China is saving a lot.
And it is investing a lot.
Both its savings and its investment rate are among the highest worldwide.
But is it investing so much because there are so many savings?
Or is it saving so much because there is such a huge demand for investment?
A bit of both actually:
- The household savings rate is very high (most estimates put it at around 30 % of disposable income), so Chinese households obviously want to save.
- But at the same time, most corporate investments are "self-financed" (77 % of fixed investments in 2007 were self-financed, and only 15 % were financed via domestic loans, says the Statistics China Yearbook), i.e. companies pay for them out of their own cash-flow instead of distributing funds to shareholders. In other words: They are saving because they want to invest.
Obviously, China's investment rate can't stay sky-high forever.
What will happen when it eventually starts to come down?
- Insofar as corporate cash-flow is concerned, it can in principle be distributed to shareholders, and thereby becomes available for consumption (-> private shareholders) and government spending (-> state owned enterprises).
- But if household savings rates stay high, there will still be excess savings. Currently, household savings make up 15 % of GDP (rough estimate based on: household income = 50 % of GDP, household savings rate = 30 %). Currently, these are channelled into the trade surplus (close to 10 % of GDP) and to finance corporate investments (via bank loans). If more corporate profits are distributed, this might increase household savings further (as it increases household income as a percentage of GDP, and as shareholders tend to be high-income households, which usually have an above average savings rate).
China's trade surplus can't stay at close to 10 % of GDP in the long run: As its economy keeps growing faster than the rest of the world, the rest of the world's trade deficit with China would keep growing in % terms, and eventually, this will become unsustainable.
So China has only two ways of dealing with its excess savings:
- Either entice households to save less (by reducing their motivation to save, or by taxing them more harshly, thereby taking away the money they might otherwise save)
- Or increase the government deficit (which is still much lower than in Western countries, and extremely low compared to Japan)
My guess is that it will opt for the latter, just like most of the rest of the world has already done long ago.
(Intensive discussion of savings and investments in China can be found at Michael Pettis. Some thoughts on China's investment rate in an earlier post of mine.)
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