L’AGEFI - China’s excess saving uncertainty

Translation of an article published by L'AGEFI on 23 March 2023
By Michala MARCUSSEN, Group Chief Economist

The economics of the pandemic came with the build-up of unusual buffers as lockdowns constrained household demand, driving significant forced “excess” savings. These savings are also an important part of the current inflation picture, as the unleashing hereof drove strong demand and higher prices. At the same time, these excess savings also allowed households to buffer the impact of inflation shocks and supported corporate profits.

With the end of the zero Covid policy, attention is now turning to China’s buffers and how these may influence both the domestic and global economy. A quick look at Chinese household deposit suggests “excess” savings of around 10% of GDP, but this number merits several qualifications. Around half of this number can be attributed to a reallocation of savings, including from lower housing sales. Of the remaining 5%, a further question is how much of this households will set aside to compensate for lower valuation of real estate holdings. Contrary to US and European households, Chinese households have seen real estate value decline in recent years. Finally, as was the case elsewhere, there is a distributional question with “excess” savings more likely concentrated on higher income households.

Judging from the data available, the Chinese economy is seeing a lift to driven by the reopening of the economy. The latest monthly data showed firm gains for retail sales and improvement to investment with local governments increasing infrastructure spending. This latter point is a reminder that the Chinese economy still needs policy support. On the external front, moreover, lacklustre global goods demand suggests limited potential for upside surprise. In a notable difference with trends observed in the US and Europe, the lifting of lockdowns does not seem to have given much support yet to employment. The urban unemployment rate even ticked a little higher on the latest print, to 5.6% from 5.5% in December. As such, the picture of China’s reopening so far is that improved momentum, rather than an outright boom and we remain of the view that households will be cautious about rapidly spending excess savings. After GDP growth of just 3% in 2022, Consensus sees just over 5% in 2023. This number is also in line with the target set by Beijing.

While China’s reopening is certainly good news for the rest of the World, this seems unlikely to deliver the same boost to the global economy as that seen in the wake of the Great Financial Crisis. At that time, the Chinese economy engaged a significant investment roll out and saw debt increase by close to 100% of GDP for the non-financial sectors. China has in fact actively been engaging policies to tame leverage and not least in the property sector. While recent policy easing will offer some respite, there is little chance to see a return of the boom times.

This time round, it seems more likely that the benefits of the Chinese recovery for the rest of the World will come from the return of Chinese tourists, which will be welcome news and not least for the most-tourist dependent economies of Southeast Asia, such as Thailand and Vietnam. Should China, contrary to expectations, opt for more aggressive policy stimulus on the infrastructure and property side, then this would drive stronger growth and further lift China’s imports, not least for key commodities. At the current crossroads where inflation remains a concern globally, a new lift to commodity prices may not be quite such welcome news.

On a final link to China, Europe will be closely watching Chinese demand for LNG. Weak demand from China last year was a supportive factor for Europe to secure gas supplies and fill its storages. Of course, this was not the only supportive factor as Europe also made significant energy savings and is seeking to boost other sources of supply. With LNG supply unlikely to see a sharp increase, a more cautious unwind of Chinese households’ excess savings may just be good news.