Roach says China-US need to re­bal­ance re­la­tion­ship

China Daily (Canada) - - FRONT PAGE - By LI YANG in Shang­hai

China and the United States need to re­bal­ance their re­la­tion­ship and be­come less code­pen­dent on one an­other, says Stephen Roach, a Yale Uni­ver­sity econ­o­mist and for­mer chief Asia spe­cial­ist with Mor­gan Stan­ley in­vest­ment bank.

“The only re­ally sus­tain­able way for both coun­tries to ad­dress their mu­tual prob­lems is through eco­nomic re­bal­anc­ing,” Roach said in Shang­hai re­cently in pro­mot­ing his new book Un­bal­anced: The Code­pen­dency of Amer­ica and China.

The cur­rent code­pen­dence tends to cause fric­tion, as well as trust deficits, leav­ing the world’s most im­por­tant bi­lat­eral ties vul­ner­a­ble to vi­cis­si­tudes of ex­ter­nal fac­tors, Roach said.

“We’ve got to move from co-de­pen­dency to a more con­struc­tive in­de­pen­dency, where in­di­vid­u­als or na­tions are bet­ter able to stand on their own and are more self-re­liant, rather than overly re­liant on each other,” said Roach, now a se­nior fel­low at the Yale Jack­son In­sti­tute for Global Af­fairs at Yale.

He said that each coun­try’s re­liance on one an­other has gone too far to let them see each other and them­selves clearly.

“That’s what hap­pens in a co-de­pen­dent re­la­tion­ship be­tween two peo­ple. They be­come so de­pen­dent on one an­other that ul­ti­mately they lose sense of who they are and they start to blame the other for their prob­lems,’’ he said.

If the United States man­u­fac­tures more for China and saves more for it­self, if China makes more in­no­va­tion­based ex­ports to the US and con­sumes more for it­self, the world’s two largest economies can cul­ti­vate a more sta­ble co-de­pen­dence, Roach ex­plained.

The US needs to rebuild na­tional sav­ings, in­vest that sav­ings in hu­man cap­i­tal, in phys­i­cal cap­i­tal, man­u­fac­tur­ing ca­pac­ity, and in­fra­struc­ture, and rebuild its com­pet­i­tive­ness as a na­tion, Roach said.

China, on the other hand, should begin to deploy sur­plus sav­ings to boost the safety net of Chi­nese fam­i­lies, rather than send­ing sur­plus sav­ings to the US by ac­quir­ing US Trea­sury debt, which ends up sub­si­diz­ing US fam­i­lies, and in­creas­ing peo­ple’s dis­pos­able in­come to boost con­sump­tion, he said.

A bi­lat­eral in­vest­ment treaty be­tween the US and China, which was talked about at the re­cent Strate­gic and Eco­nomic Dia­logue, will be a very im­por­tant step in that di­rec­tion, Roach said.

China’s re­struc­tur­ing of its econ­omy and the GDP growth slow­down are in line with the needs of the roleswitch be­tween the two, he said.

“The slow­down in China is a de­lib­er­ate out­growth of the re­forms that the new lead­er­ship is putting in place to deal with the ex­cesses and the im­bal­ances,” said Roach. “What’s emerg­ing now is a more bal­anced a more ser­vices-led econ­omy that re­quires slower growth.”

Roach thinks the main chal­lenge comes from what he said has been China’s over­due fi­nan­cial re­form, which is cen­tral to the coun­try’s re­forms in many as­pects.

In­ter­est rate re­form will be im­por­tant in rais­ing con­sumer in­comes, and in di­vert­ing all the re­cy­cling of high lev­els of pre­cau­tion­ary sav­ings in China into ex­cess re­turns in say the prop­erty mar­ket or the wealth man­age­ment prod­ucts, he said.

“I look for fur­ther cur­rency cap­i­tal mar­ket re­forms head­ing into 2020, by which time I think the cur­rency will be float­ing and the cap­i­tal count will be open,” Roach said.

Pres­i­dent Xi Jin­ping’s fight against cor­rup­tion in the Party and gov­ern­ment, and rep­re­sen­ta­tives of vested in­ter­est, “may be the most dif­fi­cult and painful phase in China’s trans­for­ma­tion”, he said.

He said that cre­at­ing new jobs, mainly in pro­duc­tive ser­vice sec­tors, in­creas­ing peo­ple’s dis­pos­able in­come in ur­ban­iza­tion and con­struct­ing a so­cial wel­fare safety net are three press­ing tasks for Chi­nese gov­ern­ment.

Roach said that China is as ca­pa­ble of be­ing in­no­va­tive as any other ma­jor econ­omy

“Chi­nese need free and open think­ing to drive the en­tre­pre­neur­ial spirit, but it’s not clear to me that there is that type of in­no­va­tion en­tre­pre­neur­ial ac­tiv­ity is only uniquely as­so­ci­ated with one type of sys­tem, the West­ern democ­racy,” he said.

He thinks China is ca­pa­ble of get­ting the smart, bright, tal­ented peo­ple com­ing out of a vastly im­proved ed­u­ca­tional sys­tem to fo­cus on the devel­op­ment of new prod­ucts, new con­cepts, ad­vances in science, in en­gi­neer­ing and other forms of tech­nol­ogy.

“It’s go­ing to take years for that type of process to re­ally have a per­va­sive im­pact on China. The say­ing that China is not an in­no­va­tions-based econ­omy I think is in­her­ently wrong at this point,” he added.

John Mengda Fu con­trib­uted to this story.

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