Rebalancing the US-China Economic Relationship€¦ · Rebuilding Saving Source: Federal Reserve...

Rebalancing the US-China Economic Relationship

Stephen S. Roach

Beijing July 2014

America and China: Economic Codependence

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Mirror Images: Consumption Shares of America and China

United States

China

!  America: The Ultimate Consumer •  Depends on cheap goods from

China •  Depends on surplus Chinese

saving •  Depends on Chinese demand for $

!  China: The Ultimate Producer •  Depends on exports •  Depends on America’s demand for

those exports •  Dollar-linked RMB

!  An unsustainable codependence

!  The rebalancing solution

%

1  

Drivers of the Old Model Engine of the New Model

Source: China National Bureau of Statistics

China’s Rebalancing Imperative

“Unstable, unbalanced, uncoordinated, and unsustainable.” — Premier Wen Jiabao, March 16, 2007

Fixed Investment

Exports

Private Consumption

% of GDP % of GDP

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55  

1978  

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2012  0  

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Pro-Consumption 12th Five-Year Plan

Source: National Bureau of Statistics (China)

Chinese Disposable Personal Income (as a % of GDP)

Last plotting: 42.6% in 2012

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35  

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45  

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1978  

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JOBS:  Services  

WAGES:  Urbaniza6on  

FEAR:  Safety  Net  

Labor-­‐Intensive  Growth  

Labor  Income  Genera6on  

Spending  Propensity  

Mechanism Goal

The Plan The Challenge

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China’s Embryonic Services Sector Shifting Mix of Chinese GDP

Jobs: The Potential in Chinese Services

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1952  

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Primary   Secondary   Ter9ary  

Services-led transition

Shifting Gears: Services-Led Chinese Growth

Source: National Bureau of Statistics (China)

Average Growth Over Designated Intervals

1980 to 2005 to 2004 2011 2012 2013 1Q14

GDP 9.7% 11.0% 7.9% 7.7% 7.4%

Primary 4.5 4.6 4.5 4.0 3.5 Second. 11.5 11.9 7.9 7.8 7.3 Tertiary 8.5 10.4 8.1 8.3 7.8

Difference: Sec.-Tert. 3.0 1.5 -0.2 -0.5 -0.5

!  For 25 years (1980 to 2004), China’s secondary sector grew 3 percentage points faster than the tertiary sector

!  Growth differential was cut in half from 2005 to 2011

!  In 2012 and 2013, growth in tertiary sector exceeded that in secondary by 0.35 percentage points per year

!  This is the first period in modern China’s history of services-led growth

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Source: Eswar Prasad, “Rebalancing Growth in Asia,” Finance and Development, December 2009: IMF, WBMS, BP, CRU, Morgan Stanley Research.

China’s Labor Absorption Paradox Old Model vs. New Model

Average GDP and Employment Growth: 2000-2008

0

3

6

9

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China India Indonesia Korea Thailand

% Change

GDP Growth Employment Growth

Social Stability: From Labor Saving to Labor Intensive

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0.002  

0.004  

0.006  

0.008  

0.01  

0.012  

0.014  

0.016  

Secondary   Ter6ary  

Employment Per Unit of Output: 2009-12

Note: Labor intensity is ratio of employment per RMB1000 GDP Source: National Bureau of Statistics (China)

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Ratio of Urban to Rural Income

Urban Share of Chinese Population

Source: UN, OECD

Projected  urban  popula6on  growth:  2030:  316  million  (OECD)  

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

1980 1985 1990 1995 2000 2005 2010 0

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1950 1960 1970 1980 1990 2000 2010

2013: 53.7%

2015 UN Projection

Wages: Powered by Urbanization

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Premier Li Keqiang on Services and Urbanization

!  “The issues of urbanization and development of service industries are closely related.”

!  Developed economies demonstrate that “the service sector is largest generator of urban employment.”

•  Highly personalized requirements make services “capable of greatly increasing employment.”

•  Services requirements of China’s rapidly aging population – especially healthcare – have the potential for “huge amounts of employment capacity.”

Source: Li Keqiang, “Promoting Coordinated Urbanization – An Important Strategic Choice for Achieving Modernization, September 2012, and OECD China Survey, March 2013.

Urbanization Rates: China’s 150-year Lag

China

Rest of the World

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Source: Penn World Tables and International Monetary Fund

0

50000

100000

150000

200000

250000

300000

350000

Japan  

Australia  

Germany  

United  States  225000  

France  

Singapore  

United  Kingdo

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Korea  

Mexico  

Malaysia  

Brazil  

South  Africa  

Russia  

China  

Indo

nesia  

Philipp

ines  

Vietnam  

India  

Capital Stock per Worker $USD

Chinese Capital Stock Per Capita Relative to the U.S. and Japan

1990 2000 2010

%

Urbanization Drives Investment

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Safety Net Imperatives: High-Speed Aging and Underfunded Retirement System

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1950   1960   1970   1980   1990   2000   2010   2020   2030   2040  

Total  (LHS)  

Chinese Dependency Ratios

Old  age  (RHS)  

300

1500 869

Retirement Assets 2010-11: RMB 2669 Bil

(USD $435 bil or $569 per worker)

National Social Security Fund (2011)

Local Govt Social Security Funds (2010)

Private Pensions (2010)

Source: UN population database, annual reports of China Social Security Fund, and domestic Chinese news reports

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Strategy and Reforms: A Powerful Combination

Consumer-Led China requires a new policy mindset

!  Expanded opportunities: 12th Five-Year Plan •  Jobs: Services •  Real wages: Urbanization

!  Altered behavioral norms: Third Plenum of 18th CPC •  Relax one-child policy •  Hukou reforms •  Deposit interest rate liberalization •  Social safety net funding by 30% SOE profits tax •  Reduce fear-driven precautionary saving

!  The strategic breakthrough •  De-emphasize technocratic Producer Model •  Embrace the new norms of a Consumer Society •  The market-based endgame •  Implementation – the big question

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Revolution in Governance

Third Plenum 1978 (11th Party Congress)

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Third Plenum 2013 (18th Party Congress)

Leading Committee on Comprehensively Deepening Reforms (2013)

Six pillars: Headed by Xi Jinping - Economics and finance Multiple implementation levels: - Politics - Central government - Environment and ecology - Provincial government - Culture - Local government - Party structure - SOEs - Social structure Marginalizes NDRC

China and the Global Leverage Cycle

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2008   2009   2010   2011   2012   2013-­‐H1   2013-­‐H2  

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2008   2009   2010   2011   2012   2013-­‐H1   2013-­‐H2  

Central    govt   Local  govt   Small  Businesses  

Mid/  Large  Corporates   Households  

China: Debt-to-GDP Ratios %

%

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Debt-to GDP in 2011 China vs. Developed Countries

Source: CEIC, Morgan Stanley, and McKinsey Global Institute

Total Debt

Mix of Chinese Debt

Shadow Banking in Perspective

!  Global shadow banking assets totaled $71 trillion in 2012 (vs. $61 trillion in pre-crisis 2007)

!  China’s growth of more than 40% in 2012 was the highest in the world – but off a very low base

!  Narrow FSB definition: Non-bank credit intermediation

!  Broad definition would include trust companies and wealth management products

!  Broad definition could boost China’s shadow banking share to 69% of GDP (JP Morgan)

Source: Financial Stability Board, ”Global Shadow Banking Monitoring Report: 2013”

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2011   2012  

Shadow Banking Assets as % of GDP

2011: 20% 2012: 26%

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The China Distinction

Note: Portfolio inflow share is from 2Q09 to 4Q12; current account balance and external debt are most recent quarters. Source: Morgan Stanley

Behind the current EM turmoil

Fact: Legitimate Case for EM fragility !  Large current account deficits,

heavy reliance on external debt and portfolio inflows

!  Post-QE tapering changes the return arbitrage calculus

Fiction: The China factor !  China is the least vulnerable to

capital flight on all counts !  Squeezing debt-intensive growth !  Chaori Solar debt default !  US: 1.5% long-term average

default rate (1866 to 2008)

-­‐10  -­‐8  -­‐6  -­‐4  -­‐2  0  2  4  6  

0  50  100  150  200  250  300  350  400  

PorVolio  inflows  as  share  of  total  inflows  External  debt  as  a  share  of  FX  Reserves  

Current Account Balances as % of GDP

“Sudden Stop” Early Warning Signs

%

%

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Deleveraging

Rebuilding Saving

Source: Federal Reserve flow-of-funds and U.S. Department of Commerce, BEA

Household Sector Debt Outstanding (% of Disposable Personal Income)

Personal Saving Rate (% of Disposable Personal Income)

Lingering Headwinds of U.S. Balance Sheet Repair

1970-99 average: 74.3%

America: Lingering Balance Sheet Recession

0  20  40  60  80  100  120  140  160  

1970-99 average: 9.3%

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America’s Zombie Consumers (US real consumption: Average annualized growth)

!  The Balance Sheet Recession 2008-I to 2009-II: -1.8%

!  Anemic Recovery 2009-III to 2014-I +2.2%

!  25-Quarter Average 2008-I to 2014-I: +1.2%

****************************************** !  Pre-crisis trend 1996 to 2007: +3.6%

The Next America

America’s Rebalancing Imperatives

!  Saving agenda !  Capital investment: Physical and human !  Exports: Goods and services !  Restore competitiveness

America’s Net National Saving Rate (As % of Gross national Income) %

-­‐4  -­‐2  0  2  4  6  8  10  12  14  

Average 1970-99: 6.3%

Source: U.S. Department of Commerce 17  

Asymmetrical Rebalancing

Chinese Rebalancing: Likely

!  Surplus saving to saving absorption

!  Reduced demand for dollar-based assets

U.S. Rebalancing: Unlikely

!  Persistent saving shortfall

!  Reduced external funding from China

China

United States

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Symmetrical Rebalancing

China United States

Services-led Chinese growth ! Labor-Intensive ! Commodity-lite ! Greener growth

Services-led U.S. exports ! 84% of private jobs ! Services tradability ! Market access to China’s $4-6Tn bonanza

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From Codependence to Interdependence?

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Codependence: The unhealthy relationship !  Expect partner to serve your needs !  Loss of a sense of self !  Leads to frictions, imbalances !  Denial and the destructive blame game !  Unsustainable – the break-up !  Fixation on relationship risks

Interdependence: The healthy relationship !  Partners responsibly satisfy their own needs !  Maintain self identities !  Appreciate mutual benefits of partnership !  Constructive interactions !  Sustainable – reinforcing growth journeys !  Appreciation of relationship opportunities

Chinese Edition of Unbalanced

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Yale University Press January 2014 CITIC Press

July 2014