If China Changes its economic growth model then the US will also need to change to a new growth model

Stephen Roach says the days of Sino-US mutual dependency are nearing an end, as China strikes out on its own towards a consumer-led economy. And, if it is to prosper, the US must also find a new growth strategy.

Stephen S. Roach is a faculty member at Yale University and former chairman of Morgan Stanley Asia. An article that appeared in the South China Morning post and is copyrighted The Whitney and Betty MacMillan Centre for International and Area Studies at Yale describes Roach’s view of the future of the economies of China and the United States.

In November, 2013 at the third plenum China ratified some 60 reforms. The reforms aimed at altering the behavioural norms of long-insecure Chinese families were especially important – namely, modifications in the one-child family planning and residential permit, or hukou, systems; a shift to market-based interest rates that would boost long depressed yields for Chinese savers; and a 30 per cent tax on state-owned enterprise profits that would provide funding for safety net programmes such as social security and health care.

The third plenum also established a new and powerful implementation mechanism that should be especially effective in putting these reforms into action.

Roach feels the codependent relationship between the US and China as it existed for decades will end. China is locked on a course that will transform it from surplus saving to saving absorption – no longer inclined to lend its capital to the US but increasingly focused on putting its savings to work in building a social safety net and funding the wherewithal of its own populace. Long the world’s Ultimate Producer, China is now determined to emerge as a consumer, too.

If China changes and does not provide cheap goods and low interest capital to the USA and the US still is short of savings then the US will suffer higher inflation, rising interest rates and a weaker dollar.

America should adopt a new growth strategy – moving away from excess consumption towards a renewal based on saving, and on investing those savings in people, infrastructure and capacity. In doing so, the US can draw support from exports, especially to China, where demand for US-made products and services could provide a bonanza for a refocused US economy.

SOURCES – Yale, South China Morning Post

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