First step to curb overheated investment

The interest rate rise Tuesday is clearly the first of a number of additional steps to curb an overheated investment, Managing Director and Chief Economist of Morgan Stanley, Stephen S. Roach, said Friday.

Roach said though China needs a lot of investments, the current growth rate is far too excessive with an investment sector of 45 percent in GDP last year and 50 percent on its way this year.

"The current rapid growth is certainly unsustainable," he said.

The action taken by the Chinese government will importantly temper the overall growth rate by decreasing the current 10.2 percent to 8 or 8.5 percent by the end of this year, Roach said.

He suggested some other measures that the Chinese government may adopt. One is to slow down in the export growth. "The export has been growing far too rapidly and there is a breakout of anti- China protectionism in the United States and increasingly in the Europe as well," he said.

Another step that China should take, and it has been carefully written in the 11th Five-Year Plan, is to call for 7.5 percent average real GDP growth through 2010, and it means that China is moving away from the 25-year export and investment growth to more of a private consumption one, he said.

On the flexibility of the Chinese currency RMB, Roach said China deserves more credit for the current appreciation.

He noted a lot of politicians and policy-makers are making a huge mistake by simply looking at the fluctuation of RMB against the U.S. dollar, saying though RMB has moved very little against U. S. dollar at 3 or 3.5 percent since July of last year, the real effect of the exchange rate against all Chinese trading partners is up 15 to 16 percent over the last year.

"This has much bigger impact on all Chinese trade than the dollar against RMB," he said.

G7 and the United States think there should be a big, big increase in RMB and they gave China the same advice they gave to Japan 20 years ago, which has led to 15 years of inflationary slump. "China understands the mistake that Japan made and it will not make the same mistake," he said.

Roach believed that RMB will continue on a path of very slow and gradual revaluation.