Warnings of Potentially Disastrous US Policy Toward China

Bloomberg "Odd Lots" podcast with Joe Weienthal and Tracy Alloway

One of the rare areas of bipartisan consensus in the US right now is taking a tough line on China. We saw President Trump put tariffs on Chinese goods, and the Biden administration has only added to them. A second Trump administration may add to them even further. Meanwhile, we're increasingly placing export restrictions on various technologies, such as semiconductors. Stephen Roach, the former chairman of Morgan Stanley Asia and now a fellow at Yale Law School, foresees disaster from this. He sees an explosion of Sinophobia, with policymakers misreading China and ushering us into a new Cold War, where the risk of some kind of accidental conflict will inevitably rise. In this episode of the podcast, we talk about the current tensions, how they compare to the US-Japan trade tensions in the 1980s, and how things could go bad. The transcript has been lightly edited for clarity.

Key insights from the podcast:

The key lessons from the US-Japan trade tensions — 5:07
Why was Japan viewed as such a major thread? — 9:19
Can China learn from Japan’s downturn? — 15:41
The current state of US-China relations — 17:30
How concerned should we be with China from a national security perspective? — 21:05
The right way to build up domestic self-reliance — 25:11
The danger of a new Cold War — 27:50
Why China is so focused on its export model — 32:19
Are CHIPS and the IRA the right policy for US reindustrialization? — 35:08
The end of the old Hong Kong — 37:20
How China has changed under Xi — 42:41

Joe (00:18):
Hello and welcome to another episode of the Odd Lots podcast, I’m Joe Weisenthal.

Tracy (00:23):
And I'm Tracy Alloway.

Joe (00:24):
Tracy, when it comes to US trade tensions with China, obviously there are a number of people they sort of reach back for the fear and the anxiety of trade with Japan in the eighties. But I have to say I don't actually know much about that. I wasn't paying that much attention to trade policy when I was seven years old or nine years old and stuff.

Tracy (00:46):
That’s very disappointing

Joe (00:47):
I know, even though I'm aware that that was a thing. And probably some of the concerns, particularly about automobile specifically and the threat to Detroit and all that was popular the way it is popular now. I actually know very little of that story.

Tracy (01:00):
Don't you watch movies from the 1980s? There are quite a few villains from 1980s cult classic movies that end up being Japanese businessmen. And I do remember some pop culture zeitgeisty moments from the big fear that Japan Inc was going to eat the US economy, for instance, there was that famous photo of, I think it was a bunch of congressmen smashing a radio or a TV or something I remember in Washington in the late 1980s. Do you remember seeing that?

So the idea was the US feels threatened by Japan's dominance in certain primarily consumer electronic goods back then, but also increasingly in computers. And so a bunch of politicians went out and started smashing those publicly to make a statement that hasn't happened with China just yet. But you could imagine something like that being done today. But it would be with Chinese solar panels or something like that.

Joe (02:02):
Oh, I'm looking at the photo. They smashed a boombox right in front of the capitol.

Tracy (02:07):
You can't get much more in 1980s than smashing a Japanese boombox.

Joe (02:12):
This photo goes, it goes hard as the kids say. It's quite a photo. But you're right. And I do remember the pop culture elements and movies like Falling Down or the villain in Back to the Future II I think it was, or maybe whatever. So, I remember it, but I certainly don't remember how it resolved or why it faded or why. I know a little bit, but not really about what the ultimate was there, how similar it actually was because.

It's one thing with boomboxes in cars, but obviously there seems to be, at least in US policy circles, this big national security element that dovetails with some of the concerns about cars and solar and stuff like that. And of course, when speaking of analogies, we've also talked about the history with the real bubble and bust.

We've talked with Richard Koo about the similarities of the real estate boom that Japan had and the bust that subsequently followed. And there may be parallels there, but I definitely feel like I need to wrap my head around even further about how useful or not some of these historical patterns are.

Tracy (03:17):
Absolutely. The other thing I would say is it is remarkable in some respect that the commonality between Biden and Trump is being tough on China trade, right? That is a common thread. And so, no matter what happens in November, it seems reasonable to expect that these trade tensions are going to continue in one way or another. So, I definitely think it's worth talking about.

Joe (03:42):
Totally. This is really an important element, and I'm glad you brought it up, which is the complete Washington consensus it would seem at this point where there doesn't seem to be any disagreement about the basic notion that we have to do something on trade, that we have to amp up the national security anxiety, whatever it is, with respect to China has become completely conventional wisdom of both parties. And when something is conventional wisdom like that, it's probably good to question some things.

Tracy (04:11):
Absolutely. Let's do it.

Joe (04:12):
Alright, I'm excited. We really do have the perfect guest today, someone I don't believe we've ever had on the podcast before, but someone whose work and writing I've admired and read for a really long time. Really excited to be chatting with Stephen Roach. He's a senior fellow at Yale Law School, former chairman of Morgan Stanley Asia, and has been talking a lot about this topic for years and years and has been warning about what he sees as the errors of our current approach to China. So, Stephen, thank you so much for coming on Odd Lots.

Stephen (04:41):
Well, great to be with you Joe and Tracy. I'm astonished at how young the two of you are and that you don’t have any firsthand knowledge of what it was like to live in an era where Japan was our main economic adversary.

Tracy (04:59):
Well, I was in Japan in the 1980s, so maybe I missed out on it. I was on the other side. Japan in the 1980s was great. I got to say just great.

Stephen (05:07):
One background note. I taught a seminar at Yale for 12 years called ‘The Lessons of Japan.” In that seminar, I went through in great detail what happened to Japan in the 1980s, at that time Asia's first major growth engine; the class delved into the rise and the fall of the Japanese economy, and how that came into the cross hairs of American economic and political policy. And that was just the first half of the course. The second half of the course was to look at the lessons of Japan’s experience, to see how they applied to other economies around the world. In keeping with your pithy introduction, the main candidate we considered was China. So how much of the China story has an antecedent in our experience with Japan is a very, very important question and I'm delighted to talk to you about it.

Joe (06:05):
Fantastic. One thing I remember at the time, and I guess by this point I was 11 years old, I remember George HW Bush vomiting onto the lap of the former Prime Minister while on some visit. But what happened, I mean the story is so big, as you mentioned, it was a whole lecture series that you did over years at Yale, but how did that end? Because I remember some of the anxiety about cars from when I was 10 or nine or whatever, and they're eating our lunch and stuff like that. And then by the mid-nineties it did not seem to be a thing that people were talking about as much. How did I guess, in the minds of the America how did that end? What happened? How did that fade?

Stephen (06:48):
You alluded to the auto area, which was a major issue of contention. We ended up negotiating some voluntary export restraints on Japan who we had a very close security relationship with.  That, of course, is very different than our current situation with China.

In addition, Japan was eager to shift some of its domestic auto production into the United States through building and investing in American-made facilities using American workers. And so, US consumers ended up buying Japanese cars, but they were produced in the United States. But your question is about the end game, which I think was quite tough for Japan. Japan went from a growth miracle to a growth bust, including three lost decades of near economic stagnation, a considerable amount of which was an outgrowth of the currency policy that we and other developed nations imposed on Japan. They voluntarily agreed to it, but that triggered a series of policy blunders that ultimately led to lethal asset bubbles.

You said you spoke with Richard Koo about the balance sheet recession that he's written so eloquently about that left Japan flat on its back for, as I said, nearly three lost decades. So, Japan did an end-around in moving production to the US but then was effectively neutered as an economic power by these lost decades. The short answerer to your question is that it didn't end all that well for Japan.

Tracy (08:41):
Maybe we could step back for a second because the thing that I'm unclear on with the Japan US business rivalry of the 1980s is, and you touched on this Stephen already, but there is a security alliance in place between the US and Japan. I mean the US has lots of military bases in Japan. I grew up on one of those. So how was it that Japan's industry and technology was viewed as such an enormous threat for the US even if they were military and strategic allies? That's the one thing I don't get.

Stephen (09:19):
Well, that's a fair point. The main issue in the United States at that point was I think a total misunderstanding of international economics. We had a large trade deficit as a nation and as we came out of a horrible recession in the early eighties that deficit endured, even in the face of economic recovery, leaving our manufacturing sector under unrelenting pressure.  The manufacturing recession continued well into the mid 1980s, even though the overall economic recovery was progressing nicely, and our politicians decided that the main culprit in this this development was the something that they didn't understand, a trade deficit. The biggest piece of the trade deficit was with Japan. That was the a-hah moment for Washington politicians who instantly became highly critical of Japan, alleging the trade deficit was Japan’s fault, due significantly to its unfair trading practices framed around an undervalued currency, the yen.  Japan was vilified for basically eating our lunch in terms of putting pressure on our companies, our workers, and our communities.

You noted in your intro that there was a boombox that was destroyed. There were a number of other highly public episodes of destroying Japanese cars. There was even an unfortunate instance in the late 1980s where two displaced, laid off auto workers assaulted and ultimately, unable to make the distinction  between two nationalities, murdered a Chinese American by the name of Vincent Chin. So, it wasn't a very pretty period, but it also unmasked a critical misunderstanding of the role that trade plays in an economy — evident in Japan back then and even more evident today in China.

And that reflects a US has that trade deficits with many countries, making it wrong to single out one country in an effort eliminate the overall trade deficit. You can't do that because our multilateral trade deficit, a trade deficit with many countries, is an outgrowth of our shortfall of domestic savings.

When nations don't save and they want to grow, they have to import surplus savings from abroad, requiring a balance-of-payments deficit that gives rise to a multilateral trade deficit with many, many nations. So fast forward to today.  In 2023, we ran merchandise trade deficits with 106 countries. China was the largest, although it has come down as a share of our overall trade deficit because of the tariffs that were imposed and sustained from Trump to Biden.

But if you take China out of the equation, it still leaves you with 105 other countries that we ran deficits with last year. So, we tried the Japan recipe on China, we put huge tariffs on China. The Chinese piece of the overall merchandise trade deficit, which peaked out a little below 50% in 2015 has since come down to a little below 30%. On the surface, you might say, wow, that's a great strategy.

And Trump would echo that saying, see, my policy worked.  But we didn't boost our domestic savings because we run these massive budget deficits. So, all that happened was the Chinese piece of our multilateral trade deficit went somewhere else — namely to countries like Mexico, Vietnam, Canada, Korea, Taiwan, India, Ireland, and even Germany.  That means a significant portion of the US trade has shifted from a low-cost producer, China, to higher cost producers, which effectively ends up taxing American workers. All in all, our policy of trying to find a bilateral fix for a multilateral problem has backfired, reflective of a total misunderstanding of the way that international economics works in the context of our saving short US economy.

Joe (14:34):
So I want to obviously get into more soon about the current conditions and the mistakes that you believe we're making with respect to China, but going back to the parallels between China and Japan, and this something we talked with Richard Koo about is they had this real estate bubble, and for Japan, the aftermath is really bad, multiple lost decades.

And obviously there are a lot of academics and policy makers in China today looking at that experience and hoping to avoid similar lost decades after as they try to control their own real estate bubble, which is something they've done. I mean, when you tell the story of what happened with us and Japan, I listen to that and say, actually it seems like it turned out fairly well from the US perspective, but that it turned out very badly from the Japanese perspective. Had they not acquiesced in the same way to our desire for export restrictions or building some of their vehicles in the us, would that have allowed the country to move from manufacturing to a robust industrial power in a more stable manner that didn't result in so many lost years?

Stephen (15:41):
That’s a fair point. Japan had an economic model that it developed in the aftermath of the total destruction of its economy during World War II.  Their model was very focused on boosting economic growth through exports, largely supported by a cheap or undervalued currency. We called them on that. We and other so-called G-5 nations agreed to currency realignments in the mid-eighties, the so-called Plaza Accord, that forced the Japanese to revalue their currency.  In response, they basically panicked over this threat to their economic model.

Japan’s Ministry of Finance, which controlled the central bank as well as foreign exchange policy, essentially ordered the Bank of Japan to slash domestic interest rates. And that's what led to massive asset bubbles in equities and property.  When they burst, as all bubbles do, the rest is history — one lost decade followed by another and another. So, this policy that was imposed on Japan from the outside was not without consequences for other policy choices they subsequently made. By no means was that the sole source of the lost decades. As I teach it in my seminar, there were many other factors at work, but that was clearly an important part of the story.

Tracy (17:20):
Talk to us about the Chinese economy now and in particular how you would characterize trade relations between the US and China. What are you seeing?

Stephen (17:30):
Well, the Chinese economy is in difficult shape right now. It's facing a number of short-term headwinds brought about by the property crisis, which is very Japanese like, and also facing financial problems amongst many of their local governments. That combination has led to a significant slowing of the Chinese economy relative to an historic 30-plus years of 10% growth. And yet that is only part of the problem. China is also afflicted by a number of structural problems, not the least of which is declining population, especially the working age piece of the population, and weak productivity. What we learned from Japan, and this is very relevant for China, is when the demography works against you, as it certainly did and continues to do so in Japan, you've got to have strong productivity growth to offset that. You've got to get more out of the surviving workforce, otherwise underlying economic growth will weaken.

Unfortunately, that has been a key problem in Japan now for three decades.  China has a similar problem. Its population is now declining. We knew this was coming because of their unsustainable one-child family planning policy, but it's come sooner than we thought. And their productivity problems are actually worse right now than they were in the 90s in Japan. So, China has serious structural issues on top of its cyclical problems.

Your second part of the question asks about the US-China relationship, which is in the worst shape it's been in since the US championed China's membership to WTO in late 2001. We've had tariffs initiated by Trump and sustained under Biden, who has tightened the noose further through sanctions and through making every conceivable effort to contain Chinese technology under the guise of national security risks.  As you pointed out earlier, national security was not a serious consideration with Japan and the 1980s.

Joe (20:12):
So that is obviously does seem like a pretty big difference. And when I think about the tensions between the US and China, there seems to be the national security concerns, the concerns that Chinese exporters are going to undermine American industrial powerhouses, whether we're talking chips, planes, cars, solar powers, whatever. And then the synthesis of the two, which is, well, if we continue to let our industrial companies weaken, then that also has security concerns directly due to our ability to manufacture things like weaponry or whatever else from a national standpoint. So maybe the way I'd ask you is setting aside trade, do you consider the national security concerns real or is this something that has been more ginned up in the head of policymakers in DC? Should it inform how we trade with China?

Stephen (21:05):
I think that there has been a lot of exaggeration of the so-called security threat from China. Certainly, the Chinese are moving ahead aggressively in the area of technological change and innovation, and they're applying these breakthroughs to their military capabilities as you would expect any leading power to do.

But I've looked at this very carefully and wrote about it in my last book, Accidental Conflict, where I lay out the thesis that a lot of the national security concerns that have been expressed by US politicians and by executive branch officials either in the Trump or the Biden administration are exaggerations, false narratives based on the presumption of nefarious intent on the part of China that cannot really be validated.

I mean, take electric vehicles. Here, we have the spectacle of a US Commerce Secretary, Gina Raimondo, warning that if China felt like it, for some motive that she was unable to articulate, it could transform Chinese made EVs into vehicular weapons of mass destruction. There's just absolutely no credible evidence of that other than the script of a recent Netflix movie (”Leave the World Behind”).

And you could argue the same thing with respect to Huawei on 5G telecommunications, even TikTok, in terms of the allegations that TikTok has corrupted the minds of innocent young US teenagers.  Then there are concerns that have been raised over dock-loading cranes made in China that with the flip of a switch the Chinese could disable all of our dock loading infrastructure. You have an FBI director, Christopher Wray, who's been negative on China as long as I can remember, who's absolutely convinced that China has a stranglehold on America's utility infrastructure. And again, with just a flip of a switch from Beijing, he warns that our entire public utility system could conceivably come to a halt.

Our politicians are eager and aggressive to warn of consequences based on the presumption of intent that they have not been able and are unwilling to validate.  I know that's an unpopular view to hold in this bipartisan era of what I've called Sinophobia.  But I've never seen in my adult lifetime an adversary that's been so vilified as we are now vilifying the Chinese. I find that very worrisome.

Tracy (24:19):
My sense of some of the concerns is that they have more to do with the strategic importance of certain industries and the idea that, well, if something were to happen with China, for instance, if it were to invade Taiwan, the assumption would be that the US is cut off from Chinese exports, or at least they would be disrupted in some way. And so it might be desirable from the US' economic and national security perspective to build out your own strategically important industries. So things like batteries, semiconductors, maybe even solar panels. So I guess I always thought they were coming at it from more of autarky point of view rather than a vehicular weapons of mass destruction point of view.

Stephen (25:11):
There's some of that Tracy. Every nation wants to be able to stand on its own and not be strategically reliant on others, especially on a nation like China who has a different ideology. The discomfort deepens to the extent that China engages in activities that run against American values, whether it's with respect to Taiwan, the South China Sea, or the partnership with Russia who happens to be prosecuting a criminal war in Ukraine.

So yes, that's certainly an important part of the political equation and it aligns with my earlier point on the idea of being strategically reliant on production at home. But this gets back to the economic lesson that I tried to teach you guys earlier on. If we want to be strategically reliant  on our own production, then we have to be able to save more at home and reduce our tendency to run these trade deficits which create the dependence on this linkage with overseas production.

I have already laid out the numbers: We've cut our trade deficit with China, so you could arguably say that we have made some progress in at least weaning ourselves from Chinese products, but we've shifted our reliance to other countries. Our overall trade deficit is bigger today, a lot bigger today than it was when the Trump tariffs were imposed on China in 2018. So, you've got a good point, Tracy, but the numbers just don't add up. And the point you're making on strategy and its role in shaping national defense, how do you stretch that to the outright ban of TikTok? I have a hard time with that.

Joe (27:21):
What happens if we go down this route? Because like Tracy said, it's consensus. It's probably the case that if we get another Trump presidency, we will see policy tighten or harden even further against China. What worries you about this trajectory? How does it go bad?

Stephen (27:38):
Well, again, I'm not trying to sell my recent book because it's been out for a while.  But as I noted I did write a book called Accidental Conflict, and that …

Joe (27:46):
That doesn’t sound good. Just the title…

Stephen (27:50):
What I argue in the book Joe, is that both nations, the US and China, are prone to politically expedient false narratives that they have framed about the other, that have really poisoned the relationship. We don't trust the Chinese for a second, and they don't trust us either. They are convinced that we want to bring them down.

There's certainly a lot of evidence that supports their view as well. And so, when you have this relationship that was initially built on mutual trust in the 1990s and early 2000s to what is now a relationship that's built on mutual distrust, it doesn't take much of a spark to trigger a very worrisome escalation that could lead to outright war. That's why I wrote this book. I very much subscribe to the notion that was articulated by the late Henry Kissinger a number of years ago, at a Bloomberg conference where he said back in 2019 that the US and China were in the early stages of a new Cold War.

He actually described them as being in “the foothills of a new Cold War” and before he died, he said that this conflict had moved to a higher elevation. Cold Wars are a very worrisome development.  When you have two nations acting in adversarial positions, both focused on national security and building up their defense capabilities, you can come very close to getting involved in outright kinetic war – deliberately, or by accident.

We came certainly close with Cuban missile crisis in 1961, and if there was an accident, like an invasion of Taiwan or a clash in the South China Sea, there's no telling where that could go. So, I think the time has come to take these concerns seriously, before it is too late. We've got to come up with a better way, a new way to frame our relationship with China to avoid the specter of accidental conflict. I write about that in my last bool. I have my own approach that I articulate in chapter 14,  where you'll see it spelled out in great detail.

Tracy (30:44):
Stephen, you mentioned earlier structural imbalances or weaknesses in China's economy, and you've obviously been analyzing China's economy for a very long time at this point. One of the things that you hear sometimes is people talk about the need for China to boost domestic consumption. So rather than export all the goods that it makes to the US, maybe it could sell more of those into the country and that could aid with development and all of that.

And then I have to say, we're recording this right before The Third Plenum, which I think is scheduled to take place from July 15th to 18th, and this is the big political event on the CCP calendar. It's held every five years, and one would expect to get a better sense of the economic direction that the party wants to take China from this event and in the runup to the plenum.

One thing we keep hearing is Chinese officials say over and over again that they're focused on export led growth and they want to boost manufacturing and they're very committed to the export sector. And I guess my question is why, because it seems like there's maybe not a consensus, but there is strong feeling x China that Chinese exports are problematic in various ways. There are European countries that are actively trying to get away from things like Chinese electric vehicles and stuff like that. Why does China remain committed to manufacturing as a source of growth?

Stephen (32:19):
The short answer to your question is they're good at it. It's part of their central planning legacy to support strategically, with vast financial resources, manufacturing-led growth on the supply side of their economy. They're bad at being able to stimulate internal private consumption. The only demand they're good at stimulating is the demand for new investment, housing and infrastructure, and building the manufacturing capacity that underpins their export machine.

I can't even count how many lectures I've given inside of China since the year 2007 on the imperatives of consumer-led rebalancing. I've given lectures at universities, I've given lectures to the government, to senior leaders. I gave a series of them in Beijing last month again.  You talk about the Third Plenum, which starts in a few days. Consumer-led rebalancing is my favorite agenda item that I would hope they would embrace.  But I'm convinced they're not going to do it because these third plenums, and I've studied them back to 1978, are more about ideology and governance than they are about really coming up with creative new policies to address thorny problems like consumption or industrial policy or productivity or the like.

So, I understand the fact that everybody is waiting for a clear signal that China is going to move the needle on consumer demand. You're talking to somebody who's been arguing that for a long, long time. I just don't think you're going to get it at this upcoming third plenum.

Joe (34:32):
I want to actually just go back to one thing you said earlier, which is that if we were serious as a country about building up more strategic capacity in various industries like cars or chips or whatever else, that ultimately tariffs are not really the way to do it, that we'd have to build up our domestic savings, grow less or buy less from abroad, or have less demand for goods from abroad. We've done some things in the US to boost domestic capacity, the CHIPS Act inflation reduction Act, what actually moves the dial from a increasing domestic savings standpoint. What policy allows that to happen?

Stephen (35:08):
The most important thing, Joe, is just to reduce our budget deficits. There, of course, we're going exactly the wrong way. Trump and Biden alike have done more damage to the long-term budget deficit and federal debt trajectory than all of our previous presidents combined. But when you boost domestic savings by cutting your budget deficit, by definition, you are less reliant on surplus savings from abroad and on the trade deficits, you need to give you the capital that provides the access to that surplus savings from abroad.

So, number one thing to do is make meaningful progress on the budget deficit and do it sooner rather than later. Then, use the proceeds to invest at home in research and development and in building domestic infrastructure.  We've got a bipartisan infrastructure bill that was enacted by the Biden administration that's taken a step in that direction, but we need to do a lot more in the way of modernized infrastructure than that bill is going to provide. And finally use the windfall of domestic saving to invest in human capital, which we sorely need, given the poor status of our secondary and tertiary educational system. There's a lot that we can do with deficit reduction, but politically it's not attractive and not palatable to short-term focused American politicians.

Tracy (36:52):
Stephen, you wrote recently what we in the journalism business might call a punchy column in the Financial Times with the headline, ‘It pains me to say Hong Kong is over,’ and this created quite a stir within Hong Kong and maybe even beyond. Can you talk to us a little bit about what your recent interactions with Chinese officials and at various events in China have actually been like?

Stephen (37:20):
Well, they've been different, Tracy. I mean, I'm historically known as a good guy in China and a member of the in-crowd in Hong Kong. I lived in Hong Kong for a number of years when I was the chairman of Morgan Stanley Asia. I love the city, and right now, I won't say I'm public enemy number one, but I'm on their top 10 list of despicable commentators. But what I wrote in the FT in February is that the Hong Kong that many of us have known, admired, and loved for years, is no longer a sustainable way to view this city-state going forward.

I cited three reasons for that. One, the Hong Kong economy is tied very tightly to the ups and downs of the Chinese economy. China is in a slowdown for reasons we've talked about earlier on this podcast and so is Hong Kong. And the slowing in the growth rate of both economies over the past dozen years has been identical to the tenth of a percentage point. So, if you don't have a rebound in the Chinese economy, you're not going to get one in Hong Kong.

Secondly, the US-China conflict — Hong Kong is caught in the crossfire. America is putting pressure on its trading partners to embrace friend-shoring, and that diverts trade away from China and Hong Kong — especially problematic since Hong Kong is a very trade dependent city-state. And thirdly, politics. There were massive demonstrations in Hong Kong in late 2019. Beijing imposed a national security law on Hong Kong in early 2020, and Hong Kong followed suit with its own national security law a few months ago in March of 2024, the so-called Article 23 of Hong Kong’s Basic Law. And so, the political environment is really very chilling in Hong Kong right now. These developments challenge the idea that this is an autonomous city state that has been so resilient in the past. I just don't think that's going to happen again this time.

While I worry in particular about the economic linkages, I also worry about the erosion of the rule of law. Recently, one of Hong Kong's senior justices from the UK resigned, a judge by the name of Jonathan Sumption. (The highest court in Hong Kong, the final appeals court, has a unique system of also having foreign and domestic judges). Upon his resignation, he wrote an article in the FT in June talking about the grave dangers to the rule of law in Hong Kong and warned of a new strain of what he called “judicial patriotism.” That doesn't sound to me like a rule of law that is reflective of the autonomous values of Hong Kong.

I've talked about these developments in both Hong Kong and in Mainland China.  That made politicians there so uncomfortable that they refused to let me speak at this year's China Development Forum, where  I had spoken for each of the preceding 23 years. I gave an address on the same topic more recently to the Foreign Correspondents Club in Hong Kong, and the local politicians almost chased me out of town, unleashing a series of ad hominem attacks on me.  Still, I'm looking forward to going back — provided I can get guarantees of safe travel in both directions on my next trip.

Tracy (41:33):
Do you want to go back?

Stephen (41:35):
Yes.  I love Hong Kong and I relish the opportunity to engage in constructive criticism and free and open debate. I was actually able to do that a few weeks ago. I gave a talk at the Hong Kong Asian Society, I had a number of private meetings, and then I had this very public speech at the Foreign Correspondents Club that I just mentioned. It caused a lot of controversy, but that’s OK. I guess I'm sort of borrowing a page from the script of the US civil rights activist, John Lewis —  trying to make some “good trouble.”

Tracy (42:10):
Stephen, if I could ask just one more question. So again, you are obviously an expert in the China economy. You've been studying it for a long time. I think you talked about studying the plenum since the 1970s, which is an extraordinary breadth of career. Could you talk about what's been the most surprising to you over the years in terms of China's economic policy? Is there one thing that sticks out to you that has come as a shock?

Stephen (42:41):
I think that’s a fair question, Tracy. In answering, I go back to the Third Plenum of 2013. Xi Jinping had been in office for one year. Most of us, me included, thought he was going to be cut out of the same cloth of his father, Xi Zhongxun, who was a leading reformer in the 1980s in Guangdong province. Xi Jinping had the opportunity in the Third Plenum of November 2013 to demonstrate his commitment to getting on with the reforms which had stalled out under his predecessor, Hu Jintao.

And China went into this three-day meeting back in November of 2013. The meetings concluded with a decision document that listed over 300 individual reforms, and we were convinced that China was on a spectacular path of renewed reform and opening up of market-based economic activity.  But it never happened. The disappointment of Xi Jinping's Third Plenum of 2013 was probably my greatest surprise and disconcerting development.  The reforms that we were hoping to take China to the next place as a market-based system that we in the West would be more comfortable with, never materialized.

Xi, of course, initially focused on a sweeping anti-corruption campaign, which then took on a far greater emphasis on political control and a shift to a more backward-looking ideology, emphasizing a leader-centric model of Chinese governance, which has deep roots in the history of China. A couple years later, we started hearing nothing, but “Xi Jinping Thought” as a general concept guiding China’s new ideological construct along with the official party designation of Xi Jinping as China’s  “core leader.” The consensus leadership model, which had been carefully assembled by Deng Xiaoping to have a regular plan of succession after two five-year leadership terms was eliminated. Xi Jinping is now in his third five-year leadership term. So, the big surprise, the big shock is just the 180-degree turn that has happened for China under the fifth-generation leader, Xi Jinping.

Joe (45:46):
Stephen Roach, such a pleasure to finally chat with you and to hear your perspective. Thank you so much for coming on the podcast. That was fantastic.

Stephen (45:54):
My pleasure. Great to talk to you, and thank you for your great questions.

Joe (46:10):
Tracy. I really enjoyed that conversation, and I guess there were big picture two things that sort of struck me is a, you don't get to talk to a lot of people who have really studied China's economy for as long as.

Tracy (46:23):
I know when Stephen was like, I've been studying plenums since, what was it, 1978, 79? Yeah, those are credentials!

Joe (46:32):
Totally. And then the other thing that you don't get very much is people who are critical of China in some ways, which Steven is, and you particularly talked about it in the last answer with the turn he identified under Xi Jinping, but who also think it's a mistake for the US to raise tensions, right?

Because typically those two views frequently go hand in hand. You identify concerning aspects of the current leadership and you say, therefore the United States needs to ratchet up tensions or ratchet up trade restrictions or military restrictions, et cetera. And so it's refreshing to hear someone who identifies some of those concerns, but also doesn't think that the current approach is productive.

Tracy (47:13):
There's that old journalism maxim that if one side is mad at you and the other side is happy, you probably haven't done a good job. But if everyone is mad at you, then you're probably going in the right direction. Yeah, I found that really interesting. I mean, I will say in hindsight, the trade tensions with Japan seem kind of outrageous.

And it is funny looking at some of the old 1980s movies reading some old pot boilers from the eighties and nineties where the characters are Japanese businessmen who are going to assassinate the US economy. It does seem ridiculous. I do think the military rivalry is probably a key difference between what's happening in China and Japan right now. I do think that you can't entirely dismiss the experience of the pandemic where we did see certain important Chinese exports suddenly cut off from the US economy. And so there is sort of a natural response there to say, well, wait a second.

Maybe we do want to build up some domestic capacity and some resilience in key things like semiconductors. I get that. But it is also true that America benefits enormously from Chinese exports. We all like having access to cheap consumer goods at a time when green transitions seems to be very important. I imagine we want access to cheap and bountiful solar panels, many of which come from China. So yeah, I can see where Stephen's coming from.

Bottom of Form

Joe (48:48):
Totally. It also is just interesting, and again, thinking about some of our conversations with Richard Koo, the degree to which, okay, because everybody saw how the Japan story played out. It's almost certainly not going to play out the same way. And as Steven mentioned, perhaps Japan made a pretty fatal mistake when it agreed to limit exports and to agree to build more Toyotas and so forth on American soil, and then it had its bust.

And of course, so obviously Chinese policymakers are going to study that and they're going to study the sort of unilateral dismantling of the Soviet Union, and they're going to study the property bubble that collapsed. So it's almost like there is no way it's going to play out the same way this time just because of so much observation of history.

Tracy (49:36):
Well, and also going back to what's been said before the plenum, it does seem like Chinese policy makers are so far committed to that export led growth. We haven't seen any rhetoric about like, oh, we're going to start transforming our economy and that sort of thing. It's all very much focused on doing what they have been doing, just maybe in a better way. So that's interesting.

Shall we leave it there?

Joe (50:01):
Let’s leave it there.

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