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Stop Fixating on Data, China Doing Fine, Says Roach

Wednesday, 5 Jun 2013 | 11:21 PM ET
China Economy Doing 'Much Better' Than Data Show: Roach
Stephen Roach, Former Non-Executive Chairman of Morgan Stanley Asia and Senior Fellow at Yale University says look past China's monthly economic releases because the economy is on solid footing.

The world's second largest economy, China, is doing "much better" than the recent slew of discouraging monthly economic data might suggest, according to Stephen Roach, a professor at Yale University and former non-executive chairman of Morgan Stanley Asia.

Recent economic indicators including the latest HSBC China purchasing managers index (PMI)—which fell into contractionary territory for the first time in seven months in May - have reignited investor concerns over the outlook for the economy.

"I think the economy is much better than superficial assessment seems to indicate. The growth rate was a little slower in the first quarter than people thought, but the mix is a good one," Roach told CNBC Asia's "Squawk Box" in Chengdu, China, on the sidelines of the Fortune Global Forum 2013.

While China's gross domestic product growth slowed to a worse-than-expected 7.7 percent in the first quarter, the services sector outpaced that of the overall economy, growing 8.3 percent over the same period, which Roach believes is a very encouraging sign.

(Read More: China's Strength Could Become Its Weakness)

"I see something you don't. China is moving methodically to put in place a pro-consumption economy; they are focusing on building out their services sector, increasing urbanization which levers their per capita income three-fold over the old rural employment model and, eventually, they will focus on social safety net," he said.

JPMorgan Lowers China Forecast
Fang Fang, CEO of Investment Banking, China at JPMorgan says the bank has recently trimmed its 2013 GDP growth forecast for China to 7.6-7.8% due to concerns about industrial overcapacity.

As the economy's growth moderates, Roach says investors should not look for "Abe-style big splashes" that have enamored markets, referring to comparisons with Japan, where Prime Minister Shinzo Abe has embarked on radical policies to boost the weak economy, measures which have triggered in huge gains in the domestic stock market.

Beijing, Roach argues, will go about its economic strategy "very differently." He expects policymakers to step up their focus on structural reforms, instead, in areas such as interest rate liberalization and restructuring the state owned enterprise sector.

(Read More: Why China's Slowing Growth Could Be a Good Thing)

US Recovery Overhyped

However, Roach sounded a less optimistic tone in his assessment of the U.S. economy.

"The American consumer is not getting better. [They are] in a Japanese-like balance sheet recession still encumbered by excess debt and totally inadequate personal savings and only just beginning to repair his or her balance sheets," he said.

While the domestic housing market recovery is under way and the stock market is soaring, he said it's important to look at how far they have come relative to historic levels.

(Read More: Surprise! China Stocks Are May's Best Performers)

"The property market [home prices] is up by 10 percent over the last year, but it is still down 28 percent from its previous peak," he said. "The same thing is true of the stock market. We hear every day about the stock market closing at new record, but we don't hear in real terms—it's still 20 percent below the levels in 2000."

By CNBC's Ansuya Harjani.

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