Hong Kong: Escalating trade friction between China and the US is one of the biggest risks to the global economic climate, and unwise trade sanctions imposed on China by a politicking US Congress could provoke a "proud" China to boycott US Treasury auctions, with serious implications for the US dollar, cautions Morgan Stanley Asia managing director Stephen Roach.
"I am worried about US-China trade friction next year," Roach told DNA Money in Hong Kong on Tuesday. "It's one of the biggest risks to the global economic climate..." The reason, he adds, is quite simple: US unemployment rate is "exceedingly high" right now, and Americans are "pressured by the loss of jobs as well as the stagnation of real wages... And politicians don't have an easy answer to fix it, and so they prefer to point the finger at somebody else."
That "somebody", in most cases, is China. "There is a lot of empty-headed criticism aimed at surplus-savings countries like China by the US and the others who are not doing their part," says Roach.
The escalation in rhetoric between the US and China on Monday is indicative of emerging strains. Premier Wen Jiabao drew attention to the US deficit and the declining dollar and urged the US to "discharge its responsibility" and provide "stability of exchange rate".
US President Barack Obama, in turn, said that he would raise the issue of the yuan - which, critics say, is grossly undervalued - with Chinese officials when he meets them later this week."
Roach, however, reasons that the global economic imbalances "have very little to do with the level of the Chinese renminbi." Instead, "they reflect structural disparities in savings and consumption between the West and the East. China needs to do a number of things to stimulate internal private consumption, and the US needs to do a number of things to stimulate savings investment... This is not a crisis or a recession that has anything to do with currencies."
But that message may be lost on US politicians as unemployment mounts in an election year. China, says Roach, "is a proud country", and if the US Congress imposes trade sanctions on it, it could boycott US Treasury auctions, which would have serious implicatins for the US dollar. "It won't be pretty," he prophesies.
In Roach's estimation, the Chinese economy "is the most unbalanced major economy in the world today," says Roach. Its growth model needs to shift from export dependency to internal private consumption. He reckons that by the middle of next year, the Chinese economy will experience another slowdown as the effect of the stimulus package begins to fade. "The second piece of a revival is usually a pick-up in exports driven by the combination of export tax incentives and a snapback in global demand. But what's going to be missing next year is the snapback in global demand - for no fault of China's but reflecting the adjustments that are ongoing in the US."
And without the export pick-up and a slowing economic stimulus, the overall growth rate of the Chinese economy "will slow again around the middle of the year." The Chinese government "is determined to maintain economic growth at around 8% and does not want to see a renewed increase in migrant worker unemployment like we saw last year, and so I think there will be another stimulus in the second half of next year."
India 'in a juicy sweet spot'
The Indian economy is moving into a very juicy sweet spot, says Stephen Roach. "Think of the optimistic case for India as a three-legged stool: the micro, the macro and politics." The micro in India, he says, has always been good: A very large population of world-class, competitive companies; well-educated, English-speaking workforce; IT companies; solid market infrastructure and rule of law.
The macro, on the other hand, has been deficient, particularly when compared to China, but it's improving, says Roach. Infrastructure spending and FDI is up, and the macro is getting better.
The clincher for him was the elections in May, which swept the Communist parties out of government, which has raised the prospect of pragmatic reforms going forward.


