Stephen Roach was not pleased when he was snubbed to speak at the China Development Forum (CDF) last year, for the first time in 24 year. An annual gathering of top western experts and businesses in Beijing organized by the State Council, the CDF offers a rare occasion for foreign elite intellectuals and business leaders to debate China’s policy in front of a Chinese government audience, with a closing reception typically hosted by the premier (though this did not happen last year). And as the former chief economist of Morgan Stanley and former chairman of Morgan Stanley Asia, Stephen Roach ranks among the most recognized foreign experts in China.
The reason for China’s sudden snub is unclear, though some suspect the censure comes from his article two months earlier when he argued “Hong Kong is over” in a Financial Times op-ed. Once among the most China-bullish senior economists on Wall Street, Stephen Roach has traveled a remarkable journey of course correction. He now regularly sounds alarm bells about China’s economy through his media op-eds and his Substack,
. He left Morgan Stanley over ten years ago and is now a Senior Fellow at Jackson School of Global Affairs, Yale University, teaching the popular course The Next China.Last autumn, I sat down with Prof. Roach at his spacious Cape Cod-style house surrounded by lush greenery in Connecticut. We chatted about his life, from the Anti-Vietnam War protests in his undergraduate years, to his time at the Federal Reserve, his pivot to China at Morgan Stanley, and his switch from Wall Street to Yale. We traced the evolution of his views on China. Since then, he is back in the good graces of Beijing and spoke at this year’s CDF. His views on Hong Kong have also moderated. Much can happen in a year’s time, so I was pleased that the transcripts of our conversations — which have here been edited for brevity and clarity — have stood the test of time well, and remain a truthful representation of Prof. Roach’s personal journey, and the story of Wall Street and China over the past decades of engagement.
Enjoy.
Leo
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“Now you need to learn how to be an economist.”
You studied economics as an undergraduate at the University of Wisconsin-Madison. During your time there, the campus was the site of one of the most well-known anti-Vietnam War protests, which was violently put down by police officers. Could you talk about that experience?
There was a growing outcry of college students not wanting to get drafted and fight in Vietnam. It all broke out into the open during my final semester, in October of 1967, on what became a very famous day of anti-war protest. Dow Chemical was coming to campus to interview students for jobs after college. Dow Chemical was also making a product called napalm, which was used in bombing villages in Vietnam and inflicting horrific injury and death on innocent civilians.
A group of students announced they were going to block the interviewers. When the police came to remove them, it immediately became a pretty violent incident. Those of us that were standing on the outside as curious observers got swept into the melee. One thing led to another and the entire campus erupted — thousands of students, tear gas, police dogs. Students were clubbed and beaten — though I was not.
Fast forward a few months: To avoid the draft, I had enrolled in grad school at NYU. There were two more major demonstrations there. It was a period of protest and, for me, of beginning to think about the role of government in society and the fact that it’s appropriate to stand up and voice criticism if you believe in it and it is well-founded.
Those were the seeds by which I have looked at or I dared to question government policies in dealing with economic or other social issues.
What was it like to do a PhD at NYU?
I enjoyed it. I made it through the courses, written exams, and oral exams. But then I couldn’t figure out what I wanted to write about for my dissertation. I worked for nine months thinking I wanted to do something on economic development, but it just didn’t work.
A young professor had just been recruited from Columbia, M. Ishaq Nadiri. He was building cutting-edge models, and he suggested where I might look to apply some of his models. I developed a system of equations that linked the labor market to other markets.
Of all the things I’ve written over the years, it’s probably the thing I’m least proud of. But I poured my heart into it.
Wall Street finance, those were the fat-cat enemies.
By the time of my defense, I’d already started working at the Federal Reserve. So I took the train up. And before I went back, Oskar Morgenstern, the esteemed game theorist and a member of my dissertation committee, said, “Do you have a second? I would love to just chat with you in my office.” He poured me a glass of sherry and poured one for himself, and he said, “Congratulations, I want to drink a toast to the newest doctorate of economics in our profession.” Then he said, “I just have one question. What’s the gross national product of the United States?” I said, “Well, it’s the sum of goods and services produced in the United States.” He said, “No, what’s the number?” I went, “I don’t know.”
He went down a list of well-known economic concepts, all of which I knew the definitions of but none of which I knew the actual numbers for. He said, “Okay. You’ve completed your coursework. You’ve completed your dissertation. You have great knowledge of all the tools of modern economics, but you’re now working for the Federal Reserve. Now you need to learn how to be an economist.”
I’ve never forgotten that. That was a focusing aspect of my life, of trying to use economic tools to really understand and deepen my knowledge of my clients and of real substantive economic issues, rather than going off and doing abstract theory.
From the Fed to “fat cat”
Did you want to work on Wall Street after your PhD?
I had no interest in doing that. Wall Street finance, those were the fat-cat enemies that I had no desire to associate with. I just dug in and went to work at the Fed, and I loved it.
What did you do at the Fed? Which part of the economic forecasting did you contribute to?
I specialized in business capital spending. The existing forecast was pretty primitive. Rather than utilize one model to provide the input, I built a system that was able to produce four to five alternative answers to the capital spending forecast based on leading models.
I had been there for about three years when the research director wanted to see me and a colleague. The overall forecast of the U.S. economy was pulled together mechanically every month by this old-timer. He had an old-fashioned Monroe calculator on his desk, and somehow he produced a full-blown forecast of the U.S. economy based on the input from the sector analysts like me and others.
It was a horribly obsolete and primitive way to do it. So the research director asked us to create a different approach using a computer. The old-timer went on vacation one summer for two weeks. And the director said, “By the time he comes back, you guys have this done.” We created a forecasting tool for the whole economy that to some extent is still in place today.
Did you enjoy working at the Fed?
I loved it. I almost didn’t want to leave. I was approached by a headhunter to go to a place called Morgan Guaranty Trust Company, a predecessor of JP Morgan. I was torn, but at the Fed the financial opportunities for me and my soon-to-be family were limited.
If you had a provocative and correct call on the economy that made clients think about their companies, you’d get more business.
I took that job at Morgan Guaranty, and I hated it. It was a stodgy institution. I lasted three years. A former colleague from the Fed had been recruited by Morgan Stanley to start an economics operation. I was the first guy he called. I picked up the framework that I had developed at the Fed and put it to work at Morgan Stanley.
Why did Morgan Stanley want a team of economic researchers?
Wall Street’s a very competitive place, and all the firms do trades, banking, and underwriting the same way. Research enabled them to differentiate. If you had a provocative and correct call on the economy that was different from the competitors’ and made clients think about their companies, their investments, their strategy, you’d get more business.
Were there big contrarian calls that you made?
In the ‘90s I changed my optimistic view on U.S. productivity largely because I felt too much productivity was being driven by cost-cutting — firing people, closing plants — rather than by creative and thoughtful applications of new technologies. I argued there would be a backlash from American workers if productivity gains were largely due to the pressures that companies were placing on their job security and wages.
There was one CEO, Al Dunlap, who was the poster child for the excesses of corporate power squeezing workers — he was known as “Chainsaw” Al Dunlap. I was critical of him on a television program. It turned out he was a client of Morgan Stanley. He demanded to see the CEO and have me fired on the spot for having the audacity to be critical of him. But the CEO stood by me.
After a few years at Morgan Stanley, you became their Chief Economist. What was it like being in charge of the MS research team?
In 1995, email and the internet were becoming an important tool of the business. I had this thought: Wouldn’t it be great if everybody were to write something briefly every day about their economy, a market, a policy development, data, whatever interesting, and that we would assemble that information to know what’s going on in the world every day?
I knew I had gotten onto something big.
I asked the whole team to write 150 to 200 words a day. I said, “I want to know what’s going on in your part of the world every day, five days a week.” So, when I got up in the morning, I would have a note from my Japan guy, my China guy, my Hong Kong guy, my Germany guy. Morgan Stanley is such an entrepreneurial place that their sales force got hold of this daily briefing, and they started sending it to clients. The clients loved it. So I knew I had gotten onto something big.
I remember I made the pitch to the senior management of Morgan Stanley when I needed them to commit to building a website — something Morgan Stanley had never heard of. I said, “Last night while you were sleeping, the Mexican peso was devalued, there was a debt default in Argentina, and consumer sentiment collapsed in Brazil. None of this was in the newspaper today, but here’s what your team said about it that you could have read when you came to work in the morning.” I slapped it on the table, and they all immediately jumped and said, “Yeah, we want this.”
The first web address that Morgan Stanley had was www.ms.com. But MS was also Microsoft, and that was a client of Morgan Stanley, so they asked us to drop the name. It’s now www.morganstanley.com.
I did this for a decade, five days a week. I used it to bring the team together to look at the global financial crisis, the dot-com crisis, inflation, deflation. We would use this for thematic insights into what was making the world work. There was no team that was organized around these types of insights and developments like ours. I was very proud of that.
A pivot to China after the Asian Financial Crisis
What were some big moments in the ‘90s and 2000s for you?
The late ‘90s was pivotal for me professionally because that’s when the Asian Financial Crisis erupted. It got me attracted to China.
Our economics team on Wall Street probably had the worst forecast of any economics group as to what this crisis meant for Asia and the world economy. We were lowering our forecast every few weeks. I was embarrassed by this and felt that I needed to get a better handle on it. I had a hunch at that time that China would be decisive in shaping the endgame of the Asian Financial Crisis.
I decided I would do a Kissinger-like shuttle diplomacy and go to China almost every month until I could figure out if this hunch was correct. It was deeply held in the West that China would be the next shoe to fall, or, as a now famous cover story in The Economist had it, the next ship to get sucked into the whirlpool of financial market contagion.
I had a series of meetings in late ‘97 before I dared to reach any conclusion. Then I wrote an article for the Financial Times called The Land of the Rising Dragon. The basic argument was: Don’t paint Asia with the same brush. China is very different and here’s why.
The response from my clients in the West was incredulous. They accused me of being a Wall Street shill for Morgan Stanley’s nascent Chinese businesses. This was just after we’d entered into a joint venture with the China Construction Bank to establish CICC, and just before we were getting some pretty juicy assignments to take state-owned enterprises public. So my views were dismissed as having the classic Wall Street sell side biases.
I stayed pretty consistent with my view that China would emerge as the new leader of the pan-Asian economy, replacing Japan.
A couple of months later I got a message from the China team at the World Bank telling me that they had read the article and had passed it along to then-Finance Minister Xiang Huaicheng. He was coming to the United States, including to Seattle to visit Boeing. Would I have time to meet with him and discuss the article?
I said, “Sure.” I dropped everything and flew to Seattle. We just hit it off, and he became my guide in laying out what he felt was the new China, the China that the West, from his point of view, didn’t understand. I remember he told me about quasi-private small companies called Township Village Enterprises, and I knew nothing about that. He said, “You come back, and I’ll make sure that we’ll set up a tour.” A few months later I took him up on that. I was going to Shanghai, and I visited a few TVEs.
I kept writing and learning more about what was going on in China. The Asian Financial Crisis came to an end in late ‘98. China did not devalue its currency as the Western view had held it. I stayed pretty consistent with my point of view that, coming out of this crisis, China would emerge as the new leader of the pan-Asian economy, replacing Japan, which was widely thought to recover. I felt that would not happen, and it didn’t.
So I made a pivotal macro call on Asia based on my early days of learning about China and my long-standing understanding of Japan, and spoke of a new China-centric Asia.
The next pivotal moment for me came around the year 2000. Minister Xiang had introduced me to Premier Zhu Rongji, and Zhu Rongji was in the process of setting up what has now become China’s most important international conference, the China Development Forum. I went, starting in 2001, to every one since then. I’ve been 24 years in a row. I’m probably the longest-serving foreign delegate to this conference.
At the 2001 conference, I was the keynote speaker at lunch and I laid out a view for the global economy that was negative. I said the global economy was going to be weak and bordering on a global recession, and that China needed to prepare for that. I was challenged afterwards by a well-known Western economist, Fred Bergsten.
The West has always been skeptical of China. I had a different approach.
The China Development Forum always ended with a small private audience with the premier. The way that usually goes is, the chairman of the China Development Forum, an international CEO, gives a formal report. The former CEO of HSBC John Bond was the chairman that year. He stood up in his elegant British attire and started to give this report and Zhu Rongji just cut him off and said, “You can send it to me. I hear there was a debate between Roach and Bergsten. I want to hear the debate.” I gave a brief summary. Bergsten gave his point of view.
As we were leaving that room, the premier came over, shook my hand, thanked me for coming in perfect English. He said, “I hope you’re wrong but we’re going to plan as if you’re right.” And I did turn out to be right. The next year he came up to me and thanked me for my advice, and made some humorous comment about, “you’ll notice that Mr. Bergsten has not been invited back.”
So those two officials, Finance Minister Xiang, Premier Zhu Rongji, they welcomed me as somebody from Wall Street who was able to articulate a different view about China than what had become conventional wisdom in the West.
The West has always clung to a view of doubt, suspicion about China — the books about the coming collapse of China and all that. The West has always been skeptical of China. I had a different approach and stayed with it consistently and until about a few years ago, when I did turn more cautious.
You just mentioned Morgan Stanley set up a joint venture with the China Construction Bank, creating China International Capital Corporation. Could you talk about that?
The deal was signed around 1995. From the Chinese side, the key participants were Zhu Rongji and Wang Qishan. Zhou Xiaochuan, the governor of the China Construction Bank at the time, was also closely involved.
The idea of taking state-owned enterprises public sounds pretty straightforward. But to conduct a listing in international capital markets under the regulatory purview of U.S. or other authorities was particularly challenging. These SOEs in large part did not exist in the corporate form that was required of underwriting regulatory oversight.
So our bankers were charged with the task of looking at these entities that were under the auspices of the state, and going through the records of the companies, the warehouses of filing cabinets, to create companies on paper that would be consistent with those regulatory needs to conduct a successful listing. And that was a hugely demanding, labor-intensive job, but we were able to do that on several occasions.
Reportedly Morgan Stanley gradually lost control over CICC. The first few CEOs were appointed by Morgan Stanley, but later the firm was taken over by the businessman Fang Fenglei and then Zhu Rongji’s son Zhu Yunlai, and Morgan Stanley ended up selling its stake.
It was more complex than that. By investing in a joint venture, there were a lot of short-term opportunities that would be hugely beneficial to Morgan Stanley and helping the Chinese government create an investment banking function in a country where there was none.
I had access to almost any prime minister or political leader that I wanted to.
Yet we knew that, if it was going to work out, the success of the new company would challenge the sustainability of that relationship, that the joint venture itself would become more autonomous, more independent, more willing to chart its own course. And it did. That was a consideration as to why we ended up terminating that relationship and moving on to a new platform where we had complete control.
You soon became Chairman of Morgan Stanley Asia, though you weren’t specialised in Asia per se. Were you surprised to be offered that role?
Yes and no. At that point I was spending a lot of time going back and forth in Asia. I was the firm’s senior research person and had made a pretty good name for myself in focusing on Asia and China. I sensed that the Morgan Stanley senior management might be looking to change the management structure of the Asia platform.
I continued to write and speak on broad global economic issues with financial market implications and, in particular, expressing my views on China. That was a source of enormous intellectual satisfaction for me because during that period, I was a real leader in driving macro thought and debate in Asia. I had access to almost any prime minister or political leader that I wanted to. The card that said Chairman Morgan Stanley Asia was a real entrée into pretty rare circles in the policy and political debate in Asia, and I took advantage of that.
Now you’re at Yale. Why did you leave Morgan Stanley?
I had a long career. Toward the end, a Yale professor I’d known for years, Jeffrey Garten, was bringing a class of students through Asia, and he wanted me to speak to them as the Chairman of Morgan Stanley Asia about the Asian economy and financial businesses. He was going to be setting up a new course at the Yale School of Management and wanted to know if I could give a few lectures.
I said I could do it, and I enjoyed it. Then I got a call from the president of Yale saying that they were setting up a new Global Affairs Institute at Yale, and if I ever wanted to stop working at Morgan Stanley, they would want to offer me a job on the faculty.
Was this to be the Jackson Institute?
Yeah. I thought about it, and agreed to do that but continue in my capacity at Morgan Stanley and reduce my role from chairman to non-executive chairman. I did both for about a year. And then, as I was reaching my 30-year anniversary at Morgan Stanley, I decided that I couldn’t effectively do both at the same time and that it was a good time for me to stop. I wanted to be back with my family on a full-time basis, and I felt it was appropriate to end my relationship at Morgan Stanley on good terms after 30 years.
In my discussions with the president of Yale, Rick Levin, we talked about what I might teach, and he said, “Well, it’s up to you what you want to teach. This is a global affairs institute, but you clearly know an awful lot about China, and about the U.S. and global economy, so I would think that you would be interested in teaching that.” I initially laid out a syllabus for an economics class on China that I called The Next China, to look back and draw inferences on the reforms and opening-up to figure out what that meant for China’s future.
“The Next China” stymied
Looking back over the past two decades of being bullish on China, has China turned into The Next China the way you thought it would?
No, it’s been stymied. To me, The Next China, as I taught it at Yale, would be a consumer-led China. I raised questions on whether or not China would be able to make it to the promised land. I warned and worried about the aspirational aspects of a consumer society being compatible with how Xi Jinping viewed the China Dream through his ideological lens. I recognize that that is an unresolved issue.
What would it take for China to get its economic momentum back?
I wrote about that in the Financial Times, where I said that China is at risk of falling into a Japanese-like quagmire — stagnation, deflation, and a growth trajectory that will fall short of what the party and its leader has laid out for 2049. China is not Japan, but it’s close enough to make it a legitimate comparison.
The demographic issues have become acute as the population has been declining more quickly than any of us expected.
The structural similarities between Japan and China are striking. Different systems, but both facing rapid aging, a shrinking working age population, and problematic prospects for productivity. When your workforce declines, the only way you can keep growing is to get more output out of the surviving workers through higher productivity. Japan was unable to do that, and I worry about China being able to do that as well. Especially with so much of the Chinese economy having shifted back into low-productivity state-owned enterprises, and the once-dynamic and high-productivity private sector being restricted.
What factors or events were most critical in shifting your views on China?
A big development in the China debate was when, in May of 2016, there was an interview with an “authoritative person” published on the front page of the People’s Daily. This was a big event in senior circles in the Chinese policy structure. And the authoritative person, always rumored to be a person very close to Xi Jinping, warned of a Japanese-like disease with asset bubbles and debt that could lead to stagnation and an “L-shaped” trajectory for China.
I made a note of that, and wrote and warned about it myself. A few years ago, I expressed my views openly that these risks were now in growing danger of coming to pass. I marked down my prognosis for the Chinese economy on the basis of those concerns.
It was an evolutionary process. The demographic issues have become acute as the population has been declining more quickly than any of us expected. The productivity issues have become acute. And the unwillingness on the part of the government to provide a meaningful stimulus to consumer demand has become serious. And the property crisis has deepened.
So what John Maynard Keynes purportedly said, when questioned about his shifting views on the British economy by the House of Commons, is appropriate: “When the facts change, I change my mind. What do you do, sir?” I think the China story has changed, so I have become more cautious as a result.
I am not in the “China disaster, China crisis, China collapse” camp, but I subscribe to the view that the prognosis has darkened, and the urgency by which Beijing needs to address the growth challenge has grown. The government is starting to understand that.
And it seems even that much critical thinking was too much for the Chinese government. When you attended the China Development Forum this year [editor’s note: this interview was done in 2024], you weren’t given a chance to speak for the first time.
The government has let it be known that criticism is not welcome. Xi Jinping has described this as saying that he only wants to hear the good stories about China. Well, good stories are great. But when the facts change, you sometimes need to hear the tougher stories.
When I pushed the leadership of the China Development Forum for what my speaking assignment would be — as someone who had attended every single one of the China Development Forums, except the first one, from 2001 to 2023; as someone who had given keynote addresses, spoken on panels, and always had a role — they were silent.
Finally, the week before, they said that “We don’t feel it is appropriate for you to speak this year. Your views are too sensitive, and they are likely to be sensationalized by domestic and foreign media. We think it is in your best interest, and our best interest that you do not speak. You can attend, but you can’t speak.”
And they said, “You will have the opportunity to speak the day after the Forum’s over, there’s something called the Bozhi Macro Forum, still held at Diaoyutai, but it’s a closed session, and you can speak there.”
I still went, knowing that I was not going to be able to speak. I took the opportunity the day after at the Bozhi Forum to be very direct in telling them what I thought of that decision. And then on the way back, I wrote a piece that is now on my Substack, called, What’s the Point?
The message was, why did I go? And why should I ever go back? The point is: Show up and stay focused on trying to provide constructive feedback. Sometimes it may be criticism, sometimes encouragement, but engaging in debate is what you would hope that “an old friend of China” — which is how I’ve been described for decades — would be allowed to do. That’s why I went, and that’s why I will go again.
Recommended readings
Stephen Roach, 2009, The Next Asia, Wiley
Stephen Roach, 2014, Unbalanced, Yale University Press
Stephen Roach, 2022, Accidental Conflict, Yale University Press
About us
The Peking Hotel podcast and newsletter are digital publications in which Liu He interviews China specialists about their first-hand experiences and observations from decades past. The project grew out of Liu’s research at Hoover Institution collecting oral history of China experts living in the U.S. Their stories are a reminder of what China used to be and what it is capable of becoming.
We also have a Chinese-language Substack. We hope to publish more conversations like this one, so stay tuned!
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