April 14, 2010

Stephen S. Roach
Chicken or the Egg? Chairman, Morgan Stanley Asia

The China debate is terribly one-sided.
The same can be said for the broader
discussion over global rebalancing.
The emphasis in both cases has largely been
on the destabilizing impact of the surplus
Chinese saver. If China would only stop
manipulating its currency, goes the argument,
its current account surplus would vanish and
an unbalanced world would finally enter
the Promised Land of balanced growth.
What about the other side of the story? After all, barring
an extraterrestrial imbalance, earthly surpluses must always
be counter-balanced by deficits on the other side of the
international accounting ledger. Unfortunately, the blame
game has focused primarily on surplus savers, paying only lip
service to profligate deficit savers.
The global blame game has focused primarily
on surplus savers such as China, while paying
only lip service to profligate deficit savers such
as the United States.
In that spirit, it is equally important to contemplate an
alternative reality. It can best be seen through the lens of
America’s massive saving shortfall and its concomitant
current account deficit. This version of the unbalanced world
poses a very different dilemma: If the United States would
only start saving again—namely, reduce its budget deficit
and/or boost its long-depressed household saving rate—
it would become less reliant on surplus savers such as China
to fund its shortfall of domestic saving and provide cheap
goods for over-extended consumers.
Note: An edited version of this essay was originally published on Germany’s Handelsblatt as a commentary piece on April 14, 2010 under the title:
“Die USA schieben China den Schwarzen Peter zu”.
What came first—the surplus or the deficit? Was it China’s
saving-led development strategy that forced the United States
to squander its domestic saving and lead the external demand
that fueled the Chinese export machine? Or was it America’s
penchant for living beyond its means that required the world’s
savers, such, as China to run large current account and trade
surpluses to provide the US with both cheap capital and low-
cost imports?
Between the US and China, It is not clear which
came first—the surplus or the deficit.
Like all disputes, there are shreds of truth on both sides of
this tale. Yes, China is guilty of staying with an export-led
development model for too long and for failing to provide
adequate support to internal private consumption. Even so,
the US was hardly an innocent bystander here. Without the
profligacy of income-short America, China would have faced
weaker external demand and might have had to abandon the
old model sooner.
At the same time, the United States became addicted to
excess consumption—drawing freely on open-ended support
from asset and credit bubbles. America probably couldn’t
have pulled it off without China. Without the prowess of the
Chinese export machine and the surplus capital that made
its way into US asset markets, the United States might have
found it a good deal tougher to feed its addiction and stay the
course of unbalanced growth.
The concept of shared responsibility is missing from the
current debate. The West is collectively pointing its finger at
China. But it hardly utters a peep about the equally important
role the US has played in creating this problem. It is both
ironic and hypocritical that many politicians and global
thought leaders have concluded that the Great Crisis was
made in America but that China should be held accountable
for the imbalances that linger in the post-crisis world.
This is where I draw the line. As the global hegemon,
America should have known better. By opting for bubble-
dependent growth, it made a conscious choice to shift
from income- to asset-based consumption and saving.
Yet a saving-short US economy could not have pulled off
this transformation without the support of a new form of
vendor finance—namely, China’s massive accumulation of
foreign exchange reserves that have been disproportionately
recycled into dollar-based assets.
In the end, it always pays to be wary of unintended
consequences. China’s coming transition will have profound
implications for the United States and the rest of the world.
It will create vast new markets that will benefit most
exporters. But as China’s surplus saving gets diverted into
internal private consumption, it will have less capital left over
to bankroll other nations. Specifically, that means that China
will be less capable of funding America’s insatiable addiction
for excess consumption. And then, the chicken—or maybe
the egg—will finally come home to roost.

At the same time, Chinese mercantilism enabled the

American dream of open-ended consumption—providing Mr. Roach is the Chairman of Morgan Stanley Asia and
income- and saving-short consumers with an unlimited author of The Next Asia (Wiley 2009).
supply of low-cost and increasingly high-quality goods.
And by turning to China’s low-wage workforce, American
multinationals benefited handsomely from Chinese
outsourcing options—boosting their earnings, share prices,
and wealth of asset-dependent consumers.

In essence, for the United States, it was a virtuous circle

of virtual purchasing power—partly made in China at the
implicit bequest of the overly indulgent American consumer.
This is where hypocrisy enters the equation: China is being
chastised for a mercantilist currency policy by those who
benefited the most from this so-called manipulation.

It is hypocritical for those who benefit the

most from Chinese trade and capital flows to
chastise China for its mercantilism.

Of course, the blame game is always subjective. But,

ultimately, this dispute goes right to the heart of the value
proposition that shapes economic development. Just thirty
years ago, the Chinese economy was on the brink of collapse.
Export- and investment-led growth was China’s salvation—
producing nothing short of a miracle in the annals of poverty
reduction and economic development. China did what it had
to do in order to avoid the abyss.

That was then. China knows full well that it now needs to
transition to a different growth structure—one that shifts
support from external to internal demand. But it puts a high
value on 30 years of extraordinary progress, and does not want
to squander those gains by acceding to destabilizing western
demands for a large currency revaluation. That doesn’t mean
China won’t bend. As it shifts to more of a consumer-led
economy, China can be expected to do so with a return to the
gradual renminbi appreciation strategy that was in place from
mid-2005 to mid-2008.

2
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