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.

Credit card bad debts soar in China

The focus of Chinese NPLs is on its overheating property market and the related bad debts incurred by developers and local governments. Consumers, unlike those in the US, are largely seen as prudent and safe. To a large extent this is still true. Consumption is still mostly paid with cash. Mortgages require 20%-30% down payment. However, there’s a sub-sector within the consumer market that is seeing increasing risk of NPLs, that of credit cards.

Credit cards as an industry is still new in a country that traditionally issued only debit cards. But credit card issuance has been exploding in recent years. Couple this with stone age risk management practices in Chinese banks and the new consumption habit of the post-reform generation, the result is catastrophic. According to a spokesman from Shenzhen Development Bank, 2009 credit card NPLs totaled RMB7.7bn (USD1.1bn) nationwide which may sound peanuts, but in fact was 226% (!) that of 2008.

No the Chinese banking system will not collapse, one of the tiny winy benefits of having real savings instead of just printing press. But a major banking crisis is looming and China’s formidable foreign reserve has already been earmarked for the eventual cleanup.

What will China do in a trade war?

Many people still seem to believe that the recent saber-rattling is just of the normal type, that both sides scream a lot but will eventually see the light and settle down to talk. But the mood in both the US and China are a lot more somber this year. Call me a pessimist, but I think a showdown in trade is inevitable.

What Washington will do is quite obvious. What’s the point of labeling someone a currency manipulator if you can’t stick punitive tariffs to its exports? The question is what China will do in retaliation. The folks calling for blood now seem oblivious to the cost right now. Maybe they don’t know, or maybe they just want to lash out at the “culprit”.

Would it hurt China? Oh, you bet! Despite all the talk of developing a domestic economy, the Chinese economy is 40% export. Although China is a lot less dependent on the US as a key customer now compared to a decade ago, any MAJOR customer is still important in this environment.

The question is at what cost? What will China do to retaliate? The natural suspect of dumping Treasuries is usually brushed off as not feasible since it will cost China in terms of capital loss to its existing holdings. What this argument fails to note is that the Chinese do NOT buy treasuries out of their kindness, out of love for Washington, or even out of their freewill, but out of necessity from holding too much excess US dollars coming from their trade surplus. If export to the US is slapped with punitive tariffs, China’s trade surplus will naturally shrink, leaving it with less dollars which in turn will translate into less purchase of treasuries.

Now of course, lost business to China will naturally go somewhere else. So someone somewhere will eventually end up with excess dollars and buy treasuries. But this trade adjustment will take some time and there’s no telling how much they actually save up from the trade to buy treasuries. Theoretically they could have spent it all. Vietnam, a most likely beneficiary, actually runs a trade deficit. On the other hand, the impact on interest rate will be immediate, especially given the aggressive borrowing schedule from the Treasury. Already China is reporting its first trade deficit since 2004 for March, and we are seeing turbulence in 10-yr yield. Could this be a harbinger of catastrophe to come?

In this scenario, China doesn’t even have to do anything. This is just the natural outcome from diminishing trade surplus. As for the hope that economic pain will push China to revaluate, keep on dreaming. If trade collapse, the natural order of things is to devaluate, isn’t it?

In the end, it will come down to a masochistic competition of pain tolerance, and I’m not holding my breath for a people steep in entitlement.

Why do the Chinese save so much?

With all the talk about savings glut and spendthrift, one theme always pops up: the Chinese like to save…a lot. The usual explanation given is the lack of a modern welfare state, so that people have to depend on their own resources for education, health care, retirement etc. etc. Another popular reason is, well, the Chinese just like to save. It’s a cultural thing!

Right. Try listening to an American who had lived through the Great Depression, and you will know how “spendthrift” Americans can be. By the same token, why should the Chinese be natural born savers?

Saving is defined as the deferral of current consumption for the benefit of future consumption. The more uncertainty we have for the future, the more we will need to save up for. And China, folks, had been the land of chaos for much of the past 150 years. Civil wars, invasions, famines, go a long way in destroying people sense of security.  The last famine was from the 1959-61 period, when an estimated 20-44 millions people STARVED to death. Memories of these are not particularly helpful in fostering a consumption habit, no matter how well off you actually are now.

Does this mean China is destined to remain the land of the savers? Afterall, you can’t erase people’s memory.

But, the older you are, the more likely that you’re going to, ahem, die.  The post-reform period has been relatively stable and prosperous. By now everyone and his mother would have heard about the 30 years double digit growth story. People who grew up during this period know only of continuous rapid improvement in standard of living. And they are entering the society en masse now.

How many are these people? How much would they spend? Well, that’s the million dollar question. But I think we can use the following as a handy proxy, as Chinese movie goers tend to be young and urban. Now, before someone screams that China will save the world economy, let’s put things into perspective. China totaled RMB6.2bn (USD908mn) in 2009 box office receipts, less than one-tenth of the USD9.87bn haul in the US. Nevertheless, the growth rate has been spectacular and is expected to continue for some more years down the road.

EconoChina