rose: welcome to the broadcast. foowing up on our interview la night with lee kwa wu of ngapore. tonight stevenoach a rmer chief economist with moan stanley who is stillith the company but spends most of his time inhina. >> the 60t anniversarof the pele's republic of china. bu the first 30 years were pretty awful and t next 30 yes have been spectacular. thdifference is they have really put a huge focus on transitioning this economyrom one at was owned by the stat to tt is more of market-based economy. they've tan huge risk in terms of reforms, layoffs, building mart structus, buding companies thatwe've never seen before, and tbe on the insi and watching, watching that risk takg up close is a pretty scinating experience for anye. and i love evy bit of it. >> rose: turning to sports and a busy weekend, wetalk t peter king of "sports illustrated". >> one of ththings that footll players, it's underrated because a l of times you just s them out ere banging into eac other, and you don't really get gd sense that when you're around team on dnesday or thursday they'll spdour or five hours in and o of meings, brief meetings, the quarterbacks meeting with eacother to talk about what ty're going to do that day a actice and what exactly is in the game plane an. and then may two hours of actice, and then they're back in for a couple moremeetings. and one of the thgs that i've always thought aboutootball that i s i once did this thing with btt farve where i did 40 secos to the start of a play, anwhat he does. and, charlie, when i finied the story from the start of the play to thend, the story was 8900 words lg, and at's to dissect whatappens in 40 seconds. >> rose: updaten china and sports when we continue. captioning sponsored b rose communitions fromur studios in new york city, this is charlirose. rose: stephen roach is here he is chairman of morgan stanley asia. for much of hicareer heerved as t firm's chief economist. his new book is called "the next asia-- opportunities and challenges for a new globalization." i am pleased to hav him back at is table. welcome. >> good see you, charlie. >> rose: you left ll street to go live inhina. >> i d. about threyears ago your friend and mine, john mack called me upand said 2 years as an economist, a long time, good job. how would yo like to do something different and be the chairman of morgan staey's business activities in asia. d i tol john i thoht he was nuts. i hathe best j. i wasn't going toleave it. he said,think about it." d john when he says, "think out it," the's a fair amount of emphasis tre. i did think about it. i'd blt fabulous relationships over the years in asia. i was passionate about the region. i thght i kw it wellbut i knew from my gut it woulde a lot fferent from the inside than the outside and i said yeah i'm going to go for it. ve been out there twond a ha years. i have no regrets. i love it. i have lrned an awful lot about asiand i thought it s time to put ift do in a boo d get it down there when the world is very focused onasia, it's own challenges anits role in the global economy. >> ros what are you loved and what have yo learned? >> what i amost passiate abouin terms of asia is wha th've done, especially i china, over the last30 years. big celebrati,0th anniversy of the pele's republic of china, but the first 30 yrs were pret awful. the next 30 years have bee spectacular. and the difference is they have really put huge fus on transitioning this ecomy from one that was owned by the ate to that is more of a maet-based economy. they've taken huge sks in terms of reform, layoffs, building market structures building companies tt we've never se before. and toe onhe inside and watching, watchinghat risk taki up close i a pretty fascinating experience for anyone. and i love every bit of it. >> rose: do you have access there, the kind that you might have he? >> i have-- i've bn really blessed and fortunate. when i first start writing about china in depth, probay about a dozeyears ago, i wrote a piece in the "nancial times" called, "this china is different right after the fancial crisisn 97-98. thfinance minister of china at the time read it, and summoned me to meet wit him, believe it or not, in a boat in the back harbs of seatt on saturday in mid-1999. we hitt off. opened one door aft another for me in china, inclung intrucing me to the premiere d it's been nonstop ever since. it helps to be in the right place at the right te and be lucky. >> ros how do they see their future? there was that famous speech in which was said--o the alarm of some china wchers and to the alarm of people in ina which was-- surprise,urprise this economy may not be sustaable. it may not be as goo as you think it is. yoremember the quote. >> i washere. th was back in march of 200, the end of the big congress they have in beijing, the national people's congress. he said the economy, while i appears to be strong o the surface, beneat the surface is unable, unbalanc, uncoordinated, andltimately, unsustainable. and we have got to addres these issues before it's tooate. and it w really a quote that used as a setup for much of this book. and intereingly enough, in mid-september,here was a big kihs again-- conference again that i attended, and you wld expecthe premiere tocome out and say, "we're recoveng. we're leading the world. wore proud of what we've done." he said,"no, this is recovery is fragile. it's tentive, a it continues to reect anconomy that's unstable unbaland, unordinated and unsustainable. and th is the issue in china right now. thpath they're on, as spectacular as it'been, it' dominated by eorts. it's dominated by investments they're under-consumers, they're over-savers. it's very destilizing and they've got to aress it. and this csis that the world is in righ now i thi is their wake-up call that theyave no choice but tget on with the heavy liftg of addrsing these issues. >> rose: and they are? >> they're draggintheir heels. th've get to do more. they did a stimulus package that gave thea lot of growth in t first half of 2009,ut 88% of that growth, crlie, came in one sector,nvestment, whichs already very top-heavy,and they fued it with a bonanza o bank lending whicif this type of approach conties wl compromise loan qualities and cause prlems for the bank. >> rose:hat did they do with it, dwup infrastructure. >> infrastructure wamost of it. you want state-of-the-art infrastructure go china. there's thing like it. if you get stuck the wan v wick here, ithink of wh it's like to drive to the airport in beijg. >> rose: what'it like? >> the roads are smooth no bumps. you go to the airrt, it is spectalar. >> rose: howast you can dri? >> wl, it depends on the time of the dayyou pick. you pick a day when there'so affic, there's no telling how fast you can drive. the problem with drivi in china is most of the drivers don't have a l of driving experience. >> rose: so what china has too first of all, is to create more consumerpending so there will be a demand forthe productsit makes. >> absutely. i mean-- and here the issue in china-- chinese households save to excess. their savings rate for the household sector in the year 2000 was aut 27%. the year 2008 it was 37%. so the more income th get the more they saveand the reason theyave is because they have no social safety net eir national sial surity fund, e pillar of the retirementystem, s out $82 billion u.s. dolla, that' 0 a worker of lifetime social curity benefits. they did a medical ce plan earlier this year. $30 person for three years. so when you don't have any security for t future, when you-- when your medical benefits don't cover your average expenses, you' got to save, and that inhibits the growth of a broadly based consumer cuure. they'vgot to invest i their safety net and they'veot to do now. >>ose:uncoordinated means what? >> it talks about e fragment and aspects of china. there's an old chinesroverb-- the mountains e high and the emperor so farway. the guy in beijing, they may give an order, buteyond beijing people dohatever the heck thewant and i think that's very, very true,very fragmented banking sa system of regial governance, and they're trying to ll that together an ey're actually making some progress. >> rose: what's happening t there in theegions? are we seeing any local demoacy? >> in some pockets of china, especially close to hong kong. there ve been some experents in fely held elections and in politicaleform. but these are e exception, not the rule and the fascinating thing abt transitioning to a conmer. -based siety, you will raise the whole aspirational level of this massive populatn. it's going to be vy hard to do that ultimately. without more free choice of political leership. >> rose:ut they see economic growth as their own salvation. >> the two biggest-- well,he two words that always shap my assessmentof risk in china are social stability. and they hav made t determination th need rapid grth to absorb surpl labor and maintain social stability. without that rapi growth, they do worry about destabilizing events in their population. theye had plenty of them recently. they've had ethnic violenc in tibe th had massive layoffs in one provin because of the export collapse. the keyor china, i think, is to me away from this fation on the qntity of growth and now start to tnk much more about th quality of growth, and that's a better mixf the g.d. it's environmental isss. 's resource consumption. they've done s well that the really need to rethink this growth paradigm. >> rose: but ialk to a lot of people engaged in theork of looking at climate chaeay not withstanding their refusal to accept established emiion andards, they are very committed to sol, they're very committedo electric cars, they're very committed to range of things that suggest their areness that growth has the peril of a kind of environmental damage. >> well, i think-- there is a growing coniousness inside of china that open-ended growth has awe lot of negive side effects or what econists call externalits. and excess resource consumption, oilonsumption, and pollution arclearly the most obvious of these negative externalities. the questions are they really doing something about it andthere certainly is lot of advance going on in altnative energy technologies in china. and because of the nature theirystem of goveance, they can douclear in aay that a sociy like the u.s. could not even-- so they can move very aggressively in the areas but the bottom line is as long as they have this growth model, 's fixated on export, fixated on investment, is dinated by the indusial production, okestack-type industries, which are very, very biased toward pollution and exces ergy consumpti. they've get to get out of that mode >> rose: what'sheir commitment to some kind of removg the dollar as aeserve currency the worl >> i think it' all talk right now. the end game is, ocourse, that thdollar will not be the preeminent anchor the world financial systemt some point the distance future. >> rose: are they right. what does "distant" mean? >> probably 50, 60, 70 years out. look at china they're an export onomy. theyeed a competitive currency to suprt their export business. they sold their llars right now it would undermine their export competiveness, lose jobs and runhe risk of social instabily. they're t going to do that. >> rose: is notn their interest to ge rid of the dollar. >> not at all, until they change eir economic structure that makes them less dependent on the currency suppo to their main engine of growth, which is exports. >> ros is china differenthan the st of asi >> absolutely. the piec i told you about earlier that theinance minister rd a dozen years ago, the titl wasthis sort of trivial title cald, "this china is difrent." and i wrote that because in the asian cris, all these, you know,conomies that we were so envious of werefalling boy the waysid they were devaling their currencies. they hadassive accou deficits. theyere running out of reserves. ey had to run to the i.m.f.. ina huge save ethey had a current account surus. they did not to the i.m.f.. they did n deval their currcy. and they were very, very focused on buildg the gatestxport chine the worldad ever seen and executi that cstruction project by transitioning from a system ostate ownershito a system of mart-based private ownersp. >>ose: is it a joint venture betwn government and private? >> aolutely. the government still h huge stakes in all--. >>ose: huge stakes meang the majority? >> in my cases, 50%,0% are own bide the government. >>ose: what's the possibility of a tre war wi china? >> that's sort up to , i think. in the years 2005-2007, the u.s. congress in its infine wisdom introduced 45 separate piece of ti-china tradeegislation. not one of them passed. reason? employment rate was 4%. today, we've t a little bit more than 4% unemployment in the u.s. we have president w in september imposed sanctns on 35- big sanctions-- o the exportof tires coming ou of china in the uted states. small potatoes. ny piece of the overall trade between the two countes, but emblematic of big issue that's looming in 2010. midterm elections coming f a very popular president. the unemployme rats going to be 9%-plus, maybe hher. and the coress is itchy to push the blameono somebody else, and that somebody else always seems to be cna. so ia bilateral trade bill goes through the congress, i think prident obama is going to have a heck of a time vetoing itand that's a big ise-- >> rose: and i he does? i mean, if he doesn't veto it? what will the chine do and wherdoes it take us? >> wl, you can't forget one itical thing. we don't save a nickel erica, courtesy o trillion-dolla budget ficits our savings position i going t t worse, so our bigges lender our biggest provider of surplus savings fromverseas are the chinese. we p trade sanctionon them they will nothow up at treasuryuction. the llar will crash. long-term terest rates will shoot up, and we'll be back in thsoup again. i appear in front of the ngress several times a yr. i've done it t last five, six yes. i talk about ts. it goes in one ear out the other. ey don't seem to scare. they want a specoat for the pressures, the veryegitimate and palpable pressures beang do on middle-class erican workers. china is the economy. >> rose: youupported president obama. >> i did, i vote for him. >> rose: what doou think of his stewardship ofhe economy? >> he inherited a tal mess. thisrisis had been buiing for long, lg time, an outgwth of reckless behavr om main street to wall stree to washington. but, you kw, like all these messes, he can blame it on t other guy but it's n his recovery whether he likes it not. so the challenge will be for him to put in ple policies that really ge us a better ocess of enomic oanization, sustainable aling. >> rose:hey say they' turned the economy around. in your judgnt have they >> i think they put huge ho-- they plugged huge ho in the financi system. they seem to have, because of that, instilled better see of confidence amongst busisspeople and consumers. so the fefall has stopd. the recovery, though, think is still a way out, very ttative veryragile, andltimately very anemic and vulnerae. >> rose: do e chinese see the global economic issues different than the amecans do, beyond this sorof consumption spending issue tt's been there before and which you used to sort oprovide for many yes as warng? >> well, i think the chinese are using this crisis-- their word focrisis charlie is an interesting word, weji, which means bothangernd portunity. and i think-- but they're looking at this as a time rethinkthis global strategy. they've been hugely dependent d successfully so on the u.s. as a main engine driving the exteal demand that supports their expo machine. and so now they-- they're beginning to sense that they-- they need a broer platform to suort tir globalizaon reach. they need to be le to sell those exportsn intoou're and latin america anto aica. they're thinking lotbout resoce acquisition strategy in places like australia and sout america. >> rose: they're doing lot of resource acquision strate all er the world in terms of ener. >> they're an energy-short naon, and they absolutelyeed to do th. >> rose: how d they view the united states? i mean, i realize there's no monoliic view. >> they have extraordina admiration for t united stes. they truly d you ow, when i go t china which is every other week, they continue to talk a lotbout our resilience, our flexibily, how they would givanything hav a silicon vaey. >> rose: but en't they trying to delop a silicon valley? >> they've g a fe- >> rose: i'm asking whether there's a coitment to do it, not whether they've be able to do it. >> they'd ke to, but the true licon valley spirit, th inrplay between entrepreneurs and major universiti andhe creative genius th comes out of thainterplay, that takes a longime to build. they don't he that yet. >> rose: but ty recogze that. >> they wod love to have that. they really would. they've got a few good technology comnies but there e few. >> rose: ds that cause you to say, look, not withstanding evything that's said aut the economicrowth level in mparison between the united states and chine and india, do not countmerica out becau it has this entrepneurial, creative, risk-taking instinct? >> absolutely. that's our strgth. you know, when we're fad with a problem tha forces to look inside of ourselves, wcan be a very resient, tough ple. but, you know, when we pretend that ese problems tt we have are not important, we canet oursves in a al mess. >> rose: what's o biggest problem? >> i think our biggest proem was we spent 12 years growi well beyond r means, funding those-- thatrowth by borrowing againstsset bbles. and that washony growth, chare. >> rose: and now we look at a defit like we've neverseen before. >> andecause of that, we built up excesses in t financi system, excesses in the real economy. th's the key to thisrisis. this was not just a financial problem, a wall street problem. this is a probm that had a horrible interplay between t real economy and e financial econy. so it all has bece-- >> rose: wh does that mean a horrible interpl? >> consumers. the american consumer. moved up to 71.5% of orall g.d.p. in the united states, is still there toy. the savings rateent to zero for the firs time sincethe 1930s. a lot of peoplsay, "we, americans are saving again." the sangs rate numbers just came out for the month of august. 3%. that'sot much. we've got to take that savings te, givenhe retirement that's loong for 77 million ba boomers, that saving rate's got to go back up to seven, eight, 9%. >> rose: you're moreoptimistic for china's future than the united states? >> i ink right now the path china on is much more impressive. they're running their financi syem much morerudently. and i think e balance sheet for the private ecomys in bett shape. they do have a lot of issues, though. i don't want to just paint rosy picture. >>ose: what are tho issues, beyond what u've aeady lked about, in ter of--. >> i just go back to the premie on diagnosis. this is probably the most unbalanced economy of y of the big economies inhe world today. d they're compouing the imbalances as we spea and this crisis to me is all about the unsustainability of imbances. >> rose: a what is their geopolical ambition? >> i think we make too much out of it. they have a bigtanding army. the army, think, mainly is an armyhat is focused on defense, as opposedo offense. thone issuethat has always been a big risk factor for china has been taiwan. there's been big pitical change itaiwan with the change in leaderships. i think that sue has been defud. i'm not worrie about china as a military threat. and i realize that there are experts at t pentagon tha say next to the u.s. china is investing more in i.t.-enabled military capabilits and that we should worry about this. i dot see tha >> rose: you have said th