A key feature of China’s new five-year plan “is to shift official policy from maximizing GDP growth toward raising consumption and average workers’ standard of living” writes Martin Feldstein Project Syndicate (March 29).
The future reduction in China’s savings will mean a reduction in its current-account surplus, and thus in its ability to lend to the US and other countries:
“If the new emphasis on increased consumption shrank China’s saving rate by 5% of its GDP, it would … completely eliminate China’s current-account surplus. … China would no longer be a net purchaser of US government bonds and other foreign securities. Moreover, if the Chinese government and Chinese firms want to continue investing in overseas oil resources and in foreign businesses, China will have to sell dollar bonds or other sovereign debt from its portfolio. The net result would be higher interest rates on US and other bonds around the world.”
The net effect on interest rates would be the greater if the Americans’ demand for housing picks up and businesses want to increase their investment.