Friday, December 15, 2006

Saving China's Future

Bernake gives a detailed talk on China’s economic outlook.

One of the choice bits

Policies aimed at increasing household consumption would clearly benefit the Chinese people, notably by improving standards of living and allowing the fruits of economic development to be shared more widely. Such policies, by reducing saving and increasing imports, would also serve to reduce China's current account and trade surpluses.
. . .
Why is domestic saving so high at present? The high saving rate of households, even very poor households, likely reflects the relatively thin "social safety net" in China. . . . In the absence of a stronger social safety net, Chinese households save at high rates to protect themselves against risks such as unexpected medical expenses and poverty in old age.

The problem here is that China faces are very serious demographic shift. In the United States we are concerned about the retirement of the baby boom generation because the birth rate declined from a peak 25.8 (per 1000) in 1953 to 14.8 in 1973. Generation X is just not big enough to support its older cousins.

In China, however, the birth rate collapsed in the early 80s as the county moved from the “more people, more strength” doctrine of Mao to the one-child policy of Deng Xiaoping. The resulting one-two-four dilemma – one child has to support two parents and four grandparents in old age – makes saving a national necessity.

While the US’s population pyramid will flatten out by 2050, China’s will out right invert, leaving an amazing strain on the coming generation.

The solution to this problem is two fold. First, invest has heavily as possible in domestic infrastructure and technology to raise the productivity of the coming generation. Second, invest abroad to build up a nest egg that the nation can draw down on in the future. China is doing both. And while China is a major net exporter today, sign are that it will become a major importer tomorrow as America (Hispanamerica as Tyler likes to say) manufactures the goods that will sustain China's population in the future.

Hat tip to Mankiw