Today World News Online

Importance of Survival Skills

Can the U.S. and China Survive Without Each Other? (w/ Stephen Roach & Grant Williams)

GRANT WILLIAMS: Professor Roach, welcome to
Real Vision. It’s great to have you with us. STEPHEN ROACH: Thank you. It’s a pleasure. Heard a lot about you guys. GW: Well, we’ll try and prove it, all the
good parts, true in the next hour or so. The subject I have is China. We’ve had a lot of discussion on China, and
recently a lot of it has been bearish, which seems to be the general tone at the moment. So I thought this is a great opportunity to
get someone on who’s seen up close for three decades, has a lot of interesting thoughts,
and which take the other side of the argument in many ways so. I guess the sensible thing for us to start
with would be your personal experience in Asia if you just walk us through the time
you spent there and the changes you saw. SR: Well, it goes back for me about 20 years. In the late 90s, I was heading up Morgan Stanley’s
global economics team. I was the chief economist for the firm based
in New York. But I traveled the world and spend a lot of
time in Asia. And out of the blue comes this Asian financial
crisis starting with the devaluation of the Thai baht in the summer of 1997, and one by
one these socalled miracle economies of Asia crumbled. And we had a highly ranked economics team
by then, various investor polls, and we had a horrible forecast. So it was a great source of humiliation for
me to see our forecast in tatters. And so I had this hunch that somehow China
would hold the key to the endgame of this crisis. If China went the way of Thailand, Korea,
Indonesia and devalued their currency, who and who knows where this crisis would’ve gone? I’d been to China a few times, but I had no
idea really what was going on. So I started going to China in earnest in
the second half of 1997 when every other month. And it quickly became evident to me that China
was very different, and I just got hooked on China at that point and started writing
about China. I had a Hong Kong-based Chinese economist
who was working for me. But I became fascinated with China from the
Wall Street perspective and wrote about China and its ability to deal with this crisis in
a way that was very very different. And so I wrote an article in the Financial
Times I think in early 1998 that made the case that coming out of this crisis, China
would emerge as the new economic leader of Asia and Japan, the pre-crisis leader, would
lose its role as the dynamic economy in the region. And my friends in Japan hated me. They wouldn’t speak to me for years. And the Chinese were a little bit embarrassed
by this but certainly welcomed the outside view. And the rest is history. I just kept going back and back to China,
and toward the end of my Morgan Stanley career, right around the time of the financial crisis
right around 2007, the CEO of the firm, John Mack, said you know what. Do you want to give up your job as our chief
economist and go to Asia as the chairman of our Asian businesses and be our senior executive
on the ground in dealing with Asian governments, Asian clients, Asian investors. And I said no. I’m an economist. I want to live and die as a chief economist. And he was a pretty forceful guy, my CEO John
Mack, and he said I want you to think about it very, very carefully. And I talked it over with my wife, and I thought
about it. And I said, this is a unique opportunity. I’ve had a fantastic job. I’m going to take this job, and it turned
out to be five extraordinary years of being on the ground in Asia, spending half of my
Asia time in the People’s Republic of China and allowed me to really dig into what then
became my passion. And now I teach it about it at Yale. So that was a brief travelogue of how I got
from the US-based economists to and now, a professor of teaching about China. GW: It’s– with the benefit of hindsight,
it seems such an obvious call to make that China would rise and Japan would fall. But at the time it wasn’t. Can you take us back to what China was like
back then because it’s a world away from how we know it today and also some of the signs
you saw that made you crystallize this opinion because you were an outlier at the time. SR: Yeah. Back in the mid to late 1990s, there was a
lot of suspicion about China. It had literally been 10 years after the devastating
political turn of events in Tiananmen Square in June of ’89. China was aspiring at that point to join the
World Trade Organization, feeling that this was the means to really get involved in driving
and shaping global trade. But the China Dream was just a dream. And there was little concrete evidence that
China was poised for the type of takeoff that was about to occur in the 2000s. The economy had actually been growing very
rapidly in the 1980s and early 1990s but off a small base and still was very much state-directed,
state-owned. Big state-owned enterprises accounted for
the bulk of the business activity. The Asian crisis came along, and the policymaker
who really made a difference to me in both getting to know him and watching him operate
was the prime minister at the time Zhu Rongji, who used the crisis as an opportunity to really
force through some dramatic reforms on how who owned the state owned enterprises, started
bringing these companies to market. Morgan Stanley was participating in that. And he thought strategically, and he was very
open to the analytical approach I had in discussing it with me and others about what some of the
challenges were that he had to address. And so I watched China basically as an outside
observer deal with this devastating crisis ’97, ’98, learning that the last place they
want to be is in a position of being too dependent on short-term external debt, not have enough
currency reserves to defend their currency if it came under pressure. And slowly but surely, they took their foreign
exchange reserves from at the time was like $50 billion US up to a peak few years ago,
$4 trillion and used that reservoir– reserves and this vast stash of saving to plow it back
into their economy, investing in infrastructure plant and equipment and eventually education
reform, and they became a legitimate, full-blown powerhouse. GW: We’ll get onto those reserves in a little
while because they may hold the key to an awful lot of things that are happening now
and possibly in the future. But this idea that spending time in China
seems to give everybody a much different perspective than those who look at it from across- – my
time in Asia, I always felt that people that were a long way away from Asia didn’t understand
China, and they were frightened about all the wrong things. And then we went through a period where the
closer you were to China, the more frightening it was. Where are we now in that dichotomy between
the people up close and their view and the people observing China from this part of the
world for example? SR: Well, that’s a great question. I find myself often times debating some of
these China bears. Some of them are Chinese or Chinese-American. Some of them are Americans who have– I don’t
want to name names– but been very well-known short sellers who have a strong negative view
on China who have never been to China. GW: Yeah. SR: And the line from them is, well, I shorted
company XYZ and didn’t spend time in their headquarters. Why do I have to go to Beijing to apply my
same trade? When I see a problem, I know a problem. And I think the a-ha moment for me came when
I was early on in my China venture learning and traveling during this crisis. And I read a book that was written by– little
did I know he was going to go teach there– by very famous Yale professor Jonathan Spence
called The Chan’s Great Continent. And that book published I believe in 1998
was a brilliant forensic history of how Western observers saw China from the outside looking
in starting with Marco Polo going all the way up through Henry Kissinger and Richard
Nixon and many, many in between. And he found something in that forensic history
that I just blew me away. He said most of the Western observers saw
China through the same lens that they saw their own systems, their own economies, their
own histories. And so when Marco Polo wrote about the canals
of Beijing, he really mistook the canals of Beijing for the canals of his own native Venice. He left out some of the most important characteristics
of Chinese culture like the fact that women basically were hobbled because they bound
their feet. He wrote about China the way he saw his native
Italy. And so I think– the lesson for me is our
Western perspective is not necessarily the best lens to look at China. And then when you fast forward to where we
are today and so many people are talking about, oh, China’s the next Japan or we had a property
bubble in the US and look at the excess house price appreciation in China– we went through
it they’re going to go through it, it’s difficult to map your own experience into a different
system, different politically, socially, and economically. GW: But that’s what everybody tries to do. And I agree. That’s always been my problem with China. And I go backwards and forwards between thinking
the sky’s going to fall and thinking it’s going to be all right. But I always do that understanding that I
am looking at it through perhaps a wildly misguided lens. But we’ll get into the numbers and stuff shortly,
but I want to try and dig into the politics of it because obviously we’ve seen some enormously
powerful figures come and go through your time in the region. And we now have an incredibly strong leader
in Xi Jinping. Talk a little bit about how that– the political
cycle has changed and how the CPC has evolved during that time because it does seem wholly
different today. SR: Yeah, I think if there’s one big surprise
in my 20 years of in-depth connection with the Chinese system, it has been the change
in course. Politically that’s occurred under Xi Jinping. Because you go back to the first 25 years
of the PRC under Mao Tse-tung and there were these massive upheavals at the end of his
life, the Great Leap Forward, the Cultural Revolution, that pushed the system to the
brink economically, politically, and socially. And there was a big leadership struggle after
that, and out of that struggle came Deng Xiaoping, who said wait a second. It’s time to get away from my ideology. Let’s do fact-based reforms based on observable
issues. And he set in motion some dramatic reforms
on the economic realm that were accompanied by a steady and progressive liberalization
of the political system. And so what happened was that there was a
burst of creative activity in the arts, and some of the political discussions became very
intense. And then there was this tragic boiling over
in the late 80s that the government clamped down on, but once a few years went by after
that, then the political system continued to relax. And then all of a sudden, seemingly out of
the blue, the socalled Fifth generation of leaders headed by Xi Jinping takes power literally
six years ago. And he– the first thing he said in a very
expansive press conference after being appointed party secretary is that we’re at risk. The party is– has been corrupted by special
interest groups. Society is also at risk for the same comparable
sources of corruption and erosion of our basic Marxist values. And I’m going to deal with that. And so he began early on in 2013 with the
most dramatic anti-corruption program and a return to core party values that China has
seen really since the days of Mao. Some people compare it to the Cultural Revolution. I don’t because it’s not nearly as disruptive,
but in terms of an about face in a political environment that had been opening to one that
now is more focused on core values of this Marxist system, that’s been a big shift. GW: Was that– how much of that was cleaning
house, and how much of it was a man trying to ring fence himself and get himself in a
position as a new leader of a country? SR: Well, we speculate about that all the
time. We don’t really know. The anti-corruption campaign is widespread. There are various websites that try to count
up how many people have been caught up in this campaign. And in preparing to teach a class on this
very issue a few weeks ago, I looked at multiple websites, and the estimates range from 500,000
to over 1.5 million people. He breaks them down into what he calls tigers
and flies. The tigers are the big guys, the former members
of the standing committee of the Politburo like Zhou Yonkang who was the head of the
state security apparatus, or to the little guys operating at the local governments and
in small businesses. And there’s been a lot of discussion about
the high-profile leaders that have been ensnared, starting with the very first one. This whole campaign was sparked before Xi
Jinping took over by the really extraordinary corruption case that was brought against what
they call a princeling, the son of a revolutionary hero, a gentleman by the name of Bo Xilai. GW: Bo Xilai, yeah. SR: Who was in his life– before this incident
became public– was the mayor of a big city, Dalian. He was the Minister of Commerce and there
therefore the outside face to the world representing Chinese trade interests in the early to mid
2000s. And then in his final position when before
he– right before he was arrested, he was the party secretary the biggest city in the
world, Chongqing. And he was leading a very patriotic, nationalistic
revival in China and blatantly campaigning to be elevated to the so-called standing committee,
the top seven or nine leaders of China. No one had ever done that. No one ever seen that before. And he was arrested before Xi Jinping was
brought into office. But this was a really an amazing process to
witness from both the outside and the inside. And I think Xi Jinping took that as a threat
as to what could happen if these new leaders were to get power outside the accepted party
structure. Could that pose a grave risk to the sustainability
of the system? And so his anticorruption campaign needs to
be set in the context of those events that were occurring as well. GW: The Bo Xilai affair was– to me that was
a sea change because not only was it a very high profile guy to take down, but the fact
that it played out so publicly, you knew that the stuff that was coming out was being leaked
deliberately to create the story and show the world that things were changing. SR: Yeah, it was amazing. I actually– it transpired– the drama unfolded
really in 2012. And I had just made the move to Yale at that
point. And I remember full well going to one of these
academic dinner parties with a bunch of– a small number of faculty members. And the host actually invited my hero Jonathan
Spence and his Chinese wife to the dinner. And literally that morning the other shoe
had fallen where the Chinese had announced that his wife was also arrested for the murder
of a– I think it a British compatriot and the alleged crimes against the state. And I remember Spence turned to his wife,
when we talked about it, he says, I knew it. There’s always a woman involved in these great
crimes of intrigue that are alleged to have been initiated by a high-level male statesman. GW: Always. SR: So Spence and his wife said, this is right
out of the script of the way this palace intrigue has unfolded in China for centuries. And only he could say that because he’s studied
the centuries of Chinese history. I had no idea whether he was right or wrong. GW: Well, the other obviously– the other
big figure that looms in China is America, this relationship between the two countries. And this is something you wrote a book about
in 2014, which talked about the co-dependency between the two. And I think that at the time was right. It’s changed and morphed. That relationship has become more fractious
perhaps. And I know you’ve got some thoughts on that. So I’d love to get you to lay out the theory
of that co-dependency and then talk about where we are in the evolution of such a thing. SR: Yeah, I have to say, though, the book
was an outgrowth of my personal journey as a professional economist prior to my initiation
into Asia under fire. I was predominantly a US-based US-trained
economist with the responsibility for Morgan Stanley of forecasting and analyzing the US. And then I was promoted to chief economist
and got hooked on Asia and really switched my focus to China. And then when I went to Yale– once you go
to academia, you got a chance to sit back and contemplate what have I been doing for
the last 30 years. And to me, the last– 30 years at Morgan Stanley
had broken down into two pieces, the US guy and then the China guy. And I thought to myself, there are people
that know more about the US than I do although I hated to admit that, and there are definitely
people that know more about China than I do. But I know a lot about the intersection of
the two countries and the relationship that really weaves them together in shaping that
intersection. And so I started thinking about the two-way
character of this relationship and the fact that China, as an export-led economy, clearly
depended a lot on the US for the largest source of external demand that drove its growth miracle. But there was more to it than that. And I said you know what about us in the US? And I said, well, we’re a saving short economy. So we need a lot of foreign surplus savings
in order to grow. And when you learn economics as a young pup,
when you don’t have savings and you want to grow, you do import that surplus savings. You run big current account and multilateral
trade deficits. And I go a-ha. This big trade deficit, which has gotten only
bigger over time is an outgrowth of our own imbalances, hence the title of the book, “Unbalanced,”
because I focused on the joint confluence of the macro imbalances in both economies. And I took it further. I said, look, the US doesn’t only need now
some $500 billion of goods from China to make ends meet for income constrained American
consumers, but we need China to buy our treasuries because we have these massive budget deficits. And our biggest export markets we know are
Mexico and Canada, but who’s number three? It’s China. And whose growth rate of US exports to another
country is the fastest of our major trading partners? It’s China. So I said, this is a two-way relationship. We depend on them. They depend on us. And my wife is a psychotherapist. I’ll admit. So I sometimes read some of her textbooks
and articles. And one day– I don’t know– seven or eight
years ago, I found some article laying on our desk about codependency, and I go a-ha. That’s what’s going on here is two needy partners
searching to each other for the sustenance of their– in this case it wasn’t personal
growth– but economic growth. And then I went back and reconstructed the
relationship, and to me that co-dependency, the seeds that, were sown in the late 1970s
when China was just coming out of these two unstable decades of the Great Leap Forward
and the Cultural Revolution desperate for a new source of growth. And we were in the midst of a horrific stagflation
that was really an unfortunate place for our economy to be. And so we came together and– I know I’m stretching
this a little bit– what I would call a marriage of convenience, which is the way these co-dependencies
start with humans, where we drew on each other to deal with the tough places we were in. But I was quick to realize that this was a
marriage of economic convenience. It was definitely not a marriage of love. And so there was always a risk that one partner
might turn on the other one. And when I wrote the book four or five years
ago, I underscored that risk, but I had no idea that Donald Trump was going to get elected
and act out in that fashion that’s actually classic in studying the human pathology of
co-dependency where one partner moves on and the other one feels scorned and lashes out
and strikes back. And that’s what’s going on right now. GW: Well, let’s talk about that because this
idea that China’s moving on, you’ve laid out, and you’ve written very eloquently about it. And it makes sense when you look at it prima
facie. It looks like it makes sense. So how are they moving on? When you talk about that, what exactly do
you mean? SR: Well, China for 30 years dependent on
exports and on investment largely to grow this export platform and its biggest market
for those exports was the United States. In 2007, a former premier of China by the
name of Wen Jiabao, he gave a press conference right after one of these big national Congress
meetings in March of 2007 and said our economy looks pretty strong on the surface. But beneath the surface, it’s unstable, unbalanced,
uncoordinated, and ultimately unsustainable. What did he mean? He meant that– and I’m putting words in his
mouth– but this is the way the debate unfolded, so the words are accurate with the benefit
of hindsight– that China needed to shift the model from external to internal demand
to stimulate more of a consumer-led, services-led economy and an awful lot of effort and thought
has been put into redesigning the growth model. And so in a consumer- and services-led economy,
you’re less reliant on your year former external partner as a sustenance for growth. And by the way you end up saving less and
therefore you have less to spend on treasuries that the US needs so desperately to compensate
for its own savings inadequacies. So in some respects, this structural re-balancing
is a big shift in the Chinese growth model that allows China to move beyond an old model
and its dependency on the US. And in some respects the US is very uncomfortable
with that shift and especially since it entails a lot of new and important efforts China’s
making in the way of technological change and innovation that the US views as an egregious
violation of its own proprietary technology and intellectual property rights. GW: Donald– the outlier that is Donald Trump,
we’ll come to in a second because who could have possibly foreseen that. But the big word that everybody throws around
when talking about China through this whole period through the beginning of the 2000s
rightly through now is debt and the amount of debt that they’ve used to fuel that growth. And it wasn’t all just this return from an
exporting nation into internal consumption and services. Your experience in China, how does the picture
on the ground of the Chinese debt situation differ from perhaps the way people see it
from the US and Europe when they’re looking onto the inside? SR: Well, the debt intensity of China took
on new proportions in the aftermath of the financial crisis. Going into the financial crisis debt, the
GDP in China was– the ratio was about 150%, which– it was a little higher than it had
been, but it was not an outlier relative to other nations if that in fact is a comparative
metric that we want to use. But in any case, after 2008, the ratio exploded. And today that same ratio in which pre-crisis
was 150 is about 262%, and that’s worrisome. And so the debt intensity of the Chinese GDP
has increased dramatically. If you pick apart the sources of that debt,
you will find that it was not the household sector that did it. It was not the government sector that did
it. But it was largely this big, big increase
in corporate debt. And if you look further, you find that it
was in the state-owned enterprises that really became the drivers, the engines of debt-intensive
growth. And there’s been a lot of discussion about
this actually inside of China. And there was a famous interview about three
years ago—2.5 years ago. It was published on the front page of the
state newspaper, People’s Daily, that contained an interview by– between the editor of the
People’s Daily and someone who did not want to divulge his identity, so he became known
as the Authoritative Person to indicate that he was high-level, very well-connected official
but did not want to disclose his name, which is a little weird, but that’s just the way
they did it. And he said China’s on a tough and dangerous
course very reminiscent of the experience of Japan. And he laid out the whole Japan model debt-intensive
growth underpinned by asset bubbles that when they burst pose a risk to levered companies
in Japan, the levered companies that got dragged down by. The bursting of the equity and property bubble
in the early 1990s became known as zombies and that– and the economic Walking Dead–
and that unleashed a whole conversation that’s still going on today about the incidence of
zombies in China and their relationship to debt-intensive growth. And the bottom line is the Chinese government
is very cognizant of the risk of a replay of a Japanese-like scenario. And they’re very focused on avoiding that. And I give them a lot of credit for that in
naming and owning up to the major risk of debt-intensive growth. I teach a few courses at Yale. One of the courses I teach in the spring is
called The Lessons of Japan where I go through the rise and fall of modern Japan and then
try to distill some lessons that has for other countries including China. I’ve been asked to teach parts of that course
in China for the last three years, and I do. GW: Whichever view you have on China whether
your bullish or bearish, you seem to be able to find exactly what you need to not only
back up your case but strengthen it. SR: Isn’t that true of any view in the markets? You talk to a lot of market guys– GW: Yeah,
but it is. But I think China, particularly because there’s
that certain amount of opacity about everything that comes out of China. You never really know. And the narrative around it is that you’re
going to get told by the CPC exactly what they want you to hear, and you’re never going
to get the real truth. So can we believe anything? But it does seem that– SR: You hear that
a lot. Like I debated at Yale just the other day
one of the most prominent China bears. Again, I won’t mention his name, but he wrote
a book in 2001 called The Coming Collapse of China, so you can do on internet search. And he’s a great guy, but he said to your
point you can’t believe the numbers in China. They publish 6.5% or 10%, but I know the numbers
are 1. GW: Right. SR: How do I know it? Well, I look at this or that gauge, and so
I conclude that I know more about the Chinese economy than the published data lead you to
believe. And you’re right. There’s a lot of outside adverse– experts
or doubters about China who will say the same thing. You can’t trust the information that the government
puts out, and so we know that the place is a lot weaker than that. GW: But I guess that’s the problem really
because if you– if everyone’s getting the same data, it’s just down to interpretation. Whether data is right or wrong, it’s the only
data we have. People go in and try and come up with their
own data sets, and generally those tend to be bearish or certainly more bearish than
the governments, which would suggest that they do massage the figures in a favorable
direction to them. But when you look at some of the numbers that
some of the bears are coming out with in terms of the sheer levels of debt, it’s hard to
see how you gently work your way out of something like that without some kind of major correction
happening suddenly. SR: Well, look, that’s why I’ve often felt,
whether it’s looking at the US economy, the European economy, the Chinese economy, the
Japanese economy, that you’ve got to do more than just focus on headline GDP or headline
debt. You need to look at the pieces of the puzzle,
how they fit together and whether or not the logic of that puzzle can be corroborated by
evidence that the government does not put out, that others have assembled, or that you
can look at through your own analytical lens. And so so much discussion about China as well,
GDP was 10 and now it’s 6 and 1/2. And so that’s a 35% reduction in growth rate. And then adjusting for the well-known biases
of whatever it is– 2, 3, 4 percentage points– the economy is already terribly weak, the
day of reckoning is at hand. That’s what I hear all the time. They’ll look at other things like property
bubbles or the environment and say, see, I told you. I’m suspicious of that. I really am. The overall GDP in China to me is far less
important than its pieces. And the pieces that I’ve looked at also aggregate. But break down the GDP and its three major
sectors, primary or agriculture and mining, secondary manufacturing construction, and
tertiary services. And if you look at just those three pieces
of the puzzle since 2007 when again my favorite provocateur of the debate Wen Jiabao said
the Chinese economy was unbalanced. There’s been a big shift away from manufacturing
construction increasingly towards services, which is the infrastructure of consumer growth. When he made his famous comments that I alluded
to earlier, the services share was about 42% of Chinese GDP. Today it’s 56%, 57%. It’s still too small. GW: Yeah. SR: But that move in 10 years from 42 to 56
is extraordinary indications of structural change and so the service-based economy is
whether developed or developing, they grow more slowly. And so how much of this slowdown in the growth
from 10 to 6.5reflects the shift deliberate to slower growing services activity to achieve
their goals of a more balanced economy. I don’t think the bears really get into the
shifting composition. They want to judge China by one number and
one number alone, whether it’s debt to GDP or GDP and say this is the problem. And I need to do more than that. GW: What about the currency because the currency
is obviously at the center of a lot of this, and that co-dependent relationship is changing
as you said. China seems to be trying to find a way to
have less need for dollars, and certainly the treasury holdings are declining over time. SR: A little bit. Not a lot. GW: Yeah, a little bit. But it’s pretty steady now. It’s– since 2013, it’s been a pretty steady
reduction that suggests this is a change in direction for them. What do you think about the currency? It seems to, again, hold the key to a lot
of potential moving parts that float around it. SR: Well, I think the currency was enormously
important when China was deriving so much growth from exports because that’s the sort
of the way in which Chinese goods are priced relative to other goods. And certainly there was evidence that the
Chinese like their predecessors the Japanese were deliberately holding the currency down
to gain competitive advantage in the 19– early 19– excuse me early 2000s maybe going
up to 2012, 2013. Since then they’ve allowed the currency to
rise a lot. But the currency helps you compete if you’re
an exporter, but it– you need a stronger currency to expand the purchasing power of
your consumers as they start to come to life in attempting to realize their demands for
foreign produce goods. And so the governments allow the currency
to appreciate although recently in the last nine months or so it’s come down pretty sharply
again. So I think the currency is one important policy
lever in China. It’s meant different things for the Chinese
leadership at different phases in its growth cycle, and cheap currencies help exporters. And that was the case in China when we had
export-led growth. Strong currencies help consumers. And with the exception of the last nine or
10 months, that’s been the case for over in China as well. GW: We touched on Donald Trump, the big outlier,
since you wrote the book. So let’s talk about the Trump effect on the
relationship between America and China, how it’s changed, how each country sees the other
perhaps, and also the trade wars that are happening. We just can’t ignore them. They seem to be escalating. There’s an awful lot of talk trying to calm,
quiet the horses that we’ve got this under control, but it seems to me if you look beyond
the rhetoric from the people who– the discussions, it’s steadily escalating, and it seems like
a battle neither side can afford to back down from. So let’s start with the Trump effect. What effect has Donald Trump had? Has he just reset the boundaries of this,
or has there been a bigger change in that since he took the helm? SR: Well, I think President Trump has really
brought a troubled relationship to a head. Again, going back to my earlier framework
of co-dependency, co-dependency is not a healthy or sustainable relationship between humans. And I warned of that when I wrote this book
that ultimately there would come a time in this bilateral economic relationship where
one partner, either the US or China, would feel threatened by the other and lash out
in response. I did not when I wrote the book certainly
envision the election of a president like Donald Trump, who would seize on the bilateral
trade imbalance as a means to really tighten the screws dramatically on China. And as much as I object to tariffs and trade
wars, I will give the president credit for bringing out into the open debate on very
important issues. Whether it’s bilateral trade deficits, which
most card carrying economists, myself included, would tell you not to focus on, but to these
thorny issues of technology theft, intellectual property rights, state-directed system versus
a market-based system, cyberhacking, these are all allegations that were explored in
great detail by the Trump administration’s trade representative Robert Lighthizer. When he issued this report in March of this
year regarding the unfair trading practices as alleged under what is called section 301
of our Trade Act, in his report 182 pages with over 1,000 footnotes, which every one
of which I read, brings out and crystallizes a lot of issues that have worried a lot of
people for a long time. I’ve read the report carefully. I think it’s poorly done. I think it’s politically biased, but there’s
a lot of issues that don’t necessarily get expressed fairly and accurately by politicians. But we debate them because they’re important
to debate. And so the Trump administration, to its credit,
has put these issues on the table for all of us to debate. And that’s a good thing. GW: But what happens to that debate because
it’s a debate that realistically it’s very difficult to have between America and China
because the accusations, particularly around IP theft hacking and spying and all that kind
of stuff, it really is the stuff you don’t talk about at parties. When you bring that stuff out and you put
it out on the table, it’s very hard to have a debate about that in good faith on both
sides because the quantum of being exposed or being wrong is so high. And to do that within a wider framework of
trade wars, is that– a, good idea, b, can it work? I’m not sure it can. SR: Well, I would say not that this has become
the hottest topic of conversation in social circles or parties that I go to, but there
is a recognition that these issues are now– have now driven an enormous wedge between
us, the largest economy in the world and China, the second largest. And a lot of casual empiricism has recognized
that this conflict, this pattern of conflict, between the rising power and the ruling power
has a tough history that that can end in outright hot wars. There is a professor at Harvard, Graham Allison,
who’s written a book called Thucydides’s Trap that talks about this. And so– and then Michael– Vice President
Pence along with former Treasury Secretary Hank Paulson very recently have both laid
out the possibility that, well, if it’s not going to be a hot war, there’s a good chance
it’s going to be a cold war. And we know what a cold war was like with
this former Soviet Union. So again I don’t mean to say this is a burning
issue in every cocktail party, but it’s an issue of increasingly important consequence
in the discourse of international problems that I think many observers are now facing
for the first time in a long time. GW: So with this co-dependent relationship
and it’s clear to see the nature of that co-dependency, but who, if anybody, has the upper hand. Because it seems to me looking at it that
with the US deficits getting bigger and their need to fund ever bigger deficits based on
some of the Trump policies, I feel like China almost has the upper hand here. But I’m willing to– SR: Yeah, but you’re
alone in that because– I wouldn’t say alone– but clearly the Trump administration harbors
the belief that the US economy is now strong because of the president’s tax cut and regulatory
relief. And the Chinese economy, the growth rate is
slowing. The stock market’s down some 30% this year,
and China is weak. So why not go after China right now if we’re
so strong and they’re in a position of vulnerability? I actually share your view. I think that maybe on a short-term basis,
we have momentum going to the upside and the Chinese don’t. But they’re tackling a lot of tough issues
that are going to leave them I think in surprisingly good shape long term, and we are squandering
our long-term strength by refusing to address our savings problem. In fact, by enacting tax cuts at a time when
our economy was actually heating up and our budget deficits were large going into these
fiscal policy adventures. And that will make our future even more problematic
down the road. So the idea that this is the time for us to
strike because China is weak and we’re strong and that we– they export more to us than
we export to them, therefore our tariffs can be larger than theirs, I think that’s really
misplaced in a very myopic appreciation of the risks. GW: So how would you if you had to write an
epilogue to the book now, given what’s happened, is there anything you’d change in your framework? And if not, is there anything that particularly
now you see as more important to focus on from what you wrote back in 2014? SR: Well, I like the framework of the book
in terms of laying out the details and the genesis of this two-way relationship. But I think if I had to write the book again,
I would take the cue from the tariffs, the so-called section 301 investigation that the
Trump administration launched, and I’d spend somewhat more time in discussing the innovation
challenge that both nations find themselves in, where this came from, how we deal with
it, and what does it say about the eventual struggle between two very different systems? Is it the innovation challenge a zero sum
game where if China succeeds in areas like artificial intelligence or biogenetic breakthroughs
or gene therapy that we can’t? It comes at the expense of us? Or can we both utilize technological breakthroughs
and innovation for our own purposes to make us stronger for the future? I would explore and probe that because I think
that the answer to this battle over innovation, intellectual property rights, and the cyber
hacking issues that go along with this discussion will be very important in shaping the future
for us in the United States, for the Chinese, and broader global economy as well. GW: So, again, I mean given your experience
in China, what do you think the future holds? I’m obviously– it’s an impossible question
to answer, but as you apply your experience in talking to the very top levels of the Chinese
government and understanding a bit better than most of us how they think and how they
strategize, what do you think the future holds? SR: I’m pretty optimistic on the broad parameters
of what they’re trying to achieve focused on a strategy that builds out the middle class
Chinese consumer as an increasingly important source and sector of economic activity that
moves away from resource intensive, pollution intensive, manufacturing construction into
more of a services-based resource-light economy that helps China address this horrific problem
with environmental degradation. It’s a very, very serious problem throughout
China, not just air but also water. So I’m pretty optimistic. Having said that, there are still some big
issues that I worry about. I worry about the demographic distortions
that have arisen through the one child family planning policy, which has since now been
abandoned. But how easily is it going to be for Chinese
families just because the government says to have another child or two just to change
the dynamic of the way in which elderly people are supported by active members of the working
age population. I also think that the Chinese face a lot of
challenges in continuing to expand their property markets without succumbing to asset bubbles. And then finally I’d say the one thing that
continues to puzzle me, which is very paradoxical, is the role of the state in owning companies,
in owning property, in owning enterprises. They talk a lot about state-owned enterprise
reform. What does that really mean? From, again, our point of view, it means taking
these state-owned entities and listing their shares in public capital markets and turning
the ownership over. And they did a lot of that in the late 90s. But now they’re not so much rethinking that,
but they’re adding a different approach to stateowned enterprise reform. And I find puzzling and potentially problematic
in that they call it a mixed ownership state-owned enterprise reform where they continue to emphasize
the importance the state has in guiding and owning assets, but they want this to occur
within the environment where markets are decisive in shaping the allocation of resources. It’s a blended model. How can you do that? How can you have the markets and the state
in such intricate and complex partnership as the Chinese aspire to? So far they’ve pulled it off, but this is
a model that lends itself to a fair amount of risk down the road. And they have yet to really resolve this key
paradox, this big dilemma. GW: The cynic in me suspects that the answer
may also have something to do with that enormous amount of debt that’s layered into the SOEs
and the effect that sunlight would have– the sunlight of that listing– SR: Well, it’s
possible. The poster child of mixed ownership state
enterprise reform is this capital injection of about 12 billion that was done little over
a year ago into China Unicom, a big stateowned enterprise telecom company. And they brought maybe a dozen or so strategic
investors to inject the capital into it. About 40% of them were the big tech companies
Alibaba, Tencent, and the like, Baidu. But the balance were other state-owned enterprises. GW: Yeah. SR: So now they’re in a position where they’re
getting SOEs, to use the jargon for state owned enterprises, investing in other SOEs. And as somebody who studies and teaches about
Japan, this is out of the playbook. Where cross shareholdings ultimately led to
the demise of the Japanese currencies when the equity bubbles that underpinned their
cross ownership collapsed and the debt that used those artificially inflated equity values
became very onerous and left these companies insolvent. Hence the phrase zombies to describe the horrific
impact that these companies had on the Japanese economy. And so I see some signs of that in China,
and that worries me. GW: Well, so that’s the future China, but
just in closing to get to China’s future, we have to somehow navigate this trade war
successfully. And it needs to be something that both sides
I guess can claim victory. How do you see the trade war playing out from
here? SR: I think that we have this upcoming meeting
between President Xi and President Trump on December 1 in Buenos Aires after the G20 meeting. I think who knows how that’s going to play
out, but I think both leaders feel compelled to send a message that they have come to agreement
on something. Whether it’s an agreement and to develop a
more robust framework to resolve the problems as one Trump administration official has said
or a standard Chinese deal which is we’ll buy some more soybeans and airplanes, just
please leave us alone, I think they’ll be a cosmetic deal. But I think it’s going to be really difficult
to come up with a meaningful and lasting deal that gets to the core of this clash between
two co-dependent nations over technology, intellectual property rights, cyber hacking,
and the role of the state in supporting and driving competitive policy. These are core interests for China. These are core interests from us. And to compromise any nation on its core interests
is asking a lot. And so I don’t see a formula that’s been developed
that allows for that compromise to take shape. I would be hopeful that we could come to some
agreement on that. And if we don’t, then those who are warning
of the protracted struggle of the Cold War type model that we had for years with the
former Soviet Union may turn out unfortunately to be correct. GW: Well, Professor Roach, we’ve run out of
time. It’s been fascinating and a real thrill for
me. So thanks for taking the time to do this. SR: Thank you. Pleasure.

Leave a Reply

Your email address will not be published. Required fields are marked *

Proudly powered by WordPress