Chinese savings rate to plummet?

Speaking of collapsing Japanese savings rate, could the Chinese savings rate take the same dive in the not to distant future? BIS has come out with a new report that answers with a resounding yes.

Instead, we argue that tough corporate restructuring……, a marked Lewis-model transformation process…… and rapid ageing process have all played more important roles [in explaining high Chinese savings rate]. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.

The authors basically see several social and economic factors uniting to drive down Chinese savings rate. First and foremost should be the slowdown in long term economic growth coming from the restructuring of Chinese industries. As China gradually rebalance towards its domestic market, trend growth inevitably slips. You can’t save what you don’t have.

Another factor is simply having less people joining the workforce, having hit the so-called Lewis Inflection Point. The resent labor shortage and unrest in China is another facet of the same demographic change. With less people saving, of course the overall savings will decline.

The last kicker is the aging of the population. Due to the draconian one-child policy, China is aging rapidly. And Japan has already shown the world what happens when your retirees need to draw down on their savings….

If the authors are right, then it doesn’t matter which side of the “savings glut” theory you stand, ’cause it an’t gonna last very long.

What does this mean? Does it imply that China would have to pawn its reserves? Possibly, but I think the reserves would have been long gone by then to pay for the clean up of the bad debts in Chinese banks. It will certainly mean soaring interest rates in China, and across the globe.

China buying more JGB

In an attempt to diversify from the USD, China bought more JGB in June.

China purchased a net 456.4 billion yen ($5.3 billion) of Japanese debt in June, following net buying of 735.2 billion yen in May that was the most in records dating from 2005, according to a report released today by the Ministry of Finance in Tokyo.

This is expected as the nation switched to a soft peg referencing to a basket of currencies.  Although Japan is the 4th largest export market of China, making up about 10% of its exports, the trade is more or less balanced. As such China’s trade surplus against Japan was only about USD20bn in 2009.

Since China has so far bought about USD20bn JGB this year, has it used up its quota then? Not likely. China has been under-weighting JGB in its reserves since 2006. If China does indeed intent to bring its currency to be trade weighted, there’ll be more JGB to buy, at the expense of US Treasuries naturally.

A side effect of buying more JGB is pushing up the Yen and Japanese Finance Minister Yoshihiko Noda commented yesterday that he’s watching the matter. But this may be a price that Japan has to paid, as it becomes increasingly relying on foreign lenders. Savings rate tumbled in  to a mere 2.2% in 2007 from 11.4% of a decade earlier, as economic stagnation and an aging population takes it toll.

China ups JGB holdings, sees no gold standard

The FT mainly attributes this to jitters about Europe:

Chinese investors bought up a net Y541bn ($6.2bn) in Japanese government bonds in the first four months of the year, amid ongoing global concerns about Europe’s debt woes.

Analysts said the scale of the buying – which was more than double the full-year record total of Y253.8bn set in 2005 – was notable when compared to the rate of increase in China’s foreign exchange reserves in the first quarter.

Yes, this is possible, but I was surprised that it did not connect the dot at all with China’s recent change in currency regime. Switching to a dirty peg of a basket of currencies, requires, well, more diversified currency holdings, like for example…Yen. The WSJ  pointed out this possible angle of interpretation, but rightly noted that:

“They still haven’t bought much in the longer-end, with a comparatively small level of purchases of maturities greater than two years, so whether they expand their buying beyond of the short-end will be crucial,” Mr. Inadome said.

Since 96% of the new JGB purchase was those maturing in less than 2 years, this is not alarming per se. But given the recent change in currency regime, this is an area that is worth paying more attention. Most people are too sanguine in assuming that China has nowhere else to go but the UST, due to the depth and liquidity of the market. Well, while the market depth of UST may remains so, it surely is not liquid for the Chinese, given the size of their portfolio. And they don’t have to actively sell down existing UST holdings to change its reserve mix and alarm the market in the process. Due to its massive trade surplus , China has new money to invest in any number of securities every month, and plowing some of these cash in other basket constituent currencies makes perfect sense.

Separately, in an article published on its website, the SAFE (that’s the folks in charge of China’s reserves) punctuated the hopes of gold bugs by explicitly ruling out gold as a major component of Chinese reserves, on  concerns of market depth and wild swings in prices. This is hardly surprising given the earlier call for adopting SDR as the new reserve currency by Zhou Xiaochuan, the governor of the PBoC.