You're listening to Asia Centric, the podcast that explores the big ideas and trends moving money across the region, and Kaijidmitrieva in Hong Kong and.
I'm John Lee. Katya. You moved to Hong Kong earlier this year.
Yes, I did. Back in March, and.
About a month before you've moved, there was a big discussion happening in the city. People were asking whether Hong Kong might be over. Yeah.
I think I represented a bit of the reverse migration. There were a lot of folks, you know, hundreds of thousands of people had left Hong Kong at the time.
Well, it's still a big question that I think the people in the financial sector are still asking. Earlier this year, Hong Kong was once again named the number one financial capital of Asia, replacing Singapore.
Yeah, because Singapore had replaced it for a bit, and then it was once again kind of crowned the top for global listeners folks who aren't in Hong Kong, I think some background is in order. Stephen Roach, former chairman of Morgan Stanley Asia and an economist, earlier this year, declared the city over in an opinion column in The Financial Times and this elicited a surge in responses, including from local politicians. But Stephen is back. Stephen comes back
quite a bit. Actually, he joins us here today. Welcome Stephen.
Great to be back, and great to tell you that even if I thought Hong Kong was over, I am not over.
We're glad to have you back. You came back a few times this year, you said in March. In June, you sat down with myself and some reporters here, and I wonder, have you changed your mind about Hong Kong.
No, I have. I laid out in this article three factors that led me to this seemingly draconian conclusion. One that Hong Kong was tied to the Chinese economy, and we can talk about that, but I think the Chinese economy is still in trouble. Two that Hong Kong was caught in the crossfire of the US China trade war, and that needs to be updated in light of the reelection of Donald Trump. And you know, i'll give you a spoiler alert, it doesn't look like it's going to
get any better. And three, admittedly a very contentious issue, especially here in the great City of Hong Kong. The political climate in the aftermath of twenty nineteen Article twenty three, and a general sense on the outside that is very different than I pick up from the Hong Kongers on the inside, that there's still a tough impression of what's going on in the city from the standpoint of a rule of law, free speech, free press.
And those are things that haven't changed.
I think the government is trying very hard to put on a good face, but I don't detect a seismic shift in that area either.
Stephen, you are the chairman of Morgan Stanley Asia Pacific for a number of years. Can you compare Hong Kong today versus when you left Hong Kong ten or so years ago.
Well, I loved my platform here in the position I was in. The city was vibrant. It's a large city, but it's a small community. It's just amazing. You can walk down the street or you know, walk on a sidewalk, you know, a large city. And it hasn't happened to me today because I haven't been out because of the typhoon. But you always bump into somebody, you know. You know, I'm a transplanted New Yorker, have lived there most of my life, and you know that rarely happens in New York.
It does happen in Singapore and in other city in Asia, but Hong Kong is unique in that regard. The city has changed, it's grown. The one thing I really notice a lot is the development of West Calhoun, especially the cultural centers, has really come into its own and that's great to see because that was always a missing link when I was here. You know, I loved art, loved to go to the museums music, and it was much
harder to do back then. You know, the West Calhoun Art District is right outside the building that Morgan Stanley moved into as the first tenant of ICC during my time as being the chairman of Morgan Stanley Asia, so we were sort of pioneers back then. We actually moved into ICC when it was still under construction. You know, they cleared an elevator bank for us, and our offices were in great shape, but there was nothing else there.
And you know, to see all of these museums come to life and the traffic it attracted like a magnet has been certainly great to see since I've been gone.
The makeup of Hong Kong is changing quite a bit, and you can see it in the investments coming in, the kinds of retail and restaurant tenants coming in, and you mentioned that it's becoming much more tied to the Chinese economy. I mean, historically it's been kind of a bit of both. You know, you have the West, you have China, but it's kind of leaning more towards the mainline. Now, we saw a lot of initiatives that Hong Kong's bringing out to make doing business easier and you know, transportation
and traffic easier between the two places. So I wanted to ask you what do you think that means for the city and what do you think it means as Hong Kong's traditional role as sort of the financial capital of Asia and sort of a meeting point.
Well, the advertising campaign for Hong Kong has long been folkscused on the view that Hong Kong is Asia's world city, and certainly the point got that you made on the presence of mainlanders begins to skew that image in a much more China centric fashion. Again, going back to my experience of working in the early days of ICC, I saw that immediately when I would walk through the mall to you know, take an airport express train or to take the MTR back to Central and I would see
bus loads of Chinese tourists coming into shop. You know, initially I was unprepared for that because I think the mall had been built in large part is a typical Hong Kong mall that had you know, a large attraction for international students, but it was more and more Chinese from literally the very start.
Isn't that good for the economy?
Well, traffic is good, but you know, what is Hong Kong really attempting to achieve in its not just branding, but in looking to the future. Does it ascribe to the notion that the pr campaign of Asia's World City always promised, or does Hong Kong want to just be another big, dynamic city of China. Those are two different concepts, and I think that well, Hong Kong certainly maintains a
very strong international flavor. There are many more Chinese characteristics to that flavor than were evident during the years when I worked here.
So, Stephen, if you're the chairman of Morgan Stanley right now and you're still looking to expand in the Asia, Pacific region. Would Honkong still be the place where you would expand or would it be another city?
Well, you know, Hong Kong was our base, and you know, we built a big infrastructure of talent facilities support around Hong Kong, and you know, it's centrally located. It made a good deal of sense when we established it. You know, our hope and the hope of you know, most global financial services firms was that Hong Kong, unlike any other city in the region, would be the gateway of international capital markets into China. And I you know, I still
think that's a reasonable approach to take. And you know, if we had to do it all over again from scratch, I think that would be a decision that my former colleagues would still be comfortable with today.
So you're saying you would still choose Hong Kong.
Yeah, I think with the benefit of hindsight, you know, we're now more aware of the challenges that China faces than before and the impact those challenges would have on Hong Kong.
One of those challenges going forward, maybe the US president and US policies. President elect Jnald Trump has promised sixty percent tariffs on Chinese imports as well as tariffs on on other goods. But I wonder what do you make of the US China relationship going forward, because you literally wrote a book called Accidental It's sitting in front of me, Accidental Conflict America, China and the clash of false narratives. So would love to hear your take on this. I mean, where do we go from here?
Well, I'm I'm worried about it. You know, I started working on it maybe five years ago, published it about two years ago. And the topic, there are a few things in there that need to be updated, but the concept, the topic, the arguments I think are more relevant today than they were back then. And the theory of the book,
if you want to call it. The theory is that both nations are enamored largely for political reasons of false narratives about the other, and in some respects, especially in the United States, that reflects almost a demonization of China.
And looking specifically at who Donald Trump is named to his senior policy team, from Robert Leithheiser to Marco Rubio to the new Defense secretary to the new National Security Advisor, You've got a group of hawkish advisors the likes of which have never really been at the top of any
American administration before. And not only do you have hawkish advisors and by the way, at the bench of those who have not been selected as very deep in China hawks, so there could be more of these individuals have put
in place. But not only do you have the people, you've got the blueprint of a strategic anti China strangulation that was laid out in explicit detail in Project twenty twenty five, which Donald Trump on the campaign trail said, well, I certainly have nothing to do with it, but we all know that wasn't true.
I'm glad you brought up Project twenty twenty five because something like a nine hundred plus page document really lays out what a lot of Republicans hope to accomplish, and a large part of that has been China. I think you were reading that casually the other night.
Well, you know, when the election didn't go the way I thought and admittedly hoped, I forced myself to because I couldn't go back to sleep read I think it's like eight hundred and eighty nine pages. I went through that with the help of my search tool and picked out six chapters that were particularly onerous with respect to China, and just briefly, Chapter four on Defense policy America needs to re arm to fight China and equip Taiwan with
anything it needs to resist the coming invasion. Chapter five on the State Department identified China as America's number one foreign adversary, Russia above Iran. Chapter eight on Development Aid said end the fanaticism over climate change in the midst of you know here, I sit here typhoon, and Lord knows what kind of weather we've had in the US this year, and the fanaticism on climate change because it's an opportunity for China to take advantage of US through
its superb green technologies. Chapter seventeen on the Department of Justice argues for reinstatement of the China Initiative, which is a huge threat to people engagement. Chapter twenty three on the Commerce Department urges strategic decoupling and no uncertain terms with China. And finally, Chapter twenty six on Trade policy lays out the manifesto for tariffs and it was written signed by none other than the recently incarcerated Peter Navarro.
So read all these chapters, but take a look at Project twenty twenty five because it is a blueprint that is very much aligned with what the President articulated on the campaign trail. And the final thing I'll say about it is when I woke up at two thirty in the morning on November sixth and saw the president's victory
statement live from mar A Lago. Near the end of the statement, the words that just wrung in my ear, which he has now acted and delivered on, is my motto to govern will be very simple, and I'm quoting promises made are promises held.
So we should definitely expect sixty percent tariffs.
Sixty I don't think he'll do sixty, but he will do tariffs.
Stephen, lots of pundits think that Trump two point zero would just basically be a peat of his first term, But reading between the lines, you think that things could actually get worse in terms of US China relations.
I do.
I mean he was a neophyte when he came to office in twenty sixteen. It was unexpected to him, unexpected to all of us. He had some strong views, especially on China, what he wanted to do, and he delivered on him. Now eight years later, he has the experience of that, his views have strengthened, and he's got this blueprint that we just talked about, Project twenty twenty five. So I think we we have to take him much more at his word this time than we did before.
You know, a lot of his words prior to the twenty sixteen election were very inflammatory and contentious, and it's not clear that he meant or delivered on all of them. But again, promises made, promises kept. He's going to keep his word.
And what do you think the response will be from China? In the first time around, when Trump was in office, China arguably showed some restraint. Do you think will be the same this time around?
Well, you know, that's up at China. I think what we learned from two Thoy eighteen, nineteen and twenty was that when the US takes action, China will retaliate. Whether they retaliate to the same magnitude is debatable. It's an opportunity for China to really show, you know, maybe a little bit more leadership and restraint if they don't, but I think given domestic political concerns in Beijing, you can definitely expect retaliation if Trump were to move as promised on the campaign trail.
What are the things that you know, I wanted to talk about money and the economy, what people are worried about. You come here frequently, you're in China, frequently based in the US, and you talk to a lot of people. So I wonder from those conversations, what are people, especially in the kind of weeks and days and weeks following the election of Donald Trump, what are people concerned about? What are people saying? What are people asking you?
Well, I haven't been to China since the election. I'm going there in two days, and you know, get in touch with me and I'll let you know what I find. I think that there is a fair amount of uncertainty, and there is still this sort of naive, bordering on smug belief that, oh, he doesn't mean what he says. Some people say, oh, you know, he's the consummate, quintessential deal maker. This is just a negotiating ploy. None of
what he says will come to pass. Keep in mind that when he was sworn into office in early twenty seventeen, the effective tariff of the US head on Chinese products was three percent. When he left office, it was nineteen.
It stayed there too, and it's still at nineteen.
So you know, again, I think the Chinese who are in denial and in belief that you know, the deal maker is back. We can do another deal like we did with you know, the Phase one trade deal, which by the way, accomplished nothing. You know, they're they're still
holding out for a more transactional deal focused Trump. And you know, the new wild card in the equation, and I stress, and I put emphasis on the word wild is, of course Elon Musk, who has a very large manufacturing facility in China and a very prominent role as Trump's new buddy.
Do you think he could counteract some of the hawkishness in the cabinet, at least as it's announced so far, just because of that.
So what's that mean, Katcha. Does that mean that the US is going to impose forty fifty, maybe sixty percent tariffs on China for everything that comes in except Tesla's. If that's what it means, you will see the most extreme outcry from the guy in the street that you've ever seen. You know, you think that the protests from time to time have been bad, Let him try that and see what happens.
Could Musk potentially I've heard this idea flagged that that must could potentially kind of walk back or working with Trump walk back some of the tariffs. Say hey, and you know, I've got this factory in China. We get a lot of these cars from these factories. We don't want to be tariff And by the way, there's a lot of other products that probably wouldn't be good to tax.
So Elon Musk, speaking purely from the standpoint of self interest, is going to be able to get Donald Trump, who has been as strident in his anti China views as anyone over the last fifteen years, to change his mind just because of his self interest in preserving the sort of the financial integrity of this huge outsourcing betties made in China. Look, I'm not going to rule anything out, but I think again that borders on a hugely disruptive response from Trump's core based constituency.
Yeah.
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I'd love to talk more about China. You know, recent co ed you highlighted the risk of China falling into a Japan like quagmire characterized by stagflation deflation as a result of a major debt field asset bubble. You also mentioned that China may need at japan like three arrow strategy. I think you're referencing the framework of the late Japanese PM Shinzo Abe, But can you explain more on this?
Yeah. I taught for a number of years John two courses at Yale. One was a course called The Next China, which focused on where China was headed. Was focused on the lessons of Japan, the rise and fall of Asia's first miracle economy, how it happened, and how they responded.
So I've studied both economies very careful, and increasingly in recent years, I've been struck by the similarities between Japan and China, largely from a structural point of view, aging societies, declining working age population, and stagnant to falling total factor of productivity. And then China does exactly what Japan did, mistakenly stumbles into a debt fueled property bubble the likes
of which no country has really ever experienced before. And lo and behold, this year there is China's first whiff of deflation. So, look, these two economies are not the same. I recognize that there's a lot of differences between a developing economy that it needs more urbanization, you know, more capital stock per worker to boost productivity, and most importantly more consumption as China does. But you know, the similarities that I've just outlined are close enough where Beijing cannot
afford to split hairs. And so I argued in this piece in the Ft that China needs to act on the basis that in fact is succumbing to the Japanese disease, rather than be in denial of the applicability of that analysis and the three arrows of Shinzo Abi said that you address this problem if it is a Japanese like problem with monetary policy, which China has done very effectively. I might add fiscal policy, which China has been the sort of lukewarm and really going as large as it
needs to. And then the third piece, the third arrow in ABB's nomenclature, the structural piece, which China, like Japan, has been unable and unwilling to do. And it was a political problem in Japan, and it's a political problem in China. And monetary and lukewarm fiscal are necessary but
not sufficient from a Japanese three arrow perspective. And that's what worries me about China right now, that it's sort of following the path that Japan has been on with respect to its structural problems as well as its response.
I'm glad you brought up that piece, John, because one thing that I've been surprised by is recently, you know, in recent months, kin has started to roll out and this is all kind of provincially and city by city, but policies that at least address some of the demographics challenges, so you know, profertility policy, a lot more funding for childcare, and incentives sometimes just all out just direct cash stimulus.
So I wonder if they are if officials are kind of starting to realize this challenge because demographics and the decline in tafar, as you mentioned, is it big, is a big part of this.
Well, you know, they certainly realize it now. For I would say fifteen years I mean they abandoned their one child family planning policy formally.
No, I forget maybe twenty sixteen, fish.
Seven or eight years ago, and they have since they did that, increased incentives for women of child bearing age to have more care, and they've been reluctant to do that. I found that interesting because in my China class, I had a number of Chinese women, it was a large class, and I pulled them aside and unscientifically selected focus groups and I asked them about that, So, like, what's the deal, what would it take Chinese women to have more babies?
And they said two things. Number one, we are now used to small families. It's our culture, it's the way our family units operate. And number two, the expense it's huge and it's not something that we can afford. And given high levels of youth unemployment, if anything, that has become more of a problem.
Yeah, certainly a structural issue.
Stephen, what pushback do you get when you compare China to Japan? Like the big picture discussion on the demographics and the asset bubble get but a lot of people when they look at Japan. It's quite unique. You know, the corporate culture is well known to be resistant to change,
resistant to new technologies. You know. I recently had a discussion with an executive of a major Japanese broker and he was telling me that they still send investment research reports to clients via a fax machine, and I was really shocked. Could you argue that maybe China's economy is much more dynamic, much more entrepreneurial.
Yeah, you could, But I think again, I go back to the work I did in sort of understanding the culture of corporate Japan wrapped around these fairly rigid, inefficient care retzus conglomerates centered around a main bank, and you know, they invested in each other. And I don't think you have to be that creative to find their equally dominant counterpart in China in the form of state owned enterprises state on enterprises, who are conglomerates who have their tentacles everywhere.
The banking system is still very much under the thumb of the government. And if you look at relative productivity statistics private versus state owned enterprises, state on enterprises are the low productivity growth segment of the Chinese economy and they have become much more important under Jianping than they were under his predecessors. So, like I said, they're different. The final thing I'd say about this, John, is the
Chinese have debated this issue internally actively. In May of two, twenty sixteen, and there was a big feature on Bloomberg about this. There was an interview published on the front page of People's Daily, an interview with the editors of People's Daily, and a quote authoritative person who preferred to remain anonymous, as they do in China, who warned of the Japanese like disease afflicting China, and that spurred a
really active debate. And you know, I do go to China a lot, and the Chinese knew that I taught a course on the lessons of Japan. I was invited, and I have given most recently, you know, last June lectures in China to senior Chinese officials on the lessons of Japan and their relevance to China. So they they understand the risks, and you know, the onus is on them to address the poor of those risks they think are applicable to them.
Yeah, long term challenges and short term challenges We've talked about quite a bit today. Is there anything else that you think we missed or we should ask you one more final question about well.
I think I'm still reeling from the news of who Donald Trump is bringing into his inner circle to advise him on strategy, and I think that that is challenging both internally in the United States and externally to China and to the rest of the world. And I would maybe just not only is he going after China with higher tariffs, but his concept of the most beautiful word in the dictionary, tariffs, is one that he wants to apply to all of America's trading partners with broad tariffs.
Sometimes he's mentioned in number ten, but he most frequently mentioned in number twenty percent on all tariffs, citing the brilliance of the President William McKinley in the late eighteen hundreds for realizing the tariffs were the panacea for all that ails America. McKinley was dead wrong on that. Trump is going to be dead wrong on that. And what we never really appreciate in the US is when we
take actions against others, they take actions against us. It's human nature, it's geopolitical strategy, and that type of thinking after we passed the Smooth Holly tariffs in the early nineteen thirties led to a global trade war that played a key role in creating the Great Depression. So, you know, we've got to be mindful of the consequences of the choices we made in December fifth. American voters never really want to look at consequences until it's too late.
Stephen, before we let you go, I wanted to ask there's a lot of investors listening to our podcast. It's been quite a sobering discussion on US China relations. Is there any countries or sectors that you think could do well over the next few years.
It's very clear that we're in an extremely frothy period in asset markets right now. The US market's gone straight up, cryptocurrencies have gone straight up.
Tesla stock has soared more than thirty percent since Trump was elected.
Yeah, Tesla. You know, the Chinese stock market, the Hong Kong stock market have gone on massively since the stimulus measures were announced on September the twenty fourth. I've been around long enough that I don't like to buy into vertical lines in markets, and so I'm cautious I'm certainly fully invested in my own account, but I do not check it every night because I'm nervous about what comes next.
This is, you know, a time to be wary rather than a time to be unbridled in your enthusiasm for that asset class that everybody except you seem to be missing. So I'm not going to go out there and venture a bet on that one.
Yeah, a lot, a lot of uncertainty, and we appreciate you joining us here today to kind of guide us through the fog. Thanks so much for joining us.
Thank you, Kytya, Thank you John.
I'm Katya Dimitrieva.
I'm John Lee and this podcast was produced by Clara Chen And you've been listening to the Asia Centric podcast