China’s net saving abroad has been slowing and will slow further as its households consume more, its corporations save less and its central and provincial governments continue in combined deficit. These changes are associated with weaker global economic performance but, importantly, they stem from the acceptance by Chinese governments of slower and more “inward focussed” future growth. Yet these changes will raise global financing costs, to an extent that has been recently disguised by “quantitative easing” (QE) in the US, Europe and Japan. The coincidence of reduced excess-saving in both China and Japan with the unwinding of these QE policies, both of which will contribute to an excess supply of long term bonds, could see very substantial tightening in financial markets. Moreover, the substitution of China’s outward FDI for reserve accumulation will redirect what remains of China’s excess saving away from the US, causing a disproportionate rise in the cost of US investment financing, possibly stifling the recovery there. The effects of this pessimistic scenario could be offset by fiscal consolidation in the major economic blocs, so that global debt falls as global saving falls, leading to a soft landing for private investment and continued expansion.
