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The Real Problem with China’s Economy

If Chinese savings remain at their current level (over 40% of GDP), but investment falls to 30% of GDP, China would have to maintain a current-account surplus of ten percentage points of GDP to keep its economy in equilibrium. At nearly $2 trillion, that would be enough to affect the global savings/investment balance.

MILAN – China’s ongoing economic slowdown has elicited a variety of explanations. But forecasts largely have one thing in common: while the short-term data are somewhat volatile – annual growth rates have been distorted by the legacy of the authorities’ draconian zero-COVID policy – most observers expect Chinese GDP growth to continue trending downward. The International Monetary Fund, for example, expects growth to reach just 4.5% in 2024 and fall to 3% by the end of this decade – better than most advanced economies, but a far cry from the double-digit rates of a decade ago. Yet growth is only part of the story.

Of course, the focus on it is understandable. For decades, China has accounted for a significant share of global GDP growth. Moreover, the size of China’s economy – a key determinant of its ability to continue expanding its military capabilities – will shape the evolution of the balance of power with its main rival, the United States. But growth is not the only – and probably not even the main – channel through which the Chinese economy affects the rest of the world. The balance of savings and investment also matters, perhaps even more.

One of the Chinese economy’s distinguishing characteristics is its extraordinarily high investment and savings rates, which exceed 40% of GDP. This is double the level in the European Union and the US, and higher even than the rate in Asia’s other high-savings countries, such as Japan and South Korea.