Comments on: China’s savings problem and the consumption constraint

By: My Reference Frame

My Reference Frame — Tue, 14 Jul 2009 04:59:54 +0000

Interesting point. The simplification of analyzing on two countries still does not mean that there is a direct relationship between increases in US consumption and increases in Chinese savings. The US, even in this simplified example, could drain investments or simply print more money rather than rely on Chinese savings. In addition, there are 2 other reasons the situation remained steady for so many years: low US interest rates & a pegged Chinese yuan.

By: Logie

Logie — Sat, 04 Jul 2009 02:10:04 +0000

Most enjoyable article.

My belief when comparing China with Japan, is the main difference between the two is that the Japanese got rich before they got old. China, on the other hand, will do the opposite and this promises to be a much more painful process.

China is essentially facing a demographic Tsunami. In 2025 there could be 200 million or more senior citizens in China, nearly two and half times as many as there are today.

In China today the national retirement security system covers, at best, only one-sixth of the work force, and many estimates suggest its unfunded liabilities may run to 125 to 150 percent of current Chinese GDP. It would appear fairy likely that such a program is unsustainable and will likely cease to exist in 20 years.

It would appear that some of these simplistic factors are going to severely test the more bullish long term GDP forecast scenario that many believe.

By: Long only Fundie

Long only Fundie — Fri, 26 Jun 2009 12:40:27 +0000

Michael, was just stirring the pot. Whilst I don’t live in China, I have beeen there on almost a dozen occasions (for work and holidays) and always enjoy visiting the incredibly diverse range of cities – be it Xi’an, Wuhan or Shanghai. Indeeed I was in Hangzhou this year as a groomsman for a friend who has married a woman from there.

But I did use the phrase “for work” – which is very different from learning a language for interest.

My reference was more to the surge in the Japanese language learning in the late 1980’s – which whilst nice from a cultural perspective (and another place I enjoy visiting), has not turned out to be the resume necessity people thought it would be, despite still being the 2nd largest economy in the world.

I try not to let my biases on whether I like a place or not, colour my investment decisions – decisions, which are helped by this excellent blog I might add.

By: Michael Pettis

Michael Pettis — Thu, 25 Jun 2009 15:07:02 +0000

Long only, my two neices, besides learning the traditional family languages, English, Spanish and French (and for one of them, Persian), are also learning Mandarin. To say that China has problems means mostly that the China hype is absurd, but China will nonetheless grow faster than the world for many years and will probably become the second-largest economy within the next decade or two. By any standard I think it is an important country and one whose language should be learned, but having said that I confess that I am too old to have learnt it as well as I should have (that’s why I want my 7-year-old nieces to learn it now, while they are young).

By: Long only Fundie

Long only Fundie — Thu, 25 Jun 2009 13:18:02 +0000

High quality blog Michael.

Some points:

1) I too have been perplexed by the dichotomy between the collapsing US CAD (todays GDP revisions lowered it again for Q1), yet thus far China hasn’t seen its CAS change that much. Further, whilst acknowledging a non-convertible currency can circumvent the “Unholy Trinity” to some extent, there is nearly always leakage and it makes the explosion in lending stranger.

2) Your point on Japan shares one very large similarity: the Japanese dependency ratio peaked around 1990 – productivity was always going to decline. Chinese peak? 2010 (BTW US peak was 2000-02. Deutsche Bank released a great piece on this). China will have the glory of being the first country that gets old before it gets rich;

3) Therefore savings rates are not going down, implying your 5-6% growth rates are bang on. BTW someone posted an excellent piece on FAI – there is only one country that has run the same or higher level of FAI as a percentage of GDP for an extended period – USSR. And we saw how that ended.

4) I think we can confidently say our kids need not waste their time learning Mandarin for work(just to put the cat amongst the pigeons).

By: Rhys

Rhys — Wed, 24 Jun 2009 15:43:58 +0000

Sounds like China needs to look beyond the overall picture and take note of the fine print. Hopefully The Power of Small ( http://tinyurl.com/cmdxg6 ) will be translated into Chinese.

By: Bill Tomko

Bill Tomko — Wed, 24 Jun 2009 02:58:56 +0000

With the recently announced policy directive that the stimulus money must be used to buy Chinese made goods, and I think from Chinese owned companies, Hasn’t China just enacted Smoot Harley?

By: Belisarius

Belisarius — Tue, 23 Jun 2009 22:46:05 +0000

Michael,

I think you are right. I also happen to think the US authorities are trying to manipulate asset prices upward, through certain banks, to keep consumers spending.

By: brasil61

brasil61 — Tue, 23 Jun 2009 21:15:57 +0000

Thoughts on causality..by my eye the key point was to negotiate the huge trade issues like currency manipulation ect..before… not complaining about it after…but trade reps in Washington were either naive/stupid or paid not to think hard and to forget history ..Why? ..because the goal was to avoid the overly bureaucratic west with built in excessive regulation, unions, health care costs, cost of living and a gone wild tort system ..which could all be minimized or avoided by decree or bribe in China ..not to mention the huge opening of future consumers..so that was the policy push from Washington side … and the opportunity to expand quickly was the Chinese impetus…now why these issues were left uncovered…because imo everyone involved had the same goals for different reasons and there is no US politician who doesn’t have plausible denial pre-packaged in mountains of reports from economists of every stripe. There is little question the US trade negotiations with China were driven by and favored (long term) 1) China 2) Western Corporations 3)Spendthrift congress ..at the expense of an ignorant consumer/American taxpayer …like the years of Greenspan testimony and Bernanke testimony and the buying of Triple A ratings ..everyone involved knows the game..and who’s getting what and why…yet only in hindsight do we know the consequences.. of policy by undo influence, crisis and bribe…painted in Red White and Blue and sold as democracy.

By: Anders

Anders — Tue, 23 Jun 2009 19:10:14 +0000

Dear prof. Pettis.

I see your argument this way.

“Everything must balance” (meaning the balance of pyaments must balance or just reach a more balanced level?)

Country A
(excess) consumption (shortage) production

Country B
(excess) production (shortage) consumption

Dynamics: Everything must balance. Thus at some point (and I guess that point has arrived now with the crisis) one of the following has to happen:

Country A has to reduce its excess consumption or
Country B has to reduce its excess production or
Country A has to increase its shortage in production or
Country B has to increase its shortage in consumption.

Now in this case we are seeing (or are we?) that country A is reducing its excess consumption and not any of the 3 other scenarios.

About scenario 2. I can’t think of a sound reason why any country would reduce its production unless the market forces it to do so. (to me: Currency manipulation is just part of the game)

About scenario 3. I think that all countries at all times are trying to increase their production within the world market, so this scenario does not seem to be very useful.

About scenario 4 This is where the goverment fear of inflation and the saving versus spending debate comes in. This being said consumption can be increased by government intervention and is happing big time now.

As I see it only scenario 1 can really happen and then it should force on scenario 4?

and is this a recurring cyclic thing or just a freak of the world order?