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Chinese savings and Western indebtedness

Peter Schiff, as ever, has a nice take on an argument that I have heard expressed from various commentators in recent years and months: China saves “too much” and its “excessive” savings are the source for all this Western borrowing – and now the financial SNAFU – so Chinese folk need to get their wallets out, spend more, be less frugal, so that this “imbalance” in the world economy can be corrected.

Schiff gives this line of thinking fairly brutal treatment, but as he says, there is also some truth in it. Because China’s exchange rate is kept artificially low against the dollar and other currencies, Chinese exports are cheaper in Western markets than they would otherwise be; this means that in turn, China earns large amounts of foreign exchange, which in turn get invested in things like Western government debt securities, such as US Treasuries. This buying of Western debt like Treasuries has enabled Western consumers to enjoy credit for cheaper than otherwise would have been the case, fuelling the credit boom, etc. Of course, what this line of thinking tends to overlook is that if Chinese savings are based on real earnings, and those earnings are being invested in Western productive assets, then how is this a problem? Consider: part of the 19th Century, the UK invested enormous sums of its capital in places such as Argentina, the US, Canada, Australia, India, and so on. This export of capital was entirely benign as it generated long term returns based on real investments. Would it have been better had this process not happened?

I agree with Mr Schiff that the Chinese yuan will float freely eventually; when it does so, Chinese exports will be more expensive in Western markets, while Chinese consumers will be able to buy more Western goods, and so the “problem” of all this surplus capital will disappear or be less pronounced. The “imbalance” will begin to rectify itself, given the chance. And that means the West will have to rely more on its own savings to generate investment in the future. The question, of course, is whether the tax and regulatory climate makes that process happen smoothly or not.

There have been many different explanations of what has gone awry in the world economy in recent years, and of course any search for an explanation cannot ignore China and the impact of its own policies. But it strikes me as unjust to put China in the dock. The prime driver of the crisis has been Western monetary incontinence, a largely home-grown force.

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15 comments to Chinese savings and Western indebtedness

  • Richard Allan

    “Excessive savings” from the perspective of Chinese consumers. These are not voluntary savings, but coerced savings. Also I’d argue that any investment in US Treasury bonds is excessive because of their low RoI and high probability of default.

  • Valerie

    I agree that the credit problems are mostly our fault, although the Chinese do float their money unwisely. However, with interest rates being in the 1-2 % range for so long, how are average workers to get any real return on their money from savings accounts? There has been no incentive in 15 years or so for anyone to save, as opposed to investing in real estate and look where that got us.

  • RRS

    ” … if Chinese savings are based on real earnings, and those earnings are being invested in Western productive assets, then how is this a problem?”

    From what can be inferred to be the background and experience of JP, he knows full well the problem(s); one of which begins with :

    ” …if …those earnings are being invested in Western productive assets….”

    Next:

    “…real earnings……

    which may not be an accurate label for what is principally compensation for labor, plus some return on domestic capital plant to facilitate the production of labor (the latter gaining earnings).

    Next: The motivations for “saving” by laborers; thus, the implicit central control of the use of “money” as a “store of value,” limits alternatives. Everybody essentially works for the central command, which controls the conditions that affect those motivations.

    As an aside, what have been the motivations in the U.S. & U.K. to “save”; to borrow? Have those motivations now shifted? What has affected them?

    But, onward: The Central Command in China does not invest the compensation for its people’s labor in ” productive assets.” it holds obligations of the U.S. Government and its Agencies (Agency debt being converted to U.S. currently) -Hey! wouldn’t you?
    If one regards U.S. obligations as productive assets, one should avoid large cities with bridge salesmen (unless you work for PIMCO).

    Now, this is not to say that there are no non-governmental debt asset purchases. Much has been directed to acquiring access to, or ownership of, raw materials, commodities and some intangibles; but very little, if any, that provides significant capital for use in productive activities in the West.

    The Central Command must be constrained by the fact that probably no more than 20% of the population has been brought into the “new economy;” the rest remain on the edge of subsistence and poverty for which reserves (savings, if you prefer) from the labor and successes of the 20% must be built for ultimate redistribution (the basis of Socialism and the political success of its aparatus) to enlarge the 20% to 25, 30, etc.

    Deng summed it: “In order for all to get rich some must get rich first.” He did not complete the recital of how the first rich would provide for those to follow (t’would spoil the fun).

    Meanwhile, back at the ranch, demographics are affecting the herds and the wranglers. Homme propose Dieu dispose.

  • “…an argument that I have heard expressed from various commentators in recent years and months: China saves “too much” and its “excessive” savings are the source for all this Western borrowing – and now the financial SNAFU – so Chinese folk need to get their wallets out, spend more, be less frugal, so that this “imbalance” in the world economy can be corrected.”

    Oh that is commonly found in just about any English-language or Mandarin newspaper.

    I have challenged the Taipei Times editorial team on this on two seperate occasions which both went unpublished. Just as they left unpublished my letters challenging them on Climategate. The cloth-eared pillocks.

    Anyway, I am glad someone like Peter Schiff is around who at least stands a chance of actually being heard by a reasonably large audience of moderately wealthy people.

  • The Wobbly Guy

    Agree with RRS. China’s savings are not necessarily spent on productive assets.

    In fact, the sheer amount of construction going on in China, especially the South and Eastern regions, gives me a very bad feeling, as though another construction/housing bubble ready to burst.

    When I was in Hangzhou, I heard of obscenely high prices for condo buildings under construction, and the first thing I thought of was whether there were actually enough buyers for those flats.

    I’m slowly developing a conviction that the China bubble will burst over the next three years. It won’t be pretty.

  • Johnathan Pearce

    Richard Allan:

    “Excessive savings” from the perspective of Chinese consumers. These are not voluntary savings, but coerced savings. Also I’d argue that any investment in US Treasury bonds is excessive because of their low RoI and high probability of default.

    You have a point in that Chinese investors do not have total freedom to buy the assets that they want, and of course if they did, it would be interesting to know if they had bought other things besides US Treasuries or whatever. But when they were buying US T-bonds and the like, the yields on these things were relatively higher than now.

    As for the default risk, it is certainly true that it exists, but again, that is not the picture when China began to buy such debt more than a decade ago. The risk of a US debt default or partial repudiation of its debt cannot be ruled out.

    It is certainly true that liberalising China’s capital and investment flows would be a positive step for the world economy, which is why I regard Obama’s recent decision to sign off on protectionist moves against Chinese tire imports as irresponsible and dangerous.

  • seems to me that the chinese are just as trapped as the west: if they stop lending the consequences could be disastrous and then they will not only never get their money back, but they’ll lose the market for their exports. Could it be that they are throwing good money after bad in the hopes that the situation will improve eventually?

  • Bod

    Well, Wh00ps, that’s a reasonable hypothesis, but that presupposes that the Chinese believe that US fiscal policy is going to improve the situation.

    This isn’t (merely) a gratuitous snipe at the Obama Administration and US policy, but there are plenty of pitfalls between here and a robust recovery, despite what the public are being told. Some of those risks are only becoming apparent to the public now – Sovereign debt, continuing unemployment (and the prospect of no relief in sight), continuing budgetary incontinence – you get the picture.

    If I were the Chinese, I’d be buying exploration rights in developing countries, physical commodities where possible, and buying friends -with US Treasury paper wherever possible.

  • Paul Marks

    There is no such thing is a “too much saving”.

    The whole “underconsumption” theory is a mess of absurdiites – most of which go back long before Keynes.

    The idea that the supply of credit must be expanded beyond real savings (contrary to Keynes – an expansion in the money supply is not “saving” or the “same as saving”) in order to serve the “needs of trade” or whatever, is also absurd – utterly absurd and incredibly harmful.

    As for the Chinese fixing their exchange rate…….

    Surely the vast American inflation (in the real sense of the word “inflation” i.e. the increase in the money supply) will solve this problem – although in a horrible way.

    Unless the Chinese are also vastly inflating – and that leads us to the great void in economic knowledge, our knowledge of China.

    Neither “broad money” (bank credit) or “narrow money” (the monetary base – notes and coins and so on) figures in China can be trusted – we know nothing (for sure) about what is going on.

    To use an example from science fiction (both games and stories) the Chinese are as hard to read as the face of Horus.

    He could be loyal to humanity – or he could have sold out to the powers of evil. His seeming order masking a soul under the control of the powers of Chaos (the opposite of anarchy as anoachocapitalists would understand that term) .

    Of course in the stories (the background to 40k universe) it turns out that…………

  • Richard Allan

    There is no such thing is a “too much saving”.

    Yes there is. If you buy capital assets with an RoI lower than your marginal rate of time-preference, then by definition, you have saved too much.

    And I may not know much about the Horus Heresy, but I know that’s what it was.

  • Johnathan Pearce

    Richard, the point about the “excess savings” line of Keynes and others is the question: excessive according to whom?. If the incentives to save and consumer are not deliberately distorted by things such as tax, inflation of the currency, etc, then people will not, in general, save “too much” or “too little”. Time preference, of course, being an entirely subjective thing.

  • Laird

    I would also add that generally you can’t predict with certainty what the ROI will be when you purchase a capital asset. It is highly unlikely that anyone would intentionally invest where the ROI is lower than the rate of marginal time-preference; if such occurs it’s likely that it was simply a miscalculation, an error in judgment, or simple bad luck (a market shift or whatever). None of which is “too much saving”. Paul is correct.

  • Paul Marks

    JP and Laird have made any further comment by me unneeded.

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