March 23, 2005
Stephen Roach Goes to China
Morgan Stanley: China is a huge growth machine, but it is growth with a big asterisk. Rapid GDP growth of at least 7% per annum is necessary to compensate for the headcount reductions that arise from ongoing reforms of state-owned enterprises -- an elimination of some 8–10 million jobs each year. As such, sustained rapid growth is vital for stability of the Chinese system -- stability in economic, social, and even political terms.... By celebrating the successes of last year’s tightening campaign, the Chinese leadership is telling us that it has no desire to go overboard and trigger an unexpected hard landing that would jeopardize its all-important stability constraint. Instead, the leaders would rather err on the side of tolerating more rapid growth....
For world financial markets, the China call is obviously very important. Those banking on a prompt policy response from Beijing to the surprisingly strong Chinese data for early 2005 are likely to be disappointed. At a minimum, the authorities seem willing to let the economy run for a while before they see how the data shake out in the months ahead. Barring a growth accident elsewhere around the world, that suggests little relief on the demand side of energy or other commodity markets -- further fueling inflationary expectations, central bank tightening, and a general back-up in the bond market. My bottom line for the markets: With China’s risk-reward calculus acutely sensitive to the all-important stability constraint, I read the message from this year’s China Development Forum as pretty much a green light on the growth front.
As always, the highlight of this conference is a private session with the Premier... this year’s discussions were framed around the hot topic du jour -- Chinese currency policy. Our group of outside experts laid out both sides of the debate to Wen Jiabao. He said nothing to tip his hand and simply reiterated that China continues to actively study the issue and is ‘now trying to select both the proper plan and timing for RMB reform.’ Here, as well, I suspect it will all boil down to stability.... At the end of the meeting, the Premier shook his head and exclaimed, ‘I cannot sleep well at night with this issue of the RMB.’ He then glanced at his watch and politely excused himself. As we left the Great Hall, a noisy motorcade rolled up to the official entrance. We went out one door, and US Secretary of State Condoleezza Rice literally went in the other door. There was a lot on Premier Wen Jiabao’s plate that day. The growth and currency debates are only one piece in the big Chinese puzzle. But in the end, always think stability when it comes to China -- whether the issue is economic or geopolitical. For that reason alone, and based on what I picked up at this year’s China Development Forum, I have little reason to doubt that China is once again going for growth...
Posted by DeLong at March 23, 2005 01:12 PM