China’s excess savings are a danger
Beijing must dare to choose radical remedies to deal with them
Martin Wolf
© James FergusonChina is the global savings superpower.
In the past, in a fast-growing economy with superb investment opportunities, its high savings have been a big asset.
But they can also cause huge headaches.
Today, with the ending of the property boom, managing these savings has become a challenge.
The Chinese government must dare to choose relatively radical remedies.
According to the IMF, China generated 28 per cent of total global savings in 2023. This is only a little less than the 33 per cent share of the US and EU combined. That is quite extraordinary.
It also has several implications.
One is that if China were an open market economy, its capital markets would be the biggest in the world.
Another is that how these savings are managed is likely to be the most important single determinant of global interest rates and the global balance of payments.
I analysed these underlying challenges in a column in September.
A recent visit to China confirmed both the significance of this issue and the apparent unwillingness of the government to make decisive shifts in the structure of income and spending.
It seems highly likely therefore that China will continue to have an extremely high overall propensity to save.
But this is not mainly due to the frugality of Chinese households, as so many assume.
Even more important is households’ ultra-low share in national income.
In other words, as Michael Pettis of Peking University’s Guanghua School of Management has frequently argued, China’s savings are in large part a distributional issue.
That may be why they are hard to reduce and so the savings rate has remained over 40 per cent of gross domestic product.
If demand is to match potential supply in such an economy, domestic investment, plus the current account surplus, must match the desired savings.
If they do not, adjustment will work through weak economic activity — that is, a recession or even a depression. This is “secular stagnation”.
With savings as high as China’s that is hard to avoid.
Doing so required a huge current account surplus prior to the 2008 global financial crisis and, subsequently, China’s debt-fuelled property boom.
The latter is now apparently over.
So what next?
A natural course would be for the investment rate to fall significantly.
It is highly implausible that the economically profitable rate of investment can remain over 40 per cent of GDP in an economy whose potential rate of growth has, at the very least, halved over the past 15 years.
That makes no sense.
The property boom masked this reality.
Now it is here.
If the savings rate remains where it is and the investment rate duly falls, the “solution” will then be a rise in the current account surplus as savings flow abroad.
Official data do not yet show this.
But there are doubts about this.
Brad Setser of the Council on Foreign Relations argues that the surplus may be double what the official data show, at 4 per cent of GDP.
One reason for his upward adjustment is unexplained gaps between the trade surplus in the customs and balance of payments data.
Another is that the rise in world interest rates is not showing up in net income from foreign assets.
A current account surplus of 4 per cent of GDP does not look large by China’s past standards.
But, since 2007, when China’s current account surplus peaked at 10 per cent of GDP, its share of the world economy (at market prices, which is what matters here) has jumped from 6 to 17 per cent.
So, from the point of view of the rest of the world, a Chinese surplus of 4 per cent of GDP is far bigger than one of 10 per cent in 2007.
Who is going to run the offsetting deficits?
Who, in particular, will run them when the concomitant rise in exports will be driven by investment in competitive manufactures, such as electric vehicles?
The answer is not creditworthy high-income countries: they will view these as “beggar-my-neighbour” policies.
The same will surely be true for big emerging economies, such as India.
If China wants the mercantilist solution to excess savings it will have to fund smaller emerging and developing countries.
It can pretend these are loans.
But much of the money will be grants, after the fact.
If it ends up funding renewable energy there, that could be good for the world.
But, from China’s perspective, it would be a costly gift.
From the economic point of view, a mercantilist solution just will not work.
China is far too big to try such a thing.
So, again, if the savings rate remains this high, China needs to offset the inevitable decline in the rate of property investment with something else.
What might that be and how might it happen?
An obvious and desirable solution, which is in fact already happening, is a huge expansion in investment in renewable energy.
The benefits for the global energy transition would be enormous.
The question is how large this investment might be and for how long it will last.
Another possibility is even higher investment in manufacturing.
But that is going to run into the already discussed limits on markets abroad.
As Sherlock Holmes said: “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”
Given China’s size, stage of development and excessive savings, an essential part of any strategy for macroeconomic stability must be a jump in private and public consumption as shares of GDP.
Moreover, given the financial difficulties of local government, this will also mean a bigger role for central government spending.
China needs a new macroeconomic strategy.
This is not about another “stimulus”.
It is about changing the distribution of income and spending.
The leadership does not want to do this.
But events will force its hand in the end.
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