NEW YORK - Shortly before US Treasury Secretary Timothy Geithner testified before the Senate Banking Committee hearing on China's industrial policy, two high-caliber economists said that the high US trade deficits with China is an issue driven by the low US savings rate and election politics rather than the Chinese exchange rate.|
Stephen Roach, non-executive chairman of Morgan Stanley Asia and a senior lecturer at the Yale School of Management, told some 200 Council on Foreign Relations members Thursday morning that the main problem in the US is the lack of national savings.
"We are deluding ourselves if we think that we are going to solve our problems by bashing the Chinese," said Roach, who has testified many times before Congress on the subject of Chinese currency.
"We need to import surplus savings from abroad in order to grow, and we have to run this massive current account and multi-lateral trade deficits to attract the capital. If we pass a currency bill and don't save, which we are not going to do, the Chinese piece of multilateral balance goes somewhere to a higher cost producer that will tax the American public," warned Roach.
"Congress is clueless in understanding this," he said.
With the election season in hand, the drumbeat of Congress getting louder and the Obama administration and the Democratic Party in general in serious trouble, the rhetoric becomes dominated more by politics than by global macroeconomics, according to Roach.
He shows his understanding of the Chinese currency policy. "They have a policy that gives them more leeway to vary the RMB, and they have elected in a still extremely fragile global climate to be very cautious and judicious in a way in which they let their currency fluctuate," Roach said.
While politicians in the US refer to Chinese currency policy as manipulation, "the Chinese and others, including myself, refer to this as focus on stability anchor in an embryonic financial system. And given what's going on in the world's financial market in recent years, having a stability anchor policy is not particularly a bad thing," he said.
Jacob Frenkel, chairman of JPMorgan Chase International, said that given the extremely high savings rate in China and extremely low savings rate in the US, there is no doubt that the country that saves a lot will export its goods abroad and a country that consumes a lot more than it produces will import from the rest of the world.
"The change in Chinese exchange rate will not solve the problem unless the savings gap between China and the US also changes," said Frenkel, former governor of Bank of Israel.
While acknowledging that it's a choice up to the Chinese, the US could talk the Chinese into having a constructive discussion about narrowing the savings gap, citing the high savings rate in China as a result of its underdeveloped social security system and underdeveloped pension system as well as a growing aging population.
He suggested the US help design a program for China where people don't have to save so much in order to secure their future. "We will help you develop your financial market. And the beauty of the financial market is that when you develop it, you can transfer purchasing power from the present to the future and from the future to the present in an easy way," Frenkel said.
"That will translate and transform the debate from an exchange rate rivalry into a constructive structural development that is win-win for everyone," said Frenkel, also chairman of the Group of Thirty, an international body of leading financiers and academics that aims to deepen understanding of economic and financial issues and to examine consequences of decisions made in the public and private sectors, including the foreign exchange issue.
Roach, who has spent a lot of time in China and other parts of Asia, assured the audience that China needs to continue its rapid growth. "If they don't have the external support, they are going to turn internal," he said.
"I can promise you that they are looking very very hard, not just at the social safety net, but at a lot of other measures that will stimulate internal private consumption," said Roach, who predicts that China is going to raise its consumption share of the GDP by at least 5 percentage points in the upcoming five-year planning and draw down their national savings.
"By the way, they will then have less surplus savings to send our way, and how the heck we are going to finance our budget deficits? So be careful what you wish for," said Roach.