Op-Ed Contributors

A giant step toward solutions

By Stephen S. Roach (China Daily)
Updated: 2011-03-22 07:56

The 12th Five-Year Plan provides a reasonably coherent framework as to how China will go about implementing this daunting transition. The plan depicts three legs to the consumer-led growth stool - boosting employment, raising wages, and shifting the allocation of the resulting increment in labor income away from saving toward spending. The goal is to generate a windfall of discretionary purchasing power for China's 1.3 billion consumers - the ultimate sustenance of any consumer-led growth dynamic.

There is an important global twist to the new plan. China has been one of the greatest beneficiaries of globalization. But globalization, of course, is not a one-way street. Shifts in the Chinese macro structure have important implications for the rest of the world. Nowhere could that be more evident than in the United States.

China will make solid progress on the road to rebalancing over the next five years. By the end of the 12th Five-Year Plan, the private consumption share of China's GDP will have risen into the 42 percent to 45 percent range - still quite low relative to other major economies but a meaningful improvement from the rock-bottom 35 percent reading of 2008 (and about 36 percent at present).

The United States will not, however, embrace its post-crisis adjustment imperatives with equal fervor. Particularly disconcerting is the US saving prognosis - the mirror image of America's bubble-dependent consumption binge. While household saving rates have moved up a bit - from pre-crisis lows of 1 percent to around 5.5 percent at present - this improvement has been more than offset by the massive dissaving of outsize government budget deficits.

The result is that America's net national savings rate - depreciation-adjusted savings of households, businesses, and the government sector combined - remains in rarefied negative territory, averaging -1.2 percent of national income over the first three quarters of 2010. Notwithstanding Washington's steadfast assurances, the prospects for deficit reduction and a meaningful revival in domestic US savings are far from encouraging.

Therein lies what could be a critical source of global tension - an asymmetrical global rebalancing scenario. China, the world's largest surplus saver, could well rebalance before the US, the world's largest deficit saver. Such an outcome could prove quite problematic for the US economy and for world financial markets. As China shifts its macro structure toward private consumption, its surplus household savings will decline, reducing its current account surplus, its accumulation of foreign exchange reserves, and its demand for dollar-denominated assets. At the same time, deficit-prone America will see no slackening of its appetite for surplus saving from abroad.

In such an asymmetrical rebalancing, there can two possible outcomes: One, saving-short America miraculously comes up with a new source of funding - namely another nation that is willing to suppress domestic demand so that the US can continue to live beyond its means. Or, two, the world demands very different terms on which the US secures its external funding - namely a sharply weaker dollar and/or a rise in real long-term interest rates. Needless to say, the global repercussions of a US funding crisis would hardly be inconsequential. The odds would most assuredly rise for collateral damage in the real economy - a recessionary relapse, or the dreaded global double dip.

That's not to say it will be easy. There will undoubtedly be bumps on the road. And China can stay the course provided it resists denial and remains committed to the reforms, opening-up and development that have served it so well over the past 30 years. The 12th Five-Year Plan is a historic step in this direction.

The author is a member of faculty at Yale University, and non-executive chairman of Morgan Stanley Asia and has The Next Asia to his credit.

This is an excerpt of his speech delivered at the 12th annual China Development Forum in Beijing on March 20-21.

(China Daily 03/22/2011 page9)