May 28, 2014

The USA, Canada, Brazil and Other Countries will also have to rebalance their economies

China’s new leadership is trying to create a shift in its economy from low-wage, investment-driven growth to a consumer economy driven by domestic demand and when that change happens, the rest of the world will have to change too.

That’s the message Stephen Roach is trying to deliver, with some urgency, in his book Unbalanced: The Codependency of America and China.

“To the extent that Canada, Australia, Brazil and other resource-based economies are counting on China to stay the course of open-ended resource demand, you could be in for a rude awakening,” says Roach, a former chairman of Morgan Stanley Asia who is now at Yale’s Jackson Institute for Global Affairs.

“China is about to create the biggest middle-class the world has ever seen and that’s a huge opportunity for other countries to export into," Roach says.

"For a resource-based country like Canada, there’s a special challenge. As China moves from manufacturing to services, services require far less resources per unit of GDP,” he says.

In his book Unbalanced, Roach argues that China and the U.S. are codependent, with the U.S. reliant on China for cheap capital, cheap goods and demand for treasuries. China is a big holder of U.S. bonds as it seeks to invest its current account surplus.

A China slowdown will effect the world economy. China is about 25% of total global growth.

Encourage savings in America

He makes a case for American leaders to stop stimulating consumer consumption with their fiscal policies and start giving incentives to save. Roach is critical of the Fed's loose monetary policy and believes American families should be saving more of their income.

“If we focused our policies more on providing incentives to save, we could reinvest that saving in spending on infrastructure, human capital, research and development and new capacity,” he says.

Americans consume beyond their means, with their level of purchases outstripping their improved income for the past 20 years. The financial crisis helped expose the damage this is doing, Roach says.

As China shifts to domestic consumption, there won’t be another superpower to provide the U.S. with capital or finance U.S. debt, he argues. That capital could be coming from American savings, he says.

“We’ve got to really focus on rebuilding competitiveness. You can’t do that if you don’t save,” he says.

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