Blame the saving rate

Yi Fuxian blames the one-child policy for China’s fed-up youth in this Project Syndicate piece. The mechanism he describes, fewer children weakening household bargaining power and dragging household income from two-thirds of GDP to 44%, holds together. Still, I find myself increasingly in agreement with Michael Pettis.

The one-child policy did weaken the need for a safety net. With one child per family, the state could lean on the family for care and put off the welfare state. That part of the diagnosis sticks. The real driver is China’s high saving rate, pushed for decades as industrial policy. Household income was squeezed deliberately so state and industry could fund investment on the cheap.

That saving machine upgraded Chinese industry, built infrastructure on a scale no other economy matched, and drove the growth miracle. Results like that are hard to argue with.

Shifting away from it is still the right call, and easier said than done. Success makes the model hard to recognize from the inside, and failure makes scapegoats irresistible. The one-child policy is a satisfying villain, but it is downstream of the savings machine.