China is the global savings superpower. In the past, in a fast-growing economy with superb investment opportunities, its high savings have been a big asset. But they can also cause huge headaches. Today, with the ending of the property boom, managing these savings has become a challenge. The Chinese government must dare to choose relatively radical remedies.
According to the IMF, China generated 28 per cent of total global savings in 2023. This is only a little less than the 33 per cent share of the US and EU combined. That is quite extraordinary. It also has several implications. One is that if China were an open market economy, its capital markets would be the biggest in the world. Another is that how these savings are managed is likely to be the most important single determinant of global interest rates and the global balance of payments.
I analysed these underlying challenges in a column in September. A recent visit to China confirmed both the significance of this issue and the apparent unwillingness of the government to make decisive shifts in the structure of income and spending. It seems highly likely therefore that China will continue to have an extremely high overall propensity to save. But this is not mainly due to the frugality of Chinese households, as so many assume. Even more important is households’ ultra-low share in national income. In other words, as Michael Pettis of Peking University’s Guanghua School of Management has frequently argued, China’s savings are in large part a distributional issue. That may be why they are hard to reduce and so the savings rate has remained over 40 per cent of gross domestic product.