I shudder whenever someone proclaims that we are entering a New Era, or this time it’s different. There are certain things in life that I have come to depend on, such as a bearish Stephen Roach, the chairman of Morgan Stanley (MS) Asia and former global strategist. His writing used to be so depressing that you had to read King Lear to cheer up. He was such a perennial bear that I used to joke with my Morgan Stanley sales contact that Morgan Stanley needed to throw a huge party when he turned bullish.
Maybe it’s me, maybe it’s Roach in his old age. Lately I have detected a note that this perennial bear is turning sanguine.
The China bubble debate
In the post-crisis era, China has been the bulwark of growth and stability in a growth-starved world and there are signs that the Middle Kingdom economy may be at risk. The Chinese economy has shown signs of growing a property bubble. As examples, consider this commentary about the China property bubble and the video below of, not only see-through buildings, but a see-through city:
Most recently, I noted that the central government took steps to nullify financing guarantees by local governments, which would further put the brakes on an overheating economy. The Chinese authorities are trying to engineer a soft landing, but fiscal and monetary authorities have had a nasty habit of overshooting and turning intended soft landings into hard landings.
The debate in China is now becoming one of hard landing or soft landing.
Stephen Roach a (sort of) bull?
I nearly fell off my chair when I read the FT Alphaville post entitled Roach pooh-pooh to Chinese bubbles. In it, Roach is reported to believe that the Chinese authorities are in a better position to respond to the current situation because they are being proactive with the emerging property bubble:
Wow! Not quite turning bullish, but an un-bearish Stephen Roach.
Unlike policy circles in the West, where there is no appetite to pre-empt bubbles and crises, China views these risks very differently. In the depths of the Asian financial crisis of the late 1990s, the Chinese leadership first adopted a “pro-active” policy strategy—a forward-looking approach that relies on the combination of fiscal, monetary, and regulatory tools to lean against bubbles and financial crises.
Similar tactics were deployed with great success in the global downturn of 2000–01 and again in the Great Crisis of 2008–09, he continues. In fact, Chinese authorities repeatedly have stressed pre-emptive policy discipline over the reactive self-regulation practiced in the West. “Bubbles, and the imbalances they spawn, were to be addressed early rather than after the fact”.
Is this truly a New Era?