The Myth of Chinese Savings

Monday, November 9, 2009 2:15

In this month’s Far Eastern Economic Review, UBS’s Jonathan Anderson writes a piece entitled The Myth of Chinese Savings, which is a must read (download by right clicking here).

Why is it a must read?

Simply put, like a financial philosopher (wizard) Anderson has pulled together a very interesting thread of events and trends to highlight how China’s industrial savers have undermined their own economic stability.

Now, in saying that, I must admit that I am having a bit of a hard time again with the context of this article as (1) the context changes from the initial page to the end and (2) I am not sure that the foundation of the article was set into the right cast. But, like any good economic debate, Anderson (if I view the world through his eyes) does a really great job of bringing to light a context that has been largely let in the dark:

The incongruous vision of low-income Chinese families scrimping and saving in order to subsidize the insatiable American consumer has become so firmly ingrained in the collective consciousness that it is no longer taken as a point of debate, but rather as a fundamental truth.

That Chinese corporations (SOEs included), who have saved too much, have severely compromised the stability of the Chinese economy, and that there are three things the Chinese government must do RIGHT NOW to make corrections.

  1. Extract savings from companies and give them to households
  2. Stop building steel mills, and maybe even close some down.
  3. Move the exchange rate.

All of which I would agree with, and I believe all would certainly reallocate the wealth in a more balanced manner.

Anderson rightly points out that the imbalance was sp perverse that it came full circle:

Some two-thirds of it was channeled directly into the U.S. economy, and particularly into Treasury and quasi-official bonds—making China the single largest foreign creditor to the U.S. government. This, in turn, allowed American households to borrow and spend unflaggingly for a full half-decade without having to worry about the impact of sharply rising external deficits on dollar interest rates. If you will, China effectively financed the U.S. consumption and housing boom and eventually the subprime finance bubble.

Further

No one put off consumption in Chinese homes, and U.S. households were not exactly borrowing from poor peasants toiling in the fields and factories to make the cheap consumption goods they demanded. In fact, in some sense these are not really Chinese savings at all. Of course the excess income accrued to mainland companies, but that income was earned by taking industrial market share away from foreign producers.

A very interesting insight.

However, and this is where I hope to hear your input as well, where I am still looking for more is on the global side of China’s economic equation is on jsut how we ended up here. What was the true catalyst for the imbalances that occurred globally. I will agree that over he last 3-5 years China’s policies were part of the problem (this is a global system), however I am still left with a much larger set of questions like

  1. Was the true cause of China’s massive surplus expansion a result of Chinese savings rates and RMB policies, or was it simply that American consumers were moving too fast for policy makers to keep up?
  2. Is the model broken when the manufacturer begins lending money back to the buyer, and if so, then at what point does it become a problem?
  3. Is savings really the problem, or is it the model that is the problem? Where is the balance

As far as I can tell, Anderson believes that the model itself (consumption should drive economies) is fundamentally sound, but that the actions/ policies of China essentially undermined the model.  A point, that if I believed his model to be sound I would also see.  However, through that theory we must also believe that savings are bad, or at the very least that the levels of savings should be “responsible”.

Yet, there is no number provided.  No target.  No line. No “X” marks the spot.

So.. anyone have a guess? What would be a responsible savings rate for China?  Where would an economist at CASS likely put the figure?

.. and more importantly, would they subscribe to Anderson’s ideas?

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4 Responses to “The Myth of Chinese Savings”

  1. Chris of Stumptown says:

    November 12th, 2009 at 9:02 am

    You say:

    As far as I can tell, Anderson believes that the model itself (consumption should drive economies) is fundamentally sound, but that the actions/ policies of China essentially undermined the model. A point, that if I believed his model to be sound I would also see. However, through that theory we must also believe that savings are bad, or at the very least that the levels of savings should be “responsible”.

    I do not read Anderson this way. It seems to me that he is not saying that savings are bad, but rather that they should be used for constructive purposes. Misallocation of capital by business is not an uniquely Chinese problem. Indeed, his suggestion to move corporate savings to households reminds me of Benjamin Graham’s efforts in the great depression.

    The “problem” may simply be that the Chinese populace demands industrial job creation which exceeds the rate at which industrialization can proceed. Is the management of an SOE steel company really going to forgo new capacity while they have cash and officials demanding more jobs?

    What he is proposing shares the common thread of removing assets from areas that are pursuing misallocation of resources.

  2. Rich says:

    November 12th, 2009 at 9:11 am

    Hi Chris

    I guess where I agree with you, and disagree with you, is that (1) yes, he is more focused on the misallocation of resources, but (2) I think he sees savings as a the misallocation.

    To our second point, I would like to see more on where the money invested on overcapacity came from. Was it savings, or was it stimulus money made available to these companies. I do not deny that poor investments were made, but it would be important to know if the money blown was their own… or from a loan that they would never be asked to repay.

    R

  3. Jay Boyle says:

    November 16th, 2009 at 9:29 pm

    The most important thing in any economy is efficient deployment and redeployment of precious capital.

    China gets mixed marks in this.

    In the plus column is the admirable job of rolling out its new exchange modeled after the NASDAQ last month that is aimed at small and innovative companies and government decrees that banks should be loaning money based on credit worthiness. We also have a new bankruptcy law on the books.

    While in the minus column we are fighting against the local protectionism and nepotism that protects inefficient factories and the “neibu” or internal policy of many local governments that will not allow companies to declare bankruptcy in their district despite the new law.

    Jay Boyle

  4. Chris of Stumptown says:

    November 19th, 2009 at 10:08 pm

    Rich

    Thanks for your response. I’m wondering if you saw the IMF commentary here:

    http://blog-imfdirect.imf.org/2009/11/08/asia%e2%80%99s-corporate-saving-mystery/