Stephen Roach is a senior fellow of the Jackson Institute for Global Affairs at Yale University and a senior lecturer at the Yale School of Management. He joined Morgan Stanley in 1982. For the bulk of his 30-year career at the company, he served as the chief economist and chairman of Morgan Stanley Asia.

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“I think the Chinese economy is performing much, much better than your average market participant would want to conclude right now,” said Stephen Roach during a China-themed event at the Brookings Institution in Washington, D.C., on Feb. 10. Recently, Roach shared his insights on the Chinese economy with the Chinese Social Sciences Today (CSST), citing employment rate and shifting mix of the GDP as the mainstays of his argument.

 

CSST: Why are you so optimistic about China’s economic prospects?

 

Roach: Those expecting a hard landing in China consistently argue that the economy is much weaker than the published data indicate, inferring that in such a relatively sluggish growth climate, job growth should be weak, unemployment should be on the rise and social stability is at risk.  With the labor market data—drawn from a different data source than the GDP statistics—pointing to solid, above-target employment growth, that argument appears to be based on a false premise, which takes me to the second part of this question. The only way that job growth can hold up as GDP growth slows is if the growth of the economy shifts from labor-saving manufacturing to labor-intensive services. With Chinese services requiring about 30 percent more jobs per unit of output than manufacturing and construction, the shifting mix of the GDP toward services-led growth is a key piece of the optimistic growth story that I continue to stress.

 

CSST: But, a number of disheartening signs have appeared since June of last year, such as the stock market free-fall and the devaluation of the RMB.

 

Roach: China is not without its problems. I am not saying that these problems should be dismissed. But I don’t believe they should be seen as the primary forces at work in shaping an otherwise largely resilient Chinese economy. Again, in terms of GDP growth, my focus is less on the overall number and more on shifts in the mix as I noted earlier.  As long as an increasingly rebalanced Chinese economy that is now drawing more support from labor-intensive services continues to generate above-target employment growth, then worry about the lowest total GDP growth is misplaced.

 

CSST: Why is the stock market crash less pertinent to the big picture?

 

Roach: While I do feel the stock market problems pose a serious hurdle for capital market reforms—something that China needs quite urgently—I do not believe that the bursting of the equity bubble poses a major risk to the real economy. A comparison with the US is particularly important in that regard. In China, only about 12 percent of the urban population owns shares, which is in sharp contrast to the 49 percent of the US population that have equity exposure. Moreover, stock market losses typically are manifested in the form of negative “wealth effects” that have a negative impact on personal consumption. With China’s consumer sector accounting for only about 37 percent of its GDP, which is just about half the share of US consumption, such wealth effects are likely to be minimal.

 

CSST: Will the devaluation of the RMB trigger a global financial crisis?

 

Roach: While I would concede that the 2015 early August shift in China’s foreign exchange mechanism was not handled well and that every effort should be made to improve communications with the financial markets in the future, I do not believe that this will result in a full-blown currency crisis along the lines of what happened in Asia during the financial crisis of 1997 to 1998. None of this is to ignore the latest extreme fluctuations in the Chinese and world financial markets. But it is very important to put these developments into their proper context before leaping to conclusions.

 

Sun Mengxi is a reporter at the Chinese Social Sciences Today.