Aug 28th 2019

Flailing at China 

by Stephen S. Roach

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of a new book Unbalanced: The Codependency of America and China.


NEW HAVEN – This will be the tenth year that I have taught a course at Yale called “The Next China.” The course focuses on modern China’s daunting economic transitions. It frames the moving target that eludes US President Donald Trump’s administration, which is taking dead aim at the Old China (a convenient target for a leader who wants to resurrect Old America). The incoherence of Trump’s trade and economic policies, with all their potentially grave consequences for the global economy, is a destabilizing byproduct of this disconnect.

My course starts with the urgency of the challenges addressed by Deng Xiaoping in the late 1970s. But its main focus is how the resulting Chinese growth miracle presents President Xi Jinping with four transitional imperatives: the shift from export- and investment-led growth to an economy driven increasingly by domestic private consumption; the shift from manufacturing to services; the shift from surplus saving to saving absorption in order to fund the social safety net desperately needed by China’s rapidly aging middle class; and the shift from imported to indigenous innovation, which ultimately will be decisive for China’s goal of being a “moderately well-off society” by the middle of this century.

The confluence of these four transitional challenges would be daunting for any country. That is especially true for China, with its blended political economy – the so-called socialist market system, with an ever-changing balance of power between the Communist Party and a vibrant private sector. It is a very tricky balancing act, to be sure.

I date the pivotal point on the path from Old China to the Next China to early 2007, when then-Premier Wen Jiabao correctly diagnosed the high-flying Chinese economy of the time as increasingly “unstable, unbalanced, uncoordinated, and unsustainable.” The Four Uns, as they famously came to be known, sparked a vigorous internal debate in China that led to major rethinking of the Chinese economic-growth model and a series of new strategic plans and reforms – the 12th and 13th Five-Year Plans (of 2011-15 and 2016-20, respectively) and the so-called Third Plenum Reforms (of late 2013).

Notwithstanding all the criticism of China in the West (to say nothing of the bipartisan political angst now boiling over in Washington, DC), progress on the road to the Next China actually has been quite extraordinary over the past dozen years. The middle-class Chinese consumer has come to life, and the services sector has emerged as an increasingly powerful growth engine. China’s outsize current-account surplus has all but vanished, a trend that is crucial to the saving absorption that its domestic economy requires. And the signs of indigenous innovation are everywhere, from e-commerce and fintech to artificial intelligence and breakthroughs in the life sciences.

True, like all sagas of economic development, China’s progress since 2007 has been uneven at times, and new challenges have emerged along the way. Wen’s Four Uns provide a useful way to frame the pitfalls that still lurk. Instability remains an ever-present threat, underscored by China’s voracious appetite for debt, which has sparked an aggressive deleveraging campaign aimed at avoiding the dreaded Japan syndromeImbalances persist, underscored by private consumption’s sub-40% share of Chinese GDP – a shortfall that can be addressed only by a more robust social-safety net (especially pensions and healthcare). Persistent regional disparities, in conjunction with mounting income inequality, are visible manifestations of a lack of coordination. And, of course, despite recent progress in dealing with air pollution, environmental degradation remains central to China’s challenging sustainability agenda.

But the trade conflict with the United States is a new and important sustainability challenge for China. Despite years of denial, there can no longer be any doubt that the US is pursuing a containment strategy vis-à-vis China. From an ever-escalating tariff war and the weaponization of trade policy by blacklisting leading Chinese technology companies, to Trump’s “order” to US companies to cease doing business with China and Vice President Mike Pence’s declaration of a new Cold War, the US political establishment has swung dramatically from viewing China as an opportunity to regarding it as an existential threat. And public sentiment has followed suit. A recent survey by the Pew Research Center found that fully 60% of Americans had an unfavorable view toward China — up 13 percentage points from 2018 and the most negative assessment of China since the Pew survey’s inception in 2005.

Forget about whether this about-face is justified. I am less concerned than most about the so-called China threat, but I understand the fear and anxiety that grips the doubters. The real problem is less the merits of the allegations than the deep inconsistencies of Trump’s policies to address them.

An anger-driven US president doesn’t seem to grasp that bilateral trade implies the possibility of prompt retaliation when one side imposes tariffs on the other. Nor does his administration show any understanding of the linkages between ever-expanding budget deficits, subpar domestic saving, and multilateral trade imbalances. On the contrary, it has embraced a China-centric bilateral fix for a multilateral problem just when America’s own lack of fiscal discipline virtually assures a widening trade deficit with the world at large. 

And rather than view Huawei as a legitimate competitor in 5G telecommunications, Trump wants to put a chokehold on China’s leading tech company. Never mind the resulting value-chain disruptions, which would do great damage to US suppliers, or that targeting Huawei does nothing to address America’s own glaring lack of 5G capability.

Reminiscent of Don Quixote, Trump is tilting at windmills. His administration is flailing at antiquated perceptions of the Old China that only compound the problems it claims to be addressing. Financial markets are starting to get a sense that something is awry. So, too, is the Federal Reserve. Meanwhile, the global economy is fraying at the edges. The US has never been an oasis in such treacherous periods. I doubt if this time is any different. 


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. 

Copyright: Project Syndicate, 2019.

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jun 4th 2020
EXTRACT: "Many Americans are clearly horrified by their president’s crass and incendiary words. But will their disapproval be offset by anxiety about violent social unrest? Will age-old racial prejudices, often unspoken, or even acknowledged, still make them vote for the false security of a coarse white bully?  Much will depend on how hot this summer gets. If people think rationally in November, it is hard to imagine that enough of them would vote to keep this appalling administration in power for another four years. But fear is reason’s worst enemy."
Jun 2nd 2020
EXTRACT: "For starters, many Americans have accepted that they live in a winner-takes-all society of deepening inequality. While the wealth and incomes of those at the very top continue to grow, tens of millions of Americans struggle to afford health care, childcare, and other basic goods. This story has been told many times over. But what often goes unremarked is that the responsibility for managing the social costs of this system has been offloaded onto the police."
May 27th 2020
EXTRACT: "Obamagate is the latest conspiracy theory to be pushed by US president, Donald Trump. It started on the morning of May 10, when Trump retweeted the word “OBAMAGATE!” By the next day, the Obamagate hashtag had accrued over two million tweets and another four million by the end of the week. Trump has repeatedly reused the slogan on his Twitter feed since and it has been promoted by right-wing influencers including Glenn Beck, Sean Hannity and many others....You are not alone if you’re confused by what Obamagate actually is or why Trump is tweeting about it."
May 23rd 2020
EXTRACT: "Not all aspects of our near and medium-term future can be foreseen at this juncture of the Covid-19 pandemic, but we now know enough to make some hypotheses about what is likely to change, based on what has already changed. The future is sure to look very different than it did before this decade began, regardless of whether a vaccine is found. If a vaccine is found, it is unlikely to be tested, approved, manufactured, and efficiently distributed to the world’s population of nearly 8 billion people for years. Bearing in mind that there is no vaccine for any coronavirus, what is likelier is that the world will be living with Covid-19 as a part of our ecosystem for many years to come – possibly permanently. That means that our new normal is probably already here."
May 21st 2020
EXTRACT: "LONDON – The new Franco-German proposal for a €500 billion ($547 billion) European recovery fund could turn out to be the most important historic consequence of the coronavirus. It is even conceivable that the deal struck between German Chancellor Angela Merkel and French President Emmanuel Macron might one day be remembered as the European Union’s “Hamiltonian moment,” comparable to the 1790 agreement between Alexander Hamilton and Thomas Jefferson on public borrowing, which helped to turn the United States, a confederation with little central government, into a genuine political federation."
May 19th 2020
EXTRACT: "In April 2011, Donald Trump, then considering a run for the presidency the following year, said that he had sent investigators to Hawaii to check out rumors that President Barack Obama wasn’t born there, but in Kenya, which would disqualify him for the presidency. His investigators, Trump declared, “cannot believe what they’re finding.” I can find no record of Trump being challenged on this outlandish claim at the time. In the fall of 2016, Trump, now the Republican presidential nominee, was convinced by his staff that he had to abandon this “birther” nonsense. He did so reluctantly, charging – also with no evidence – that such rumors had actually been initiated by his opponent, Hillary Clinton. There, in a nutshell, is Trump’s modus operandi: he’s not just a liar but a fabulist, seemingly unconcerned with whether his fictions will be exposed. If they are, the world simply moves on as he invents fresh distractions."
May 19th 2020
EXTRACT: "Li, a doctor, was purportedly silenced and chastised by Chinese officials for warning on December 30, 2019, about a new virus in the Wuhan hospital where he worked. When it became evident that he was on to something serious – so serious, in fact, that it ultimately killed him – the Chinese government changed its tune and celebrated Li’s bravery. If only that had happened sooner, the argument goes, the world would have avoided this horrific pandemic.................... But that’s not what happened."
May 9th 2020
EXTRACT: "Jana Winter and Hunter Walker at Yahoo News broke the story that 11 Secret Service agents have tested positive for the coronavirus. Likely some of them served in the West Wing. This week it was revealed at that a US military valet who brought Trump food came down with the virus, sending Trump into a “lava level” rage. Two aides to Vice President Mike Pence have tested positive. Some observers are afraid that the virus is circulating in the West Wing itself."
May 6th 2020
EXTRACT: "There has been much debate around the world about the source of the COVID-19 pandemic, ranging from a laboratory to Wuhan’s seafood market to some other form of animal-to-human transmission. While there is no proof (yet) that the virus may have been inadvertently released from one of the two biological research laboratories located at Wuhan, there is evidence that viral release has occurred in the past, and a host of additional data that point to a laboratory connection. "
May 4th 2020
EXTRACT: "A better bet is that nothing will be the same. Wealth will be destroyed on a catastrophic scale, and policymakers will need to find a way to ensure that, at least in some cases, creditors take part of the hit, a process that will play out over years of negotiation and litigation. For bankruptcy lawyers and lobbyists, it will be a bonanza, part of which will come from pressing taxpayers to honor bailout guarantees. Such a scenario would be an unholy mess."
Apr 29th 2020
EXTRACT: "We need the twenty-first century’s two superpowers, America and China, to set the example, by burying their rivalry and uniting all of humankind around a collective response to the current crisis, and to those that await us. As COVID-19 has taught us, the old international system can no longer guarantee humankind’s safety and security. We cannot afford to be taught that lesson twice."
Apr 29th 2020
EXTRACT: "It should come as no surprise that Trump has abused his power in orchestrating the federal response to the pandemic. For example, he made sure that Colorado received 100 much-needed ventilators, and made sure that Colorado voters knew it, in order to help re-elect troubled incumbent Republican senator Cory Gardner.  More alarming, Trump effectively threatened to wage germ warfare against US Postal Service workers by denying them congressionally approved virus-mitigation aid unless the USPS quadrupled rates on packages. Trump’s actual target was Jeff Bezos, the CEO of Amazon and owner of The Washington Post."
Apr 28th 2020
EXTRACT: "These ten risks, already looming large before COVID-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimize many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression."
Apr 26th 2020
EXTRACT: "In response to the COVID-19 pandemic, the US Federal Reserve will buy unlimited quantities of Treasury bonds, the Bank of England will purchase £200 billion ($250 billion) of gilts, and the European Central Bank up to €750 billion ($815 billion) of eurozone bonds. Almost certainly, central banks will end up providing monetary finance to fund fiscal deficits. The only question is whether they should make that explicit."
Apr 25th 2020
EXTRACT: "Even if you’re not enamoured with creepy crawlies, their gradual disappearance from the places they were once numerous is an ongoing crisis for the natural world. Insects and small invertebrates occupy the bottom rungs of most terrestrial ecosystems. As ecologist E.O. Wilson once observed, if you take away the “little things that run the world” then most of the creatures occupying niches further up the food chain will disappear too, and that includes humans. That’s why a 2017 study in Germany rang so many alarm bells – it reported a 75% decline over 27 years in the local biomass of all kinds of flying insects."
Apr 24th 2020
EXTRACT: "By 2000, China had already established near monopoly status on the manufacture of a whole range of products that the world rapidly consumes. Just a decade ago, 91% of all personal computers, 80% of all air conditioners, 74% of global solar cells, 71% of cell phones, and 60% of all cement were being manufactured in China. The world was hooked on Chinese-made products and the Chinese government had its way with foreign companies choosing to manufacture goods there, enforcing many draconian operating requirements in an environment that most companies would never have agreed to endure anywhere else."
Apr 20th 2020
Extracts: "Long before people and goods were traversing the globe non-stop, pandemics were already an inescapable feature of human civilization.........Nearly two millennia before London’s Great Plague, during the epidemic that killed at least one-third of Athenians near the end of the Peloponnesian War.............Epidemics not only ravage economies, but also throw societal inequalities into sharp relief, deepening deepen mistrust in the status quo........... Machiavelli, who witnessed – and probably died in – the plague in Florence in 1527, viewed the outbreak as the direct result of misrule. Criticisms of China, Trump, British Prime Minister Boris Johnson, and others have echoed this sentiment....Others view epidemics through the lens of conspiracy theories. Marcus Aurelius blamed the Christians for the Antonine Plague. In Christian Europe, the fourteenth-century Black Death was blamed on the Jews......Despite these similarities, the COVID-19 pandemic is likely to stand out in a crucial way: it is unlikely to upend the established order. The Antonine and Justinian Plagues encouraged the spread of Christianity throughout Europe. The Black Death drove people toward a less religious, more humanistic view of the world – a shift that would lead to the Renaissance. The Spanish flu prompted uprisings, massive labor strikes, and anti-imperialist protests; in India, where millions died, it helped to galvanize the independence movement."
Apr 17th 2020
EXTRACT: "From peddling disinformation about the virus to disbanding the National Security Council directorate overseeing pandemic threats, Trump has squandered multiple opportunities to get ahead of the COVID-19 crisis. The health and economic consequences that we are now experiencing have long been predicted. US intelligence analysts were warning about precisely this scenario for at least 12 years. But even they could not foresee that America would end up with a president willing to sacrifice so many lives on the altar of his ego."
Apr 9th 2020
EXTRACTS: ".........[1] The average bankruptcy takes 260 days to work out. During that period, businesses will have a hard time rebuilding.......[2]...consider the complexity of the global supply chain. More than 90% of Fortune 1,000 companies have at least one tier-2 (secondary) supplier in Hubei, the Chinese province around Wuhan.........[3]...disturbingly, 40% of all US corporate debt was rated BBB, just above junk, going into the crisis, while only 30% of the world’s outstanding stock of non-financial corporate bonds were rated A or above..........[4] Despite central bank interest-rate cuts, borrowing costs for companies are now rising dramatically. With further downgrades from credit ratings agencies all but guaranteed, especially with many big earnings announcements due after Easter, some companies will lose access to credit altogether. Moody’s estimates that the default rate for junk-rated companies could hit an astounding 10%, compared to a historical average of 4%......[5]...flu vaccines are relatively ineffective. They reduce your risk of becoming ill by 40% to 60%, compared to 97% for measles vaccines and 88% for mumps........[6] Lockdowns might end, while other measures like social distancing, limits on gatherings and travel restrictions continue – perhaps on a seasonal basis......[7] South Korea could be a glimpse into the future. It has so far avoided an Italian-style health crisis without a lockdown, but has still imposed various restrictions on the economy."
Apr 8th 2020
EXTRACT: "A recent study, published in the British Medical Journal, suggested that 78% of people with COVID-19 have no symptoms. The findings are in line with research from an Italian village at the epicentre of the outbreak showing that 50%-75% were asymptomatic, but represented “a formidable source” of contagion. A recent Icelandic study also showed that around 50% of those who tested positive to COVID-19 in a large-scale testing exercise were asymptomatic. Meanwhile, a WHO report found that “80% of infections are mild or asymptomatic, 15% are severe infections and 5% are critical infections................The new BMJ study is seemingly different to the findings of studies from earlier in the pandemic, which suggested that the completely asymptomatic proportion of COVID-19 is small: 17.9% on the Diamond Princess Cruise Ship and 33.3% in Japanese people who were evacuated from Wuhan.”