Read China’s lips
U.S. President Barack Obama looks on as his Chinese counterpart Hu Jintao answers a question during a press conference in the White House on January 19, 2011. (Getty Images)
July 27th, 2011
12:52 PM ET

Read China’s lips

Editor's Note:  Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia. For more from Roach, visit Project Syndicate or follow it on Facebook and Twitter.

By Stephen Roach, Project Syndicate

NEW HAVEN – The Chinese have long admired America’s economic dynamism. But they have lost confidence in America’s government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.

Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”

China is no innocent bystander in America’s race to the abyss. In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks. Fully two-thirds of that total – around $2 trillion – is invested in dollar-based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac). As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.

Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.

Those days are over. China recognizes that it no longer makes sense to stay with its current growth strategy – one that relies heavily on a combination of exports and a massive buffer of dollar-denominated foreign-exchange reserves. Three key developments led the Chinese leadership to this conclusion:

First, the crisis and Great Recession of 2008-2009 were a wake-up call. While Chinese export industries remain highly competitive, there are understandable doubts about the post-crisis state of foreign demand for Chinese products. From the US to Europe to Japan – crisis-battered developed economies that collectively account for more than 40% of Chinese exports – end-market demand is likely to grow at a slower pace in the years ahead than it did during China’s export boom of the past 30 years. Long the most powerful driver of Chinese growth, there is now considerable downside to an export-led impetus.

Second, the costs of the insurance premium – the outsize, largely dollar-denominated reservoir of China’s foreign-exchange reserves – have been magnified by political risk. With US government debt repayment now in play, the very concept of dollar-based riskless assets is in doubt.

In recent years, Chinese Premier Wen Jiabao and President Hu Jintao have repeatedly expressed concerns about US fiscal policy and the safe-haven status of Treasuries. Like most Americans, China’s leaders believe that the US will ultimately dodge the bullet of an outright default. But that’s not the point. There is now great skepticism as to the substance of any “fix” – especially one that relies on smoke and mirrors to postpone meaningful fiscal adjustment.

All of this spells lasting damage to the credibility of Washington’s commitment to the “full faith and credit” of the US government. And that raises serious questions about the wisdom of China’s massive investments in dollar-denominated assets.

Finally, China’s leadership is mindful of the risks implied by its own macroeconomic imbalances – and of the role that its export-led growth and dollar-based foreign-exchange accumulation plays in perpetuating those imbalances. Moreover, the Chinese understand the political pressure that a growth-starved developed world is putting on its tight management of the renminbi’s exchange rate relative to the dollar – pressure that is strikingly reminiscent of a similar campaign directed at Japan in the mid-1980’s.

However, unlike Japan, China will not accede to calls for a sharp one-off revaluation of the renminbi. At the same time, it recognizes the need to address these geopolitical tensions. But China will do so by providing stimulus to internal demand, thereby weaning itself from relying on dollar-based assets.

With these considerations in mind, China has adopted a very transparent response. Its new 12th Five-Year Plan says it all – a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances. By focusing on job creation in services, massive urbanization, and the broadening of its social safety net, there will be a big boost to labor income and consumer purchasing power. As a result, the consumption share of the Chinese economy could increase by at least five percentage points of GDP by 2015.

A consumer-led rebalancing addresses many of the tensions noted above. It moves economic growth away from a dangerous over reliance on external demand, while shifting support to untapped internal demand. In addition, it takes the heat off an undervalued currency as a prop to export growth, giving China considerable leeway to step up the pace of currency reforms.

But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving. That could bring its current account into balance – or even into slight deficit – by 2015. That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets.

So China, the largest foreign buyer of US government paper, will soon say, “enough.” Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame. After all, where else would they place their asset bets? Why would they risk losses in their massive portfolio of dollar-based assets?

China’s answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.

The views expressed in this article are solely those of Stephen S. Roach. Copyright: Project Syndicate, 2011.

soundoff (61 Responses)
  1. Eric

    One aspect this article fails to evince is that politics will trump any progressive economic endeavor that China desires to implement. Foremost, China’s politics will prevent it from developing and sustaining an economy based on consumption because that would mean fostering a middle-class population. Simply, China’s form of government risks dissolution if a middle-class population emerges because middle-class populations will eventually require and will demand freedom. Freedom is the death knell to totalitarianism, which is China’s form of government.

    July 27, 2011 at 1:23 pm | Reply
    • Chris

      Only ignorant people like you think China only consists of an upper and a lower class. Please do your research before trying to sound smart and end up making blanket statments.

      July 27, 2011 at 1:52 pm | Reply
      • Jdg

        To all the tom, chris, and henrys who are really chinese, thanks. Your dishonesty makes me not believe you.

        July 28, 2011 at 5:55 pm |
    • Maersk

      You sound like another typical American BS artist/kwok head.

      July 27, 2011 at 3:15 pm | Reply
      • Jdg

        You sound like a down on your luck 50 cent internet troll. Ill give you 75 cents to dance like a puppet.

        July 28, 2011 at 5:57 pm |
      • Balla

        Damn son you be tearin' up those chinese with your jokes.....

        July 28, 2011 at 6:48 pm |
    • That'snotTrue:(

      How ignorant can you be? Have you been there, or do you get all your information from CNN?
      The middle class in China is growing while in the US it's being shrinked to the size of a pea.
      Which is the size of your brain to.....
      The government may not be the best...but look at the white house now, it's one party vs a circus.....yeah not a good model for "democracy" until it can solve all its own problems, and debts, it have no business bothing ANY OTHER country on domestic affairs.

      July 27, 2011 at 9:01 pm | Reply
      • Maersk

        It is a demo-of-crazy, not democracy. Just look at the facts a fool could steal the presidency once, started two wars that killed so many people, and doubled the national deficit, and still got reelected for a second term. Where can you find this kind of foolishness?

        July 27, 2011 at 9:52 pm |
      • Jdg

        Thats not true, your name says it best.

        July 28, 2011 at 5:53 pm |
      • That'snotTrue:(


        July 28, 2011 at 7:32 pm |
    • DumbYank

      If there is indeed a very Small Middle Class in China , then perhaps one just needs to Google the following and explain to the world who is actually buying these products ??

      i) China is Pradas biggest and most important market in the world.
      ii) China has become the German automaker's biggest market for the BMW 7, 5 and X6 Series as well as the BMW 5 Series GT.
      iii) Rolex sells more waches in one month in China , than it does for 3 years in the US.

      July 28, 2011 at 2:53 am | Reply
      • ABU

        Right. China is the world's biggest market for cars, having overtaken the USA.

        July 28, 2011 at 6:16 am |
      • Jdg

        Chinas market isnt worth a crap. You have to build stuff there and will eventually end up competing with your own technology. Doing business with china always looks good on paper, until you consider what isn't written down.

        July 28, 2011 at 5:52 pm |
      • Peter

        Middle class people do not buy Prada, BMW or Rolex, buddy. Dont get confused.

        July 29, 2011 at 2:25 pm |
    • ABU

      You are so ignorant about China that it is best that you don't talk. If you keep quiet, we won't know that you are ignorant.

      July 28, 2011 at 6:12 am | Reply
    • Jack Rainbow

      Why do you insist freedom will be demanded by an emergent middle-class? The American middle class has forgone its basic democratic freedoms years ago. You can be arrested and locked up without trial at the whim of any homeland security clerk at any moment. Many have been. While under arrest you can be tortured and then not allowed to complain about it. This has happened to many. So wake yourself up and face the truth – the middle class have historically always been the tolerators of oppression, imprisonment and torture without trial. Read the history of the Nazi movement. You are not free any more than you would be in China, the only difference is in the type of victims which the state selects. You guys are kidding yourselves and it is truly pathetic to watch your denial.

      July 29, 2011 at 10:43 am | Reply
  2. Eric

    @ Chris – You're the truly ignorant one. You make it sound like China has freedom. You need to graduate college before you can argue with the big boys. Perhaps, you're not even smart enough to get into a community college, let alone a good one. China does not have a middle-class population like the US or other advanced western countries. If they did you would hear their voices.

    July 27, 2011 at 2:04 pm | Reply
    • Chris

      @Eric – Congratulations on offering nothing but strawman arguments. You DO know what a strawman is, right? And just because YOU are too blind and deaf to do research and see/hear the middle class from China does not mean other people are too. Again, do your research and "graduate from college" before "arguing with the big boys". Should I give you some tips on how to pass that community college entrance exam maybe?

      July 27, 2011 at 2:40 pm | Reply
      • Nic

        Good one Chriss, i think Eric is leaving in the year 1960 or just under a plain old rock

        July 28, 2011 at 6:34 am |
      • Jdg

        Nice jumping jacks for the ccp, chris. now bend over if you want to receive their reward.

        July 28, 2011 at 6:33 pm |
    • Maersk

      You are definitely another typical American BS artist/kwok head who is still playing swing between your father's legs.. If China had no middle class, who the fuc do you think were buying 18 million cars last year, you loser? Do you realize that China is becoming the biggest market for luxury goods?

      July 27, 2011 at 3:26 pm | Reply
      • Jdg

        maersk your english slang needs work. Now go give the ccp some mouth love.

        July 28, 2011 at 6:44 pm |
      • Peter

        Too bad American makes only things for middle class. Had we made luxury toys, we would not have trade imbalance with China.

        July 29, 2011 at 2:45 pm |
  3. Michelle G

    I wonder if other countries will do the same now that China is thinking twice before investing in the US. That could be very difficult for the US budget.

    July 27, 2011 at 5:21 pm | Reply
    • j. von hettlingen

      "Its new 12th Five-Year Plan says it all – a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances."
      The purchasing power is going to last for a while in China. The vast number of consumers want western designer-labels. They will continue to buy Dior, Estee Lauder, Prada, BMW etc. There are still many business opportunites with China. Concentrate on innovatons and manufacturing. That's the answer to creating jobs in America and dealing with its economy.

      July 27, 2011 at 5:48 pm | Reply
      • Maersk

        It is just too bad that America is concentrating on manufacturing BS artists/kwok heads that no one wants.

        July 27, 2011 at 9:43 pm |
      • Jdg

        Maersk china needs your help burying a train to cover up their stupidity. Please get a shovel and help them. Rofl!!

        July 28, 2011 at 6:46 pm |
  4. huyu

    The world should know that other than praises for our fellow men in other countries such as India, we Chinese have nothing to say about other inhabitants of our shared planet. We would always find faults with ourselves for only then we can strive to improve, even if it proves to be impossible. Certainly sticking our nose into other people's knickers is not one of our habits.

    But, commerce, we are most enthusiastic for.

    These are nice knickers indeed. I have in possession 1,000 different styles here to satisfy your most basic and the most exciting carnal needs. Drop a call, and we can do business, just like Lady Baroness T. said.

    We have so many our own problems, if you know them yourself, your mind probably will explode. Because of our retardedly developed venting machines and lack of such propaganda splendors like the Economist, the CNN, or Fox, we usually get off by breaking your nose; whenever, for some reason my spit flies off onto your fragranced face. Or sometimes chopping a few heads off, especially for some of our violent fellows and tradition seeking long-knife carriers. I sometimes wonder how the Messers like Mr. Hu, Wen, Ho, and Whi can ever sleep; the jobs have to be a life expectancy killer bordering on self-assisted suicide, and so little pay, and not even a mistress or two.

    If you see any Young & Restless (FengQing) like our proverbial Mr. Chris, just please please please, ignore him. How does he know that no one ever falls off the train in China while speeding at 200 miles per hour, and how would he know maybe some people prefer to sit on the roof of the train for a more splendid view, and indeed superior air to breathe in the scorching sun at a more leisurely pace.

    And indeed, on his miserly 5,000$ annual income, and a clear lack of in-the-know on our planetary affairs, how would he contribute to such galactic human endeavors as whether white cats are superior to the black cats, or the black ones to the white ones, or maybe even both. It is indeed much preferable to leave such high-intellectual exercises to our Mr. Han's IQ beating western oratoriatators and Indian Brahmins.

    His patriotism is admirable, but it is not what most of us think in China. There is nothing in the world that we want other than to get the next bottle of Maotai (read expensive), my wife's next Gucci bag (fake actually), any my kids next lessons (rote learned anyways), the next car, the next house, or the next mistress (shhiii...).

    To claim that China will modela consumer, or model a saver, or even model this or that really is just a little bit over the top; our best known models are the ones most slimly clad, smiling splendidly, who whispers with that most tender, vibrating voice, while posing in the most fantastical ways at the Beijing Motor show. You see, that really got my plum in my mouth wriggling.

    For such mundane matters, we prefer to delegate to Uncle Sam. Nice Uncle indeed, who spends the money and body bags to trouble shoot for all us while we collect some interests. It is a good bargain, we are already getting used to it.

    July 27, 2011 at 5:26 pm | Reply
    • Matt

      i'm sorry, but you don't make much sense at all.

      July 28, 2011 at 2:11 pm | Reply
      • Jdg

        It's a chinese con artist.

        Sorry, I dont want any. I dont buy clothes made in china. I buy vietnam or india. Will buy used to boycott china.

        July 28, 2011 at 6:42 pm |
  5. Mike Smith

    Chinese Human Rights Abuses:


    July 27, 2011 at 7:35 pm | Reply
  6. Mike Smith

    Chinese Human Rights Abuses:


    July 27, 2011 at 7:36 pm | Reply
  7. Mike Smith

    Chinese Human Rights Abuses:


    July 27, 2011 at 7:36 pm | Reply
  8. Mike Smith

    The brutal PRC regime that engages in the barbaric practice of organ harvesting done in Chinese labour camps (Gulags)



    July 27, 2011 at 7:37 pm | Reply
    • Chris

      nice broken images and empty accusations there, keep it up.

      July 27, 2011 at 8:17 pm | Reply
    • Maersk

      The Chinese must have harvested your tiny little kwok and fed it to pigs.

      July 27, 2011 at 9:39 pm | Reply
      • Matt

        your comments do nothing but contribute vile senselessness to a serious topic. take your childish racism elsewhere.

        July 28, 2011 at 2:15 pm |
  9. That'snotTrue:(

    ABOUT TIME!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!^.^

    July 27, 2011 at 8:55 pm | Reply
  10. Taiwanguy

    USA is world Human Right Champion? Really?
    How many Native Americans (indians) were killed by White americans?
    Historians estimate ranging from a low of 8.4 million to a high of 112.5 million Native Americans (indians) were killed by White americans

    July 28, 2011 at 1:14 am | Reply
    • Choco monster

      How long ago was that? Lol.

      July 28, 2011 at 11:25 pm | Reply
      • marc gunn

        About 30-40 yrs ago we were finishing up killing up several million Vietnamese. Last century we also killed 1.3 million civilians primarily in the Philippines who wanted freedom. We've killed several hundred thousand Iraqis for bogus WMDs and are still doing it. I'd say these are pretty recent.

        July 29, 2011 at 10:19 am |
  11. whosurdaddy

    Oh i thought this was about business and money, I guess i came to the wrong place.

    July 28, 2011 at 4:39 am | Reply
    • U2ovrUS

      Read any article about China and you'll find the indignant CCP/PLA snipers talking about how great China is...and those
      of us who've seen the Chinese up close and who've learned to despise their crummy, criminal society...I just hope I live
      long enough to see it implode...

      July 29, 2011 at 4:57 am | Reply
      • George

        U20vrUS you talk as if you know all about China. I am a British Chinese and had been to China including short stay at Peking Language University and what I had seen was nothing remotely resemble what you had discripted. Are you making it up as you goes along. A poor and weak country starting from 1949 to become the second largest economy in 30 years is no small feat. Read some history and keep youself inform instead of spreading lies and speaking rubish.

        July 29, 2011 at 8:16 am |
  12. Mike

    Honestly, with 1.4 billion citizens, shouldn't China expect to have the no.1 economy? Then again, maybe they don't know how to get there without the assistance of the idiots in the US congress.....

    July 28, 2011 at 7:14 am | Reply
  13. ChinaSays

    "Tax your overweight, useless, overpaid, executives more. They earn too much for doing too little."

    July 28, 2011 at 10:01 am | Reply
  14. Freerange_ape

    Can we get a-bong?

    July 28, 2011 at 12:58 pm | Reply
  15. Notislam

    China should STFU and release all of its political prisoners. The only thing worse than communism and nazism is islam.

    July 28, 2011 at 4:39 pm | Reply
    • Maersk

      Not until a kwok head like you can zuck more kwoks for less.

      July 28, 2011 at 6:23 pm | Reply
      • U2ovrUS

        kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok, kwok,....!!!!
        What are you? A squawking, headless Chinese chicken????
        BOYCOTT CHINA!!!

        July 29, 2011 at 4:44 am |
  16. RM

    It is China's turn to lead the world and we should accord them every opportunity as they will take time to mature into this new role. Meanwhile, please dont read thier lips (ain't no baseball) but watch them walk the talk.

    July 28, 2011 at 5:10 pm | Reply
  17. Justin

    Does the author work for Chinese government or what?
    Over the past 20+ years, it is these Wall Street China fans pushed Western companies into China to squzee the company profit. The result is obvious: Unemployeement everywhere in US and other Western countries, national debts hit ceilings... While China prospers, some Wall Street China fans made money and fame, and ordinary Americans lost their job.
    Wake up, fellow Americans, tell your congressmen and women: stop trading with China, stop buying made-in-China, tax those companies invested in China.

    July 28, 2011 at 5:35 pm | Reply
    • Nixon

      Sure they will listen to us.

      July 29, 2011 at 12:01 am | Reply
    • U2ovrUS

      They won't listen. They are the very people (financed by their lobbyists) who sold us out to China in the first place.
      China is one nasty piece of work, and, unfortunately, the rest of the world is in for a long sad ride on this stinking
      Chinese dragon.

      July 29, 2011 at 4:37 am | Reply
  18. Maersk

    The end of the US empire had to come at some point, now the US should focus on creating war to keep their economy alive.

    July 29, 2011 at 7:01 am | Reply
    • Peter

      Good idea. China should stay away from South China Sea or would fall into US trap. Very scary, indeed!

      July 29, 2011 at 3:02 pm | Reply
  19. Truthwillsetyoufree

    Someone with a serious social crisis talks about someone with a debt crisis? How many have you killed or imprisoned today for thinking freely? Yes we have our issues but, OMG, clean your house and we'll talk....

    July 29, 2011 at 10:57 am | Reply
    • That'snotTrue:[

      US debt crisis >>> any other crisis in the world right now!!! Don't you know it can affect the global economy?
      &&& The US have major social issues to, ex. shrinking middle class, failing education system, focus on hollywood as rolemodels instead of well educated people etc. I can go on and on.
      Ps. Read a news paper, or the economist and you'll see how serious the debt crisis REALLY is, so educate yourself before making a statement with little base. (^.^)

      July 29, 2011 at 4:04 pm | Reply
  20. gaetano

    democrazia,non democrazia. qui parliamo di non ne ho,ma oggi conviene comprare valuta cinese.

    July 29, 2011 at 11:57 am | Reply

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