How US trade negotiators are misreading China while ignoring America’s dangerously low savings rate
- China’s recent economic slowdown is less a result of the trade war than its domestic deleveraging campaign, which can be adjusted as needed. Meanwhile, US economic strength is likely to be short-lived as the effect of its tax cuts fades
Yes, the Chinese economy has weakened significantly in the past few months. But, contrary to US perceptions that this is due to its successful tariff strategy, China’s downturn has been largely self-inflicted.
To their credit, Chinese policymakers have moved aggressively to avoid the dreaded Japan syndrome – not just a debt overhang, but also a profusion of zombie companies and related productivity challenges.
Largely as a result of this effort, credit growth has moderated from around 16 per cent at the start of 2016 to about 10.5 per cent in late 2018.
This has had marked repercussions for China’s once-powerful investment engine, the largest component of the economy, which has slowed from 20 per cent growth in late 2013 to about 6 per cent in late 2018.
Meanwhile, the effects of US tariffs are only just starting to bite. While exports to the US fell by about 3 per cent year on year in December 2018 and January 2019, shipments to the rest of the world have continued to expand, owing largely to resilience in emerging markets, especially Asia.
To hedge its risks, China has been quick to exploit its intrinsic advantage: much greater policy flexibility than Western economies, which have largely hit their limits on fiscal and monetary stimulus.
But with fiscal stimulus fading, GDP growth should follow suit – consistent with the Congressional Budget Office’s latest projection of just a 2.3 per cent rise in 2019.
The likelihood of contrasting economic growth trajectories – a policy-induced improvement in China and a policy-constrained slowdown in the US – reinforces a more serious mismatch of longer-term fundamentals.
China’s domestic saving rate in 2018, at 45 per cent of GDP, was nearly 2½ times the US rate of 18.7 per cent. Although China’s saving rate has fallen from its 2008 peak of 52 per cent, it still has a cushion that the US would die for.
Moreover, 85 per cent of America’s gross saving goes towards replacement of obsolete and worn-out capital stock. Adjusting for depreciation, the US had a net national saving rate of just 3 per cent in 2018 – less than half the 6.3 per cent average in the final three decades of the 20th century and even further below the net saving position of China, where the capital stock is considerably newer and in less need of replacement.
These saving disparities underscore a critical difference in the investment underpinnings of both economies’ growth potential. China’s investment was 44 per cent of its GDP in 2018, more than double the 21 per cent share in the US.
Moreover, the saving gap between America and China is likely to widen further in the years ahead, as seemingly chronic US budget deficits push domestic saving even lower. A further complication is that in funding its limited investment potential, the US will require equally chronic current-account deficits to augment depressed domestic saving.
And, of course, with the current-account deficit comes an outsize multilateral trade deficit, underscoring the weakest link of the pending trade deal: reliance on a bilateral Chinese fix for a far more insidious deficit problem with over 100 trading partners.
In the end, economic strength is relative. The US economy’s current strength appears fleeting. Its short-term resilience is already faltering and, in view of worrisome long-term fundamentals, may fade further.
China is in the opposite position: today’s short-term weakness should run its course by mid-year, against a backdrop of relatively solid longer-term fundamentals. This reality will come as a rude awakening to US negotiators, who are misreading China’s strength and the hollow benefits of a cosmetic trade deal.
Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate