China has been in the news recently – for not entirely positive reasons. But behind these stories is that of a nation that has latched on to a unique method of generating growth. The following are some facts by one China watcher; in a second editorial we offer his conclusions.
China has huge underlying economic growth from moving peasants into the modern economy. Every economy that has moved peasants to an export-orientated manufacturing economy has had rapid economic growth. Great Britain industrialized at about one percent per annum. It was slow because all the technology needed to be invented for the first time.
During the 19th Century US economic growth – once started – ran about twice the rate of the UK. They copied the technology which was faster than inventing it. Later economies (e.g. Japan, Malaysia, Thailand, Korea) went later and faster. As a general rule the later you industrialized the faster you went – as the ease of copying went up. In the globalized internet age copying foreign manufacturing techniques and seeking global markets is easier than ever – so China is growing faster than any prior economy.
One fortuitous key to China’s success has been the one-child policy, which drives massive savings rates. In most developing countries the way that people save is they have multiple children hopefully to generate a gaggle of grandchildren all of whom are trained to respect their elders. Given most people did not live to old age if you did you became a treasured (and well cared for) family member.
This does not work in China. Longevity in China is increasing rapidly and the one-child policy results in a grandchild potentially having four grandparents to look after. The “four grandparent policy” means the elderly cannot expect to be looked after in old age. “Four grandparents, one grand-child” makes abandoning the old-folk look easy and near certain. Nor can the elderly rely on a welfare state to look after them. There is no welfare state.
So the Chinese save. Unless they save they will starve in old age. This has driven savings levels sometimes north of fifty percent of GDP. Asian savings rates have been high through all the key industrializations (Japan, Korea, Singapore etc). However Chinese savings rates are over double other Asian savings rates – this is the highest savings rate in history and the main cause is the one-child policy.
Bank deposits rates are regulated. You can’t get much different from one percent in a bank deposit. Life insurance contracts (a huge savings mechanism) are just rebadged bank deposits – attractive because the regulated rate is slightly higher. But this is not a good savings mechanism because inflation has been between six and eight percent (but is now lower than that and is falling fast).
At almost all times (except during the height of the GFC) the inflation rate has been higher – often substantially higher – than the regulated bank deposit (or life insurance contract) rate.
In other words real returns for bank accounts are consistently negative – sometimes sharply negative. But why would people save with sharply negative returns? The answer is the “four grandparent” dilemma. Moreover because of the underlying economic growth (moving peasants into a manufacturing economy) there are increasing quantities of these savings every year.
This is the critical point – the negative return to copious and increasing Chinese bank deposits drives a surprising amount of the global economy and makes sense of many things inside and outside China.
Apart from the bank and life insurance savings that give negative returns Chinese have property. Bank deposits have sometimes five percent negative returns.
If you got one percent negative returns from property, that is doing better. Buying an empty apartment and leaving it empty will do fine provided you can sell the property at some stage in the future.
It is commonplace amongst Western investors to view the see-through apartment buildings of China as insane. And they may be a poor use of capital. But from the perspective of the investors – they look better than bank deposits.