China-watchers have long scratched their heads over the rapid build-up of Beijing's foreign exchange reserves. In April, official reserves hit a record US$2 trillion, less than three years after they passed the US$1 trillion mark.
You see, things aren't supposed to work like that. According to traditional economic theory, fast-growing economies such as China offer a higher return on investment than slowly growing rich countries. As a result, developing countries tend to attract capital inflows, and so soon turn into net debtors.
Only China hasn't followed the script. As expected, it has sucked in investments from abroad, building up gross external liabilities worth US$1.4 trillion by the end of 2007.
But lately, China has been accumulating foreign assets at an even faster pace. By the end of 2007, these had exceeded US$2.4 trillion, mostly in the form of official reserves, leaving the economy with a net foreign asset position of more than US$1 trillion (see the first chart below). Far from becoming a debtor, China is now the world's second-largest creditor.
The reason for this apparent defiance of economic logic is that over recent years, China's domestic savings rate has far outstripped its investment needs, allowing it to snap up foreign assets with the surplus.
Different people offer wildly different explanations for this excess saving. In a paper published earlier this year, People's Bank of China governor Zhou Xiaochuan credited the cultural influence of Confucianism, 'which values thrift, self-discipline ... and anti-extravagancy'.
Many of Beijing's foreign critics - and a few of its domestic ones, too - detect a more sinister influence at work.
They argue that China's excess savings are a by-product of government policies aimed at maintaining the Communist Party's grip on power. According to this view, Beijing deliberately undervalues its currency while keeping interest rates artificially low in order to suppress workers' incomes and channel wealth to the state and state-owned companies. The result is anaemic consumer demand coupled with a massive build-up of savings by the state and corporate sectors.
Now a new paper by Ma Guonan of the Bank for International Settlements and Zhou Haiwen of the State Administration of Foreign Exchange offers a more plausible explanation for China's theory-busting position as a major international creditor.
They point the finger at demographic trends. Because of declining birth rates, in recent years, China's workforce has grown far more rapidly than the number of children dependent on it. As a result, between 1985 and 2007, the ratio of dependents to workers dropped from 55 per cent to just 38 per cent (see the second chart).
This has had all sorts of effects. For a start, fewer children mean fewer expenses for adult workers, allowing them to save more of their incomes.
What's more, a falling dependency ratio implies a growing workforce, which holds down wage increases, boosting company profits and corporate savings rates.
At the same time, a lower dependency ratio means less government welfare spending, allowing the state to save more. In addition, declining youth dependency rates mean less need for the government to invest in housing, schools and hospitals, permitting the build-up of savings over investment which has fuelled China's accumulation of foreign assets.
But whether China can retain its position as a big net creditor for much longer is less clear. The decline in youth dependency rates is now stabilising, while China's old-age dependency ratio is set to double to 20 per cent over the next 15 years, as legions of workers approach retirement.
Mr Ma and Mr Zhou argue that more retirees will reduce the need for investment, allowing China to continue exporting capital for the foreseeable future.
Others believe that more elderly will mean higher spending and less saving, eating into China's capital surplus and propelling a swing from net creditor to net international debtor. It seems analysts will go on scratching their heads for a good while yet.