China forecasting is a mug’s game. The terrible example before us all is Gordon Chang, who in 2001 published a book titled The Coming Collapse of China, which predicted that within five to ten years the Communist Party would be chased out of power amid social and economic breakdown. (I reviewed the book here.) As Stephen Roach notes drily in Unbalanced: “During the next ten years China averaged 10 percent annual growth in its GDP, with no signs that the Party was losing its grip on power.”
(Nothing abashed, Chang still writes a weekly column for Forbes, always insightful. For what it’s worth—see above—I think he was right about everything but the time scale.)
Thus chastened, book-length China commentary nowadays mostly shuns the predictive for the prescriptive. What should we do to maintain stability and prosperity? What should we encourage China to do?
Unbalanced takes that more modest prescriptive approach. Stephen Roach is a seasoned economist and a former chairman of Morgan Stanley Asia. His main theme here is the asymmetric character of the U.S.-China economic bond. That term “codependency” in his subtitle is taken from clinical psychopathology, where it is defined as: “an unhealthy close relationship between two dependent individuals.”
The nature of this particular relationship is one of producer to consumer. That might be expressed more bluntly as “supplier to addict,” except that the addiction cuts both ways. The Chinese labor away for low remuneration, a high percentage of which goes into savings, to produce cheap goods for export. Americans buy those goods so enthusiastically that we no longer save at all.
Stuffed with citizens’ savings, the state-dominated Chinese financial system outputs tumorous property booms and grand pharaonic projects (along with, to be fair, much necessary infrastructure improvement).
By contrast, the U.S. net savings rate—the portion of savings actually available to fund expanding productive capacity—has been negative in recent years, a factor in America’s well-known fiscal and monetary problems.
The Chinese worker has meanwhile fallen into the Paradox of Thrift, saving so much he has nothing to spend on the goods produced by the factories built with loans from banks fat with his savings.
Everyone’s behaving reasonably, and the results seem fine on both sides, but they are not sustainable. Stephen Roach works the analogy with psychopathology:
Each nation deluded itself into a false prosperity that distorted its economic sense of self. America pushed its consumer model too far, and China did the same with its producer model. Mirror images of each other’s insatiable appetite for growth, they turned codependency from a supportive to a potentially destructive force. Just as a psychologist would argue that it is now time for the cure, the economist must reach the same conclusion.
All right, but what’s the cure?
China on the whole has more, and easier, options. One reason the Chinese save so much, for example, is the very low level of public provision in healthcare and retirement support. Carp all you like about America’s bloated welfare state: a fortysomething middle-class Chinese person has no choice but to squirrel away as much of his income as he can for illness and old age.
On the American side, the way to rebalancing is less clear. An export-or-die policy sounds promising, until you reflect that China is already our second-largest export market (behind NAFTA-advantaged Canada and Mexico), up nearly 300 percent from 2003 to 2012. Roach recommends a change in the export mix to “sophisticated goods and services.” He is emphatic that China-bashing by U.S. politicians will not help, and brings out a wealth of statistics to support his case.
If Unbalanced has a weakness, it is a slight tendency towards Friedmanesque I-have-seen-the-future-and-it-works naïvety—seeing the timid, blinkered apparatchiks of the Politburo as meritocratic masters of geo-econo-political strategizing. For example, Roach fears that the Chinese will bite the re-balancing bullet before we do, placing us in a reactive posture.
You can find some support for this view: in the reformist pronouncements from last year’s Third Plenum, for example, and the thoughtful comments by new Prime Minister Li Keqiang and his predecessor Wen Jiabao. (The Third Plenum is discussed by economist Barry Naughton in the second half of a recent Ying Ma podcast.) Also of course in the pharaonic schemes of our own leaders, financed by ever-increasing national debt.
I’m not so sure, though. It has been a pattern for twenty years now that Chinese Prime Ministers propose, but the Party machine—by no means all of which resides in Beijing—disposes. Jonathan Fenby has things to say about this in his very useful 2012 book Tiger Head, Snake Tails.
And while politics is the enemy of economics everywhere, there is still far less politics in the U.S.A. than in China, where everything is political. Okay, I’ll play the mug’s game: the U.S.A. will come out of this decade in better shape than China.