Follow us on:   

Why the US is troubled by China’s rebalancing
March 5, 2014, 8:47 am

Once again, all eyes are on emerging markets. Long the darlings of the global growth sweepstakes, they are being battered in early 2014. Perceptions of resilience have given way to fears of vulnerability.

Chinese President Xi Jinping (L) and U.S. President Barack Obama before their second meeting, at the Annenberg Retreat, California, the United States, June 8, 2013 [Xinhua]

Chinese President Xi Jinping (L) and U.S. President Barack Obama before their second meeting, at the Annenberg Retreat, California, the United States, June 8, 2013 [Xinhua]

The US Federal Reserve’s tapering of its unprecedented liquidity injections has been an obvious and important trigger. Emerging economies that are overly dependent on global capital flows-particularly India, Indonesia, Brazil, South Africa, and Turkey-are finding it tougher to finance economic growth. But handwringing over China looms equally large. Long-standing concerns about the Chinese economy’s dreaded “hard landing” have intensified.

In the throes of crisis, generalization is the norm; in the end, however, it pays to differentiate. Unlike the deficit-prone emerging economies that are now in trouble-whose imbalances are strikingly reminiscent of those in the Asian economies that were hit by the late-1990’s financial crisis-China runs a current-account surplus. As a result, there is no risk of portfolio outflows resulting from the Fed’s tapering of its monthly asset purchases. And, of course, China’s outsize backstop of $3.8 trillion in foreign-exchange reserves provides ample insurance in the event of intensified financial contagion.

Yes, China’s economy is now slowing; but the significance of this is not well understood. The downturn has nothing to do with problems in other emerging economies; in fact, it is a welcome development. It is neither desirable nor feasible for China to return to the trajectory of 10 percent annual growth that it achieved in the three decades after 1980.

Yet a superficial fixation on China’s headline GDP growth persists, so that a 25 percent deceleration, to a 7 to 8 percent annual rate, is perceived as somehow heralding the end of the modern world’s greatest development story. This knee-jerk reaction presumes that China’s current slowdown is but a prelude to more growth disappointments to come-a presumption that reflects widespread and longstanding fears of a broad array of disaster scenarios, ranging from social unrest and environmental catastrophes to housing bubbles and shadow-banking blowups.

While these concerns should not be dismissed out of hand, none of them is the source of the current slowdown. Instead, lower growth rates are the natural result of the long-awaited rebalancing of the Chinese economy.

In other words, what we are witnessing is the effect of a major shift from hyper-growth led by exports and investment (thanks to a vibrant manufacturing sector) to a model that is much more reliant on the slower but steadier growth dynamic of consumer spending and services. Indeed, in 2013, the Chinese services became the Chinese economy’s largest sector, surpassing the combined share of the manufacturing and construction sectors.

The problem, as I argue in my new book, Unbalanced: The Codependency of America and China, is not with China, but with the world-and the United States, in particular-which is not prepared for the slower growth that China’s successful rebalancing implies.

The codependency construct is rooted in the psychopathology of human relationships whereby two partners, whether out of need or convenience, draw unhealthy support from each other. Ultimately, codependency leads to a loss of identity, serious frictions, and often a nasty breakup-unless one or both of the partners becomes more self-reliant and strikes out on his or her own.

The economic analogue of codependency applies especially well to the US and China. China’s export-led growth miracle would not have started in the 1980’s without the American consumer. And China relied heavily on the US dollar to anchor its undervalued currency, allowing it to boost its export competitiveness.

The US, for its part, relied on cheap goods made in China to stretch hard-pressed consumers’ purchasing power. It also became dependent on China’s savings surplus to finance its own savings shortfall (the world’s largest), and took advantage of China’s voracious demand for US Treasury securities to help fund massive budget deficits and subsidize low domestic interest rates.

In the end, however, this codependency was a marriage of convenience, not of love. Frictions between the two partners have developed over a wide range of issues, including trade, the renminbi’s exchange rate, regional security, intellectual property, and cyberattacks, among others. And, just as a psychologist would predict, one of the partners, China, has decided to go its own way.

China’s rebalancing will enable it to absorb its surplus savings, which will be put to work building a social safety net and boosting Chinese households’ wherewithal. As a result, China will no longer be inclined to lend its capital to the US.

For a growth-starved US economy, the transformation of its codependent partner could well be a fork in the road. One path is quite risky: If the US remains stuck in its under-saving ways but finds itself without Chinese goods and capital, it will suffer higher inflation, rising interest rates, and a weaker dollar. The other path holds great opportunity: the US can adopt a new growth strategy-moving away from excess consumption toward a model based on saving and investing in people, infrastructure, and capacity. In doing so, the US could draw support from exports, especially to a rebalanced China-currently its third-largest and fastest-growing major export market.

Compared with other emerging economies, China is cut from a different cloth. China emerged from the late-1990’s Asian financial crisis as the region’s most resilient economy, and I suspect the same will be true this time. Differentiation matters-for China, Asia, and the rest of the global economy.


This article first appeared in China Daily.

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

3 Responses to Why the US is troubled by China’s rebalancing

  1. Vaibhakoroz Reply

    March 8, 2014 at 11:35 am

    This article shows economic dependency of Chinese Economy on USA. China no doubt carries huge Forex Reserves, but still it lagging USA in Technological field & Per-capita sector . Also, China is surrounded by powerful Asian powerhouse including Russia,Japan & more importantly economic & nuclear power India, which soon going to become 3rd biggest economy of world.

  2. Roache Reply

    March 23, 2014 at 3:58 pm

    Why are ultra-wealthy Chinese oligarghs and Party Members, plus military brass, fleeing to the West in such large numbers and apparently being allowed to take their wealth with them [black credit cards]? They buy “price-no-object” assets, often for cash, in the US-UK causing inflated land and real estate prices in areas they target?

    The Triads have been in the West en masse for decades. They present no obvious problems, but are infiltrating the financial system and other lines of business. All but the most insignificant of their number seem to have the same “get out of jail free” card that Western Elites (there must be a better word) enjoy.

    Globalization is co-dependency, but don’t try to tell that to the fanatics, especially psychopaths who are simply unable to comprehend “win-win”. Global corruption is now at unimaginable levels – there is little or no trust possible. Even if neo-liberal goobalist nonsense is disgarded, and some form a mega regionalism emerges, how can civilization remain viable?

  3. Braziliant Reply

    March 25, 2014 at 2:39 am

    Interesting article. So nice to learn that the hard-working Chinese people will see increasing prosperity for its majority and finally reap what they have sowed without ever oppressing the entire planet as was the case of the declining, desperate, compulsively barbarian West . Present economic details left aside, all of us in the planet should acknowledge FACTS : China is a civilization of more than 5200 years and it is THE exceptional civilization par excellence and its own virtues, not by self-proclamation, neither by militaristic oppression of others. I hope the West learns from China and grows out of its militaristic mindset and become more civilized, leaving its barbaric past as history, for its own sake, becoming really civilized. China recently became Brazil´s largest trading partner and I can not wait for the moment Brazil and China start trading in our own currencies. I doubt it will take too long . The next Olympics are looming here in Rio de Janeiro and welcome China to top the medals chart as the symptom of its rightful position amongst all nations. By that time, I believe China will be the inevitable number 1 economy in this planet. It is its natural, unavoidable position : VIVA CHINA .

Leave a Reply

Your email address will not be published. Required fields are marked *

Anti-Spam * Time limit is exhausted. Please reload the CAPTCHA.