Name: Fortune Global 500 Summit: A conversation with Stephen Roach
Uploaded: 2021-10-20
Duration: 15 min 4 s
Description: American economist Stephen Roach sits down with Fortune's Clay Chandler at the Fortune Global 500 Summit.

American economist Stephen Roach sits down with Fortune's Clay Chandler at the Fortune Global 500 Summit.

Fortune Global 500 Summit: A conversation with Stephen Roach

International

we're joined by Stephen Roach. He's a senior fellow at the Yale Jackson Center for Global Affairs Studies. Uh former chairman of morgan Stanley Asia and a good friend of fortune steve. Welcome. Thank you Clay, Great to be with you again steve. You have been one of the world's most sought after economic forecasters for years. You've spent many years in Asia and have offered advice to economic policy makers, both in Washington and Beijing. We're delighted to hear your take on on both of these, the world's two largest economies and where they're headed. Now, I wonder if maybe we could start with the United States. The IMF has just flashed at 2021 growth forecast for the US. By one full percentage point down to 6%. That's the biggest of any of the G-7 economies to be reduced. Um And they've cited a number of factors including supply chain issues and uh and and others um what's going on right now with us economy and how worried should we be about? Well, I think, you know, the growth issue is is very important for for obvious reasons in driving jobs and this post covid rebound, which has been stunning. But the the big surprise is that the growth is really led to a significant deterioration on the inflation front because we're in the midst of a full blown global supply shock. That is strikingly reminiscent of what we lived through with the shortages in the early 19 seventies and the growth slowdown that the IMF is modeling is not anywhere near enough to alleviate those pressures. And the related pressures on the Federal Reserve to begin taking the punch bowl away, which has been important for financial markets and fueling economic recovery. So, we're in a very unusual a place right now. And the growth numbers tell only part of the story you've been warning about stag inflation. Obviously it's a very slow sluggish growth with high inflation uh for nearly a year and a half now. You more or less see your your fears on that front coming to pass. Well, I I think that the bad dreams every once in a while they do come true. And this is one example of that. When I first warned of stagflation, I think it was an op ed in the Financial Times In May of 2020. I said that uh we were only a broken supply chain away from a 1970 style stagflation. Well, you know, guess what the supply chain has broken, but what I was not really factoring in when I warned of that was the extraordinary uh speed, the unprecedented speed on the demand side. And so not only has the world's supply chain uh broken, but the demand has has really squeezed what is left on the supply side. And that's the big, the big problem. So slower growth is not just a us problem. Obviously, uh the IMF has reduced its forecast for Japan for for Germany and of course China, which is now expects to grow 8% in 2021, which is lower than it was expecting in uh in July. And the fund and its recent outlook express concerns about large scale disorderly corporate debt defaults including and maybe especially in the property sector. A lot of talk and global markets lately about Evergrande, the big chinese property developer you've written about that and said that you're not as concerned about. That is maybe some other folks. I wonder if you could elaborate a little bit about that. Well, I don't want to minimize a fallout of the likely failure of china's second largest property developer with its $300 billion dollars in debt. That is at risk of at least a partial uh default here, if not not worse, but I think um the government has ample liquidity to ring fence and backstop this failure. You have to keep in mind secondly that it's um ah really making a conscious and deliberate efforts to go after the excesses of of leverage and speculation in many sectors of the economy and property in general and Evergrande in particular is a major target. And thirdly, I think the impact on the real economy is going to be limited because unlike other uh nations that have had property bubbles like the U. S. Or Japan um China still got great support on demand side through rural urban migration and You know, the urbanization rate is a little over 60% right now. It's probably headed up to 80 over the next decade or so. And so that's going to continue to fuel the demand for shelter and limit the impacts of a property, uh, shake out on the overall real economy. So I'm not that worried about, I'm worried about other things in china, but property and Evergrande are not at the top of my list. Okay, let's talk about some of those other things because you, you have expressed some concern about some of the regulatory moves recently and also, uh, the, the effort to curb, uh, and reduce some of the inequality and in wealth and income in china. And it's interesting that you single out these issues because I think you could argue that if you took them case by case, you know, each one of these individual policies, you can find pretty good justification for a lot of them, whether it's tightening restrictions on internet, whether it's a crackdown on the education technology sector, some of these other things, uh, and, and the effort to close the income and wealth gap is not totally different from the sort of things that divide and administration is doing right now with its big stimulus effort. And yet you're still concerned, help us to understand, uh, what it is that worries you about these moves. Well, I think, I think that point is well taken clay. I mean, you know, issue by issue, I mean, you know, I'm old enough to say that, you know, I'm not too thrilled with some of this online gaming and the extremes of video music either, but you know, I don't want to get my personal baggage into this. Um there are there are a lot of excesses in society that have been enabled by the internet that clearly are disruptive and should be addressed uh you know, by governments and regulatory authorities. But I look at what's driven, China especially over the last 20 years, and it's been a dynamic entrepreneurial uh sector that has uh really developed an extraordinary uh culture for hard work startups uh and the outgrowth of that has been very powerful internet platform companies that have revolutionized china and the world from e commerce to Fintech to life sciences. Uh and many other examples and these actions when you put them together, uh the government going after the internet platform companies going after uh the uh the opportunity to increase income at the upper end of the, of the pay scale, uh really putting a crimp on the dynamism that has driven the private sector is a major engine of economic growth in china. This is very worrisome and I think, you know, the government has possibly bit off too much here and it's interesting to see a lot of the uh sort of the spin that's come out of the government since they made these announcements in uh you know, august and september, they've tried to address uh precisely those points, don't worry says uh huh you know, we're still support the private sector, we just want to do it our way. And I think that's uh you know, a big risk going forward. So your your messages, I understand it is that while each of these individual things might might be worthy of themselves, that the important thing is to consider how they interact and really take a macro perspective on them. And that one is a little more risky. Yeah, I'm a macro guy. So you know, I can certainly see the the need to look at some of these issues on a case by case basis. But I think, you know, in looking at the broad thrust of what has really driven china Over the last 40 years, especially over the last 20 years, these actions go right at the heart of that dynamism. And so when I put them together, uh it doesn't give me concern about the near term, but it gives me much a greater hesitation about the medium and longer term for china. You know, what type of dynamic as the chinese economy uh going to be supported by uh if it is uh undermining uh the approach that has been so successful over these past couple of decades. You know, there is an argument that I've heard many on Wall Street and uh you know, even on the market in Hong kong make in recent weeks, that one can distinguish between uh kind of nice to have in the central technology companies like uh e commerce and video games and you know some of these online entertainment type type things, The edtech companies versus hardcore, you know actual manufacturing related technology, semiconductors, uh robotics and this notion that china should uh is pursuing the german model. Um do you see that you can make a neat distinction between different types of sectors and and how they contribute to the what you call the animal spirits and the dynamism of an economy like china? Well, you know, we we have this theory that was developed by David ricardo, you know several centuries ago called comparative advantage. And you know what we've learned over the you know, succeeding a couple of centuries is that you do what your your best at, you do what your your resources uh provide you with the efficiencies to do compared to your trading partners. And you know there's no greater example of that than china coming out of the a really difficult period of the, the Mao era truly did become the factory of the world. And manufacturing is what created the miracle that is the modern chinese economy today. But over time china became less of a factory and more of an assembly plant because it drew on these global supply chains which are now unfortunately very clogged uh and assembled a lot of components and parts many of which were made in china but many of which were made all over the world. And um you know, I think a lot of nations and china included are saying maybe we went too far that you know, these supply chains have strictest of some of the critical components that we need for uh sort of autonomous economic success in the years ahead, like semiconductors. And so this has become a big issue and the related issue has been to quote, move to reassuring or bring back some of this offshore a production uh to home markets. There are consequences of that. I'm not saying it's a bad thing, but if you do that you're going to lose some of the efficiency gains that have been passed on to your company's and your people and that's going to be challenging. So steve, you mentioned the importance of trading partners in trade. Um let's talk a little bit about that because uh the biden administration obviously has uh not diverged at all from the trump administration in terms of trade policy with china. If anything you could argue, maybe this is a little bit uh stricter uh tougher on china. What do you make of that? Is that a good thing for these two economies? And you see uh the U. S. China trade relationship changing uh in the foreseeable future. Well I think one of the big surprises for me is that While Joe Biden on Day one in office was quick to get rid of, you know, as many trump policies as he could from, you know, the border wall to uh the muslim travel ban uh and so on and so forth. He stuck with trump's trade policy and the tariffs are in place and uh the tensions have if anything uh escalated and I think that's worrisome and it underscores, I think the strong political sentiment uh in the United States that biden with his very slim majority is very fearful of taking on. So, you know, we're in the early stages of a second Cold War. I totally agree with Henry Kissinger who raised that a point uh some time ago and uh or the conflict escalation I think is uh on a worrisome and dangerous trajectory as I will am documenting in a new book I'm writing on the U. S. China conflict steve, we look forward to reading that book as soon as it's ready. And as always it is uh incredibly insightful, uh fascinating to uh to hear your views about the global economy and these two large engines of its growth. Thank you Stephen, thank you Clay