April 23 (Bloomberg) -- Stephen Roach, the Morgan Stanley chief economist who predicts China will overtake the U.S. as the dominant economy within two decades, will become the firm's Asia chairman, leading a push to arrange more takeovers and stock sales in the region.

Roach, 61, will take up his post in June and move to Hong Kong in September, Morgan Stanley said in an e-mailed statement. He replaces Alasdair Morrison, who retired this month.

A 25-year Morgan Stanley veteran, Roach in past years has repeatedly said the U.S. economy will stagnate, only to be proven wrong as expansion continued. Roach, who forecasts China may overtake the U.S. as the biggest contributor to global growth by 2025, cautioned on April 20 that failure to rein in lending and investment may derail the nation's economic boom.

``China is at a critical juncture in its extraordinary development saga -- needing to make the transition from an export- and investment-led growth dynamic to more of a consumer- led economy,'' Roach said in an e-mailed response to questions.

``I am confident that China is up to this daunting challenge -- but it will take both time and determination to pull it off.''

Roach's task in Asia will be to manage relationships with governments, companies and clients in the region, the release said. Hans Schuettler leads day-to-day operations as Asia Chief Executive Officer.

China Rankings

Morgan Stanley has been expanding in Asian markets including China, India, Korea and Japan. The firm last month announced it will pay $425 million to buy out its joint venture in India with JM Financial Ltd., opting to go it alone in the world's second- fastest-growing major economy.

On April 18, the world's second-largest securities firm said it hired Blair Pickerell from HSBC Holdings Plc to head its Asian investment funds unit.

Roach, who has a Ph.D. in economics from New York University ``is an intellectual leader on many global economic issues, including those related to China,'' Morgan Stanley CEO John Mack said in the statement. ``He will bring a combination of seniority, strategic thinking, and local knowledge to this important role.''

Morgan Stanley ranks second this year in advising on overseas share sales by Chinese companies, up from 10th in 2006, according to data compiled by Bloomberg. It doesn't have a license to manage domestic stock offerings.

China's Rise

Morgan Stanley, the first overseas bank to buy a stake in a Chinese securities firm, owns 34 percent of China International Capital Corp. It surrendered management responsibilities at CICC in 2000 following a dispute with the Chinese company's management, ceding an advantage to Goldman Sachs Group Inc. and UBS AG.

Goldman won regulatory approval in 2004 to set up an investment-banking venture with Beijing Gao Hua Securities Co. Goldman has management influence over Gao Hua through a loan made to its major shareholder, though doesn't own a direct stake. UBS is close to winning final approval to invest $210 million in Beijing Securities Co.

As the only Wall Street investment bank currently allowed to manage domestic share sales, Goldman ranked third in China this year, after Bank of China Ltd. and China Galaxy Securities Co. Ltd.

China's economy has grown more than 10 percent in each of the past four years, and is poised to overtake Germany's as the world's third-largest this year. It has surged more than 10-fold in size since Deng Xiaoping began free-market reforms in 1978.

``I have been positive on China for a decade and remain so today,'' Roach, a frequent visitor to the nation, said.

U.S. Slowdown?

Roach has been less bullish on the U.S. economy. In a November 2005 interview, he predicted a 40 percent chance of a U.S. recession in the following year. The U.S. economy expanded 3.3 percent in 2006, up from 3.2 percent in 2005.

In an April 13 report, Roach said U.S. economic growth may slow to about 1 percent in the coming year from its ``current 2 percent clip'' as a housing slump erodes consumer spending.

Lately, he's been sounding warning bells on China, too. In a March 10 article published in Newsweek Magazine, Roach wrote that a China slowdown could trim more than half a percentage point off global growth this year. He estimated that China accounted for a third of the increase in world gross domestic product in 2006.

``From where I sit, the Chinese government has no choice other than to up the ante on tightening and macro control,'' Roach said in his April 20 report.

China's GDP growth accelerated to 11.1 percent in the first quarter from 10.4 percent in the previous three months.

Lobbying Snow

Roach was a speaker at the China Development Forum in Beijing in March, together with executives including BP Plc CEO John Browne and Vodafone Group Plc Chairman John Bond.

In a September 2003 e-mail to Stephan Newhouse and Vikram Pandit, the then co-heads of Morgan Stanley's institutional securities unit, Roach said he ``played a key role behind the scenes'' in getting then Treasury Secretary John Snow to soften calls for China to let its currency become more flexible.

``I do believe that we should make every effort to let the Chinese know that we played a decisive role in shaping the outcome on a key issue of great strategic importance for them and the broader global economy,'' he wrote in the e-mail, a copy of which was seen by Bloomberg News.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net.

Last Updated: April 23, 2007 06:03 EDT