China-US relations no Hollywood script

Imagine two people, together 35 years.

Family members, workmates, friends, romantic partners - it doesn't matter. The point is that out of love, or convenience, they've grown to depend on each other - heavily.

Despite the mutual benefits of their relationship, they rely on one another so much that their identities have become blurred. They don't know who they are.

Now they turn on one other, angry, frustrated. Ultimately, they break up. There is much pain.

"That is the US and China."

The speaker is economist Stephen Roach.

The senior fellow at Yale University's Jackson Institute for Global Affairs and a senior lecturer at Yale School of Management, Roach told the National Committee on US China Relations one recent snowy evening that the world's two largest economies are like a couple suffering from a psychological malady known as codependency.

Repeating the thesis of his new book Unbalanced: The Codependency of America and China, the former chairman of Morgan Stanley Asia said the Chinese and US economies have been locked in an uncomfortable embrace since the late 1970s.

Although the relationship initially arose out of mutual benefits, in recent years it has taken on the trappings of an unstable codependence, with the countries losing their sense of self, increasing the risk of their turning on one another destructively.

"The US power structure did not get China," Roach said of the US government as China was emerging, years ago, as the new leader of the pan-Asian economy. "The view from the US was that China needs us more than we need them. We can count on China to sell us cheap goods, provide us with a new source of savings. We don't have to save any more, just importing surplus savings from China would be fine. We can run big deficits because China will fund our deficits because they have nowhere else to park their money," Roach said.

He was referring to China's status as the largest foreign US creditor with $1.317 trillion in US Treasury securities held in November.

"We as consumers depend a lot on cheap goods from China to stock our shelves at Walmart to make ends meet," Roach said. "We don't save as a nation, so we borrow freely from the world largest surplus saver, China. China provides us with an insatiable demand for US Treasuries, which we need because of our inability to fund our deficits ourselves."

On the other hand, "China depends on exports for economic growth - its major export market has been the US. The US is a nation of consumers. China is (a country of) exporters and investment. So the dependency is a two-way street - we need them, they need us. Yet, both economies marching down this road of codependency have become unstable and unbalanced and ultimately unsustainable," Roach said.

For China, the next step in its evolution is "breaking the shackles of co-dependency", Roach said. That means transforming itself from a producer to a consumer - building out the service sector to promote new sources of job creation to limit overreliance on manufacturing; raising wages; and building out its social savings net, including retirement benefits, pensions and unemployment insurance.

"If the model works, it will transform China from a surplus saver to a nation that begins to absorb surplus savings," Roach said.

The makeover would alter the US-China relationship but in the wake of the 2008 crisis, both economies face urgent and mutually beneficial rebalancing, according to Roach.

The economist repeated his view that China's rebalancing needn't impair "the Chinese development miracle". The country's GDP grew 7.7 percent in 2013, beating the government's 7.5 percent growth target; but its reliance on investment in the latter part of the year to prop up the GDP raised speculation that the rebalancing strategy - which many economists say is needed to ensure sustainable growth - is sputtering.

"What matters is not the quantity but the quality of economic growth," Roach said. "I will take 7 percent growth from China any day if it is more balanced, if it's less resource, less energy intensive; if it's more labor-intensive, as services are. You don't need 10 percent growth if you can absorb the same amount of surplus labor with 7 percent."

"You've got to change the model," Roach said. "This idea that China is in the early stages of a major protracted slowdown in economic growth that will lead to an outbreak of social instability - it's a movie script," he said.

Roach wrote that structural reforms will face resistance in both countries - China remains focused on strengthening its producer culture and the US seems unwilling to cut back on personal spending and consumerism. Ultimately, he said, the strategic thinking and economic management skills of both the US and China will determine whether the transition to a more mutually self-aware relationship is both stable and peaceful.

Policy makers, take note.

Contact the writer at michaelbarris@chinadailyusa.com