Michael Pettis

China: The Coming Clash in Savings

Glenn88, China’s net accumulation of foreign currency assets will be determined only by the size of its current account surplus. If Japan wants to sell dollars and buy euros, in principle China could take the opposite side, but China would probably not want to convert the few euros it has into dollars, making its reserve accumulation too dependent on just the dollar. If japans eels dollars for euros 9which I do not think they want to do) the net impact would be a rise in the euro versus the dollar and a transfer of the US deficit to Europe, something I think the Europeans would find unacceptable.

Djackson and HaavBline, of course one doesn’t automatically require the other. For example a rise in US savings could be offset by a rise in global investment, or by a decline in European and Japanese savings, but each is unlikely. Global investment is more likely to decline than to rise as a consequence of the crisis and especially once government fiscal expansions reach their limits. Japan’s savings rate has already declined tremendously and Japan and Europe are seeing sluggish growth and rising unemployment, which are unlikely to lead to the necessary rise in consumption to offset the rise in US savings. Other countries are much too small to make a difference, and anyway are mostly all suffering from the global slowdown so are likely to exacerbate, not absorb, the savings imbalance. The rest of the world is actually likely to make the problem worse, not better.

Chap08, I am impressed by your certainty that Jim Walker is wrong – especially since his prediction turned out to be right and everyone else’s wrong. What impresses me less is the logical sequence that assumes that a dollar bloc obviates the problem of rising savings within the member of that bloc. It seems to me that the opposite is true. The more tightly the economies are linked the more important are the mutually offsetting imbalances.