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Morgan Stanley Chief Economist: China Stands Tall
For the second time in four years, China's economy is successfully bucking the headwinds of a world in recession. During the crisis-induced global downturn of 1998, China resisted the pressure of pan-regional currency devaluation and kept its economy on a 7.5 percent to 8 percent growth path.

"Chinese economic resilience is once again coming through loud and clear," said Stephen S. Roach, chief economist of Morgan Stanley Dean Witter. "Its economy has never stood taller, both within Asia, as well as in the broader global economy."

Roach commented on China's recent economic development in exports, foreign direct investment, consumer demand in his latest report, entitled "China Stands Tall".

The recent performance of the Chinese economy stands in sharp contrast with the steady drumbeat of weakness increasingly evident elsewhere around the world, Roach said, adding that is not to say that China has emerged unscathed from this global recession.

Export growth, always the first point of vulnerability in a trade-sensitive nation such as China, has indeed slowed sharply this year. Following a 28 percent surge in 2000, export comparisons have fallen to 8 percent over the first seven months in 2001.

However, Roach said, China is far less exposed to the vicissitudes of the U.S. information technology demand cycle, with such items accounting for only about 30 percent of total Chinese exports.

Also, key in that regard is China's emerging role as an outsourcer of Japanese consumer products, along with the nation's emergence as a formidable production platform for global multinational corporations, he said.

Nor has there been any sign of let-up in China's impressive structural transformation, Roach said. Reforms remain on track on a variety of fronts, especially the restructuring of state-owned enterprises, capital markets liberalization, a growing shareholder value culture, social security and pension reforms, and progress in developing a rule of law, the economist added.

"Imminent WTO accession provides added impetus to this transformation, especially by encouraging a powerful wave of foreign direct investment, as multinationals continue to establish a beachhead in this gigantic market," Roach noted.

The Morgan Stanley economist said that this unrelenting surge of foreign direct investment is a key link in China's virtuous circle and a principal means of technology and management transfer, and it continues to play an important role in offsetting the slippage in export demand.

The utilized foreign direct investment in China surged 29 percent in July, and Roach predicted it on track to top a record US$50 billion this year.

The same can be said for an improving state of domestic demand in China, with the consumer price index inflation running 1.5 percent in July, indicating, to some extent, an ending of long simmering deflationary forces in China.

In the absence of the deflationary forces of price destruction, Chinese consumers now have less of incentive to wait for cheaper-priced goods, Roach said. In recent months, consumption has also been boosted by last April's pay rise to state-sector workers.

"To China's credit, it saw the global slump coming, a foresight that distinguishes it from the rest of Asia, which remained overly dependent on the US-led IT cycle," Roach said. "The Chinese leaders recognized that it could not afford to count on any vigor from external support in order to hit its overall economic growth objectives."

As was the case during the Asia crisis of 1997, China has turned on the fiscal spigot to insulate its economy from an increasingly harsh global climate by boosting its infrastructure spending, he said.

"In my bearish view of the world, China stands particularly tall, and it is the only major country in the global economy where I remain optimists." "Global recession or not, the bull case for China remains very much intact," Roach concluded.

(Xinhua News Agency 08/31/2001)

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