Has China’s period of relatively rapid economic growth come to an end? That was the focus of last week’s column. The answer, I argued, was that it still had the potential to catch up on the living standards of the world’s richest countries, because it is relatively poor. But this does not mean it will do so. It confronts big obstacles to continuing success. In this column, I will address one of the most important such obstacles: “underconsumption”.
The past two decades should have eliminated the view that economies tend naturally towards full employment. On the contrary, excessive propensities to save can generate chronically deficient demand, which needs to be offset by expansionary monetary and fiscal policies. Though these “solutions” may generate other problems. The analysis of the global financial crisis of 2007-09 in my book The Shifts and the Shocks largely rested on this point. I have also noted that excess savings play a central part in the story of Japan’s fall from economic grace. Germany’s excess savings played a central role in the eurozone crisis.
China’s story is similar, but on a bigger scale. Its gross national savings peaked at 52 per cent of GDP in 2008. It was still at 44 per cent in 2019, before Covid hit. Prior to 2008, nearly a fifth of these huge savings went into China’s current account surplus. After the crisis, such surpluses became politically and economically unacceptable. The alternative turned out to be even higher investment, much of it in property. Gross investment rose from 40 to 46 per cent of GDP from 2007 to 2012. (See charts.)