The Myth Of China's 'Excess Savings' Is Weighed Down By Excessive Debt
One of the great prevailing conventions in international economics at the moment, is that China suffers from an excess of savings. Mention concerns about the U.S. 'trade deficit' and eyes will roll, heads will shake, and the patient voice of the exasperated expert will explain, as if from the ether, that the problem is not the 'trade deficit' at all, but an imbalance between consumption and saving. The U.S. consumes too much, and China saves too much, lending the excess to the U.S. to keep the global show on the road. All that needs to happen is a few habits need to change, some incentives offered, and all will be well, subject to a period of adjustment.
This is not an innovative interpretation, but instead dates back many years. In the aftermath of the 2007/08 financial crisis no less, it was pointed out by many that perhaps trade and current account imbalances had something to do with the underlying problems? The experts granted that the U.S. was indeed spending beyond its means, and issuing record debt to pay for it all, but no, the real problem was that Chinese consumers were saving too much. Given time this huge, pent up dragon of Chinese consumer demand will be released and the global economy will take off again.
The Chinese consumer did not emerge, however, and the rest of the world settled for the substitute of Chinese government stimulus, as surely this would drive global demand and provide just the growth that everyone was looking for. Several years later, as the Chinese consumer remains stubbornly unmoved, debts are rising rapidly, soaking the entire Chinese economy in non-performing loans. The I.M.F. is warning of serious problems, and the growth rate, although it remains impressive, is now costing greater and greater multiples of increased debt, and has done–by and large–since 2009. Still, the Chinese consumer hoards his savings
Indeed the I.M.F. now finds itself in the peculiar position of welcoming China's recent 6.9% annualised Q1 growth rate, while warning ever more loudly about China's growing debt load, without ever mentioning that the former is a direct– and increasingly inefficient–consequence of the latter.
Comforting Narrative?
What if this story about 'Chinese saving' is wrong? What if the economists who routinely highlight China's 'excess saving' are simply drawing their conclusions from a textbook that says this must be so, rather than actually describing the problem that confronts them? That like the indigenous Americans confronted with the ships of Christopher Columbus, they simply can't see what is in front of them?
This is the implication behind the work of economist Richard Duncan from Macrowatch whose 2012 book The New Depression: The Breakdown of the Paper Money Economy neatly dismantled the myth of the Chinese saver. "It is absurd to argue" Duncan suggests "that there are not enough attractive investment opportunities in China to absorb its savings and that China is therefore compelled to lend its surplus savings to the U.S." Instead, U.S. dollar export earnings have simply been exchanged for printed yuan and held in the reserves of the central bank. Some of these reserves have been used to purchase U.S. T-Bills, which counts as U.S. investment but is a movement on the reserve account, rather than the capital account, and is a loan to the U.S. government, rather than an investment in the U.S. economy, still less a purchase of U.S. goods and services.
Of course, what the U.S. government does with the money is relevant here, but by the same token, the investments made by the Chinese government–through state banks to SOEs–make up the bulk of 'Chinese savings,' not some growing reservoir of potential consumer demand. The hoped for growth in consumer demand will only come about if China's investments generate a return. This is why the high GDP growth rate matters, because it implies that China is becoming a wealthier country
forbes.com |
