November 22, 2011. CEIBS Shanghai Campus -- The students and faculty of the China Europe International Business School were today once again delighted and honoured to welcome a dear friend, Dr Stephen S. Roach, non-executive Chairman of Morgan Stanley Asia and Senior Fellow of Yale’s Jackson Institute for Global Affairs, for his tenth visit. Dr Roach recently released a new book entitled The Next Asia -- Opportunities and Challenges for a New Globalization, and his address to a full house revolved specifically around the current world economic turmoil. He shared candid insights and judgments on the roots, causes and optimal responses of the three key participants: the United States, Europe, and particularly China.

The former Morgan Stanley Chief Economist began by highlighting the challenging state of the global economy, and drew attention to US President Obama’s recent comments about China at the Asia Pacific Economic Cooperation (APEC) summit in Hawaii. Dr Roach juxtaposed this with another recent summit held in Europe, at which China was approached to help bolster the European Financial Stability Facility. He emphasized the ironic divergence of these two approaches but underlined that both the United States and Europe clearly recognized the role of China in shaping their fortunes.

Dr Roach then moved on to an analysis of financial crises over the past three decades. His eleven examples included Japan, Mexico, the Asian Crisis, the dotcom burst, the Enron fallout, the 2008 sub-prime disaster and now Europe. He observed that this implied at least one crisis every three years, each becoming deeper and more global, covering more markets and instruments, and becoming exponentially more complex. Dr Roach rejected the widely held view that these were one-off “natural disasters”, calling them “man-made” instead, and claiming that the root cause was mistakes by policymakers and politicians.

After citing numerous examples, Dr Roach criticized the lack of constructive reactions to the challenges facing the world economy. He singled out China’s approach for commendation. He told the audience that he first became impressed by China’s ability to “do what needs to be done” during the Asian crisis. This ‘can do’ attitude, he added, is still evident today. Before turning to the subject of China in detail, he embarked on a brief and pointed analysis of the key issues preventing the United States and Europe from recovering. Dr Roach talked about America’s “zombie consumers”, showing the crippling debt-to-income ratios that are sharply misaligned with historical savings levels. He also emphasised the dramatic adjusted growth figure of 0.4% between 2008 and 2011. He argued that neither the traditionalists, monetarists nor the “Jobs Bill” proponents were targeting the right area (that is, increasing savings) that would lead to changing growth expectations and ultimately create employment demand.

Openly admitting his Euro-scepticism, Dr Roach said that the European Union -- founded by sheer political will and not an economic basis -- was flawed from the start. He said that, like a chair, it needs three legs -- a single bank and unified fiscal and monetary policies. He believes that Europe would either need to put this fiscal leg in place or face the (remote) possibility of a break-up. Dr Roach continued by highlighting the huge vulnerability of Europe’s bank and capital issues, and made no secret of the fact that he felt Europe was still in recession.

He believes that the common theme of the US and European economies is that they have attempted to extract extra growth from financial engineering -- the US borrowing against a property bubble and Europe forming a monetary union -- and they have failed.

“This is China’s challenge”, he said, quoting Premier Wen Jiabao’s 2007 statement that the Chinese economy was “unstable, unbalanced, uncoordinated and unsustainable”. Agreeing with Premier Wen, Dr Roach cited the massive impact of the global crisis. He said the $4 trillion stimulus, despite good execution and success in boosting GDP this leading to a quick recovery, had also left the Chinese economy even more unstable and unbalanced than before.

Acknowledging the importance of exports in driving China’s miracle growth from 1979 to 2007, Dr. Roach said the current climate no longer fits this model. China has no choice but to “pivot” to an internal-demand-focused approach, or join other countries experiencing “disappointments”. This strategy change, in alignment with the 12th Five Year Plan, implies development of jobs, increases in wages and improved financial security, in order to give households the confidence to spend income rather than save. Dr Roach explained how transforming into a service economy was an essential antidote to the effect of technology, creating 35% more jobs per unit of GDP output. He also explained why there was not a more powerful mechanism than urbanization for raising wages. Finally, he talked about the importance of retirement benefits as a safety net from which consumption could increase. He reiterated that China had the right plan but that it should be urgently acted upon.

Returning to his opening remarks, Dr Roach reflected on the increasing US political rumblings about protectionism and sanctions as punishment for what is perceived as China’s “undervalued and manipulated currency”. He warned that this could mean potential derailment for China. Roach rebutted popular sentiment in the US that China was responsible for causing their trade imbalance, pointing out that China was only one country among 87 others with whom the US ran a deficit. Despite China making up 42% of this mass, the US will never be able to solve a structural multilateral problem with a bilateral solution. Roach called this “bad economics driving bad politics”. He predicted that China would ultimately move their business elsewhere.

In closing, Dr Roach pinpointed lack of savings as the fundamental threat to the American worker -- not China, as some American politicians and even economists now argue. He said that the world economy had reached a critical point and that resisting the “medicine that needed to be taken” would only result in more and more pressure. Roach hopes, despite not yet seeing concrete signs, that this crisis will finally put an end to the “madness”.

Today’s address was part of Roach’s second appearance as a CEIBS Visiting Leader. He was also the guest lecturer at an FMBA info session at the CLFC. Roach was also at CEIBS from June 14 to 16, the first Visiting Leader after the school launched the Series in 2011. The CEIBS Visiting Leader initiative has brought a roster of impressive global business leaders to the school’s campuses throughout this year. Each Visiting Leaders spends several days at one of the campuses to deliver exclusive talks and presentations, as well as meet with students, faculty and alumni for coaching and consulting. The second Visiting Leader was world renowned expert on finance, leadership and business decision-making, Ms Blythe McGarvie, CEO of Leadership International Finance. She spent October 10-14 at the Shanghai campus and returns to CEIBS in March 2012. Visiting Leader Mr Liu Chuanzhi, Lenovo Board Chairman, spent October 30-31 speaking at the CEIBS EMBA Graduation and presenting to CEIBS MBA students and faculty. For video and podcasts of Visiting Leader Presentations, visit the CEIBS Podcast Centre.