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The Deep End has already featured the jaw-dropping dodginess of the Chinese economic model several times, for instance here and here. But writing on his Bronte Capital blog, John Hempton has a fresh angle on this deeply troubling issue: 

  • "In most developing countries the way that people save is they have multiple children hopefully to generate a gaggle of grandchildren all of whom are trained to respect their elders… 
  • "This does not work in China. Longevity in China is increasing rapidly and the one-child policy results in a grandchild potentially having four grandparents to look after. The "four grandparent policy" means the elderly cannot expect to be looked after in old age… Nor can the elderly rely on a welfare state to look after them. There is no welfare state."  

So what do the Chinese do to provide for their old age? The answer is that they save like no nation has saved before:

  • "Unless they save they will starve in old age. This has driven savings levels sometimes north of fifty percent of GDP. Asian savings rates have been high through all the key industrializations (Japan, Korea, Singapore etc). However Chinese savings rates are over double other Asian savings rates – this is the highest savings rate in history and the main cause is the one-child policy."  

In an economy growing as fast as China’s, you’d expect there to be plenty of great investment opportunities. But unfortunately for the Chinese people, the Chinese state has monopoly control over the banking system – and uses its power to rip-off ordinary savers who have no other option, forcing them to accept nominal interest rates that fall well below the inflation rate.

This also means that those who control the banks – i.e. the senior apparatchiks of the Chinese Communist Party – get to borrow virtually unlimited quantities of money at consistently negative real interest rates. Much of this cash is funnelled into various state-owned enterprises, where it provides an accommodating cushion for various shades of inefficiency and corruption. But the deluge of ultra-cheap credit does not stop at China’s borders: 

  • "When you have copious funds at a negative cost a lot of investments that look stupid under some circumstances suddenly look sensible. US Treasuries look just fine. Don't think the Chinese are going to stop holding Treasuries. The Treasuries yield far more than they pay the peasants. The Chinese make a positive arbitrage on holding low rate US bonds."  

So, if you ever wondered how spendthrift western governments get to fund their deficits so easily, it’s thanks to the Communist exploitation of the Chinese people.

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