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The writer is chief China economist and head of Asia research at GlobalData TS Lombard
The actions of one-fifth of humanity in China have wide-ranging spillovers beyond its borders. For almost 30 years now, the global economy has been underpinned, for better or worse, by two structural constants — goods disinflation stemming from the country and its excess savings. The latter is about to change, significantly increasing upward pressure on bond yields in developed economies.
The three principal drivers of Chinese consumption — demographics, limited government transfers and poor returns on wealth — are all shifting.
Demographics are destiny, especially for the composition of savings and investment. By definition, productive workers produce more than they consume; as a result, the peak in national savings rates tends to correspond to highs in the working-age share of the population. When people retire, they switch from being savers to consumers.
In China, productive workers reached a high of 73 per cent of the population in 2010 with savings 50 per cent of GDP. Fifteen years on, workers account for 60 per cent of the population and savings have fallen to 43 per cent of GDP. Demographic dynamics are hard to change; and while retirement ages can be adjusted, even Xi Jinping cannot make people work forever. The UN projects China’s working-age population will fall by almost another 10 percentage points over the next 10 years. A shift in saving/consumption behaviour is guaranteed.
To unleash consumption as a genuine growth driver, serious structural reforms are required. For decades, Beijing has been reluctant to do this but that is now changing. Although GDP targets are less important under Xi, a minimum level of growth is necessary to achieve geopolitical, technological and social stability goals. With its traditional economic locomotives of exports and property tapped out, policymakers are finally getting serious about consumption.
In fact, raising consumption when alternative economic drivers are weak could even become a matter of national security — the top policy priority. Our long-held thinking on this is playing out. In the recently published 15th Five-Year Plan proposals, Beijing explicitly stated the goals of achieving a “notable increase in household consumption as a share of GDP” and that domestic demand should play an increasingly greater role as the principal engine of economic growth.”
Policymakers are already acting. This year Beijing has significantly expanded child benefits, increased minimum wages, raised pension payouts and triggered a strong run in stocks. The full 15th Five-Year Plan will in the first quarter next year continue these efforts, adding specific long-term objectives around reform of the hukou system for restricting movement of rural workers, income, welfare and perhaps even a target for the consumption share of GDP.
This is not the classic Chinese “big bang” stimulus; rather, it is slow-moving reform. It will take years for ingrained behaviour to change; but once it has, the impact is likely to be positive, in conjunction with demographic trends. Even without reform, increased retirement alone would lower the savings rate.
China spending more has huge global implications. An additional 5 percentage points of extra consumption (less than the increase in consumption share of GDP from 2010 to 2020) would equate to roughly $1tn in additional spending last year, equivalent to nearly a quarter of Indian GDP.
At the broad macro level, if you subtract investment from savings, the result roughly equals net exports. If savings are lower and investment roughly constant (Xi is committed to spending on high tech and infrastructure), then net exports fall, with legacy industry, not advanced manufacturing, probably seeing the larger drop.
This would be a positive for emerging economies looking to trade but would add upward pressure to global rates given proceeds from China’s trade are reinvested partly in foreign securities. Economists debate the size and impact of the “savings glut” on developed economy yields, but the papers we have reviewed put the impact on lowering yields at anywhere between 0.05 and 1 percentage point, depending on action from the US Federal Reserve, issuance levels and private-sector purchases.
For their part, Rashad Ahmed and Alessandro Rebucci of the US Treasury and Johns Hopkins University, respectively, estimate that a 1 per cent shift away from US assets by China would lead to a 0.24 percentage point increase in US yields.
In a world of growing government borrowing, increased sovereign competition for capital, more turbulent geopolitics and ageing populations, the end of the Chinese “savings glut” will add another structural upward driver to long-end rates.
