The United States and China are widely perceived as rivals, but the superpowers in fact rely on one another in a number of areas and — if political maneuverings don’t get in the way — could work together on a scale that would help balance the shortcomings in their respective economies.
So said Stephen Roach, senior fellow at Yale’s Jackson Institute for Global Affairs and a former chief economist at Morgan Stanley, in an April 12 presentation at Razzo Hall. Roach’s lecture was sponsored by Clark’s Graduate School of Management.
Roach is a frequent visitor to China, and as the former head of Morgan Stanley’s global economics team he became a student of the country’s economy, spending about 15 years “learning, teaching and writing about China.”
The U.S. and China economies are mirror images of one another, yet each is on the cusp of important changes, Roach said. The nations’ relationship is “not in a good place right now,” but it has the potential to be a transformative force for the global economy. Like a marriage, he said, that relationship must be nurtured because “it’s too important to let it go off track.”
Roach noted that the while the Chinese economy continues to grow, its income per capita is only one-tenth of that of the U.S. — thanks largely to its population of 1.3 billion people, about four times that of the United States. Still, he’s optimistic that, unlike most developing countries, China will exceed the $10,000 per capita threshold, especially as better-paying jobs attract people from rural to industrial areas.
He pointed out how the two economies stand in stark contrast. China boasts the largest surplus in the history of the modern world; the U.S. holds the greatest deficit. China has money to lend; the U.S. needs to borrow. China saves too much; the U.S. saves too little. China’s consumption is half that of the U.S., the biggest consumer in the world.
Still, they enjoy “a symbiotic relationship that has worked well for both,” Roach said. “But we should not extrapolate the past into the future.”
The burst of the real estate and credit bubbles means the U.S. is more overextended than any country in modern history; consumption is stagnant. To break out of this “hibernation” will require meaningful job creation to lower the unemployment rate.
China’s economic “miracle” is showing strain, he said. Five years ago the then-Chinese premier made a surprising admission that his country’s economy may appear strong on the surface, yet he was concerned about underlying instability.
“He was dead right,” Roach said.
So-called red-line exports went bust in seven months after the premier issued that statement and a massive stimulus did not produce the desired effect, leaving the economy out of balance. Roach said China’s challenge has been to find a new source of growth that doesn’t involve exports, which had been its major driver. He noted that the export-based economy is not sustainable: It doesn’t produce enough jobs, gobbles up natural resources, and substitutes machines for people in the factories.
“Both economies have been dancing with one another, and the dance has taken them to difficult places.”
~ Stephen Roach
China’s strengths, he said, are that it’s pragmatic, strategic and focuses on stability. The country’s newest five-year plan (the 12th in a series), shifts the emphasis to the internal demands for jobs, higher wages and financial security.
The social safety net, in particular, is terribly inadequate, he noted. While China has instituted universal health care and a form of social security, it hasn’t funded those programs. Currently, a Chinese worker has $470 of retirement assets to cover a lifetime of employment. With China population experiencing “the world’s fastest high-speed aging problem,” asset management is critical.
“The challenge is not figuring out what to do, but to do it,” Roach said. “They’ve got to turn up the juice, especially on the safety net issue.”
Roach posed the question of whether the tension between the United States and China can be converted into a mutual opportunity. As China looks to make more internal investment, the United States can position itself to become a major supplier to that country, he said, noting that China is already the third largest customer for U.S. exports behind Canada and Mexico.
That scenario is complicated by the political climate. In Washington, D.C., and on the presidential campaign trail, China has been a popular target for bipartisan bashing, Roach said. He cited a recent poll that said 60 percent of Americans believe China is the greatest threat to U.S. financial security. The charge that China is manipulating currency has become a familiar complaint.
“Washington agrees on nothing, but it does agree that China is the source of all the problems bearing down on American workers,” Roach said. “It’s a great story and it works well, but the facts, the analytics and the economics are dead wrong.”
While China has been made a convenient scapegoat, the fact is the United States has a trade imbalance with 87 other countries besides China, he said. As China shifts its priorities to meet internal demand for goods and services, the potential to sell to them will expand. However, trade sanctions against China will hinder the progress of opening up that market. “[Talk of sanctions] is a slippery slope we’re on and we should avoid it at all costs,” Roach asserted. “China is not the threat to the American worker, and must be seen as an opportunity.”
Despite the enormous growth in its own economy, China still looks to the United States as a model of synergy among higher education, industry and entrepreneurship, Roach said. “They’d give anything for Silicon Valley,” he said.
“Both economies have been dancing with one another, and the dance has taken them to difficult places,” Roach said.
But it doesn’t have to be that way, he said. As China works to rebalance its economy, the U.S. needs to compete for market share in China.
“The United States needs to look in the mirror and get going with the heavy lifting on our own competitive issues to regenerate the American job machine that’s been stuck in low gear,” Roach said. “There is no greater opportunity than in China.”