Morgan Stanley: China's Growth Potential Tough Enough to Stand on Its Own

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Last updated at: (Beijing Time) Tuesday, March 12, 2002

Morgan Stanley: China's Growth Potential Tough Enough to Stand on Its Own

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"A huge milestone on the road to reform"

China's growth potential is now tough enough to stand on its own, having passed yet "another important test with flying colors," the second time in four years that China has had to face a major external shock, the chief economist of a major financial institution said.

The comment came immediately after Finance Minister Xiang Huaicheng unveiled China's government budget for 2002 at the on- going session of the National People's Congress in Beijing.

Morgan Stanley's Chief Economist Stephen Roach said in his latest global economic report that with the downside of the rare synchronous global recession now having come and gone, the Chinese economy has emerged largely unscathed.

Describing it as "a huge milestone on the road to reform," Roach said, once again China has separated itself from the pack, not just in Asia but from the rest of the global economy.

In the midst of the Asian crisis, there were few who believed that China would stay the course. But China barely flinched during the period, demonstrating an extraordinary resilience that has hopefully dispelled these concerns, the economist said.

"China has demonstrated time and again that it has both the determination and the capacity to withstand tough external pressures," he noted.

"Once again, the fears that Chinese export comparisons were about to go sharply negative in the final months of 2001 and in early 2002 turned out to be overblown," Roach said. Instead of dipping into negative territory, Chinese export comparisons actually accelerated dramatically in the months after the terrorist attack of September 11, he noted.

One obvious explanation of this stunning development lies in China's increased role as the world's outsourcer of first resort, Roach said. An explosion in foreign direct investment has been key in establishing and expanding this ever-growing outsourcing platform, he added.

On the heels of China's WTO accession, foreign multinationals have been moving aggressively along those lines and foreign direct investment accelerated by another 15 percent in 2002 to record 47 billion U.S. dollars.

The economist stressed that in light of the ongoing foreign direct investment flows, Chinese outsourcing seems to be destined to increase sharply further in the year ahead, providing China with a structural source for export demand that is largely insensitive to the vicissitudes of the global business cycle.

"China has no other choices than to embark on a transition from external to domestically driven growth"

However, some of analysts on China's economy here believed that while China's reforms are very focused on unlocking the economy's vast domestic demand potential, that opportunity remains a distant hope. For the time being, Chinese economic growth continues to be driven mainly by exports and investment, they noted.

With the embarkment on a transition from external to domestically driven growth, the heavy lifting of Chinese development is about to begin, said Andy Xie, senior analyst for Morgan Stanley's Asia Pacific. "If Chinese multifactor productivity is now expanding at a 4 percent rate, the rapid pace of 7 percent growth may not be strong enough," Xie said.

In a high-productivity-growth economy, it takes an exceptionally rapid growth rate in activity to drive the job creation machine. That remains one of China's most daunting challenges in the years ahead, Xie commented.

China's greatest constraints are not external, but lie in its capacity to tap the world's greatest reservoir of domestic demand, and in the end, China has no other choices than to embark on a transition from external to domestically driven growth, the analyst said.

Summary of Finance Minister's Report on Central, Local Budgets

Finance Minister Xiang Huaicheng has delivered the Report on the Implementation of the Central and Local Budgets for 2001 and on the Draft Central and Local Budgets for 2002 to deputies to the on-going annual session of the National People's Congress (NPC).

China's Export to Increase by 4 Times in 10 Years: Morgan Stanley

A report published by Asian chief economist with Morgan Stanley points out that China's export will grow fast in 10 years in spite of a slump at present. In the coming ten years, China is expected to be capable to increase its export value by 4 times, up to US$1,000 billion.

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