A bear in a China shop

By Minxin Pei

Stephen Roach, chairman of Morgan Stanley Asia, is an unusual Wall Street banker. In his previous incarnation as the investment bank’s chief economist, Roach was one of the few who actually warned against both the tech bubble at the end of the 1990s and the credit bubble a few years ago. He characterized the former Fed Chairman Alan Greenspan as a “serial bubble blower.” And he sounded alarm about America’s overconsumption and debt binge. His bearish views, of course, earned him few friends during the bubble years.

Although he has been vindicated by the Great Recession, Roach has apparently set his sight on a new target: the booming Asia. If you shudder what a bull can do in a china shop, wait until you see a bear inside.

The Next Asia, on the surface, does not seem very bearish. A collection of Roach’s essays on the United States, global trade, and Asia, this book tries to maintain a delicate balance between celebrating Asia’s dramatic achievements in economic development since WWII and warning against complacency and the continuation of an unsustainable export-led growth model. Unlike the recent flood of books that portray Asia as an unstoppable juggernaut that will continue to grow at its current pace, The Next Asia provides a more realistic and cautious prognosis: While the region’s fundamentals are strong, most of the Asian economies (except for India’s) need to rebalance by boosting domestic consumption and reducing reliance on exports.

The reason, according to Roach, is straightforward. Asia’s phenomenal growth in recent years was driven largely by rising exports absorbed by America’s debt-fueled overconsumption. At the height of the boom, in 2007, exports accounted for a whopping 47 percent of Asia’s GDP. Now that the party is over, Asia’s export powerhouses cannot count on the ever-rising external demand to keep their factories running at full capacity. The danger, warns Roach in The Next Asia, is that Asia may not fully understand the permanent structural change in the American economy brought about by the Great Recession. With stagnant income and the end of excess consumption supported by asset bubbles, the overstretched American consumers will have no choice but to repair their household balance sheets and cut their purchases of goods made in Asia. Consumption as a share of the U.S. GDP, which reached 72 percent in 2007, will probably fall 4-5 percentage points and settle at its historical norm of around 67 percent, effectively taking $650-700 billion in final demand off the table. For Asia, this would be a huge demand shock.

To continue its drive to prosperity, Roach argues, Asia must reinvent itself.

But will Asia rebalance?

As a seasoned Asia-watcher steeped in the region’s cultures, Roach is perhaps too polite to be blunt. But the sections on China in his book reveal his cautious pessimism (despite his repeated proclamation that he is an optimist). Roach pointed out China’s structural imbalances — such as overinvestment, excess export dependence, and anemic domestic consumption — many years ago, but he steadfastly maintained his faith in Beijing’s ability to tackle the challenges because he believed in China’s “unrelenting commitment to reforms.” But that was in October 2006. However, in early 2009, Roach clearly grew less confident in his earlier assessment. He characterized Beijing’s pledge to boost domestic consumption “lip service.” He noted Beijing’s inadequate progress in building a social safety net in encouraging consumption. He was alarmed by the display of complacency and assertiveness by Chinese officials who were blissfully unaware of the changing landscape of the global economy.

China, of course, is not the only sinner in East Asia. Japan, according to Roach, has also miserably failed to rebalance its economy, and has suffered a lost decade.

So the record of economic rebalancing in Asia is not exactly encouraging. I wish that Roach had gone a step further and analyzed the deeper causes of the region’s chronic structural distortions. Without understanding why such obvious problems are left uncorrected for so long, it is hard to be optimistic that Asian countries will actually heed the advice, however well-meaning and useful, proffered by Roach in The Next Asia.

Minxin Pei is the Tom and Margot Pritzker Professor of Government at Claremont McKenna College and an adjunct senior associate at the Carnegie Endowment for International Peace. His article, “Think Again: Asia’s Rise,” appeared in the July/August issue of
FP.