I thank you for this great opportunity to talk about one of the defining issues of our time—the relationship between the U.S. and China. The Committee of 100 is a vital voice in deepening that relationship and furthering understanding on both sides. Your role will only grow as the importance of U.S.-China ties intensifies.
Just two days ago, in Washington, I joined Secretary of State Clinton, Secretary of the Treasury Geithner, and Secretary of Commerce Locke in meeting a delegation of senior Chinese officials, including Vice Premier Wang Qishan and State Councilor Dai Bingguo, as well as a number of China’s most prominent business leaders. I am proud—and grateful—that Citi is a part of this U.S.-China Strategic and Economic Dialogue. And I’m encouraged by the news that Secretary Locke will be America’s new ambassador to Beijing, where I’m confident he will represent our country well.
Citi began its operations in China in Shanghai in 1902. Today, we have 5,000 people working in the country. We maintain retail branches in 13 cities. And we have developed joint ventures with both the Guangdong and Shanghai Pudong Development Banks.
Citi is also a “Founders Circle” member of the State Department’s “100,000 Strong” Initiative, a program that helps to enhance America’s understanding of China by increasing the number of American students who live and study in China. Over the next four years, we plan to provide more than 100 internships in our offices in China.
Mutual understanding has never been more important. Senior government officials and business leaders on both sides of the Pacific have called the Beijing-Washington relationship the single most important bilateral relationship in the world today. And they are exactly right.
But I would go further. It’s not merely the most important. It’s also unique—in our time … and in history. Great power rivalries are common. What’s unusual is a situation in which the world’s two leading powers are partners across a range of globally important issues.
That’s not to say that the U.S. and China don’t have their differences. But I think it’s more constructive to focus on what’s working—and on those areas where it makes sense for the two countries to work more closely together.
As you know, I’m a banker, and bankers are not usually good politicians. So I’m not here to give political advice. Instead, I want to talk about the collaborative role that our two economies can play in driving world growth—and how that role is changing.
My company maintains a physical presence in 101 countries and does business in some 60 more. I am in constant contact with our people on the ground and with ministers and central bankers in many nations. I also do a fair bit of travelling myself. Most of our employees and clients, as well as the government officials I talk to, see the U.S.-China relationship in fundamentally the same way. That’s the perspective I’d like to share today.
We are the two most important economies in the world—and not just because we are the two largest. Our importance is deeper than that. The U.S. is the world’s largest economy—and it’s the largest consumer market, one of the largest manufacturers and still the biggest innovator. In other words, the U.S. economy has the single greatest impact on global economic aggregates.
While the U.S. sets the average, China drives the margin. It’s not only the world’s fastest-growing major economy overall. China also has the world’s fastest-growing consumer market and is increasing the pace of its resource usage faster than any other country.
Thus, together the two economies drive the prices for virtually every important commodity in the world—from food to energy to raw materials—and in large measure determine what kind of jobs are created, where, and at what pace. The rest of the world’s economies not only feed American and Chinese consumption and growth … they either ride the wave of our success ... or suffer when we stall.
Therefore, it’s plain that our countries have two important responsibilities: first, to manage our own bilateral relationship well … and second, to jointly manage how the two of us together affect and interact with the wider world. I’ll spend the bulk of my remarks on the first point and just touch on the second.
To borrow a Chinese metaphor, over the last few decades—and especially before the financial crisis—the U.S. and Chinese economies have been locked in a yin-yang relationship. They are like complementary opposites that together form a whole. Neither, I would argue, is a well-balanced economy on its own. But together they set the pace for the world.
For most of the duration of this relationship so far, the U.S. pursued a growth model that was based on consumption, fueled by debt. China grew by increasing its investment very rapidly, by vastly expanding its export sector, and by investing the resulting surplus cash reserves mainly in the U.S.
We now know that the model had real limitations. It produced illusory growth in the U.S. for a time. But when the bubble burst, that model exploded with it. The U.S. was left with a mountain of debt that could take decades to pay off. Millions of jobs evaporated—many in industries such as housing construction and mortgage brokerage that will never return in anything like their former strength. As America’s export and manufacturing sectors atrophied, the U.S. economy lost much of its crucial diversification.
The financial crisis was like a great storm that ripped the hood off the American economy. It exposed the engine to plain sight for the first time in a long time. And it allowed Americans to see that we face some serious structural issues, including massive public and private debt, an unsustainably low savings rate, huge trade imbalances, and lackluster exports.
Some believe that the Chinese model is a lot better. China weathered the crisis more quickly, with less pain, and avoided most of the worst problems that we face here. And it did so while racking up incredible accomplishments. China’s GDP has grown at roughly 10 percent per year for decades, rising twenty-fold in the last 30 years. China recently overtook Japan as the world’s second largest economy and—depending on how you measure—is now either the world’s number one manufacturer or else just behind the United States.
No other country in world economic history has risen so far, so fast. The only conceivable parallel is Japan in the second half of the last century—at least until the Nikkei and Tokyo property bubbles deflated in the early 1990s. Thus the high-savings, high-manufacturing, export-driven model clearly holds some attraction.
But the Chinese model faces its own challenges—ones that the Chinese government is aware of and working to address.
The first is the high savings rate. It’s understandable why the Chinese people are such diligent savers. Many feel economically insecure. The social safety net in China is less developed than it is in the U.S. Capital markets are still in the early stages of development, making it necessary to save large down-payments toward the purchase of consumer durables and property.
All that money has to be invested somewhere. Given Chinese constraints on cross-border capital flows, this high level of private savings can’t flow out of the country and find productive investments abroad because today only the government lends on the international market. As a result, we can’t be confident that what investment that does take place is happening efficiently. As too much money chases too few opportunities in the domestic market, asset price inflation is inevitable.
Second, the Chinese consumer market hasn’t yet come close to fulfilling its vast potential. A savings rate of 53 percent—which prevails in China today—translates to rates of consumer spending that are well behind China’s peers in the developing world and lower even than some countries with markedly lower per capita incomes, such as India. In addition, household disposable income makes up a surprisingly low share of China’s GDP. Wage income is only about 45 percent of GDP, compared to 65 to 75 percent in advanced industrial countries. China consumes only 35 percent of its GDP annually, a rate far lower than the other BRIC countries and half the level of the U.S. Low consumer spending could limit future Chinese growth—especially as consumption slows in Western countries.
Vice Premier Wang, with whom I met two days ago, said the same thing recently to Charlie Rose: China faces an imbalance between savings and consumption. It’s an imbalance that is almost the mirror image of the imbalance that troubles the American economy.
China’s savings rate is too high, America’s is too low. China’s consumer spending is too low, America’s is too high. America is burdened by excessive public and private leverage, while China accumulates more capital than it can productively invest at home. China lacks a sufficiently robust safety net, whereas America’s safety net is fueling our debt problem and needs reform. America runs a massive trade deficit while China maintains a surplus.
We all know why these imbalances aren’t good for the American side of the equation. Less appreciated in the long run is that they are unlikely to be good for the Chinese side either—and Chinese government officials seem to understand that very well.
China recently approved a new five-year plan that specifically seeks to rebalance its economy, with a greater emphasis on domestic demand as a new source of growth. Chinese markets are increasingly opening up, with an emphasis on industries that are high-tech, high value-added and low-energy consumption.
Officials still face some difficult decisions with no easy answers, only trade-offs. Making the currency convertible would go a long way toward solving the liquidity problem and addressing inflation. But it might also exacerbate unemployment and slow growth. The dialogue continues but there’s reason to be confident that China will find the right balance.
On the U.S. side, we have no choice but to get the country’s finances in order. Second, we should work on correcting our trade imbalances, which means addressing the consumer-producer imbalance in our domestic economy. Third, we need more economic diversification. Fourth, we need to advocate for—and help create—a better and more protective environment for intellectual property around the world … and we need China’s help to accomplish that.
I’m not going to say much more about the first point, except that one never sees growth without confidence. And a credible plan to address the debt is necessary to restore confidence, which in turn will inspire real investment.
The other three essentially boil down to one: America needs to become a bigger exporter.
China may now be tied, or close, to the U.S. in total manufacturing output—each country generated about $2 trillion in manufacturing output last year. But the U.S. did so with 11 million workers in the sector compared to 100 million on the Chinese side. The United States remains a manufacturing powerhouse.
But America has become—especially compared to our peers—a weak exporter. According to the National Association of Manufacturers, among the world’s 15 top manufacturing economies, the United States ranks only 13th in how much of that output we export. Only Brazil and Russia score lower. Stated differently, we are 55 percent below the world average in the share of our manufacturing output that we export.
For the last few decades, consumer demand in the U.S. and elsewhere in the developed world helped the emerging markets build their exports and their economies. In the process, we not only consumed too much. Crucially, we also didn’t focus enough on stimulating consumption and demand for our goods and services in other countries.
The remedy is obvious. The emerging markets are developing enormous consumer blocs. Around the globe, millions of people rise above poverty and enter the middle class every year—by one estimate, some 70 million in 2009 alone. According to another estimate, by 2020, three-quarters of incremental consumer spending will come from emerging markets. If that bears out, then Asia will overtake North America as the world’s largest consumer bloc.
I see this rising economic power as an opportunity. American business can help kick start our economy and correct our consumer-supplier imbalance by reviving our export sector—by selling to the emerging- market consumer.
That means maintaining a strong commitment to free trade. The three trade agreements awaiting ratification in the U.S. Congress—with Colombia, Panama, and South Korea—are critical for the U.S. economy and for expanding American exports. So is further engagement at the multilateral level.
But, as noted, by far the most underdeveloped consumer market among the world’s major economies is China’s. The rise of the Chinese consumer is not just an opportunity for American business. It is, and should be seen as, the culmination of decades of reform and progress by the Chinese government. Rising incomes mean greater opportunities and higher living standards for the Chinese people.
Most of the issues I have discussed here are domestic priorities that each nation has to confront separately. But there remain many issues that we need to confront together. As the world’s two largest economies for the foreseeable future, we have an interest in helping to build and support an international system that is not just in our own interests, but in the service of broad-based growth across the globe.
All the other economies in the world look to ours for direction—and more. As the leading average and marginal consumers and price-setters for the world, we are also the primary direct and indirect sources of the world’s jobs. The need is enormous. By some estimates, just to recover from the recession and to keep ahead of demographic trends, the U.S. will need to create 12.5 million jobs through the rest of this decade. China will need 20 million, and India 88 million. Africa will need 125 million, Latin America another 44 million—and the entirety of the developing world will need nearly 400 million new jobs—or 40 million per year.
Chinese and American focus up to now, and especially in the wake of the recession, has understandably been on creating jobs in our own countries. But it’s no longer enough only to focus on our own growth. It’s in both countries’ interests to think more broadly. First, because our own growth increasingly depends on the economic health of other nations. Second, because that growth depends on the political stability of other nations, which is determined in part by their labor markets. Third, because we are increasingly producing in global supply chains that depend on cross-border trade and investment flows. And finally, because it’s simply the right thing to do.
This relationship is remarkable for its unprecedented nature. Our collective task is to keep it that way. Devolution into trade wars—or worse—would fit the template of history. But I don’t see that happening this time.
In any case, history is always what leaders make it. Everyone in this room is a leader. I thank the Committee of 100 for leading the U.S.-China relationship in a direction of greater cooperation. We at Citi are working to do our part—for both countries’ benefit … and for the benefit of all the world.