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 onet.gif.  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.


China may need 2nd fiscal stimulus next yr-Roacht.gif – Forbes

Originally published at Credit Writedowns and reproduced here with the author’s permission.

7 Responses to "Stephen Roach Sees a W-shaped Recovery for China"

  1. Anonymous   August 5, 2009 at 10:02 pm

    What an wonderfully correct observation! We are a country that actually needs a stimulus every year, except the years when we have large export growth to the rest of the world. You see you are correct that we still have a Communist economy modeled on that prophesied by Karl Marx. We work according to high much we can contribute, you may actually call us slaves, and we take whatever that we need, just like the halfling described in his dirty manifesto. I guess this year we have no more large export growth, then we are back to normal. Oh, did you say we have a bubble. I actually feel like we are normal this year. Strange we are normal while everybody else is sinking. Strange this black cat vs white cat and capitalist vs communist comparison. Maybe the halfing was actually right, I need to re-read his dirty manifesto.

    • Guest   August 6, 2009 at 1:36 am

      Did a human write this comment? Or was it written by a Chinese AI program??? I suspect the latter-the quality is SOOOOOO BAD!

    • Guest   August 6, 2009 at 5:24 pm

      Yeah come on Edward Harrison. Don’t write anything about China that doesn’t say great and wonderful it is. And Stop calling China Communist. I mean your description of a country with such Communist characteristics as these:”…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.”BTW – did the Chinese ever understand communism as put forward by Marx? I mean, “Socialism with Chinese Characteristics” = “Capitalism with a tiny pinch of Socialism”. Was “Communism with Chinese Characteristics” equally different from Communism? I know Mao was very opposed to the one party state….before he became the leader of one.On the “W” shape recovery, i have seen many Sell side analyst reports showing a second dip starting in 2010 recently. Citibank being the most recent. THey didn’t forecast far enough to be a full “W”, IE the right side of the “W” wasn’t on the chart yet.

  2. Anonymous   August 5, 2009 at 10:46 pm

    Sir,We in China prefer a X shaped recovery, where X is for invisible. It is very frustrating for your media types to be writing about us. You never are able to write objectively good or bad, and you exaggerate in every direction but the objective direction; the result of that is just a lot of confusion of our customers. As a consequence, we simply prefer you guys never write or talk about any about us. If you want to do business with us, we will do business and we will win by the quality and price of our products. Other than these two objective measures, let’s just forget about us. If we have a recover, it is our business, not yours. If we do not have a recovery, it is still our business, not yours and we may just suffer a little bit more, nothing new really, and we will recovery.

    • Guest   August 6, 2009 at 1:32 am

      Typical, Internationalist when it suits (open trade) whiny brats when you get called on anything. ie the recent “BUY CHINA” provisions by your government, were that America we would be devils(that happened!!!).If you people are upset reading about your country, it IS YOUR PROBLEM! So much of Chinese data is faked, Western writers are rather in the dark. WE ARE STILL ALLOWED TO SPECULATE IN THE ABSENCE OF FACT> And, I believe we are not yet subject to editorial control by the buffoons in the PRC government.The sooner the US trashes this “Special” relationship with China the better off WE will be.We know the Chinese are not honorable, maybe WE should put restrictions on instruments owned by the PRC, delayed payments?? Maybe 90 days?? 180 days?? Specifically devalue PRC owned Treasuries since the PRC can be regarded as a national threat, 20% fee for “SPECIAL” processing maybe.If you are so mad go out and kill more Muslims and Tibetans, that is cool in your country.PS Our group goes through a lot of current Chinese press and there seems to be no qualms writing slander about the USA! But, that is part of the Chinese character, it is OK if Chinese do it-NO ONE ELSE PERMITTED!!! Read your own history, what was “China” in 1933??? Our prediction is that there will be many bargains in your area by 2015!(and a large surplus of unemployed CPC lackeys such as yourself)And, if it bothers you so much JUST DON’T READ WESTERN PRESS! And please stop commenting, Chinese whiners are VERY obnoxious. You may be bribing our government officials to get what youy want, but rest assured this is a very thin layer of US society that wishes you well.

      • Guest   August 6, 2009 at 1:55 am

        Well, I may not agree with this writer but I feel the inevitable tensions between the disparate cultures of the US and the PRC will make future co-operation of any sort less and less likely as time goes on. This is a much broader issue than simple trade. The ongoing cyberattacks against the US ARE NOT being ignored by the defense department.Trade wars will seem miniscule if the USA is forced to run a real CyberFirstStrike on China. Originally a historian, my view is that this or something MORE serious is almost inevitable given the Chinese “Imperial” character. The USA will suffer damage, the DoD knows this. Still, the USA is threatened regularly by PRC DOS attacks anyhow. Draw your own conclusions as to our joint futures!

  3. Anonymous   August 6, 2009 at 12:56 pm

    For the majority of us folks, it does not matter. For the rest of the folks who post the above, better to keep them at each other’s throat with a pen, or a computer keyboard, than guns and knives.