Exclusive Seminar with Stephen Roach: “American and China: An Unsustainable Codependency” Go back »
2014-03-28 | Beijing
Dr Roach began with an interesting definition of ‘codependency’ that he learned from his wife, a psychologist. He said that from a psychologist’s perspective codependency is "an unhealthy relationship between two individuals" because both parties lose the sense of who they are. This loss of identity means that distinctions between the two parties start to blur which will make the relationship become unstable and unbalanced and finally lead to break up. According to his analysis, he argued that the US and China’s relationship was initially born out of needs when China was just stepping into the post-Cultural Revolution era and the US was facing stagnation and trying to encourage economic growth. He defined the relationship as a "marriage of convenience", not a "marriage of love". After a brief overview of the big picture, he provided more details to fully explain why the relationship between these two economies is codependent, unstable, unbalanced and, ultimately, unsustainable. He defined the US as the ultimate consumer that depends on the cheap goods from China, surplus Chinese savings, and the Chinese demand for US dollars. On the other side, he called China the ultimate producer that depends on exports and America’s demand for them. The Chinese currency is also dollar-linked.
However, he believes that China has already started rebalancing. The 12th Five-Year Plan is "pro-consumption". He believes that the potential for more jobs lies in the service sector because tertiary industry is labour-intensive. In terms of wages, he argued that it will be powered by urbanisation. By sharing research from the OECD and the UN, he pointed out that Chinese urbanisation rate was 52.6 per cent in 2012 and projected to move 316 million people to the urban areas by 2030. This means that the urban population will grow to 75- 80 per cent by 2030. There is, he said, a problem with rapid ageing and an underfunded retirement system. He argued that the consumer-led China requires a new policy mindset, and the recent strategies and reforms could be a powerful combination. The 12th Five-Year Plan helps expand opportunities while the Third Plenum of 18th CPC altered many behavioural norms. He said that a strategic breakthrough would be to "de-emphasise the technocratic producer model and embrace the new norms of a consumer society". Though there are still many unbalanced problems, he awarded China’s overall performance in rebalancing, or the so called "shifting gears period", a Grade B.
He then discussed the current situation of the US economy by way of comparison. By illustrating the statistics from Federal Reserve, Dr Roach argued that today’s America was lingering on balance-sheet recession. He advocated that the new growth of the American economy would be in savings, capital investment, restoring competitiveness and exports. This implies that China’s opportunities are in the exports of goods and services. He compared both China and America’s rebalancing scenario and concluded that they had asymmetrical rebalancing risks. China needs to change from surplus saving to saving absorption and reduce the current account surplus, the pace of foreign exchange reserves accumulation and the demand for dollar-based assets. The risks of American economy are the pro-consumption policy and cultural bias, the persistent savings shortfall and the current account deficit, as well as diminished Chinese funding. He described the difference in rebalancing the economy of China and the US as being the difference between using strategy and relying on an invisible hand. He concluded by proposing a provoking question: "Does America need a Third Plenum moment?"
