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China plenum to 'surprise' on reforms: Stephen Roach

Monday, 11 Nov 2013 | 10:52 PM ET
Stephen Roach: How China can boost internal demand
Monday, 11 Nov 2013 | 6:15 PM ET
Stephen Roach, Senior Fellow at Yale University says China needs to create more jobs and increase household spending to successfully change the nature of its economy.

Investors banking on an aggressive raft of reforms following the China plenum should be positively surprised, said Stephen Roach, senior fellow at Yale University.

It is hoped that Chinese president Xi Jinping will unveil plans to create a national social security system, reform state-owned enterprises, and create equal valuation of urban and rural land following the meeting.

(Read More: What you need to know about China's Third Plenum)

"This is not a leadership that has to run for election, they are very secure and Xi Jinping has very well established power for a new leader," Roach told CNBC Asia's Squawk Box on Tuesday. "I think they are going to surprise in terms of their commitment to a wide array of reforms."

Previous plenums have marked important turning points for major policy shifts in China. In 1978, Communist Party leader Deng Xioping announced a reform plan that led to the opening up of China's economy and paved the way for the country's rapid economic development.

(Read More: Investors ignoring risk of China Treasury selling: Roach)

Roach told CNBC the Plenum would also mark an "important juncture for China."

"The strategy is clear. It's [China] shifting the model from external to internal demand... and they've got to do things to achieve that goal," he said.

Roach said key to this transition would be altering the behavior of Chinese families, in terms of moving them away from a culture of "saving out of fear," to "spending with confidence."

(Read More: As plenum looms, China's big challenge is a balancing act)

"To do that [the government has] to build out the social safety net that has really been neglected," he said, adding that he hoped to see the government address issues around retirement, social security, healthcare, unemployment, insurance, reform to the residential Hukou system - a household registration system that has been criticized for restricting migration - and the liberalization of interest rates.

"If they can do this, then families will be more confident about the future," he added.

Stephen Roach
Jin Lee | Bloomberg | Getty Images
Stephen Roach

In particular, Roach, who previously worked as Chairman for Asia at Morgan Stanley, said he expected progress on the opening up of state owned enterprises, despite many analysts expressing doubts over whether the government will tackle the long-running politically sensitive issue.

(Read More: Will China's Plenum be a watershed event for stocks?)

"I do [think there will be progress]. We heard the same thing in the late 1990s [in terms of doubts over progress] and yet... Deng Xioping was extremely aggressive in forcing through the first wave of [state-owned enterprise] reforms. The only problem with that initiative is that there has been... a real stagnation in the past 10 years and it's important for this new leadership to regain the momentum," he added.

However, Roach said he did not expect all these expectations to be met.

"They are not going to do it all, but I think you'll see a number of actions taken in all of those areas that will be encouraging," he said.

The Third Plenum is the third meeting of China's Central Committee following a once in a decade leadership change that took place a year ago. Approximately 370 top member of the ruling Communist Party will gather behind closed doors from November 9 to 12.

(Read More: Stephen Roach warns of global economic crisis)

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

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