Growth slowdown to be good over long term

China's economic growth slowdown during the current period of transition reflects the need for reforms so that the system may be more adapted to the new growth model, Nobel laureate economics Michael Spences said Wednesday.

Speaking at a conference in Singapore, Spence said that China's challenge lies in that it is moving to a system that is more driven by consumption but the system had been largely adapted to the past model which relied heavily on public sector investment.

Spence said that the components of an economy can be separated into the tradable sectors and the non-tradable sectors which include the construction sector and the government services.

An examination of historical data showed that the growth of the tradable sectors had been stagnant over the years before the crisis, partly due to the inevitable industry migration in an era of globalization. But the growth in the non-tradable sectors, supported by public investment, had compensated for the lack of growth in the tradable sectors, which also led to asset bubbles and growing income disparity.

The United States would have to reinvigorate the economy by investing in education, among others, as the division of labor has been globalized. However, this will take some time.

The qualitative easing, if continued over a long period of time, could lead to risks of credit buildup, he said.

The problem is similar in Europe, he said. But the money is still flowing into Europe, adding to challenges.

China has been trying to promote consumption as a more important growth driver. However, the system had been adapted to the old growth model with public sector investment as a key driver and it takes time to reform it.

China has been observing fiscal discipline recently and carrying out financial reforms to make the transition happen. One of the challenge is that a slowdown in China's growth may "scare the wits out of the markets globally, because they won't be able to tell whether it's a trend or transition."

Nevertheless, "I am kind of optimistic that it will be done," Spence said.

The conference was organized by the Asian Bureau of Finance and Economic Research, an independent research organization in Singapore that brings together finance and economic experts from universities and business schools and scholars from elsewhere.