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Tom Keene Talks to Morgan Stanley's Stephen Roach

Morgan's non-executive chairman for Asia discusses the U.S., China, and Japan

How do our economic policies resemble Japan's failed policies?

I think the No. 1 thing was to look the other way when these monster bubbles built up. And we failed to use regulatory and monetary policy to prevent the contamination of our real economy by bubbles. We're still in denial over the linkage between bubbles and economic activity. Unless we crack that denial, we could be in a Japanese-like shakeout ourselves.

What is the most important reason that China is different from Japan?

The one that is most intriguing to me is the shift away from manufacturing into services. Services generate about 35 percent more jobs per unit of Chinese GDP than do manufacturing and construction. That means as they move from manufacturing to services, they can slow growth down to a 6 or 7 percent rate and still create as many jobs as they do with the current model, which requires 10 percent growth. China has a strategy to change its model, Japan did not.

Don't the Chinese view any economic slowdown with fear?

Their key goal, Tom, is absorbing surplus labor and maintaining social stability. If they can do that with slower growth, they would be delighted. The Premier of China, Wen Jiabao, has stated repeatedly that while the Chinese economy is strong on the surface, beneath the surface it is unstable and ultimately unsustainable. They want slower growth.

Keene hosts Bloomberg Surveillance 7-10 a.m., 1130 AM in New York, XM129, Sirius 130 .

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