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China’s financial system will ‘provide some cushion of support,’ expert says

Stephen Roach, Yale School of Management Senior Lecturer at the Jackson Institute, joins Yahoo Finance Live to discuss the economic slowdown in China, the government's liquidity, inflation, and the narratives contributing to U.S.-China tensions.

Video Transcript

AKIKO FUJITA: Yale University's Jackson Institute of Global Affairs senior fellow Stephen Roach. Stephen, it's good to talk to you today. You've been hearing us trying to kind of break down what's been playing out in China. Obviously, the concerns about the economy also contrast, or I should say, coupled with what's about to play out in the fall here, with the party Congress and Xi Jinping seeking that third term. How do you connect all the dots there? And what's the overall outlook for China?

STEPHEN ROACH: Well, there are lots of dots to connect. It's true that the near term downward pressures on China are pretty evident not just from property, as you indicate, but from the ongoing implications of this ridiculous zero-COVID policy, along with regulatory constraints on the once dynamic internet platform companies and the online demands that fuel them.

You know, and add to that the headwinds from demography, which are pretty powerful and stiff right now, along with a very weak underlying support from productivity growth. And the Chinese economy is clearly on a slower growth trajectory. And can a few cuts, modest cuts in interest rates may make a difference here?

And the best guess that I would have is maybe a little bit, but certainly not a lot. And that places China on a much weaker trajectory over the next few years than it was, say, a decade ago when it played a very powerful role in offsetting weaker growth in Europe and the United States that you just went through.

BRIAN CHEUNG: Hey, Stephen, it's Brian Cheung here. So I mean, the trend is clear, as you mentioned, about this slowing growth in China. But you have some that are really worried about the overleveraging of the financial system that are specifically in the real estate and property sector. Do you have worries about something that could be a lot more dangerous happening in China? Because as the world's second largest economy, that can have some serious ripple effects around the world.

STEPHEN ROACH: Well, Brian, it's a fair point, especially in light of what happened a year ago in Evergrande. But I think the government has ample liquidity to backstop and ring fence the financial sector. And it made it through the Evergrande problems in relatively good shape. You can't rule anything out in the future. The government has, I think, rightfully been focused on deleveraging.

But it's not just a property sector deleveraging. There's a huge appetite for debt intensive growth sponsored by the state-owned enterprises. And I think that's a shoe that I worry could still fall and one that I don't think has been all that successfully addressed thus far.

AKIKO FUJITA: Stephen, there's obviously what's been playing out with the zero-COVID policy, the stop and starts, if you will, of the economy. You've got concerns with unemployment or high unemployment, I should say, in younger workers, but also now you've got what's playing out in terms of the drought. Certainly a number of manufacturers suspending production. Hard to say how long this is going to last, but how do you think that complicates the picture?

STEPHEN ROACH: Well, look, I've had enough challenges, being an economic forecaster over 50 years. And fortunately, I've never had to forecast the weather. I know it's hot in China, especially in Southern provinces. And, you know, it's been pretty darn hot in the Northeast recently in the US. Weather related disturbances can be minimized, but I don't think they should be emphasized as a lasting structural impediment to the economy. They can certainly contribute to the near term downside, however.

BRIAN CHEUNG: I want to ask about kind of the story here globally when you consider that you have a Federal Reserve in the United States that's rapidly raising rates. We're not done with that yet. And that you have China cutting rates here. And even though we know that the renminbi is very tightly controlled by the government, I'm wondering if you see any concerns about the impact of a strong dollar on the Chinese wrangling of the economic situation that they find themselves there. Or is that actually a risk that people need to be aware of as well?

STEPHEN ROACH: Well, Brian, I-- you're asking the wrong guy. I mean, I've been dead wrong on the dollar for the last couple of years. I was one of those idiots who said the dollar was going to fall sharply. And of course, it did anything but that. The renminbi is certainly weakened recently, in large part, I think, because of the strength of the dollar, rather than a conscious choice on the part of Chinese financial authorities.

That may be providing a little bit of a cushion to the export sector, but not enough to offset the weakness from the other sources we just talked about, property in particular and sluggish consumer demand due to ongoing COVID related lockdowns. So, you know, I don't look for China to be squeezed by any currency related volatility. And I think their financial system will continue to provide some cushion of support for limiting the downside on the renminbi.

AKIKO FUJITA: Stephen, let's talk about your upcoming book, Accidental Conflict, America, China, and the Clash of the False Narratives. On that title, what are those false narratives? And what's the biggest risk stemming from that?

STEPHEN ROACH: Well, Akiko, the point of the book is to say that both nations are to blame for this escalating conflict, which, in the last six years, has gone from a trade war to a tech war and now to a cold war raging across the Straits of Taiwan. The US has a number of false narratives with respect to China. The one I highlight the most is one I've spoken about for years, is blaming one country, China, in this case, for a massive trade deficit that, last year involved 106 nations.

And so we bash China and impose tariffs and hoping that we can reduce our trade deficit, and yet our overall trade deficit got larger, rather than smaller. China has an equally large number of false narratives and analogies with respect to the US, and the most important being a strict state control regime of censorship that distorts literally everything that Chinese leaders want to convey to their people and the rest of the world about the behavior of the United States.

And China also harbors this view of that it's a great power that deserves to be at the top of the global power structure. It tried that approach inappropriately with the United States under the Obama administration. And now by joining up with, of all people, Vladimir Putin in a, quote, "new unlimited partnership," Xi Jinping thinks that, again, he and the Chinese nation are deserving of great power status, and nothing can be further than the truth.

AKIKO FUJITA: We'll certainly look forward to reading the book. Yale University senior fellow Stephen Roach, appreciate you joining us today.