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Stephen Roach, Morgan Stanley
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Euro a first ‘aftershock’ of American sub-prime — ‘More in next several years’
26-07-2010
ATI June/July 2010 issue
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HONG KONG — The European sovereign debt crisis is an aftershock of the American sub-prime crisis, says Stephen Roach, Chairman of Morgan Stanley in Asia, warning that there could be other post-crisis shocks in the world in the next several years.
Roach says people are going to be disappointed if they hope that the global economy will snap back to the rate of growth seen in the five years preceding the US sub-prime crisis. “The recovery is likely to be uneven and weak. And that is very much consistent with what is going on in Europe,” he told ATI.
“There is the likelihood of a significant shortfall in European economic growth. With the trillion-dollar European rescue package comes a lot of austerity, which will squeeze economies in Greece, Portugal, and Spain. There will be collateral damage to countries elsewhere in Europe — like Germany, France and Italy — which are exposed through trade flows and bank lending to activities in Greece and Portugal and Spain.”
But talk of the end of the euro is overblown, he says, despite the fact that the Euro zone faces many issues.
“The shocks in the US and Europe in the past 18 months are clear warning shots to Asia in a broad sense that external demand has moved into a period of vulnerability and uncertainty, and is less likely to support Asian exports in the years ahead than it has been in years past,” he says. These shocks are “powerful signals” to China and to the rest Asia that they need to focus on stimulating domestic consumption.
“This is the defining issue on the macro agenda for China and Asia over the next five years,” he told ATI. “China grew by 8.7 per cent last year on the back of a huge stimulus package. Now, Chinese authorities are dealing with the consequences of that stimulus. It would be difficult for China to do the same thing (stimulate the economy) again in the event of (further) shocks to Europe or other external markets.”
Roach says there are “some bumps in the road” ahead for China. “The growth rate may not be quite as strong as the Chinese authorities would like. But I do think – and I could be wrong – it is reasonable to expect that current disruption to economic activity from the European sovereign debt crisis is likely to be considerably smaller than that of US sub-prime.
“Largely for that reason, the downside to China and for the rest of the region is likely to be limited. But there will still be a shortfall.
“But Europe is China’s largest export market. This underscores once again some downside risks to Chinese exports, which are a key driver of the Chinese economy.”
Asked if the experience of Europe will now throw talk of an Asian monetary union overboard, Roach says plans for pan-Asian integration, whether financial or in other areas, will not change dramatically in response to developments in Europe.
“In the last 10 years, we’ve seen a powerful trend towards pan-Asian integration and intra-regional trade. Korea, Japan and Taiwan are all critical pieces of this trend, he says.”
The European problem has temporarily pushed aside a bilateral Sino-US spat over the value of China’s renminbi. But Roach says that, with the mid-term US election looming, there is still a risk that the US Congress will force the issue to a head.
“The Chinese position on the currency situation, as expressed by China’s central bank governor, Zhou Xiaochuan, is that, in principle, they want to go back to the gradual RMB-dollar appreciation that was in place between mid-2005 and mid-2008,” he says.
“This policy was suspended in mid-2008 due to the crisis. They were getting ready to go back to gradual RMB appreciation, but recent developments in Europe prevented them from doing that.
“With the dollar rising sharply against the euro and the RMB pegged to the dollar, the RMB actually has been rising sharply vis-à-vis the euro. And, because Europe is the largest market for China, this is putting upward pressure on the broad trade-weighted RMB. That will intensify currency-related pressure on Chinese exports.”
Roach believes tension between Washington and Beijing will remain serious for some years to come. In a worst-case scenario, China will shift its foreign allocations in and out of dollar-based assets in retaliation against any US move, he says. “The best case is that, hopefully, we will make it through this period of tension without those developments happening,” he says. |
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