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U.S. – China Relations:
An Unsustainable Codependency?
Stephen Roach
Senior Fellow
Yale University
Sir Gordon Wu Distinguished Speaker Forum
Columbia University
May 6, 2015
America and China: The Relationship Puzzle

Two largest economies in the world
• PPP: China surpassed the US in 2014
• US dollars: China surpasses the US in 2025-28

Two largest exporters in the world
• U.S. is China’s largest export market
• China is America’s third largest and most rapidly
growing export market

Tensions on many fronts
• Trade and currency
• Security: East and South China Seas
• Cyberhacking
• Human rights

Risk or opportunity?
America and China: Economic Codependency
%
Mirror Images:
Consumption Shares of US and Chinese GDP
80

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 codependency

The rebalancing solution
United States
70
60
50
40
China
30
20
Source: China National Bureau of Statistics and
U.S. Department of Commerce (2013)
Codependency as a Psychological Disorder

“Relationship addiction” that often involves placing a lower priority on ones own
needs while being excessively occupied with the needs of others

Asthenic personality disorder (DSM diagnostic code: 301.6)

Triggers reactive responses to partner; sense of self is externally oriented – not
internally focused

A progressive disorder: From manageable and sustainable to unmanageable and
unsustainable

Defensive Functioning Scale:
1. High-adaptive level
2. Mental inhibitions (compromise formation) level
3. Minor image-distorting level
4. Disavowal level
5. Major image-distorting level
6. Action level
7. Level of defensive dysregulation

From individuals to economies?
Source: American Psychiatric Association, Diagnostic and Statistical Manual of Mental Health Disorders,
Fourth and Fifth editions (2000 and 2013)
The Timeline of US-China Codependency
1978
2007
2010: America’s Dodd-Frank Bill
2011: China’s 12th Five-Year Plan
1978
2007
2013
China
Post-Cultural
Revolution
Four Uns of
Wen Jiabao
Third Plenum
United States
Stagflation
Great Crisis
Government
Shutdown
2013
1978: In the Beginning
1978
2007
America: Stagflation
1950-69
1970-79
China: Lagging Per Capita GDP: 1950-78
Index
800
%
8
700
600
500
7
Japan
S. Korea
400
300
Thailand
6
5
4
3
200
100
2013
China
2
1
0
Year
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
0
Source: International Monetary Fund, WEO database
GDP growth
CPI inflation
Unemployment rate
1980 to 2007: A Marriage of Convenience
China: The Ultimate Producer
America: The Ultimate Consumer
%
US $
7000
70
35
6000
68
40
Export share
Of GDP (LHS)
30
5000
%
Consumption
Share of GDP
66
64
25
4000
62
20
3000
60
Source: National Bureau of Statistics (China), IMF, BEA US Department of Commerce
2012-Q1
2009-Q1
2006-Q1
2003-Q1
2000-Q1
1997-Q1
1994-Q1
1991-Q1
1988-Q1
1985-Q1
1982-Q1
1979-Q1
2011
2008
2005
2002
1999
1996
1993
54
1990
0
1987
0
1984
56
1981
1000
1978
5
1976-Q1
58
1973-Q1
2000
GDP per
capita (RHS)
10
1970-Q1
15
2007: The Wake-Up Call
1978
China: The “Four Uns”
“Unstable, unbalanced, uncoordinated, and
unsustainable”
-- Premier Wen Jiabao, March 2007
2007
2013
America: The Great Financial Crisis
2009: The Response
America: Unconventional Approach
China: Conventional Approach
%
Real GDP growth
%
16
Investment share
of GDP (RHS)
14
60
50
12
40
10
Total FR Assets
$Bil
%
6
5000
4
4.3% Past recoveries
2
2.3% Current recovery
8
30
Real GDP growth (LHS)
6
20
4000
3500
0
CRISIS
4500
3000
-2
2500
2000
-4
4
1500
10
2
-6
1000
-8
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
0
CRISIS
-10
1/3/07 1/3/08 1/3/09 1/3/10 1/3/11 1/3/12 1/3/13 1/3/14
Source: National Bureau of Statistics (China), Federal Reserve, and BEA US Department of Commerce
500
0
2013: Divergent Policy Strategies
1978
2007
China: Third Plenum of 18th Party Congress
November 9 to 12, 2013
2013
America: Government Shutdown
October 1 to 16, 2013
China’s Strategy: Pro-Consumption Rebalancing
BUILDING BLOCK
EMPLOYMENT
LABOR-INTENSIVE SERVICES
WAGES
INCOME LEVERAGE OF URBANIZATION
SAFETY NET
SAVING AND INEQUALITY
IMPLEMENTATION
POLITICAL COMMITMENT
12TH FYP
THIRD PLENUM
GOOD PROGRESS
TRADE AND INVESTMENT
SOE REFORMS
INNOVATION
GOOD PROGRESS
LAND POLICY
INNOVATION
POOR PROGRESS
HUKOU REFORM
ONE-CHILD FAMILY
DEPOSIT RATE LIBERALIZ.
FUNDING: SOE TAX HIKE
MIXED PROGRESS
REVOLUTION IN GOVERNANCE:
LEADING SMALL GROUP
First Steps on China’s Road to Rebalancing
Shifting Mix of Chinese GDP
Services Share of GDP
Primary
Secondary
Tertiary
60
100%
Targetedin
inthe
12th12th
Five-Year
Plan
(2011-15)
Targeted
Five-Year
Plan
* = 2014 actual
80%
50
40
60%
30
*
40%
20
GDP Shares: 2014
Primary
9.2%
Secondary 42.6%
Tertiary
48.2%
20%
10
Targeted in
0%
China
Korea
India
Taiwan
Japan
US
0
Source: OECD and China National Bureau of Statistics (2014)
11
America’s Strategy: The Invisible Hand
Saving-Short America
%
14
The Saving Imperative
12
Net Domestic Saving Rate
10
Chronic saving shortfall
• Government
• Households
8
1970-99 average
6
4
The “vision thing”
2
0
-2
-4
1970-Q1
1972-Q1
1974-Q1
1976-Q1
1978-Q1
1980-Q1
1982-Q1
1984-Q1
1986-Q1
1988-Q1
1990-Q1
1992-Q1
1994-Q1
1996-Q1
1998-Q1
2000-Q1
2002-Q1
2004-Q1
2006-Q1
2008-Q1
2010-Q1
2012-Q1
2014-Q1
Funding the competitiveness agenda
• Investment in human capital
• Investment in infrastructure
• Investment in new capacity
Source: US Department of Commerce (BEA)
Longer Term Outlook: Asymmetrical Rebalancing
Chinese Rebalancing: Likely
 Surplus saving to saving absorption
 Reduced demand for dollar-based assets
China
United States
U.S. Rebalancing: Unlikely
 Persistent saving shortfall
 Reduced external funding from China
Mounting US-China Tensions
 U.S. presidential election campaign
 China: From inward to outward facing
• One Belt, One Road
• New Development Bank (BRICS)
• Asian Infrastructure Investment Bank (AIIB)
 Trade and Currency
• Bilateral distortion of multilateral problem
• Renminbi policy
• U.S. Congress: Currency Reform for Fair Trade Act
• BIT on hold
• TPP without China
 Hegemon vs. rising power
• From “hide and bide” to China Dream
• America’s Asia pivot
• Containment or engagement?
The Hegemon and the Rising Power
Chinese vs. U.S. GDP: 1890 to 2015
(Ratio in purchasing power parity)
1.2
1
0.8
0.6
0.4
0.2
0
1890 1900 1913 1929 1936 1950 1960 1970 1980 1990 2000 2010 2015
Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD (2011)
and International Monetary Fund World Economic Outlook database
From Codependence to Interdependence?
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