China's economy transforming but challenges remain

NEW YORK - China's economic growth is becoming more balanced but there are still some important issues to be addressed, according to a US expert.

China's economy had grown at a tremendous pace and the current big challenge is to go from an unbalanced to a balanced economy, said Stephen Roach, a senior fellow at Yale University and former chief economist at Morgan Stanley Asia, at a New York Society of Security Analysts forum Wednesday.

China also needs to open up the market to more active participation by foreign companies and address the issues, including transparency of corporate governance, and there was a lot pressure on the Chinese to do that, Roach said.

"I'm hopeful that you'll see some moves to further open up their markets to outside investors and address some of these issues," he said.

Roach said the central bank and central government were sending a strong signal that the leveraged credit-driven growth would change.

China's growth rate slowed in the first quarter this year and the leadership was sending the message they were willing to accept slower growth without physical stimulus, the economist said.

He also saw early signs of a shift, but he thought the new leadership is different in that they want to go deeper than just quantitative growth and really address quality of growth.

However, James Chanos, president and managing partner at Kynikos Associates LP, told the event that shadow banking is a big risk in China and loans going to local funding vehicles are the most likely to suffer financial distress.

He also warned China should be careful with the housing market's share of China's GDP.

Chanos suggested China slow credit growth, but the problem is that every time that happens, the economy slows further, creating a "chicken and egg" problem, which makes the transition more difficult.