Grow­ing ser­vice sec­tor bol­sters China's eco­nomic growth

The Pak Banker - - BUSINESS -

China has enough re­sources to re­al­ize 6.5-per­cent growth and has made en­cour­ag­ing head­way on struc­tural ad­just­ments, said Stephen Roach, an econ­o­mist with Yale Univer­sity.

Roach, a se­nior fel­low of Yale Univer­sity's Jack­son In­sti­tute of Global Affairs who was just back from Bei­jing, told Xin­hua on Thurs­day that his im­pres­sion is that there is less con­cern in­side China than out­side China. "The broad con­clu­sion in­side China is (that) there re­mains con­fi­dence in the lead­er­ship and con­fi­dence in the strat­egy to ad­dress th­ese is­sues," said Roach. In his view, China's econ­omy is do­ing well, much bet­ter than what the mar­ket is con­clud­ing.

"The slowed growth rate is a re­flec- tion of the struc­ture shift in the Chi­nese econ­omy, away from man­u­fac­tur­ing and con­struc­tion to ser­vices. For any econ­omy, it means a slower growth; China is not an ex­cep­tion." China's in­dus­try sec­tor is ob­vi­ously be­ing hit by weak global de­mand and the lagged im­pacts of RMB ap­pre­ci­a­tion. Those are the on­go­ing source of weak­ness, said Roach, who was chief econ­o­mist of Mor­gan Stan­ley and for­mer chair­man of Mor­gan Stan­ley Asia.

How­ever, the emerg­ing growth of China's ser­vice sec­tor can off­set the blows, he said. "The grow­ing ser­vice sec­tor can't com­pletely com­pen­sate the de­clin­ing in­dus­try sec­tor. The im­por­tant thing is ser­vice sec­tor can com­pen­sate a large por­tion of re­duced em­ploy­ment from in­dus­try sec­tor. It's more im­por­tant than GDP." He said he be­lieves that as long as the Chi­nese govern­ment com­mits it­self to the re­struc­tur­ing and move ag­gres­sively to ex­e­cute the re­form, China can def­i­nitely achieve the growth rate of 6.5 per­cent.

China's slow­down, he noted, will af­fect ma­jor com­mod­ity ex­porters like Aus­tralia, Canada, Rus­sia, Brazil as China is mov­ing away from an in­dus­try-driven model to a car­bon-light ser­vices model, re­sult­ing in less de­mand for com­modi­ties. But the good news is that China, if suc­cess­ful in re­bal­anc­ing its econ­omy, will cre­ate a huge de­mand for con­sumer goods, he pointed out. "That's enor­mous op­por­tu­ni­ties for coun­tries to sell things to Chi­nese con­sumers. That's a plus in the cur­rent dif­fi­cult global eco­nomic en­vi­ron­ment," he said.

Mean­while, he added that cap­i­tal out­flow from China will not trig­ger a cri­sis like what hap­pened in Asia in the late 1990s. "There is a lot of dif­fer­ence be­tween China and East Asia economies dur­ing the cri­sis back then," he said. China is still run­ning a con­sid­er­able cur­rent ac­count sur­plus whereas all of those economies were in deficit at the time of the cri­sis, said Roach, adding that China to­day has over 3 tril­lion dol­lars in cur­rency re­serves and those coun­tries had run out of re­serves. In ad­di­tion, he noted, those economies were all vul­ner­a­ble to short-term cap­i­tal out­flows, and they had short-term for­eign li­a­bil­i­ties quickly rushed out the coun­try, while China has lim­ited ex­po­sure to that kind of cap­i­tal.

"China learned re­ally im­por­tant lessons dur­ing the later 1990s," he said, point­ing out that the large for­eign cur­rency re­serve China has built up af­ter the Asian cri­sis is a huge cush­ion to deal with the prob­lems just like that. The main chal­lenges to the Chi­nese econ­omy, he added, have much to do with the im­ple­men­ta­tion of the re­forms which have al­ready been pro­posed. In his view, to bal­ance the econ­omy, the govern­ment needs to ac­com­plish three main ob­jec­tives: more em­ploy­ment growth, con­tin­u­ous ur­ban­iza­tion, and build­ing a strong and se­cure so­cial safety net. He com­mented that the Chi­nese govern­ment has done a good job in the first two, but still lags in the third.

"The govern­ment has pro­posed a num­ber of re­forms in the last two years to deal with so­cial se­cu­rity and health care, house­hold reg­is­tra­tion re­form, one-child pol­icy, that are all en­cour­ag­ing as the safety net is get­ting at­ten­tion." "If they don't quickly im­ple­ment the safety net re­forms, the econ­omy will get stuck in a sort of in­com­plete struc­ture-change re­bal­anc­ing. That will be proved to be a great risk for Chi­nese econ­omy," he said.

As re­gards the up­com­ing an­nual ses­sion of China's leg­is­la­ture in March, Roach said he is look­ing for a clearly out­lined frame­work of a new five-year plan. "Last year the Chi­nese govern­ment gave us some hints on what to ex­pect in terms of the growth and some broad re­form pro­pos­als," he said. He said he looks for­ward to a clar­i­fi­ca­tion of what the govern­ment is ac­tu­ally do­ing, as well as the time­lines of so­cial safety net­work re­forms and house­hold reg­is­tra­tion re­forms. "The mar­ket wants to hear a clear and much more pre­cise time­frame by which the govern­ment is mov­ing to ad­dress eco­nomic chal­lenges," he added.

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