Views from a friend

Mar 28, 2024

It is always a pleasure for me to be at the China Development Forum. I have attended this event for 24 years in a row, only missing the first CDF in 2000. I have been to every single one since—making me the longest attending foreign participant. Over the years, the China Development Forum has enabled me to develop a special friendship with China.

Good friends are open and honest with each other. They support each other, both in good times and in difficult times. In doing so, they develop a mutual trust that binds them together.  Sometimes that requires delivering uncomfortable messages.  Mutual trust enables the acceptance of constructive criticism that can deepen friendships, making  friends better versions of themselves. Constructive criticism is not a threat based on ulterior motives.  It is intended to provide honest and open suggestions of how to address tough challenges.

In that spirit and with deep respect to all my good friends in China, I would like to summarize my message in the following three points:

First, I believe that you have a serious medium- to long-term growth problem that could complicate your objectives of achieving the stature of a high-income society by 2049. My concerns reflect a Japanese-like interplay between a shrinking workforce and a growing problem with total factor productivity. While China is not Japan, the 220 million decline in your workforce projected by the United Nations by 2050 compels you to address the productivity challenge head-on. The good news is that your leadership understands this problem and that there is now much discussion in Chinese policy circles about a so-called new productive framework. However, to become operational, this concept needs greater model-based and empirical specificity. A key lesson from the Japanese experience is that these major headwinds must be addressed—sooner rather than later.  I made this point at last year’s Bozhi Macro Forum following CDF-2023 and do so again today.

Second, these structural headwinds bring the long-standing subpar performance of the Chinese consumer into sharp focus. In a paper I prepared for this year’s China Development Forum,[1] I focused on the increasingly urgent imperatives of consumer-led rebalancing. In my view, social safety net reform is critical to achieving this transformation—shifting the emphasis from expanding the enrollment coverage of retirement and healthcare to increasing the benefits of both plans in order to reduce the excesses of fear driven precautionary saving. Only then will China be able to achieve the “worry free consumption” that was noted in the Premier’s Work Report delivered on March 5 to the National People’s Congress. I have been stressing this message at the CDF for over a dozen years and do so again today.

Third, the US-China conflict remains a major challenge to both nations, as well as to the world at large. My latest book, Accidental Conflict: America, China, and the Clash and False Narratives, stresses that conflict resolution must be viewed as an urgent priority.  While I draw comfort from recent signs of stability in the relationship following last November’s successful Woodside Summit between Presidents Xi and Biden, I continue to believe that leader-to-leader diplomacy is a necessary, but not sufficient, condition to resolve the deep-rooted problems in this critical super-power relationship. As such, I underscore my emphasis on institutionalizing the process of conflict resolution through the establishment of new architecture of engagement, framed around a permanent US-China secretariat.

I would like to close with some thoughts on courage. In the end, rebalancing is about having the courage to take tough steps to resolve tradeoffs—tradeoffs between supply and demand, between consumption and investment, between state and private ownership, between imported and indigenous innovation, and between emphasis on industrial development and the aspirations of the Chinese people. Rebalancing won’t work without the courage of imaginative leadership, driven by new reforms rather than by clinging to the time-worn approach of the past. The long-awaited Third Plenum of the 14th Party Congress offers you an historic chance to seize that opportunity.

Finally, a personal observation: I fully realize that some of the points I have made above, including my recent comments on the challenging future of Hong Kong, have been interpreted by some inside of China as “sensitive” issues.  I would urge you to take these views in the spirit of the good friendship offered by a “trusted advisor,” supported by the same type of analytically grounded and empirically based insights that I have been bringing to China for the past quarter of a century. The word “spirit” is especially important. My concerns touch on problems—or challenges, if you wish—that need to be debated in the same vigorous spirit of exchange that played such a powerful role in the early days of the CDF. Debate among trusting friends is ultimately the glue of self-improvement for all of us.

Thank you very much. Xiè xie!

(Note: These remarks were delivered to the Bozhi Macro Forum on March 26, 2024, held in Beijing the day after the conclusion of the 2024 China Development Forum).

[1] See Stephen Roach, “China’s Rebalancing Imperatives: Past, Present, and Future,” a paper prepared for the Engagement Initiative of the 25th China Development Forum, March 24-25, 2024.

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