Roach says China-US need to rebalance relationship
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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