitable returns on its foreign exchange reserves and diversify away from its U.S. dollar holdings.34 The CIC was originally funded at $ billion, making it one of the world's largest sovereign wealth funds.35 Another factor behind the government's drive to encourage more outward FDI flows has been to obtain natural resources, such as oil and minerals, deemed by the government as necessary to sustain China's rapid economic growth.36 Finally, the Chinese government has indicated its goal of developing globally competitive Chinese firms with their own brands. Investing in foreign firms, or acquiring them, is viewed as a method for Chinese firms to obtain technology, management skills, and often, internationally recognized brands, needed to help Chinese firms become more globally competitive. For example, in April , Lenovo Group Limited, a Chinese computer company, purchased IBM Corporation's personal computer division for $ billion.37 The largest destinations of cumulative Chinese FDI outflows through were Hong Kong (% of total), the Cayman Islands (%), the British Virgin Islands (%), and the United States (%) (see Table 3).

Table 3. Major Destinations of Chinese Nonfinancial FDI Outflows by Stock through 

($ billions and percent of total)

Destination

Stock of FDI through

Share of FDI Stock through (%)

Total

Hong Kong

Cayman Islands

British Virgin Islands

United States

Singapore

Australia

United Kingdom

Source: China Natural Bureau of Statistics.

Note: Ranked according to the top seven destinations of the stock of Chinese FDI outflows through

A significant level of Chinese FDI that goes to Hong Kong, the British Virgin Islands, and the Cayman Islands likely is redirected elsewhere. The American Enterprise Institute (AEI) maintain the China Global Investment Tracker (CGIT), a database that has been developed to track the actual flows (from the parent company to the final destination) of Chinese investment globally. The CGIT database tracks FDI valued at $ million or more (which it refers to as "China's outward non-bond investment").38 These data differ significantly from official Chinese FDI outflow data. The CGIT data on the top destinations of total Chinese outward non-bond outward investment from to included the United States ($ billion), Australia ($ billion), the United Kingdom ($75 billion), Brazil ($ billion), and Russia ($) (see Figure 14).39

Figure AEI Estimates of Chinese Cumulative Outward Investment by Major Destination:

($ billions)

Source:AEI China Global Investment Tracker.

Notes: Data includes outward FDI and valued at $ million or more. These data differ significantly from official U.S. and Chinese government data which rely on different methodologies.

China's Merchandise Trade Patterns

Economic reforms and trade and investment liberalization have helped transform China into a major trading power. Chinese merchandise exports rose from $14 billion in to $ trillion in , while merchandise imports grew from $18 billion to $ trillion (see Table 4 and Figure 15). China's rapidly growing trade flows have made it an increasingly important (and often the largest) trading partner for many countries. According to China, it was the largest trading partner for countries in 40 From to , the annual growth of China's merchandise exports and imports averaged % and %, respectively. However, China's exports and imports fell by % and %, respectively, due to the impact of the global financial crisis. China's trade recovered in and , with export growth averaging % and import growth averaging %. However, since that time, China's trade growth slowed sharply. From to , China's exports and imports grew at an average annual rate of % and %, respectively. From to exports and imports fell by an average rate of % and %, respectively (see Figure 16), reflecting a sluggish global economy and a decline in commodity prices (such as oil and ores). However, in , China's exports and imports rose by % and %, respectively. Exports and imports in rose by and %, respectively. However, during the first three months of , China's exports grew by %, while imports fell % year-over-year. China's merchandise trade surplus grew sharply from to , rising from $32 billion to $ billion. That surplus fell each year over the next three years, dropping to $ billion in However, it rose in each of the next four years, reaching a record $ billion in before falling to $ billion in , $ billion in , and $ billion in In , China overtook Germany to become both the world's largest merchandise exporter and the second-largest merchandise importer (after the United States). In , China overtook the United States as the world's largest merchandise trading economy (exports plus imports). As indicated in Figure 17, China's share of global merchandise exports grew from % in to % in , but fell to % in and to % in

Table 4. China's Global Merchandise Trade:

($ billions)

Year

Exports

Imports

Trade Balance

1,

1,

1,

1,

1,

1,

1,

1,

1,

2,

1,

2,

1,

2,

1,

2,

1,

2,

1,

2,

1,

2,

2,

Source: Global Trade Atlas and China's Customs Administration.

Figure China's Merchandise Trade:

($ billions)

Source: World Trade Atlas and China's Customs Administration.

Note: Data are in U.S. dollars which may be impacted by changes in exchange rates.

Figure Annual Change in China's Merchandise Exports and Imports:

(percentage)

Source: Global Trade Atlas and China's Customs Administration.

Note: Data are in U.S. dollars which may be impacted by changes in exchange rates as well as commodity prices.

Figure China's Share of Global Merchandise Exports:

(percentage)

Source: Economist Intelligence Unit.

Note: Data for are estimated.

China's Major Trading Partners

Table 5 lists official Chinese trade data on its seven largest trading partners in (based on total trade). These include the 28 countries that make up the European Union (EU28), the United States, the 10 nations that constitute the Association of Southeast Asian Nations (ASEAN), Japan, South Korea, Hong Kong, and Taiwan.41 China's top three export markets were the United States, the EU28, ASEAN,42 while its top sources for imports were the EU28, ASEAN, and South Korea. According to Chinese data, it maintained large trade surpluses with the United States ($ billion), Hong Kong ($ billion) and the EU28 ($ billion), and reported large trade imbalances with Taiwan ($ billion) and South Korea ($74 billion). China's trade data differ significantly from those of many of its trading partners. These differences appear to be largely caused by how China's trade via Hong Kong is counted in official Chinese trade data. China treats a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical purposes, while many countries that import Chinese products through Hong Kong generally attribute their origin to China for statistical purposes, including the United States.43

Table 5. China's Major Merchandise Trading Partners in

($ billions)

Country

Total Trade

Chinese Exports

Chinese Imports

China's Trade Balance

European Union

United States

ASEAN

Japan

South Korea

Hong Kong

Taiwan

Source: China's Customs Administration.

Notes: Rankings according to China's total trade in China's bilateral trade data often differ from that of its trading partners.

Major Chinese Trade Commodities

China's abundance of low-cost labor has made it internationally competitive in many low-cost, labor-intensive manufactures. As a result, manufactured products constitute a significant share of China's trade. A substantial amount of China's imports is comprised of parts and components that are assembled into finished products, such as consumer electronic products and computers, and then exported. Often, the value-added to such products in China by Chinese workers is relatively small compared to the total value of the product when it is shipped abroad.

China's top 10 imports and exports in are listed in Table 6 and Table 7, respectively, using the harmonized tariff system (HTS) on a two-digit level. Major imports included electrical machinery and equipment;44 mineral fuels; nuclear reactors, boilers, and machinery (such as automatic data process machines and machines to make semiconductors); ores; and optical, photographic, medical, or surgical instruments. China's biggest exports were electrical machinery and equipment; nuclear reactors, boilers, and machinery; furniture; plastics; and vehicles.

Table 6. Major Chinese Merchandise Imports in

HS Code

Description

$ Billions

Percentage of
Total Exports

/
% Change

Total Commodities

2,

Electrical machinery and equipment

Mineral fuel, oil etc.

Nuclear reactors, boilers, and machinery

Ores, slag, and ash

Optical, photographic, cinematographic, measuring
checking, precision, medical or surgical instruments
and apparatus; parts and accessories thereof

Vehicles, except railway, and parts
trucks, and bicycles)

81

Precious stones and metals

61

Copper and articles thereof

48

Oil seeds, misc. grain, plants, and fruit

43

Pharmaceutical products

28

Source: World Trade Atlas, using official Chinese statistics.

Note: Top 10 imports in , two-digit level, harmonized tariff system.

Table 7. Major Chinese Merchandise Exports in

HS Code

Description

$ Billions

Percentage of
Total Exports

/
% Change

Total Commodities

2,

Electrical machinery

Nuclear reactors, boilers, and machinery

Furniture and bedding

96

Plastics and articles thereof

80

Vehicles, except railway, and parts

75

Apparel articles and accessories, knit or crochet

74

Apparel articles and accessories, woven

71

Optical, photographic, cinematographic, measuring

checking, precision, medical or surgical instruments

and apparatus; parts and accessories thereof

71

Articles of iron or steel

65

Organic chemicals

60

Source:World Trade Atlas, using official Chinese statistics.

Note: Top 10 exports in , two-digit level, harmonized tariff system.

Major Long-Term Challenges Facing the Chinese Economy

China is currently undergoing a major restructuring of its economic model. Policies that were employed in the past to essentially produce rapid economic growth at any cost were very successful. However, such policies have entailed a number of costs (such as heavy pollution, widening income inequality, overcapacity in many industries, an inefficient financial system, rising corporate debt, and numerous imbalances in the economy) and therefore the old growth model is viewed by many economists as no longer sustainable. China has sought to develop a new growth model ("the new normal") that promotes more sustainable (and less costly) economic growth that puts greater emphasis on private consumption and innovation as the new drivers of the Chinese economy. Implementing a new growth model that sustains healthy economic growth could prove challenging unless China is able to effectively implement new economic reforms. Many analysts warn that without such reforms, China could face a period of stagnant economic growth and living standards, a condition referred to by economists as the "middle-income trap" (Several of these challenges are discussed below.

China's Incomplete Transition to a Market Economy

Despite China's three-decade history of widespread economic reforms, Chinese officials contend that China is a "socialist-market economy." This appears to indicate that the government accepts and allows the use of free market forces in a number of areas to help grow the economy, but the government still plays a major role in the country's economic development.

Industrial Policies and SOEs

According to the World Bank, "China has become one of the world's most active users of industrial policies and administrations."45 China's State Council has said that there are currently , SOEs at the central and local government level.46 China's SOEs may account for up of 50% of non-agriculture GDP.47 In addition, although the number of SOEs has declined sharply, they continue to dominate a number of sectors (such as petroleum and mining, telecommunications, utilities, transportation, and various industrial sectors); are shielded from competition; are the main sectors encouraged to invest overseas; and dominate the listings on China's stock indexes.48 One study found that SOEs constituted 50% of the largest manufacturing companies in China and 61% of the top service sector enterprises.49 Not only are SOEs dominant players in China's economy, many are quite large by global standards. Fortune's list of the world's largest companies includes Chinese firms (compared to 29 listed firms in ).50 Of the Chinese firms listed, Fortune identified 75 companies (73% of total) where the government owned 50% or more of the company. Together, these 75 firms in generated $ trillion in revenues, had assets valued at $ trillion, and employed million workers. Of the 28 other Chinese firms on the Fortune list, several appear to have financial links to the Chinese government.

China and Global Steel Overcapacity

China has become a major global producer of steel. From to , China's production of raw steel rose from million metric tons to million metric tons, an increase of %. During this period, China's share of global production rose from % to % and China accounted for % of the increase in global steel production.51 While much of China's increased steel capacity has been in response to domestic demand (resulting from China's large-scale fixed investment), it is also a major exporter. In , China was the second-largest exporter of semifinished and steel products (after the EU) at million metric tons, or % of global total.

Concerns have been raised over the past few years over the effects of increased global steel production despite falling global steel demand. Following an EU Symposium on Excess Capacity and Structural Adjustment in the Steel Sector in April , then-U.S. Secretary of Commerce Penny Pritzker and then-USTR Michael Froman issued a joint statement that said that the "U.S. steel industry is in a crisis driven in large part by global excess capacity led by unsustainable expansion in steelmaking capacity by China," and noted that global steel overcapacity had impacted the U.S. industry through price declines, decreased profitability, and over 13, jobs lost.52

Many analysts contend that China's steel industry is heavily supported by government entities at the central and local government level through low-cost credit and subsidies. These enable many Chinese steel firms to operate, even when they are unprofitable and heavily in debt—these are termed by some as "zombies." The government is reluctant to allow such firms to go bankrupt due to concerns over effects layoffs could have on social stability. One study by Renmin University estimated that half of Chinese steel firms were "zombie enterprises."53 In April , the USTR released a list of 86 government subsidies from to given to Hebei Iron & Steel Company, one of the largest steel companies in China, which was obtained from the company's annual reports.54

In February , the Chinese government announced plans to shut million to million metric tons of crude steel capacity over the next five years and cut , jobs.55 The USTR's report on China's WTO compliance stated that China had committed to "ensure that no central government plans, policies, directives, guidelines, lending or subsidization targets the net expansion of steel capacity," and to take steps to reduce existing capacity, including "actively and appropriately dispose of 'zombie enterprises' through bankruptcies and other means."56

A State-Dominated Banking Sector, Excess Credit, and Growing Debt

China's banking system is largely dominated by state-owned or state-controlled banks. According to one analyst, the mangers of China's state banks are drawn from the ranks of the Chinese Communist Party cadre system, which "enables the party and government leaderships to exert influence over bank lending."57 In , the top five largest banks in China in terms of assets were state-owned entities.58 The percentage share of assets held by state-owned commercial banks (including the five large state-owned banks), the three government policy banks,59 and joint-stock commercial banks (where government entities are a major stock holder), together accounted for % of total bank assets in China.60 Foreign participation in China's banking system is relatively small, accounting for % of total bank assets.61 SOEs are believed to receive preferential credit treatment by government banks, while private firms must often pay higher interest rates or obtain credit elsewhere. According to one estimate, SOEs accounted for 85% ($ trillion) of all bank loans in 62 It is believed that oftentimes SOEs do not repay their loans, which may have saddled the banks with an ever-increasing amount of nonperforming loans.63 Many analysts contend that one of the biggest weaknesses of the banking system is that it lacks the ability to ration and allocate credit according to market principles, such as risk assessment.

The Chinese central government uses the banking system to boost credit in order to help meet its GDP growth objectives and to, when needed, offset the impact of global economic downturns, such as after the 9/11 terrorist attacks and the global financial crisis. From to , China's domestic credit increased in dollar terms by % (see Figure 18), and as a share of GDP, the level rose from % to %. As indicated in Figure 19, China's combined household, corporate, and government debt levels as a percentage of GDP as of mid are comparable to those of the United States and South Korea and lower than those of Japan and the European Union. However, China's debt levels (in both dollars and as a percentage of GDP) have risen sharply within a relatively short time, which, some have speculated, could spark an economic crisis in China in the future. From year-end to mid, China's total nonfinancial sector debt as a percentage of GDP increased from % to % (up percentage points). Much of the rise in that debt came from the corporate sector, which, as a percentage of GDP, rose from % in to % in mid (up 64 percentage points). In dollar terms, China's corporate debt rose from $3 trillion to $ trillion (up $ trillion) and currently greatly exceeds U.S. corporate debt levels (see Figure 20). Several observers have warned that China's credit growth may be too extensive and could undermine future growth by sharply boosting debt levels, causing overcapacity in many industrials (especially extending credit to firms that are unprofitable to keep them operating), contributing to bubbles (such as in real estate), and reducing productivity by proving preferential treatment to SOEs and other government-supported entities.

Figure Annual Change in the Stock of China's Domestic Credit

($ billions)

Source: Economist Intelligence Unit.

Figure Core Debt of Nonfinancial Sectors in * as a Percentage of GDP
for Selected Economies

(percentage)

Source: Bank for International Settlements.

Note: * As of second quarter

Figure U.S. and Chinese Corporate Debt: *

($ billions)

Source:Bank for International Settlements.

Note: *As of second quarter

Local government debt is viewed as a big problem in China, largely because of the potential impact it could have on the Chinese banking system. During the beginning of the global financial slowdown, many Chinese subnational government entities borrowed extensively to help stimulate local economies, especially by supporting infrastructure projects. In December , the Chinese National Audit Office reported that from the end of to mid-year , local government debt had increased by 67% to nearly $3 trillion.64 The Chinese government reported that local government debt rose to $ trillion as of Efforts have been made over the past few years by the central government to restructure local government debt and restrict local government borrowing, with mixed success, according to some press reports, because of pressures on local governments to maintain rapid economic growth.65

Many economists blame China's closed capital account for much of China's debt problems. The Chinese government has maintained restrictions on capital inflows and outflows for many years, in part to control the exchange of its currency, the renminbi (RMB), against the dollar and other currencies in order to boost exports. Many argue the Chinese government's restrictions on capital flows have greatly distorted financial markets in China, preventing the most efficient use of capital, such as overinvestment in some sectors (such as real estate) and underinvestment in others (such as services).

Environmental Challenges

China's economic growth model has emphasized the growth of heavy industry in China, much of which is energy-intensive and high polluting. The level of pollution in China continues to worsen, posing serious health risks to the population. The Chinese government often disregards its own environmental laws in order to promote rapid economic growth. China's environmental challenges are illustrated by the following incidents and reports.

  • A report by ExxonMobil estimated that China contributed about 60% of the growth in global CO2 emissions from to , and that its emissions would surpass the combined CO2 levels of the United States and EU by 66
  • A OECD report estimated the health costs of China's air pollution in at $ trillion, equivalent to % of its GDP.67
  • A study by the Rand Corporation estimated that the costs (in terms of health impact and lost productivity) from China's air pollution were equal to % of GDP each year from to It further estimated the costs as a percentage of GDP of water pollution and soil degradation at an additional % and %, respectively.68
  • On August 12, , a series of large explosions in several warehouses containing chemicals occurred in the Chinese port city of Tianjin, claiming the lives of at least people. Some press reports have blamed poor government enforcement of environmental regulations for the disaster. For example, some in China have questioned why dangerous chemicals were warehoused so close to residential areas and have raised concerns over the extent of chemical contamination in the area that may have resulted from the explosions.
  • The U.S. Embassy in Beijing, which monitors and reports air quality in China based on an air quality index of particulate matter (developed by the U.S. Environmental Protection Agency) considered to pose a health concern, reported that the air quality in Beijing for a majority of the days in January ranged from "unhealthy" to "hazardous" (based on hour exposure) and, on a few days, it recorded high readings that were "beyond index."69 The level of poor air quality in Beijing was termed by some in China as "Airpocalypse," and reportedly forced the government to shut down some factories and reduce the level of official cars on the road.70 On December 9, , China's media reported that half of China was blanketed by smog.71 The U.S. Consulate General in Shanghai reported that were a number of days in December where its measurement of the air quality in Shanghai was hazardous or very unhealthy, and during some time periods on December 5, , its readings were "beyond index." According to the U.S. Embassy in Beijing, from to , nearly two-thirds of the days in Beijing had air pollution considered to be unhealthy.72
  • In February , China's Geological Survey reportedly estimated that 90% of all Chinese cities had polluted groundwater, with two-thirds having "severely polluted" water.73
  • According to a report by the Asian Development Bank, less than 1% of the largest cities in China meet the air quality standards recommended by the World Health Organization, and 7 of these are ranked among the 10 most polluted cities in the world.74

The Chinese government has indicated that it is taking steps to reduce energy consumption, boost enforcement of environmental laws and regulations, reduce coal usage by expanding the use of cleaner fuels (such as natural gas) to general power, and relocate high-polluting factories away from large urban areas, although such efforts have had mixed results on the overall level of pollution in China.75 In addition, China has become a major global producer and user of clean and renewable energy technology. In January , the Chinese government said it would spend $ billion on renewable energy power generation by 76

Corruption and the Relative Lack of the Rule of Law

The relative lack of the rule of law in China has led to widespread government corruption, financial speculation, and misallocation of investment funds. In many cases, government "connections," not market forces, are the main determinant of successful firms in China. Many U.S. firms find it difficult to do business in China because rules and regulations are generally not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected (due to the lack of an independent judicial system). The relative lack of the rule of law and widespread government corruption in China limit competition and undermine the efficient allocation of goods and services in the economy. A New York Times article reported that (former) Chinese Premier Wen Jiabao's family controlled assets worth at least $ billion.77 One study estimates that between and , China was the world's largest source of illicit capital outflows at $ trillion.78 A survey by the Pew Research Center's Global Attitudes Project reported that 50% of respondents said that corrupt officials are a very big problem (up from 39% in ).79 Chinese officials often identify government corruption as the greatest threat to the Chinese Communist Party and the state. The Chinese government's anticorruption watchdog reported that , officials were found guilty of corruption in 80 Since assuming power in , Chinese Xi Jinping has carried out an extensive anticorruption drive. China has reportedly sought cooperation with the United States to obtain extradition of alleged corrupt officials who have fled to the United States.81 However, many analysts contend that government anticorruption campaigns are mainly used to settle political scores with out-of-favor officials. Some analysts contend that President's Xi anticorruption drive is more about consolidating his own political than instituting reforms.82 In addition, there are some indicators that the current anticorruption campaign may be having a negative impact on the Chinese economy, due to hesitancy by some local officials to pursue projects they feel will lead to scrutiny from the central government.83 Many observers argue that meaningful progress against government corruption cannot occur without greater government transparency, a system of checks and balances, a free press, Internet freedom, and an independent judiciary.84 In October , China held its fourth Plenum of the 18th Party Conference. The meeting focused on the need to enhance the rule of law in China, but emphasized the leading role of the Communist Party in the legal system.85

China maintains a weak and relatively decentralized government structure to regulate economic activity in China. Laws and regulations often go unenforced or are ignored by local government officials. As a result, many firms cut corners in order to maximize profits. This has led to a proliferation of unsafe food and consumer products being sold in China or exported abroad. Lack of government enforcement of food safety laws led to a massive recall of melamine-tainted infant milk formula that reportedly killed at least four children and sickened 53, others in Transparency International's Corruption Perception Index for ranked China 79th out of countries and territories, up from 72nd in 86

Demographic Challenges

Many economists contend that China's demographic policies, particularly its one-child policy (first implemented in ), are beginning to have a significant impact on the Chinese economy. For example, according to a McKinsey Global Institute study, China's fertility rate fell from about births per woman in to in 87 This is now affecting the size of the Chinese workforce.

The existence of a large and underemployed labor force was a significant factor in China's rapid economic growth when economic reforms were first introduced. Such a large labor force meant that firms in China had access to a nearly endless supply of low-cost labor, which helped enable many firms to become more profitable, which in turn led them to boost investment and production. Some economists contend that China is beginning to lose this labor advantage. According to the Chinese government, the size of its working age population (ages 16 to 59) peaked at million in , but then fell for seven consecutive years to million in The Chinese government projects that its working age population will drop to million by and to million by If these projections prove accurate, the Chines working age population could drop by million individuals ().88

The one-child policy has also resulted in a rapidly aging society in China.89 According to the Brookings Institute, China already has million people aged over 60, and this could reach million by and million by The population share of people aged over 60 could reach 20% by , and 27% by 90 With a declining working population and a rising elderly population, the Chinese government will face challenges trying to boost worker productivity (such as enhancing innovation and high-end technology development) and expanding spending on health care and elderly services. China's Hukou (household registration) system also poses challenges to the government.

China's Hukou System91

First introduced in , the Chinese Hukou (household registration) system is a categorization of its citizens based on both their place of residence and eligibility for certain socioeconomic benefits. Hukou is issued through a registration process administered by local authorities and solidified into inheritable social identities.92 The classification of the system is composed by two related parts: socioeconomic eligibility (agriculture/nonagriculture); and residential location (living in urban/rural areas). The Chinese government imposed the system with the purpose of regulating population distribution, especially in regard to cities. Since economic reforms were begun in , hundreds of millions of people have been allowed to leave their home towns to work in urban areas, such as Shanghai. The number of rural laborers working in China's cities was million in , over one-third (36%) of the total workforce.93 Although such workers are allowed to reside in the cities where they work, they are generally denied access to social entitlements, such as pensions, medical insurance, and basic education for children. This forces such workers to save a very high level of their income to pay for these services. Due to China's desire to increase the urbanization of its population, combat demographic disparities, and boost domestic consumption, the Chinese government is currently considering implementing new reforms to the Hukou system.

Economic Goals of the 19th Party Congress of the Communist Party

President Xi's report to the 19th Party Congress in November stated that socialism with Chinese characteristics had entered a new era. He stated that China would work to become a "moderately prosperous society in all respects" by Major goals include boosting living standards for poor and rural people, addressing income disparities (e.g., rich-poor and urban-rural), making private consumption the driver of the economy, boosting services, reducing pollution, promoting innovation and economic modernization, and improving overall living standards.94 For example, the report states the following:

We will work faster to build China into a manufacturer of quality and develop advanced manufacturing, promote further integration of the internet, big data, and artificial intelligence with the real economy, and foster new growth areas and drivers of growth in medium-high end consumption, innovation-driven development, the green and low-carbon economy, the sharing economy, modern supply chains, and human capital services. We will support traditional industries in upgrading themselves and accelerate development of modern service industries to elevate them to international standards. We will move Chinese industries up to the medium-high end of the global value chain, and foster a number of world-class advanced manufacturing clusters.

The report indicated that China would continue to pursue trade and investment reforms, noting the following:

We will adopt policies to promote high-standard liberalization and facilitation of trade and investment; we will implement the system of pre-establishment national treatment plus a negative list across the board, significantly ease market access, further open the service sector, and protect the legitimate rights and interests of foreign investors. All businesses registered in China will be treated equally.

However, the report emphasized the continued importance of the state sector and the government's continued role in various economic sectors:

We will improve the systems for managing different types of state assets, and reform the system of authorized operation of state capital. In the state-owned sector, we will step up improved distribution, structural adjustment, and strategic reorganization. We will work to see that state assets maintain and increase their value; we will support state capital in becoming stronger, doing better, and growing bigger, and take effective measures to prevent the loss of state assets. We will further reform of state-owned enterprises, develop mixed-ownership economic entities, and turn Chinese enterprises into world-class, globally competitive firms.95

China's Belt and Road Initiative

China's Belt and Road initiative (BRI), also called "One Belt, One Road" (OBOR), was launched in to boost economic integration and connectivity (such as infrastructure, trade, and investment) with its neighbors and various trading partners in Asia, Africa, Europe, and beyond.96 At the APEC summit in November , President Xi said the following:

The Belt and Road Initiative calls for joint contribution and it has a clear focus, which is to promote infrastructure construction and connectivity, strengthen coordination on economic policies, enhance complementarity of development strategies and boost interconnected development to achieve common prosperity. This initiative is from China, but it belongs to the world. It is rooted in history, but it is oriented toward the future. It focuses on the Asian, European and African continents, but it is open to all partners. I am confident that the launch of the Belt and Road Initiative will create a broader and more dynamic platform for Asia-Pacific cooperation.97

Many U.S. analysts view the BRI differently than how Chinese leaders describe it. For example, Nadège Rolland, senior fellow with the National Bureau of Asian Research states the following:

The Belt and Road Initiative (BRI) is generally understood as China's plan to finance and build infrastructure projects across Eurasia. Infrastructure development is in fact only one of BRI's five components which include strengthened regional political cooperation, unimpeded trade, financial integration and people-to-people exchanges. Taken together, BRI's different components serve Beijing's vision for regional integration under its helm. It is a top-level design for which the central government has mobilized the country's political, diplomatic, intellectual, economic and financial resources. It is mainly conceived as a response to the most pressing internal and external economic and strategic challenges faced by China, and as an instrument at the service of the PRC's vision for itself as the uncontested leading power in the region in the coming decades. As such, it is a grand strategy.98

Many aspects of the BRI initiative remain unclear, including which (and how many) countries will participate, how much China will spend to finance the initiative, and what projects will fall under the BRI. For example, the government's China Belt and Road Portal currently lists profiles of 70 countries on its website.99 However, China's official media in December stated that 86 countries and international organizations had signed cooperation agreements with China under the BRI. Nadège Rolland said that China pledged it would spend $1 trillion to $ trillion, TheEconomist reports that China put the figure at $4 trillion,

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mynewextsetup.us

Generally savings accounts offer very low interest rates. So, if you want to earn on your deposits (rather than simply using your account as a temporary “holding tank” or directing to longer-term saving and investing vehicles), a savings account with a high interest is a no-brainer.

However, when shopping for an account, there’s more to consider than just the interest. You can make an informed decision by using the finder tool to compare the fees and features of several different options available. But do scroll down to read our seven editors’ picks for the best high-interest savings accounts (HISA) in Canada.

These are rates offered by Ratehub partners. You can find information about additional product options below.

You can compare high-interest rates in the table above or input your estimated account balance to compare the growth between HISAs, tax-free savings accounts, registered retirement savings plans and youth savings accounts.


Our pick for the best high-interest savings accounts in Canada for

 


Best high-interest savings account rate: Saven Financial High Interest Savings Account*

This HISA may sneak under the radar, but once you see the rate you will be impressed. This online-only financial institution hits in with a strong interest rate on its HISA offering, along with no minimum balance requirements and free transfers. Saven is a division of FirstOntario Credit Union, a financial institution with roots back to , and which currently has more than , member clients. Note, you will need to invest at least $25 to become a member of FirstOntario.

  • Promotional rate: None
  • Interest rate: %
  • Minimum balance: None
  • Fees: None, except for a $25 cost to become a member of FirstOntario
  • Other restrictions: Only available to residents of Ontario

Also consider: Motive Savvy Savings Account

Motive Financial, the online banking division of Canadian Western Bank, offers the highest regular interest rate on this list. As such, your eligible deposits are held at Canadian Western Bank, and protected by the Canada Deposit Insurance Corporation (CDIC; see details below). There isn’t a monthly fee, and account holders get two free monthly withdrawals. But additional transactions will cost you.

  • Promotional Rate: None
  • Interest Rate: %
  • Minimum balance: None
  • Free transactions per month: 2 free monthly withdrawals ($5 charged per additional transaction)
  • Interac e-Transfer fee: $1 per outgoing transfer (no fee to receive)
  • Fees for extras: $ charged per withdrawal though non-exchange ATMs
  • CDIC insured: Eligible on deposits up to $, in Canadian funds that are payable in Canada and have a term of no more than 5 years
  • Other restrictions: Not available to residents of Quebec

Best for interest rates and no service fees: EQ Bank Savings Plus Account*

EQ Bank is owned by Equitable Bank, a Canadian institution in business since Another in the burgeoning online space, EQ Bank offers great returns on their Savings Plus account. There is no fee for the account and no minimum balance. All services, including Interac e-Transfer, are free.

  • Promotional Rate: None
  • Interest Rate: %

EQ Bank Savings Plus Account*Get more details*

  • Minimum balance: None
  • Free transactions per month: Unlimited
  • Interac e-Transfer fee: Free
  • Fees for extras: None
  • CDIC insured: Eligible on deposits up to $, in Canadian funds that are payable in Canada and have a term of no more than 5 years
  • Other restrictions: There’s a maximum balance of $, per customer; paper statements are not available

Best regular interest rate at a credit union: Maxa Financial High-Interest Savings Account

Maxa is a division of Westoba Credit Union, located in Manitoba. But its accounts are open to all Canadians, and it offers an impressive interest rate on savings. There’s no fee, but account holders can expect to pay service charges for many transactions.

  • Promotional Rate: None
  • Interest Rate: %
  • Minimum balance: missing info
  • Free transactions per month: First debit of each month free
  • Interac e-Transfer fee: $2 per transfer domestically; $5 per transfer internationally
  • Fees for extras: $ per debit except on the first of each month
  • CDIC insured: No, but all deposits guaranteed by the Deposit Guarantee Corporation of Manitoba, with no dollar-amount limit
  • Other restrictions: Online interface is dated

Best eSavings account: Neo High-Interest Savings Account

The Neo High-Interest Savings Account is a no-fee hybrid account that lets you spend and save—and earn cash back rewards—all in one place. Clients earn % in interest on every $1 held in the account, and can access their money from an app on their phone, making bill payments, purchases, Interace-Transfer transactions and more simple and seamless. 

 

  • Promotional Rate: None
  • Interest rate: %
  • Minimum balance: None 
  • Free transactions per month: Unlimited
  • Interac e-Transfer fee: $0
  • Fees for extras: $ for each printed document 
  • CDIC insured: Deposits held in Neo Savings accounts are combined with eligible deposits held at Concentra Bank, for up to $, of deposit protection, per category, per depositor
  • Other restrictions: Maximum balance per customer is $,; not available to residents of Quebec

Best regular interest rate in a hybrid account: Wealthsimple Cash*

Wealthsimple Cash* was launched in January by the Canadian online financial services provider Wealthsimple. Joining the fintech’s original robo-advisor offering and its more recently added discount brokerage Wealthsimple Trade, Wealthsimple Cash is a hybrid chequing and savings account. Unlike many of the big banks, this institution offers a high regular interest rate. Plus, as with a good chequing account, this one gives you unlimited transactions with zero fees. From the account, you can make no-fee bill payments and Interac e-Transfer transactions. If you have a Wealthsimple investment account, such as a TFSA or RRSP, you can contribute to them easily using funds from your savings account.

  • Promotional Rate: None
  • Interest Rate: %
  • Minimum balance: $1
  • Free transactions per month: unlimited
  • Interac e-Transfer fee: free
  • Fees for extras: free
  • CDIC insured: Yes, as of January 1,
  • Other restrictions: none
  • Open a Wealthsimple Cash account now*

Best promotional rate: Tangerine Savings Account

The Tangerine’s regular savings account is really flexible. It doesn’t require a minimum balance, and there are no fees or service charges. The entire Tangerine banking experience is simple and friendly, and their savings offerings are the same. Account holders can set up an Automated Savings Program online to help plan and meet savings goals.

  • Promotional Rate: % for the first days
  • Interest Rate: %
  • Minimum balance: None
  • Free transactions per month: Unlimited; free unlimited deposits and withdrawals at Tangerine or Scotiabank ABM Network bank machines in Canada; no surcharge or access fees on withdrawals from Global ATM Alliance machines internationally
  • Interac e-Transfer fee: Free
  • Fees for extras: None; no cost for paper statement, if desired (sent quarterly)
  • CDIC insured: Eligible on deposits up to $, in Canadian funds that are payable in Canada and have a term of no more than 5 years
  • Other restrictions: None

Best tiered interest savings account: Scotiabank MomentumPlus Savings Account

With tiered earnings on interest starting, this product acts like a GIC, giving account holders the opportunity to save more just by leaving their money alone—but with the freedom to make withdrawals if you need to. Provided no debit transactions have taken place during that time; deposits stashed for longer can earn extra interest based on the following calculations:

% +

  • % after 90 days
  • % after days
  • % after days
  • % after days

Plus, if you also have an Ultimate Package account with Scotiabank, your earn rate will be % for a limited time. The account is no-fee and self-service transfers are unlimited.

  • Minimum balance: None
  • Fees for extras: $5 per debit transaction that’s not self-service
  • Free transactions per month: Unlimited for self-service transfers
  • Interac e-Transfer fee: Free
  • CDIC insured: Eligible if in Canadian currency with a term of 5 years or less and payable in Canada
  • Other restrictions:  No paper statement available

Also Consider:

LBC Digital High-Interest Savings Account

Since , Laurentian Bank has been available only in Quebec, but with the recent launch of a new digital offering at mynewextsetup.us, the institution is tempting clients from across the country. The headline news here is the high-interest rate and the fact the account has no minimum balance and no monthly fees, easily topping the best rates of most financial institutions on GICs, which lock in your money for a specified period of time. With the LBC Digital High-Interest Savings Account, you can access funds whenever you like, and frequently used services including electronic fund transfers, pre-authorized deposits, and transfers between LBC Digital accounts are included. This last is important as it means you can move your money to an mynewextsetup.us chequing account, from which you can make unlimited free Interac e-Transfer transactions.

  • Promotional Rate: None
  • Interest Rate: % on deposits up to $,; rate drops to % on deposits over $,
  • Minimum balance: None
  • Free transactions per month: Unlimited
  • Interac e-Transfer fee: Free
  • Fees for extras: None
  • CDIC insured: Eligible on deposits up to $, in Canadian funds that are payable in Canada and have a term of no more than 5 years
  • Other restrictions: Non-sufficient funds (NSF), returned items and overdrawn accounts are subject to fees, and if you close the account within 90 days there’s a $25 penalty

Didn’t find the perfect savings account?

If none of our editors’ picks sound like the right HISA for your exact financial needs, then head to our Savings Account Finder tool to compare the best HISAs in Canada from most Canadian financial institutions side by side.


Compare the Best Savings Accounts in Canada >


What is a high-interest savings account?

A HISA is a savings account that pays a better rate of interest than standard savings accounts. HISAs are offered widely by a variety of banks, credit unions and other financial institutions.

This type of account allows you to safely and securely set aside money and earn a modest return without losing the ability to access that money anytime.

It’s also great for short or medium-term savings that want to be able to withdraw from than later. People will often use a HISA to save for big costs, like a wedding, the down payments on a home, a vacation or for an emergency fund. HISAs are also smart places to stash some money during times of uncertainty or during economic downturns.

 

 


How does a high-interest savings account work?

The greatest appeal of HISAs is that they are a safe and secure place for savings to grow money slowly. Financial institutions that are members of the Canada Deposit Insurance Corporation (CDIC) insure savings of up to $,, while credit unions are insured provincially and usually cover the full deposit, with no limits. Money that is deposited in a HISA account generates interest by allowing the bank to access those funds to loan to others. Interest rates offered by HISA accounts typically vary between rates as low % and to the 2% range at the upper end. There are usually no monthly service fees associated with savings accounts since they are intended to serve as places for people to park their money for stretches of time. However, it’s not unusual to see the number of withdrawals and transfers limited or to have a fee associated with transactions. (Read more for how CDIC protects you.)


How are high-interest savings accounts taxed?

Earnings from a HISA are taxable as income. That means any interest you earn from your savings must be declared and will be taxed at your normal rate. It is, however, possible to shelter your savings from taxes if you hold a HISA within either a TFSA or an RRSP.


What is the difference between a high-interest savings account and a regular savings account?

The main difference between a standard savings account and a HISA is the interest rate. As suggested by their name, HISAs pay a slightly higher rate than standard savings accounts, allowing savings to slowly grow. They may, however, be subject to withdrawal or transfer limits, transaction fees or minimum balance requirements. A standard savings account is a good place to keep surplus cash that you don’t need for everyday transactions (use a chequing or hybrid account for those needs). A HISA, on the other hand, is a better choice for holding savings that are geared toward a particular goal, such as paying for home renovations or university tuition. 


How to choose a high-interest savings account

Most financial institutions in Canada offer HISAs, and you will want to consider which is the best fit for your needs. First and foremost, you should consider the interest rate. Conventional wisdom states that you want to look for a rate of interest that outpaces the rate of inflation or you will wind up with less buying power than you started with. In recent years the rate of inflation has been about 2%. During recessions, however, we can expect both interest rates and inflation to decrease. 

You also want to carefully look at the HISA terms and conditions. Some may require you to keep a minimum balance, charge fees on transactions, limit withdrawals, or enforce lock-in periods. 

Look to take advantage of cash signing bonuses or higher promotional rates, but also keep in mind that the long-term interest rate is more important than a short-term introductory rate.


Savings account vs. chequing account

Chequing and savings accounts are two of the many products offered by financial institutions. While they share some similarities, there are a few differences. Generally speaking, chequing accounts are used for everyday banking transactions while savings accounts are designed to help you reach longer-term goals by offering interest on your deposits without monthly fees. As a third option, hybrid accounts are an increasingly popular choice for those seeking the perks and features of chequing and savings accounts in a single package. Let’s take a closer look.

What is a savings account?

There are different types of savings accounts, each with their own specific terms. But in general, these accounts are where you put money while working towards a financial goal. Savings accounts do not typically have monthly fees, and you are paid interest on your deposits. Depending on the type of savings account you have, you may be able to use the money in it to make everyday purchases but usually you will have to transfer the money into your chequing account first. You cannot write a cheque from a savings account.

What is a chequing account?

As the name suggests, you can write cheques against a chequing account, and you might receive your paycheque into this account as a direct deposit. While writing a physical cheque isn’t as popular as it once was, “chequing” accounts are still around. As they are used for everyday transactions, these accounts are accessible from ATMs, at tellers, online and apps. This type of account is where you store money you intend to spend on routine transactions, including Interac e-Transfer, bill payments, withdrawals, deposits, pre-authorized payments and point-of-purchase payments, like using your debit card at a store. 

The best of both worlds—the hybrid account

Hybrid bank accounts combine the interest of a savings account with the flexibility of a chequing account—all for low or no fees. Money in this kind of account earns interest but it can also be accessed for purchases, pay bills, buy money transfers, make Interac e-Transfer transactions and so on. For those who want to simplify how they bank, a hybrid account could be the solution. Note that not all banks offer hybrid accounts, so you may have to shop around.

What kind of account is my money in?

After reading the above options, you might be wondering what kind of account you have already. The easiest way to find out is to call or visit your bank. Speaking with a banking teller can clarify your current structure and give you the opportunity for help should you want to make a change or move your money. 

Other types of savings accounts

A standard HISA is a very safe and secure way to squirrel away some money and earn a small amount of interest in the meantime. For medium or long-term savings, Canadians should consider holding their HISA in one of two types of registered plans that will help mitigate the amount of tax you will owe on your interest earnings.

Tax-free savings account

TFSAs are registered with the federal government, like an RRSP. More than just a savings account, a TFSA allows you to invest up to $6, per year and not pay any taxes on the earnings. You are free to withdraw the money, tax-free, at any time. The savings plans available within a TSFA may have somewhat lower interest rates than some other HISAs, but could be a better choice after considering the tax savings. (You can also hold other kinds of investments inside a TFSA, such as stocks and ETFs.)

Registered retirement savings plan

An RRSP is a tax-deferred retirement savings plan, registered with the federal government, that allows Canadians to defer paying taxes on their income until after retirement.

Canadians can defer paying taxes on up to $27, this year and instead hold that money in a savings account (or other types of investments, including stocks, bonds and ETFs) within an RRSP where earnings will accrue tax-free as well. When you withdraw the money to use for living expenses in retirement, it’s typically taxed at a lower rate, assuming your income in retirement is lower than when you made the original contribution.

Why do the interest rates on a savings account go up and down?

The interest rates on savings accounts fluctuate, sometimes on very short notice. In , for example, there were several rapid changes—mostly on a downward trend. In that case, it’s not hard to understand why. The COVID pandemic threw the world’s economies into disarray, and this was reflected in interest rates. The rates offered by savings accounts are controlled by the prime rate, which is linked to the Bank of Canada’s policy rate.

In times of economic turmoil, the Bank of Canada might reduce its interest rate to stimulate the economy by making it more affordable for people to borrow money. This shift affects your interest rate. In general, the interest rates are high in a strong economy, and they are lower during downturns. Today’s prime rate is %.

Reductions in the Bank of Canada policy rate might negatively affect your savings account, but they do have benefits. You’ll get a very attractive interest rate when taking on or refinancing a mortgage, for example. The same goes for personal loans. If you’re looking for a good savings rate and can plan to set aside your savings for a certain term, you might consider moving it to a GIC. GICs offer guaranteed interest rates for a given term so needn’t worry about fluctuation.

The rates for GIC, like with many investments, go up and down with the economic environment. Right now the GIC rates are very low, despite the fact that the money is locked in. So, look at GIC rates when deciding what to do with your money. Would you want to tie up your money for the minimal payoff.

Is having a savings account really necessary?

Even when the economy is strong, the interest rates on savings accounts tend to be in the low single digits. If you compare this to real estate or stock portfolio returns, you might wonder why you should hold a savings account at all. The thing to understand is that these aren’t comparable products. They’re apples and oranges, each used for different specific reasons.

A savings account is an essential part of everyone’s personal finance portfolio. Why? They are a place to keep your money safe—and liquid!—while earning guaranteed returns. Although these returns tend to be modest, they can help your money grow steadily to combat against inflation. Having a savings account is important if you want a safe way to set aside money in case of emergencies or for an upcoming major purchase, like a car or a down payment on a house. Stocks do well in the long term, but short-terms fluctuations make them unsuitable places to store money for a purchase in the near future because you may well be forced to sell during a downturn. If you’re lucky enough to have real estate, you already know that it is anything but liquid. Savings accounts hit the sweet spot by providing interest, while your money is protected by CDIC or similar deposit insurance coverage, up to specified limits.


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If a link has an asterisk (*) at the end of it, that means it's an affiliate link and can sometimes result in a payment to MoneySense (owned by Ratehub Inc.) which helps our website stay free to our users. It's important to note that our editorial content will never be impacted by these links. We are committed to looking at all available products in the market, and where a product ranks in our article or whether or not it's included in the first place is never driven by compensation. For more details read our MoneySense Monetization policy.

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What is an offshore savings account?

An offshore savings account is, simply put, a savings account that is based outside of the UK.

While it might call to mind images of globetrotting millionaires who deposit money with overseas institutions in order to avoid tax, that's not often the case. In fact, they're more likely to be opened by expats and other people working abroad.

Many of UK-based banks and building societies have an offshore arm, for example, Lloyds Bank International Limited and Skipton International.  

You are typically required to invest a minimum of £10, to open an offshore savings account, so these accounts are unlikely to be suitable for first-time savers. 

This guide explains how offshore savings accounts work

 

Do offshore savings accounts pay higher interest rates?

While offshore savings accounts often come with attractive-looking interest rates, these may not be any better than the rate you could get from a top UK-based savings account, so it's inadvisable to opt for an offshore account for the interest rate alone. 

Here are some of the top rates on offer:

Watch out, though. Charges for operating an offshore savings account can eat into your returns, for example, fees for making a withdrawal can be as high as £25 each time.

Make sure you fully check an accounts' terms before you go ahead and open it.

What charges will I pay with an offshore savings account?

One downside to offshore savings accounts are the myriad fees and charges that you can face for the day-to-day running of the account. The most common charges you'll need to look out for include:

  • Withdrawal fees
  • Transfer fees
  • Monthly accounts fees
  • Charges for not maintaining a minimum account balance
  • CHAPS fee (these can vary depending on which currency is used)
  • International payments
  • Cheque clearance charges
  • Document translation charges
  • Agents payments on foreign transactions

Prices will vary between providers; some advertise free withdrawal fees as a major perk, while others will charge a percentage of the amount being withdrawn.

You should check a provider's terms and conditions before opening a savings account to see if the charges suit how you want to use it.

How do I open an offshore savings account?

You can open an offshore savings account in a few easy steps.

1. Find a bank: make sure it offers the kind of offshore savings account that you want, and then apply either online or in-branch - depending on what the bank offers.

2. Send your verification documents: much like opening a UK account, the bank will need to check your identity. You'll usually need things like a certified copy of your passport or driving licence, plus recent bills or bank statements.

3. Get approved: the bank will usually contact you to say your account is open and ready to go.

4. Make your initial deposit: this will usually be done online, but you may also be able to send a cheque. As with UK accounts, minimum initial deposits vary, so you may have to pay anything from £1-£10, in order to activate your account.

5. Start using your account: we explain how to manage an offshore savings account further down the page.

As with any other savings account, it’s important to shop around for the best deal before committing to a particular product.

Banks operating in the Channel Islands, Gibraltar and the Isle of Man feature on price comparison websites such as Moneyfacts and MoneySuperMarket.

How are offshore savings accounts managed?

Managing an offshore account is usually done online, where you transfer money between your UK account.

You can usually make withdrawals online by transferring your money in the overseas account back into your UK account.

Then, when you want to top-up your savings, you can transfer cash from your UK account into your offshore savings account. 

Do I pay tax on offshore savings? 

Yes, you are liable for tax, and interest is paid to you without tax deducted, much like UK-based accounts. 

Ultimately you do have to pay any UK income tax due, although there can be a substantial delay between earning interest and having to pay tax on it.

For example, if interest is paid once a year at the end of April, you could hold the previous year’s interest in your account for up to 20 months. This ‘deferral’ of the income tax payment due on your offshore savings could allow you to earn a small amount of extra interest.

If you use an offshore savings account to evade tax and are caught, you will have to pay HM Revenue & Customs whatever you owe, plus interest and a fine.

Depending on where your offshore savings are based, you may be liable for overseas tax, as well as UK tax. 

It’s important to investigate this before depositing your money, although more than double taxation agreements exist between the UK and other countries to help prevent this situation arising. 

Where this is the case, you should be able to claim UK tax relief on the tax you pay overseas.

Where are most offshore accounts held?

The most common countries that hold offshore savings accounts for UK citizens are:

  • Jersey
  • Guernsey
  • Isle of Man
  • Gibraltar
  • France
  • The Netherlands

Are offshore savings protected? 

Before you open any savings account, it’s vital to ensure you understand how your money would be protected, if at all, in the event of a provider’s collapse. 

Money held in offshore financial institutions is NOT covered by the UK’s Financial Services Compensation Scheme so your cash will not have the same standard of protection it would get if you saved with a bank or building society based in the UK.

The location of the financial institution you choose may not be immediately obvious from its website – but it will affect whether your money is protected if it went bust.

Several popular offshore locations have their own financial compensation schemes so, as in the UK, a proportion of your savings is guaranteed should your account provider go bust.

Here are some examples from some of the most popular countries for offshore savings:

  • Jersey: Jersey Depositor Compensation Scheme (JDCS) covers up to £50, per person, per Jersey Banking Group.
  • Isle of Man: Depositors' Compensation Scheme (DCS) covers up to £50, of net deposits per individual depositor.
  • Guernsey: Guernsey Bank Deposit Protection Scheme (GBDCS) covers up to £50, per individual claimant per institution.
  • Gibraltar: Gibraltar Deposit Guarantee Scheme (GDGS) covers up to €, of qualifying deposits.
  • France: French Deposit Guarantee Scheme (FDGR) covers up to €, per depositor.
  • The Netherlands: Dutch Central Bank's Deposit Guarantee Scheme (DGS) covers up to €, per depositor.

It's worth remembering, however, that each country's depositor protection scheme is only as strong as the economy of that country. 

Here in the UK, the FSCS is backed by the UK government, which is highly unlikely to ever go bust. Smaller economies could be more vulnerable, however.

That's why Which? does not recommend that anyone puts their money into an account that does not have full UK FSCS protection.

In addition, you should investigate the standard of financial regulation in the country you’re considering: are there controls on who can set up a bank and how it is run? You may want to think twice about saving money in a location where there is little regulation in place.

It’s also worth checking whether there is a consumer complaints system in the country where your savings will be held.

Should anything go wrong with your account, it’s important that you’re able to seek redress in a simple manner – and in a way that won’t cost you any extra money.

Offshore savings accounts: your questions answered

Below, we answer some of the most common questions that crop up about offshore savings accounts.

 

Do I have to declare my interest from offshore savings accounts?

 

Yes, you do. If your income is taxed in the UK, you must declare your savings interest as part of your self-assessment tax return - failing to do so could mean a hefty fine from HMRC. 

The good news is, if you qualify for the personal savings allowance, you'll be able to earn up to £1, a year from savings interest before having to pay any tax.

Find out more: personal savings allowance and tax on savings interest

 

Can anyone have an offshore account?

 

Yes - as long as the bank accepts banking applications from the UK, and you are able to verify your identity and address with documents required to open any other bank account. 

Offshore accounts are easier to open in some countries than others - it can depend on the UK's relationship with that country.

Источник: mynewextsetup.us

These Countries Offer the Highest Interest Rates Today

With extremely low interest rates in the United States, you won’t get rich by parking your money in a savings account. But in countries with extremely high interest rates, your cash could make a nice chunk of change just sitting in the bank. If you’re thinking about relocating, consider a country where you can earn substantial interest on savings accounts, but make sure to factor in how inflation affects interest rates.

Keep reading to find out which countries have the highest interest rates on savings, see how inflation affects those interest rates, and learn about real interest rates.

Interest Rates Today: The Highest Interest Rates in the World

Checking, savings, money market account and CD interest rates in the United States are low. Consider that the national average interest rate for savings accounts is a mere %, according to the Federal Deposit Insurance Corp.

You might be wondering if rates are better in other countries. The answer is yes — many do offer better savings rates. But there are risks, including unstable governments and economies. Additionally, the FDIC only insures domestic deposits, and some countries have protection that is much less developed. With that in mind, here is a list of countries offering the highest savings interest rates worldwide:

Top 10 Countries With the Highest Savings Interest Rates
RankingCountrySavings Interest Rate
1Kyrgyz Republic%
2Gambia%
3Mexico%
4Brazil%
5South Africa%
6Uganda%
7Bangladesh%
8Zambia%
9Kingdom of Eswatini%
10Seychelles%
Source: International Monetary Fund

Related: What’s the Average Interest Rate for Savings Accounts?

How Inflation Factors Into High Interest Rates

When the price of goods and services rises over time, it’s called inflation. A certain amount is healthy, but high inflation rates are a sign of trouble. The problem occurs when consumers buy instead of save, which contributes to higher inflation and weakens the purchasing power of the dollar. To keep inflation in check and encourage saving, the Federal Reserve will raise interest rates on occasion. To understand the effects of a rate increase, assume, for a moment, that inflation is 3%, but you can get 5% interest by placing your money in a savings or money market account. Under these conditions, you might choose to save instead of spend.

Your “real interest rate” is the interest rate minus the inflation rate. In this case, you would make 2% on your deposited money. Although you earn a 5% annual interest rate, the price of goods and services increases by 3% due to inflation, leaving you with 2%. When looking at savings interest rates, you also need to factor in inflation to understand how much money your deposit will really earn.

How Inflation Affects the Top 10 Highest Interest Rates by Country

The true yield on an interest-bearing account must factor in the country’s inflation and currency. Here are the countries with the world’s highest bank interest rates on savings, with the effects of inflation on those interest rates:

Top 10 Highest Interest Rates After Inflation by Country
RankingCountrySavings Interest RateInflation RateDifference
1Kyrgyz Republic%%%
2Mexico%%%
3Gambia%%%
4Brazil%%%
5Uganda%%%
6South Africa%%%
7Seychelles%%%
8Bangladesh%%%
9Kingdom of Eswatini%%%
10Zambia%%%
Source: International Monetary Fund

Top 10 Highest Real Interest Rates in the World

The real interest rate is the lending interest rate adjusted for inflation, as measured by an index called the gross domestic product deflator. The GDP deflator measures changes in prices. Here are the 10 countries with the highest real interest rates, according to the latest data from the World Bank, released in

Top 10 Highest Real Interest Rates by Country  
RankingCountry Real Interest Rate ()
1Madagascar%
2Brazil%
3Malawi%
4Gambia%
5Rwanda%
6Kyrgyz Republic%
7Burundi%
8Uganda%
9Honduras%
10Sao Tome and Principe%
Source: The World Bank

In the United States, the real interest rate was just % in — approximately 22 times less than Madagascar, the country with the highest real interest rate.

Also See: Investing In Certificates of Deposit — The Ultimate Guide

How the US Banking System Compares

Most countries have central banks responsible for controlling the currency, much like the United States does. They also have both well-established banks and banks that are smaller and newer, similar to U.S. credit unions and small, local banks.

At the higher end of the spectrum, many U.S. banks offer high-yield savings accounts with an APY of more than %. Low interest rates in the United States are an indicator of stability — the highest current interest rates in the world come from highly unstable countries.

In the United States, everything from your mortgage and car loan interest rates to your credit card interest rate is affected by the most basic of interest rates: the federal funds rate. If the federal funds rate rises, all other public and private rates will generally rise, too. This could mean the difference between your money earning interest against inflation in a savings account and your account losing money.

Consider: Are High-Yield Savings Accounts Worth It? Here’s Everything You Need To Know

Proceed at Your Own Risk

Before you roll the dice overseas with dreams of double-digit interest gains, know that the international insurance protection on your deposits is likely not as comprehensive as FDIC deposit insurance. Although foreign central bank interest rates might be higher, American banks protect your money either through FDIC insurance up to a certain amount or, in the case of credit unions, National Credit Union Administration insurance. If you make a savings deposit at an FDIC-insured bank, your deposit is insured up to $, If you bank at a credit union that is insured by NCUA, your funds are insured up to at least $,

As with all investments and bank accounts, especially in developing countries, it’s important to weigh the amount of risk you’re willing to take on versus the return that you can expect. Although it would be great to earn nearly % APY on a savings account, it’s comforting to know that money you keep in American banks is fully protected in the event that your financial institution crumbles.

Keep reading to learn about the different types of deposit accounts that are available.

More Interest Rates

More from GOBankingRates

Ruth Sarreal, Jason Larkins and Cynthia Measom contributed to the reporting for this article.

Savings interest rates were sourced from International Monetary Fund data and are accurate as of July 16, Rates are based on U.S. currency.

Editorial Note: This content is not provided by American Express. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone and have not been endorsed by American Express.

Источник: mynewextsetup.us

Putting a ceiling on Sub-Saharan Africa's sky-high interest rates

This article was first published in the October international edition of Accounting and Business magazine.

Sub-Saharan Africa has some of the highest interest rates in the world, according to a study last year by mynewextsetup.us Three of the six countries with the world’s highest interest rates are in sub-Saharan Africa. The three are Malawi, Gambia and Ghana, and they reflect the broad picture in the region – and, indeed, the wider African continent – of generally high interest rates.

Interest rates in sub-Saharan Africa are commonly above 20% a year for borrowers, and the spread between lending and borrowing rates is also extremely high (8%%) compared with spreads at commercial banks in other regions of the world. Banks cite a high-risk environment and high inflation as well as financial volatility as explanations for this situation. 

Efforts to cut commercial lending rates so as to encourage startup businesses and to foster growth for small and medium-sized enterprises (SMEs) have not typically been successful in the past.

But in August this year, in an effort to change that, Kenya passed an unprecedented law placing a nationwide ceiling on loan interest rates and a floor on deposit rates for all financial institutions, thereby imposing a form of price control on the banking industry. The move threatens the traditional profit base of the region’s commercial banks because, as the most developed economy in sub-Saharan Africa, Kenya sets the trend. It could mean the same controls will be imposed in other East African countries, especially as the region moves further down the road to monetary union and a common market. 

Kenyan commercial banks have moved quickly to publish a common lower lending rate of % based on the central bank rate. Predictably, entrepreneurs have supported the legislation, more so since some banks have indicated they will apply the rate to loans too. 

But analysts are watching closely. An ill-considered price cap in a relatively open market will often quietly turn it a black market. Some bank collapses in Kenya have highlighted the issue of undeclared deposits and parallel banking in the banking sector where depositors pay to deposit instead of being paid interest because their funds are ‘dirty’. These funds do not even have to be lent onwards. Such distortions, if they are indeed widespread, could mean that these regulations will do little to bring new businesses to the market and encourage SMEs to grow.

What’s more, the regulations do not affect government borrowing. Banks may therefore simply buy more Treasury bills and avoid lending very much to the private sector at all.

It remains to be seen if the interest rate price caps will work in practice for the formal banking sector.

The real problem may be that banks are so risk-averse because they are not strictly local institutions. Many have foreign investors or large depositors. The best alternative for many Africans needing to borrow are the savings and credit societies (Saccos) created to pool people’s savings and share borrowing opportunities between them. 

Saccos are exclusively local and because of their low operational costs can charge effective rates of less than 10% a year. However, they can lend only to individual members of the Sacco, so such loans tend to be for household needs. 

Alnoor Amlani FCCA is an independent consultant based in East Africa

Источник: mynewextsetup.us

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Comments

  1. I mean... Not really, it's going to be encrypted so nearly impossible to read. And even if it wasn't it's not like there is a picture of your fingerprint stored in there, you'd have to be able to physically reconstruct the fingerprint from the data which I don't think would be too easy.

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