A China Optimist’s Lament - Stephen S. Roach (Project Syndicate)

 A China Optimist’s Lament

With a shrinking working-age population, China, until recently the world’s greatest growth story, needs an acceleration in productivity growth to reclaim that mantle. That is why President Xi Jinping’s increased emphasis on security, power, and control comes at the worst possible time.

Stephen S. Roach 

 Project Syndicate, 22.12.2022

 

New Haven – I have been a congenital China optimist for most of the past 25 years. I first came to that view in the depths of the Asian financial crisis in 1997-98. The so-called East Asian growth miracle was in tatters and China was widely portrayed as the final domino that would fall in what was then viewed as the first crisis of globalization. Having shuttled back and forth to the region during that period as Morgan Stanley’s chief economist, I had quickly come to appreciate the power of China’s market-based economic transition. So, in March 1998, I took a very different view on the pages of the Financial Times with my first published commentary on China, “The Land of the Rising Dragon.”

My argument, in a nutshell, was that China would supplant Japan as the new engine of post-crisis Asia. Japan was floundering in the aftermath of its post-bubble implosion, whereas a reform-oriented China had the wherewithal, determination, and strategy to withstand the currency contagion of a devastating external shock and sustain rapid economic growth. As China delivered, boosted by its accession to the World Trade Organization in late 2001, and Japan sunk into its second lost decade, the Chinese economy took off like a rocket.

It was the beginning of an extraordinary journey for me as Wall Street’s resident China optimist. In the spring of 1998, I spent a day in Seattle with then Chinese Finance Minister Xiang Huaicheng. He had read my piece in the FT and wanted to exchange views on the Chinese and US economies. He implored me to think of China less in terms of legacy state-owned enterprises (SOEs) and more through the lens of a rapidly emerging entrepreneurial subculture driven by township-village enterprises (TVEs).

Xiang was kind enough to organize a subsequent tour of several TVEs in Fujian Province. The most impressive was the Hengtong Group, a rapidly growing producer of high-quality fiber optic and telecom cables. Loaded with state-of-the-art technology from the United States and Germany, and staffed with a surprisingly large number of college graduates, Hengtong was the opposite of China’s long-ossified SOEs.

That experience whetted my appetite. I deepened my research into the seemingly paradoxical dynamism of China’s blended economy, with newly reformed and increasingly marketized SOEs starting to list shares in international capital markets in a balancing act with a rapidly growing private sector. Could China avoid the chronic problems that had long afflicted other blended systems, including Japan?

This same question was posed by former Premier Wen Jiabao. I first met Wen in late 2002, a few months before his elevation to the premiership under President Hu Jintao. His curiosity impressed me more than his skills as a strategist, which had distinguished his predecessor, Zhu Rongji.

But Wen had the courage to spark a debate about one of China’s toughest problems: In a public press conference in March 2007, he warned that while the economy was superficially strong, it risked becoming “unstable, unbalanced, uncoordinated, and unsustainable.” To Wen’s great credit, he posed the paradox of the “Four Uns” just a few months before the eruption of America’s subprime mortgage crisis, which would culminate in the 2008-09 global financial crisis.

At this point, I doubled down as a China optimist. The resilience of the blended system – the legacy of Deng Xiaoping’s “reform and opening up” – held the key to what I believed would be a powerful rebalancing of the Chinese economy. Wen’s Four Uns could be resolved only by a structural shift from exports and investment to consumer-led growth, from manufacturing to services, from surplus saving to saving absorption by investing in a long-deficient social safety net, and by shifting from foreign to indigenous innovation.

China’s flexible, blended, increasingly dynamic private sector could do all that and more. In the years following Wen’s proclamation, China’s five-year plans aligned with this rebalancing agenda. The case for a structural transformation to a more market-based system was increasingly on track. Optimists, like me, felt vindicated.

Then came Xi Jinping. At first, China’s fifth-generation leader seemed to be cut from the same cloth as the reform-oriented Deng. A sweeping set of reforms proposed at the Third Plenum of the 18th Party Congress in late 2013 was especially encouraging. But shortly thereafter, uncomfortable frictions started to creep into the rebalancing strategy.

In 2017, Xi kicked off the 19th Party Congress with a regression to Marxist ideology that immediately became known as “Xi Jinping Thought.” Consumer-led rebalancing was de-emphasized. An anti-corruption campaign became less about purging wrongdoers from the party and more about eliminating Xi’s political rivals and consolidating his power. And Xi’s geostrategic muscularity broke from Deng’s low-key (“hide and bide”) posture and led to a major conflict with the United States.

But 2022 was the ultimate wake-up call for China optimists. Xi’s great-power gambit aligned China in an “unlimited partnership” with Russia on the brink of the Kremlin’s unprovoked invasion of Ukraine. Xi’s stubborn insistence on an untenable “zero-COVID” policy tapped an undercurrent of dissent not seen in a generation. And the 20th Party Congress in October was less about Xi’s claim to an unprecedented third term as general secretary and more about his fixation on security in what he dubbed to be a threatening world of “perilous, stormy seas.”

With a shrinking working-age population, China, until recently the world’s greatest growth story, needs an acceleration in productivity growth to reclaim that mantle. Yet Xi’s increased emphasis on security, power, and control undermines productivity at a time when China needs it the most. The growth miracle can only suffer as a result.

China had come close to the promised land. Its modern economy was on an extraordinary trajectory. The rebalancing agenda promised more to come. But Xi broke that promise. The political economy of autocracy has thrown cold water on those of us who used to be diehard China optimists.

 

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press, 2014) and Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022).

 

 

 

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Ten Reasons Why China is Different - Stephen S. Roach

Ten Reasons Why China is Different
Stephen S. Roach
Commentary, May 5, 2011

NEW HAVEN – The China doubters are back in force. They seem to come in waves – every few years, or so. Yet, year in and year out, China has defied the naysayers and stayed the course, perpetuating the most spectacular development miracle of modern times. That seems likely to continue.
Today’s feverish hand-wringing reflects a confluence of worries – especially concerns about inflation, excess investment, soaring wages, and bad bank loans. Prominent academics warn that China could fall victim to the dreaded “middle-income trap,” which has derailed many a developing nation.
There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem. But they stem largely from misplaced generalizations. Here are ten reasons why it doesn’t pay to diagnose the Chinese economy by drawing inferences from the experiences of others:
Strategy. Since 1953, China has framed its macro objectives in the context of five-year plans, with clearly defined targets and policy initiatives designed to hit those targets. The recently enacted 12th Five-Year Plan could well be a strategic turning point – ushering in a shift from the highly successful producer model of the past 30 years to a flourishing consumer society.
Commitment. Seared by memories of turmoil, reinforced by the Cultural Revolution of the 1960’s and 1970’s, China’s leadership places the highest priority on stability. Such a commitment served China extremely well in avoiding collateral damage from the crisis of 2008-2009. It stands to play an equally important role in driving the fight against inflation, asset bubbles, and deteriorating loan quality.
Wherewithal to deliver. China’s commitment to stability has teeth. More than 30 years of reform have unlocked its economic dynamism. Enterprise and financial-market reforms have been key, and many more reforms are coming. Moreover, China has shown itself to be a good learner from past crises, and shifts course when necessary.
Saving. A domestic saving rate in excess of 50% has served China well. It funded the investment imperatives of economic development and boosted the cushion of foreign-exchange reserves that has shielded China from external shocks. China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.
Rural-urban migration. Over the past 30 years, the urban share of the Chinese population has risen from 20% to 46%. According to OECD estimates, another 316 million people should move from the countryside to China’s cities over the next 20 years. Such an unprecedented wave of urbanization provides solid support for infrastructure investment and commercial and residential construction activity. Fears of excess investment and “ghost cities” fixate on the supply side, without giving due weight to burgeoning demand.
Low-hanging fruit – Consumption. Private consumption accounts for only about 37% of China’s GDP – the smallest share of any major economy. By focusing on job creation, wage increases, and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power. That could lead to as much as a five-percentage-point increase in China’s consumption share by 2015.
Low-hanging fruit – Services. Services account for just 43% of Chinese GDP – well below global norms. Services are an important piece of China’s pro-consumption strategy – especially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure. Over the next five years, the services share of Chinese GDP could rise above the currently targeted four-percentage-point increase. This is a labor-intensive, resource-efficient, environmentally-friendly growth recipe – precisely what China needs in the next phase of its development.
Foreign direct investment. Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the world’s most populous market. Such investments provide China with access to modern technologies and management systems – a catalyst to economic development. China’s upcoming pro-consumption rebalancing implies a potential shift in FDI – away from manufacturing toward services – that could propel growth further.
Education. China has taken enormous strides in building human capital. The adult literacy rate is now almost 95%, and secondary school enrollment rates are up to 80%. Shanghai’s 15-year-old students were recently ranked first globally in math and reading as per the standardized PISA metric. Chinese universities now graduate more than 1.5 million engineers and scientists annually. The country is well on its way to a knowledge-based economy.
Innovation. In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the United States. China is fourth and rising in terms of international patent applications. At the same time, China is targeting a research-and-development share of GDP of 2.2% by 2015 – double the ratio in 2002. This fits with the 12th Five-Year Plan’s new focus on innovation-based “strategic emerging industries” – energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels. Currently, these seven industries account for 3% of Chinese GDP; the government is targeting a 15% share by 2020, a significant move up the value chain.
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself. Today’s cottage industry of China doubters is a case in point. Yes, by our standards, China’s imbalances are unstable and unsustainable. Chinese Premier Wen Jiabao has, in fact, gone public with a similar critique.
But that’s why China is so different. It actually takes these concerns seriously. Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints. Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy. This is not a time to bet against China.

Stephen S. Roach, a member of the faculty of Yale University, is Non-Executive Chairman of Morgan Stanley Asia and author of The Next Asia (Wiley 2009).