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Chairman-Morgan Stanley/Asia on “from US excess to Chinese consumption”

Tuesday 18 January, 2011

Stephen Roach, non-Executive Chairman of Morgan Stanley Asia,  Sr. Fellow @ the Jackson Institute for Global Affairs @ Yale, & author of The Next Asia, recently talked about GLOBAL IMBALANCES: MOVING FROM U.S. EXCESS TO CHINESE CONSUMPTION which was hosted by the Chicago Council on Global Affairs.  Steve believes we really are in post-crisis mode in the US, but not yet in Europe because of their sovereign debt crisis, but there is no clear demarcation @ the beginning & end of a crisis, so this is all speculation.  There are 3 very basic interrelated issues about which we need to be concerned:

  1. global demand is dictated by American demand, but after 12 years of 4% annual growth & spending beyond our means with debt to fuel that, we’ll need years to rebuild those finances.  Europe is trying to be fiscally responsible, but no 1 country can replace that void.  The world is acutely unbalanced towards American consumers & needs to be rebalanced.
  2. China has taken over the supply side with 30 years of 10+% growth, but that’s unsustainable because even in the words of Premier Wen Jiabao, it’s “unstable, unbalanced, uncoordinated, & unsustainable.” (March 16, 2007).  Despite the export boom, 20M Chinese have lost their jobs, which makes them hostage to world demand.  Their social safety net is unfunded, so they have little security.  Income inequality is a problem & getting worse, so they are supporting rural policies & committed to changing programs to create jobs in services & consumption opportunities.  Their 12th 5 year plan is pro-consumption.
  3. US fiscal, monetary, & currency policies are imbalanced.  Policymakers are doing what consumers demand-throwing money @ the problem, but our tax cuts contribute to the fiscal deficit.  We have a currency problem with China.  US companies can combat a manipulated currency, but it requires huge bipartisan support.  A New York Times columnist estimates that issue costs America 1.5M jobs.  Our current approach is dead wrong.  It’s a multilateral problem, so there is no easy fix, but it is urgent.

Q&A with Michael Moskow

  • China’s goal is simply social stability, so consumption needs to be their own choice.   Europe & the US have convinced the Chinese they need a new source of demand.
  • If the US consumer comes flying back, there is no urgency to change.  But if not, can our value proposition as a consumer society come to fruition without a change in policy?
  • inflation is a tough problem in China.  Walmart must get permission from the government to raise prices.  Cyclical inflation, particularly in food, is a problem.  The Bank of China should be aggressive in changing interest rates, but doesn’t, so they have to play catch-up.
  • Roach worries about protectionism with a new US congress because of high unemployment
  • China is more aggressive on security issues regarding North Korea.  The last thing China wants is a unified Korea, which will move US military forces closer to the Chinese border.
  • There are 2 different views on how to solve our current economic problems:  be prudent like the European Central Bank or throw money @ the problem as the US is doing.  Both can’t be right.  The US must recognize it’s temporary, but they’re not hearing it.  Injecting liquidity without lending is just adding money on deposit.
  • Fiscal policy requires a framework that gives a long-term exit strategy.
  • Bernanke is trying to recreate an asset-backed growth strategy, but Roach is no fan of it & say’s it’s been a trainwreck.
  • Deflation is a bit of a worry, but there is no cumulative downward spiral.
  • Investments in China should be based on government structures.  A disproportionate share of companies will fail, but there is enthusiasm about consumer businesses.

Open Q&A

  • China saves 54% of its GDP, but has no social safety net, so paying $400 of lifetime health care benefits to 700M people is a problem.
  • We can learn to emphasize financial (labor, economic, social) stability from China, & although we can’t eliminate bubbles, move quickly with regulatory & policy tools to solve problems.  For example, in April, 2010 China raised down payment requirements & made them all cash to combat a property speculation bubble.
  • The Chinese are raising a lot of capital in international capital markets & attracting institutional investors, but they must present their accounting more transparently.  They have no understanding of a services culture.  They need education to scale that up.
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