The Great Savings Debate

Squaring off on the great savings debate of 2006 are Hong Kong University economics professor Danyang Xie, author of this editorial appearing in China Daily, and U.S. Treasury Under Secretary for International Affairs Timothy Adams, with this statement before the Senate Finance Committee.

Today's discussion - does the U.S. save too little, or does China save too much?

Xie: The solution is with the United States and not, as pointed out by Governor Ben Bernanke in March 2005, with global savers. The problem is not the global savings glut, it is the lack of savings in the United States on the part of the government no doubt, but also on the part of the individual households.

Believe it or not, the extremely low household savings in the United States can be partly attributed to the rising housing price. Think about it: Who needs to save if his house is gaining value astronomically? By the time of retirement, all he needs to do is to cash in on the house or get an annuity through reverse mortgage to pay for all the bills for the rest of his life (increase in rental cost consistently falls short of the increases in housing price).

Saving little is indeed rational if the housing price continues to rise at its current pace indefinitely, if down payment and mortgage cost remains low, and if the dollar does not collapse in the foreign exchange market. Unfortunately, these are big "ifs."

Adams: The counterpart to China's high investment and its current account surplus is a savings rate of roughly 50 percent of GDP, which may be the highest in the world. One World Bank study estimated that China's savings rate was 10 percent of GDP higher than one would predict from China's economic and demographic characteristics.

Chinese households save 25 percent of their income, on average, mostly in the form of low interest-earning bank deposits. Household saving reflects a weak social safety net and limited access to financing and insurance; households need high savings in the event of serious illness, disability, or to pay for children's education. The "iron rice bowl" of cradle to grave wages and benefits is gone and a modern social safety net has not yet been erected. Chinese state and private firms also save heavily – and invest the earnings they have rather than paying out dividends.

China's leaders recognize the importance of lowering the savings rate and boosting domestic demand, and achieving more balanced growth is central to current Chinese policy.

Xie: We need the Fed doves to help remove the lid on the long rates and break the wishful thinking that cheap financing is always around for property purchase, for fiscal budget deficit, and for current account deficit. The property market will cool off. With well-targeted CPI inflation rate eating into the value of the house and with dollar depreciating against all major currencies, the property market bubble will shrink over time.

The US households will finally begin to realize that they need to save for their retirement nest egg, or else, be prepared to face the reality that the equity they build into and the capital gains on their house won't be enough to keep them happy for the rest of their retirement life.

Adams: Finally, let me address the concern of some members of this committee regarding China's holdings of Treasury securities. Chinese holdings are 3.2 percent of the $8.2 trillion in total public debt outstanding, or 6.6 percent of the $4.0 trillion in total privately held public debt outstanding. China has purchased around $34 billion in Treasury securities in 2005. This is in the context of the extraordinarily deep and liquid Treasury market where daily turnover exceeds $500 billion. China holds only about $470 billion, or 2 percent, of a total of $23 trillion in U.S. credit market debt securities.
...
As a significant member and beneficiary of the international economy, China should make a greater contribution to sustaining strong global growth by reducing its large current account surplus and working to maintain global support for open trade and investment. To put it simply, China must play be the rules of the system.

It seems that the U.S. has the same approach for fixing every global imbalance - let the other guy do it:

• Decrease your savings rate so our trade deficit will narrow
  
• Let your currency rise so our manufacturers will be more competitive
• Reform your financial sector so you're not so dependent on ours

China is doing what is in their best interests and there doesn't appear to be any reason for them to change that approach anytime soon.

While senators debate tarriffs to compensate for an undervalued currency, Chinese officials allow the value of the renminbi to move a few percent, forestalling punitive action. When U.S. officials complain of copyright violations, stories of crackdowns against this sort of piracy appear in the Chinese media.

All the while, the U.S. and its citizens go deeper into debt, becoming increasingly distracted by foreign adventures and domestic entertainment that yield little economic benefit. The Chinese economy grows, a consumer class slowly emerges, and military spending rises rapidly.

Our advice to the rest of the world, that their economy will prosper if they would only spend more money, seems more unsound with each passing month - emerging economies may have better ways to increase their wealth than through more consumption and more debt.

Slowly, the global balance of power shifts.