Practice English Speaking&Listening with: Can the U.S. and China Survive Without Each Other? (w/ Stephen Roach & Grant Williams)

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GRANT WILLIAMS: Professor Roach, welcome to Real Vision.

It's great to have you with us.


It's a pleasure.

Heard a lot about you guys.

GW: Well, we'll try and prove it, all the good parts, true in the next hour or so.

The subject I have is China.

We've had a lot of discussion on China, and recently a lot of it has been bearish, which

seems to be the general tone at the moment.

So I thought this is a great opportunity to get someone on who's seen up close for three

decades, has a lot of interesting thoughts, and which take the other side of the argument

in many ways so.

I guess the sensible thing for us to start with would be your personal experience in

Asia if you just walk us through the time you spent there and the changes you saw.

SR: Well, it goes back for me about 20 years.

In the late 90s, I was heading up Morgan Stanley's global economics team.

I was the chief economist for the firm based in New York.

But I traveled the world and spend a lot of time in Asia.

And out of the blue comes this Asian financial crisis starting with the devaluation of the

Thai baht in the summer of 1997, and one by one these socalled miracle economies of Asia


And we had a highly ranked economics team by then, various investor polls, and we had

a horrible forecast.

So it was a great source of humiliation for me to see our forecast in tatters.

And so I had this hunch that somehow China would hold the key to the endgame of this


If China went the way of Thailand, Korea, Indonesia and devalued their currency, who

and who knows where this crisis would've gone?

I'd been to China a few times, but I had no idea really what was going on.

So I started going to China in earnest in the second half of 1997 when every other month.

And it quickly became evident to me that China was very different, and I just got hooked

on China at that point and started writing about China.

I had a Hong Kong-based Chinese economist who was working for me.

But I became fascinated with China from the Wall Street perspective and wrote about China

and its ability to deal with this crisis in a way that was very very different.

And so I wrote an article in the Financial Times I think in early 1998 that made the

case that coming out of this crisis, China would emerge as the new economic leader of

Asia and Japan, the pre-crisis leader, would lose its role as the dynamic economy in the


And my friends in Japan hated me.

They wouldn't speak to me for years.

And the Chinese were a little bit embarrassed by this but certainly welcomed the outside


And the rest is history.

I just kept going back and back to China, and toward the end of my Morgan Stanley career,

right around the time of the financial crisis right around 2007, the CEO of the firm, John

Mack, said you know what.

Do you want to give up your job as our chief economist and go to Asia as the chairman of

our Asian businesses and be our senior executive on the ground in dealing with Asian governments,

Asian clients, Asian investors.

And I said no.

I'm an economist.

I want to live and die as a chief economist.

And he was a pretty forceful guy, my CEO John Mack, and he said I want you to think about

it very, very carefully.

And I talked it over with my wife, and I thought about it.

And I said, this is a unique opportunity.

I've had a fantastic job.

I'm going to take this job, and it turned out to be five extraordinary years of being

on the ground in Asia, spending half of my Asia time in the People's Republic of China

and allowed me to really dig into what then became my passion.

And now I teach it about it at Yale.

So that was a brief travelogue of how I got from the US-based economists to and now, a

professor of teaching about China.

GW: It's-- with the benefit of hindsight, it seems such an obvious call to make that

China would rise and Japan would fall.

But at the time it wasn't.

Can you take us back to what China was like back then because it's a world away from how

we know it today and also some of the signs you saw that made you crystallize this opinion

because you were an outlier at the time.

SR: Yeah.

Back in the mid to late 1990s, there was a lot of suspicion about China.

It had literally been 10 years after the devastating political turn of events in Tiananmen Square

in June of '89.

China was aspiring at that point to join the World Trade Organization, feeling that this

was the means to really get involved in driving and shaping global trade.

But the China Dream was just a dream.

And there was little concrete evidence that China was poised for the type of takeoff that

was about to occur in the 2000s.

The economy had actually been growing very rapidly in the 1980s and early 1990s but off

a small base and still was very much state-directed, state-owned.

Big state-owned enterprises accounted for the bulk of the business activity.

The Asian crisis came along, and the policymaker who really made a difference to me in both

getting to know him and watching him operate was the prime minister at the time Zhu Rongji,

who used the crisis as an opportunity to really force through some dramatic reforms on how

who owned the state owned enterprises, started bringing these companies to market.

Morgan Stanley was participating in that.

And he thought strategically, and he was very open to the analytical approach I had in discussing

it with me and others about what some of the challenges were that he had to address.

And so I watched China basically as an outside observer deal with this devastating crisis

'97, '98, learning that the last place they want to be is in a position of being too dependent

on short-term external debt, not have enough currency reserves to defend their currency

if it came under pressure.

And slowly but surely, they took their foreign exchange reserves from at the time was like

$50 billion US up to a peak few years ago, $4 trillion and used that reservoir-- reserves

and this vast stash of saving to plow it back into their economy, investing in infrastructure

plant and equipment and eventually education reform, and they became a legitimate, full-blown


GW: We'll get onto those reserves in a little while because they may hold the key to an

awful lot of things that are happening now and possibly in the future.

But this idea that spending time in China seems to give everybody a much different perspective

than those who look at it from across- - my time in Asia, I always felt that people that

were a long way away from Asia didn't understand China, and they were frightened about all

the wrong things.

And then we went through a period where the closer you were to China, the more frightening

it was.

Where are we now in that dichotomy between the people up close and their view and the

people observing China from this part of the world for example?

SR: Well, that's a great question.

I find myself often times debating some of these China bears.

Some of them are Chinese or Chinese-American.

Some of them are Americans who have-- I don't want to name names-- but been very well-known

short sellers who have a strong negative view on China who have never been to China.

GW: Yeah.

SR: And the line from them is, well, I shorted company XYZ and didn't spend time in their


Why do I have to go to Beijing to apply my same trade?

When I see a problem, I know a problem.

And I think the a-ha moment for me came when I was early on in my China venture learning

and traveling during this crisis.

And I read a book that was written by-- little did I know he was going to go teach there--

by very famous Yale professor Jonathan Spence called The Chan's Great Continent.

And that book published I believe in 1998 was a brilliant forensic history of how Western

observers saw China from the outside looking in starting with Marco Polo going all the

way up through Henry Kissinger and Richard Nixon and many, many in between.

And he found something in that forensic history that I just blew me away.

He said most of the Western observers saw China through the same lens that they saw

their own systems, their own economies, their own histories.

And so when Marco Polo wrote about the canals of Beijing, he really mistook the canals of

Beijing for the canals of his own native Venice.

He left out some of the most important characteristics of Chinese culture like the fact that women

basically were hobbled because they bound their feet.

He wrote about China the way he saw his native Italy.

And so I think-- the lesson for me is our Western perspective is not necessarily the

best lens to look at China.

And then when you fast forward to where we are today and so many people are talking about,

oh, China's the next Japan or we had a property bubble in the US and look at the excess house

price appreciation in China-- we went through it they're going to go through it, it's difficult

to map your own experience into a different system, different politically, socially, and


GW: But that's what everybody tries to do.

And I agree.

That's always been my problem with China.

And I go backwards and forwards between thinking the sky's going to fall and thinking it's

going to be all right.

But I always do that understanding that I am looking at it through perhaps a wildly

misguided lens.

But we'll get into the numbers and stuff shortly, but I want to try and dig into the politics

of it because obviously we've seen some enormously powerful figures come and go through your

time in the region.

And we now have an incredibly strong leader in Xi Jinping.

Talk a little bit about how that-- the political cycle has changed and how the CPC has evolved

during that time because it does seem wholly different today.

SR: Yeah, I think if there's one big surprise in my 20 years of in-depth connection with

the Chinese system, it has been the change in course.

Politically that's occurred under Xi Jinping.

Because you go back to the first 25 years of the PRC under Mao Tse-tung and there were

these massive upheavals at the end of his life, the Great Leap Forward, the Cultural

Revolution, that pushed the system to the brink economically, politically, and socially.

And there was a big leadership struggle after that, and out of that struggle came Deng Xiaoping,

who said wait a second.

It's time to get away from my ideology.

Let's do fact-based reforms based on observable issues.

And he set in motion some dramatic reforms on the economic realm that were accompanied

by a steady and progressive liberalization of the political system.

And so what happened was that there was a burst of creative activity in the arts, and

some of the political discussions became very intense.

And then there was this tragic boiling over in the late 80s that the government clamped

down on, but once a few years went by after that, then the political system continued

to relax.

And then all of a sudden, seemingly out of the blue, the socalled Fifth generation of

leaders headed by Xi Jinping takes power literally six years ago.

And he-- the first thing he said in a very expansive press conference after being appointed

party secretary is that we're at risk.

The party is-- has been corrupted by special interest groups.

Society is also at risk for the same comparable sources of corruption and erosion of our basic

Marxist values.

And I'm going to deal with that.

And so he began early on in 2013 with the most dramatic anti-corruption program and

a return to core party values that China has seen really since the days of Mao.

Some people compare it to the Cultural Revolution.

I don't because it's not nearly as disruptive, but in terms of an about face in a political

environment that had been opening to one that now is more focused on core values of this

Marxist system, that's been a big shift.

GW: Was that-- how much of that was cleaning house, and how much of it was a man trying

to ring fence himself and get himself in a position as a new leader of a country?

SR: Well, we speculate about that all the time.

We don't really know.

The anti-corruption campaign is widespread.

There are various websites that try to count up how many people have been caught up in

this campaign.

And in preparing to teach a class on this very issue a few weeks ago, I looked at multiple

websites, and the estimates range from 500,000 to over 1.5 million people.

He breaks them down into what he calls tigers and flies.

The tigers are the big guys, the former members of the standing committee of the Politburo

like Zhou Yonkang who was the head of the state security apparatus, or to the little

guys operating at the local governments and in small businesses.

And there's been a lot of discussion about the high-profile leaders that have been ensnared,

starting with the very first one.

This whole campaign was sparked before Xi Jinping took over by the really extraordinary

corruption case that was brought against what they call a princeling, the son of a revolutionary

hero, a gentleman by the name of Bo Xilai.

GW: Bo Xilai, yeah.

SR: Who was in his life-- before this incident became public-- was the mayor of a big city,


He was the Minister of Commerce and there therefore the outside face to the world representing

Chinese trade interests in the early to mid 2000s.

And then in his final position when before he-- right before he was arrested, he was

the party secretary the biggest city in the world, Chongqing.

And he was leading a very patriotic, nationalistic revival in China and blatantly campaigning

to be elevated to the so-called standing committee, the top seven or nine leaders of China.

No one had ever done that.

No one ever seen that before.

And he was arrested before Xi Jinping was brought into office.

But this was a really an amazing process to witness from both the outside and the inside.

And I think Xi Jinping took that as a threat as to what could happen if these new leaders

were to get power outside the accepted party structure.

Could that pose a grave risk to the sustainability of the system?

And so his anticorruption campaign needs to be set in the context of those events that

were occurring as well.

GW: The Bo Xilai affair was-- to me that was a sea change because not only was it a very

high profile guy to take down, but the fact that it played out so publicly, you knew that

the stuff that was coming out was being leaked deliberately to create the story and show

the world that things were changing.

SR: Yeah, it was amazing.

I actually-- it transpired-- the drama unfolded really in 2012.

And I had just made the move to Yale at that point.

And I remember full well going to one of these academic dinner parties with a bunch of--

a small number of faculty members.

And the host actually invited my hero Jonathan Spence and his Chinese wife to the dinner.

And literally that morning the other shoe had fallen where the Chinese had announced

that his wife was also arrested for the murder of a-- I think it a British compatriot and

the alleged crimes against the state.

And I remember Spence turned to his wife, when we talked about it, he says, I knew it.

There's always a woman involved in these great crimes of intrigue that are alleged to have

been initiated by a high-level male statesman.

GW: Always.

SR: So Spence and his wife said, this is right out of the script of the way this palace intrigue

has unfolded in China for centuries.

And only he could say that because he's studied the centuries of Chinese history.

I had no idea whether he was right or wrong.

GW: Well, the other obviously-- the other big figure that looms in China is America,

this relationship between the two countries.

And this is something you wrote a book about in 2014, which talked about the co-dependency

between the two.

And I think that at the time was right.

It's changed and morphed.

That relationship has become more fractious perhaps.

And I know you've got some thoughts on that.

So I'd love to get you to lay out the theory of that co-dependency and then talk about

where we are in the evolution of such a thing.

SR: Yeah, I have to say, though, the book was an outgrowth of my personal journey as

a professional economist prior to my initiation into Asia under fire.

I was predominantly a US-based US-trained economist with the responsibility for Morgan

Stanley of forecasting and analyzing the US.

And then I was promoted to chief economist and got hooked on Asia and really switched

my focus to China.

And then when I went to Yale-- once you go to academia, you got a chance to sit back

and contemplate what have I been doing for the last 30 years.

And to me, the last-- 30 years at Morgan Stanley had broken down into two pieces, the US guy

and then the China guy.

And I thought to myself, there are people that know more about the US than I do although

I hated to admit that, and there are definitely people that know more about China than I do.

But I know a lot about the intersection of the two countries and the relationship that

really weaves them together in shaping that intersection.

And so I started thinking about the two-way character of this relationship and the fact

that China, as an export-led economy, clearly depended a lot on the US for the largest source

of external demand that drove its growth miracle.

But there was more to it than that.

And I said you know what about us in the US?

And I said, well, we're a saving short economy.

So we need a lot of foreign surplus savings in order to grow.

And when you learn economics as a young pup, when you don't have savings and you want to

grow, you do import that surplus savings.

You run big current account and multilateral trade deficits.

And I go a-ha.

This big trade deficit, which has gotten only bigger over time is an outgrowth of our own

imbalances, hence the title of the book, “Unbalanced,” because I focused on the joint confluence

of the macro imbalances in both economies.

And I took it further.

I said, look, the US doesn't only need now some $500 billion of goods from China to make

ends meet for income constrained American consumers, but we need China to buy our treasuries

because we have these massive budget deficits.

And our biggest export markets we know are Mexico and Canada, but who's number three?

It's China.

And whose growth rate of US exports to another country is the fastest of our major trading


It's China.

So I said, this is a two-way relationship.

We depend on them.

They depend on us.

And my wife is a psychotherapist.

I'll admit.

So I sometimes read some of her textbooks and articles.

And one day-- I don't know-- seven or eight years ago, I found some article laying on

our desk about codependency, and I go a-ha.

That's what's going on here is two needy partners searching to each other for the sustenance

of their-- in this case it wasn't personal growth-- but economic growth.

And then I went back and reconstructed the relationship, and to me that co-dependency,

the seeds that, were sown in the late 1970s when China was just coming out of these two

unstable decades of the Great Leap Forward and the Cultural Revolution desperate for

a new source of growth.

And we were in the midst of a horrific stagflation that was really an unfortunate place for our

economy to be.

And so we came together and-- I know I'm stretching this a little bit-- what I would call a marriage

of convenience, which is the way these co-dependencies start with humans, where we drew on each other

to deal with the tough places we were in.

But I was quick to realize that this was a marriage of economic convenience.

It was definitely not a marriage of love.

And so there was always a risk that one partner might turn on the other one.

And when I wrote the book four or five years ago, I underscored that risk, but I had no

idea that Donald Trump was going to get elected and act out in that fashion that's actually

classic in studying the human pathology of co-dependency where one partner moves on and

the other one feels scorned and lashes out and strikes back.

And that's what's going on right now.

GW: Well, let's talk about that because this idea that China's moving on, you've laid out,

and you've written very eloquently about it.

And it makes sense when you look at it prima facie.

It looks like it makes sense.

So how are they moving on?

When you talk about that, what exactly do you mean?

SR: Well, China for 30 years dependent on exports and on investment largely to grow

this export platform and its biggest market for those exports was the United States.

In 2007, a former premier of China by the name of Wen Jiabao, he gave a press conference

right after one of these big national Congress meetings in March of 2007 and said our economy

looks pretty strong on the surface.

But beneath the surface, it's unstable, unbalanced, uncoordinated, and ultimately unsustainable.

What did he mean?

He meant that-- and I'm putting words in his mouth-- but this is the way the debate unfolded,

so the words are accurate with the benefit of hindsight-- that China needed to shift

the model from external to internal demand to stimulate more of a consumer-led, services-led

economy and an awful lot of effort and thought has been put into redesigning the growth model.

And so in a consumer- and services-led economy, you're less reliant on your year former external

partner as a sustenance for growth.

And by the way you end up saving less and therefore you have less to spend on treasuries

that the US needs so desperately to compensate for its own savings inadequacies.

So in some respects, this structural re-balancing is a big shift in the Chinese growth model

that allows China to move beyond an old model and its dependency on the US.

And in some respects the US is very uncomfortable with that shift and especially since it entails

a lot of new and important efforts China's making in the way of technological change

and innovation that the US views as an egregious violation of its own proprietary technology

and intellectual property rights.

GW: Donald-- the outlier that is Donald Trump, we'll come to in a second because who could

have possibly foreseen that.

But the big word that everybody throws around when talking about China through this whole

period through the beginning of the 2000s rightly through now is debt and the amount

of debt that they've used to fuel that growth.

And it wasn't all just this return from an exporting nation into internal consumption

and services.

Your experience in China, how does the picture on the ground of the Chinese debt situation

differ from perhaps the way people see it from the US and Europe when they're looking

onto the inside?

SR: Well, the debt intensity of China took on new proportions in the aftermath of the

financial crisis.

Going into the financial crisis debt, the GDP in China was-- the ratio was about 150%,

which-- it was a little higher than it had been, but it was not an outlier relative to

other nations if that in fact is a comparative metric that we want to use.

But in any case, after 2008, the ratio exploded.

And today that same ratio in which pre-crisis was 150 is about 262%, and that's worrisome.

And so the debt intensity of the Chinese GDP has increased dramatically.

If you pick apart the sources of that debt, you will find that it was not the household

sector that did it.

It was not the government sector that did it.

But it was largely this big, big increase in corporate debt.

And if you look further, you find that it was in the state-owned enterprises that really

became the drivers, the engines of debt-intensive growth.

And there's been a lot of discussion about this actually inside of China.

And there was a famous interview about three years ago2.5 years ago.

It was published on the front page of the state newspaper, People's Daily, that contained

an interview by-- between the editor of the People's Daily and someone who did not want

to divulge his identity, so he became known as the Authoritative Person to indicate that

he was high-level, very well-connected official but did not want to disclose his name, which

is a little weird, but that's just the way they did it.

And he said China's on a tough and dangerous course very reminiscent of the experience

of Japan.

And he laid out the whole Japan model debt-intensive growth underpinned by asset bubbles that when

they burst pose a risk to levered companies in Japan, the levered companies that got dragged

down by.

The bursting of the equity and property bubble in the early 1990s became known as zombies

and that-- and the economic Walking Dead-- and that unleashed a whole conversation that's

still going on today about the incidence of zombies in China and their relationship to

debt-intensive growth.

And the bottom line is the Chinese government is very cognizant of the risk of a replay

of a Japanese-like scenario.

And they're very focused on avoiding that.

And I give them a lot of credit for that in naming and owning up to the major risk of

debt-intensive growth.

I teach a few courses at Yale.

One of the courses I teach in the spring is called The Lessons of Japan where I go through

the rise and fall of modern Japan and then try to distill some lessons that has for other

countries including China.

I've been asked to teach parts of that course in China for the last three years, and I do.

GW: Whichever view you have on China whether your bullish or bearish, you seem to be able

to find exactly what you need to not only back up your case but strengthen it.

SR: Isn't that true of any view in the markets?

You talk to a lot of market guys-- GW: Yeah, but it is.

But I think China, particularly because there's that certain amount of opacity about everything

that comes out of China.

You never really know.

And the narrative around it is that you're going to get told by the CPC exactly what

they want you to hear, and you're never going to get the real truth.

So can we believe anything?

But it does seem that-- SR: You hear that a lot.

Like I debated at Yale just the other day one of the most prominent China bears.

Again, I won't mention his name, but he wrote a book in 2001 called The Coming Collapse

of China, so you can do on internet search.

And he's a great guy, but he said to your point you can't believe the numbers in China.

They publish 6.5% or 10%, but I know the numbers are 1.

GW: Right.

SR: How do I know it?

Well, I look at this or that gauge, and so I conclude that I know more about the Chinese

economy than the published data lead you to believe.

And you're right.

There's a lot of outside adverse-- experts or doubters about China who will say the same


You can't trust the information that the government puts out, and so we know that the place is

a lot weaker than that.

GW: But I guess that's the problem really because if you-- if everyone's getting the

same data, it's just down to interpretation.

Whether data is right or wrong, it's the only data we have.

People go in and try and come up with their own data sets, and generally those tend to

be bearish or certainly more bearish than the governments, which would suggest that

they do massage the figures in a favorable direction to them.

But when you look at some of the numbers that some of the bears are coming out with in terms

of the sheer levels of debt, it's hard to see how you gently work your way out of something

like that without some kind of major correction happening suddenly.

SR: Well, look, that's why I've often felt, whether it's looking at the US economy, the

European economy, the Chinese economy, the Japanese economy, that you've got to do more

than just focus on headline GDP or headline debt.

You need to look at the pieces of the puzzle, how they fit together and whether or not the

logic of that puzzle can be corroborated by evidence that the government does not put

out, that others have assembled, or that you can look at through your own analytical lens.

And so so much discussion about China as well, GDP was 10 and now it's 6 and 1/2.

And so that's a 35% reduction in growth rate.

And then adjusting for the well-known biases of whatever it is-- 2, 3, 4 percentage points--

the economy is already terribly weak, the day of reckoning is at hand.

That's what I hear all the time.

They'll look at other things like property bubbles or the environment and say, see, I

told you.

I'm suspicious of that.

I really am.

The overall GDP in China to me is far less important than its pieces.

And the pieces that I've looked at also aggregate.

But break down the GDP and its three major sectors, primary or agriculture and mining,

secondary manufacturing construction, and tertiary services.

And if you look at just those three pieces of the puzzle since 2007 when again my favorite

provocateur of the debate Wen Jiabao said the Chinese economy was unbalanced.

There's been a big shift away from manufacturing construction increasingly towards services,

which is the infrastructure of consumer growth.

When he made his famous comments that I alluded to earlier, the services share was about 42%

of Chinese GDP.

Today it's 56%, 57%.

It's still too small.

GW: Yeah.

SR: But that move in 10 years from 42 to 56 is extraordinary indications of structural

change and so the service-based economy is whether developed or developing, they grow

more slowly.

And so how much of this slowdown in the growth from 10 to 6.5reflects the shift deliberate

to slower growing services activity to achieve their goals of a more balanced economy.

I don't think the bears really get into the shifting composition.

They want to judge China by one number and one number alone, whether it's debt to GDP

or GDP and say this is the problem.

And I need to do more than that.

GW: What about the currency because the currency is obviously at the center of a lot of this,

and that co-dependent relationship is changing as you said.

China seems to be trying to find a way to have less need for dollars, and certainly

the treasury holdings are declining over time.

SR: A little bit.

Not a lot.

GW: Yeah, a little bit.

But it's pretty steady now.

It's-- since 2013, it's been a pretty steady reduction that suggests this is a change in

direction for them.

What do you think about the currency?

It seems to, again, hold the key to a lot of potential moving parts that float around


SR: Well, I think the currency was enormously important when China was deriving so much

growth from exports because that's the sort of the way in which Chinese goods are priced

relative to other goods.

And certainly there was evidence that the Chinese like their predecessors the Japanese

were deliberately holding the currency down to gain competitive advantage in the 19--

early 19-- excuse me early 2000s maybe going up to 2012, 2013.

Since then they've allowed the currency to rise a lot.

But the currency helps you compete if you're an exporter, but it-- you need a stronger

currency to expand the purchasing power of your consumers as they start to come to life

in attempting to realize their demands for foreign produce goods.

And so the governments allow the currency to appreciate although recently in the last

nine months or so it's come down pretty sharply again.

So I think the currency is one important policy lever in China.

It's meant different things for the Chinese leadership at different phases in its growth

cycle, and cheap currencies help exporters.

And that was the case in China when we had export-led growth.

Strong currencies help consumers.

And with the exception of the last nine or 10 months, that's been the case for over in

China as well.

GW: We touched on Donald Trump, the big outlier, since you wrote the book.

So let's talk about the Trump effect on the relationship between America and China, how

it's changed, how each country sees the other perhaps, and also the trade wars that are


We just can't ignore them.

They seem to be escalating.

There's an awful lot of talk trying to calm, quiet the horses that we've got this under

control, but it seems to me if you look beyond the rhetoric from the people who-- the discussions,

it's steadily escalating, and it seems like a battle neither side can afford to back down


So let's start with the Trump effect.

What effect has Donald Trump had?

Has he just reset the boundaries of this, or has there been a bigger change in that

since he took the helm?

SR: Well, I think President Trump has really brought a troubled relationship to a head.

Again, going back to my earlier framework of co-dependency, co-dependency is not a healthy

or sustainable relationship between humans.

And I warned of that when I wrote this book that ultimately there would come a time in

this bilateral economic relationship where one partner, either the US or China, would

feel threatened by the other and lash out in response.

I did not when I wrote the book certainly envision the election of a president like

Donald Trump, who would seize on the bilateral trade imbalance as a means to really tighten

the screws dramatically on China.

And as much as I object to tariffs and trade wars, I will give the president credit for

bringing out into the open debate on very important issues.

Whether it's bilateral trade deficits, which most card carrying economists, myself included,

would tell you not to focus on, but to these thorny issues of technology theft, intellectual

property rights, state-directed system versus a market-based system, cyberhacking, these

are all allegations that were explored in great detail by the Trump administration's

trade representative Robert Lighthizer.

When he issued this report in March of this year regarding the unfair trading practices

as alleged under what is called section 301 of our Trade Act, in his report 182 pages

with over 1,000 footnotes, which every one of which I read, brings out and crystallizes

a lot of issues that have worried a lot of people for a long time.

I've read the report carefully.

I think it's poorly done.

I think it's politically biased, but there's a lot of issues that don't necessarily get

expressed fairly and accurately by politicians.

But we debate them because they're important to debate.

And so the Trump administration, to its credit, has put these issues on the table for all

of us to debate.

And that's a good thing.

GW: But what happens to that debate because it's a debate that realistically it's very

difficult to have between America and China because the accusations, particularly around

IP theft hacking and spying and all that kind of stuff, it really is the stuff you don't

talk about at parties.

When you bring that stuff out and you put it out on the table, it's very hard to have

a debate about that in good faith on both sides because the quantum of being exposed

or being wrong is so high.

And to do that within a wider framework of trade wars, is that-- a, good idea, b, can

it work?

I'm not sure it can.

SR: Well, I would say not that this has become the hottest topic of conversation in social

circles or parties that I go to, but there is a recognition that these issues are now--

have now driven an enormous wedge between us, the largest economy in the world and China,

the second largest.

And a lot of casual empiricism has recognized that this conflict, this pattern of conflict,

between the rising power and the ruling power has a tough history that that can end in outright

hot wars.

There is a professor at Harvard, Graham Allison, who's written a book called Thucydides's Trap

that talks about this.

And so-- and then Michael-- Vice President Pence along with former Treasury Secretary

Hank Paulson very recently have both laid out the possibility that, well, if it's not

going to be a hot war, there's a good chance it's going to be a cold war.

And we know what a cold war was like with this former Soviet Union.

So again I don't mean to say this is a burning issue in every cocktail party, but it's an

issue of increasingly important consequence in the discourse of international problems

that I think many observers are now facing for the first time in a long time.

GW: So with this co-dependent relationship and it's clear to see the nature of that co-dependency,

but who, if anybody, has the upper hand.

Because it seems to me looking at it that with the US deficits getting bigger and their

need to fund ever bigger deficits based on some of the Trump policies, I feel like China

almost has the upper hand here.

But I'm willing to-- SR: Yeah, but you're alone in that because-- I wouldn't say alone--

but clearly the Trump administration harbors the belief that the US economy is now strong

because of the president's tax cut and regulatory relief.

And the Chinese economy, the growth rate is slowing.

The stock market's down some 30% this year, and China is weak.

So why not go after China right now if we're so strong and they're in a position of vulnerability?

I actually share your view.

I think that maybe on a short-term basis, we have momentum going to the upside and the

Chinese don't.

But they're tackling a lot of tough issues that are going to leave them I think in surprisingly

good shape long term, and we are squandering our long-term strength by refusing to address

our savings problem.

In fact, by enacting tax cuts at a time when our economy was actually heating up and our

budget deficits were large going into these fiscal policy adventures.

And that will make our future even more problematic down the road.

So the idea that this is the time for us to strike because China is weak and we're strong

and that we-- they export more to us than we export to them, therefore our tariffs can

be larger than theirs, I think that's really misplaced in a very myopic appreciation of

the risks.

GW: So how would you if you had to write an epilogue to the book now, given what's happened,

is there anything you'd change in your framework?

And if not, is there anything that particularly now you see as more important to focus on

from what you wrote back in 2014?

SR: Well, I like the framework of the book in terms of laying out the details and the

genesis of this two-way relationship.

But I think if I had to write the book again, I would take the cue from the tariffs, the

so-called section 301 investigation that the Trump administration launched, and I'd spend

somewhat more time in discussing the innovation challenge that both nations find themselves

in, where this came from, how we deal with it, and what does it say about the eventual

struggle between two very different systems?

Is it the innovation challenge a zero sum game where if China succeeds in areas like

artificial intelligence or biogenetic breakthroughs or gene therapy that we can't?

It comes at the expense of us?

Or can we both utilize technological breakthroughs and innovation for our own purposes to make

us stronger for the future?

I would explore and probe that because I think that the answer to this battle over innovation,

intellectual property rights, and the cyber hacking issues that go along with this discussion

will be very important in shaping the future for us in the United States, for the Chinese,

and broader global economy as well.

GW: So, again, I mean given your experience in China, what do you think the future holds?

I'm obviously-- it's an impossible question to answer, but as you apply your experience

in talking to the very top levels of the Chinese government and understanding a bit better

than most of us how they think and how they strategize, what do you think the future holds?

SR: I'm pretty optimistic on the broad parameters of what they're trying to achieve focused

on a strategy that builds out the middle class Chinese consumer as an increasingly important

source and sector of economic activity that moves away from resource intensive, pollution

intensive, manufacturing construction into more of a services-based resource-light economy

that helps China address this horrific problem with environmental degradation.

It's a very, very serious problem throughout China, not just air but also water.

So I'm pretty optimistic.

Having said that, there are still some big issues that I worry about.

I worry about the demographic distortions that have arisen through the one child family

planning policy, which has since now been abandoned.

But how easily is it going to be for Chinese families just because the government says

to have another child or two just to change the dynamic of the way in which elderly people

are supported by active members of the working age population.

I also think that the Chinese face a lot of challenges in continuing to expand their property

markets without succumbing to asset bubbles.

And then finally I'd say the one thing that continues to puzzle me, which is very paradoxical,

is the role of the state in owning companies, in owning property, in owning enterprises.

They talk a lot about state-owned enterprise reform.

What does that really mean?

From, again, our point of view, it means taking these state-owned entities and listing their

shares in public capital markets and turning the ownership over.

And they did a lot of that in the late 90s.

But now they're not so much rethinking that, but they're adding a different approach to

stateowned enterprise reform.

And I find puzzling and potentially problematic in that they call it a mixed ownership state-owned

enterprise reform where they continue to emphasize the importance the state has in guiding and

owning assets, but they want this to occur within the environment where markets are decisive

in shaping the allocation of resources.

It's a blended model.

How can you do that?

How can you have the markets and the state in such intricate and complex partnership

as the Chinese aspire to?

So far they've pulled it off, but this is a model that lends itself to a fair amount

of risk down the road.

And they have yet to really resolve this key paradox, this big dilemma.

GW: The cynic in me suspects that the answer may also have something to do with that enormous

amount of debt that's layered into the SOEs and the effect that sunlight would have--

the sunlight of that listing-- SR: Well, it's possible.

The poster child of mixed ownership state enterprise reform is this capital injection

of about 12 billion that was done little over a year ago into China Unicom, a big stateowned

enterprise telecom company.

And they brought maybe a dozen or so strategic investors to inject the capital into it.

About 40% of them were the big tech companies Alibaba, Tencent, and the like, Baidu.

But the balance were other state-owned enterprises.

GW: Yeah.

SR: So now they're in a position where they're getting SOEs, to use the jargon for state

owned enterprises, investing in other SOEs.

And as somebody who studies and teaches about Japan, this is out of the playbook.

Where cross shareholdings ultimately led to the demise of the Japanese currencies when

the equity bubbles that underpinned their cross ownership collapsed and the debt that

used those artificially inflated equity values became very onerous and left these companies


Hence the phrase zombies to describe the horrific impact that these companies had on the Japanese


And so I see some signs of that in China, and that worries me.

GW: Well, so that's the future China, but just in closing to get to China's future,

we have to somehow navigate this trade war successfully.

And it needs to be something that both sides I guess can claim victory.

How do you see the trade war playing out from here?

SR: I think that we have this upcoming meeting between President Xi and President Trump on

December 1 in Buenos Aires after the G20 meeting.

I think who knows how that's going to play out, but I think both leaders feel compelled

to send a message that they have come to agreement on something.

Whether it's an agreement and to develop a more robust framework to resolve the problems

as one Trump administration official has said or a standard Chinese deal which is we'll

buy some more soybeans and airplanes, just please leave us alone, I think they'll be

a cosmetic deal.

But I think it's going to be really difficult to come up with a meaningful and lasting deal

that gets to the core of this clash between two co-dependent nations over technology,

intellectual property rights, cyber hacking, and the role of the state in supporting and

driving competitive policy.

These are core interests for China.

These are core interests from us.

And to compromise any nation on its core interests is asking a lot.

And so I don't see a formula that's been developed that allows for that compromise to take shape.

I would be hopeful that we could come to some agreement on that.

And if we don't, then those who are warning of the protracted struggle of the Cold War

type model that we had for years with the former Soviet Union may turn out unfortunately

to be correct.

GW: Well, Professor Roach, we've run out of time.

It's been fascinating and a real thrill for me.

So thanks for taking the time to do this.

SR: Thank you.


The Description of Can the U.S. and China Survive Without Each Other? (w/ Stephen Roach & Grant Williams)