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GDP is ‘worst metric’ to use in gauging China: Stephen Roach

Tuesday, 30 Jul 2013 | 3:51 AM ET
Economist Stephen Roach
Jin Lee | Bloomberg | Getty Images
Economist Stephen Roach

Recent bearishness surrounding China's growth is just another "false alarm" and investors are focusing on the wrong data points to assess the outlook for the world's second biggest economy, said well-known economist Stephen Roach.

He argues that industry watchers should stop the obsession with gross domestic product (GDP) figures for China, and instead focus on consumption data, which he says is a better measure for an economy in the midst of rebalancing.

(Read more: Forget growth, China is contracting, experts say)

"The composition of GDP is probably the worst metric to use in assessing early-stage progress on economic rebalancing," the Yale University professor and former nonexecutive chairman of Morgan Stanley Asia said in a note published Monday.

"Eventually, of course, the mix of GDP will provide the acid test of whether China has succeeded. But the key word here is 'eventually,'" he added.

'China is Changing Its Stripes': Expert
Stephen Roach of Yale University explains how China is rebalancing its economic model as Treasury Secretary Jack Lew meets with China's vice premier to talk about building economic relationships.

Several investment banks and high profile economists have in recent weeks revised down their growth forecasts for China, with the more bearish ones falling below 7 percent. Last week Societe Generale warned that in an extreme scenario, Chinese growth could fall as low as 3 percent in the second half of this year.

But according to Roach, a closer look at Chinese consumption tells a different story and gives "good reason for optimism." He points specifically to an uptick in the services sector, which he believes will eventually beat growth in key sectors like manufacturing and construction.

(Read more: What if China lands hard? SocGen outlines the scenario)

In the first half of 2013, Chinese services output expanded 8.3 percent year on year, much faster than the combined growth of manufacturing and construction of 7.6 percent, said Roach.

"Accelerated growth in China's services sector is encouraging, with output in this sector now growing faster than that in manufacturing and construction - reversing the pattern of the past 20 years," he said, adding that greater reliance on services will allow China to settle into a "lower and more sustainable growth trajectory."

It is Roach's analysis of the consumption data that has led him to believe that calls for a crash in China's economy are not warranted.

(Read more: Is China about to launch a new round of stimulus?)

He claims the "China crash syndrome" is a "malady that seems to afflict economic and political commentators every few years, never mind the recurring false alarms over the past couple of decades."

"Far from crashing, the Chinese economy is at a pivotal point. The wheels of rebalancing are turning," Roach said.

—By CNBC's Katie Holliday: Follow her on Twitter: @hollidaykatie

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