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.
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Roach argues the rest of the world has become dependent on China’s high-growth model, with resource economies such as Canada’s growing faster than the rest of the world after the financial crisis because of demand for raw materials from China.
But Chinese wages are no longer the lowest in the world and, with millions lifted out of poverty, the Chinese are adapting to a middle-class level of comfort. That means higher expectations among people, for social and labour mobility and quality of life, a change the leadership may not yet be prepared for.
Chinese leaders are under pressure to replace a growth model based on exports and investment that delivered three decades of rapid expansion but has run out of steam. Chinese premier Li Keqiang has promised more private investment and greater reliance on domestic consumption as exports continue to fall.
Challenge for Canada's resource economy
“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 in an interview with CBC's The Lang & O'Leary Exchange.
"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.
“We’ve gotten ourselves into a quagmire because this has kept us mired in a sluggish recovery with a shortage of savings while China has a mirror image of the problem – too much exports, too much of a foreign account surplus, excess foreign exchange reserve and lots of imbalances in their country from excess resource consumption to environmental degradation,” Roach says.
Both China and the U.S. have to learn to better manage their economies, he says.
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.