The US And China's Codependency Is Unhealthy: Stephen Roach

Apr 9 2014, 9:55pm CDT | by

The US And China's Codependency Is Unhealthy: Stephen Roach
Photo Credit: Forbes Business

China wants broader economic, political and military co-operation with the U.S., “a new type of major-power relationship”, said Chinese President Xi Jinping during his unprecedented, informal get-together with U.S. President Barack Obama last summer, where the two spent hours chatting in a private desert estate in southern California.

But building such a relationship is no cakewalk. Trade disputes, scrutiny over Chinese investment in the U.S. and cyber security conflicts have continued since the meeting; and as China embarks on a transition from an export-led economy to a consumption-driven one, the cozier part, where “Made in China” and American consumerism perfectly matched, will have to change as well.

This change is necessary, however, as the way China and the U.S. rely on each other is no longer healthy to either side, says Stephen Roach, senior fellow at Yale’s Jackson Institute of Global Affairs and former Chairman of Morgan Stanley Asia. Roach’s latest book—Unbalanced: The Codependency of America and China—explores this theme.” The U.S. paid its price for its overreliance on China’s cheap goods and capital in the financial crisis of 2008, and China’s economy could also be in danger if it continues with the old growth model, says Roach.

Too much saving, current account surplus, unbalanced macro structure, environmental degradation and pollution in China—(they) all can be traced to an export-led, manufacturing-driven model that just went too far, courtesy of the American consumers. In the U.S., it is the opposite. Savings deficits, current account deficits, excess consumption, reliant on asset bubbles and large fiscal deficits… in many cases, much of that can also be traced to the support from the surplus Chinese savers. So as the case for a codependent relationship, you need to become healthier.”

Roach says the good news is that China has realized the risks, and it’s making an effort to redirect its economy toward a consumerist direction. He stresses three elements that are essential to the success of China’s economic transition—more job growth, higher wages through urbanization and fixing the social safety net. He also disputes the argument that China’s debt problems and high housing prices are serious enough to drag the entire economy down.

Unfortunately, even as China has already started tweaking its model, Roach says that the U.S. has already fallen behind in adjusting its own role.

We said, ‘we’d like to just keep doing the same thing, thank you’. We have adopted quantitative easing, for example, by the central bank. The idea the Fed has is that consumers will spend their wealth created in the stock market. It is an excess consumption model again. But it’s really far more sinister than that, because the wealth effect only works for wealthy people. That’s why it’s called the wealth effect. Very few Americans actually own stocks. It’s really a sad state of affairs. We need to stimulate saving. The sooner America wakes up to the longer-term imperatives of boosting its savings rate, the better off we will be as a nation.”

But how long can America’s “excess consumption model” last? For now, China remains America’s largest overseas debt holder and it may continue buying U.S. securities (it dumped $47.8 billion in December but bought $3.5 billion in January this year). But Roach is convinced that China would significantly reduce its demand for dollar-denominated assets and treasuries in the next three to five years. And when that happens, the U.S. is going to need its own savings to support the economy.

I do think that the U.S. has lived beyond its means as its means are defined by the income-generating capacity of the U.S. labor market. We’ve done that for too long and we have squandered our saving which is our ability to invest, grow, and consume for the future… Our savings rate is the lowest of any leading nation has had in modern economic history. So lacking in saving and wanting to grow, we borrow surplus savings freely from abroad, from places like China, Germany and Japan. Those days are coming to an end. China is putting its savings to work in supporting its economy, not our economy. America has ignored its infrastructure, investing in human capital and the manufacturing capacity. It ignored its competitiveness. ”

Roach agrees that switching roles (that is more consumption for the Chinese, and more savings for the Americans) “is always a dangerous thing in any marriage”, especially when the marriage is of “convenience, not love”, as he described in his previous writings. China and the U.S. haven’t really be at loggerheads, so is it possible for the two to actually fall in love?

It’s hard to say. Certainly with the situation in Russia, there looks to be a little bit more love in the eyes of president Obama and Xi when they saw each other recently in Europe at this nuclear summit. Love is probably a stretch for these two leading nations. They have so much in common though. There’s a lot that they can gain from each other in treating the relationship as an opportunity as opposed to a threat. I’ve been myself discouraged from time to time as I appear in front of the U.S. congress testifying on a variety of issues and find that the political sentiment in the U.S. is overwhelmingly predisposed to view China as a threat.”

Nevertheless, Roach said that China does “push the envelope” from time to time in areas of global commerce practices and human rights issues. And it should be held accountable for those matters as the country rises into an important global power. But more importantly, the U.S. has to fully realize what China can offer with the building of a prosperous consumer market.

Now China is at a critical juncture, a juncture that many developing economies are unable to move through. This is the middle-income area that often proved very challenging for poor countries to go through. China’s determined to do it and if it does do it—and I’m confident they will—that’s an opportunity for us to participate in as opposed to feel threatened by.”

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

'Petitioners Village' -- the price for seeking justice in China
Beijing, Nov 29 (IANS/EFE) More than two hours away from the centre of Beijing is the "petitioners village", a group of huts that belong to citizens demanding justice in China and who are unable to find work or decent housing as they have been blacklisted by the regime.
 
 
(After 12) 'Petitioners Village' -- the price for seeking justice in China
Beijing, Nov 29 (IANS/EFE) More than two hours away from the centre of Beijing is the "petitioners village", a group of huts that belong to citizens demanding justice in China and who are unable to find work or decent housing as they have been blacklisted by the regime.
 
 
Eel-like robotic fish to scan inaccessible ocean areas
Singapore, Nov 29 (IANS) Inspired by Anguilliform fishes due to their superior flexibility compared with other fish species, a team of scientists in Singapore developed and built a prototype of an eel-like robotic fish.
 
 
NASA's Orion all set for Dec 4 test flight
Washington, Nov 29 (IANS) Designed to carry astronauts to deep space destinations like Mars, NASA's Orion spacecraft is all set to blast off for its first test flight Dec 4.
 
 
 

Latest from the Network

Abigail Breslin slams ex Michael Clifford
Abigail Breslin has slammed her ex, Michael Clifford. The 'My Sister's Keeper' actress went on a date with the 5 Seconds of Summer guitarist last year but it seems as though it didn't end well after she released a song...
Read more on Celebrity Balla
 
Kevin Bacon to sizzle in Jungle
Kevin Bacon is to star in 'Jungle'. The 56-year-old actor will appear in the survival drama, which is based on the true story of Yossi Ghinsberg, an adventurer who found himself lost in the Amazon rainforest for three...
Read more on Movie Balla
 
Mickey Rourke to return to boxing at 62
Mickey Rourke will return to boxing aged 62. The actor will come out of retirement and step into the ring tonight (11.28.14) for the first time in 20 years as he competes against 29-year-old Elliot Seymour. He said: ''...
Read more on Celebrity Balla
 
Kristen Stewart: Actors are isolated
Kristen Stewart claims actors become ''isolated'' because of their fame. The 24-year-old actress has become one of the biggest movie stars in the world following her portrayal of Bella Swan in the 'Twilight' franchise...
Read more on Celebrity Balla
 
Burt Reynolds to sell memorabilia
Burt Reynolds is selling over 600 personal items to stave off bankruptcy. The 78-year-old Hollywood star is reportedly struggling financially so will see awards, cars and costumes go under the hammer in Las Vegas next...
Read more on Celebrity Balla
 
Eddie Redmayne's fear of failure
Eddie Redmayne has a fear of failure. The 'Theory of Everything' star has admitted that like fellow actor, Rachel Weisz, he worries about ever getting hired again. He said: ''I was reading an interview with Rachel Weisz...
Read more on Celebrity Balla
 
Where to Find Black Friday Car Deals
The Black Friday Car Sales events have gained traction over the past couple of years. This year several major brands ran nation-wide commercials announcing their Car Black Friday deals. In the beginning it was creative...
Read more on Auto Balla
 
Indian Aces win inaugural IPTL tie
Manila, Nov 28 (IANS) The much-awaited inaugural International Premier Tennis League (IPTL) got off to a flying start with the Indian Aces notching an impressive 26-16 first victory against the Singapore Slammers at...
Read more on Sport Balla
 
Australian navy's largest ship commissioned
Canberra, Nov 28 (IANS) HMAS Canberra, a 27,000-tonne landing helicopter dock (LHD), was commissioned Friday, providing the Royal Australian Navy (RAN) with one of the world's most capable and sophisticated amphibious...
Read more on Politics Balla
 
Sindhu, Prannoy enter Macau Open semis
Macau, Nov 28 (IANS) Indian shuttlers P.V. Sindhu and H.S. Prannoy came out with contrasting wins to enter their respective semi-finals at the $120,000 Macau Open Grand Prix Gold here Friday. While defending champion...
Read more on Sport Balla