Bloomberg – China will curb its reliance on exports sooner than the U.S. can cut its budget and external deficits, removing a support from the dollar that will unsettle currency markets, Morgan Stanley’s Stephen Roach said. “In the next three or five years China will move aggressively to increase its private consumption and reduce its surplus saving,” Roach, who is non-executive chairman of Morgan Stanley Asia Ltd., said in an interview in Oslo yesterday.
China may post a trade deficit as early as this quarter as imports outpace sales abroad, the government said last month. The country’s reliance on trade to fuel economic growth close to 10 percent is now fading as its consumers grow wealthier, removing a key incentive for China to support the dollar. At the same time, the world’s largest economy estimates its budget deficit will swell to a record $1.5 trillion this year, as President Barack Obama channels stimulus to revive growth.
“If we don’t move to address our deficit before China addresses its surplus then we are going to be facing some pretty significant external funding constraints,” Roach said. “That would lead to a significant downward pressure on the dollar and/or higher long-term U.S. interest rates.”
China aims to reduce its trade surplus to less than 4 percent of gross domestic product in three to five years, central bank Deputy Governor Yi Gang said last year. Roach said the risk that China will cut its reliance on exports before the U.S. weans itself off external funding is greater than 30 percent.