Rebalancing of the economy

By Stephen S.Roach

China Daily, March 3, 2014

In other words, what we are witnessing is the effect of a major shift from hyper-growth led by exports and investment (thanks to a vibrant manufacturing sector) to a model that is much more reliant on the slower but steadier growth dynamic of consumer spending and services. Indeed, in 2013, the Chinese services became the Chinese economy's largest sector, surpassing the combined share of the manufacturing and construction sectors.

The problem, as I argue in my new book, Unbalanced: The Codependency of America and China, is not with China, but with the world-and the United States, in particular-which is not prepared for the slower growth that China's successful rebalancing implies.

The codependency construct is rooted in the psychopathology of human relationships whereby two partners, whether out of need or convenience, draw unhealthy support from each other. Ultimately, codependency leads to a loss of identity, serious frictions, and often a nasty breakup-unless one or both of the partners becomes more self-reliant and strikes out on his or her own.

The economic analogue of codependency applies especially well to the US and China. China's export-led growth miracle would not have started in the 1980's without the American consumer. And China relied heavily on the US dollar to anchor its undervalued currency, allowing it to boost its export competitiveness.

The US, for its part, relied on cheap goods made in China to stretch hard-pressed consumers' purchasing power. It also became dependent on China's savings surplus to finance its own savings shortfall (the world's largest), and took advantage of China's voracious demand for US Treasury securities to help fund massive budget deficits and subsidize low domestic interest rates.

In the end, however, this codependency was a marriage of convenience, not of love. Frictions between the two partners have developed over a wide range of issues, including trade, the renminbi's exchange rate, regional security, intellectual property, and cyberattacks, among others. And, just as a psychologist would predict, one of the partners, China, has decided to go its own way.

China's rebalancing will enable it to absorb its surplus savings, which will be put to work building a social safety net and boosting Chinese households' wherewithal. As a result, China will no longer be inclined to lend its capital to the US.

For a growth-starved US economy, the transformation of its codependent partner could well be a fork in the road. One path is quite risky: If the US remains stuck in its under-saving ways but finds itself without Chinese goods and capital, it will suffer higher inflation, rising interest rates, and a weaker dollar. The other path holds great opportunity: the US can adopt a new growth strategy-moving away from excess consumption toward a model based on saving and investing in people, infrastructure, and capacity. In doing so, the US could draw support from exports, especially to a rebalanced China-currently its third-largest and fastest-growing major export market.

Compared with other emerging economies, China is cut from a different cloth. China emerged from the late-1990's Asian financial crisis as the region's most resilient economy, and I suspect the same will be true this time. Differentiation matters-for China, Asia, and the rest of the global economy.

The author, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Project Syndicate