Beijing should dip into China’s corporate bank
China represents something new in the history of the modern world: a developing country that has a vast global impact. This is why Hank Paulson, the US treasury secretary, has followed Robert Zoellick, former deputy secretary of state, in calling for it to be a “responsible stakeholder”.* But China will behave as the US wants only if it perceives that this is in its own interests. Again, the US should not be surprised. This is how Americans view their own country’s international obligations.
At present, the most vexed issue between the two countries is the payments “imbalances”. Many in the US complain that China is manipulating its currency, to preserve excessive competitiveness. Certainly, China has a large current account surplus, forecast by the International Monetary Fund at $184bn this year, or 7.2 per cent of gross domestic product. No other country has as big a surplus.
The starting point then must be whether it makes sense for a poor country to export so much capital. The answer, I would argue, is “no”. But we must then also ask why China is running such large surpluses. The short answer is that it is saving even more than it is investing at home. This is true by definition. In China’s case, this surplus is largely being invested in its vast foreign currency reserves, now some $1,000bn (or 40 per cent of gross domestic product).
Contrary to the conventional wisdom, the frugality of Chinese households is not the chief explanation for China’s surplus savings. As Jonathan Anderson of UBS notes, the principal explanation is China’s huge corporate savings.**
Between 2000 and 2005, China’s gross domestic investment rose from 33.7 per cent to 41.2 per cent of GDP. Over the same period, however, its gross savings rate rose from 35.4 per cent to 48.4 per cent. If we examine the latter more closely, we discover that corporate savings (that is, undistributed corporate profits) jumped from 19.6 per cent of GDP to 29.1 per cent over the same period, while household savings rose from 12.9 per cent to 16.8 per cent of GDP. Overall, some 70 per cent of the increase in gross savings was generated by the rising profitability of the corporate sector (see chart).
Certainly, Chinese household savings are high by international standards. As the International Monetary Fund noted recently, they were an impressive 32 per cent of household disposable income in 2004.*** Nevertheless, household savings generate only a third of China’s overall savings. The undistributed profits of corporations are far more important. Corporations still need to borrow from banks, as Mr Anderson stresses, since they invest even more than they save. But this makes China no different from most other Asian emerging economies.
The bottom line, then, is that the restructuring of the corporate sector, particularly of the state-owned enterprises, which have laid off tens of millions of workers since the mid-1990s, has greatly improved their profitability and so the savings of the Chinese corporate sector. As one would expect, therefore, profit margins have improved sharply since the mid-1990s (see chart). As a result of these reforms, China has a savings surplus, despite its high investment.
Some readers may remain sceptical about the claims that the lumbering state-owned corporate sector is making large profits. They should note, however, that if these figures are wrong, one or more of four things have to be the case: the current account surplus is hugely exaggerated; households are saving a vastly higher share of GDP than measured; the government is saving a far higher share of GDP; or investment is a much lower share of GDP than believed. None of these is at all likely. As Sherlock Holmes said, when you have eliminated the impossible, whatever remains, however improbable, must be the truth. The truth, in this case, is that China’s corporations are generating vast savings. This does not mean that they are sensationally profitable, however, since the capital they use is also, as the investment rate shows, very large.
Now consider the big question: does it make sense for China to save so much or, for that matter, to invest so much? After all, consumption
