China is doing some major tinkering with fiscal policy according to today’s Wall Street Journal. To try to moderate the flow out of bank savings into their stock market, they are decreasing the tax rate on savings from 20% to 10% and increasing the savings interest rate.
This will indeed get people to save more in the banks. But it will also give them more future cash from the lower taxes and higher returns. This may make them more confident about speculating in the stock market. This means that China’s mountain of cash will continue to grow. Here’s a report that China’s savings rate is 55%.
If you think about the combination of pension products (6% to get all the 401k matching seems typical), Social Security (12.4%) and Medicare (2.9%) we are doing a good bit of forced savings. If you add in home equity, most US workers in their prime are socking away 30% if you don’t deduct the debt they’re taking on.
Our population doesn’t have a huge demographic bulge brought about by a one-child policy, industrialization and massive improvements in life expectancy. The upshot is China will have very high savings until the inverted pyramid kids (one kid who is the only kid of two parents who are each the only kids of two grand parents) get to the workforce. They can expect bequests, a healthy mortgage loan market and modern employee benefits. In the mean time, no amount of cajoling from Chinese or American treasury and central banking officials is going to curb the Chinese savings rate much.
The impact means cheap money across the board for another 20 years. According to the CIA World Factbook $180 billion of their savings is going abroad net. Since they get about $65 billion in foreign direct investment, they get to invest almost $250 billion a year abroad.
They have $1 trillion in bank reserves and gold compared to US’s $70 billion. They have about $300 billion in government debt or $1.2 trillion at purchasing power parity (PPP), compared to $10 trillion US. China has a vastly undervalued currency with gross domestic product (GDP) PPP estimated at $10 trillion at about 4 times the official exchange rate which puts their GDP at current fixed exchange rates at $2.5 trillion.
In short, with a floating exchange rate, China would have the world’s second biggest economy. And that is without the benefit of substantial deficit spending, a stock market, consumer credit, a public pension system up to western standards, a health care finance system up to western standards or any of a number of multipliers that the US already has.
In the next few years, we can look forward to China becoming an economic super power and not slowing its growth (10.7%) until it rises from $7700 per capita PPP GDP to that of Poland ($14k, 5.8%) or France ($27k, 2.1%). That is respectively twice and three and a half times what it is today. With four times as many people that’s 2-3 times as big an economy as ours in the next 40 years.
Can the US manage a peaceful decline and start playing the role of junior partner in defense alliances?