Asia out of the woods? Not yet, says Stephen Roach

Ever since Stephen Roach, arguably one of the world’s most influential economists, moved back to the US in July after “three fantastic years” in Hong Kong as Morgan Stanley Asia chairman, he’s been travelling back to Asia practically every month.

But on Thursday, in Hong Kong, he senses an indescribable lightness of being after the region bounced back from the bruising trauma of the global financial crisis of 2008-09.

“It feels like we’re right back at the peak,” says Roach, who has now taken up a full-time teaching position at Yale, where he is sensitising the next generation of thought leaders to the dramatic changes under way in Asia.

“Stock markets are up, property markets are strong, and there’s a deeply held conviction that we’re in the early stages of the Asia century, the China century.”

At the swank Four Seasons hotel where Roach is lodged, the manager told him that occupancy rates were above the peak levels of 2007 and 2008 — and that it felt as if “nothing had ever happened here.”

Yet, as someone who’s accustomed to “look for a dark cloud behind every silver lining”, Roach is disquieted by the over-the-top, gung-ho optimism manifest across Asia.

“I always get a little bit worried when people run to one side of the boat, wherever that boat is going.”

And while there are many reasons to be confident and optimistic about Asia’s future, it strikes him that there’s “too much complacency —- as if nothing could go wrong.”

Roach then points to at least two things that could go horribly wrong for Asia. The first relates to Asia’s excessive dependence, even today, on exports and external demand from the developed markets of the West.

“You hear a lot about the decoupling of the Asian economy —- but there was no decoupling,” he asserts. And while the region is, post-crisis, growing much more rapidly than the rest of the world, “the dependence on external demand remains very significant.”

If there is a “bump in the road” in the US or Europe, he reckons, there will be “significant consequences” for the externally dependent Asian economy.

“So don’t kid yourselves. There’s no region that benefited more from globalisation than Asia, and should something unexpected happen in the broader global climate —- as happened in 2008-09 —- Asia will feel it with a vengeance.”

A second thing that could go wrong, Roach fears, is “an outbreak of protectionism.”
As far-fetched as it sounds, and as antithetical as it is to the lessons of history, “people in Asia and in the US, especially elected representative in Washington, need to take these concerns very seriously.”

Roach recalls that in September, the US House of Representatives passed by an overwhelming majority a bill to impose trade sanctions on China for its “undervalued” and “manipulated” currency.

He reckons there’s a good chance it will be brought before the Senate in early 2011, where it will sail through, given the broad bipartisan support for it. And it’s unlikely that President Barack Obama will veto it - given his “current state of political security.”

There is, in his estimation, a “minimum 40 per cent chance” that the Senate will pass the bill - and if that happens, “it would truly be a very
worrisome development for China, the Asian region and for the broader global economy.”