Stephen Roach: China and the US Like Two Ships Passing in the Night

From Morgan Stanley economist Stephen Roach's February 3rd essay:

Much is made of the so-called symbiotic relationship between the US and China. It has been an especially good story over the past five years. With the US consumer driving the demand side of the global economy and the Chinese producer increasingly driving the supply side, the two economies appear to fit together like a glove.

China’s apparent willingness to play a disproportionate role in funding America’s gaping current-account deficit only adds to this conviction. My advice: Don’t get used to it. Like two ships passing in the night, both China and the US are headed in very different directions.

At the macro level, disparities between consumption and saving underscore one of the most important differences in the structure of the US and Chinese economies. US consumption has been holding at a record of around 71% of GDP since early 2002, while the gross national saving rate fell to only about 13.5% in 2005.

By contrast, based on China’s newly revised national income statistics, the consumption share of GDP appears to have slipped to a record low of slightly less than 50% in 2005, whereas the overall Chinese saving rate rose above 45% last year. In both cases, these are unsustainable extremes. America needs to consume less and save more, whereas China needs to do precisely the opposite -- save less and consume more...

Policy activism has long been central to China’s extraordinary progress on the road to reform. China is now proposing to tackle its excess saving and subpar consumption story with the same fervor evident when it went after other aspects of its growth and reform story during the past 28 years. While success can hardly be taken for granted in a nation that knows little of the magic of the consumer culture, experience cautions in taking the other side of this bet.

Failure has not been an option for determined Chinese reformers. And I don’t think it will be this time, either. This determination stands in sharp contrast with Washington’s inattentiveness to saving initiatives. That could spell trouble for the US. As these two ships pass in the night, America may feel China’s wake most acutely in the form of a painful and long overdue current account adjustment. So much for the pipe dream of a newly symbiotic world.

Full essay here.