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Charlie Rose Talks to Stephen Roach

The former Morgan Stanley chief economist and Beijing watcher discusses the sudden ouster of Bo Xilai and recommends that the U.S. pipe down about China's currency
“China’s our third-largest and most rapidly growing export market by a long shot”
“China’s our third-largest and most rapidly growing export market by a long shot”Photograph by Kevin Lee/Bloomberg

What do you see in China’s growth prospects for this year and next?
The Chinese economy is slowing, and the premier, a couple of weeks ago, signaled that the growth rate could be as low as 7½ percent. That just underscores that China—hit by external demand shocks two times in the last three years, first the one made in America, now the one made in Europe—has really got to shift the growth model to one driven much more by internal private consumption.
Everyone’s been talking about that, but how fast is it happening?
I just got back from what I think is China’s most important conference of the year, the China Development Forum, and I was talking about this in my presentations to them. But the time for talk is over. You need to do this quickly because the longer you defer and delay, the weaker the growth prospects will be for your still-unbalanced, export-led economy. And you know, they’re one year now into this 12th five-year plan and, by my estimation, the progress has been slow, disappointingly slow. I urged them to pick it up, just get on with it. That’s still the big question in China: the speed, the urgency with which they address this transformation. It’s just not easy to wean themselves from this model that has been extraordinarily successful for 32 years.
Bo Xilai: He’s the Chongqing party secretary, Politburo member, on the rise, charismatic. What do you read into his ouster?
There was a so-called Chongqing development model that he personified, and it did rest on a sort of a resurrection of state-owned enterprises and the power of the state in driving economic growth and dealing with some of the income inequality issues. It was in contrast to the more market-based reforms that China had introduced, beginning in the ’90s. He’s also identified with this resurrection of Maoist-style patriotic songs that got some traction in China over the last year or so. When an individual goes against the grain, whether it’s from an economic or political or even social leadership perspective, it’s a warning shot that, ultimately, the central government addressed. I think they were pretty explicit in saying, “That’s not acceptable in the current political structure of China.”
We’ve discussed the undervaluation of China’s currency for years now. What’s their perspective on this?
They’re pretty adamant, Charlie. I mean, they claim they’ve moved the renminbi up a lot against the dollar. And they have: It’s up 30 percent since 2005. Their external imbalance has shrunk a lot. But they still have a big bilateral imbalance with the U.S., and that’s a source of ongoing tension between the U.S. and China. It’s something that they’re worried about, and something that certainly hits the political hot button in the U.S. From our point of view, we’ve got to remember that we run trade deficits with 88 countries. China’s our biggest, but there are 87 other countries, and this multilateral trade imbalance is an outgrowth of the fact that we don’t save and we need to import surplus capital and savings from abroad to keep growing.
I think we should just stand down on the currency issue completely … and recognize that a post-crisis U.S. economy needs a new source of growth. Exports are the top potential source of growth in the U.S. China’s our third-largest and most rapidly growing export market by a long shot. We need better access to their markets, especially as they transform into more of a consumer society, and we should push hard in that regard.
Are the Chinese beginning to lose the low-wage advantage they’ve had for so long?
They’ve still got plenty of scope to move facilities to central and western China, and in doing it they’ve got great infrastructure that logistically ties these distant cities into the coastal distribution network. Secondly, they’re really boosting productivity a lot. And the productivity growth is almost enough, if not more than enough, to offset the rising wage pressure. So their labor costs are still very competitive. The Chinese know this, and they have conscious policies that are aimed at boosting wages to raise personal income to get the consumer going. They are driving a lot of this.
What impresses you most about Beijing and China’s rapid growth.
To me, the most impressive thing is they operate with strategy. You know, you may not like the strategy, but they have these five-year plans, which is a broad outline of how they want to run their economy. Then they commit to it. And they have tools that enable them to deliver on that commitment.