Monday, June 11, 2012

CIP vs Krugman

Krugman's latest target is China's banking policies. Here he repeats John Hempton's claims that they amount to a kleptocratic theft of savings.

Hempton basically argues that China has turned financial repression — controlled interest rates on deposits, which ensure a negative real rate of return — into a giant engine of kleptocracy. The banks extract rent from depositors, transfer those rents on to state-owned enterprises in the form of cheap loans, and then the Party elite essentially embezzles the money. Underlying the whole system is a high savings rate that Hempton attributes to the one-child policy.

Actually, if he’s right about the demographic underpinnings, there’s a time bomb lurking in the system quite aside from his concerns about inflation running too hot or too cold: eventually, and as I understand it fairly soon, those older Chinese who have been frantically saving because they don’t expect enough grandchildren to support them will become net dissavers, pulling money out of the banks to live on. And then, if his basic story is right, the whole system implodes.

Not really arguing with his points, but there is an important counterpoint: However the system has worked, China's real GDP per capita has increased tenfold (1000%) since 1980. This enormous difference means that, at least in principle, China is likely to be vastly more able to support it's old people than it was in the youth of those now approaching retirement age. For Germany and the US, the comparable increases are more like 50%.