Un Prospectiv
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Chinese Reform, U.S. Stasis
By STEPHEN S. ROACH
HONG KONG — The Third Plenum, a twice-a-decade meeting where China’s leaders set economic policy, ended Nov. 12 with a consensus that the country should shift away from a growth strategy focused on producing exports for the United States and other wealthy countries to one that draws increasing support from its 1.3 billion consumers.
By STEPHEN S. ROACH
HONG KONG — The Third Plenum, a twice-a-decade meeting where China’s leaders set economic policy, ended Nov. 12 with a consensus that the country should shift away from a growth strategy focused on producing exports for the United States and other wealthy countries to one that draws increasing support from its 1.3 billion consumers.
But these reforms have been urged for nearly seven years, and the previous generation of Chinese leaders didn’t carry them out. What’s different this time?
There are two reasons to believe that the leadership’s latest promises are credible, and that the reforms will be momentous, maybe even historic.
First, President Xi Jinping, who took office a year ago, operates from a very solid power base, with unquestioned command over the party, the state and the Chinese military. In contrast, his predecessors Jiang Zemin, the president from 1993 to 2002, and Hu Jintao, the president from 2002 to 2012, took years to consolidate their power.
Second, the imperative for change is greater today in China than at any point since the tumultuous period following the Cultural Revolution. Just as Deng Xiaoping seized on those precarious circumstances in the late 1970s to enact a fact-based, nonideological platform of “reforms and opening up,” Mr. Xi must do the same to avoid faltering growth and avert social instability.
Power and urgency don’t guarantee success, but they suggest that China will bring a strong level of commitment to this daunting task.
The economic transformation spelled out in the various decision documents of the Third Plenum reveals a significant shift in China’s development strategy. Market-determined pricing — for necessities like fuel, food and pharmaceuticals; services; and eventually even the renminbi, China’s currency — is now emphasized over allowing the state to arbitrarily set these prices.
This new embrace of the market as the “decisive” factor in allocating resources and capital will help address many economic imbalances: overcapacity in manufacturing; the fixing of deposit interest rates on consumer savings accounts by the central bank, which has the effect of subsidizing banks and penalizing savers; and the excess liquidity that results from a tightly controlled currency.
By limiting the rise of the renminbi to support exports, China is forced to inject excess liquidity into its domestic economy by issuing government bonds. That fuels property bubbles and makes housing unaffordable for many Chinese families. Letting the currency fluctuate freely in foreign exchange markets would help eliminate these distortions.
Perhaps the government’s greatest challenge is to change the behavior of Chinese families from fear-driven savers to more active consumers.
The Third Plenum addresses that fear by proposing a long overdue relaxing of the one-child policy. Also notable are a proposed elevation of farmer’s rights, a more equitable system of land rights and a revamping of the antiquated household residential system, known as hukou, that made it nearly impossible for nearly 200 million migrant workers to transfer social welfare benefits from their hometowns to their places of employment. The government also plans to set aside up to 30 percent of the profits of state-owned businesses to finance safety-net programs, including social security and health care.
The rest of the world should welcome this rebalancing from a producer model to a consumer society. But it could prove especially challenging for the United States. Over the past 20 years, China and America have been locked in an increasingly uncomfortable embrace. China supported America’s growth agenda by producing cheap goods and buying Treasuries, and American consumers helped China by their insatiable demand for cheap imported goods.
As in relationships, codependence is not sustainable for economies. It can cause nations to lose confidence and could lead to frictions and, ultimately, economic conflict, like a trade war.
The coming transition to a rebalanced China changes the rules of engagement in this co-dependent relationship. America seems unprepared for this possibility. Long dependent on China as the world’s ultimate producer, the United States may have a hard time waking up to the reality of a China that is less focused on enabling America’s excess consumption and more interested in spending money on social services rather than buying Treasuries and helping to keep United States interest rates down.
The United States needs to liberate itself from the mind-set that it cannot afford to change its economic strategy. It must shift the fixation on consumption for today’s generation to greater focus on saving and investing for future generations. The sluggish recovery and unacceptably high unemployment make this shift difficult, but not impossible.
The restructuring suggested by China’s Third Plenum is an enormous opportunity for growth-starved economies like the United States’. The coming emergence of the Chinese consumer could be the greatest global growth bonanza of this century, benefiting American manufacturing and services enterprises alike. But that won’t happen unless American leaders have the vision and commitment to restore competitiveness through savings, innovation and investment. An asymmetrical rebalancing — Chinese restructuring and American stasis — is a recipe for failure.
Thirty-five years ago, an earlier Third Plenum gave Deng Xiaoping an opportunity for China to unleash the most powerful economic development story of modern history. America needs its own Third Plenum moment.
Stephen S. Roach, a senior fellow at the Jackson Institute of Global Affairs at Yale University and a former chairman of Morgan Stanley Asia, is the author of the forthcoming book “Unbalanced: The Codependency of America and China.”
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