US-China challenges beyond 2015

Elusive calm through 2014-15

Thanks to the House and Senate negotiators, the budget deal has the potential to ensure stability until the mid-decade in the United States. In order to deliver their compromise, however, mainstream constituencies in each party must keep their vocal and extremist minorities in line. This will not be easy because the mid-term elections are no longer and the end of the Obama era is looming.

Instead of a sustained solution, the bipartisan negotiators have set aside the critical debt-reduction objectives, even though U.S. debt amounts to $17.3 trillion and U.S. total debt already exceeds $60.2 trillion. Total interest for 2013 alone amounts to $2.6 trillion, which is more than all three largest budget items combined – that is, Medicare/Medicaid, social security, plus defense expenditures.

China, too, remains haunted by difficult challenges. In particular, Beijing must manage its growth transition, even as it seeks to contain local debt that soared as collateral damage from the 2009 stimulus package. While probabilities for hard landing are fading for 2014-15, deleveraging challenges loom thereafter. Further, if local government deleveraging, along with legacy debts, begins already in late 2014, the potential for downside risks could increase after mid-decade.

What Washington has not achieved is an accord on a sustainable, long-term blueprint for tax and spending policies over the next decade. That would require credible, bipartisan cooperation over a medium-term debt/deficit plan.

What China has not achieved yet is a detailed blueprint for local debt management over the next few years. That requires decisive consensus in Beijing, which does exist, but also tough implementation at local level and across Chinese provinces, which is more challenging to achieve.

The last thing the ailing Europe and Japan, and the slowing large emerging economies need is still another U.S. debt debacle, or a protracted slowdown in China.

However, if the looming post-2014-15 challenges can be overcome, global prospects could be blessed by another period of slower, though more sustainable growth and increasing prosperity.

Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). See also www.differencegroup.net