Stephen Roach sees a W-shaped recovery for China
The US is not the only place where a double dip downturn is to be feared. China has its own economic imbalances to deal with. Too much money is being thrown at the problem creating malinvestment and a bubble economy, shares having doubled this year alone.
Stephen Roach thinks much of the stimulus money in China has been wasted, potentially requiring a second stimulus package.
‘The impact of the investment-led stimulus will fade and the Chinese growth rate will start to slip again some time towards the middle of 2010,’ Roach said, suggesting that slowing growth could lead to increased layoffs and thus social instability.
‘That means, the Chinese authorities will be forced to contemplate another proactive fiscal stimulus.’
In May, Roach had said China may face a ‘W’-shaped economic recovery and had previously said that China’s current stimulus is directed too much at the pace of growth rather than the quality of the growth.
The former global chief economist for the U.S. investment bank also reiterated his concerns about excessive investments in infrastructure, rather than on stimulating private consumption or bolstering health care or social safety nets for Chinese.
‘Bottom line is they are creating a very unbalanced macroeconomic structure,’ Roach said in the interview, estimating that investment spending in the first half of the year as a share of gross domestic product had exceeded 45 percent of the economy.
‘This is a ratio unheard of in the annals of a modern, large developing economy,’ he said.
These are much the same complaints that can be levelled against US policy makers. However, the scale of the endeavour in China is truly breathtaking. And while the growth potential in China is still very strong, the economy has a number of significant problems with which to deal, unemployment being one. Another mentioned by Roach is the need for the Chinese to save huge sums in order to meet health care costs and to insure against economic misfortune because of the porous social safety net.
Were the government to put more emphasis on increasing economic security, many Chinese would feel more comfortable spending and the economy would be able to wean itself from its reliance on exports. However, to date, infrastructure has been the name of the game in China’s fiscal stimulus. Come this time next year, we will have a much better handle on whether this growth dynamic is sustainable or whether the government needs to top up its stimulus with yet more money.