Odd Lots - Stephen Roach Warns of Disaster From Our 'Sinophobic' China Policy

Episode Date: July 15, 2024

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.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Bloomberg Audio Studios. Podcasts, Radio, News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, you know, when it comes to U.S. 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 80s. But I have to say, like, 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. That's very disappointing, even though I'm aware, I know, even though I'm aware that that was a thing and probably some of the concerns, particularly about automobiles specifically and the threat to Detroit and all that was popular the way it is popular now. Like, I actually know very little of that story. 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 U.S. economy.

For instance, there was that famous photo of, I think it was a bunch of congressmen smashing, like, a radio or a TV or something in Washington in the late 1980s. Do you remember seeing that? No. Which you can imagine, like, so the idea was the U.S. 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. Oh, I'm looking at the photo.

They smashed a boom box right in front of the Capitol. It's pretty. You can't get much more in 1980s than smashing a Japanese boombox. 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, you know, movies like Falling Down or the villain in Back to the Future, too. 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, you know, I know a little bit, but not really like what the ultimate was there, how similar it actually was because, yeah, sure, you know, it's one thing with boomboxes and cars, but obviously there seems to be, at least in U.S. 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, you know, we've also talked about the history with the real estate bubble and bust.

we've talked with Richard Koo about the similarities of the real estate boom that Japan had and the bus 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. 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? 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. 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, you know, when something is conventional wisdom like that, it's probably good to question some things. Absolutely. Let's do it. All right. 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 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. Well, great to be with you, Joe, and Tracy. I'm astonished at how young the two of you are. Thank you. No one's any firsthand knowledge of what it was like to live in an era where Japan was our main economic enemy. Well, I was in Japan in the 1980s, so maybe I missed out on it because I was on the other side. Japan in the 1980s was great, I got to say. Just one background note. I mean, I taught a seminar at Yale for 12 years called The Lessons of Japan.

And in that seminar, I went through in great detail what happened to what happened to what at the time was Asia's first major growth engine, the rise and the fall, and how that came into the crosshairs 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 those lessons to see how they applied to other economies around the world. And, you know, in keeping with your pithy introduction, you know, the main candidate 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. Fantastic. You know, one thing I remember at the time, and I guess by this point, I was 11 years old,

I remember George H.W. Bush vomiting onto the lap of the former prime minister while on some, you know, 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, like, how did that end? Because I remember, like, some of the anxiety about cars from when I was 10 or 9 or whatever, and they're eating our lunch and stuff like that. But, and then, you know, by the mid-90s, 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 or in the literal economics, did that end? What happened? How did that fade? You alluded to the auto area. That was a major issue of contention. We've negotiated some voluntary export restraints on Japan. And then in Japan, who, you know, we had a very close security relationship with, which is, of course, very different than our current situation with China. 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 we all ended up buying Japanese cars, but they were produced in the United States. But I think the endgame was quite tough for Japan. You know, Japan went from a growth miracle to a growth bust, went through arguably 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 led to acid the bubbles, and you said he spoke with Richard Koo, the balance sheet recession that he's written

so eloquently about that really 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 U.S. and then was effectively neutered as an economic power by these lost decades. So it didn't end all that well for Japan. Maybe we could step back for a second, because the thing that I'm unclear on with the Japan, U.S. business rivalry of the 1980s, is, and you touched on this Stephen already, but there was, there is a security alliance in place between the U.S. and Japan. I mean, the U.S. 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 U.S., even if they were military and strategic allies?

That's the one thing I don't get. Well, it'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 we came out of a horrible recession in the early 80s that continued, even in the face of economic recovery, to leave our manufacturing sector under pressure. The manufacturing recession continued well into the mid-1980s, even though the overall economic recovery was. progressing nice our politicians figured out that the main culprit in the manufacturing recession was this thing that they didn't understand but it was a trade deficit and the biggest piece of the

trade deficit was with Japan they were highly critical of Japan the politicians were for unfair trading practices for running an undervalued currency, the yen in their case, and for basically eating our lunch in terms of putting pressure on our companies, our workers, and our communities. You noted in your intro that, you know, 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 murdered a Chinese American in the late 80s not being able to mistake the difference between the two nationalities.

So it wasn't a particularly pretty period, but it unmasked a really critical misunderstanding of the role that trade plays in an economy that was evident in Japan that is even more evident today in China, and that is the U.S. has trade deficits with many countries, and it's wrong, to single out one country in an effort to eliminate the trade deficit. You can't do it 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 import surplus savings from abroad, and they run what's called a balance of payments deficit that gives rise to a multilateral trade deficit with many, many nations. So fast forwarded to today in 2023, we ran

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%. So you say, wow, that's a great strategy. And Trump would say, 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 went somewhere else. And that's somewhere else were countries like Mexico, Vietnam, Canada, Korea, Taiwan, India, Ireland, and even Germany. In large part, these countries are higher cost producers. So the trade shifted from a low-cost producer like China to higher-cost producers, which ends up taxing American.

workers. So the policy reflects a total misunderstanding of the way that international economics works in the context of our saving short U.S. economy. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, Leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's a lot. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday.

Follow leaders with Francine Lacroix wherever you get your podcasts. 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, you know, going back to the parallels between China and Japan and there's something we talked with Richard Koo about is like they had this real estate bubble. And for Japan, the aftermath is really bad, multiple lost decades. And, you know, 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 U.S. and Japan, I listen to that and

say, actually, it seems like it turned out fairly well from the U.S. 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 U.S., 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? It'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, that was very focused on boosting

economic growth through exports largely supported by a cheap or undervalued currency. We called them on that. There was a currency agreement in the mid-80s and the so-called Plaza Accord that forced the Japanese to revalue their currency. They, panicked over this threat to their economic model. And the Ministry of Finance, which controlled the central bank as well as the foreign exchange policy, basically ordered the Bank of Japan to slash domestic interest rates. And that's what boosted asset bubbles in equities and property. and when they burst, as all bubbles do, the rest is history, one lost decade followed by another. So this policy that was imposed from the outside on Japan was not without consequences for other policy choices they made.

By no means was that the sole source of the lost decade, as I teach it, and myself, There are many, many sources, but that was clearly an important part of their story. Talk to us about the Chinese economy now, and in particular, how you would characterize trade relations between the U.S. and China. What are you seeing? Well, the Chinese economy is in difficult shape right now. It's facing, you know, a number of short-term headwinds brought about by the property crisis. which is very Japanese-like, and also financial problems amongst many of their local governments.

And that combination of issues has certainly led to a significant slowing of the Chinese economy relative to this historic 30-plus years of 10% growth. And yet, you know, that is only part of the problem. is 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 to offset that. You've got to get more out of the surviving workforce. Otherwise,

your growth will weaken. And it has done that in Japan now for three decades plus. China's got 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, you know, China's got some structural issues on top of the cyclical problems. U.S.-China trade relations, your second question, you know, the relationship is in the worst shape it's been in since the U.S. championed China's men. membership in joining the WTO in late 2001. We've had tariffs initiated by Trump and sustained

under Biden, who was tightened the news further through sanctions and through making every conceivable effort to contain Chinese technology under the guise of national security risks, which as you pointed out earlier, we're not a serious consideration with Japan in the 1980s. So that is obviously, does seem like a pretty big difference. And when I think about the tensions between the U.S. 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 security 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 D.C.? Should it inform how we trade with China? I think that there has been a lot of exaggeration of the so-called security threat from China. Certainly, they 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 think personally, I've looked at a lot of this very carefully, wrote about it in my last book called Accidental Conflict, where I lay out the thesis that a lot of the national security concerns that have been expressed by politicians and by executive branch officials, either in the Trump or the Biden administration, are false narratives based on. on the presumption of intent on the part of China, they cannot really be validated. I mean, just take electric vehicles. I mean, we had the spectacle of a Congress secretary, Gina Raimondo, a warning that if China was,

for some motive that she was unable to articulate, felt like it, they could transform Chinese-made EVs, presuming that they were allowed to be sold in the U.S. into vehicular weapons of mass destruction. And there's just absolutely no credible evidence of that. And you could argue the same thing with respect to, and I have, Huawei on 5G, telecommunications, even TikTok in terms of the allegations that TikTok has corrupted, you know, the minds of innocent young teenagers. We've got concerns that have been raised over dock loading cranes that are made in China,

that, you know, with a flick of a switch that the Chinese could disable all of our dock loading infrastructure. You have an FBI director, Christopher Ray, 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, our entire public utility system will 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. And 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. So I find it very worrisome.

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, you know, for instance, if it were to invade Taiwan, the assumption would be that the U.S. is cut off from Chinese exports, or at least they would be disrupted in some way. And so it might be desirable from the U.S.'s 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 an autarky point of view rather than a vehicular weapons of mass destruction point of view.

There's some of that, Tracy. I will, every nation wants to be able to stand on its own and not be strategically reliant on others, especially on a nation who, you know, has a different ideology, who you feel has been engaging in activities, whether it's with respect to Taiwan, the South China Sea, the partnership with Russia, who happens to be prosecuting a criminal war in Ukraine. So, yeah, that's certainly a part of the political equation. And, you know, the idea of being strategically reliant on production at home is good. But this just gets back to my economic lesson that I tried to teach you guys earlier on. You know, if we want to be strategically reliance 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 this linkage with overseas production.

I gave you some of the numbers. I mean, you know, we've cut our trade deficit with China. So you could arguably say that, you know, we have made some progress and at least winging ourselves from the Chinese. But, you know, 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 know, you've got a good point, but it just, 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 mean, I have a hard time with it. 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? Well, again, I'm not trying to sell my book because, you know, it's been out for a while, but I did write a book called Accidental Conflict.

That doesn't sound good. That's just the title of lung. What I argue in the book, Joe, is, look, both nations are prone to politically expedient false narratives that they framed about the other. and that has 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's gone from initially back in the 90s and early 2000s,

from a relationship built on mutual trust to 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. And I subscribed to the notion that was articulated by the late Henry Kissinger a number of years ago, actually at a Bloomberg conference, where he said, I think it was back in 2019, that the U.S. and China were in the early stages. of a new Cold War.

He described them as being in the foothills of a new Cold War. And, you know, before he died, he said, you know, they're at a higher elevation now. It's a very worrisome development. And Cold Wars, when you've got two nations acting in an adversarial position, both focused on national security and building up their defense capabilities, you know, you can come very close and possibly even get into the realm of a kinetic outright war. We came certainly close with the Cuban Missile Crisis in 1961. And, you know, if there was an accident, you know, an invasion of Taiwan or something in the South China Sea,

there's no telling where that could go. So I think the time to take these concerns seriously is now, before. forward 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. And I write about that. I have my own approach that I articulate in the book that I, again, not trying to sell on this podcast, but read chapter 14 and you'll see in all of its core detail. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed.

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So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify or anywhere you listen. Stephen, you know, 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, you know, rather than export, all the goods that it makes to the U.S., 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 run up 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 ex-China that, you know, 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?

The short answer to your question is they're good at it. It's part of their central planning legacy to support strategically and with 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, you know, the demand for new investment in infrastructure and the building, the manufacturing capacity that underpins their export machine. I have given, 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 the last month again. And you talk about the third plenum, which starts in a few days. You know, it is my favorite item on, the agenda 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, these third plenums 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 policies. or productivity or the like. So I understand the fact that everybody is waiting for, you know, a clear signal that China is going to move the needle on consumer demand. You know, you're talking to somebody who's been arguing that for a long, long time. I just don't see you're going to get it at this upcoming third planet. I want to actually just go back to one thing you said earlier, which is that if we are 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 U.S. to boost domestic capacity, the Chips Act, inflation reduction act. What actually moves the dial from an increasing domestic savings standpoint?

What policy allows that to happen? No, the most important thing, Joe, is just to reduce our budget deficits. And, 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 and use the proceeds to invest at home in research and development and in building domestic infrastructure, we've got, you know, a bipartisan infrastructure bill that was enacted by the Biden administration that's taken a step in that direction. But we need a lot more in the way of modernized infrastructure than that bill is going to provide. And finally, you know, use the windfall of boosting domestic saving to invest in human capital, which we sorely need, given the status of our secondary and in some cases, high educational system. So there's a lot that we can do, but politically it's not attractive and not palatable

to short-term focused American politicians. 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? Well, they've been different, Tracy. I mean, I'm historically known as a good guy in China and, you know, 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, you know, right now I'm, I won't say I'm public enemy number one, but I'm on their, you know, their top ten list of sort of despicable commentators. What I wrote in the FT in February is that, You know, the Hong Kong that we've known for years and loved and admired is no longer a sustainable way to view this city-state going forward. And 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's in a slowdown for reasons we've talked about earlier on this podcast, and so is Hong Kong. And the slowing in both economies over the past dozen years has been identical to the tenth of a percentage point.

And so if you don't have a rebound in the Chinese economy, you're not going to get one in Hong Kong. Secondly, the U.S.-China conflict. Hong Kong is caught right in the crossfire. America's putting pressure on its trading partners to embrace this friend shoring and that diverts trade away from China and Hong Kong. And Hong Kong's a very trade-dependent city-state. And thirdly, politics. I mean, you know, there were massive demonstrations in Hong Kong in late 2019. Beijing imposed a national security law on Hong Kong and 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. And so the political environment is really very chilling in Hong Kong right now. And 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. And I worry in particular about the economic linkages, but also the erosion of the rule of law. Recently, one of Hong Kong's senior justices from the UK, the court system, the final appeals court, which is the highest court, has a unique system of also having foreign and domestic judges. One of them resigned a gentleman by the name of Jonathan Sumpchin, and he wrote an article in the F.T. in June talking about the grave dangers to the rule of law in Hong Kong and was warning of a new strain of what he called judicial patriotism.

that doesn't sound like, to me, a rule of law that is reflective of the autonomous values of Hong Kong. So, look, I've talked about these things. They talked about them in China. They were so uncomfortable. They refused to let me speak at this year's China Development Forum. I gave an address on the same topic more recently to the Foreign Correspondence Club in Hong Kong. and they sort of chase me out of town. The politicians unleashed almost everything they can in terms of ad hominem attacks on me.

And, you know, I'm looking forward to going back, provided I can get guarantees of safe travel in both directions on my next trip. Do you want to go back? Yeah. No, I love Hong Kong. And I relish the opportunity to engage in construct. criticism and free and open debate. And I was actually able to do that a few weeks ago. I gave a talk of the Asian Society.

I had a number of private meetings. And then I had this very public speech at the foreign correspondence. But it caused a lot of controversy. And I'm sort of borrowing a page from the script of John Lewis trying to make some good trouble. Stephen, if I could ask just one more question. So, you know, 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? Yeah, I think fair question, Tracy. I mean, I go back to the third plenum of 2013.

Shee Jinping had been in office for one year. Most of us, myself included, thought he was going to be cut out of the same cloth of his father, who was a leading reformer in the 80s and 90s in Guangdong province. and Xi Jinping had the opportunity in the third plenum of November of 2013 to demonstrate his commitment to getting on with the reforms, reforms which had stalled out under his predecessor of Hu Jintao. And, you know, China went into this three-day meeting back in November of 2013. the meetings concluded with a, quote, 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 market-based economic activity, and it never happened. And the disappointment of Xi Jinping's third plenum of 2013,

probably, you know, my greatest surprise and disconcerting development. The reforms that we were hoping to take China to the next place, is a market-based system that we in the West would be more comfortable with, never materialized. initially focused on an anti-corruption campaign, which then took on a far greater focus on control and a shift to a more backward-looking ideology, emphasizing sort of a leader-centric model of Chinese governance, which has deep roots in the history of China. years later, we started hearing nothing but Xi Jinping thought as a general concept guiding this new

ideology, constant and continued reference to Xi Jinping as a core leader. The consensus leadership model, which had been carefully assembled by Deng Xiaoping, which had a regular plan of succession after two five-year leadership plans was eliminated. Xi Jinping is now in his third five-year leadership model. So the big surprise and the big shock is just the 180 that's happened for China under the fifth generation leader Xi Jinping. 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. My pleasure. Great to talk to you and thank you for your great question. Tracy, I really enjoyed that conversation. And I guess there were big picture. Two things that sort of like struck me is like, A, you don't get to talk to a lot of people who have really studied China's economy for as long as indebted. When Stephen was like, I've been studying Plenum since, what was it, 1979?

Yeah. That was, yeah. Those are credentials. Totally. And then the other thing that you don't get very much. is people who are critical of China in some ways, which Stephen is, and you particularly talked about it. And the last answer with the turn he identified under Xi Jinping, but who also think it's a mistake for the U.S. 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. 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 like old 1980s movies, reading some old, you know, pot boilers from the 80s and 90s where the characters are Japanese businessmen

who are going to assassinate the U.S. 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 U.S. 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 transition 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. 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. out. It's almost certainly not going to play out the same way. And as Stephen 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. Well, and also going back to what's been said before the plenum, it does seem like Chinese policymakers are so far committed to that export-led growth, right? 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? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow Stephen Roach.

He's at S. Roach underscore Econ. Follow our producers, Carmen Rodriguez, at Carmen Armin, Dashel Bennett at Dashbot and Kel Brooks at Kel Brooks. Thank you to our producer, Moses, Ondom. For more OddLod's content, go to Bloomberg.com. slash odd lots, where we have transcripts, a blog, and a newsletter. And you can chat about all of these topics 24-7 in the Oddlots Discord. Discord.g.g. slash oddlots.

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