Stephen Roach: Raising interest rates does not solve inflation

China Economic Network Beijing March 21 (reporter Liangmeng Night) The Yale University professor, Morgan Stanley (Asia) non-executive Chairman Roach at the 2011 China Development Forum, said the government by raising interest rates, it is impossible to solve inflation. Roach believes that to curb inflation, the economic structure must be adjusted, "This is a difficult task, China is now working to complete this task, if you want to curb inflation, it can not keep growing wages, facing a dilemma." The following is a transcript of the speech: Thank you very much! It is a great honor to attend such a grand event. At the outset, I was happy to share some of my thoughts with you. There is a consensus that the 12 five-year plan is the right strategy, the right plan and the time to come, and I agree with that. What am I trying to say? Actually, we just heard about Michael. Professor Spenth talks about the implementation of the problem, strategic attribution strategy, it is a number of conditional games. It involves a country's internal and external conditions, and then it's hard to include everything when you make assumptions, especially in the first year of "Twelve-Five" planning, the global economy and, of course, the Chinese economy, with some unusual forces. Personally, I'm going to introduce you to a possible strategy, as well as the possible tensions or elements of a "Twelve-Five" plan strategy.　　Let's start with a historical review. The picture behind this is the five-year plan, two of which are strategically important for China. The fifth five-year plan was in the late 70, after the Cultural Revolution, the introduction of Mr Deng Xiaoping's idea of "reform and opening up", and the reform of state-owned enterprises in the late 90 brought about changes in ownership. Now that we have the 12th five-year plan, in fact, within the 12 five plans, I want to talk about the rise of the Chinese consumer, which is that they may be rebalancing and Michael? Professor Spenth a different concern. In future demand, Chinese consumers may need to play a more important role in boosting China's growth momentum. This is a very simple causal diagram, to see how China's policy concerns to achieve the relevant goals, especially in China's macroeconomic dynamics, three basic elements: first, employment. Employment is provided by the service industry. Second, wages. Wages are mainly achieved through support for agricultural income and rural income. Third, the propensity to consume.　　This is the most subtle, that is to say more to domestic demand to prop up growth. We can see from the beginning of China that the share of China's personal income in GDP is actually very low in the major economies, and other countries are relatively high, both in development and in developed countries. For example, the United States is now 86% percentage. China still has a long way to go to increase the share of personal income in GDPRatio, and then turn this personal income into a real increase in purchasing power in the future. We talked about the key role of the service sector, particularly in terms of increasing labour income and creating employment, and we have heard about the upgrading and improvement of services, particularly in recent years. China is still a relatively small country in the service sector, accounting for only 40% of GDP, and the global average is now over half. In fact, China's "Twelve-Five" plan has a heading goal, even if the level is relatively low level. It depends on how to nurture the service industry into bigger problems, "Twelve-Five" plans to see more of the so-called wholesale and retail trade, logistics industry development, and of course, domestic transport, hospitals, health care and other services industries have great potential, and other knowledge-intensive industries, it needs to make a lot of investment,　　There is also a lot of trading to be done. The service industry is the key, because China seems to me to need to improve the labour intensity of its growth. Another surprising chart here is that China's GDP growth is likely to be the highest in other Asian economies, to more than 9% per cent. But employment growth is indeed relatively low. Because China has an export-and manufacturing-driven model, the vast majority of manufacturing is called capital substitution. Services are also on the rise, and now the service industry is actually labour-intensive, with every unit of GDP and services providing more opportunities.　　So now that China is undergoing a transformation, moving from manufacturing to services, which will absorb more labour for each unit's GDP output, I think this is most important, and it will enable China to create jobs at the same time in the transition process, over the next five years. We are now focusing on seven strategic emerging industries, and we should keep in mind that the seven industries are capital-intensive industries, and we also need to develop labor-intensive industries. Look at the salary, wages will rise in the next five years, but it is important to shift from rural to urban, and we can see that we have a large population of people moving from rural to urban in the next few years, creating a lot of new working-class workers. Now let's look at a trend in China's savings rate growth change. We have doubled our income over the past 12 years, and a big challenge is social security, and yesterday we talked about the importance of building a secure social safety net. If we can build this social security network, we may be able to make people more confident to spend.　　We can take a look at the coverage of our network, the management of China's pensions, most of which are managed by the local government, which is a big part of the administration, and the Social Security Fund accounts for only a small portion of this problem. I think that our tactical challenge is mainly three, this year is the "Twelve-Five" plan of the first year, this year's inflation rate is too high trend, soSay China needs to deal with this. Inflation is not a mistake, China has always had inflation problems and challenges, the Prime minister also said, inflation is the 2011 's most important, is to curb the inflation rate. If we want to curb inflation, we have to adjust a lot of the structure of the economy, which is also a difficult task, China is now trying to complete the task, if you want to curb inflation, you can not keep increasing wages, so there is a dilemma. Let's look at the problem of inflation in China, probably mostly from agriculture. If the government were to raise interest rates, it would be impossible to tackle inflation in the long term. You see, in the short-term interest rate, if you want to raise it, it is relatively limited to the inflation, the impact is relatively limited. Let's look at the speed of adjustment, I think one of the developments in the external market is a case of personal consumption. From personal consumption, the United States, Europe, Japan, personal consumption is a very limited growth, which is also a challenge to China's exports is also a challenge. So, with the weak external demand, we must turn our focus to internal demand and domestic demand.　　So, all of these must let us immediately emphasize, not a gradual process, we have to carry out some internal domestic demand stimulation. Another is that this morning at the breakfast meeting, I also feel that China has set up a good consumer stimulus policy, I am not very optimistic about the balance sheet of the United States, I think China should still be able to do a better job. Look at the comparison between China and the United States, which is a current account in dollar-denominated balance comparison. I made a diagram of "Twelve-Five" plan, the left is our mechanism, right is our goal. Michael？ As Professor Spenth just mentioned, we have a lot of short-term tactical challenges that need to be tackled immediately, and must be resolved in the first year of the Twelve-Five plan. China has to solve some urgent problems in the short term, and it will have to implement some plans in the long run. Thank you!