Roach Says U.S. Faces Dollar Decline as China Becomes Importer

China will curb its reliance on exports sooner than the U.S. can cut its budget and external deficits, removing a support from the dollar that will unsettle currency markets, Morgan Stanley’s Stephen Roach said.
“In the next three or five years China will move aggressively to increase its private consumption and reduce its surplus saving,” Roach, who is non-executive chairman of Morgan Stanley Asia Ltd., said in an interview in Oslo yesterday. “The U.S. talks the talk, but there is actually no shred of evidence whatsoever that America is going to reduce its budget deficit over that same period.”
China may post a trade deficit as early as this quarter as imports outpace sales abroad, the government said last month. The country’s reliance on trade to fuel economic growth close to 10 percent is now fading as its consumers grow wealthier, removing a key incentive for China to support the dollar. At the same time, the world’s largest economy estimates its budget deficit will swell to a record $1.5 trillion this year, as President Barack Obama channels stimulus to revive growth.
“If we don’t move to address our deficit before China addresses its surplus then we are going to be facing some pretty significant external funding constraints,” Roach said. “That would lead to a significant downward pressure on the dollar and/or higher long-term U.S. interest rates.”
China aims to reduce its trade surplus to less than 4 percent of gross domestic product in three to five years, central bank Deputy Governor Yi Gang said last year. Roach said the risk that China will cut its reliance on exports before the U.S. weans itself off external funding is greater than 30 percent.
‘Significant Risk’
“Nothing is inevitable, but I think there is significant risk in that direction,” he said.
The dollar has lost 13.5 percent against the euro since a June 7 high and is down 14 percent against the yen since an April 2 high. China pegs the yuan to the dollar.
The world’s second-largest economy is under pressure to allow the yuan to appreciate as inflation gains steam. Consumer prices rose an annual 4.6 percent in December, the Beijing-based National Bureau of Statistics said on Jan. 20.
China will need to allow the yuan to appreciate as much as 8 percent to avoid further inflation, according to Barton Biggs, who runs the New York-based hedge fund Traxis Partners LP.
China, the world’s biggest foreign holder of U.S. Treasuries, saw its portfolio of the securities fall by $11.2 billion to $895.6 billion in November.
Consequences
“If they were to engineer a major reduction in their dollar-based holdings there would be consequences for the currency that would lead to a sharp appreciation and that would impair their export competitiveness,” Roach said. “They are not prepared to take that risk.”
Still, China will gradually cut its holdings of U.S. assets as its consumers purchase more and save less, he said.
“The world in general -- the U.S. in particular -- can expect sort of a natural, organic reduction of China’s buying of dollar-denominated assets,” Roach said.
To contact the reporter responsible for this story: Josiane Kremer at jkremer4@bloomberg.net