China's global economic influence growing

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FALLOWS: While there are parts of the relationship which are unbalanced and obviously need to be corrected, the US has to rely less on debt, China should rely less on export markets, especially the US, on the whole it is a surprisingly complimentary relationship where each country has been able to get what it wants to a certain degree over the last decade or so out of the interaction. And so I think it is as the excesses are trimmed back the fundamental value of the relationship can remain. It certainly is the case that China year by year is becoming more important and influential in the world, and also it'll be the case that at some point the Chinese economy will be larger in total than the US economy is. But I think that if you look carefully at the two of them they still, the US just a much richer place than China is now with all sorts of developed capital markets and all the rest, and so it's valuable to recognise the vulnerabilities the US has shown that need to be corrected, and also the strength that China has shown in recovering from this recession and getting money out into its economy. But most people in China would be the first to say there is a long way to go in raising people's living standards, as most people are still very poor, developing the infrastructure and all the rest.

LAM: And James how do you gauge the mood in Beijing? Do you think China might perhaps feel trapped by its economic link to the US, particularly vis-à-vis the US currency?

FALLOWS: There certainly was a lot of resentment earlier this year when there were huge layoffs, especially in the southern parts of China, about the excesses in the US financial markets which had spilled over into this world recession, which was causing such hardship for largely poor people in China. In terms of resentment of their relationship with the currency, it's a complicated situation from Beijing's point of view because on the one hand they like the fact that the RMB is both at a stable value and a relatively low value that is crucial to the export ambitions of China over the next couple of years, and they recognise that they are sort of locked at the hip with the United States, because so many of their assets are in dollars or in US securities and there's not really an immediate alternative for where to put them. And of course the most recent economic results in the US show that during the third quarter of this year the recession at least technically ended and there was positive growth again. Whether there'll be some slowdown again in the fourth quarter we'll see. There's a short term versus a long term calculation for the economic planners in China. In the short term their economic prospects depend on a pickup in world demand, especially in the US. In the long term I think everybody there recognises as would the US planners too that it's in China's interest to develop its own domestic demand more fully so its own people can enjoy more of the fruits of their labour.

LAM: And would this be particularly true of the recovery of the US retail sector?

FALLOWS: Yes certainly for all the Chinese manufacturers in the southern parts of China they are really connected to retailers like Walmart or the computer makers or other brand names in the US, and I think that that already for this Christmas season, the holiday purchasing season of 2009 it's sort of too late to have an impact, but they're already gearing up for a year from now. So yes, the retailers in the US and Europe to a lesser degree have a big impact on how China's employment level recovers.

LAM: And James the Chinese like many people in the Asian region have a savings mentality. Do you think the planners in Beijing might be tempted to try and get the Chinese to spend more if you like, buy more of their own products and services?

FALLOWS: It impressed me living in China that the savings situation has an aspect that we don't usually talk about outside of China. The aspect we usually talk about is the individual savings behaviour where people know they have to save to buy an apartment, since there's a limited mortgage market and they have to save for retirement as there's very limited pension system, save for medical care and all the rest, and people do save for those reasons. But there's a whole different level of savings, which is at least as important, which is essentially the enforced savings that the government creates by keeping the RMB at a relatively low level and sending the money that it earns from export sales back overseas for investments rather than using it domestically. So I think the calculation both for individual households and for the economy as a whole is how at what pace they can unleash more of this wealth to be used by Chinese people who still on average are quite poor for better living conditions, less pollution, better roads, all the things which would make their domestic situations more attractive, and also have a more balanced relationship with the outside world. I think from the government's point of view it may be the beginning of a longer term understanding of the importance of developing China's domestic economy, which means saving less nationally and using more for domestic projects and consumption because they see that they can't depend as reliably on outside demand forever.

LAM: Does that involve a fairly fragile balancing act, because the Chinese authorities are quite fearful of the local economy overheating are they not?

FALLOWS: Yes and I think there's been two reasons why for the last decade or so there's been this policy of having a stable value of the RMB and a low value of the RMB against the US dollar because that reduces the heating up of the domestic economy and it keeps the export market strong, it makes Chinese goods all that more competitive and attractive. So I think it becomes a matter therefore not of whether the Chinese authorities have more and more demand domestically, but at what pace they think they can move towards this goal they recognise as being desirable without overheating.

LAM: What is your view for the near to medium term. Do you see China and the US still doing this dance and if so might this ongoing relationship have any impact on liberalisation within China, not just economically but also politically and socially?

FALLOWS: I think the overall relationship between China and America will continue to be difficult, will continue to be fraught, will continue to have disagreements and yet has so many fundamental connections where I think both parties recognise that it's not in their interest at all to shake it. They both have much more to lose by a real rupture in the relationship than they have to gain. So I think there will be that interaction and what that means for the evolution of political liberties within China I think no one can say with confidence. The main point I would make is I was impressed while living there that there is a strong demand for liberties as opposed to democracy, liberties in the sense of more freedom to travel, freedom to read, freedom to do what you want as opposed necessarily to structural democracy in the short term. So I ended up thinking that if western powers, including the US and Australia, can work for more liberty within China then they are working in sync with the demands of a lot of people there.