A link between China’s multibillion-dollar obsession with spectacular wedding ceremonies and the path of Britain’s interest rate policy is not immediately obvious. But look east and it is possible to see how nuptials in Shanghai are going to keep UK interest rates low for a decade or more.
China’s savings rate has jumped from about 16% of disposable income in 1990 to over 30% in the last few years. According to Shang-Jin Wei, a professor of Chinese business and economy at Columbia Business School, about half of this rush to accumulate can be attributed to the rise in the number of boy births versus girls, and the consequent need for young men to throw ever more extravagant weddings to attract a wife.
There is also a link between the UK’s cost of credit and China’s steeply rising housing costs.
Buying a wedding and buying a home are the two biggest costs faced by young Chinese. When there are in excess of 10m weddings a year at an average cost of $16,000 (£10,000), and mortgages need to be supplemented by deposits of 50% or more, it amounts to a stratospheric sum. Importantly for the west, it encourages huge savings that must be invested somewhere.
It is not just China’s young people who have acquired a massive savings habit. Middle-aged Chinese people must save to cope with spiralling health costs, most of which are provided privately, while the wealthy choose to get their money out of the country and into western banks to protect their savings and avoid tax.
Asian savings were highlighted last week by the Bank of England deputy governor, Ben Broadbent, as one of the biggest factors driving down short- and long-term interest rates. He might also have pointed the finger at oil-rich nations, which have charged unprecedented sums for oil over the last decade, and stuffing much of the profit into vast savings vehicles.
Various estimates put the total global savings glut in excess of $60tn with around $30tn in pension funds and a further $30tn locked up in the sovereign wealth funds of China, Singapore and states in the Middle East.
There are simply not enough places to hold this money if such countries pursue their existing savings strategies which involve seeking safe havens, mainly government and high-grade corporate bonds, coupled with a bit of stock market and property investment on the side.
In a speech last week, Broadbent was at pains to explain that central banks – especially those acting for small open economies such as the UK – had little influence on the path of interest rates.
The growth of Asian savings – fuelled by Chinese weddings, soaring property costs in Shanghai and the high cost of oil – are more influential on setting interest rates than the central banks themselves.
“Over time, trends in real asset prices are determined by real [non-monetary]forces. We may occasionally be prominent actors, but it’s someone else writing the script,” he said.
In effect, Asian money competes with money from oil-rich nations for a berth in a western economy. As they compete, they are prepared to accept lower and lower rates of interest to secure that berth.
When they buy an asset, they are prepared to pay a higher price than the year before. A high price drives down the income relative to the cost, depressing the yield, which is a proxy for the interest they make on owning the asset.
It means that in the private sector world of borrowing and lending, away from the central banks, there is no need for banks to charge high loan rates when they can source money almost for free from Asia.
According to Broadbent, central banks have watched this process and merely tracked the downward march of private dealing with its own base rate. It is a follower, and not a trendsetter.
He congratulates central banks for reacting quickly to the rush to safety in the midst of the crash by absorbing much of that demand by taking in Asian dollars. That was the effect of quantitative easing.
Without the Federal Reserve and Bank of England agreeing to purchase domestic assets from struggling banks, they would have been unable to take in Chinese funds.
Without the $4.5tn from the Fed and £375bn from Threadneedle Street, an increase in the amount of Asian money searching for a good home would have driven down interest rates even further.
Broadbent recognises they did little more than prevent negative interest rates. That was an important victory lost on eurozone policymakers who refused to follow this gameplan, to ruinous effect. Even Germany is now suffering as interest rates become negative, business and consumer confidence plummets, and inflation heads into negative territory.
But while central banks can offset the worst effects, Asian and Middle Eastern countries continue to accumulate savings and seem adamant that the only place to invest the cash is in the west. And while they do so, the problem will continue. Following the same path means vast sums will compete in the bond market for the safest bonds and in the equity market for the most sustainable company shares. In property, trophy assets in London and New York will be fought over harder and harder, driving up their price.
China’s savings ratio is projected to fall, but India’s is growing fast and following the same pattern.
Unless Asian savers can be persuaded to change their habits, it looks like we will be stuck with low interest rates for longer than just a decade. There will be much more money pouring into western banks, companies and money markets than it can cope with, driving prices higher and yields lower still.
If Asian savers could bring themselves to demand better domestic services – health, transport, social care – and pay higher taxes to pay for them, they could halt this process. The taxes could be paid largely by their super-rich, who account for a vast amount of capital flight to the west (mostly via tax havens).
In the short term, Broadbent says the consequences “are significant”.
He said: “If monetary authorities fail to recognise a decline in the underlying, natural rate of interest, leaving the official interest rate unchanged amounts to a tightening in policy”.
That’s a warning to his colleagues Martin Weale and Ian McCafferty, who are currently lobbying for an interest rate rise. And a warning to us all that global forces, like the Chinese wedding phenomenon, are more important forces in the international money markets than central bank policy.
When Broadbent says he can use central bank funds to round off the jagged edges of volatile swings in asset prices and hence interest rates, it is not an admission of failure, but a recognition that his firepower is limited and like a low lying dam, unable to protect against the bigger and bigger waves of funds sweeping over the west.