Think of it as an unhealthy, symbiotic relationship: China and the United States have been enabling each other’s bad behavior. Unless each rebalances its economy, growth of the past four decades simply can’t – and won’t – continue.
That’s the premise presented at the recent Sir Gordon Wu Distinguished Speaker Forum at Columbia Business School by Stephen Roach, senior fellow at Yale University’s Jackson Institute for Global Affairs and former chairman of Morgan Stanley Asia. He says the two nations are codependent, a term he doesn’t use loosely.
Codependence starts innocently enough, but over time the partners lose their sense of self, observed Roach. Defensive behavior sets in, with reaction to each other's nuances taking precedence over pursuit of their own clear paths forward. “The American Psychiatric Association describes seven steps of mental health disorders that apply to individuals,” said Roach, noting that his wife happens to be a psychotherapist. “It’s not a total stretch to apply the same progressive pattern to economics.”
A Win-Win...For a While
The dynamic dates back to the 1970s and 80s, when China's post-Mao answer to its staggering poverty was to make and export cheap goods. America’s response to its own recession was to buy these Chinese goods. With the money it received, China built infrastructure to support the world’s most powerful export platform. Increasingly, surplus savings went to US Treasuries, enabling America to continue buying Chinese products while using its trading partner’s savings to fund government debt.
“China gave Americans a way to repeal the basic laws of economics,” Roach wrote. “They could live beyond their means, and that enabled the Chinese to do the same.”
Fast-forward to the 21st century. Both economies have fallen out of balance. China’s production economy today relies too heavily on exports as its consumers don’t spend enough to spur domestic growth. On the other side of the globe, the US consumer economy just doesn’t make enough of its own goods to encourage robust employment. And it certainly doesn’t save enough to support public or private debt.
Where to Go From Here
The professor and former Wall Street economist offered a prescription for a healthier, more productive coexistence that begins by each country putting its own house in order. First, the Chinese government needs to keep surplus savings within its borders, rather than buying up foreign investment vehicles such as US Treasuries, and use those savings to stimulate consumer spending and create a social safety net.
The United States, meanwhile, needs to do the opposite, he said. “We need to be weaned off of consumerism and build our savings so the United States can invest in education, infrastructure, and growth.”
China, he said, seems to get it. A “fairly comprehensive plan” that the PRC laid out in China's 12th Five-Year Plan in 2011 and the Third Plenum in 2013 is pointing the country away from production and exports to a more balanced consumer-led economy.
Roach warned against declaring victory too soon, though. It will take at least a decade for China to rebalance from export manufacturing to an economy focused on supplying and servicing its own consumers. And it will take a stronger, broader safety net to ensure the Chinese populace doesn’t need to hoard savings to cover individual emergencies — or old age.
In contrast, America seems to be fumbling just to return to its pre-recession cushy consumer existence, Roach noted. However, a few positive signs are currently boosting America’s position globally. “Some manufacturing is returning to the United States. Unemployment is coming down. Consumers began to deleverage, but it will take another five years to get back to the US debt levels of 2008,” he said.
Beyond that, though, Roach sees no evidence of a will — much less a strategy — to abandon profligate US spending and encouraging saving. “Savings is a four-letter word in America,” he said. “But without savings, we will be in real trouble without China’s surplus.”