China has a comparative advantage in savings

Here is a chart comparing the savings rates of the US and China…


Thanks to a friend in Chile who sent me this chart from Fidelity International.

On the x-axis is GDP per capita. So the more economically advanced countries are to the right. The chart on the left shows that China has low household debt as a share of GDP, whereas the US has a much higher share. The chart on the right shows that China has a much higher gross domestic savings as a share of GDP than the US.

China has a comparative advantage in their savings rate, which leads to relatively more savings than the US… China thus exports those excess savings to the US. The result is a Current Account deficit for the US. If China was not the second largest economy, the effect would not be so challenging for the US.

Once again, we need to realize that the US is not awash in excess savings, but rather the world in comparative advantage to the US. There is an equalizing dynamic for the US to drop labor share and consumption to raise its savings rate, while it does its best to maintain production. But that could manifest as a long protracted slump… ahem.

On the other hand, 50% savings rate is not sustainable for China. Eventually that will have to come down as China builds its domestic consumption. Much of their currently high investment will require stronger sustainable domestic consumption in the future. The solution for the US is not a Chinese implosion, but rather wise re-balancing in China by raising wages… a lot.

I know it would be nice to see Japan on these charts. Sorry.

Notice also the EU (European Union). Realize that some countries have high savings rates like Germany, and some have low savings rates like Spain.