Should China and the U.S. Be Economic Partners?

At a Glance

  • Roubini says China on path to be economic equals with U.S.
  • A trade partnership could lead to less China risk for the U.S.

China’s economy is decelerating and financial and commodity market participants are worried about the prospect of a recession in the second largest economy in the world.  Nourial Roubini, speaking at CME Group’s Global Financial Leadership Conference (GFLC) in November, took the view that China’s growth deceleration would be a bumpy ride but not a hard landing.  While this relatively consensus view was supported by others at the conference, what set Roubini’s views apart from other China watchers was his attention to U.S.-Chinese diplomatic relations as a potential source of global financial market risk.

From Roubini’s perspective, the United States could mitigate some of the global economic risks associated with a slower growing China by moving away from its policy of “containment” and embracing a more supportive “economic partner” approach.  The key for Roubini is that China is clearly on a path to be the economic equal of the U.S. in the next decade, even if per capita consumption lags far behind.  Moreover, as the U.S. has expanded oil production, China is emerging as the major consumer of oil produced in the Middle East.  And, China is already the dominant economic force in the Asia-Pacific region.

Given these observations, Roubini sees increasing frustration by the Chinese Government at their lack of global clout in organizations such as the International Monetary Fund or The World Bank, where the U.S. been an impediment to China taking on responsibilities commensurate with its economic size, or for that matter, in global trade negotiations where China has largely been ignored.  And, the frustration has led to China helping create alternative lending organizations for emerging market countries, weakening the influence of the U.S. in the region.

Roubini’s point is simply that economic risks go hand in hand with political risks.  He believes that the U.S. containment policy will eventually need to give way to a more realistic acceptance of China’s size and role in the global economy, so moving toward a trade partnership approach could well lead to less China risk and greater global growth.

And, as an interesting note, the IMF recently added the Chinese yuan to its official currency basket – a largely symbolic move – yet still an indication that China is moving to take its place on the global power scene regardless of impediments from the U.S.  Of course, to make room for the Chinese yuan in the IMF’s Special Drawing Rights (SDR’s), the Euro gave up the most ground, while the U.S. dollar ceded next to nothing to allow the RMB to have an 11 percent weight.  Certainly, Roubini’s focus on financial market risks coming from political risks provides an interesting perspective that reminds us that back in the 1700s the analysis of markets was known as political economy.

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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