An anti-China trade sanction bill in the U.S. would be a "huge mistake", stresses Stephen Roach, chairman at Morgan Stanley, noting that it would be a bad political decision with a bad economic outcome.
"America has trade deficits because we don't save, and America has trade deficits with over 90 countries," he said on CNBC Tuesday.
However, with the Obama Administration "vulnerable" to both the House and the Senate leading up to the midterm elections, Roach said that there is a high possibility that President Obama will sign a bill to restrict the inflow of Chinese goods into the United States.
"There's broad bi-partisan support…for taking actions against China. High unemployment and political risk intensify that…this is a worrisome development," said Roach.
With regards to increasing calls by U.S. lawmakers for Beijing to revalue its currency, Roach says the world should focus on the yuan's exchange rate against a basket of currencies, rather than just the dollar-yuan cross.
Roach cites the euro, which has collapsed 16 percent against the yuan since the beginning of this year, confirming that the Chinese currency is "not frozen".
"They've chosen to anchor it against the dollar because they're still a developing economy with an embryonic financial system," Roach explained.
Beijing Won't Allow Hard Landing
Although China's economy is at a "crossroads", Roach believes that the government will do everything in their power to avoid a crash.
"The (Chinese) economy is going slow," he said, as forward-looking data suggests.
China now needs to put policies in place that will focus on the internal demand of its private consumers, Roach said. "That's what their next 5 year plan is all about."