Without more investment, an economist argues that China cannot solve its most pressing problems, including pollution, traffic congestion, food security, and the quality of medical and educational services.

These days the general consensus is that China must rebalance its economy to rely more on its growing consumer class rather than its past emphasis on investment and export-led growth. While boosting domestic consumption is necessary, one economist argues the government must continue to make investments in infrastructure.

“China has to invest more before it can consume more,” says Helen Qiao, chief economist for Greater China at Morgan Stanley in Hong Kong. Last week, Qiao addressed members of the US-China Business Council (USCBC) during its annual meeting in Washington, DC. (USCBC is the publisher of China Business Review.)

During her address, Qiao elaborated on her biggest concerns for Chinese citizens and businesses operating in China, which include pollution, traffic congestion, food safety, and the quality of medical and educational services. For China to solve these problems, Qiao says the Chinese government must continue to invest to improve the lives of its citizens and make the country attractive to businesses.

For instance, while it takes about 30 minutes to take high-speed rail from Beijing to Tianjin because of the government’s investment in that area, she says regardless of where you are in Beijing it will take you about an hour and a half to get the train terminal because of the amount of traffic.

In addition, Qiao said that consumers buying air purifiers and facial masks will not reduce air pollution.

Morgan Stanley’s forecast for China’s GDP growth rate in 2013 is 8.2 percent, slightly more optimistic than the consensus rate of 7.8 percent, but the predication comes with risks, Qiao says.

“There’s a fairly good chance we don’t reach 8 percent in the short term,” says Qiao, who previously served as China economist at Goldman Sachs. However, over the next three to six months she expects China’s economic growth to stabilize. For the longer term, Qiao is even more optimistic. Morgan Stanley forecasts that, on average, China’s economy will grow at a rate of 7.6 percent from 2011 to 2020.

What makes Qiao nervous is a “general lack of clarity,” she says. “Who exactly is in charge of economic policy at the moment? I’m not sure, and this is not something I’m very used to.”

Before the new leadership took office, Qiao says former Premier Wen Jiabao was given all the decision-making power over the economy. Now, newly chosen Premier Li Keqiang is trying to distance himself from previous administrations that have been seen as putting off necessary economic reforms, but it remains to be seen whether there is a general consensus on the path forward among the Chinese leadership.

For foreign companies doing business and investing in China with concerns about how discussions of reform in China will affect them, Qiao says, “It’s all about implementation.” She is optimistic that the slight slowdown in growth could produce meaningful results for foreign companies operating in China.

“When growth is slowing it presents a better opportunity for policymakers to make changes that will potentially change the landscape, and that perhaps can benefit foreign investors,” she says.

[author]Ben Baden is associate editor of the China Business Review.[/author]

(Photo by Axel Drainville via Flickr.)

Posted by Ben Baden