Brad Setser

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Cross border flows, with a bit of macroeconomics

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Three Takes on China to Start a New Year

by Brad Setser
January 3, 2017


Christopher Balding (Balding’s World) highlights the risks from the interaction between PBOC tightening—whether because China’s own economy has picked up or a need to mimic the Fed’s tightening cycle —and rising levels of debt (mostly corporate debt, counting the debts of state enterprise as corporate) in a carefully argued Bloomberg view column.

Adair Turner’s column “A Socialist Market Economy with Chinese Characteristics” emphasizes how surprised many were by China’s 2016 rebound: “Almost all non-Chinese economists anticipated a significant slowdown, which would intensify deflationary pressures worldwide. In fact, the opposite has happened. Central and local government borrowing in China has soared: bank and shadow-bank credit has grown rapidly: and the People’s Bank of China (PBOC) has increasingly issued direct loans to state-owned banks in a maneuver closely resembling monetary finance of government spending.”

Turner highlights the risks of large losses from the bad lending that has come with rapid credit growth, while—correctly in my view—noting that financial crises ultimately come from a run on the liability side of the balance sheet.

Turner also notes that even if a quarter of China’s investment is unproductive, the three-quarters that is invested productively still equals about a third of China’s GDP. That alone would drive a strong expansion in China’s stock of useful capital. I like to be reminded just how unique China is.

I have my own take out as part of the Council on Foreign Relations’ look at global economic issues at the start of the new year.

I was less surprised than many by China’s 2016 rebound, though there isn’t much of an electronic record to document my views. I thought that China’s 2014-2015 slowdown was in no small part a consequence of a poorly timed policy decision to tighten “off balance sheet” fiscal policy (by limiting local government financing and infrastructure investment) when real estate investment was in the doldrums. Since I viewed the 2014-2015 slowdown more as a function of policy tightening than as a direct consequences of the underlying weaknesses in China’s growth model, I also believed that policy easing was likely to support growth—even if I would have preferred more of the easing to come through a larger rise in the central government’s headline fiscal deficit and less through the usual off-balance sheet funding channels.

While both Balding and Turner emphasize the risks created by China’s rapid credit growth, I put more emphasis on what I view as the more fundamental problem: China’s exceptionally high level of savings.

Such high savings — now that productive investment opportunities have shrunk a bit as the easy catch-up gains fade — generates an underlying, structural weakness in demand growth. And until the savings rate falls, making up for the weakness in household demand requires getting demand from exports, from credit fueled investment, or from fiscal deficits. I still like a line from my paper on Asia’s savings glut: “A national savings rate that still approaches 50 percent of output increasingly implies either bubbles in credit domestically or large capital surpluses that have to be exported.”

In my view, durably ending China’s reliance on credit for growth without giving rise to massive trade surpluses that create (additional) global problems requires the kind of reforms that bring savings down and consumption up—not just policy tightening.


  • Posted by Anton

    Following up on your conclusion, I was wondering what you think of the argument that China is, in fact, boosting its consumption and doing so quite rapidly.

    Andy Rothman made this case a couple of months back:

    I’ve been following the debate about China’s savings and consumption since 2009 and still don’t know what to make of it. Whenever i’m in China, anecdotal evidence tell me that consumption is very much surging, in line with the case made by Rothman and others. The piece I linked to also has some interesting data points in its Figure 1 that support this view.

    In the end, however, as long as China’s savings rate is around 50% the case could be made that consumption is still insufficient. But snapshots in time are not trends, and the trend does *seem* to favour rising consumption.At the same time, a lot of developed, well-functioning economies (e.g. Singapore) have high savings. So the issue–i.e. risks from its high savings rate–seems to be another global financial crisis or a surge in protectionism against China. This is due to China’s size and role in the global economy, not its savings rate per se.


  • Posted by Brad Setser

    Singapore has a current account surplus of between 15 and 20 percent of its GDP! It is no model for China. Rather the opposite. Too much forced savings, too little internal consumption, too much reliance on external demand to support an admittedly high standard of living.

    China has grown fast, and the savings rate has come down from 52% of GDP at its peak to 48% of GDP (last year), so do not disagree that consumption growth has been strong absolutely. It just hasn’t been strong enough to put a real dent in the high level of savings. Need strong consumption growth to continue even as investment slows to really rebalance, and I think that takes policy support.

    or put differently, if it is generally agreed that China invests too much (far too much) and China still has funds left over to lend to the world (e.g. runs an external surplus) it logically follows that China also saves too much — unless you think China really should be providing more financing to the world/ running bigger trade and current account surpluses (which setting aside the merits of poor financing rich, is at odds with the politics of the US right now)

  • Posted by David O'Rear

    Retail sales have grown at nominal double-digit rates for 12 straight years, and better than 9% real for all but one year (2003) since 2000.

    Sure, all data from China is suspect, but his one is also consistent with antidotal information and with some of the trends in the national accounts.

  • Posted by Savannah

    There is a confusion on Singapore and China! Do not mix the data!

  • Posted by Thaomas

    Why isn’t the “solution” higher investment in the rest of the world (including but not mainly the US) to take advantage of the low cost savings in China?

  • Posted by JF

    Consumption spending might increase more if the retirement-income side was improved for the population. But I suspect that their economic system has not yet matured to the point of being smoothly systemic and broad in geographic scope. I say you shoud watch how chinese officialdom speak about social security systems.

    The savings rate is symptomatic. The downside view is that the population still senses how fragile the socio-political-economic ‘systems’ are.

    But we should wush them success in building a modern economic system that briadly serves their people and their own move to be stanced as a consumer led economy.

  • Posted by Paine

    Adair is miles ahead of too many pundits on the PRC

    I’d like to suggest this however on a sudden gush out of RMB

    The only problem worth fixing is the forex impact on trade

    Stigilitz long ago suggested stand by export taxes
    As a good fair trader remedy for a crashed currency

    As to the mop up

    Simply issue a new currency
    This fiasco will teach a big lesson to the cross border specs

    Work it thru
    Here I’m just opening the door

    Make private fund flows harmless to macro nautics
    and domestic wage and price levels

    My hunch a huge surge in import prices for raw commodities
    will be containable and temporary

    Complex product imports and inputs should be subsidies till
    The crisis wave subsides

  • Posted by rayward

    China’s savings rate will continue to decline, and may decline rapidly, during this emerging phase of globalization in which China firms produce goods in China for China firms (as opposed to China firms producing goods in China for western (e.g., American) firms to compete both domestically and globally with goods produced for western firms (including goods produced in China for western firms). Chinese will be encouraged to consume goods produced in China for China firms. Indeed, China has made it difficult for Chinese to consume goods produced in China for western firms (by, among other things, requiring the goods to be first exported and then imported back to China, often in ships that load in China, set sail, and then return to China for unloading).

  • Posted by Brad Setser

    rayward — the nyt suggests apple may not mind shipping goods to produced in china to ireland (in theory) and shipping them back (e.g. selling them to apple sales international before “importing” them to china from a bonded zone — helps with their tax management. but set that aside, think you are right that China is favored domestic production. effect though of not importing is that world will have less CNY to pay for China’s exports — the “big country” problem (your exports are my imports and vice versa)

  • Posted by Brad Setser

    savannah — apologies for the lag in approving your comment, it was caught in a spam filter. Singapore by the way is the East Asian economy with a national savings rate that comes closest to matching that of China. in that narrow way, the comparison is very apt. Both are very high savings economies