Stephen Roach on China's economy, needed reforms, U.S. tariffs on Chinese products, etc.
Stephen Roach on China's economy, needed reforms, U.S. tariffs on Chinese products, etc.
Highlights from the Morgan Stanley economist turned Yale scholar's public event at the Center for China and Globalizaiton on Friday, May 31.
Stephen Roach, Senior Research Scholar at the Paul Tsai China Center of Yale Law School, delivered a presentation, engaged in a conversation with Henry Huiyao Wang, President of the Center for China and Globalization (CCG), and answered questions from journalists at CCG on Friday, May 31.
CCG has broadcast the public event on YouTube and domestically, where it remains available.
The entire transcript has also been published on CCG Update
Below are highlights from Roach’s remarks. He has not reviewed the highlights or the transcript.
Economic Growth Dynamics
Roach began by acknowledging China's past role as a dominant engine of global economic growth. However, he argued that this dynamic is changing. The International Monetary Fund's (IMF) latest projections indicate that global growth will be below the long-term trend through 2029, making the world more vulnerable to economic shocks. This is particularly concerning given the ongoing U.S.-China conflict, which Roach identifies as the greatest threat to global growth.
Roach illustrated China's economic slowdown using several data points. China's five-year GDP growth trend peaked at 11.7% in 2007 but is projected to fall to 3.8% by the end of the forecast period. This slowdown is attributed to both short-term cyclical pressures, such as the property crisis, and longer-term structural issues like demographics and declining total factor productivity (TFP).
Roach emphasized that when the world grows below trend, it lacks the cushion needed to deal with shocks, leaving the global economy vulnerable to recessions. The forecasted global growth rate is below the historical trend rate of 3.5%, and this precarious situation is compounded by the U.S.-China conflict, which represents a significant threat to global economic stability.
China's Economic Challenges
Roach highlighted the property crisis as a significant cyclical impediment to China's growth. He compared it to Japan's prolonged property crisis, noting that China's situation might be similarly protracted. The government's recent property support package is a step in the right direction but is insufficient to address the large inventory of unsold housing.
“I'm not saying that China is the next Japan,” Roach said, “but there are clearly some worries and parallels as seen from the standpoint of asset bubbles, debt intensity, the incidents of corporate zombies, the aging demography, and of course, conflict with the U.S. Japan was in conflict with the U.S. on trade policy in the late 80s, and now it's China. The U.S. always needs to blame somebody for its growth problems, and we like blaming large Asian nations.”
He stressed that addressing China's property market problems will require substantial efforts and resources, much like Japan's experience.
On the structural side, Roach pointed out two major issues: the aging working-age population and declining TFP. These issues mirror Japan's past challenges, raising concerns about China's future growth prospects. TFP has been declining since 2011, primarily due to the shift of economic activity to low-productivity state-owned enterprises (SOEs) and regulatory pressures on the private sector. Roach noted that China faces similar structural challenges to those Japan faced two decades ago, including an aging population and declining productivity.
Roach warned that the combination of these factors could lead to a "growth shock" for China, comparable to Japan's experience. He emphasized that China's contribution to global growth has already declined from its peak and is expected to decrease further. The decline in China's growth contribution to the global economy is significant, dropping from about 33% in the 2010-2019 period to around 24% post-COVID, and it is projected to fall further to about 21% by 2027-2029.
Criticism of U.S. Protectionism Against China
Roach cricitized U.S. protectionism, particularly the ongoing trade war initiated by former President Trump and continued by President Biden, as reported by Bloomberg.
Roach argued that these protectionist policies are strategically misguided and harmful to both countries and the global economy.
Roach traced the origins of the current trade conflict to Trump's tariffs on Chinese products, which have been maintained by the Biden administration. Despite reversing many of Trump's unpopular policies, Biden has continued the trade war, recently expanding tariffs under Section 301 of the U.S. Trade Act of 1974. These tariffs target Chinese production of alternative energy products, such as batteries, electric vehicles, and solar cells, which Roach views as a significant blunder given the urgent need for non-carbon energy solutions in the face of climate change.
Roach criticized the U.S. approach as driven by election-year politics rather than strategic economic thinking. He argued that protectionism is counterproductive, raising costs for American consumers and industries by diverting trade to higher-cost producers. He drew parallels with past U.S. trade policies toward Japan, which also failed to address the underlying issues of budget deficits and low domestic savings.
Roach underscored the irony of the U.S. stance on Chinese alternative energy products, emphasizing that China's comparative advantage in this area is crucial for addressing global climate challenges. He called the U.S. resistance to Chinese exports of green energy products a historic mistake, exacerbating the global climate crisis and undermining efforts to transition to sustainable energy sources.
Roach noted that recent policy pronouncements by Xi Jinping emphasize a renewed focus on manufacturing-led and export-led growth, particularly in advanced technology and capital goods.
Roach argued that the U.S. trade policy towards China is based on a flawed understanding of trade imbalances. He pointed out that the U.S. trade deficit is a multilateral issue, not one that can be resolved by targeting individual countries. The reduction in China's share of the U.S. trade deficit has simply redirected trade to other nations, many of which are higher-cost producers, effectively imposing a tax on American workers.
Roach's critique extended to the broader implications of U.S. protectionism for the global economy. He warned that the escalating U.S.-China conflict increases the risk of an economic shock, which the world is ill-prepared to handle given the current below-trend growth. He called for a new approach to U.S.-China relations, one that moves away from politically driven policies and towards a more collaborative, technocratic model.
Roach also highlighted the broader geopolitical implications of the U.S.-China trade war. He noted that the trade conflict exacerbates tensions in other areas, such as technology, cybersecurity, and national security. The escalating trade war, combined with other geopolitical frictions, poses a significant risk to global stability and economic growth.
Proposals for Future U.S.-China Relations
Roach proposed the establishment of a U.S.-China Secretariat to manage bilateral relations more effectively. This organization would be staffed by technocrats rather than politicians and would address a wide range of issues, including trade, economics, technology transfer, industrial policies, and climate change. The goal would be to create a stable and constructive framework for engagement, reducing the risk of conflict and promoting mutual understanding.
Roach emphasized the need for a shift in focus from quantity to quality of growth in China. He advocated for policies that support higher productivity in the private sector and enhance the social safety net to stimulate domestic consumption. He also highlighted the importance of environmental metrics and TFP as measures of growth quality.
Roach's proposed U.S.-China Secretariat would operate on a collaborative model, focusing on research, oversight, and compliance with bilateral agreements. It would have a built-in dispute resolution mechanism to address conflicts and promote cooperation. Roach argued that this new architecture of engagement is essential to avoid accidental conflicts and ensure long-term stability in U.S.-China relations.
Roach also discussed the importance of stimulating domestic consumption in China to sustain economic growth. He highlighted the need for reforms to the social safety net, including healthcare and retirement systems, to reduce precautionary savings and encourage consumer spending. Roach argued that enhancing the social safety net is crucial for boosting domestic consumption and ensuring sustainable economic growth.
Addressing Structural Challenges in China
Roach pointed out that the Chinese government's emphasis on SOE-led industrial activity has created inefficiencies and global repercussions. He called for intensified efforts to reform SOEs and support higher-productivity private sector companies, especially in the technology sector. Roach argued that without shifting the focus from low-productivity SOEs to high-productivity private enterprises, China's economic growth will remain constrained.
Roach also discussed the importance of addressing China's demographic challenges. He noted that the aging population poses a significant risk to long-term economic growth. To counteract the demographic headwinds, Roach emphasized the need for policies that enhance productivity and support innovation. He highlighted the role of human capital investment and technological advancement in boosting TFP and sustaining economic growth.
He said Beijing’s policies need to be formulated more explicitly and more comprehensively to address the shortfall of domestic household consumption in China. He said the third plenum is the time to address that and he would hope that more progress would be made in the upcoming reform agenda.
For the full transcript
