There have been many uncertainties over the past six months that, depending on how things played out, had the power to change what we can expect from the Next China, and what that means for the Next America.
The new leaders of China had their very important policy meeting in early November, the so-called Third Plenum of the Central Committee of the Chinese Communist Party. In the US, the government shutdown and ongoing political dysfunction roiled financial markets and raised serious new questions about America’s money-saving potential and the long-term outlook for the US economy. Meanwhile, security tensions have mounted between China and Japan over the Diaoyu/Senkaku Islands in the East China Sea, raising the threat of military confrontation between the two Asian powers and their allies.
I watched the news with that anxiety peculiar to nonfiction authors: the fear that one’s topical analysis will be quickly overwhelmed by the sweep of events. That was my worry during the seemingly interminable period that separated my final revisions to Unbalanced: The Codependency of America and China, submitted in August 2013, and the actual publication date in late January 2014. As things turned out, developments on these fronts (at least the first two) fit quite well with the central thesis of Unbalanced — that China is firmly on the road to rebalancing while America is not, and that this asymmetrical outcome poses both risks and opportunities for these two codependent nations.
China will shift to more of a consumer-led economy. The outcome of the Third Plenum makes this clear. Prior to that critical policy meeting, a gathering that is held only once every five years in China, the case for the long-awaited rebalancing of the Chinese economy was mainly a conceptual one. China had enacted its 12th Five-Year Plan in March 2011, but it provided more of a framework for economic restructuring than a series of concrete recommendations to speed the shift from the Producer Model of the past to more of a Consumer Society in the future.
That plan placed emphasis on providing new opportunities for Chinese families to boost their spendable incomes – opportunities centered on new sources of job creation in China’s emerging but still embryonic services sector, and higher per-capita incomes that come with urbanization. But there was no guarantee these opportunities would translate into new sources of discretionary consumption. Lacking a social safety net – that is, in light of unfunded retirement and medical care systems – Chinese families understandably remained quite fearful of an insecure future and were more likely to save any newfound income rather than spend it.
The reforms of the Third Plenum address this key shortcoming head on. The focus here was on specific proposals aimed at changing the very behavioral norms that have long stymied the emergence of a more active Chinese consumer. Phasing out the one-child family planning policy is an important case in point. So, too, were specific proposals aimed at reforming the residential permit system (the hukou), which had prevented the portability of social welfare benefits that any modern society needs. Equally encouraging were long awaited signs of an ending of the tight regulation of deposit interest rates for return-starved Chinese savers. The same can be said of a proposal to earmark 30 percent of the profits of China’s vast state-owned enterprises toward funding the nation’s unfunded social safety net programs.
This is a powerful combination – opportunities of job creation and higher incomes provided by the 12th Five-year Plan, and incentives to change behavioral norms of Chinese families by the Third Plenum. This puts China firmly on the road to a consumer-led rebalancing.
But it’s a development that America may not be prepared for. For as China shifts more to consumer-led growth, that means it will continue to draw down its surplus saving, which would, in turn, reduce its current account surplus, limit its accumulation of foreign exchange reserves, and reduce its demand for US Treasuries and other dollar-denominated assets.
That poses several key questions for the United States: With its largest foreign lender focusing more on saving absorption in its domestic economy than on investing its surplus saving in the United States, who will provide saving-short America with the surplus saving it needs in order to grow? In particular, who will take China’s place in helping to fund America’s outsized budget deficit – a question that seems all the more relevant in light of Washington’s latest efforts to keep kicking the fiscal can down the road? And, as China shifts from focusing on production to drawing greater support from internal consumption, who will provide the low-cost goods that hard-pressed middle-class American families now rely on to make ends meet? Finally, note that China is America’s third-largest and most rapidly growing export market. Will US industry be able to seize the opportunities inherent in what could be the world’s greatest consumer story of the 21st century?
Codependency is no way to maintain healthy human relationships. Neither is it sustainable for large economies. As my book went to press, there were plenty of reasons to anticipate an asymmetrical endgame to the codependency between America and China – that China would be the first of the two to move down the road of rebalancing. The questions central to Unbalanced have proved more relevant than ever. Geopolitical wildcards, especially with respect to intensified tensions with Japan but also in light of the ongoing cyberhacking dispute with the United States, also remain to be played, and may make for an even more destabilizing breakup. But that was always the ultimate catch of this codependent relationship. From the start, it was a marriage of convenience – not one based on love.