China’s Strength Is Having the Courage, Vision to Put Through Tough Reforms, Stephen Roach Says
Ge Weier
DATE:  Mar 07 2024

(Yicai) March 7 -- China’s unique economic growth model is the product of a government that does not shy away from difficult issues and has the courage and the strategic vision to implement tough reforms, Stephen Roach, former chairman of Morgan Stanley Asia, told Yicai in a recent interview.

"The magic of China is the courage and strategic vision to implement tough reforms," said Roach, who now serves as senior fellow at Yale University. By recognizing problems early and taking decisive action, Chinese authorities can put in place reforms that make a difference.

Roach also sheds light on three pivotal factors that investors take into consideration when assessing the Chinese stock market, namely confidence in the private sector, the structural headwinds facing the Chinese economy, and the role of state-owned versus private enterprises.

Below are excerpts from the interview: 

Yicai: What are the unique features of the Chinese economic growth model? 

Stephen Roach: To me, the unique features have long rested on China's capacity to implement reforms, reforms of its economic structure, social structure and political structure, as well as its governance. This reflects the courage on the part of Beijing to recognize the need to tackle tough issues, to accept some pain in going after the tough issues, and also in having the strategic vision to know where they want to take the Chinese economy. 

I taught for years the imperative of structurally balancing, of drawing greater support from internal private consumption by reforming, boosting and solidifying the social safety net, especially healthcare and retirement. The government's emphasis on domestic demand is the correct emphasis, but it needs to do more to realize the transformation that that emphasis should be able to generate. 

Yicai: Given the recent fluctuations in the Chinese stock market, is the market oversold? 

SR: Investors, in general, are concerned about three things when it comes to China. One is confidence in the private sector, and that I think has not yet been effectively addressed. Second are the structural headwinds that the economy and therefore, the earnings embedded in the stock market, face over the next several years. This is especially when the structural pressures of demography and productivity headwinds continue to restrict the growth potential of the Chinese economy. And thirdly, there has always been a big debate in China about the role of the private sector versus state-owned enterprises. 

So, addressing those three factors will be very important in shaping the outlook for Chinese stocks. Whether or not they're oversold remains to be seen. 

Yicai: What is the key to rebuilding confidence? 

SR: The magic of China is the courage and the strategic vision to implement tough reforms. I’ve mentioned a number of issues in this interview that China faces, not just property, not just local government financing vehicles, but also a shrinking population and a significant increase in the debt intensity of the economy. These are not easy issues to tackle for any nation. Look at how Japan has struggled with many of these same issues for over 30 years. 

What Chinese authorities are so good at is recognizing problems and acting strategically, forcefully, courageously, and putting in place reforms that can make a difference. That's the lesson of the reforms and opening up of the 1980s and 1990s, and it should not be lost on Beijing when looking to the future. 

Editor: Zhang Yushuo, Zhang Yangyang, Futura Costaglione, Kim Taylor

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Keywords:   Stephen Roach,domestic demand