China’s 50 per cent savings rate
May 22nd, 2009 | Published in Economics idea
I just read this article from the January/February 2008 issue of the Atlantic magazine. It explains why China has such a large trade surplus with the United States and why its savings rate is so high.
In short, China wants to expand its manufacturing industry. It keeps the value of its currency artificially low to promote exports. To keep its exchange rate artificially low, the government needs to keep sending dollars back to the US. It does this by buying foreign investments, particularly US treasury bills. The mechanics are convoluted. The result, though, is in effect a huge tax on the Chinese that is used to buy primarily US treasury bills.
This forced savings is crazy. The Chinese government should be using its resources to build things like sewage treatment plants. Instead, they lend money to the US government and make other foreign investments. Sooner or later China will decide it wants to start looking after its own people. The consequences on the US and the global economy will be substantial.
