Chanos Vs. Roach: Can China Stay the Course?

NEW YORK, March 27, 2013 — Financial heavyweight Jim Chanos of Kynikos Associates and renowned economist Stephen Roach of Yale University duked out their opposing views on the future of the Chinese economy to a sold-out house here, in a wide-ranging discussion that touched on energy, politics, history and the environment and included its fair share of genial ribbing between the two men as well as pointed differences in their views on what lies ahead.

Part of Asia Society's Citi Series on Asian Business Leaders, the discussion was moderated by Orville Schell, Arthur Ross Director of the Center on U.S.-China Relations at Asia Society. It took on the issue of the sustainability of China's growth after 30 years of breakneck development. Chanos, famous for his 2001 short sell of Enron, took a pessimistic view. Citing the large amounts of hidden debt and rampant corruption in the Chinese political system, he believes China may "ostensibly grow for another five years ... but it's not going to be a very fruitful environment for business." To Schell's question regarding the source of the "incredible energy" apparent in China, Chanos responded "you could have said there was a tremendous energy in Miami in 2005 and Dubai in 2009," which "doesn't necessarily translate long-term into economic success."

Roach, on the other hand, fresh from a Beijing meeting with members of China's new leadership, was more sanguine. He posited that the party was aware of its economic weaknesses and is prepared to tackle them. Roach was impressed with the new leaders, calling them "a cut above anything [he'd] seen in China." He cited their assertive personalities as a contrast to the "introspective" Hu regime, and believes that their "analytical" approach to historical precedents will bring them success in facing the challenges ahead.

More telling than their disagreements, however, was where the two debaters found common ground: for both Chanos and Roach, the economic status quo in China is "unsustainable" and real change will be needed to keep up growth and stability. "If they stay the course, Jim's going to be right," Roach remarked. Chanos, however, remained wary that any leader, not least "seven guys in a room," (referring to the all-powerful Politburo Standing Committee of the Communist Party of China), would be able to set aside self-interest sufficiently to reform the system.

For Roach, having the benefit of a long study of China, the current Chinese administration differs than the previous one, being a more "modern" regime and "mindful of…the internal instability concerns“ and weakness of the export-led model. For him, new Premier Li Keqiang exemplifies this sea change, saying that he "brings a level of expertise to economic problem-solving that China” has never had. Roach drew a comparison to Zhu Rongji, the reformist former premier, asserting that the new administration had Zhu's "guts" and courage coupled with a higher level of expertise. He also enumerated five benchmarks [video, below] which would show if Beijing was making the necessary changes to continue economic growth, saying he'd be "delighted to see [just] two or three of them."

Chanos remains skeptical of the new leadership's abilities, but for both men the message is clear: Changing policies driven by a modernizing government is the only means by which the Party can maintain continued and sustainable growth into the coming decades.

Reported by James Kochien

Video: Highlights from the program (2 min., 4 sec.)

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