Stephen Roach, Non-Executive Chairman of Morgan Stanley Asia and senior fellow of Yale University
Currency, trade and capital markets were the main topics at this year's annual Executive Summit held by the China Institute in New York City. Alongside the summit, Stephen Roach, Non-Executive Chairman of Morgan Stanley Asia and senior fellow of Yale University, and Steven Dunaway, adjunct senior fellow for International Economics, Council on Foreign Relations and former Deputy Director of the Asia and Pacific Department of the IMF, shared their views on these three issues of current concern with Beijing Review reporter Chen Wen. Edited excerpts follow:
Attitude on growth
Stephen Roach: China definitely needs to shift its growth model away from drawing support from exports and external demands and focus it more on the internal demands of the Chinese people. Now, there are a number of reasons China needs to do this.
For one thing, a better balanced economy is more sustainable. Second, it will also be very positive for China to reduce excess savings and current account surpluses that will alleviate pressure brought to China from the rest of the world. And third, which I think is most important, the external environment is going to be weak because of the crisis. China needs strong growth to absorb surplus labor to maintain social stability. If it continues to rely on foreign demand, it's going to find itself in trouble.
So, for all of those reasons, China needs to shift the growth structure and it needs to do it quickly.
Steven Dunaway: The problem is political, because right now I think it'll be very difficult to make tremendous amounts of progress with a change in leadership coming. Up to now, the Chinese growth model has been presumed to be very successful. But you can't continue this model, because China is becoming too large.
The leadership has already recognized it. Premier Wen Jiabao in 2008 said implicitly that the economy is not sustainable. But the problem is with this transition, there is the tendency that any reforms would be implemented very slowly over the next three years. That's a big problem, because the rest of the world is impatient and unwilling to wait for China to change.
China, for its own sake, should respond much quicker. The leadership believes they have time to make a gradual transition. But China had better take advantage of good economic conditions as soon as possible. When economic conditions are right, it's the ideal time to take bolder steps.
Current accounts targets
Stephen Roach: China's current account surplus is lower right now because of the state of the global economy and the business cycle. It's likely to get larger over the next few years if no policy adjustments are made.
I am very much in favor of the new framework that seems to have been endorsed at the G20 finance meeting in South Korea last month. It's much more of a practical and workable framework than relying on currency adjustment, which I think is doomed to fail anyway.
But I don't think we want to aim to get precise numerical targets. The goal here is for surplus savers like China to reduce their current account surpluses and to have policies on the path to continue to lead to further reductions over a sustained period of time. At the same time we want deficit savers like the United States to save more and reduce their current account deficits and set policies that will achieve that outcome. If we can do that, then we're on a much more workable path for the global economy that will alleviate these massive imbalances.
Steven Dunaway: The current account target is a very bad idea. What's important is policy changes that are directed at achieving higher sustainable growth. Those policy changes can be reflected in the current account.
I guess the proposal was that they can use the current account balance target as a shorthand indicator for whether or not the right policy has been put in place. But simply using the current account is a very bad indicator.
The G20 will be much better off if it continues to focus on policy change. If you focus on the current account, you'll run the risk that countries introduce additional distortion measures in order to hit the current account target, but you don't solve long term issues.
Stephen Roach: The U.S. House of Representatives recently passed a bill that could impose trade sanctions on China. After the mid-term elections, there is the possibility the U.S. Senate will pass a similar bill.
That will be a disaster, a horrible mistake. But that doesn't mean it won't happen.
Politics can move in strange ways. China is getting a strong signal where the recovery is weak, especially from the United States and Europe, that the world wants China to address global problems just like all countries that are participating in globalization. If China chooses not to move its currency, that's China's right. But if China does nothing on dealing with the other dimension of problem, such as surplus and saving, then it runs the risk of significant trade frictions and protectionist pressures not just from the United States but from other countries.