It’s not yet Asia’s world: Stephen Roach

Asian economies still have to “do a lot of heavy lifting” if they are to emerge as the new engine of the global economy, but they are becoming “complacent” that the post-crisis world “is theirs for the asking,” cautions Morgan Stanley Asia chairman Stephen Roach.

In a media interaction on the sidelines of the Asian Financial Forum on Wednesday, the former chief economist also flagged the “big risk” of trade friction this year between the US and China, arising from growing protectionism and a politically charged atmosphere in the US.

“The post-crisis global recovery will be weak, given the severity of the financial crisis,” Roach said.

“Headwinds linger in the form of write-downs by financial institutions, the breadth of the global recession, and chronic weakness in the demand side of the world — the American consumer — and the persisting imbalances in the supply side of the world — Asia, and in particular in China.”

Unmindful of these challenges, “there’s a lot of complacency here, presuming that the post-crisis world is Asia’s for the asking,” Roach noted. The West may be wounded, “but it’s certainly not out of the picture.”

Asia remained heavily dependent on external demand from the West — and “until Asia embraces a new model, which is more balanced and reliant on internal private consumption, the jury is out on whether or not this is Asia’s moment,” he added.

Roach said he remained “an optimist on Asia, especially on China… But it’s going to take a lot of heavy lifting for Asia to emerge as the new engine of the global economy.” China, in particular, would need to change its economic growth drivers from exports and investments to internal private consumption and services.

The “big risk” in 2010 was the mounting possibility of trade friction and protectionism, especially coming from Washington, given that the unemployment rate is stuck at 10%.

‘It’s not yet Asia’s world’

The political mood in the US was charged, and the Democratic Party’s loss of a critical Senate seat in Massachusetts on Tuesday would be interpreted as a loss of faith in President Barack Obama’s economic policies, Roach noted. “There is a worrisome chance that China may become a target of US Congress and the Obama administration in this highly charged political year.”

US politicians complain that China’s policy of keeping the renminbi value low is adding to global imbalances, and want “unrealistically large revaluations.” But Roach said he believed China “should not give in... I don’t think the currency is the right instrument to address global imbalances.”

In his opinion, a structural change in China’s economy that supports internal private consumption would be much more effective. China, he added, “should challenge the argument by Washington that Chinese surpluses are a destabilising force in the global economy… The Chinese government needs to make that case with more emphasis than it’s doing now.”

Roach also flagged the risk that the exit strategies of central banks around the world may not be smooth. “We’ve had the biggest monetary stimulus in the history of the world in the last 16 months, and by definition, we have to have the biggest withdrawal of a monetary stimulus in the history of the world. This has the potential to be very disruptive to markets.”

The risk, he added, was that exit strategies might proceed far more slowly than the stimulus did. “This is an asymmetrical response pattern: you stimulate aggressively, and normalise slowly… That’s what set us up for the asset bubbles and the crisis over the 2004-06 period, and central bankers are not willing to admit that or learn the lessons.”

Interest rates in the West were today at or close to zero even though the post-Lehman economic emergency was over, he pointed out. “Even if the economic recovery today is crummy, the policy rates should be set at ‘crummy’ levels, not at zero.”

Given the leads and lags of monetary policy, today’s zero interest rate policy would impact the real economy 18 months out, and would amplify the destabilising imbalances in the global economy, he cautioned.