The problem is the lack of savings opportunities in China, the lack of a mortgage market, pensions and health schemes that force the few asset buys available up to ridiculous levels – Chinese stocks trade at 50 times earnings – while the rest of the cash sits around in bank deposits.
Capital controls disallow Chinese savers from putting their money into US mutual funds so the books can only be balanced through massive official flows, traditionally into US treasuries but increasingly into other areas such as cash holdings in euros.
“Few economists have much idea how the Chinese surplus is invested,” says Mr Dumas, but he speculates that with Chinese exports shifting towards Europe its asset portfolio is following suit.
This wall of money produces the ‘Goldilocks economy’ – as described in the book The Bill from the China Shop, How Asia’s Savings Glut Threatens the World Economy, written by Mr Dumas and Diana Choyleva – in which asset prices rise, but not consumer prices, as long as “global demand is sustained by deficit policies”.
This is key to the Dumas analysis: that the savings drives the deficit and the low interest environment in the West (a boon for private equity folks and other leveraged investors) and not the other way around. “The world has an Asian current account surplus problem rather than a US current account deficit problem,” writes Mr Dumas. “The US deficit is the reaction – not so much profligate extravagance, but the result of pursuing full-employment/low-inflation policies in a world full of countries determined to run surpluses.”
Ways out of the malaise are hard to figure out. China could restructure its financial sector but that is a 10-year project. In the shorter term, it will probably revalue the renminbi. The US could cut taxes even further. But some day it all has to balance up again. Meanwhile private equity can play on…
