The Unbalanced Economic Relationship of the United States and China
Yales University Press
Jan 21, 2014
What makes the economic relationship between the United States and China so fraught with anxiety, tension, and a surprising dependency on the successes and failures of the other? …
Stephen Roach, senior fellow at Yale’s Jackson Institute for Global Affairs and School of Management and former Chairman of Morgan Stanley Asia and Chief Economist of Morgan Stanley has written Unbalanced: The Codependency of America and China. Read below for an interview with Roach on the present challenges in U.S.-Chinese economic development, the next steps following the Third Plenum of the Central Committee of the Chinese Communist Party, and a controversial take on what the United States needs to address in order to continue its prosperity.
Yale University Press: Who has the upper hand in the codependency of America and China?
Stephen Roach: As is the case in human relationships, codependency for economies is not sustainable. It can lead to imbalances, a loss of identity, and a broad array of tensions and frictions. As I argue in Unbalanced, there are visible manifestations of all of these characteristics now at work in both America and China. It’s hard to say who has the upper hand in this relationship.
- The United States, with its dominant military power and the world’s largest economy, certainly has a commanding position today. But
- a rising China, with a huge reservoir of domestic saving – some 51 percent of its GDP in 2013, or fully three times the 17 percent national saving rate in the U.S. – certainly has the wherewithal to go its own way in the years ahead and break the shackles of its dependence on the United States if it choses to do so.
Saving-short America, still heavily dependent on surplus saving from abroad, has far less latitude in that key regard.
YUP: How has the U.S. and China’s unbalanced relationship created a false sense of prosperity?
SR: Beginning in the late 1990s, the income-strained U.S. economy drew increasing support from the so-called wealth effects of surging asset markets – first from equities, then from residential property and finally from cheap credit. The problem was that each of these asset-dependent underpinnings ended in bubbles – bubbles that ultimately drew support from Chinese purchases of dollar-denominated assets. Washington, Wall Street, and Main Street collectively deluded themselves into thinking this asset-dependent growth was a new recipe for economic prosperity. When the bubbles popped, however, it quickly became apparent that this was a dangerous false prosperity. To the extent that export-led growth in China was dependent on America’s asset and credit bubbles, it, too, went down a path of false prosperity. When the export underpinnings of China’s external demand collapsed in late 2008 in the depths of the Great Crisis, this, in fact, became painfully evident.
Bremen in 2007
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„Eine Politik des „billigen Geldes“ und des kreditfinanzierten Konsums war eine der wenigen Optionen, die der US-Regierung zur Verfügung stand, um eine drohende längerfristige Rezession nach dem Platzen der Internetblase, nach dem Absturz der Technologieaktien und nach dem 11. September 2001 abzufangen. Nur so ist es gelungen, die amerikanische „Wachstumslokomotive“ der Weltwirtschaft, die vom Konsum getrieben wird, am Laufen zu halten und eine Abschwächung der US- und Weltkonjunktur zu verhindern. Mit Schulden finanziertes Wachstum war der amerikanische Weg aus der Krise. Während die einen immer mehr Schulden machen, ihr Leistungsbilanzdefizit vergrößern und das Leben hier und jetzt genießen, sparen die anderen für zukünftigen Konsum und legen sogar noch Reserven an für der Fall, dass das derzeitige, globale Wirtschaftsregime einer „Arbeitsteilung“ mit chinesischer Produktion und amerikanischem Konsum plötzlich ins Stocken gerät. Diese Art von „Arbeitsteilung“ funktioniert bisher sehr gut und hat zu jahrelangem Wachstum der Weltwirtschaft geführt mit Kapital- und Technologietransfer von den reichen zu den armen Ländern und Waren- und Gütertransfer für den Konsum von den armen in die reichen Länder. Beide Seiten profitieren von dem Geschäft. Die eine Seite kann zur Zeit ohne die andere nicht existieren. Gleichzeitig aber ist das globale Wachstum dabei völlig aus dem Gleichgewicht gekommen und es haben sich so genannte „globale Ungleichgewichte“ gebildet. In dem Maße, wie sich die amerikanische Industriegesellschaft in eine Dienstleistungsgesellschaft gewandelt hat und die Industrie ihre Produktion und zunehmend auch Forschung und Entwicklung in „Niedriglohnländer“ wie China verlagert hat, um dort für sich produzieren zu lassen, hat sich eine Spirale gebildet, die derzeit – so scheint es jedenfalls – nicht aufzuhalten ist und sich unaufhaltsam nach oben schraubt. Mit den Defiziten der einen Seite der Medaille wachsen die Guthaben der anderen.“
YUP: Why does the U.S. economy depend on China and how can we regain our independence?
SR: U.S. economic growth has long been led by American consumers. In 2013, personal consumption expenditures accounted for fully 69 percent of U.S. gross domestic product (GDP) – a record for any nation in modern history. Paradoxically, this consumer-led growth has occurred in a period of unusually sluggish real income growth for most American families. That’s where China enters the equation – as a source of cheap goods that enables a hard-pressed middle class to buy more with their limited incomes. China has also become a huge source of demand for U.S. government securities; it is now America’s largest foreign lender, currently owning approximately $2 trillion of such assets. That partially fills the void of a shortfall in U.S. domestic saving and helps prevent U.S. interest rates from rising – thereby providing further support to American economic growth. Regaining our economic independence is simple on paper – boosting our saving capacity and revitalizing the competiveness of our workers and manufacturing industries – but much tougher in practice.
Bremen in 03.12.2008
„Multilateral konsensfähig, weil wahrscheinlich vom derzeitigen Stand der ökonomischen Entwicklung vorgezeichnet, scheint zu sein, dass
- die USA ihre Ausgaben vermindern und ihre Sparquote erhöhen müsse, will heißen, dass sie ihren Lebensstandard ganz allgemein absenken müssen, um das aus dem Gleichgewicht geratene Weltwirtschaftssystem von ihrer Seite her zu stützen.
- Auf der anderen Seite werden vor allem die Schwellenländer Ostasiens aufgefordert, ihren Teil zur Reduzierung der globalen Ungleichgewichte beizutragen, indem sie weniger für den Export, dafür mehr für den eigenen Binnenmarkt produzieren und ihre hohen Sparquoten senken, um die Binnennachfrage entsprechend anzuregen.
Der Beitrag der Schwellen- und Entwicklungsländer und hier besonders von China zur Korrektur der globalen Ungleichgewichte scheint eine nachhaltige Entwicklung ihrer Volkswirtschaften zu sein. Nötig ist die
- Umleitung des Exports in den Binnenmarkt,
- die Anhebung der Kaufkraft der heimischen Verbraucher,
- der Auf- und Ausbau eines sozialen Netzes und der Altersvorsorge, um so die
- zu hohe Sparquote zu senken. Das würde eine Anhebung des Lebensstandards besonders der ärmeren Schichten in diesen Länder bedeuten und somit eine allgemeine globale Steigerung des Wohlstands der Menschen.
Sollte das die Richtung sein, in die die Weltwirtschaft und die weltweite Arbeitsteilung durch die von der Globalisierung hervorgebrachten Widersprüche getrieben wird, dann hätte die Globalisierung „Früchte“ getragen, die es jetzt zu „ernten“ gilt. Auf Seiten der reichen Industrieländer und der Vereinigten Staaten scheint die Entwicklung in eine andere Richtung zu treiben, wenngleich die enorme Dynamik und Anpassungsfähigkeit der USA nicht unterschätzt werden darf. Insbesondere auf Seiten der USA wird als unverzichtbarer Beitrag zur Reduzierung der globalen Ungleichgewichte der Abbau eines „übertriebenen Konsums“ angeführt. Stattdessen soll die bei null stagnierende US-Sparquote gehoben werden, damit die aufgehäuften Schulden der privaten Haushalte von 11 Billionen US$ und die des Staates von über 4 Billionen US$ zurückgezahlt werden können.
YUP: How has China been able to challenge the U.S.’s global economic leadership?
SR: Thirty years of 10 percent economic growth has now pushed China past Japan as the second largest economy in the world. It is only a question of when, not if, China will surpass the United States as number one. In Unbalanced, I lay out a scenario that such convergence should come by 2027; there is a distinct possibility that it might occur even sooner than that. With China having more than four times the population of the United States, these trends are hardly a surprise. The real measure of prosperity, however, adjusts for population disparities and finds China’s per capita income of $6,600 in 2013, far short of the $51,200 level in the United States. Under heroic assumptions for sustainable rapid growth and development in China, convergence on a per capita basis is still many decades away. As that point draws near, only then can we begin to speak of a Chinese challenge to American economic hegemony.
YUP: Which superpower will rebalance their economy first, the U.S. or China?
SR: By all indications, it will be China. Seven years ago, China’s former premier, Wen Jiabao, sparked the rebalancing debate by his famous critique of the “Four Uns” – a Chinese economy that he depicted as “unstable, unbalanced, uncoordinated, and (ultimately) unstable.” This led to the enactment of the 12th Five-Year Plan in March 2011, which laid out the broad framework of a consumer-led rebalancing of the Chinese economy. In retrospect, that plan was more a rhetorical commitment to rebalancing than a detailed blueprint for change. It was lacking an implementation mechanism. This has been subsequently addressed in the recently concluded Third Plenum of the Central Committee of the Chinese Communist Party that was held in November 2013, which contained 60 specific reform initiatives and the establishment of a new “leading committee,” headed up by President Xi Jinping, to focus on implementation.
- In light of these developments, it is now safe to say that China is firmly on the path of a fundamental economic rebalancing.
- The United States, by contrast, seems intent on resurrecting the timeworn model of consumer-led growth – relying on quantitative easing by the Federal Reserve to boost consumer demand through the wealth effects arising from surging asset markets and seemingly unwilling, or unable, to boost its long-term saving potential as a source of future economic growth…
Bremen in 2007
Ein Weg zur Reduzierung der globalen Ungleichgewichte
„Die globalen Ungleichgewichte drängen auf eine Korrektur. Die chinesische Regierung scheint sich dieser Probleme bewusst zu sein. Besonders seit der Verabschiedung des neuen „Fünf-Jahres-Plans“ im März 2006 arbeitet sie mit Hochdruck an der Lösung.
- „Wir werden die Binnennachfrage in den nächsten fünf Jahren erheblich stärken, um neue Wachstumsimpulse zu setzen“, sagte der chinesische Vizepremier Zeng. Die Wachstumskräfte sollen vermehrt aus der Binnennachfrage kommen und der Befriedigung der unmittelbaren Bedürfnisse der eigenen Bevölkerung dienen.
- Das wirtschaftliche Wachstum soll nicht mehr so sehr vom Export abhängig sein, der von der weltweiten Nachfrage, insbesondere in den USA, getrieben wird. „Gleichzeitig müssen wir ein Gleichgewicht zwischen Konsum und Investitionen erzeugen.“ sagte Zeng weiter.
- Investitionen sollen sich zunehmend am Konsum aller Schichten der chinesischen Bevölkerung orientieren und nicht mehr so sehr an der Befriedigung der Bedürfnisse der amerikanischen Verbraucher. Das Potential scheint vorhanden.
- Der Markt ist riesig. Jeder fünfte Mensch lebt in China. Jeder dritte Mensch in Indien und China. Die Wirtschaftspolitik dieser beiden Länder betrifft unmittelbar ein Drittel der Verbraucher und Märkte.
- Während die chinesische „Wachstumslokomotive“ vor allem auf der Produktion von Waren und realen Gütern beruht und den Reichtum des Landes vermehrt,
- vergrößert das amerikanische konsumgetriebene Wachstum immer mehr das Loch in den Taschen der privaten US-Haushalte und der US-Regierung. Die Konsumentenschulden, das Haushaltsdefizit und das Leistungsdefizit werden dadurch in den USA immer größer, während
- in China die Währungsreserven und die Guthaben von US-Staatsanleihen jetzt auf über 900 Mrd. Dollar angestiegen sind.
- Während in den USA die Sparquote bei Null angelangt ist, liegt sie in China derzeit bei 45 Prozent.
Die Guthaben der Chinesen in Form von Währungsreserven oder US-Staatsanleihen können eingesetzt werden, um
- die eigenen Binnenmärkte zu entwickeln,
- die Infrastruktur im Lande aufzubauen und
- ein soziales Netzt zu spannen. Die Aufgabe, für über zwei Milliarden Menschen ein angemessenes Bildungs- und Gesundheitswesen zu entwickeln und so die Kaufkraft zu heben, wird eine große Herausforderung und ein großer Sprung nach vorne sein und viel Zeit erfordern…“
YUP: Going forward, what does the U.S. need in order to prosper in this relationship?
SR: First and foremost, the U.S. body politic needs to take a long and hard look in the mirror and accept responsibility for America’s homegrown economic problems such as inadequate saving, bubble-prone monetary and regulatory policies, and a loss of competitiveness. In doing so, it must stop pinning the blame on others, especially China. Yes, America has a large bilateral trade deficit with China that many believe is putting pressure on jobs and real wages of American workers. China’s alleged currency manipulation only compounds its blame, goes this view. But the so-called China problem is only part of a much broader multilateral problem as underscored by U.S. trade deficits with 102 nations in 2012. The cause of this multilateral imbalance again goes back to America’s chronic saving shortfall and the need for the U.S. to run a large current-account and multilateral trade deficit in order to attract the foreign capital that it needs to fill its saving void. As I stress in Unbalanced, there is no bilateral fix for America’s multilateral problem. In other words, China bashing is not the answer to that which ails American workers. At the same time, Washington’s trade negotiators have every reason to demand fair and equal treatment from China under international trade conventions – especially on grounds of market access in light of the limited penetration of China’s domestic markets by U.S. manufacturers and services providers. As China shifts to more of a consumer led model, the market access issue will become increasingly critical for China’s major trading partners, such as the United States. China is America’s third largest and most rapidly growing export market. Shame on us if we squander the opportunity to convert Chinese rebalancing into a new source of growth for a growth-starved U.S. economy.
Stephen Roach is senior fellow, Jackson Institute for Global Affairs and School of Management, Yale University. Prior to that he was Chairman of Morgan Stanley Asia, and for the bulk of his career on Wall Street was Chief Economist of Morgan Stanley… Roach has written extensively for the international media and appears regularly on television around the world.
is available now from booksellers.
The Chinese and U.S. economies have been locked in an uncomfortable embrace since the late 1970s. Although the relationship initially arose out of mutual benefits, in recent years it has taken on the trappings of an unstable codependence, with the two largest economies in the world losing their sense of self, increasing the risk of their turning on one another in a destructive fashion.
The Codependency of America and China
Stephen Roach, senior fellow at Yale University and former chairman of Morgan Stanley Asia, lays bare the pitfalls of the current China-U.S. economic relationship. He highlights the conflicts at the center of current tensions, including disputes over trade policies and intellectual property rights, sharp contrasts in leadership styles, the role of the Internet, the recent dispute over cyberhacking, and more… Here he discusses:
Why America saving too little and China saving too much creates mounting problems for both.
How China is planning to re-boot its economic growth model by moving from an external export-led model to one of internal consumerism with a new focus on service industries.
How America, shows a disturbing lack of strategy, preferring a short-term reactive approach over a more coherent Chinese-style planning framework.
The way out: what America could do to turn its own economic fate around and position itself for a healthy economic and political relationship with China.
In the wake of the 2008 crisis, both unbalanced economies face urgent and mutually beneficial rebalancings. Unbalanced concludes with a recipe for resolving the escalating tensions of codependence. Roach argues that the Next China offers much for the Next America—and vice versa.
Bremen in 2007
- “Während die Finanzgeschäfte von Investmentbanking , Versicherungen, Finanz investoren,“hedge-fonds“ und von „private-equity“ blühen und die globalen Konzerne glänzende Gewinne machen, sind die Bürger in den reichen Industrieländern die Geschädigten, die Immobilien-Schulden anhäufen, Kaufkraft, Kreditwürdigkeit, soziale Sicherheit und Arbeitsplätze verlieren…
- Die Menschen in den Schwellen- und Entwicklungsländer dagegen gewinnen Millionen Arbeitsplätze, zunehmende Kaufkraft, soziale Sicherheit, technologisches Wissen und häufen immer mehr Reichtum und Währungsreserven an im Zuge einer globalen „new economy“ , die sich am Wachstum der Volkswirtschaften orientiert und nicht zuallererst am Profit des Einzelnen.
Es scheint, als verringere das „globale Wirtschaftswachstum“ in Zukunft immer mehr die Armut in der Welt und besonders in den Schwellen- und Entwicklungsländern, während es gleichzeitig den Lebensstandard in den reichen Ländern drückt.
Eine globale „new economy“ ist im Entstehen.
Apr 22, 2014
By staff reporter Ding Feng
The world’s two largest economies
- have grown increasingly interdependent as China provides the United States with cheap products while holding huge amounts of treasury debts. In return, the USA offers China its largest export market.
Bremen in 2007
- But this pattern is about to change because China has been seeking to adjust its growth model by
- relying on domestic consumption and rebalancing its position in the world economy, says Stephen Roach, Morgan Stanley’s former chairman for Asia and a senior fellow at Yale University.
- These changes are inevitable because staying on the old path will create troubles for both countries in the long run, Roach says.
A number of disputes between China and United States have arisen involving trade issues, property rights, cyber security, exchange rates and other issues. Facing a changing China, Roach said the U.S. government should be more prudent in handling trade relations with China and make adjustments to its policies in order to adapt to the transforming bilateral relations.
In a recent interview with Caixin, Roach talked about the changing relationship and the impact of China’s rebalancing efforts, as well as his view of China’s reform efforts. Excerpts of the interview follow.
Caixin: You seem quite optimistic about China’s rebalancing, but not so optimistic about the United States. Why is that?
Stephen Roach: I think
- China has been debating the strategy to shift the model for seven years, and the 12th Five-year Plan was enacted three years ago to lay out the broad framework. More recently we’ve had the 60 articles of reform in the third plenum to really add specificity to the strategy.
- So China is making progress in terms of the concept, as well as the implementation. Last year, for example, the services sector in China, the tertiary sector, was larger than the combined manufacturing and construction sectors for the first time ever. This is the type of progress that China needs to continue on the road to rebalancing, and I’m very encouraged that these are positive steps in the right direction.
- The U.S wants to go back to the ways in which it’s always grown, which is heavy reliance on consumption, not much saving, and using policy tools – especially monetary policy – to squeeze more consumption out of asset markets. And I think that’s a recipe that’s dangerous and could end in another crisis for the United States.
So, China’s making progress, America’s trying to do it the same old way, but I don’t think that’s gonna work over the long haul.
Bremen in 2007
„Die Amerikaner lebten in einer „Überflussgesellschaft auf Pump“. Den künstlich durch Werbung und finanzpolitische Anreize erzeugten Konsumrausch zahlen sie zum überwiegenden Teil nach dem Motto „buy now and pay later“ und vergrößern ihren Schuldenberg von Jahr zu Jahr. Die private US-Zentralbank stellte den Verbrauchern jahrelang billige Kredite zu Verfügung. Das Land wurde mit Liquidität überschwemmt und die Kauflust der Verbraucher wurde kräftig angeheizt…“
Talking about the third plenum of the Communist Party’s 18th Central Committee and those decisions, how do judge whether this is a success or failure? What kind of particular events or indexes are you looking at? The third plenum had 60 articles of reform, several hundred actual measures, and most importantly established a new implementation mechanism, a leading committee on deepening reforms. So it’s got all the right pieces, but now it’s time to look at results. So I will look at them from a macro point of view:
- further gains in the tertiary sector, an improved share of consumption as a share of GDP, moving up hopefully into the 40 to 45 percent zone in the next five years or so,
- still ongoing job growth in services. And finally
- I’d like to see some of the high levels of excessive household savings come down, reflecting
- greater confidence in social security in the future, with respect to retirement, health care and other welfare-related expenses.
So, the reforms proposed in the third plenum – such as
- the hukou reform,
- the one-child policy reform,
- the interest rate liberalization,
- the 30 percent tax on state-owned enterprises to fund these welfare programs –
they’re all very important pieces to the puzzle that should hopefully lead China down that path, but there’s no guarantee. Well, I think that China is, and has been for a number of years, running a large current account surplus, and it’s now time for China to alter its behavior
- from a surplus saver
- to a nation that begins to absorb savings by putting that savings to work
- in funding the social safety net. For too long China’s surplus savings has been directed at providing support to the American people, and now I think
- it’s time for China to use its savings to support the Chinese people. I think minister Lou is correct. Saving is vital for any economy, but it needs to be put to the most effective uses that a nation requires, and with China’s rapid aging and massive liabilities for health care, I can think of no better purpose for China’s surplus savings.
Bremen in 2007
„Wir werden die Binnennachfrage in den nächsten fünf Jahren erheblich stärken, um neue Wachstumsimpulse zu setzen“, sagte Vizepremier Zeng und fügt hinzu: „Gleichzeitig müssen wir aber ein Gleichgewicht zwischen Konsum und Investitionen erzeugen.“ Das Zentralkomitee der Kommunistischen Partei Chinas hatte Ende 2005 einen „Entwicklungsplan“ für die nächsten fünf Jahre vorgeschlagen, der vom chinesischen Volkskongress im März 2006 verabschiedet wurde. Die Schwerpunkte sind eine
- ausgeglichene Entwicklung zwischen Stadt und Land, zwischen den reichen Ostküstengebieten und den Provinzen,
- die Verringerung der Einkommensunterschiede zwischen reichen Stadtbewohnern und den armen Bauern, eine Steuerreform,
- der Schutz der Umwelt und der natürlichen Ressourcen, die Einsparung von Energie,
der Aufbau eines Systems der sozialen Sicherung im Gesundheitswesen und bei der Altersversorgung, der Ausbau der Schul-und Berufsausbildung, eine menschenfreundliche Beschäftigungspolitik, die Sicherheit am Arbeitsplatz und die Verhinderung industrieller Unfälle.
Die Finanzierung dieser Vorhaben könnte gelingen.
- Die Sparquote war in China in der Vergangenheit mit 45 % sehr hoch und
- die Chinesen verfügen über riesige Guthaben.
Seit der Regierungsübernahme von Präsident Hu und Ministerpräsident Wen Jiabao im Jahre 2003 wurde in China eine neue strategische Ausrichtung der Entwicklung der chinesischen Gesellschaft eingeleitet.“ …
China has US$ 3.8 trillion in foreign exchange reserves. The country has considered diversification of the holdings, diverging from the U.S. dollar. What’s your suggestion? Well there’s been a huge buildup of foreign exchange reserves in China and I think it reflects a couple of things. One, the large current account surplus, even though it’s come down,
- China still has the largest current account surplus in the world. Secondly, the belief that the yuan will continue to appreciate, and the People’s Bank of China sent a pretty strong signal earlier this year that it’s now
- a two-way fluctuation in the yuan and I think that will do a lot to dampen the speculative inflows on the yuan. I think that you’re getting closer to the time when the official level foreign exchange reserves will be nearing a peak. Whether that peak is US$ 4 trillion, or US$ 4.5 trillion, no one knows. But
- the rate of the accumulation of foreign exchange reserves is likely to start slowing soon. China does have, and continues to have, a large overweight in
- dollar-based assets – US$ 1.3 trillion in treasuries, and probably another
- US$ 700 billion in the agency debt of Fannie Mae and Freddie Mac. That’s a big overweight. The overweight though reflects the fact that the yuan has been tightly managed relative to the dollar. Were it not for those purchases of dollar-based assets, the yuan would have most likely gone up sharply higher. As now China’s central bank is a little bit more relaxed in terms of the two-way moving of the yuan versus the dollar.
- It’s quite possible that they could begin to cut back purchases of dollar-based assets and let the currency fall out more naturally, trading to the downside, rather than limit it to the upside.
People are starting to worry that a yuan depreciation will lead the housing bubble could go bust. Do you think there’s a risk of that? First of all, the yuan has not depreciated a lot. It’s come down 2 percent this year after having risen 35 to 36 percent. You have to put it in perspective. I’m not a big believer that there’s a massive nationwide housing bubble in China that’s about to burst. I know many people are, but I think while there have been speculative problems in some first-tier property markets in China, the broad support of housing demands through rural migration really separates China from any other country in terms of looking at the demand side of the housing market and residential construction activity. So I think that given the plans for urbanization that were unveiled a week ago, and the likelihood of at least
- 100 million Chinese people moving into the cities and needing homes, needing shelter, needing apartments, I don’t look at a precipitous bursting of a Chinese property bubble. I don’t think there is nationwide property bubble in China.
You said in your book that the United States should change its situation of hollowing out the manufacturing base. Dou you feel that the United States has a structural and employment problem? And do you think the gap could be filled by new staff and talent? America needs a growth agenda. We don’t do a five-year plan like China. We don’t have a third plenum where we debate policy. We don’t really even have a process by which we set the priorities of economic management. But the one thing I feel very strongly about is that we’re not going to be able to sustain our high levels of economic development in the United States if we do not begin to save again.
- China saves too much, we save too little, the answer is probably somewhere in between for both. And if we could save again, whether it was reducing budgets, or getting families to save again,
- we could recycle that savings into investment and human capital, physical capital, infrastructure, rebuild our competitiveness and agenda, and then, yes, turn to exports, goods and services – to countries like China that have extraordinary opportunities opening up and the potential expansion of domestic demand.
We need to view China as an opportunity for a new growth agenda, not as a threat to our old growth agenda.
Bremen in 2007
Die Ökonomie zeichnet den Weg vor…
„Es scheint, als sei diese neue Ausrichtung der chinesischen Gesellschaft und damit von 1,3 Milliarden Menschen keine reine politische Entscheidung, sondern von der weltweiten Entwicklung der Produktivkräfte und vom fortgeschrittenen Stand der Globalisierung vorgegeben.
Der chinesischen Führung ist nicht verborgen geblieben, dass der US-Regierung früher oder später eine Korrektur ihrer Finanz- und Haushaltspolitik bevorsteht, wenn die inneramerikanischen Ungleichgewichte weiter zunehmen werden.
Die kreditfinanzierte Immobilienblase hat unnatürliche Ausmaße angenommen und droht zu platzen. Der mit Hilfe einer bewusst herbeigeführten, jetzt überbordenden Liquiditätsschwemme angetriebene Kredit finanzierte Konsumrausch der amerikanischen Verbraucher droht abzuebben, nachdem die amerikanische Zentralbank FED den Leitzins von nahe Null kontinuierlich und in relativ kurzer Zeit auf über fünf Prozent angehoben hat. Es droht ein Nachlassen der Verbrauchernachfrage in den USA mit empfindlichen Auswirkungen auf die US-Konjunktur, aber auch auf den Absatz chinesischer Waren auf dem amerikanischen Markt.
- Es ist zu erwarten, dass die US-Verbraucher und die US-Regierung in Zukunft umdenken und mehr sparen werden. Es steht ihnen viel weniger Geld zum Ausgeben zur Verfügung haben, da sie jahrelang weit über ihre Verhältnisse gelebt und Geld ausgegeben haben, das sie gar nicht besessen haben. Im Laufe der Zeit haben die Vereinigten Staaten ganze Schuldenberge aufgehäuft bei den privaten Haushalten, bei einem Teil der Unternehmen, bei den Kreditinstituten und der Regierung. Wenn die USA mehr sparen und weniger Kredit getriebene Finanzgeschäfte betreiben, scheint auf Seiten der USA ein weiteres Anschwellen des US-Leistungsbilanzdefizits verhindert werden zu können.
- Es darf weiterhin vermutet werden, dass die US-amerikanische Gesellschaft in den kommenden Jahre damit beschäftigt sein wird, sich von der zu erwartenden Finanz- und Wirtschaftskrise zu erholen, sich zu konsolidieren, angehäufte Schulden zurückzuzahlen und trotz wahrscheinlich sinkender Einkommen und Steuereinnahmen die auflaufenden Zinsen zu bedienen.“
Chinese industries or companies are also moving up the value chain. Now they are exporting machinery. Do you see this as competition?
In my eyes I think that China has clear plans to move further up the value chain in the next few years. The government’s identified seven strategic emerging industries, such as biotech, electric cars, new age technology, energy conservation, pollution control and others, whose GDP share I think in 2010 was 3 percent, but by 2018, they’re targeting something like 15 percent. Those are big increases and very advanced industries, and in many respects potentially form an overlap with counterpart industries in the United States. So it’s incumbent upon all countries, whether it’s China or the U.S. or others, to invest in their people, to invest in their technologies and make certain that they have a competitive advantage in these industries.
How do you view the so-called “new economy”?
We’ve had a lot of bubbles and fast-growing economies that don’t make money. We tend to tell ourselves that unlike the late 1990s or the early 2000s, when the companies whose share price shot up were companies without business plans and without attractive products, and we thought that that would eventually end badly, and it did. This time we’re trying to convince ourselves that there is something of greater substance to these economies. But when you think about it, to put the valuation that some in the market place on software apps that allow you to view pictures, how do you really value that? I mean there’s a lot of users, what kind of money do they make? What’s the business model? Are we sort of falling into the same trap again as we did in the late 1990s, just with a whole different type of company? I worry about that.
In your book you warn that if the Sino-U.S. relationship goes awry, things could get very, very bad. Can you explain that further?
The odds are that things will not get out of hand between the United States and China. We will from time to time, depending on the political cycle, talk tough, but not break out into open economic and trade wars. But I wrote in the book about a scenario that describes a full-blown trade war between China and the United States, just to make the point to the readers that you can’t ever say nothing can happen. You have to go through in your mind and think about the worst-case scenario and use that description of events as a reason to make certain that it never happens again. So that was the purpose of writing what I call this „bad dream.“ It was to describe in great detail what an outbreak in hostilities between the United States and China might look like, what it might mean to both economies, which would be devastating, and what it might mean to the world economy. In the United States it was really high levels of unemployment. It puts a lot of pressure on politicians, and politicians don’t know how to fix things like unemployment. It’s easier for them to blame other countries, like China. From time to time we’ve had legislation introduced to the U.S Congress that would be big tariffs on everything China sells into the United States. Some passed the House, the others passed the Senate. But no bill passed both in the same year, and yet you really can’t rule that out because I’d like to, as a risk factor, to keep in the back of your mind to think about if the labor market stays tough and there are political pressures, it’s still a possibility. It’s remote, but it’s still a possibility.
Since the financial crisis, have you seen a ‚deglobalization’ trend?
I think there are some aspects of this post-crisis period that are drawing into question the vigor of, say, global traders for an arena of exchange of goods and services between nations. The global trade share of GDP recouped the decline of 2009, but it hasn’t grown. So it’s really been flat now for going on five years. And that follows an extraordinary surge, beginning in the early 2000s, when China joined the WTO. The growth of global exports has been more than cut in half. Is this deglobalization? Or is this just weaker global growth? Probably a combination of the two.
Apr 9, 2014
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…
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… 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.”
Apr 3, 2014
By Major Tian
According to former Morgan Stanley Asia Chairman Stephen Roach, China is transitioning to a more stable economic model with a greater—and healthier—emphasis on consumption and services. China’s economy is showing more signs of slowing down, but it’s the interpretation of the slowdown that really matters… The key question is whether China can jumpstart its domestic consumption and offer the world a robust service sector, while the RMB appreciates and exports cool. Stephen Roach, former Chairman of Morgan Stanley Asia and the investment bank’s Chief Economist, believes that the country is on the right track, and is leading reforms that would shift the world’s second-largest economy toward a healthier growth model.
In this interview with CKGSB Knowledge, Roach takes a hard look at the changes that are happening in China’s economic system and how the current administration could guide the country through a maze of social and economic reforms…
Q. China aspires to transform itself from an export-led economy to a consumption-led one. How should China go about pursuing its consumerist goals?
- It’s a very complex, enormous undertaking. I’ve stressed three major building blocks to the story:
- more job growth, especially in the service sector and that’s beginning to happen;
- higher wages through urbanization, where urban workers on average earn about three times as their counterparts in the countryside and that’s beginning to happen; and thirdly,
- address the shortcomings of the social safety net. You can boost labor income by job creation and urbanization, but people will not spend the money. They’ll save it out of fear that there’s no security for the future. And the recently concluded Third Plenum of the 18th Party Congress held last November does provide
a number of potential reforms that will address the safety net issues,
- the one-child family planning policy,
- hukou reform (hukou is China’s household registration system, a hurdle for citizens to migrate freely),
- interest rate liberalization, and also
- a proposed 30% tax on state-owned enterprise profits by the year 2020.
These are all to fund the welfare system. These are all big positives in addressing the social safety net. So those are the three pieces. Now it’s up to the Chinese leaders to implement. I’m constructive on that but the proof still remains to be seen.
Q. As China changes its model, what happens to exports? People are saying this is the end of “made in China”. Do you believe that?
- Not for a second. China still has a very powerful manufacturing base. A lot of supply chains in Asia still have their hubs in China. China is not giving up on manufacturing in any way whatsoever. In fact, it’s really moving up the value chain focusing much more on what the government refers to as strategic emerging industries, industries such as electric cars, alternative energy, biotech, new-age information technology where there are plans to really significantly increase the growth rate in all these industries between now and 2020.
Q. What are the sectors that are likely to see more imports?
- I think that China historically is a very open economy… So if China maintains its imports share, there’s
- an enormous opportunity for producers and trading partners around the world to participate in this shift to internal demand.
The one I stressed the most in the book (Unbalanced: The Codependency of America and China) is the one that’s been tapped the least by foreign trading partners of China. That is the service area. Services are increasingly tradable. The services’ share of China is tiny. It’s now up to 46% and had been 43% in 2011. It’s going to grow probably into the 55% to 60% range between now and 2025. That increase will be around $12 trillion, just the increase in the scale of the Chinese services sector. And under some I think reasonable assumptions in describing the openness, the tradability of the
- Chinese services sector, that’s a bonanza for the rest of the world.
It could be anywhere between $4 trillion and $6 trillion between now and 2025. So a broad variety of services competitors, especially those in the US, which is preeminent in services, will
- have an opportunity to participate in China.
And that would mean anywhere from retail trade, to domestic transportation, to supply chain logistics, and finance. The big one, I think for the future, is the opportunity for foreign companies to get into China’s healthcare.
Q. Would you say that China has landed softly?
- I hesitate to use these words “hard landing”, “soft-landing”. Hard landing is sort of a devastating house of cards falling down scenario. I’ve never been in that [camp] in China. Most people are always looking at China [as though there is] a hard landing right around the corner. The growth rate is slow, but
- the employment generation in China has actually accelerated. So what does that tell you? It tells you that when you pick apart the numbers and you see where the growth rate has slowed is the slow [growth] predominately in the so-called secondary sector which is manufacturing and construction. You would expect that given the focus that manufacturing has on export-led economic growth. The rest of the world is still growing very slowly. Where the growth rate is picked up is in the services sector, the tertiary sector. And for the first time in modern Chinese history,
- the services sector is now the largest sector in the Chinese economy—46% in 2013, and actually exceeded that of manufacturing-and-construction-combined 44%. So what you have is that, the composition of
- GDP growth in China is shifting from capital-intensive manufacturing to labor-intensive services. GDP is slowing, employment is picking up. That’s not a landing. That’s a great transition from the old China to the new China.
Q. There are also some fears about China’s economy, such as the real estate bubble, shadow banking, and increasing local debt. Are these fears overblown?
- I think all these fears are based on legitimate concerns. There has been too much debt in China, and there has been rapid growth in shadow banking. There has been excessive house price appreciation, making affordable shelter increasingly difficult for many Chinese people. But the question you asked is the right question. Are these concerns at risk of bringing the entire economy down? Are they preconditions of massive amount of systemic risk, the likes of which we saw in the crisis in 2008 and 2009? My answer is absolutely not. For every one of these problems, there are factors on the other side of the equation that should temper your concern. The property bubble is at the top of everyone’s list. What’s missing in an assessment of the excess house price appreciation is
- the fact that
- there’s an enormous organic demand for shelter in China given the extraordinary pace of rural-urban migration. It’s been running 15 to 20 million a year since the year 2000. We’ll do another 100 million between now and 2020. Newly migrated residents of urban areas need shelter.
- They have demand for housing.
Shadow banking, it’s worrisome. The shadow banking sector in China, by IMF or Financial Stability Board estimates, is growing rapidly. But it’s growing off of a low base. The Financial Stability Board estimates for 2012, the last data point that’s available, the shadow banking sector in China is 26% of GDP. The global norm is over 110%. So it’s growing rapidly off of a low base. And the debt situation in local governments is definitely worrisome. The government has conducted an audit indicating the extent of the problem. The People’s Bank of China is definitely sending strong signals that it is trying to implement much tighter conditions on overnight bank funding markets to slow down the pace of credit creation and awing China of this dangerous string of debt-intensive growth.
Excerpt GEAB N°76
15 June 2013
THE IMPACTS OF THE SECOND SHOCK
- …collapse of financial markets especially in the US and Japan. Banks can no longer be saved by States and bail-ins are put in place;
- …spreading to the real economy: the financial impasse causes/reveals a major world recession and the reduction of international trade;
- …the economic deterioration causes unemployment to explode, in the United States the
- dollar’s decline lowers the standard of living…
- the governments of the most affected countries are under fire for their handling of the crisis, forced resignations and early elections are expected, if not coups;
- international management of the crisis: together Euroland and the BRICS impose a new international monetary system and lay down the bases of a new global governance;
- the least affected regions have exited the crisis definitively;
- it will take the United States, the United Kingdom and Japan five years to purge themselves of the crisis with, ultimately,
- a greatly reduced standard of living and a considerable
- loss of global influence (resulting from their refusal to participate in the re-casting of global governance on new bases). Being at the centre of the problem, the United States will clearly be hit head-on as well as their direct area of influence (mainly the United Kingdom and Japan).
In Euroland, which has already largely began the necessary process of change,
- the cleanup of its economy and
- the strengthening of its governance (the most recent example being Hollande and Merkel’s willingness to put a Eurozone government in place), and which has already suffered for this reason, will be less affected by this second crisis than other countries/regions; but the political crisis in the Eurozone is, on the other hand, weakening this region on a social level…”
2013, the first steps in a chaotic … Public announcement GEAB N°70 Dec. 16, 2012
Profiling Euroland in the world after the crisis
The media war against the Euro was useful inasmuch as it forced the Eurozone to implement the reforms necessary to overcome the crisis…And gradually the structures have come into place that strengthen the Eurozone. The contrast with US inaction is striking.
This should not obscure the many problems in Greece and Spain, for example; no one said it would be painless to recover from the bursting of the housing bubble and a historic global systemic crisis; as a matter of fact these countries could benefit more from technical assistance and expertise from other European countries. But overall, the situation is improving, the new Greek debt restructuring has been successful, deficits are reduced in Greece and Spain, Italy was put back on track by Monti…
But whether it is through
- the banking union which will begin functioning in early 2014, through
- increased political integration or through
- the European Stability Mechanism, the independence of Euroland states is affirmed…Visible signs of the decoupling and independence of Euroland, despite criticism, are the solutions to the crisis, ones at odds with those practiced in the US. It is indeed
- “austerity” that prevails in Europe, and avoids the faltering evident in the US budget. Euroland’s resistance also involves
- the pooling of public debt. With the launch of “project bonds” to finance EU infrastructure projects, increased pooling is underway, and the way is open for Eurobonds…
The emerging countries have begun to diversify their economies, especially in turning them in the direction of
- domestic consumption, and can versus overcome the crisis quicker. That said, their strategy of domestic demand development will suffer considerably from the shock; now
- these countries’ social fabric is still fragile.
However, we mustn’t forget that
- theWestern hyper consumption which we have seen over these last 20 years is finished since
- the artificially high standard of living in this part of the world will be reduced. The move will be particularly clear-cut in the United States when
- the dollar, losing its special central role, will drop to reflect the true worth of the US economy, which is in the order of 20% lower of what current numbers tell us, particularly due to the huge quantity of phantom assets. Given
- the inevitability of a fall in the Western standard of living, it begs the question which fundamentals of society should be preserved to avoid a pure and simple collapse of our models (or what remains of them). People can tolerate a lower level of purchasing power if, besides, it enjoys
- quality public services (education, social security, infrastructure in particular)
- requiring effective and fair tax payments (the current trend of fiscal tightening is, therefore, a move in the right direction). In Europe, these are the characteristics to preserve and enhance…
So as not to be isolated the United States is trying to keep Europe close to its chest with the negotiation of the transatlantic free trade agreement…
China, which has been one of the principal countries keeping the United States on a drip by buying its Treasury bonds, having sufficient time to progress its transfer out of the dollar and be less dependent on exports, has considerably reduced its exposure to the world’s number one problem, the dollar, by
- multiplying swap agreements, insidiously and gradually undermining the dollar’s base. On a commercial level, so to speak, it has actually laid the groundwork for
- a basket of local currencies abandoning the dollar pillar. The last five years have, therefore, enabled it to be better prepared, including making itself indispensable in Asia and keeping
- a comfortable buffer of currency reserves, even if the emerging countries’ bubble hasn’t spared it.
The share of world payments in Yuan has tripled between January 2012 and April 2013. At this rate the Yuan will dethrone the Yen before the end of 2014.
Euroland is slowly beginning to get closer to the BRICS… This alliance with the BRICS, allowing the joining of these two regions’ complementary strengths, will guarantee that the two blocs have a better capacity to absorb the coming shocks.
12 Sep 2013
Five years after the onset of the global financial crisis the world economy remains in a state of disarray.
- Strong expansionary monetary policies in the major developed economies have not succeeded in fostering credit creation and strengthening aggregate demand.
- Fiscal austerity and wage compression in many developed countries are further darkening the outlook, not only for the short term, but also for the medium term. The burden of adjustment of the global imbalances that contributed to the outbreak of the financial crisis remains with the deficit countries, thus
- strengthening deflationary forces in the world economy.
The dominance of finance over real economic activities persists,and may even have increased further. Yet financial reforms at the national level have been timid at best, advancing very slowly, if at all. In 2008 and 2009, policymakers of several economically powerful countries had
- called for urgent reforms of the international monetary and financial system. However, since then, the momentum in pushing for reform has all but disappeared from the international agenda. Consequently, the outlook for the world economy and for the global environment for development continues to be highly uncertain.
Some developing and transition economies have been able to mitigate the impact of the financial and economic crises in the developed countries by means of
- expansionary macroeconomic policies. But with the effects of such a response petering out and the external economic environment showing few signs of improvement, these economies are struggling to regain their growth momentum.
Prior to the Great Recession, exports from developing and transition economies grew rapidly owing to buoyant consumer demand in the developed countries, mainly the United States. This seemed to justify the adoption of an export oriented growth model. But the expansion of the world economy, though favourable for many developing countries, was
- built on unsustainable global demand and financing patterns. Thus, reverting to pre-crisis growth strategies cannot be an option. Rather, in order to adjust to what now appears to be
- a structural shift in the world economy, many developing and transition economies are obliged to review their development strategies that have been overly dependent on exports for growth. It is not a new insight that growth strategies that rely primarily on exports must sooner or later reach their limits when many countries pursue them simultaneously:
- competition among economies based on low unit labour costs and taxes leads to a race to the bottom, with few development gains but potentially disastrous social consequences.
At the present juncture, where growth of demand from developed countries is expected to remain weak for a protracted period of time, the limitations of such a growth strategy are becoming even more obvious. Therefore,
- a rebalancing of the drivers of growth, with greater weight given to domestic demand, is indispensable.
This will be a formidable challenge for all developing countries, though more difficult for some than for others. In any case, it will require a new perspective on the role of wages and the public sector in the development process. Distinct from export-led growth, development strategies that give a greater role than in the past to domestic demand for growth can be pursued by all countries simultaneously without beggar-thy-neighbour effects, and
- without counterproductive wage and tax competition. Moreover, if many trade partners in the developing world manage to
- expand their domestic demand simultaneously, they can spur South-South trade.