China’s economy is on the verge of a massive shift, but not the one trade hawks in the United States would like to see.
So said three China watchers assembled for a panel Tuesday at the Buttonwood conference sponsored by the Economist magazine.
The three – a leading investment strategist who is known as a China bull, a hedge fund superstar who is betting against the world’s No. 2 economy and a top China researcher – warned that those focusing on a high profile exchange rate dispute between the United States and China risk missing more important developments, such as China’s struggle to deemphasize the export industries that have driven its growth for three decades.
And while China badly needs to boost domestic consumption to drive that transition, those who would blame a still export-hungry China for U.S. job losses are missing the point, said Stephen Roach, a leading China specialist who is nonexecutive chairman of Morgan Stanley Asia.
“The idea that we in the West can blame China for our own shortcomings is pretty pathetic,” said Roach.
He said the United States last year ran trade deficits with 90 countries. Roach suggested that it is only common sense that causing the renminbi to appreciate against the dollar, in a bid to boost the cost of Chinese imports, will leave those other imbalanced relationships unaddressed, while causing unintended consequences throughout the global economy.
“It doesn’t take a rocket scientist to figure out you can’t fix a multilateral problem with a bilateral exchange rate,” said Roach. But he bemoaned the tone of public opinion, noting in an apparent reference to economist Paul Krugman that “even Nobel Prize winners who write columns for the New York Times can’t seem to figure this out.”
At the same time, Roach lauded Treasury Secretary Tim Geithner for making proposals at international meetings this weekend aiming to avert trade belligerence. He said that effort could pave the way for rebalancing efforts in both countries — though he seemed dubious at the notion the U.S. will actually take action short of a crisis.
Speaking of crisis, James Chanos, who runs the short-selling hedge fund Kynikos Associates, said he believes China has embarked on a massive overbuilding spree that will eventually lead to a collapse similar to the ones seen in the U.S. and other Western countries in recent years.
He parried Roach’s claim that the boom is being driven by massive migration from the countryside to the city, contending that few of the migrant workers arriving in urban areas can afford the properties being built now. Much of the construction is concentrated in luxury areas in the more attractive cities.
“The migration story is interesting but somewhat irrelevant,” Chanos said. “What’s being built right now immigrants can’t afford. Well under 10% of population can afford what’s being built now.”
Gene Ma of ISI research emphasized that the biggest issue in China right now is the effort to move away from exports toward internal consumption. But he noted that the transition, to the degree that it has even started, is not exactly going swimmingly.
Exports have soared since the financial crisis bottomed out last spring, as have Chinese trade surpluses and the corresponding U.S. trade deficit.
“Rebalancing didn’t happen this year,” he said. “The imbalances will get worse in 2010.”