The interview with Stephen Roach, Yale Senior Fellow and Former Chief Economist of Morgan Stanley, was conducted by Interviews Editor Jason Chau and former Editor-in-Chief Simon Hunt in early April 2023. This interview has been lightly edited for the sake of clarity and concision.
OPR: Stephen, thanks for sitting down with us today with the Oxford Political Review. We’re really delighted to have you here. The world is changing at breakneck speed over recent years, and great power conflict appears to be back in a visceral and perhaps dangerous way. Our first question is, during an earlier visit to Moscow this year, President Xi said to President Putin, that the world is witnessing “changes that haven’t happened in a hundred years”, and that China and Russia are “driving this change together”. What do you make of that, and what kind of change is Xi talking about here?
Roach: Well, Xi has always been predisposed to these grand statements about uncertainty and challenges. As I think he put it in a party address last fall, “treacherous seas in the world”. And then he’ll typically throw in the “unprecedented” aspect… There’s a couple of things going on.
One, he recognizes that China, which has drawn so heavily on globalisation, expansion of global trade, and global growth in general is probably the most significant beneficiary of all those trends. Yet these mega trends can no longer be counted on.
Two, which is probably more pertinent to your question, is his belief that China and its now partner without limits, Russia, will stand together in facing those challenges. That is clearly viewed as an ominous sign in the West, especially in the United States, because of the unconscionable war that China’s new unlimited partner unleashed in Ukraine, a little over a year ago.
The view in the West is, if China stands together with Russia, then the changes not seen in a generation and the most unprecedented challenges in 100 years that Xi Jinping alludes to, would cut both ways. They could be hugely destabilizing to the world and lead to an ominous outcome for China as well.
OPR: President Macron just visited China a couple of days ago and signed a range of deals there, including the Airbus Sales; he also urged China to play a more active role in mediating the conflict in Ukraine. And China obviously rolled out the red carpet. And Macron seem to have reciprocated that by affirming that he agrees with more multipolar world, and that the EU should stay out of the Taiwan issue. Do you see this visit as a diplomatic victory for Xi? And do you think Europe should adopt a more neutral position on China, going forward?
Roach: Well, it’s an interesting development to say the least. Going back to De Gaulle, France has had a long history of doing its own thing, much to the consternation of the West. Macron has clearly indicated his independence – what you’d call “strategic autonomy” – relative to the West. I think that Xi Jinping is probably delighted with the view that Macron expressed, because one of the things Xi is most fearful of is a very tight iron-clad uniformity of views in the Transatlantic Alliance, especially when it comes to addressing the concerns of China.
On Europe, there are two separate issues here. There’s Europe’s view of the of the war in Ukraine, which Macron clearly stands very closely with the US on. And then there’s the point on Taiwan, which is particularly important, because that’s where the US has really been tightening the screws on China in recent months. And by stating that this is not France’s crisis or Europe’s crisis, this point has been viewed in a worrisome way by many in the US, especially in the US Congress.
OPR: If you turn on Fox News, or MSNBC —
Roach: You turn on Fox News?
OPR: No, but people do… and if you go on these channels, they clearly disagree over a lot. But one thing they agree on, and that perhaps reflects a little bit the bipartisanship in in Washington on this issue, is that there is a fear of China’s growing influence. If you look at China’s growing investments, especially with infrastructure in different parts of the world, whether it’s in Africa or Latin America – do you see that China is increasingly and effectively translating some kind of economic clout to concrete diplomatic power influence, such as what we’ve seen with the brokering of the reconciliation between Saudi Arabia and Iran. Does this potentially supplant the traditional role that America has played?
Roach: “Supplanting” is too strong a word, but China clearly has a global agenda. And it’s an increasingly important focus of China’s aspirations to reshape global governance. I was in China about two weeks ago, at the China Development Forum, which took place in late March, right after the Two Sessions. China’s global initiatives – which had largely been announced – were emphasized as a package more so than I’d ever seen, e.g. the Global Security Initiative, Global Development Initiative, and the Global Civilization Initiative etc. And this, of course, follows the Belt and Road Initiative set up 10 years ago. The projection of power and influence in reshaping many of the global institutions, and the governance that underpins all these efforts, is really a very high priority for Xi Jinping. While it’s far too early to conclude that this supplants the Western approach, it certainly puts leaders in the West on notice that there is now a Chinese alternative that many countries find increasingly interesting, if not attractive.
OPR: You mentioned you were in Beijing, not too long ago. And obviously, you’ve interacted with many business leaders and policymakers there over the years. This trip to Beijing, as compared to previous trips pre-COVID: how different is the China you see now, post-COVID? What’s your biggest takeaway from that trip?
Roach: This was my first trip in nearly three and a half years. I’m somebody who has spent a lot of time in China over the years. The China Development Forum that I noted earlier, was a sort of anchor, but by no means the only thing I did on this trip. It is, however, something that I have participated in every single year – since 2001. I missed the first meeting in 2000. But I’ve been to every one of them since then. This one felt different. The environment was clearly tighter and more cautious. The security presence was certainly larger and more visible than I had seen before.
The composition of the China Development Forum itself was different. Usually, there’s a large contingent of American business CEOs that are present. This time round, I could count them on the fingers of one hand. There was a very small representation of US CEOs. The most notable exception, of course, was Tim Cook of Apple, who was pleased to be there, stressing at the final meeting of the CDF hosted by China’s new Premier, Li Qiang, that Apple was looking forward to celebrating its 30th anniversary of operating in China this coming summer.
There were nonetheless a couple of things that, that I noted from the Chinese side that I hadn’t quite seen before. Number one, they were straining to get across this view that “China is back”. This was a first articulated by the former Executive Premier Liu He earlier this year in Davos, but one that was repeated throughout the CDF countlessly, by many of the ministers – including the new Premier. The scripting of their message was remarkably tight – tighter than I’d seen before. In terms of messaging, they were effectively utilising verbatim, the same descriptions. Various individuals usually agree over the same message at the core, but they can vary in terms of the way in which is articulated. Not so this time.
Secondly, I got the distinct view that, that the Chinese leadership has pretty much come to the conclusion that the conflict with the US is here to stay. I picked up a distinct sense of resignation, over the prospects for resolving the conflict. I saw that view expressed subtly at times, but generally reflected in the view that they are now prepared to move on to other priorities in their agenda. The global governance initiatives are only part of it. The rest includes a lot of their own issues, such as economic recovery, de-leveraging, addressing the repercussions of post-COVID transition. They have a full plate, and while they’re not necessarily backing away from conflict, they realise they have other important things to do.
OPR: I would like to ask about Biden’s policies to substantially grow the semiconductor industry in the US. I wonder how that changes the dynamic in the relationship between the US and China, not least because presumably part of the Chinese’s interest in Taiwan is its dominance in the semiconductor market.
Roach: Biden, of course, did push through and sign into law, the CHIPS and Sciences Act in 2022, which is aimed and doing what you just said – providing at least $52bn of direct assistance to domestic semiconductors in the US. Whether or not that is enough remains to be seen. What worries me about the bill is if you break it down, about 80% of that those funds go to bricks and mortar construction of new fabs and only 20% goes to R&D, and this is a highly R&D-intensive industry.
But relevant to your question about China, what is far more worrisome to the Chinese are the sanctions that were unilaterally imposed by the Biden administration, on Chinese access to advanced semiconductors. These sanctions that were imposed in early October of last year have been reinforced by additional pressure that that the US has put on France and the Netherlands, to go along with US pressure by restricting, if not curtailing, Chinese access to sophisticated semiconductor producing equipment. [The result is a deprivation of the…] advanced chips that China needs to drive its most important pieces of indigenous innovation, AI and quantum computing.
America’s efforts at stifling China in that regard are a huge threat to the growth aspirations that Xi Jinping has expressed, which in many respects, legitimize the political promise he’s made to the Chinese people. What’s particularly surprising to me, is that unlike the trade tariffs that Trump put on China, where there was an immediate tit-for-tat response, there hasn’t really been much of a response by the Chinese to these export sanctions on advanced semiconductors. There has been some recent effort to focus on Micron Technology, but that’s a relatively small aspect of the US semiconductor business. There are thus two trends – America’s efforts to stimulate its domestic production of semiconductors and its efforts to stifle or curtail the access that China has.
OPR: On this point about semiconductors and just any high-tech or advanced technologies, what do you think is the right approach to evaluating investments or economic and scientific ties with China from the West’s perspective?
Roach: It’s not for me to come up with the right way. But I think what the US has and other Western nations have recognized is that China is likely to be the largest market in the world for these technologies. And we have companies, as do other economies in the West, who need the Chinese market. Up until now, we’ve let that consideration dominate.
What the US is saying now, as articulated very clearly by National Security Advisor Jake Sullivan, in a speech he gave last September, is that the problem lies with China’s so-called dual use of technology that goes both to civilian commercial and defense military purpose. We have allowed China to finesse this distinction, and just kept the spigot open. And what we’re saying now is that we’re going to curtail the availability of these products.
Now, I worry that that is probably too simplistic. Number one, it’s based on the presumption that an unquantifiable aspect of the dual use will in fact, be used in an adversarial way, toward the United States. This also resonated with case against Huawei case — where the Trump administration argued, as did others, that Huawei needs to be stopped before they install 5G infrastructure around the world, because they can allegedly “build backdoors into these routers that can be then used to unleash all sorts of nefarious activities on the US”. It’s a theory. But there’s no evidence that Huawei has done that, or is going to do that. But we presume that that is the case.
The same thing applies, more recently, to TikTok. We’ve got, 130 million American teenagers dancing the music. And we presume that the user data they provide or potentially could provide ByteDance will be used, again, for nefarious purposes, to manipulate or undermine our society. We have no evidence of that, but we presume that this “evil communist system” will, in fact, do just that.
I’m pretty critical of basically going into battle in an economic or a tech war with another nation on the basis of untested presumptions about the potential of dual use. But on the other hand, I’m sympathetic to the view that China has not been transparent in laying out the boundaries of this dual use and providing assurances that we need, to maintain that flow of technology. So, it cuts both ways. I have a chapter in my new book called “Huawei is a Trojan Horse” where I, in fact, argue that our allegedly compelling case against Huawei is not based on any hard evidence.
OPR: It’s interesting you mentioned that Tim Cook was on the few executives who attended this meeting recently. I’ve seen reports that Apple are shifting or plan to shift a lot that production from China to India —
Roach: Not a lot. They’re starting. I mean, I think what I’ve seen is something like maybe 5% of iPhones are being moved out.
OPR: Right, but are they doing that purely because it makes sense economically to set up in a big growing economy or is it because they’re worried about this sort of tech war that you talked about?
Roach: I think it’s a little of both. But I think they’re obviously concerned about an offshoring solution to their tech production challenge that, up until now, has been 100%-based on China. Apple’s recent actions are sending an important message to other Western multinationals: you need to think about hedging some of your Chinese production exposure to other areas. Tim Cook did not say that — Apple will never say that. But it seems reasonable to conclude that that is a consideration as well. He’s also flying to India later this month [April], if not early next month [May], to celebrate the opening of their first retail store in Mumbai. Apple will certainly expand its retail push in India as well, which could also justify some local production in that market as well.
OPR: Going back to TikTok for a second. Would you fully agree that would you fully agree with the statement, “If Congress passes a law that allows the secretary of commerce from Apple and President to ban tick tock, that is definitely an overreaction by the US government fuelled by a ‘Red Scare’?”
Roach: I’d say it’s pretty close to it. The TikTok congressional hearing, which took place when I was in China, went viral when I was in Beijing. There are very few video clips of the US Congress at work that can be seen by the Chinese, because of their censorship and filtering. But this was an exception. The Chinese were furious and many Westerners, including myself, were also terribly upset at the congressional conduct during the hearing, especially with aggression that was directed at the Singaporean CEO by an extremely hostile Congress. That’s not an isolated instance, in response to your question about Red Baiting. On February 28, the first hearing of the New House Select Committee on Competition with the Chinese Communist Party was convened, during primetime viewing time in the US. And there were four witnesses who laid out the most outrageous, militaristic view of China that one could imagine, complete with video film clips of Xi Jinping directing a marching People’s Liberation Army – presumed as a direct threat to American national security. This is an example of how bad China bashing has become in the United States. When one speaks up in the US in favor of re-engagement — and by re-engagement, I don’t mean appeasement, or surrender, but rather reopening discussions with Chinese on tough issues — you are vilified as being treasonous. That is red baiting, just like it was in the early 1950s.
OPR: We talked about tech in the US in response to China. I just want to quickly touch on tech within China as well. Much has been talked about when it comes to common prosperity, as well as the recent overhaul of the listing rules and regulatory crackdown on tech giants. There’s also the near-decimation the private tutoring sector… Much of this seems to a lot of people like valid evidence for this very aggressive push for common prosperity? Do you think that the room for private sector and entrepreneurs is becoming increasingly and almost irreversibly constrained?
Roach: Well, “irreversible” is too strong. But there are, for the reasons you just cited, worrisome signs on China’s willingness to provide the type of support that had long been evident and key to the dynamism of its internet platform economy. There are, to some extent, two separate strands of the shifting environment that I would underscore.
The regulatory crackdown two years ago was sparked by some unfortunate comments that Jack Ma made at a high-profile financial services conference, right on the brink of the now canceled IPO for Ant Financial, — not, in retrospect, the wisest thing to have done. That led to pervasive restrictions, initially more on the demand for online services that those companies provide, e.g. live-streaming video and music, online entertainment, which spread over into fan culture and the private tutoring sectors, though the latter actually occurred a little earlier. And then, there is the so-called rectification campaign against the companies that provided those services.
At the same time, Xi Jinping started talking the talk of common prosperity. In my book, I do put these two strands together — the restriction on the companies, as well as on the demand underpinnings of those internet platform companies, together with a separate emphasis on wealth inequality reflecting the vast fortunes that have been made by entrepreneurs in that same sector. Collectively, those impacts have led to a stifling of animal spirits that drive entrepreneurial activity in any society, activity that has been very powerful in China for the last 15 years. Without animal spirits, the startup culture, the innovation that comes from that, the indigenous innovation that then follows becomes a much riskier endeavor.
The Chinese leadership has now announced that that it’s over, that the rectification program is ended, and not by coincidence. Jack Ma happened to just show up in Hangzhou when we were in in Beijing. And then they immediately announced a breakup of Alibaba into six separate pieces to drive the point home that, “That’s over.” What’s not over is the restrictions on the demand side of the services that are provided by these industries, as well as the clear message that wealth creation by entrepreneurs is going to be scrutinised very, very carefully in the years ahead. So, I think the environment is still very challenging for China’s private sector, especially the one hyper-dynamic Internet sector that was once dominated by animal spirits.
OPR: Since you’re here in London, what is the role for the UK or the things we’ve been discussing? About a decade ago, there was what the UK hailed as a new sort of Golden Era in relations with China and President Xi was offered a state visit and all sorts of discussions about new economic agreements. Nowadays, we broadly just shadow whatever the US is doing – so we stripped out Huawei for most of the public infrastructure; TikTok is banned on government-owned devices and so on. Do you expect more of the same?
Roach: I can’t say I’m really an expert on the UK’s China policy, but everything that I’ve seen, suggests pretty much as you just said that the UK is standing side by side with the US on its conflict with China. The point that Macron made, I think, is an interesting one; while Europe is very sympathetic to a number of the issues that the US has raised with respect to China, there’s a growing difference on Taiwan policy. And I… I would ask you, if that’s been expressed in the U. If so, I think that’s an area where the West is clearly at risk of being fragmented and Macron is on the leading edge of providing evidence for that. Has there any discussion about Taiwan and the UK?
OPR: [Simon] Not to a great extent.
[Jason] I think what would be interesting to observe is if there is a split between the UK’s and Europe’s positions.
[Simon] I can’t see the UK pivoting away from the US. And I think it’d be another fault line between the UK and Europe’s approach towards global issues.
[Jason] China is signing these deals with countries like Russia or Saudi Arabia, Brazil, to trade and transact in local currencies or the RMB, instead of the USD. Some have attributed this to countries seeing the “weaponisation of dollar use” in sanctions against Russia, and fearing that that would happen to them as well. Do you see a trend of de-dollarisation? Or do you think those concerns are overblown?
Roach: Well, I think the concerns are overblown, in the sense that they would portend an imminent demise of the dollar as the world’s reserve currency. I think we are seeing a diversification away from dollar-based assets in official foreign exchange reserves. But the dollar still has a dominant albeit smaller share than it did 10 or 20 years ago. And I think this trend will continue. The dollar is still the single most important by source of global currency reserves, over twice the share of the Euro. Having said all that, I think the weaponization of foreign holdings of dollar-based reserves that occurred in the first round of sanctions that the US imposed on Russia is certainly not lost on the Chinese. And when we look at other nations who may be conducting a foreign policy that’s at odds with Washington, we’ve pretty much opened up a can of worms here. Just as Western multinationals may be hedging offshore production exposure away from China, China and its allies may be making a comparable move in in hedging currency exposure away from the USD.
OPR: Let’s talk about China’s domestic economic problems, real quick. Voices such as Martin Wolf from FT have said that China has a household debt problem that is spiraling out of control, and that it has a consumption problem, because household savings are unhealthily high. This reminds people of what Japan went through in the late 1980s. Do you think that these concerns are legitimate? And do you see China following Japan’s footsteps there?
Roach: I taught a course at the Yale for a dozen years called the “Lessons of Japan”, and I have given lectures about those risks in China. Chinese leaders are very much aware of that. Japan’s problem was not excessive household debt, it was excessive corporate debt, so it’s really a different breed. But the similarities with China are especially striking when you compare the debt of corporate zombies of Japan in the ‘90s, with the debt intensity of China’s state-owned enterprises over the past dozen years or so. That is a very worrisome similarity.
In fact, I spoke about this very issue I spoke about this at the China Development Forum 2023, on the first day I was there at an academic economic summit. It was a relatively small meeting or maybe 40 participants, with maybe triple that number sitting on the sidelines. I was one of the last speakers to contribute. I listened to what the earlier discussants had said, and then I decided to speak on a very different topic than the one I had prepared. Instead, I addressed the question of whether China is the next Japan?
I focused on two things. One, the most obvious one, which is the aging of China’s working-age population, which is very Japanese-like. Two, I really honed in on the productivity challenge and pointed out that Total Factor Productivity (TFP) in China has been declining since 2011. When your working age population is falling, the only way you can maintain solid economic growth is to accelerate the growth rate of productivity. And China’s is not accelerating — it’s not even holding steady. The TFP is actually contracting by about a one and a half percent annual rate since 2011. And so, I warned of that Japanese-like syndrome that could show up in China. I think that that got a fair amount of attention. In fact, after the end of the China Development Forum, I was summoned to meet with the head of the DRC (Development Research Center), the official think tank for the State Council, to go through the Japan debate and its implications for China.
OPR: The UK has a productivity problem. I’m just wondering if you have any thoughts about how to improve or increase productivity? Because that’s a persistent problem.
Roach: Unfortunately ,the economics profession is barren of any brilliance in understanding productivity. We’ve been grappling with this, really, for 50 years. I’ve been involved in many different aspects of that debate. In the 90s, we had the so-called Solow Paradox — computers everywhere, except in the productivity statistics. Finally, the the productivity payback started to show up, but now it’s disappearing again.
We like to think that innovation is a key aspect of the productivity solution for any society. Investment in new technologies and human capital — especially in the so called STEM based areas of higher education, such as science, technology, engineering, and math — plus R&D spending, all of these factors are as important in boosting productivity.. But when push comes to shove, we don’t quite understand how it all fits together. This gets back to my earlier point. For a large developing economy that has turned the screws on animal spirits, the impetus for the startup culture and the productivity consequences for innovation, are under pressure. And you must add to that the earlier point we made on US sanctions on advanced semiconductors, which is aimed directly at Chinese initiatives in artificial intelligence and quantum computing, which require, increasingly more rapid processing speeds to manipulate these gigantic databases. Bottom line: there are big question marks out there for Chinese TFP, especially with an aging population, which makes these questions even more urgent.
OPR: Do you think Hong Kong remains a global financial center?
Roach: For the foreseeable future? Yes, I do.
OPR: Do you think a hot war is going to happen over Taiwan in the near future?
Roach: I sure hope not. But the more the US puts its foot on China’s throat, the greater the risk of that possibility.
OPR: Do you still think the 21st century is China’s century? And do you think Western capital and companies have a role to play in that?
Roach: That’s up to China. If China is comfortable in allowing Western companies to access its markets, they’re more than willing to step up and sell things.
OPR: Is 21st century still the China’s century?
Roach: I still am optimistic that the rise of China will continue. It’s probably simplistic to label the century as any one nation’s century. China will continue to grow, despite the current tough period, which I judge to be mainly an aberration. But I could well be wrong. In the end, that, of course remains China’s biggest question. I will be the first to concede that the jury’s out.