Even Japan and South Korea didn’t reach such levels during their development phases, when their investment/GDP ratios peaked at around 39%. We can think of two reasons why high levels of investment could be problematic: first, because it drives down the marginal efficiency of capital, thus acting as a drag on future growth and, second, because it is not affordable, thus requiring financing from overseas.
Our original documents pointed to a decline in capital productivity (GDP/capital) and marginal efficiency of capital (GDP gain per unit of investment) and we will return to this topic in a future edition. For now, we will focus on the affordability of China’s investment, which is why Figure 1 is focused on saving. As can be seen, though China has been investing a lot, it has been saving even more since the mid-1990s (often said to be due to the lack of a social safety net).
One implication of saving exceeding investment is consistent current account surpluses (the size of which can be judged by the gap between saving and investment in Figure 1). It could perhaps have been argued in the 2007-09 period that China’s current account surplus was excessive (saving was way too high relative to investment). However, that imbalance has since diminished, initially due to a rise in investment but more recently because saving has fallen more than investment (as percentages of GDP).
A second implication of consistent current account surpluses is that China has been able to finance its own investment spending while also providing finance to the rest of the world. China may have a lot of debt but it is owed to itself, which makes it hard for a debt crisis to be imposed from outside.
China’s status as an international creditor can be seen in Figure 2, which shows net international investment positions (NIIP) as a percent of GDP. NIIPs are the result of accumulated current account surpluses and deficits. For example, Germany’s NIIP/GDP ratio has been increasing because current account surpluses have exceeded 6% of GDP in most years since 2006. Japan has a similar creditor status, as does Switzerland (NIIP of 117% of GDP in 2019 but not shown). China is not in that league and its NIIP/GDP ratio has been trending down in recent years because GDP has grown faster than NIIP. It is on the right side of zero but does not appear imbalanced.
On the other hand, a range of countries are net debtors and are heading in the wrong direction, with worsening imbalances, including France and the UK (Italy has seen improvement). The US appears to be in a league of its own among debtors, though Turkey (not shown) is nearly as bad (47% of GDP in 2019). It is not as though the US invests too much (around 20% of GDP in recent years) but rather that it saves too little (less than 19% of GDP in 2019). Luckily, the US owns the world’s reserve currency, otherwise we doubt it would get away with such an imbalance.
In conclusion, China may invest a lot and this may depress returns on investment. However, it is self-financing and from this perspective has fewer imbalances than the US, the UK and France. That is relatively comforting from a financial stability perspective. Among surplus countries, it appears better balanced than Germany and Japan, which could ease growing geopolitical pressures on China.