The weakness of the American consumer is having repercussions in China, which may stop buying more U.S. Treasurys as it focuses on internal consumption rather than exports, Stephen Roach, the non-executive chairman of Morgan Stanley Asia, told CNBC Wednesday.
That could result in "higher interest rates and/or a weaker dollar, and we’re not going to be able to fund ourselves on the terms we have been funding ourselves externally," he said.
Annualized growth in spending by the world's biggest consumer between the first quarter of 2008 to the second quarter of 2011 was only 0.2 percent, he said.
"This is China’s wakeup call," he warned. China can "no longer afford to stay the course of export-led growth that is hooked on the bandwagon of the American consumer."
Under its most recent five-year plan, China will be focusing more on internal consumption, Roach said.
When it focused on exports, China was sitting on "trade surpluses, current account surpluses, and massive accumulations of foreign-exchange reserves, two-thirds of which have to be reinvested in dollar-based assets," he said. "That’s what keeps them alive as the biggest foreign buyer of U.S. Treasurys."
But as China boosts internal consumption, domestic savings goes down and so does its foreign-exchange accumulation, Roach said.
"And guess what, they don’t need and they stop buying dollar-based assets, not because they're mad at us...but just because they don’t need to do it," he said.
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