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China’s zero-COVID strategy an 'unmitigated disaster,' expert says

Yale University Senior Fellow Stephen Roach joins Yahoo Finance Live to discuss China’s zero COVID policy, how the current wave of lockdowns is impacting Chinese GDP, unfolding protests, and the outlook for Chinese growth.

Video Transcript

[WHOOSH]

- And for more on what's happening in China, let's bring in Yale University Senior Fellow and author of "Accidental Conflict," Stephen Roach. Stephen, great to have you here with us this morning. When you think about what is taking place in China with regard to its own policy and what they're trying to combat, as well as the rest of the world, at a time of the year when we do see these spikes in COVID cases, you know, how does this have a broader economic impact that we should also be paying close attention to?

STEPHEN ROACH: Well, first of all, this zero-COVID policy itself is an unmitigated disaster. It was designed to cope with the original Wuhan strain of a very lethal virus, and as we've just pointed out, it's really the wrong approach to deal with the less lethal but more transmissible variants associated with Omicron. But you know, autocrats don't ever like to admit they were wrong, and Xi Jinping is the quintessential autocrat in that regard. And so you know, he's not backing down.

There will be ongoing impacts on the economy. The numbers I saw overnight suggest that the current wave of lockdowns is now impacting areas that account for about 25% of Chinese GDP, which is now markedly higher than the 21% impact of last April during that Shanghai-focused lockdown. So this is a big consequence for near-term Chinese growth prospects, with knock-on effects around the world.

- Stephen, it's Julie here. Part of what you examined in your book is false narratives that China has about the US and that the US has about China. So as we look at the unfolding protests that are happening in China, how do we view that with a sort of unbiased eye and try to get at what the real effect, if any, will be in China politically?

STEPHEN ROACH: Well, the accounts that you read in the Western press overnight are a classic example of the false narratives that the West clings to in assessing China risk. Virtually every article that I've looked at in the past couple of days draws a direct line to Tiananmen Square in 1989. Yet when you think about what triggered the student uprising back then, it was the death of Hu Yaobang, a former leader who was very pro-reform, who was-- sort of personified the spirit that a younger generation was captivated by.

There is no political figure that stands in opposition to Xi Jinping right now that is sort of a lightning rod in this debate. He took care of any political opposition in the recently-concluded 20th Party Congress. So the comparisons that we're hearing about 1989 are a classic example of the false narratives that I write about in this book.

- Stephen, what does a reopening timeline for the Chinese economy look like next year?

STEPHEN ROACH: Well, we don't know. Again, it's sort of like what we went through in 2020. We locked down too, and we said during the time that the reopening would be driven by the spread of the disease itself. And so that that's what allowed us to enjoy an extraordinary snapback after an even more extraordinary downturn in early 2020.

So it's hard to know how this Omicron is going to progress in China. I'm not an epidemiologist, but we're all sort of-- picked up some skills in that regard. And it's a very transmissible disease.

And their vaccines are lousy vaccines. They don't have the efficacy of the mRNA that we have here. And the lack of vaccinations for the elderly, it may be picking up a little bit, but it's still not at a level that makes them comfortable.

But this is a very transmissible disease. And I finally got it myself three weeks ago. And I think that there's more to come with respect to that in China.

- I certainly hope that you're fully recovering as well in that process. We do know that this impacts a range of different industries, from health care in China, all the way to technology here in the US as well on some of the production fronts. And so how do you believe that this latest wave of COVID cases in China is also impacting perhaps some of the sentiment of US-based companies, and even how they're engaging with citizens in China at this point in time through some of the technology there?

STEPHEN ROACH: Well, look, I think a lot of multinationals, US and European-based, have made massive concentration bets on China as a low-cost, highly-efficient offshore production platform. And I think they're in the process of rethinking and hedging out some of those risks, not just because of COVID, but because of the US-China conflict, China's sort of belligerence in dealing with geostrategic issues, especially its new, quote, "unlimited partnership" with Russia, the pariah of the world.

So the best bellwether of this is Apple who has been, for years, 100% focused on the offshore production of Foxconn in Guangdong Province and is now diversifying and actually making starting to make a few iPhones in India. And I think you'll see more of that in the years ahead. You can't put all your eggs in one Chinese basket anymore.

- Stephen, to Zoom out a little bit on the US-China relationship, we recently, of course, had President Biden shaking hands with President Xi and sort of symbolically agreeing to continue talking, right? And I'm just curious where you see the relationship going over the next, say, decade and what the implications are for both nations economically. I know that's a big question. [LAUGHS]

STEPHEN ROACH: Well, it's a big question, but I just wrote a book about it. And my view is that the relationship is in terrible shape. The Bali summit was long on words and photo ops, but it accomplished nothing.

The tariffs are still in place. The technology battles over advanced semiconductor chips are intensifying. And we dodged a proverbial bullet in Taiwan last August, but the presumptive Speaker of the House, Kevin McCarthy, has promised to go to Taiwan very early on after he takes over as the next leader of the House, third in line to the US presidency. And we'll see how China takes that.

And so I'm very worried about the conflict. I think the approach that we've used to engage China has not worked at all. And I write about a three-part plan in my own book that is a very different approach to, hopefully, getting us on a more constructive path. But you know, unfortunately, right now, there's no support anywhere in the US Congress or in the Executive Branch for a more constructive relationship with China, and we've got to address that before we can even start to think about a more constructive outcome.

- Obviously, for the full details, people will have to pick up the book, "Accidental Conflict: America, China, and the Clash of False Narratives." Yale University Senior Fellow Stephen Roach, thanks for being here, Stephen. Appreciate it.