Economist Liang Hong argues that Chinese authorities are missing a trick in their efforts to fix what ails the nation’s economy. The central bank is cutting interest rates to ease China’s heavy debt burden, but the fiscal authorities are working in the opposite direction. They’re sucking more money out of the economy through taxes, fees, and other measures than the government is giving back, Liang says. Public institutions have so much money that they’re socking away huge sums in bank deposits, “a peculiar phenomenon existing only in China,” she wrote in an August report.
“The government is oversaving,” Liang said in a September interview in her office at the Beijing headquarters of China International Capital (CICC), an investment bank where she serves as chief economist. As a result, she says, “the economy is not running efficiently.”
Liang has presented her views to the State Council, which is headed by Premier Li Keqiang. He appears to share her concerns. Over the past year he’s stepped up efforts to put “sleeping” government funds to work instead of letting them stay salted away in banks at low interest rates.
Liang worked for the International Monetary Fund and then Goldman Sachs before joining CICC in 2008, becoming chief economist and head of research last year. CICC, which is in the middle of an initial public offering, has close ties to the government, advising it on the reform of state-owned enterprises.
To make her case that the government is oversaving, Liang cites a rarely noted statistic. According to the People’s Bank of China, public institutions had 21 trillion yuan ($3.3 trillion) in bank deposits as of September. Those deposits have doubled since 2011 and equal 32 percent of gross domestic product. That’s an oddity: Public institutions elsewhere generally keep just enough in the bank to cover short-term spending needs, Liang notes. The anticorruption campaign may have caused the government to oversave even more by discouraging officials from spending on such luxuries as cars and banquets, Liang says.
Some aspects of the deposit bulge remain mysterious, including exactly who’s saving. The deposit totals don’t include savings by state-owned enterprises. Nor do they include the central government’s deposits at the central bank. They do appear to include ordinary bank deposits by government ministries, the People’s Liberation Army, and businesses such as hotels, restaurants, and newspapers that are run by local governments and not incorporated as state-owned enterprises.
In theory, banks should be able to recycle the huge amount of savings by lending the money to businesses and households, but that’s not efficient, Liang says. It would be better, she says, to leave more money in the pockets of households and businesses by cutting taxes and fees. She adds that public institutions should use some of the money in their bank accounts to pay off debts. “In our view,” she wrote to clients in August, “there is plenty of room for the Chinese government to achieve faster and more balanced growth.”
The Chinese government’s excess saving isn’t obvious because on paper the country is running a budget deficit of a little more than 2 percent of GDP. But that measure doesn’t take into account the income of state-owned enterprises and money paid into various government funds for housing, health care, and social security. Liang estimates that the government’s total annual take in taxes, fees, and fund contributions is 37 percent of GDP, which is as big as the take in developed nations that pay out more in benefits. “China has high taxes but low welfare,” she wrote in August.
Other economists are intrigued by Liang’s research. Tom Orlik, chief Asia economist for Bloomberg Intelligence, says the bank deposits are “stagnant money”—which is Liang’s point. Andrew Batson, Gavekal Research’s lead China economy analyst, wrote in an e-mail that “Liang Hong is a super smart economist who I respect a lot, but I’m not really sure how to respond to this.” He wrote that China’s high national savings rate (counting both public and private sectors) is “probably the main thing helping China manage such a high debt level.”
Liang responds that one reason debt is so high is that so much money is being put, by the government and others, in bank deposits: The only way to get the trapped money out is to borrow. “The savings rate is crazy,” she says in a phone interview. “It’s not natural.”
The bottom line: The Chinese government is collecting so much money from the public that its bank deposits equal 32 percent of GDP.