China Could have massive investment in the outside world or create a large social safety net

China’s President Xi outlined at the Asia-Pacific Economic Cooperation forum how much the world stands to gain from a rising China. He said outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government will spend $40 billion to revive the ancient Silk Road trade route between Asia and Europe.

These were conservative statements for investment and for tourism. First looking at investment.

China’s outbound direct investment is projected to be about $130 billion in 2014.

China’s outbound investments could more than quadruple to $600 billion by 2025.

A new report by Deutsche Bank, The Wide Angle: The Age of Chinese Capital, argues that China’s large current account surpluses will define the next round of economic expansion globally in what could be termed “Bretton Woods Three.” According to the author, Sanjeev Sanyal, global strategist at Deutsche Bank, the scale of capital outflow could be so large as to negate the effects of monetary tightening pursued by central banks around the world.

[Forbes] The Deutsche Bank report argues that brand new infrastructure, excess manufacturing capacity and a shift to services will lead to a decline in China’s investment rate, which will fall faster than the savings rate. Thus, China’s “economic rebalancing” could actually widen the savings-investment gap, leading to sustained surpluses in the years ahead. The IMF estimates China’s current account surplus at 3% of GDP or $439 billion by 2019. This flood of excess capital, according to Sanyal, could hold down the long-term cost of capital. In so doing, it has the potential to direct massive amounts of investment into the U.S. and the developed world.

China’s total outward investments to the U.S. and Europe since 2005 equaled $173.5 billion, which is just 10% of China’s U.S. treasury holdings and only 4% of China’s total forex reserves of $4 trillion.

As China pursues its own rebalancing efforts towards a consumption-driven growth model, it will seek to expand welfare of the Chinese people through social security, healthcare and other financial benefits in order to alter people’s conservative savings behavior and encourage them to consume more. In this case, China could begin to absorb its excess savings to support its welfare expansion program, rather than lend to the outside world.

Such a scenario would mean a failure of Bretton Woods Three and a weaker financial investment environment in the West, which could further depress growth in the developed world. In such a case, Christine Lagarde’s warning that a new era of mediocre growth is upon us could prove to be right

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