Global Rebalancing: The U.S.-China Dimension
Can China successfully shift from export-led to consumer-driven growth? Can the United States learn to save?
June 11, 2012
China’s Prime Minister Wen Jiabao certainly had it right when he spoke five years ago of the great paradox of the Chinese economy — an economy that looked strong on the surface, but beneath the surface was characterized by a model he depicted as increasingly “unstable, unbalanced, uncoordinated and ultimately unsustainable.”
The crisis of 2008-09 validated the “Paradox of the Four Uns” beyond any shadow of a doubt. A collapse in world trade hit China’s most dynamic source of economic growth — exports — with an unprecedented shock.
While China did what it needed to do in order to sustain economic growth and maintain social stability in the midst of a wrenching crisis, it still faces an immediate set of serious challenges. At the top of the list are its own rebalancing imperatives.
Given the likelihood of persistent weakness of demand on the part of advanced nations, and very much in keeping with the warnings of Premier Wen, China must now change its growth model to derive greater support from internal demand, especially private consumption. There is no greater rebalancing challenge on the supply side of a lopsided global economy.
The good news is that China gets it. Such a transition is, in fact, the centerpiece of the 12th Five-Year Plan (2011-15), which was approved by the National People’s Congress last year. Three building blocks frame China’s new pro-consumption growth strategy — jobs, wages and the safety net.
The jobs piece focuses on services. China has the smallest services sector of any major economy in the world today. Services are especially important because, in China, they generate about 35% more jobs per unit of GDP than do manufacturing and construction.
By shifting from capital-intensive manufacturing to labor-intensive services, China will be able to grow more slowly and still hit its labor absorption targets. The switch would also relieve pressure on oil and other natural resource markets, as well as temper China’s worrisome structural bias toward environmental degradation and pollution.
To realize this goal, there are plenty of low-hanging fruit in China’s underdeveloped services sector that could provide immediate sources of growth and job creation. This is especially the case in the distribution sector (wholesale trade, retail trade, domestic transportation and supply chain logistics) and in transactions processing (health care and finance).
The wage piece of China’s consumption equation is driven largely by rural-urban migration. Per capita income of urban Chinese workers now runs about 3 to 3.25 times that of their counterparts in the countryside. Thus, ongoing urbanization is a big plus for boosting income levels in China.
But the positive trend on labor income will go for naught if China does not have a social safety net. Lacking in financial security, workers will continue to save a disproportionate share of any income windfalls. Such fear-driven precautionary saving remains a big impediment to the flourishing of a Chinese consumer culture.
If one adds up the assets under management in the National Social Security Fund, local government social security funds and private pension plans, the severity of the safety net funding constraint becomes fully apparent. A paltry sum of $470 of assets per worker is dedicated to lifetime retirement benefits.
This shortfall must be addressed immediately — most likely in the form of a large injection of public funds — if China is to get on with the heavy lifting of its pro-consumption growth strategy.
The “currency issue”
Apart from these internal factors, I worry that the world’s most important economic relationship — that between the United States and China — could fall victim to its own unique set of imbalances.
Particularly troublesome in that respect is Washington’s bipartisan penchant for China bashing. With American workers under extraordinary pressure, a broad consensus of the U.S. power structure has identified the trade deficit as the culprit, especially the 34% of the deficit that can be attributable, since 2005, to the U.S. imbalance with China.
Politicians in both parties believe that China, charged and judged guilty of currency manipulation, should be forced to raise the value of the renminbi or face trade sanctions.
The problem with that view is that it is wrong. The United States suffers from a multilateral trade deficit — characterized by bilateral trade imbalances with 88 countries in 2010. It is impossible to fix a multilateral imbalance by putting pressure on a bilateral exchange rate.
Instead, the United States needs to look in the mirror and own up to the sources behind this multilateral imbalance — namely, an unprecedented shortfall in national saving. Lacking in saving and still wanting to grow, the United States must import surplus saving from abroad and run massive current account and multilateral trade deficits in order to attract the foreign capital.
If Washington doesn’t like trade deficits — with China or with anyone else — then it must come to grips with its saving problem. Unless, or until, that happens, tensions in the U.S.-China trade relationship could well intensify in the years ahead.
Unfortunately, the currency issue, and the false hopes it has spawned in resolving the tough problems bearing down on American workers, has hijacked the U.S.-China trade agenda in recent years.
Not only has the renminbi risen 31.4% against the dollar since mid-2005 (well in excess of the 27.5% increase long demanded by Washington politicians), but of the two current account imbalances, the U.S. deficit remains a far more destabilizing force in the world. According to the IMF’s dollar-based estimates, the U.S. deficit is likely to be 2.8 times the magnitude of the Chinese surplus in 2012.
The global rebalancing agenda would be far better served if the U.S.-China trade relationship were recast as an opportunity — not as a threat. For a growth-starved U.S. economy hobbled by a protracted period of sluggishness in consumer demand, exports could become an important offset as a new source of growth.
With China as America’s third-largest and most rapidly growing export market, the United States cannot afford to squander this opportunity. But that won’t happen if Washington’s renminbi fixation continues to dominate the debate.
Instead, the focus needs to shift away from the currency issue toward true determination on market access — insuring that U.S. companies have a fair and open shot at Chinese markets. As China shifts its sights to consumer-led growth, it could usher in what could well be the greatest consumption story of the modern era.
The potential opportunity in this relationship is a two-way street. For the United States, it is a chance for Corporate America to satisfy Chinese demand for a broad array of products, from biotech and information technology to motor vehicles components and airplanes. It is also an opportunity for U.S. services firms to play a partnership role in China’s coming services-led development push.
In short, the outlook for sustainable world growth is critically dependent on how the United States and China address their respective rebalancing imperatives. While there is far more to the pitfalls and challenges of an unbalanced global economy, these two nations are in a position to lead by example and by impact — drawing on their powerful linkages to most other major economic regions around the world.
Global rebalancing will not succeed without major breakthroughs in both the United States and China.
This article is based on the author’s speech at the Institute for Global Economics in Seoul, Korea, on May 18, 2012. A version of the speech was also published in the May 28, 2012, issue of China’s Caijing magazine.
There is no greater rebalancing challenge on the supply side of a lopsided global economy than China's shift to an internal, demand-driven economy.
By shifting from capital-intensive manufacturing to labor-intensive services, China will be able to grow more slowly and still hit its labor absorption targets.
If Washington doesn't like trade deficits — with China or with anyone else — then it must come to grips with its saving problem.
With China as America's third-largest export market, the United States cannot afford to squander this opportunity.
Stephen S. Roach
Former Non-Executive Chairman of Morgan Stanley Asia Stephen S. Roach is a senior fellow at the Jackson Institute for Global Affairs, Yale University, and a member of the Yale School of Management faculty. He was previously the Non-Executive Chairman of Morgan Stanley Asia (a position he held after serving as managing director and chief economist […]