A couple months ago, I did a post on "Subsidies, Overcapacity, and Domestic Demand/Savings," in which I argued that, in the context of concerns about Chinese overcapacity, it would be better to focus on Chinese subsidies than on differences in U.S./China domestic demand and savings rates.
At a recent CFR event, U.S. Treasury Under Secretary for International Affairs Jay Shambaugh spoke about the Biden administration's position on macroeconomic imbalances, savings rates, and Chinese overcapacity, elaborating on earlier statements by Secretary Janet Yellen. First, in his prepared remarks, Shambaugh said:
As an international macroeconomist, I have studied the economic relationship between the United States and China for decades – both as an academic and as a policy official. And throughout this time, perhaps the defining characteristic of this relationship has been macroeconomic imbalances and their effects.
Take, for example, China’s savings rate. China has maintained an exceptionally high savings rate for decades and over the past 20 years it has been roughly 45 to 50 percent of GDP. That is more than twice the historical OECD average and about 10-20 percentage points above comparator East Asian economies. China comprises 28 percent of total global savings, while only 18 percent of global GDP. The corollary of high savings is low levels of household consumption. At less than 40 percent of GDP, China’s consumption is low relative to other countries at similar levels of income.
It is textbook economics that these savings must be channeled somewhere, which leaves the Chinese economy reliant on a combination of domestic investment and foreign demand to drive growth. The mix between these two factors has fluctuated over time. Twenty years ago, China relied on foreign demand and had large growing current account surpluses. In the last decade, Chinese investment in infrastructure and real estate has absorbed much of the savings. But the recent downturn in China’s property sector and the underperformance of its domestic economy raises questions about the drivers of future growth – and, in particular, China’s likely reliance on foreign demand to sustain its growth going forward.
...
China’s large imbalances have spillovers on their own, but China’s non-market policies and practices amplify this effect by distorting markets, undercutting fair competition, and concentrating the spillovers into certain sectors. In particular, the combination of China’s enduring macroeconomic imbalances and large-scale government support to specific industrial sectors drive industrial overcapacity.
The scale of this support is striking: China’s industrial subsidies are simply much larger than those of other countries. ...
Then during the Q & A, someone asked the following question:
I want to go back to the overconsumption discussion, and in particular, what I would call the China savings rate dilemma. Because I just spent two months back in Beijing, so I have a very narrow Beijing China sample, but there's still issues with healthcare, cost of healthcare, so that's why you save. The lack of adequate government pensions, an unstable stock market, and gold is looking pretty good to my Chinese friends. So how do you deal with this excess in manufacturing at the same time of needing a Chinese economy that is stable, but yet not having anything in place that's going to really juice consumption at this point in time. So I think that's the dilemma, and I'm interested in what is your policy recommendations from that point of view.
Shambaugh responded:
So the policy recommendations that I would give, transparently, aren't ones that are new, they're ones I think the US Treasury and US government has had for a while, is that we think China should do more to strengthen the social safety net. That would be better for Chinese citizens and better for their economy. It would lower the need for precautionary savings, as you said. I think actually shifting more income to households is an essential part of that also. So a lot of the savings you see in China is actually from the corporate sector, and some of that is because not enough of the revenues are going back to households through higher wages or profits being distributed. And so that would be another way that would help increase the consumption. It would make people maybe need to save a little less. But there are a number of other things beyond that. I think one of the things I mentioned in the speech is a reform of the internal migration system, or the Hukuo system, which would actually be really helpful, because if people had more legal rights to where they are, they have better access to whatever healthcare or education systems there are where they live, it also would make it easier for them to buy property, buy homes, which you then start to buy other stuff because you have that. So I actually think there are a lot of things that we see as very, very good for China that would also then help deal with the issues that we're concerned about. I agree that the reason we started, or I started the speech with the savings rate is because, from our perspective, that is, in some ways the starting point of these issues. It then gets filtered through a government focus on manufacturing and non-market policies and practices that steer those savings towards particular sectors. But you're right that the fundamental issue there is the savings rate. And I think there are a number of things China could do that I think would be really good for China that would help in this way.
There was then this follow-up question:
Can I just follow up and ask, do you talk to the Chinese about these things, and do they appreciate it when you talk about their internal migration system or their healthcare system?
Shambaugh replied:
So the internal migration one is one I don't usually raise with them ... because that gets a little into things that I know cross out of economics purely, but I have had it raised with me by Chinese interlocutors. I mean, they know that ... I didn't just come up with these, like they're well aware that that is a way to increase consumption. They're well aware that there's precautionary savings because social security and pension and healthcare systems aren't good enough. They know these things. And so, yes, I mean, we have extensive conversations about this. This is the whole point of the economic working group, is to be able to have conversations like this and go back and forth in detail around issues of overcapacity. And not just starting with, we're worried that you have overcapacity in industry X, but we're worried about the macroeconomic imbalances and where that takes us. And this is something that Secretary Yellen, given her career and her stature as an economist, is very well placed to make these arguments to the Chinese. And she does every time we talk to them, she starts talking about savings rate and how you could reduce it in a way that would be good for China.
I found all of this discussion helpful, and for me it supports the thinking in my earlier post: It's going to be extremely difficult for the U.S. to push China to change its domestic policies related to the level of demand/savings. It's possible that, on its own, China will some day adopt policy changes that affect demand and savings, such as by reforming the social safety net. But it's hard for me to see how unilateral U.S. pressure is going to have much of a positive impact here.
On the other hand, on subsidies and other non-market practices, China agreed to a set of international rules to discipline these domestic measures. That provides an opportunity to push China to comply with its international obligations, which is the kind of pressure that has, at least in some instances, been effective at inducing policy change.
