For the past few days, the media have been full of hand-wringing stories about how China is selling US treasury bonds, after its declared holdings dropped US$25 billion in June. Without Chinese purchases, the authors fret, President Barack Obama will be unable to finance his stimulative budget deficit and the US economy will remain mired in recession. Their fears are misplaced. It's not the United States they should be worried about, but China. If China is buying fewer treasuries, it should come as no surprise. Over recent years, Beijing has built up a vast hoard of US treasury debt, financed by its huge current account surplus; one side of the global financial imbalance blamed for causing the economic downturn. Now, however, that imbalance is contracting. Yesterday, the State Administration of Foreign Exchange announced that China's current account surplus for the first half of the year was US$130 billion, down 32 per cent from the same period last year (see the first chart below). With a smaller surplus, China naturally has less foreign exchange to recycle into US treasuries and other foreign-currency assets each month. That shouldn't pose a huge problem for the financing of the US budget deficit. China is running a smaller current account surplus largely because consumers in the US are buying less stuff from China as they pare back their spending to rebuild ravaged savings. In response, the US current account deficit has shrunk to US$101 billion in the first quarter from US$179 billion a year before, and the personal savings rate has risen from just 0.8 per cent of disposable income to 4.6 per cent. That means Americans are buying more treasury bonds, funding more of the US budget deficit themselves. If American consumers are spending less and saving more, it means that one half of the great global imbalance blamed for causing the crisis appears to be correcting itself. The other half of the prescribed solution to the imbalance was for Chinese consumers to save less and spend more. Achieving this, however, is going to prove a lot more tricky. Because consumption is only a relatively small component of China's economy, the country saves a good deal more than it needs to finance its investment plans. The excess savings have to be exported, largely by buying US treasuries (this is simply another way of looking at China's current account surplus). This external imbalance is shrinking now, not so much because Chinese savings have fallen relative to the overall economy but rather because investment has risen, thanks to the government's stimulus measures. The government is also trying to encourage consumers to save less and spend more by stepping up health-care and pension provisions in the hope that better state welfare will persuade consumers to dip into their precautionary savings and spend more of their savings. The trouble is that it is not individuals who are the big savers in China. Analysts often talk about how consumers ramped up savings to compensate for the dismantling of state-owned companies' welfare programmes in the early 1990s. But as the second chart below from the People's Bank of China shows, household saving rates have barely changed in the past two decades. The big increase in savings has taken place in the corporate sector. Companies have been able to save more largely because they pay their workers at rock-bottom rates. But of course, workers paid rock-bottom wages don't go out and spend much. In short, as the central bank admits, it's low incomes, not high household savings rates, that are to blame for China's low level of consumption. To correct China's internal imbalance and reorient the economy away from investment and towards consumption, Beijing needs to raise incomes substantially, transferring wealth from the corporate to the household sector. At the moment, however, the government is moving in precisely the opposite direction by stepping up investment. That is maintaining the overall growth rate, but it is also exacerbating the imbalances in the domestic economy. So while it seems that the US may be flexible enough to correct its imbalance between saving and spending, it appears that China is not. How this will play out in the long run is unclear, but it does indicate that maybe the media should spend a little less time fretting about America and a little more being worried about China.