Stephen Roach made three arguments last Friday.
I disagree with two of them, but agree with the third. And the third is by far the most important.
But before getting to the point of agreement, the points of disagreement.
The US saves less than it invests. Roach thinks the US would do so no matter what China does. So rather than criticizing China for subsidizing its exports (and US consumption), the US ought to be writing China thank you notes.
This is one of those arguments that I strongly disagree with. It is an example, I think, of what Brad DeLong calls one-equation economics. I personally don’t think the US deficit can be divorced from the willingness of China (and others) to finance it. Like Morris Goldstein, I don't think savings and investment balances are entirely independent of exchange rate policies, even if finding the connection takes a bit of work.
It is pretty easy to explain why the depreciation in the real value of the RMB (in the face of strong Chinese productivity growth) led – with a lag to the rise in China’s current account surplus. It is even easy to link the depreciation in the RMB and growing profits in the export sector to the surge in Chinese business savings. And, as Martin Wolf has shown, China has had to adopt restrictive macroeconomic policies to prevent inflation from eating away at the real depreciation. In order to avoid real appreciation through rising inflation, China basically had to clamp down on bank lending and increase government savings … pushing the current account surplus up.
That is the core of my disagreement with Dr. Jen. He argues large Chinese current account surpluses are a natural byproduct of globalization. I think they are a natural byproduct of an undervalued RMB.
By contrast, if you start from the savings and investment side, is seems — at least to me — pretty hard to explain why the 10% of GDP increase in China’s investment to GDP ratio over the past few years should be associated with a rise (not a fall) in China’s current account surplus. Clearly, Chinese savings has grown even faster than Chinese investment – but unless it is pretty hard to explain what shock triggered a 15% of GDP increase in China's propensity to save.
A surplus in one part of the world has to be offset by a deficit elsewhere. So it isn't surprising that I think that there is a link between China’s savings surplus and the US savings deficit. China's large current account surplus and the associated growth in Chinese reserves, basically subsidizes US external borrowing. Without that subsidy, the US would borrow less from abroad. It would either save more or invest less.