China provided a source of optimism among the global leaders and economists who attended the annual World Economic Forum in Davos last month, despite the gloomy outlook for the global economy. China's economy would pick up in the second half of 2009 and witness a robust rebound in 2010, said Stephen Roach, Chairman of Morgan Stanley Asia, in an exclusive interview with Xinhua News Agency on January 29. Edited excerpts of his comments during this interview and on other occasions during the Davos forum follow.

Focus on domestic consumers

China's GDP growth will be below 8 percent in the first half of this year. That is because China has been tied closely with the global economy and has not gotten special relief from the global shock. The main driving force of China's rapid GDP growth in recent years has been exports, but now China's exports are sliding. Even though Chinese companies are improving their positions and maintaining their competitiveness, there is nothing they can do to stimulate the demand of countries such as the United States, Japan and European countries. But China's economy will be much better than those of many other countries in the world and is expected to pick up in the second half of this year. The Chinese Government is certainly doing its best to stimulate the economy, reduce its dependence on exports and rely more on domestic consumer demand to fuel its growth. It is just a question of how effective that stimulus will be. The most important thing for China to do now is to focus on domestic consumers, increasing their income and spurring domestic spending. In addition to increasing spending on infrastructure, China should dramatically expand investment in social security, pensions, unemployment insurance and health care.

Wrong time for the U.S. to push China on yuan

The United States picked the wrong time to pressure China to strengthen the yuan, because China's economy is actually contracting quarter on quarter. China is going through a very difficult period. This is the wrong time for the U.S. Treasury Secretary to turn belligerent on the Chinese currency, because a country that is contracting does not take kindly to its major trading partners saying it has to increase the value of its currency. The world economy at large is likely to contract in 2009 for the first time since World War II.

Demand from U.S. consumers, for many years the main driver of global growth, was in steep decline, while on the supply side, China had seen its economy shrink during the last quarter of 2008. The economies of the rest of Asia had become China-centric, and now that China's economy has "hit a wall," exports have plummeted 42 percent in Taiwan and 35 percent in Japan.

Anemic global growth

This is going to be the most difficult year for the global economy since the end of World War II. We will probably see a recovery next year, but the recovery will be a weak one, an anemic one, and subject to a periodic relapse. Over the next three years, the global growth rate will be very weak averaging only about 2.5 percent. We are in a tough climate, and we see a lot of policy stimulus going on, but there is no guarantee that the stimulus measures will get traction in the real economy, because the real economy ended up being devastated by the bursting of asset bubbles. And that devastation does not go away overnight just because we have created a good bank out of a bad bank.