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.”

 
 

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