The News Items Podcast
John Ellis talks with interesting people doing important work. Some you've heard of. Some you haven't. All of them are worth listening to, at some length.
The News Items Podcast
Episode 12: Stephen Roach
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On this episode of the News Items Podcast, John Ellis sits down with economist and longtime China watcher Stephen Roach for a sweeping conversation about the uneasy future of the U.S.-China relationship. Roach reflects on three decades of watching China evolve from an open, fast-rising economic experiment into a far more centralized and controlled superpower under Xi Jinping. The discussion ranges from AI, semiconductors, and electric vehicles to Taiwan, Evergrande, COVID lockdowns, and the mounting global debt crisis. Roach argues that China’s technological rise is real and underestimated, but warns that both Beijing and Washington are trapped in a cycle of suspicion that makes meaningful cooperation increasingly difficult. Along the way, he offers rare firsthand insight into China’s political culture, the collapse of open debate inside the country, and why he still believes some form of U.S.-China collaboration remains possible before economic rivalry hardens into something far more dangerous
Hosted by John Ellis
Hello and welcome back to the News Items Podcast. I'm John Ellis. I'm the founder and editor of two Substack newsletters. One is called News Items, the other is called Political News Items. You can find them both at news-items.com. Our guest today is Stephen Roach. Mr. Roach served as a senior fellow at Yale University's Jackson Institute of Global Affairs for 13 years, beginning in 2010, and is a senior lecturer at the Yale School of Management. In the fall of 2022, Mr. Roach joined Yale Law School's Paul Psy China Center as a senior fellow. Before coming to Yale, he was a chairman of Morgan Stanley Asia and the firm's chief economist for the bulk of his 30-year career at the investment bank, heading up a highly regarded team of economists. Mr. Roach's current teaching and research program focuses on the impacts of Asia on the broader global economy. At Yale, he has introduced new courses for undergraduates and graduate students on the quote, Next China and quote, the lessons of Japan. His writing and research also addresses globalization, trade policy, the post-crisis policy architecture, and the capital markets implications of global imbalances. Mr. Roach has long been one of Wall Street's most influential economists, and we're very pleased to have this opportunity to talk to him. Thank you for doing this.
SPEAKER_01Pleasure to be with you.
SPEAKER_00So you have been going back and forth to China for decades now. It's been an important part, I suspect the most important part of your professional life. When you think back to when you first traveled to Beijing, and uh when you think about what's going on there now, what are the three or four things that have just so dramatically changed in China?
SPEAKER_01Well, John, I started going there probably in the early 1990s, but these were just flybys. I'd you know, I'd land in Beijing or Shanghai and uh make a presentation and go on to the next stop. It was not until the Asian financial crisis of '97-98 when I started going there on a regular basis. I was heading up a global economics team at Merck and Stanley. At the time, uh, yes, as you kindly said in your introduction, we were highly rated, but we had a terrible forecast because we didn't have any idea what was going on with this crisis. I had a hunch that China would uh hold the key to the end game. So I started going there in the second half of 1997 on a regular basis, and it quickly became evident to me that China was uh very different than other economies that had fallen hard in Asia during that period. And, you know, I got hooked on the place and started writing about it, and one thing led to another, and I think I published my first article about China somewhere in 1998, late 1998. I think it was called The Land of the Rising Dragon, and the uh finance minister at the time read it or read a Chinese translation of it and happened to be um in the States on a official visit to Washington, but was stopping in in Seattle on his way back to visit Boeing and wanted to know if I wanted to um meet him. And you know, I jumped on a plane. I think I took a couple of planes and we hit it off, and we were great friends. And as luck would have it, he introduced me to one senior leader after another, and I became part of the inside debate of China. What surprised me when I first went there was how amazingly open the place was to debate, exchange, even in quote official meetings. Um, you know, there was a lot of, I think, willingness to speak what was on your mind, and not a whole lot of sensitivity to tough questions or even constructive criticism. And, you know, here I am um, you know, 25 years later, and I'd have to say if there's one thing that's changed the most for me in my China experience, it's that latter point. I mean, they they do not take kindly to engagement, debate, and constructive criticism. And uh my favorite example is uh I was sort of a founding participant in the China Development Forum, which is um a conference held immediately after the so-called two sessions, the National People's Congress. It was initially set up by former Premier Zhuang Ji, who became a friend of mine. And I went every year, you know, played an active role in the free and open debate that took place under the auspices of that conference. And then, you know, a couple of years ago, I started to get a little concerned about China and wrote about it. I became very concerned about what was going on in Hong Kong and wrote about it, and they expressed um, you know, some negative feelings toward that. They they said to me, this is about three years ago, you know, we know that you are the longest appearing foreign delegate at this conference. I'd been there 25 years in a row. And they said, you know, you can come this year, but we don't want you to speak. And I had been given a lot of speaking roles there. I've been keynote speakers and moderator and panelists and all that, but don't speak. So I said to myself, and I found this out, you know, a few days before I was gonna go about two years ago. I said, you know, do I go or do I just cancel? And I said, you know, I want to see what it's like. So I went. True to form, they didn't let me speak. I did speak the very next day at a closed door session and told them what I thought of their restrictions, which was not particularly a warm and fuzzy message. They let me come again last year under the same ground rules, and this year they refused to even let me attend. So the longest serving foreign delegate is now on the outside looking in. And, you know, the debate in China is stifled, and you know, I think that is just a reflection of the willingness of the leadership to allow free and open discussion, which was, you know, I said a sad thing to see firsthand, and a sad thing to see in terms of where it's going now.
SPEAKER_00One of the things that you've written about, and you cited in a recent column a study that was published by the Australian Strategic Policy Institute that had one stunning statistic uh which said that in the critical technology tracker, China now ranks first in 66 of 74 technologies. Is that something that you saw you know building uh course across the 25, 30 years that you were visiting there, or is this something that happened recently? What's your take on this gigantic leap forward in technological advance?
SPEAKER_01Aaron Powell It's been building for a while. You know, like like any um breakthrough in science or technology, it starts at the university level. I've had the occasion, the opportunity to speak at many of China's leading universities and see firsthand how impressive the faculty is in terms of uh teaching, but research programs. I've even seen firsthand how um several scientists that I got to know at Yale have gone back to China, their their homeland, where they can get better funding than they can uh in the United States and not face the discrimination that has been evident in, say, the past eight years. And you know, then you you know you spend time in the cities and you know, ride the high-speed trains, go in the subways. I was at the 2008 Olympics, and uh they built a whole subway line just to get you from the center of the city out to the um the Olympic area for the opening ceremony, the closing ceremony. The high-speed rail is unlike anything you see. Uh, there is face recognition everywhere. They have an antiquated currency. Nobody uses currency. They just sort of tap their phones. It's all digitized. I recently toured one of their dark factories that makes fleek state-of-the-art SUVs largely with robots. Uh, I also was back in China about three weeks ago and uh toured a Tesla factory, a Tesla Giga factory in Shanghai. And so I was shocked they didn't really have robots, but they had the fastest assembly line I'd ever seen in my life. There were cars finished, Teslas rolling off the assembly line. I clocked them myself about uh 35 seconds interval between cars. I also went to a digitized financial court in Shanghai that um, you know, the the public-facing part of it in terms of filing cases and getting supporting material is all um AI-enabled and digitized. So they they've got technology everywhere. But that's not to say China's perfect, because you know they have a lot of things missing that they need for sustainable economic growth as well. But uh the technology piece is uh extraordinary by by any standards uh other than I can measure.
unknownTrevor Burrus, Jr.
SPEAKER_00So recently in an interview, Elon Musk said that China would win the AI race because they had superior electricity, essentially, that the available electricity was 3x what the U.S. had. Is that a a view you share? Do you think that because of their ability to generate electricity that far exceeds our ability that they will pull ahead in the quote AI race, end quote?
SPEAKER_01Aaron Ross Powell Well, I I think it's a con more of a complex situation than that. From what I understand, they're actually lagging in data centers. They certainly do have the capacity to generate power, but you know, they're still about 50-55 percent in terms of energy sources, coal-based. They are moving aggressively to green technologies, but they're coming off a low base, and there's no question that they will grow that aspect of their power generation very rapidly. But, you know, this race to um artificial general intelligence that everybody talks about, you know, requires smart people, and they have plenty of them, but so do we. And by the intelligence I've been able to glean, you know, we may be slightly ahead in the theory and you know algorithms, but you know, they're very advanced and some would say far ahead in terms of applications and having huge databases to feed into their machine learning model. So their emphasis is really, I think, more on applications than on theory. And who's to say, you know, you know, what aspect of AI will ultimately be decisive in determining a winner or a loser?
SPEAKER_00Trevor Burrus, Jr.: Sebastian Malaby just published a book on Demas Hasebas, the chief executive and founder of DeepMind, uh, suggested that, or argues, that the U.S. and China must come together and form a kind of strategic pact to regulate AI. Is that even remotely possible?
SPEAKER_01Aaron Powell I think it's you know remotely possible. I would agree with him that it would be an important and positive development for both countries in the world, whether or not we are willing and they are willing to put aside national security concerns to consider that type of collaboration remains to be seen. But I think we should make an attempt to begin to think about the protocols that might allow us to collaborate more than we are doing right now, rather than view it as a race. AI is as revolutionary as we think it is, then um, you know, this has an impact on um on the world. And you know, we've got quantum computing around the corner that offers a sort of a similar set of concerns. And I think collaboration and having guardrails to sort of manage that collaboration ultimately will be very important for both of us.
SPEAKER_00You wrote a piece recently with Senator, a former Senator Max Baucus about BIT BIT. Can you tell us about that? I thought it was a really interesting piece and better you explain it than me.
SPEAKER_01Well, BIT stands for bilateral investment treaty. We have about 40 of them in place right now with uh our partners around the world. China has about 110 of them in place, more than any other country. And basically what they do is they're negotiated uh treaties that allow for cross-border investments between partners. And they're inherently pro-growth because if you can get foreign investors to um put capital into your industries, uh, whether they're manufacturing or services, you can you can boost employment, income, consumption, and ultimately GDP growth. So they they provide growth dividends for both partners in an arrangement. We'd been negotiating a bilateral investment treaty with China for I think it was about eight years up until 2017, and Trump was elected, it was then you know entered office for the first time, and he just suspended, canceled the negotiations, took the idea off the table. You know, at that point, he was, you know, any idea that was a legacy from Obama, whether it was, you know, the Iranian nuclear deal or a bilateral investment treaty with China, was considered to be inadequate for uh the purpose, and he canceled them. And now I'm interested, you know, to hear in this summit that is going on right now in Beijing, there's at least some rumors. There was a piece just today in the New York Times about the consideration being given to a more restricted model version of this called a an investment board that would allow cross-border investments from us into China and from China into us in non-sensitive areas, which I think would qualify if they did not violate at this point, you know, uh undefined national security uh protocols. You know, at least there's talk about it, and uh Max was a senator, but it was also an ambassador in China. We've been talking about this for a long time. And uh so we we wrote something and you know, it wasn't The Economist last week that represented our ideas for this proposal.
SPEAKER_00Yeah, I saw the I saw the story in the Times and I thought, well, they just took Mr. Roach's idea and kind of reconfigured it so that it wouldn't be credited to you.
SPEAKER_01Well, I I don't know about that, but I I you know I I put out a little bit about um my uh social media community saying, Well, it's a partial step in the right direction. I'm gratified that it's uh broadly consistent with what we're doing, but we are proposing something more ambitious, less restricted. But you know, we'll we'll take at this point we'll take a step in the right direction and go from there.
SPEAKER_00So we have to talk about the summit. You know, you've had obviously long and uh deep experience in China and with Chinese leadership and Chinese thought leadership. What what do you make of Mr. Trump's uh visit to uh Beijing? Is there reasons for optimism? What's your take? Uh I'm thoroughly confused by it. So I need to talk to somebody who isn't.
SPEAKER_01We saw that live, you know, yesterday, last night, and again, you know, all the great toasts. But I think the odds of a major breakthrough are low. I've looked at the last 22 leader-to-leader summits between the U.S. and China going back to 1972 with uh uh Mao and uh President Nixon, and with the exception of the Nixon Mao summit, and then the following one in 1979 between Deng Xiaoping and Jimmy Carter, those two were really major earth-shattering events. The the remainder of them, 20 of them, are basically placeholders that don't achieve a whole lot. Some of them backfire, and so there's negative results. I would I would put this in the category of placeholders so far. That's probably unfair because we don't have the final readouts yet, but I haven't seen anything to lead me to believe that we can expect a major breakthrough. As I said, I am encouraged about the investment board um idea that gets put into the final communique. And, you know, I think there's been a lot of focus, John, on on Xi Jinping's views on Taiwan, which are very direct and um bordering on a threat to the United States, that it should make every effort to avoid destabilizing the current sort of one China philosophy that maintains a delicate equilibrium right now between Taiwan, the US, and uh the mainland.
SPEAKER_00You know, the big theory going back to the nineties was that if you integrated China into the global economy, uh that would open up China to know the larger world, and then that would lead inevitably to some form of greater political freedom, greater ability to, you know, as you said, speak freely and debate freely, constructive criticism welcomed. That did not work out. Why do you think that did not work out?
SPEAKER_01Aaron Ross Powell Well, you know, there are several reasons, I think. First of all, I'd say that the theory was mainly ours and not theirs. They have a different system than we do for lots of reasons for that, but mostly, you know, it's a communist society as opposed to our free and open democracy. And yet, you know, there were some movements toward reform in the 1980s, 1990s, the door on reform slammed shut in uh 1998 with the tragedy at Tiananmen Square, but then began to reopen again in the early 2000s until Xi Jinping came to power. And Xi Jinping, you know, believed in the um the strength of China, was tightly aligned with the strength of the party. He felt the party was dangerously corrupt and moved to um clean out uh the corrupt pieces of the party. He's now moved in to do the same with the military. Obviously, his his hold on power is far deeper, far more extensive than any Chinese leader since Mao. He's he's now serving his third term, which had to get permissioned by changing the constitutional structure of succession, uh, which prior to Xi Jinping allowed for only two five-year terms. And he's he's basically elevated himself to a level of authoritarian leadership that has not been evident since Mao in the 50s, 60s, and early 70s. The other thing that I've done a lot of work on in terms of my own research on China is their inability or their unwillingness to simulate uh household consumption. This is the People's Republic of China, but the people's consumption share of the Chinese economy is around 40%, which is the lowest by a long shot of any major economy in the world. Ours is 65, 66 percent by comparison. And why is that? You know, I I again I've done a lot of research on that. I think I know the answer. The bottom line is they don't really want to stimulate household consumption because you think about consumer societies, you know, they feature um upward mobility, um free and open communication. It's an aspirational growth experience, and that runs against the grain of the centralized power that is manifested in certainly a leader like Xi Jinping, where the focus is on technology and production and the supply side of the economy, and he's willing to ignore, if not suppress, the vitality on the demand side. And maybe he's just uncomfortable with this aspirational force that we call the consumption in the West.
SPEAKER_00What impact did you see from the pandemic? I mean, how how did the pandemic, after five years now, we can look back, what impact did the pandemic have on the leadership and and the society at large from your research?
SPEAKER_01Well, it was a uh wrenching experience for the people and uh uh the leadership. I was in China when SARS broke out, and that was a real shock. You know, they were not prepared for that, but COVID dwarfed the impact of of SARS by A long shot. And you know, there was a big hush-hush over how the COVID virus started. You know, was it um you know transmitted through animals in a live market in Wuhan, or did it come out of a lab? I don't know if we'll ever know the answer to that. Uh, but you know, the Chinese have this is just another example of the heightened sensitivity that Chinese leaders have to being blamed for any problem in the world. They did not have, you know, while they have leading uh laboratories of scientific research, their approach to public health was deficient. So they didn't really know how to address the issues of spread. So to them, it was about draconian lockdowns. They they just prevented citizens from leaving their homes, and and this really boiled over in uh Shanghai, China's most uh dynamic uh modern city in many respects where citizens were restricted to quarters for several months. I want to say, you know, I may have to correct this in late 2020 or early 21. But you know, this was an experience that sparked significant protest by the Chinese people. They spoke out directly against uh Xi Jinping, and um he changed the the policies in a very dramatic way that let the virus run rampant in Shanghai with a death toll that remains uh unknown today. And you know, the scarring of that experience is still with China today. And consumers in this rapidly modern society were subjected to a disease shock that they never thought was coming. I would say you know, we in the West probably had a similar reaction to that as well, but we had better public health practices to deal with it.
SPEAKER_00Another thing that sort of hit the uh people of China was as the property crisis, which really drove uh a lot of economic growth for many, many years, and then suddenly it went bust. News items is obsessed with Evergrand. Uh we report with some people call it the Evergrande Daily News. But I wanted to ask you, I I don't understand maybe you can explain this, why China didn't just put Evergrand into some form of bankruptcy and be done with it. Why have they let it why have they let the property bankruptcy process, I guess you call it, stagger on as long as it's staggered on?
SPEAKER_01Well, I think you answered it, John, and in your uh in posing the question. You know, the residential construction sector at its peak was accounting for about a quarter of the economic growth in the nation, and they did not want to curtail this major source of growth. That is a very Japanese-like response. Uh the Japanese had equity and property bubbles in the late 80s and early 90s, and they did not want to restructure their banks until the late 90s. And so they had the first of what turned out to be three lost decades because they were a weak need in dealing with this threat to their growth model. And I think in the case of China, it was a similar, you know, very human-like denial that kept the government from really going in hard and liquidating these insolvent, unproductive companies.
unknownTrevor Burrus, Jr.
SPEAKER_00I wanted to go back to Taiwan for a second. 90 percent plus of the world's high-end chips are manufactured in Taiwan. China, let's call it, absorbs uh Taiwan in the next five or ten years. What is what does that mean to the global economy? Secretary Bascent uh said that it would be an economic apocalypse. That seemed like rather extreme language. What is what's your view of that?
SPEAKER_01Well, there's no question that the Taiwan uh semiconductor corporation is by far the most advanced, the strongest producer of chips, you know, uh ordinary as well as high-end um idiot type chips that drive AI. And uh if if the Chinese were to take over Taiwan by force and utilize that force to constrain the supply of those chips to the rest of the world, including the United States, you know, that would be catastrophic. There's no sign that they want to do that. Uh, this is you know hypothetical. It's always easy to uh hypothesize catastrophic uh scenarios. We used to do that for a living in Morgan Stanley, thank God I can go now. But China recognizes the importance that the global economy plays in supporting its growth model, whether it's exports or imports, and giving them the components and parts they need to produce state-of-the-art technology. And um, if they were to take over Taiwan by force, they would squander any semblance of connectivity they have to the world that they are so dependent on. And they know that, and yet there's a view in the U.S. that was based on some testimony by uh a retired admiral, uh his name was Davidson, uh, who said that Xi Jinping has a window, and I think he he initially laid this out as coming in the 2025 to 2027 uh time interval by which he was going to move on Taiwan. He had no evidence for that, but that's become sort of gospel in security and defense purposes, and has caused many like um Treasury Secretary to warn of what would happen should that uh come true. I do not think that China would make that move on Taiwan in this time frame. I personally think the biggest risk to uh to Taiwan is our destabilizing aggressive arm sales supported on a bipartisan basis by the U.S. Congress. And I think that's the subtext of Xi Jinping's warning that he uh issued to President Trump earlier today.
SPEAKER_00As you follow China, what do you read? How do you keep up to date with what's happening there, aside from obviously the primary research that you do yourself?
SPEAKER_01Yeah, I mean, uh, you know, everybody's a China expert. Um, you know, I certainly read it all, and I find um, of course, news items has a lot of regular information. I read Bill Bishop. I try to read the um you know all the official statements and speeches and work reports of the Chinese government. I have an acting active network of my own where I've been a participant in a track two dialogue with Chinese and American experts, the same group for about 15 years, uh, and we communicate on a regular basis. You know, I will I will look at anything and everything, and there's plenty of it around right now.
SPEAKER_00Aaron Powell I want to ask you one last question, which is the entire world seems to be drowning in debt. How how concerned are you about that? Is that just a post-pandemic uh we got to work our way out of it, or is it it does it seems here anyway that it just keeps growing like a monster?
SPEAKER_01Aaron Powell Well, it's a global problem, as you know, but you know, we're now at a point where our debt-to-GDP ratio is back to a level that we last saw in um the immediate aftermath of World War II. For a long time, don't worry about it because we can afford take on debt because interest rates are low, and that's a reflection of low inflation. And, you know, lo and behold, um, you know, we've had an inflation shock after COVID that came from supply chain disruptions. And we're getting some um hints of another one right now because of the constriction of the uh energy supply in the uh Strait of Hormuz and how that's spilling over into derivative products like uh fertilizer, which have impacts on the food chain and so on and so forth. And so far, the inflation shock from the supply side has been limited, but you know, you can't rule that out. And if inflation goes up, interest rates will follow despite President Trump's desire to get a friendly chair in who will give him lower rates. No one in their right mind, and Kevin Warsh has a good mind, is going to do that as a central banker. The debt bomb that nobody's worrying about because of the low interest rates becomes far more problematic as a result to fund and finance. And there's related to that, if if we're the ones who really break with our past strength more than other countries, then there's uh risk to the US dollar that could compound the domestic interest rate risk as well. Funding under those circumstances will be complicated from foreign sources of capital as well. I don't think we can take this lightly in any way whatsoever.
SPEAKER_00I think we've taken enough of your time. Thank you very much for talking to us today. And uh, we look forward to reading. You have a substack which is called Conflict. Am I correct on that?
SPEAKER_01That is correct. I like it quite a lot. I'm writing a new book as we speak.
SPEAKER_00What's the book about?
SPEAKER_01Well, I this is my third book on the US-China conflict. And the first two were were really pretty negative. And I will say they did a reasonably accurate job in projecting how this conflict was going to unfold or what its consequences were. But I didn't want to end the story, you know, on that basis. So this new book book is tentatively titled uh conflict resolution. I want to provide uh a way out. And uh as somebody who is congenitally pessimistic, it's always good to write something that's a little bit more optimistic and allows me to sleep better uh at night. And I'm about, I don't know, 75% of the way through the first draft right now, and I hope it'll be out at some point next year.
SPEAKER_00I look forward to reading it. Again, thanks very much for doing this. And your Substacks uh Substack handle, I guess, would be Google Stephen Roach, R O A C H.
SPEAKER_01If you do Roach Conflict, you'll find it.
SPEAKER_00There you go. Thanks very much. Thank you, John.
SPEAKER_01Pleasure.