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September 11, 2008

Chinese Personal Savings: An Over/Under Bet

Everyone loves to prattle endlessly about how much higher personal savings is in China compared to the U.S. The U.S. rate has, until recently, saved a shrinking percentage of income, because of, among other things, the ease with which consumers felt they could make wealth gains via rapidly appreciating home and equity assets. But those asset games are now both over, so, all else being equal, personal income savings must climb in the U.S.

But the reverse is true in China. Everything there has conspired to make personal savings a necessity, from an uncertain economic environment, to a massive discrepancy between personal incomes and home prices, to an undeveloped financial/credit sector. All of those look set to change radically over the next five years (politics and economic apocalypse aside), with credit becoming more abundant, incomes increasing faster than asset prices, and some economic/political uncertainty disappearing into history.

So, here is my bet: Over the next ten years the U.S. personal savings rate triples from its current 2% level, while the Chinese rate halves. Any takers? If true it would definitely alter the calculus of those who think the U.S. can outsource its savings to China, who, in turn, continue to buy U.S. government debt.

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