Eye on China: Banking on great American dream

It would appear to be one of the mysteries of the modern world that a developing country like China should have a vast current account surplus, while a developed country like New Zealand should have a large and increasing current account deficit.

Actually, New Zealand's current account deficit is not that strange. Any country growing strongly, as New Zealand has been doing for the past few years, tends to suck in capital to pay for that growth. In reality, it simply means that the domestic savings component is not sufficient to finance domestic investment and that foreign reinforcements are called for.

But surely China should be requiring even more capital, given its average 9 per cent growth rate over so many years and its huge infrastructure needs.

You would indeed imagine that a developing country would need all the capital it could get - but that's to underestimate the savings miracle in China. It's China's unused savings that show up in the current account surplus. No country in the world saves as much money as China. But this has nothing to do with traditional Asian values. China's savings rate has increased sharply in recent years. Why is that?

Andy Xie, the chief economist at Morgan Stanley in Hong Kong, makes the point that a communist social system works in this way: The state expropriates the population's wealth but, in return, you have cradle-to-the-grave education and medical protection.

In China, the cradle-to-the-grave protections have long been dismantled. Health and education fees are punitively high, especially for the non-urban poor.

In fact, Xie says, the Chinese Government has cancelled the welfare part of the social contract - but without handing back to the population the wealth it expropriated in 1949.

That explains the fury that fills Chinese at the sale of state assets through Hong Kong and US initial public offers.

These assets were built on the back of 50 years of great suffering by the Chinese, but they are not seeing a cent in return.

What does that make the Chinese Government then? Rather close to a criminal organisation, perhaps?

In any case, it is a well-founded fear of the future that is causing the Chinese to save as much as possible.

Yet there are gradations. Young people of my acquaintance spend in a very British way: The monthly revolving credit facility. They spend all their salary and keep an overdraft going which gets paid off once a month.

The real savings maniacs are the older generation. After making babies at a tremendous rate during the years under Chairman Mao (who promised visits to Beijing for Chinese mothers with 10 or more children), Mao's successor, Deng Xiaoping, forbade families to have more than one child.

The typical Chinese couple in their forties and above, their own education badly disrupted by the Cultural Revolution, are understandably cynical.

Not having had their chance to accumulate wealth through their working life (it went straight to the state), they will depend on their child in their twilight years.

Given the average child's obsession with online gaming and dating, and his or her natural reluctance to buckle down to the huge pressure of school life, they know that's a forlorn hope.

As a result, they save up to 70 per cent of their salaries, filling the state banks with liquidity, and encouraging the same institutions to lend it out on poorly-conceived projects - or to sit on it, since the loan-to-deposits ratio in China is low.

Restricted by the Government in their ability to make loans (quite sensibly, given their proven lack of risk management skills), the banks park a lot of the money with the central bank, which uses it to buy US bonds and equities.

That enables the US baby boomers to finance the lavish lifestyle they have become accustomed to.

What a contrast to the Chinese. If you wanted a purely materialistic exhibition of the marvellous success of the US socio-economic system, you would only have to compare the post-war generations in the US and China.

You have the ironic position of the battered and impoverished Chinese post-war generation saving up feverishly - to finance the expensive lifestyle of their American cohorts.

As is well-known, the Americans don't save. And why should they? The poor save. Rich people don't need to.

To put it in a less sensational way, the American savings rate is far lower than in China, because it's a far richer country. US babyboomers have accumulated huge assets over the past 50 years, in particular their houses. Xie estimates the US household net wealth amounts to US$50 trillion, compared with just over US$700 billion for the current account deficit.

The US also has a healthy demographic profile - almost uniquely so in the developed world. Japan and Europe are growing old at an alarming rate, which means in future years there won't be enough people entering the workforce to support the elderly.

But why should Chinese and other countries invest in the US? Surely it can't be simply because the US is willing to run large deficits. What about all the great opportunities in the emerging world?

The reason countries, even such economically powerful, capital-exporting (they have a current account surplus) countries as Germany, Japan, the Nordic countries, the oil countries and others, are willing to invest in the US is simple: The return on capital in the US is the highest in the world. You simply make better returns by investing in the US capital markets than you do at home.

So next time you get excited about investing in China, think about what the Chinese are doing: Taking their money out and putting it in the US. Maybe you should do the same.

YANKEE DOODLE IS JUST DANDY

* People invest in the US because the return on capital is the highest in the world.

* US household net wealth amounts to US$50 trillion.

* Its current account deficit, in comparison, is just over US$700 billion.

* The US also has a healthy demographic profile, unusual in the developed world.

* The writer remains anonymous to protect his position in China.