Stephen Roach, the former chairman of Morgan Stanley Asia, recently sat down for an interview with Voice of America, where he discussed three significant long-term structural issues currently impacting the Chinese economy: a declining working-age population, stagnant productivity growth, and inadequate domestic demand.
While acknowledging the dual pressures of cyclical and structural challenges in China’s economy, Roach emphasized that a disastrous economic collapse is not imminent. He posits that if China can fully leverage its growth potential and improve its relationship with the United States, it could still experience sustained growth moving forward.
Roach, who famously predicted both the 1997 Asian financial crisis and the 2008 global financial crisis, is recognized as one of Wall Street’s leading economists. He has also indicated that China might surpass the U.S. to become the world’s largest economy by around 2030.
Earlier this year, Roach generated controversy with an op-ed published in the Financial Times, proclaiming that “Hong Kong is done,” a statement that seems to have strained his previously cordial relationship with China. After attending the China Development Forum in Beijing for 24 consecutive years, he faced the unusual situation of not having a speaking opportunity this year.
During the interview, Roach argued against suppressing alternative viewpoints, stating that restrictive political thinking and controlling ideologies are detrimental to all parties involved.
He framed China’s current economic troubles as a combination of short-term cyclical issues and long-term structural challenges. The immediate concern revolves around the unresolved real estate crisis, which he believes remains largely unaddressed by Beijing’s current measures. However, he is optimistic that this issue can be remedied within the next few years. In contrast, the long-term issues represent a more serious threat to China’s economic stability.
Roach identified three critical factors affecting the Chinese economy. The first is demographic—the shrinking working-age population. The second is weak productivity growth, as a contracting labor force necessitates higher productivity to sustain economic momentum. Under President Xi Jinping, there has been a renewed emphasis on low-productivity state-owned enterprises, which he feels pressures the more dynamic private sector. The third challenge is insufficient domestic private consumption.
Drawing parallels to Japan’s “lost three decades,” Roach proposed three solutions to address China’s economic challenges. First, he stressed the importance of avoiding asset bubbles in equities, technology, and real estate. Second, he recommended reducing the debt intensity of economic activities, as excessive debt burdens can stifle domestic demand. Most crucially, he called for decisive action to enhance productivity growth, citing former Japanese Prime Minister Shinzo Abe’s “Abenomics” as a model involving monetary, fiscal, and structural reforms.
When asked whether Xi has the necessary tools to implement these strategies, Roach candidly responded, “He has these tools, but the question is whether he has the capability and willingness to use them.” He noted that the shift of economic power from the private sector to state-owned enterprises is crucial for Xi, yet it constrains his ability to take the actions many would like to see.
Despite the significant cyclical and structural challenges confronting China’s economic growth, Roach remains hopeful. He suggests that with robust and innovative measures, China could navigate these obstacles and still have the potential to align its economy with that of the United States in the 2030s.
