Stephen Roach, Wall Street's most influential economist, clearly perceived the pressure from his audience when he delivered a recent speech to Congress. In the first two months of this year, the US trade deficit with China was again greater than expected, providing more ammunition to US congressmen who have been urging China to allow the RMB to appreciate.

However, Roach continued to defend China in the speech he delivered to the House of Representatives Ways and Means Committee. He severely criticized the practice of making China a scapegoat. "China is subsidizing the United States. To solve the US-China trade imbalance, the key point is what the United States should do," Roach said.

"China subsidizing US interest rates"

Federal Reserve Chairman Ben Bernanke noted that with its current exchange rate policy, China is actually subsidizing its export companies. In fact, Bernanke's view has been widely accepted in political and economic circles in the United States.

However, Morgan Stanley chief economist Stephen Roach claims that "this is a biased comment on China's monetary policy and reform. The critic did not notice how China formulated its monetary policy, and failed to realize the benefits this so-called 'subsidy' has brought to the United States.

"The key point is to clarify who is 'subsidizing' whom," Roach argued. "China spent 60 to 70 percent of its annual increase in foreign exchange reserves on purchasing dollar assets. Based on a total foreign exchange reserves growth of $200 billion per year, China purchases at least $120 billion worth of dollar assets annually. If China didn't buy dollar assets, the dollar would decline and our interest rates would rise. This shows that China is actually 'subsidizing' US interest rates," Roach said.

In addition, China is also 'subsidizing' the US with a lot of cheap, quality products. According to Roach, as a low-cost manufacturer which is constantly improving the quality of its products, China is essentially increasing US families' purchasing power by exporting to the United States. "Even if we terminated US-China trade, our trade deficit would arise elsewhere. Trading with higher-cost producers is equivalent to imposing tax on American consumers," Roach explained.

"China is working hard, while the US remains quiet"

In his latest speech, Roach reluctantly pointed out that "America's policy-makers and politicians usually know very little about China's internal affairs. But they generally have a more serious imagination when it comes to its threat."

Roach described potentially disastrous consequences to the assembled congressmen. "Currently criticism of China is even grimmer than that of Japan in the late 1980s. Arising trade frictions and a trade protection mentality have led the world economy into a dangerous situation."

According to Roach, the proportion of consumption in the US economy as a whole has risen from 65 percent 7 years ago to 70 percent. The surge in imports, to a greater extent, is the result of excessive personal spending. "Readjusting the RMB exchange rate can neither fill the savings gap in the United States, nor slow excessive imports as a result of excessive consumption. Moreover, it is likely to shock the immature Chinese financial system."

To ease the unrest triggered by Sino-US trade tensions, Roach stressed that both China and the United States must "do something". His prescription: "China should make a greater effort to protect intellectual property rights and push forward financial reform; the United States should encourage people to put more in their savings accounts, invest more in human resources, and reform the education system."

In fact, the key issue is not what the Chinese government should do, but what the US government should do. China has made great efforts while the United States has remained quiet," Roach concluded.

By People's Daily Online