Global: A Debate to Remember
Stephen Roach (from Beijing)
I was unprepared for the drama that awaited me inside the Great Hall of the People. On the surface, it seemed like a fitting conclusion to a fascinating conference in Beijing. The final session of the two-day Global Development Forum was an audience with Premier Zhu Rongji. As we entered the beautifully appointed official greeting chamber, I thought it would be nothing more than a ceremonial meeting. Little did I know how wrong I was.
The conference was sponsored by China’s State Council -- the country’s ministerial leadership. This year’s theme was handpicked by the premier himself -- the role of government in a rapidly globalizing economy. Senior Chinese leaders presented official views on a variety of key issues the country is now facing -- from fiscal policy and WTO accession to restructuring and environmental concerns. Each of their views was then discussed by a "foreign expert" -- followed by a vigorous exchange of ideas among the assembled international gathering of officials, businessmen, and academics. I addressed the conference over lunch on the first day, focusing on the US-led downturn in the global economy and the challenges such a scenario poses for an externally dependent Chinese economy. The question-and-answer session that followed my formal remarks boiled down to a debate between myself and G. Fred Bergsten, Director of the Washington-based Institute for International Economics. Fred, whom I have known for years, was on the V side of the recovery that I still think will be U-shaped. The assembled group loved the give-and-take. Their concerns were with me, their hopes with Fred.
Back to the Great Hall. The meeting with the premier began with a well-scripted summary of the proceedings of the conference by Sir John Bond, Chairman of HSBC. Zhu listened attentively but then quickly turned to former US Treasury Secretary Larry Summers, who had been the luncheon speaker on the second day of the conference, and said, "I hear there has been a vigorous debate on the state of the US and global economy between Roach and Bergsten. Where do you come out on this dispute?" Summers -- finally liberated from his political shackles -- didn’t mince his words in response. He was as far away from the V as I was, arguing that the combination of excess IT capacity and a popping of the equity bubble would keep the US economy in a surprisingly sluggish state for some time to come. He went further to stress a point that I had picked up from an earlier meeting with him -- that the current cycle borrows a page from a more distant cyclical past, one punctuated by boom-bust cycles that create longer recessions and shallower recoveries ( see my 28 February dispatch, "Tales of a Different Business Cycle").
The premier wanted more. He then asked Bergsten and me to restate our respective cases for his benefit and for the benefit of the Chinese leadership present in the room. The message was clear: This was a man who knew full well the trump cards the US economy held in shaping the broader global outlook. The consequences were huge for an externally dependent Chinese economy. Zhu had not come to this meeting for the ceremony. He was there to work -- and to use the time as effectively as possible in helping him with his own macro dilemma in running the vast and complex Chinese economy.
I won’t bore you with my case. It has been detailed all too often in this space. Suffice it say, I used the opportunity to stress the powerful interplay between cyclical forces (corporate earnings and inventories) and structural headwinds (negative personal saving, the IT overhang, and a massive current-account deficit) that I felt were now coming together to restrain the US economy. My point was not to bemoan the state of the US economy but to suggest that a lack of American leadership spelled serious trouble for the broader global economy. With no other region likely to step up and fill the void, a sharp deceleration in world GDP and trade growth seemed inevitable.
Externally dependent economies such as China -- where exports account for 23% of GDP -- would not escape unscathed in this climate, I argued. Moreover, courtesy of the globalization of supply chains, a downturn in the US IT cycle pose an especially vexing set of problems for America’s IT outsourcers in non-Japan Asia. Agreeing with the old-cycle mindset of Larry Summers, I rested my case.
Bergsten offered three Greenspan-like points in support of a more optimistic, V-shaped scenario. First, he maintained that America’s productivity renaissance was alive and well. As a result, he believes that the potential long-term growth rate of the US economy will remain near 4%, a virtual doubling from the anemic performance of a decade earlier. Second, Bergsten insisted that recent Fed easings, in conjunction with falling energy prices, would be sufficient to unwind a significant portion of the cyclical restraint that fell into place in the second half of 1999. In his view, since the cyclical pressures outweigh any structural forces, a surprisingly vigorous recovery should be just around the corner. Third, he stressed the scope of the policy ammunition that is still available to America’s monetary and fiscal authorities -- ammunition that could come in quite handy for a rapidly decelerating global economy. Bergsten rested his case on the collective wisdom of the Blue Chip forecasting consensus, whose seers are still calling for a resumption of solid growth in the second half of 2001.
The premier pondered the arguments and then concurred with the sage advice of Larry Summers -- expect the best but prepare for the worst. "That’s exactly what China is doing right now," he maintained. Consistent with mounting perils in the US and global economy, he indicated that China’s target of 7% real GDP growth in 2001 is now conservatively based on a "zero" add-on from the export sector. In the first two months of 2001, China’s export growth rate has already slowed to 14.5%, about half the 29% surge of 2000. What the premier is saying is that China is now allowing for a good deal more export risk on the downside than has already been realized. That’s exactly the way global risks should be played at this juncture, in my view. What this also means is that Zhu feels renewed vigor in domestic demand will be sufficient for China to hit its growth target. In his determined words, "The weakness in the global economy will not have an adverse impact on China."
As a former central banker, the premier then took the opportunity to opine on the dilemma facing the Fed. In doing so, it was so obvious how little this man misses. He was completely up-to-date on the latest twists and turns in the financial markets -- especially the market’s disappointing response to the 50-bp easing of 20 March. It’s a dilemma that has "moral hazard written all over it," he argued. He seemed to have great sympathy for the tough spot that Alan Greenspan finds himself in. At the same time, he had little sympathy for any collateral damage in financial markets that might arise from Fed action. In his words, "The stock market is acting like a spoiled child." This sounds to me like a man who believes that the US central bank should do all it can to rid the US of its bubble-like afflictions and finally quash the moral-hazard-play as the ultimate backstop for equity investors.
At the appointed hour, the premier thanked us for his advice and then ushered us out of the ceremonial greeting room. While shaking my hand on the way out, he pulled me aside and said in perfect English, "I hope your fears do not come true." While there’s a part of me that shares those hopes, I urged Zhu Rongji not to bank on them. Not one to take sides, he nevertheless left little doubt that he had gotten the message. As I left the Great Hall of the People, one of the conference participants came up to me and said, "Congratulations, that was a great debate. You did him a real favor."
In the end, it is China that could be doing us the biggest favor of all. Unlike the rest of Asia, China is preparing for the worst (see my 26 March dispatch, "An Unprepared Asia"). This is strikingly reminiscent of the events of 1997-98, when China held the line in the depths of the region’s devastating crisis. The emerging global slowdown looms as China’s second major test in four years. And I am confident that China will pass this test just as well as it did before. Chinese economic leadership continues to be a defining feature of the New Asia. That’s what separates China from the pack -- and leaves me as bullish on its economic prospects as I ever have been.
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