China's shifting economy inevitable: Roach

Expert remains optimist, despite GDP numbers

China's slowing economic growth is the result of a carefully planned transformation and, Stephen Roach argues, the wheels aren't about to come off anytime soon.

Roach, a long-time China watcher and former chairman of Morgan Stanley Asia and the firm's chief economist, is now a senior fellow at Yale University's Jackson Institute of Global Affairs. He spoke at the China Institute in New York Thursday and discussed China's Hard Landing: Fact or Fiction?

"I am and remain an optimist on China," Roach told the audience. "The focus on China's headline GDP (gross domestic product) is the wrong thing to do."

China is in the midst of a vast economic shift that will see the country morph into an economy led by services from one dominated by manufacturing and exports, said Roach.

He believes that services could end up accounting for 65 percent of GDP in the next 25 years. "China is transforming from a nation of producers to a nation of consumers," Roach said.

Roach said the government now recognizes that the only way the country can achieve long-term growth is through "an employment shift to labor-intensive services-led growth."

Roach argues that the shift to a consumer-led economy will result in other changes in China. "A consumer society embraces a value system that demands open communication and upward mobility," he added.

One area that Roach thinks the government will address is the country's social safety net. He expects China to implement initiatives in retirement and healthcare in the next Five-Year Plan.

Consumers won't thrive in a system dependent on state-owned enterprises (SOEs), said Roach.

He said that the government is aligned with the new economic initiative that emphasizes a market-based approach. China's steel industry, dominated by SOEs, has a serious over-capacity problem in which job losses are unavoidable. "That's where China's thriving private sector comes in. Job growth in the private sector will help to offset job losses from reforms in the state-owned sector," said Roach.

In discussing China's recent economic travails, Roach said the People's Bank of China's decision to devalue the yuan (RMB) last August turned out to be the right call. "I was wrong on that when it first happened," Roach said. "Now I think they were right in citing market-driven concerns for the change."

Noting that China's debt-to-GDP ratio is considered high at 285 percent, Roach said the country is not in any danger of a debt bubble.

"Yes the debt is high - the county used debt to finance infrastructure improvements during the financial crisis. But China has a high savings rate that will allow the government to pay down the debt," he said.

paulwelitzkin@chinadailyusa.com