The Confucian Consumer

Article excerpt

Byline: Nouriel Roubini

Seven reasons why the Chinese save, when they really should be spending.

The traditional Chinese model of economic growth required the U.S. and a few other countries to be consumers of first and last resort, spending more than their income and running ever-larger trade deficits--so that China could be the producer of first and last resort, spending less than its income and building ever-larger trade surpluses. That model is now challenged, if not altogether broken, because the excessive accumulation of private and public debt and deficit by the U.S. has forced a painful deleveraging: the overindebted U.S. consumer needs to spend and consume less, import less, and save more to reduce debt. Indeed, as the U.S. trade deficit shrinks, the Chinese trade surplus has been sharply shrinking, too.

How has China been able to maintain its high--8 percent-plus--growth despite the collapse of its net exports? It did not do it by reducing its saving and consuming more; rather, it has boosted further fixed investment in real estate (commercial and residential), in infrastructure (roads, airports, bullet trains), and in manufacturing capacity, which already suffers from a glut. Fixed investment in China is now close to 50 percent of GDP.

But no country can be so productive that it can take, every year, half its GDP and reinvest it into more capital stock without eventually ending up with a huge excess capacity and a mountain of bad loans. Thus, China needs to radically change its growth model from net exports and investment to reduced saving and more consumption. There are, however, many structural reasons why the Chinese save too much and consume too little. (Consumption in China is 36 percent of GDP, about half of what it is in the U.S. and in emerging economies like India and Brazil.)

First, the Chinese save a lot because their social-security benefits are puny--a paltry $150 per citizen over a lifetime after retirement--and they need savings for old age.

Second, they also save because they want their children to attend private school and because public health care is poor, requiring a buffer for sick times.

Third, there is little of a social safety net in China now that the "iron rice bowl" system of cradle-to-grave public services has broken down. Now you need a buffer of precautionary savings in case you lose your job.

Fourth, the demographic consequences of the one-child policy have increased the need for savings for old age. …