Customer Reviews

Stephen Roach on the Next Asia: Opportunities and Challenges for a New Globalization

5 star:		(3)
4 star:		(2)
3 star:		(2)
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1 star:		(1)

 

 

The book is a collection of essays written by Roach over the past three years reporting how the Asia story has played out to date, and how it looks for the future. Most of the book focuses on China, providing a wealth of background for understanding Roach's recommendations for the U.S. and China, and the direction of China's leadership.

Nearly 80% of China's GDP goes to exports (30%) and fixed investment (50%). Since the early 1990s its per-capita income has increased 5X+. America accounts for about 4.5% of the world's population and about $10 trillion of spending in 2008; China and India together account for 40% of population and only $2.5 trillion on spending. America's economy has grown nearly 4%/year in real consumer demand over the past 15 years - 3X the growth in Japan and Europe. Seventy-two percent of the U.S. GDP in 2007 was consumer spending (a record), falling only to 71% currently.

China's leadership recognizes the need to reduce reliance on exports - partly because of the sagging U.S. and world economies, and partly to reduce the likelihood and severity of any anti-China trade actions by the U.S. Congress (45 such bills were introduced in the U.S. Congress between 2005-07). Other challenges include improving resource consumption efficiencies (eg. cutting oil consumption per unit of GDP by 4%/year - now 2X that of the world average), as well as reducing pollution and environmental degradation. (China's carbon emissions per person are less than 10% that of the U.S.)

China's high savings rate (50% in 2005, with 65% believing that their savings are too low) is traceable two factors - the first is massive layoffs via 15 years of reforming state-owned enterprises (SOEs - now 30-40% of the economy) that involved 60 million layoffs from 1997, and continuing reductions of 2 million/year. The second is the lack of an institutionalized safety net. (India's savings rate is in the high 30 percent range.)

American writers sometimes allege that Chinese labor costs will soon begin a rapid climb, damping increased exports. Roach, however, points out that even after six years of double-digit increases, average hourly compensation for Chinese manufacturing workers was only 3% that of the U.S. average in 2004. Meanwhile, productivity in its industrial sector surged nearly 20%/year from 2000-2004. Finally, its 745 million rural population is by far the largest pool of surplus labor in the world; there also have been 20 million layoffs in Guaydong Province resulting from the export slowdown. Obviously the Chinese leadership is not concerned about a possible shortage of labor, else its latest Five-Year Plan would not have emphasized expansion of labor-intensive services.

Private consumption in China accounts for only about 35% of its GDP, trending downwards from 65% in 1952. China's National Social Security Fund totals $80 billion - less than $100/worker. Roach suggests it be increased, thereby reducing self-imposed pressures for consumer savings and allowing increased consumer spending.

Roach strongly opposes anti-China trade measures for several reasons. 1)U.S. purchases of foreign-made products vs. consumption of domestic goods has risen from 22% in the early 1990s to about 38% in 2007. Roach contends this provides a strong anti-inflation influence. 2)Only about 20% of the value of Chinese exports to the U.S. reflect domestic Chinese content - the rest comes from China's partners, mostly other Asian nations. Ergo, China is more of an assembler than manufacturer. Banning Chinese exports will simply shift this assembly etc. work to other nearby nations. 3)The U.S. trade problem is not China, but almost all nations. We have trade deficits with one hundred other nations. 4)The 'answer' is not revaluing the Chinese currency - that has increased 20% since 2005, and is only about 10% undervalued now. 5)The 'real' problem is that U.S. profits are at a fifty-year high - 12.4%, vs. labor at 56.3% - the same as in the late 1960s. 6)Antagonizing China could lead to that government shedding its U.S. investments, driving the dollar down and interest rates up, causing a major U.S. recession.

Bottom Line: Roach believes Chinese consumers should spend more and save less, while U.S. consumers save more and spend less. The 'bad news" is that he believes there's a 25-33% chance of anti-China protectionist legislation passing in the U.S. during the next 15 months.

This collection of essays has been collected over the years and aggregated into 5 chapters, each containing a subset of the essays associated with the themes. The heart of the book focuses on the global imbalances, the causes, effects and the risks, both political as well as economic that have evolved and need to be dealt with in a coordinated systematic manner.

Much of the literature focuses on several major themes, 1- people cant globalize and decouple, they must be either or. 2 - the trading relationships that have emerged are inherintly unstable. 3 - the instability can be fixed but requires us to look from above at the problem in much greater degree than politicians tend to when they voice local constituencies. The major focus on the imbalance is on the American consumption side and their gross overconsumption to an unheard of degree.

To be precise Stephen Roach talks in depth about the change in economic landscape such that the previous arena of non-tradeable goods have morphed into tradeable, in particular services, due to the internet etc (similar in spirit to freedman's world is flat ideas). The result of this is that there has been wage pressure on developed nations that have created a downward drift barely less than productivity growth such that real wage growth has lagged substantially the growth it would have recieved in a theoretical closed economy. The repurcussions are both backlash at owners of capital who have increased their share of business revenues due to increased bargaining power within the firm due to the more open global labor market. This is both backlash to the distribution of wealth as well as global trade perspectives and the search for a scapegoat (ie providers of the replacement labor in places like china and india).

The most of the book focuses on the themes of global imbalances and speaks about China's savings glut (it has had the lowest consumption proportion of GDP and GDP growth in history) and its export dominated model to fuel growth. This is articulated as unsustainable and more importantly unstable due to unstable demand (as its abroad). The currency issue of RMB is discussed as a problem that should not be focused on, as the trade deficit is multi-lateral and is quite "obvious" scapegoating from Stephen's perspective. The US economy is on the recieving end of an even more critical analysis. It has become an asset dependent country who is growing by importing savings, and pretty much only growing by consumption. Its savings went to negative and it needs to start investing in its future as equitizing capital gains for consumption is not a source of growth.

Clearly looking at the time stamps of the essay, stephen called the bubbles forming correctly, among most of the skeptics, no one saw the magnitude coming, but those were also a product of financial feedbacks and bank run dynamics which are not the subject of his analysis. Given that, one should pay attention to him as he saw through the rationalizing of a new paradigm that wasnt necessarily there.

I am a four vs five star because, its quite repetitive (which is inevitable because the essays were written separately and not meant to be packaged together so the book was never gonna follow one thought to the next) and the other side of his arguments should have been presented and argued against better. Its easy to say multilateral trade problems in the US means that its not a china problem its a US problem, but when people act locally and governments cant control yield curves because of sovereign wealth pinning the curve, policy doesnt work like people assume they do and so implicitly oil states and china subsidized the housing market. The retort would have been, the fed etc needs to do better using other policy then, but the point is, he dismisses real arguments by falling back on the US not saving enough period, ignoring the feedback effects that distort cause and effect in the first place and make policy difficult in the specific variables to target. Many policy makers have problems with things like the rmb because they also had a large impact on the yield curve due to elasticities of supply and demand, thus reducing the maneoverability and effectiveness of some of the central bank policy. Stephen I'm sure does have responses to these sorts of criticism but they arent explored and i think his points should have gone deeper into the other side vs just trivializing them. But all in all, good book, i believe his analysis to be on target, clearly he was quite predictive and its worth reading this.

Let me begin by saying that I have huge respect for Stephen, and his research is thorough, clear and detailed.

I read the sample from amazon - the pagination is weird - characters sometimes overlap one another in the same line, and the embedded charts are next to impossible to read on the Kindle. I would recommend buying the real copy instead, based on my experience with the Kindle sample.

Stephen Roach is a kind of pide piper. He is stating the plain truth for American ears, "an important shift in the gravity of global economic power from the West to the East could well be at hand." Investors whom want to have money with purchasing power in 5 years had better be listening now.

Since I can only buy books at high retail in Hong Kong I simply can't afford every China book that comes out. But like this one I can scan through many of them in the bookstore, except those that are deemed politically objectionable in some way, like those from Peter Navarrone Death by China: Confronting the Dragon - A Global Call to Action, Ian Fletcher Free Trade Doesn't Work: What Should Replace It and Why, 2011 Edition, Elizabeth Economy The River Runs Black: The Environmental Challenge to China's Future (A Council on Foreign Relations Book) (Council on Foreign Relations Books (Cornell University)), Jasper Becker Hungry Ghosts: Mao's Secret Famine, Jung Chang Wild Swans : Three Daughters of China or even Clyde Prestowitz The Betrayal of American Prosperity: Free Market Delusions, America's Decline, and How We Must Compete in the Post-Dollar Era, etc. However, I have learned a lot about how the world has and is being changed by the China phenomenon through reading reviews and synopses of these many books, and I've even been able to obtain some when I go to Singapore.

Mr. Roach seems to belong to a category somewhere between the China aplogists/China cheerleaders groups, and for me his position at Morgan Stanley represents a vested interest in portraying China in as positive a light as credibly possible--the reason for three stars. For example, none of the well documented facts and statistics taken from the sources listed above that reflect negatively on China's history and its interaction with the world are cited in his book, and the statistics he does use seem to be tuned and chosen for the purpose of defusing any criticism of China. On the other hand, Mr. Roach is certainly a brilliant economist and his analyses and interpretations are well worth considering.

Roach is correct in his analysis and recomendations but since the book is a collection of his written commentary, it is somewhat repetitive. Good summary at the beginning of each chapter - speed read the rest.

During my read of this book I came across Jim Chanos, famous short short seller and they did a forum together.
just go to youtube and do a search for the video.

-highlights;

Roach
"oh I am not a stock guy"
"oh I don't know the numbers but its alot"

If economists were landscapers I would let this guy mow my lawn if he paid me.

Watch Roach dodge question from everything to fundamental numbers to a complete lack of understanding of the country and really economics in general. I was actually surprised because, one he could have prepared for this, and second he is going up against a guy who has never even been to china. Jim kicks this guys ass around the block so many times. WOW. I will never read another book by Roach again. (hint construction is not made as well in china as here, infrastructure doesn't last if not maintained)

I have since soured on China, having been there and talking with western businesses that get items made there or want to penetrate the market. Basically, they respect nothing, will rip off their own people or you with zero compunction. They say is because westerners have no sense of guanxi (relationship building) but its BS, they will scam at the drop of the hat. OH they say you don't understand guanxi, well if lying, cheating, stealing, cutting corners, zero rule of law are part of guanxi, count me out.

Don't take my word for it;
1. read the "poorly made in china"
2. read mr. china
3. rebar in china- google it
4. concrete making in china- fly ash +train +nyt google it.
5. corruption- just brutal
6. even Hong kong people don't like them

All china is focused on is china, as you would not trust a brooklyn crackhead, don't do business with the chinese. If they are not going to let us in, don't do business with them, don't buy stuff made in china if you can help it.

Received this book very, very quickly. Have always enjoyed purchasing all my books from Amazon! Thank you!