Asian consumers will save themselves, not the West

Could free-spending Asian consumers bail out the West? Many optimists seem to think so. At an event for fund manager Ashburton yesterday, I even heard the ever-upbeat Anatole Kaletsky, of The Times and GaveKal fame, argue that the US and UK could be running a trade surplus within a few years, as demand for Western exports from Asia picks up.

This seems unlikely. It’s based on the idea that Chinese consumers amassed a huge pile of unspent savings during the export boom, which the government can now persuade them to run down by promoting consumption. The problem is that this simply isn’t true.

China’s household savings rate has been pretty much flat as a percentage of GDP over the last two decades (it’s currently around 12%). The huge run up in savings (from 2% to 10%) took place in the corporate sector as exporters made profits from selling goods to the West. Instead of passing all these profits on as wage hikes, they kept most of the money to invest in new capacity and gamble in the stock market and on property.

The truth is that there’s no huge pool of money in China that can be painlessly run down to rebalance the global economy. The savings rate will come down over time as the government builds up the social welfare network. That in turn will reduce people’s need and desire to save for hard times. But it will be a lengthy process, and probably not a smooth one. What’s more, when it happens, those savings are more likely to be spent on goods made in China and the rest of Asia than the West.

So the West is going to have to bring its trade surplus back into balance by consuming and importing less, as it’s already doing, not by exporting more. Asian savers are going to save Asia. But they can’t save the world.

• Cris Sholto Heaton writes MoneyWeek Asia, MoneyWeek’s free weekly email on investing in Asia – you can sign up for MoneyWeek Asia here.