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Rebalancing the US-China Economic Relationship
Stephen S. Roach
Beijing July 2014
America and China: Economic Codependence
20
30
40
50
60
70
80
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
20
25
30
35
40
45
50
55
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012 0
10
20
30
40
50
60
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2
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
30
35
40
45
50
55
60
65
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
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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0
10
20
30
40
50
60
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
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
5
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
12
China India Indonesia Korea Thailand
% Change
GDP Growth Employment Growth
Social Stability: From Labor Saving to Labor Intensive
0
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)
6
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
10
20
30
40
50
60
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
8
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
m
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
9
Safety Net Imperatives: High-Speed Aging and Underfunded Retirement System
0
5
10
15
20
25
30
35
40
0
10
20
30
40
50
60
70
80
90
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
10
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
0
50
100
150
200
250
300
2008 2009 2010 2011 2012 2013-‐H1 2013-‐H2
0
20
40
60
80
100
120
2008 2009 2010 2011 2012 2013-‐H1 2013-‐H2
Central govt Local govt Small Businesses
Mid/ Large Corporates Households
China: Debt-to-GDP Ratios %
%
13
0
100
200
300
400
500
600
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”
0
100
200
300
400
500
600
2011 2012
Shadow Banking Assets as % of GDP
2011: 20% 2012: 26%
14
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
%
%
15
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%
0
2
4
6
8
10
12
14
16
16
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
21
Yale University Press January 2014 CITIC Press
July 2014
