What challenges will China's economy face under the COVID-19 epidemic? What impacts will the epidemic have on international relations, global value chains and economic trends? What adjustments can the Chinese government make to ensure economic and social stability this year?

To answer these questions, China Development Forum (CDF) launched a special column, CDF Online series, in which we will talk with forum delegates on the economic and political impacts of the virus outbreak.

Last month, Yu Jiantuo, Deputy Secretary-General of the China Development Research Foundation, had a call with professor Stephen Roach, who is a senior fellow at Yale University’s Jackson Institute for Global Affairs, and was formerly chairman of Morgan Stanley Asia and chief economist at Morgan Stanley. Yu and Roach discussed the outlook of the global economy during the COVID-19 epidemic and economic policies of the US and China.

Roach has been doing research on Asia`s influence on global economy for a long time. His opinion on global economy is deemed to have great impact on discussion of policies of countries such as the US and China.

Professor Stephen Roach, senior fellow at Yale University, former chairman of Morgan Stanley Asia and chief economist at Morgan Stanley

He once stated at the China Development Forum that there are imbalances in the two economies, and it is not advisable to use a trade war to resolve the domestic economic structure of both sides.He believes that the lessons from this experience are very important.

First and foremost, China needs to give higher priority to developing a more robust public health protection system.

Secondly, China must not flinch in its efforts at achieving a more resilient and balanced economy through a new round of reforms and opening-up — namely, focusing on the rebalancing of China from exports and investment to internal private consumption, and from manufacturing to services.

2020 global economy amid the epidemic

· Do not underestimate the risk to the global economy caused by the epidemic

· Need for all participants in global supply chains to have contingency plans

Yu: How to assess the impact of the current new coronavirus crisis on the global economy and the Chinese economy?

Roach: Significantly, there is a very important difference between economic conditions in China and in the world today relative to what was prevailing with SARS 17 years ago, in 2003.

During that earlier period, the Chinese economy was booming, growing about 10 percent, and the global economy was extremely strong, growing nearly 4.5 percent.

Today, both the Chinese and the global economy were operating at a much slower rate of growth before the virus hit. The global economy expanded only about 2.9 percent last year – the weakest year since the financial crisis. Moreover, global growth in 2019 was only slightly above the global recession threshold of 2.5 percent.

So, the world and China are lacking the cushion they had during SARS 17 years ago. That means they are at much greater macroeconomic risk today in a weaker growth environment than was the case during the boom back then. That makes it very difficult to dismiss the current disruption without considering the potential for more serious consequences for the Chinese and global economy.

Prior to the outbreak of the virus, most forecasters were looking for an increase of about 3.3 percent for the world economy in 2020. That is now clearly too optimistic.

Yu: You mentioned the global supply chain. How much has the epidemic affected the supply chain?

Roach: There are a lot of concerns amongst US, European and other Asian multinationals about the epidemic’s impacts on supply chains that run through China. While there are fears that some of these supply chains are now likely to be shifted out of China, I think those concerns are overblown. It has taken a huge effort and considerable financial support to carefully construct global supply chains over the last 15 years. That is not going to vanish overnight — provided, of course, that China rises to the occasion and effectively addresses current and prospective public health concerns.

But the virus and its impact on key production centers in Hubei province underscore the need for all participants in global supply chains to have contingency plans. That requires diversified alternative sources of components and parts to maintain production and assembly in the event of unexpected shocks such as COVID-19.

China’s public governance and economic development in the next stage

· Develop a more robust public health protection system.

· Stay with the broad thrust of reforms and opening-up.

· Use the reservoir of domestic saving to fund the retirement and health care.

Yu: What are your Suggestions for China’s public governance and economic development in the next stage?

Roach: This epidemic is obviously a very disturbing shock for China. Like the SARS-related lessons from 2003, more attention and higher priority need to be given to develop a more robust public health protection system.

My advice on economic development is unwavering: China needs to stay with the broad thrust of reforms and opening-up. In that vein, China needs to continue to focus on the rebalancing of from exports and investment to internal private consumption, from manufacturing to services, from surplus saving to saving and absorption – by that I mean using the still large reservoir of domestic saving to fund the social safety of Chinese people (i.e., retirement and health care). Finally, China needs to focus on shifting from imported to indigenous innovation.

China is in a critical transition point in terms of these four key transformations. They are absolutely essential in order to push forward on growth and development over the next 10 -20 years.

Yu: In fact, China is facing a new challenge, the savings rate has declined, savings are not as abundant as before.

Roach: China’s domestic saving rate, while it is coming down, remains very high at around 43% (versus 22% for the so-called advanced economies of the world, according to the International Monetary Fund). It is important to think of the role savings can play in promoting higher quality growth for the domestic economy and providing support for a rapidly aging Chinese population.

Yu: What’s your assessment of China's debt situation and the deleveraging measures in recent years?

Roach: China’s debt-to-GDP ratio is still high, which is bad news. The good news is it is starting to stabilize as seen through what the BIS (Bank for International Settlements) calls the “credit gap”— which measures recent trends in debt intensity relative to longer-term norms.

The US trade policy and manufacturing

· America’s trade problems need to be set in the context of our own macroeconomic imbalances

· Mighty trade policies could not bring manufacturing back.

Yu: How do you evaluate the US trade policy? The Office of the United States Trade Representative announced in this month that 25 economies, including China and Vietnam, would lose their preferential treatment in WTO as developing countries. What’s your comment?

Roach: The United States Trade Representative, Robert Lighthizer, is pushing hard to utilize trade as a source of driving improved economic growth and job creation in the US. He has made a case for using tariffs against China to accomplish those objectives. Notwithstanding the sigh of relief after the signing of the Phase I deal in mid-January, US tariffs on China remain historically high at around 19% (versus a pre-trade-war tariff rate of 3%).

I fear this policy is misdirected. America’s trade problems need to be set in the context of our own macroeconomic imbalances, especially a chronic shortfall of domestic saving.
Tariffs on one trading partner, like China, will do nothing to overcome that problem as long as domestic saving remains low. A saving short US economy, which currently has trade deficits with 102 nations, unfortunately is going to have international imbalances with developing and developed economies, alike. A reclassification of developing economies, including China, is not going to change that.

Yu: To what extent will this help accelerate America's return to manufacturing?

Roach: Ultimately, it is going to be very difficult to reverse the dramatic downward trend in the US manufacturing sector. The downtrend in factory sector job creation has been evident over most of the post-World War II period.

This is an outgrowth of two factors— one technology where we increasingly substitute capital equipment for workers and two, the growth of lower-cost production platforms in countries like China, as well as other developing countries in East Asia, Africa, Eastern and Central Europe as well.

Notwithstanding US President Trump’s preference for tariffs as a means to incorrectly resolve a multilateral trade problem by engaging in a bilateral conflict with China, the future of US manufacturing is far more dependent on America’s willingness to increase domestic saving and investment on its own terms. With US budget deficits going from bad to worse over the next ten years, that could well be America’s biggest risk of all.