English Subtitles for Davos 2016 - Where Is the Chinese Economy Heading?

Subtitles / Closed Captions - English

Welcome to Bloomberg's Davos Debate. I'm Francine Lacqua, and we're talking at China. Over the next 75 minutes, we ask, where is the Chinese economy headed, with the new five-year plan being presented in 2016. How can the world's second largest economy

shift gears without stalling its growth engine? And what does all the market volatility tell us about the perception of China, and of course, the task facing Chinese regulators. Well, we have, I'm very pleased to say, an A star panel. Thank you so much for coming on.

Jiang Jianqing, he's a Chairman of the Board, Industrial and Commercial Bank of China. Christine Lagarde, Managing Director at the IMF. Fang Xinghai, Shanghai Vice Chairman, China Securities Regulatory Commission. Of course, Director General at the Intercontinental Economic

Department. Gary Cohn, President at Goldman Sachs. Zhang Xin, of course, Chief Executive Officer and co-founder at SOHO China, and Ray Dalio, Chairman and Chief Investment Officer at Bridgewaters Associates. So thank you so much for joining us.

Chairman Jiang, let me start off with you. China's markets, of course, have begun the year with a lot of volatility. What do you believe is the underlying cause of this? [SPEAKING CHINESE]

Thank you so much, chairman. Ray Dalio, is there something that the West misunderstands about Chinese markets? And does that, of course, exacerbate the volatility we saw the last two weeks?

I think there's a lot that the West misunderstands about the Chinese markets. But I think the essence of what's going on in China is an adjustment for major challenges. They have a debt restructuring challenge. They have an economic restructuring challenge.

So they have to come up with a new model for the economy. They have a capital markets challenge, to build the capital markets in an efficient way, so that circulates capital through the system better. And right now, they have also a balance of payments challenge, having to do with the pressure on the currency, capital

outflows, and those types of things. These are things that have happened repeatedly through the rest of the world. The United States has had three major debt crises. We couldn't pay our debts in 1971. We had it in 1982, we had a debt crisis.

We had the S&L crisis. We've reshaped our economy many times. We used-- I remember when the steel industry ended, and heavy manufacturing, and we've gone into other areas. We've had a number of balance of payments and currency issues. So I think that maybe one of the things that

is being misunderstood is what is a normal balance of payments, economic, too much debt restructuring, kind of recession. In Japan, they used to define a recession as anything less than 3% growth. Maybe in China, they would describe a recession

as less than 5% growth. We're going through that. I think it's being confused with the longer term picture. In other words, I think that the reforms that are going on in China, and the leadership in China, in terms of where it's moving, is going

to be very fundamentally good. And so you're looking at something that is a short-term challenge, as distinct from something of where we will be in five years after the regeneration of new capital markets and new economy with vibrant, young entrepreneurs

in that other economy that's now beginning to flourish. But why have we had so much volatility since the start of the year? Well, the volatility has been primarily a result of-- in the world as a whole-- that we have an easing of monetary policy all around the world.

And we're not going to have the same effectiveness in that easing of monetary policy. Because with interest rates at zero, you can't cut interest rates. And with asset prices having risen because of that quantitative easing,

there is risk-- the risk premiums have gone down, and there's a big vulnerability. So when China is dealing with the rest of the world, China is a negative on the margin for the rest of the world. And the world is vulnerable, because of the lack

of monetary policy, while asset prices are comparatively high. Mr. Fang, how do you explain the volatility? Is it something that we just need to learn to live with? Well, maybe there are two factors that are going wrong. One is that China is in the midst of transiting from an economy relying heavily on investment

and exports to an economy a lot more dependent on domestic consumption. And in this transition, a lot of assets get revalued in the process. So I think this is the primary reason lying behind volatility. Now, another factor is that-- I mean,

the Fed raised interest rates not long ago. A lot of emerging markets didn't perform very well. Their domestic reforms got stored. So you have a combination of Chinese transition plus international influx, and that caused volatilities. Now, you asked why a lot of volatility

is right at the beginning of the year. Well, asset price adjustments usually went by steps. It does not go always smoothly. And we just hit that step at the beginning of this year. Madame Lagarde, if you look at the fluctuation, what have we learned?

Is there something that we have learned about what the Chinese are trying to do in the last two weeks? You know, at the IMF, we don't look at the last two weeks. So I'm a little bit embarrassed to comment on the last two weeks.

If you don't mind, I'd like to just go back to more basics. It is a fact, as has been indicated, that the second or first, depending on how you calculate GDP, the second or first largest economy in the world is going through a list of transitions. Ray has indicated that.

You have indicated that as well. Industry to service, export to consumption, lower level of investment, hopefully. And I think there's another one which is happening at the moment, which is also a governance change which has begun, which is probably going to continue

to roll out, which has to do with the anti-corruption fight that President Xi has highlighted as one of his key proposals, which has to trickle all the way down to the provinces. And that is also a management change which which has to be taken into account by Chinese authorities,

Chinese operators, so that risk can be apprehended. Risks can be taken in spite of this happening. I would say also that given those massive transitions that are undertaken pretty much at the same time and accepted as such, there is a communication issue which is something that markets do not like.

Uncertainty, not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued. Is it the dollar? Is it a basket of currencies? Which basket is it going to be?

On the balance of payment and on the exchange rate matter, I think better and more communication would certainly serve that transition better. I tend to agree with Mr. Dalio's assessment. But from our perspective, we believe that all those changes are perfectly

manageable if the right policies are taken. And given the large amount of reserves, the large amount of buffers that the country has. So from our perspective, we are forecasting a 6.5 growth rate for next year. And we believe that the Chinese authorities can perfectly

legitimately accept that this growth rate is fine for China, just as it is fine for the exchange rate to be aligned with the basket of currencies. Gary, does China actually need to decide whether they are a free market economy or not, or have they decided but not communicated it enough?

So look. I agree with everything our panelists have said so far. I mean, many of these fundamental transition points that China is going through are real. When you go from a CAPEX economy, where you're building infrastructure,

to an OPEX economy, where you're basically having consumers drive your economy, that's a long transition. You cannot monitor or affect consumer discretionary spending. It's called consumer discretionary spending.

You can't affect it the way you can affect government spending. So this transition is difficult. On the specific question of China's economy and whether it's a market-based economy, clearly this is a question that the market-- in the market as a whole, is dealing with. There have been signs that China wants

to have an open, free economy, an open, free marketplace. But in certain situations, the Chinese have intervened into their market, making it less than a free and open market. Now, I must remind everyone that many of the things that the Chinese have done in intervening

in their market are the exact replicas that many other countries, including the United States, have done at certain parts in their modern history. Not even in their old history. Whether it be circuit breakers or restrictions on certain type of trading activity.

So I agree with Madame Lagarde, who basically said, it's a communication issue. That the communication is really what's important, here. Communicating what the Chinese market is going to be and sticking with that theory, no matter how painful it is in the transition.

Transitions are very difficult, and you've got to stick through the transition. Zhang Xin, how difficult is communication when you're dealing with such a huge and complex economy? What we-- I come from the real economy side, being a real estate developer.

So what I see is that there is a total decouple between the stock market trading the stocks of the real estate developer, which is hugely discounted, and the real economy, where we see that the easing of monetary policy is actually pushing the asset price up.

And so that's on the one side. And also, in terms of transition from investment-driven economy to consumption-driven economy, for real estate, it means that we used to build buildings. Today, we just manage the leasing. And in terms of leasing, actually is going quite well.

And leasing-- the cities I operate in, Beijing and Shanghai, we're seeing a massive take-up of new space from internet companies. Mostly internet companies. We're seeing not so much new take-up from the old economy, like non-internet traditional economy.

But by and large, we have new buildings coming up to the market almost every other month, and they've all been taken up. We haven't seen a single building sitting there empty, not being taken up. So I think that there must be a communication issue.

Because on the one hand, the real economy seemed to be doing OK. But on the other hand, the stock market is trading at a huge discount. And obviously, the investors are not getting the same message as we, operating the economy,

is doing. Chairman Jiang, again, to this point of transparency, what the markets understand, in 2013, China, of course, promised to give the market a decisive role in the economy. And then since, we've had intervention

in both the currency, but also the stock market. When do you foresee China making good on its pledge? [SPEAKING CHINESE] Yeah.

I think there are three issues here. One is communication, as Christine just said. The other is that is there a strategy, a real strategy, to transit from an investment-led economy to a consumption-led economy. The third issue is that some people question

the execution of the strategy. Now, volatilities by themselves should not be worrisome for people like Gary and Ray and Jiang and Zhang as well. They know volatilities very well. It's the three issues behind volatilities

that somehow have worried a lot of international investors. In terms of communication, you're right. We should do a better job. And we are learning. And they're doing it. I'm here today to communicate.

[LAUGHTER] And you have to be patient, because our system is not structured in a way that can communicate or is able to communicate seamlessly with the market. We are learning. OK?

And China can learn. I can assure you that. In terms of strategy, I think there is a strategy, and it's the right strategy. And that is to reduce investment, to expand consumption, to shift more income

from the state-owned sector to the pockets of consumers. And to do what we call supply side structural reform. And the purpose of that reform is to make our supply side of the economy a lot more responsive to consumer demands. Because right now in China, it is not

that consumers are not there. They are there. They are demanding a lot of goods and services. But the supply side of the economy is not providing them at a reasonable price. And health care, education, entertainment,

high quality consumer goods. You can point it to everything. So therein lies a lot of opportunity. Then execution. Now, is China really transiting from an investment-led economy to a consumer-led economy?

I mean, if you read Martin Wolf yesterday, in The Financial Times piece-- Martin is a good friend of mine-- he seems to be saying that China is not transiting at all. The economy still relies very much on investment for growth. Now, on that score, I disagree with him.

Investment as a share of GDP is shrinking, and consumption, domestic consumption, as a share of GDP is increasing. It reached 52.2%. 52.5% last year, and five years ago, it was only 49%. Now, people say, oh my goodness.

3% shift, that's just not large enough. I agree. It could be faster. It could be bigger. But we're moving towards the right direction. And automatically, whenever you look at a country

and decide your views about the country, you look at two things. One is the fundamentals, the economic fundamentals that the country has. Saving, education, hard working, innovation, whatever. The other things, you look at the leadership, right?

You have strong leadership. You have confidence in the country. If the country has weak leadership, despite very good economic fundamentals, the performance will not be good. And if you look at China's leadership,

I think we have the strongest leadership in the world at this point. Mr. Fang-- Period. A question on regulation, and then I want to get to Ray Dalio.

Last week, the chairman of China's stock regulator said there has been a staff exodus. And he was basically indicating that the department was having trouble keeping up with market sophistication. Is the market getting too complex for China to regulate properly?

Because this is what people are concerned about. I understand what you are saying. These are short-term challenges. China has the talent. You have so many people going to universities, going to graduate schools, going to good Chinese universities,

going to good Western universities. We have the people. And government service, public service, still carries a very high esteem in China. So I have no doubt that we have the talent. The market, of course, has gotten a lot more complex.

And sometimes, we don't know how to deal with the market very well yet. But you bet we can learn. Gary? So look, Francine. You started out talking about the whole question

of volatility. And we morphed onto this discussion of communication and free markets. And I think these two concepts go together. And so when you look at what's going on in China, and the Chinese trying to move to more of a free market,

and this inability to communicate more freely, that's somewhat where you're generating the volatility. The world standards today for publicly listed companies and publicly listed disclosure on balance sheets, audited financial statements, corporate governance, is pretty high and getting higher everywhere in the world.

People, investors, capital is fungible around the world. Capital moves at the speed of light today. People want access to Chinese companies. They want Chinese companies held to the same standards. Number two is that they want the marketplace to determine which Chinese companies should have access to capital,

not the Chinese themselves deciding which companies should have access to capital. So as the Chinese market opens up and becomes more free, the marketplace will determine which Chinese companies should be public and which ones shouldn't be public. And to the extent you start getting more world

accepted financial statements, corporate governance, and the market determining which companies will be public and which companies won't be public, I think you will dampen volatility. So a little bit of this is just natural evolution and part of the communication problem, as you're

evolving a market real time. Unfortunately for the Chinese, they're doing this in 2014, 15, and 16 in a digital era. They're not doing this in the 1930s, when we had a telegraphic era. We did-- the rest the world did it in an analog world,

they're doing it in a digital world. So we're watching it real time. They're also doing it in an era when we just got through reregulating all of the financial institutions around the world, and we've taken an enormous amount of liquidity out of the markets, and the Chinese

are suffering from this lack of liquidity that exists out there. I think that the Chinese policy makers are not getting nearly as much credit as they deserve. But I have the benefit of seeing it from the outside. So I'm not speaking from a Chinese perspective.

I think you have to get into the nitty-gritty of what they're going through. So let's say a debt restructuring. If you take a look at the debt restructuring that they're having to go through, just to put that in perspective, local government spending

accounts for about 30% of GDP. It's running a deficit, funding deficit, of about 20%. That means if you cut that funding deficit, that's about 6% of GDP. A hacking of 6% of GDP. But if you look at the way that that

has been restructured and managed, it's been managed really superbly. It's a very difficult situation, because you're in a situation where if you just restructure, and you don't provide those capital, all of that spending that is taking place through there won't take place.

And the same people who are doing that restructuring are the same people who did it in '98 with . They're the same experienced people. If you know the mechanisms, the type of mechanisms, literally, to be using these things, they're pursuing that. If you look at the economic restructuring.

In other words, they're going from one economy that basically was like five banks, lends to state-owned enterprises and lends to local governments. OK. The development of a shadow lending system. That's been done with a lot of balance.

Because in other words, it's a risky situation. But the free exchange of capital, in a certain way, is getting capital to companies that never would have had access to capital before. And that's not producing a volatility. That's quite an accomplishment.

And if you look at the balance of payments. The balance of payments is a very difficult situation. Capital flows at what the capital flows are. And if you look at how they're handling it, I think in terms of the stock market handling it, there have been problems.

And some of the responses have not been by world standards. But there was also a big order imbalance. In other words, when the order hit, and everybody wants to sell, and then they have to respond quickly, there was that sort of circumstances.

When I speak to those policy makers, and I speak to those in the West, I find equal levels of-- or even better sometimes-- equal levels of competence in terms of dealing with the things that they're dealing with. I would say that if you compare also the politics

of the government. There are no loose cannons that are going to be running China. I mean, these are people, if you look at the system of how it has to be chosen, and how you get to there, you have to be a competent leader and devoted to the country.

If you look at the politics in the West, and we look at some of the leadership there, that could be quite scary. [LAUGHTER] So I think I think the commitment to market reforms

is a very real commitment to market reforms. In other wordS-- and think of the power that that's going to have to liberalize that economy. Basically, it's been an economy with the money clogged at the top. Top 10% is where it's passing through.

This will circulate. And there's a new China. You could speak to that new China, the new board, and the entrepreneurship. So I think we're going through a cyclical-- you can't help but go over that cyclical adjustment,

and that'll last probably two or three years. It comes at a bad time for the rest of the world, because when you look at its impact on commodity prices, and then not only just commodity prices, the other economies of Brazil and so on, and you look at the vulnerability of the rest of the world in terms

of monetary policy, that's a bad combination. But we'll get past this, I think, in terms of China. A bad year in China is going to be a great year in almost any other country. Madame Lagarde, do you question at all their commitment to structural reform?

And what are the dangers if these structural reforms are not being pushed through? We went through a couple of years of very intense discussions with the Chinese authorities, because we were going to review the composition

of the Special Drawing Right baskets of currencies, which define the value of the Special Drawing Rights, which is that elusive currency of the IMF, which central banks around the world use. And if you had asked me whether the Chinese authorities would actually complete the reforms that they

had to undertake in order to satisfy the criteria of that fully usable currency, I would have said, I don't think so. Yet, when the authorities actually put their mind and are determined to develop a strategy, implement reforms, certainly we've seen,

in that particular case, an absolute-- I wouldn't say perfection. Nothing is perfect in this world. But an unbelievable determination and ability to deliver what frankly, many would have considered as undeliverable to begin with.

So if the same determination is applied in relation to the reform of state-owned enterprises, for instance, in relation to the clarity of messages concerning the transitions that are at play at the moment, clarity of communication concerning the macroeconomic framework within which they will define their policies going forward,

even if the growth rate is not at 7%, and closer to anywhere between 6% and 6.5%, I think that it will take a little bit of time, as was said earlier. But we believe that they will deliver. It's a massive undertaking, let's face it.

And just reforming the state-owned enterprises is going to require a special fund allocated to dealing with these issues. They've done that in the past already with certain sectors, and I have no doubt that as it is part of the exercise, just like the supply side reforms that

is the buzzword at the moment in Beijing, it will happen. Chairman Jiang, there is commitment, because last month, we had a mysterious authoritative person quoted by the People's Daily, saying that China must get used to the L-shaped recovery, unless reform is pushed through now.

What are the dangers of waiting too long? [SPEAKING CHINESE] Thank you, Chairman. Ray, given the Chairman's comments on debts,

how concerned are you about an outright financial crisis, given the amount of leverage in China? As was said, the leverage levels are not intolerably high. The problem is the debt is still growing at a rate that's significantly faster than income. That's an unsustainable circumstance.

It's also an understandable circumstance, because changing that rate abruptly will have a negative effect on the economy. I think the issue of instability is more of a balance of payments currency issue. That becomes one that I'm more concerned

about that might require more of an adjustment in the currency. And that adjustment in the currency would have an effect on the rest of the world, which would also transmit deflationary pressures to the rest of the world. Because those exchange rates would essentially appreciate. And that has an effect at a time when

there is a weakness in the rest of the world. We have to look at the impact that China has on the rest of the world and the rest of the world has on China, and the fact that there is not much of an effectiveness in monetary policy. Those two things combined create for a risky situation.

There are a lot of issues that I can't address in this short period of time. But let me pick two. One is that firstly, when you mentioned the stock market volatility and then currency volatility

at the start of this year, I would like to suggest that stock market volatility should not be something that people should be so concerned with. Because even at today's level, which I was told the Shanghai stock market declined by about 2%, is now standing at around 2,900.

It's 40% down from the peak, but it's still 30% up from a year and a half ago. And that nation is still very rich. And since the stock market is rather isolated from the outside world, the impact on the outside world is very minimal.

Currency volatility is something, yes, you should pay attention to. And since Miss Lagarde is here, I just would like to say a few words on that. China used to have what we call a crawling peg against the US

dollar. Now the stated goal is to move toward a basket approach. And that approach is a serious approach. It's not something we just say it. We do it. Now, people, when they look at the actual daily movement,

they think, my goodness, what is the PBOC doing? Sometimes they kind of move back to crawling peg. I think we should not focus the Central Bank's strategy too much on just a few days' movement. If you look at the strategy over a period of say, half a year or a year, you will realize that moving to the basket approach

is the decided policy of China. Now, the RMB appreciated quite a lot against the US dollar in the last few years and passed prior to the RMB joining the SDR. So you have a little bit of what we call catch up to do, in terms of US dollar RMB exchange rate.

But once we've done with it, the rate, when measured against a basket of currencies, would be quite stable. And there's the really no basis for China to depreciate the currency, because if you look at fundamentals of the economy,

we still have a very sizable current account surplus, where the economy is growing at about 6.5%. These are not a combination for a deep depreciation of the currency. And no matter what, the appreciation of the currency is not in the interest of China, in terms of carrying out

our transition strategy. Because a too cheap currency is not good for the mass consumption. And we thank the IMF for working to admit the RMB into the SDR. Some people worried that once China enters into this. It may not fulfill the commitment,

with respect to joining the SDR. I can assure you that worry is completely unnecessary. China's record of honoring international commitment is superb, and we intend to honor all the commitments with regard to joining the SDR. So that's the issue on currency.

Very briefly on that and the financial-- the dreaded word crisis, you will see volatilities in the Chinese market going forward. But can the government deal with it? I think we will. We are able to deal with it.

We can. Because our structure of the government is such that the response to any financial risk is very swift. The decision is decisive, and we want to make sure that we deal with the issues when the issues are not very big.

And again, it always comes down to leadership. When you have steady, strong leadership, we will be able to deal with it. Will there be volatilities? Yes. Yes.

Thank you. Just a couple of things that I would like to mention in response to your points. In a way, having a certain degree of volatility is all right. And it's compatible with this market driven principles

that China is adhering to. And when you say governments can manage volatility, if volatility becomes excessive, yes. Intervening is legitimate. But the degree of volatility is OK. As Gary mentioned earlier, markets

sorts out things eventually. Not that it's , but there should be at least some acceptance of the fact that there will be some, and there should be some. The second point, in relation to exchange rate and on the undercurrency, I think you're completely right. And I think that this illusionary pegging

against the dollar has to be dismissed. There is a basket of currency. In the effective term, the renminbi has been quite stable against that basket of currency. And not just now, but for the last few months. And that should be just acknowledged,

understood by markets. And this complaint that there is depreciation against one currency, no. You're doing that against a basket of currency which includes the trading partners of China. So again, communication on that one, I think,

is an important one. So I just wanted to remind everyone that China has built its massive reserve not because of monetary policy. Because of the last 30 years of incredible reforms and is really driven by the incredible entrepreneurship,

and largely driven by private sector. So I think the government's commitment to continuous reform and continuing to support the private sector is important. Now, as Mr. Fang is here, I'd like to just remind you that the promise of the Fourth Board of this NASDAQ style of a stock exchange that would enable

the small to medium-sized enterprises to be listed to get funding without producing profit. Because a lot of the companies listed on NASDAQ are not producing profit, remember. And today in China, if you are an Amazon, and if you do not-- you can be as good as Amazon,

but if you do not produce profit, you are not qualified to be listed. Now, that commitment has to be kept. And I think that was-- the government came out. The policy makers talk a lot about the Fourth Board is going to come out.

We'd love to see it coming out, as promised, probably the fourth quarter of this year. I have a company. I needed to float it. And I'm expecting you to come out with the good news. [LAUGHTER]

There you go. Quickly, back to the currencies. Chairman Jiang, and then Gary. I'll ask you the same question. Have Chinese policy makers actually done enough to reverse this market consensus

that the yuan will devalue it? [SPEAKING CHINESE] So let me back up for 30 seconds and recount where we were a year ago.

A year ago, we were in a economic situation where there were three currencies in the world that were willing to strengthen while the rest of the world was weakening. We had the Swiss Franc, we had the RMB, we had the dollar. Literally a year ago, the Swiss National Bank

decided that was not in their best interest. I think it was 52 weeks ago now that they decided that was not in their best interest. So they no longer were in that basket of currencies that was willing to be strong. Left the dollar and left the RMB.

So if you see where the world was through the end of 2015, 2016, you had a world of devaluers. Economies trying to lower interest rate, devalue their currency, grow at the expense of other economies. And the two currencies that were willing to rally were the dollar, , and the RMB.

Now they were linked to each other. It would make sense to me that if you were linked to a currency that's naturally rallying because you're the one not lowering your interest rates, that you would decouple from that currency and become more competitive in the currency world, which

is exactly what China is doing. It makes total rational sense to me. Most market participants continue to believe that China will devalue their currency further. This is one of the areas of volatility. How will the devaluation go?

Will it be very, very, very slow? Which, I think most of us think it will be very slow and very methodical and take a long period of time. It will not be that the Swiss National Bank moved the peg one night.

But I think that the vast majority of market participants, in their global equation of how they value economies and how they value currency crosses, would have China at a lower valued currency by the end of 2016 than the spot value is today. Ray, how much do you worry about foreign exchange reserves?

We understand figures that they dropped by half a trillion dollars last year. At what point does it become dangerous and actually self-inflict a confidence crisis? I think it's a big issue, the balance of payments. Imbalance is large, and as you're referring to,

reflected in that. On the offshore rate in Hong Kong, the interest rate differentials are rising. So that's a negative for the economy in an economy in which interest rates should be lowered. And it's a situation in which if you

look at their past evaluations, roughly, they've taken place between when there's a 10% to 30% decrease in reserves. There's been, on average, a 25% devaluation. That's been in the past. So I think that those are things to pay attention to.

It's not always easy for governments to maintain clear control of their currency. Madame Lagarde, onto another point, because we actually also have some news. The IMF opened its selection process for the managing director, when your term ends in July.

You've had the support of both France and the UK. Do you want a second term? [LAUGHTER] You will appreciate that I'll be waiting a little bit before I say anything about that.

But thank you for the question. If you do get a second term, how much do you think we will be talking about China in the next four years? Well, in the next few years, given the growth rate of that country, and given the state of development

it is at, I think we'll be talking a lot about China. It is one of the two largest economies in the world. If you define in PPP terms, it is the largest economy in the world. So I think we would be crazy not to talk a lot about China. And the transformations that are at play at the moment

are going to be both fascinating and will matter a lot for the rest of the world. We've seen it over the summer, surprise, surprise. But we're going to see it more going forward, because there will be spillover effects in the vicinity, because there is a China supply chain.

We'll see it across the world as well. And any significant reduction in the growth of the largest economy in the world or the second largest economy in the world, depending on how you calculate it, is obviously going to impact the rest of the global economy.

From 2010 to 2015, growth rates for China has fallen by four percentage points. Looking at 2020, what do you think, Mr. Fang, the growth rate will be? OK. Let me--

Before you answer that, if I may. Go ahead. We keep-- it's fascinating. People say, oh, China's growth has collapsed at 6.9%. If you look at the output, relative to what the output was back six, seven years ago, with a 12% or 13% percent growth

rate, we have the same. So give us-- no, sorry. I'll stop here. [LAUGHTER] No, I understand that there's some concern about this current year in China.

Some people forecast that because of the volatilities and so forth, somehow 2016 would be a very bad year for China, growth rate will slow down dramatically. I don't think that will happen, because in China, we cannot afford to let growth rate to drop too sharply. Because that will ignite a lot of financial problems

inside China. So we will have what we call appropriately expansionary supportive fiscal and financial policy in this current year, to make sure that growth rate is still appropriate. Now, does China have the means to do so?

Obviously, we have the means to do so. But think of it on the fiscal side. We can expect quite a lot, right? So there's just no worry for a somehow sharp decline of China's growth rate. Now, some people think, well, your 6.9%

is perhaps just not accurate to begin with. Right? Now, I admit, our numbers can always be more perfect, more accurate. But let me give you a supportive figure. And that is, tax revenues in China

last year went up by 6.6%. So that's not very far away from the 6.9%. Which means that the figure is not far away from the truth. And Madame Lagarde also mentioned China's contributions to the rest of the world remains extremely large, which is true.

I mean, you talk to these multinational companies, CEOs, having business in China. Most of them tell you that their businesses in China are still expanding quite well. Ford Motors, for example. Ford is not the biggest car seller in China,

but they have sold 1.07 million cars in China last year. 1.07 million. It's not a small number. So China remains a huge contribution to the rest of the world, and this is something that the rest of the world should appreciate a little bit

more. [LAUGHTER] Zhang Xin, and you were pointing something that also a lot of observers do underestimate, which is the strength of consumer spending, and it's the strength of services.

How resilient are those two when you look at the Chinese economy? What I think, still the dynamic force for the Chinese economy is its entrepreneurism and its private sector. And especially the small to medium-sized companies. Not the gigantic SOEs, even though they

command a lot of power. But it is the millions and millions, the SMEs, that matter the most. And I think in that regard, the reforms still need to be more focused on giving them the support. Where there is a capital market support, or tax support,

monetary support, those are very important for the continuous growth. Because that will continue to be the growth engine for China. And now, from where I sit, I see incredible innovation coming from the young internet mobile companies. And that really is an exciting part of our economy

that very rarely gets featured into the news. Because we talk so much about the market volatility and so on. In fact, most of these SMEs don't even get a chance to participate in the volatility. Maybe it's important that we remember

that-- especially the policy makers, like Mr. Fang-- and important to include these SMEs. And they would reduce your volatility. Mr. Fang, a comment? No, I agree that the SO-- not SO. The SMEs are a great contributor to Chinese growth.

Our stock market should have done a lot more to support growth. It is doing quite a lot, by the way. I mean, just take last year, right? People focused so much on the gyrations in the stock market last year.

But last year, the Chinese stock market raised 1.4 trillion RMB in equity money for the Chinese companies. That placed the Chinese stock market number one in the world, in terms of equity raised. But we can certainly do much better.

And just one very short sentence about financial risk. China is different from other developing countries in the sense that our growth is largely fueled by domestic savings, by domestic capital. That gave us a confidence in our ability to deal with whatever volatilities, risks, coming out

of the financial market. If China was a country relying large on foreign capital for growth, you bet. Any major financial risk and derail our growth. But China is different. This is a fact that a lot of people should pay attention to.

Chairman Jiang, how inclusive will China's growth be in the future? [SPEAKING CHINESE] Right.

Following on from that, with global trade stagnant, when will China take the role that the US has had for years in spurring demand? I don't think we're going to see that for three years or more. We're going to see a-- China's going through this adjustment

process, and it will be, I think, a three-year type of adjustment process. It's the equivalent-- a lot of these structural things. So it's going to be a negative on the margin. A negative for world economy. And that passes through to emerging countries,

particularly those that have a dependence on exports to China or have commodities, and then that is passing through, in turn, to a number of countries. So there's a world deflationary pressure that exists. And that's why, when we think about the Fed's policies, the Fed's policies-- there's not the country

in the world that should not ease its monetary policies. Maybe some should stay pat. Maybe the UK should stay pat. Maybe. But by and large, we have that self-reinforcing negative circumstance, in terms of growth, that is a problem,

because the rest of the world also represents a weakening in force for China. For the exports, for their demand, that is also weakening. So I don't think that we're going-- I think the question will be, where is the locomotive.

Where is it and what does it mean for Fed policy? If you look at these deflationary pressures coming from a possible yuan devaluation from oil, how does Janet Yellen look at this? I think the Federal Reserve thinks of the business cycle-- a classic business cycle is that when

demand is increasing faster than your capacity, and you're at a fairly high level of capacity. Unemployment rates are low. GDP gap is fairly tight. You should tighten monetary policy. And that's the policy, I think, that's

overriding the Fed's issue. I think they're paying too much attention to the business cycle and not enough attention to the long-term debt cycle. There is a long-term debt cycle, that you can't squeeze much more out of this, because of the lower interest rates and that.

And so we're seeing that the world that they're getting feedback about is a deflating world with asset prices coming down. And I hope that they'll remain flexible in their thinking of monetary policy. Be hesitant.

There's asymmetric risks. Because there's no doubt that the Federal Reserve can be effective in tightening monetary policy. So if they're a little bit late, and then they tighten monetary policy, I don't think that's a problem. But they're not as effective in easing monetary policy.

The pushing on a string, like in the 1935 period, is a real issue. And so what they have to do is more wait for the whites of the eyes of inflation before they err on that. Because I don't think it's going to be

so easy to be stimulative and move to quantitative easing and create that reversal. Gary, do you agree with that? Yeah, I do agree with that. I think that one of the new paradigms, again, going back to this digital world we live in, versus the analog world,

a lot of the Fed policy that we're relying upon is analog policy. I mean, it's the same policy we've had for generations and generations and generations. The world we live in today is completely digitized, meaning that we're real time, we've

got a global workforce today. We've got global free movement of currency. Anyone with a handheld digital device, one of those, can move any amount of currency they want around the world, can trade any bond they want around the world. So fixating on employment in the United States is interesting,

but we've been unable to create wage inflation now for multiple years, where the Fed has told us multiple times that it will come. Every year, it will come. But in some respects, when you think of a globalized workforce today-- which I think we have a globalized workforce,

and China is part of our globalized workforce-- if you can go hire the incremental worker for less money in China than you can in the United States, where does the wage price inflation come from? And I think we're seeing that in the numbers. We see that we can create jobs in the United States.

But we can't create jobs that pay real money. And you take most companies that we represent, clients of ours, and we talk to them about how they're running their company, they will talk to me, or they will talk to our representatives, about how they're optimizing their workforce.

How they're moving jobs to Bangalore. How they're moving jobs and opportunities to China. How they're moving jobs or opportunities to Warsaw, Poland. Because these are places where they can hire workers at huge discounts

relative to a London, a Hong Kong, a New York. And so therefore, to the extent that they would have to pay incrementally more for the next worker, they'll export the job. And so I agree with Ray. Until you see the reality of this inflation in the system,

I'm not sure assuming it's coming is a good assumption. We're almost running out of time, so I'm just going to ask each of you to give me your best advice or best prescription to try and bridge the divide that we were talking about between market perception and what the policy

makers in China want. Chairman Jiang. [SPEAKING CHINESE] Thank you.

Madame Lagarde? I would say, number one, clarity of communication. I would say, number two, clarity of purpose. And I would say, number three, implementation of the reforms that have been identified. And for all of us, a bit of patience

with a massive undertaking. Madame Lagarde, Germany has also just backed you for a second term. So can you say a comment? Will you at least consider it? [LAUGHTER]

I'm getting breaking news. Look, I'm honored. I'm very grateful, and I'm extremely pleased to hear that. And I thank you. I thank those who have come out like that. Thank you.

OK. Mr. Fang, if you'll-- Ray just said that China is on the margin, a negative contributor to world growth. I was thinking, who, in your mind, would be a positive contributor on the margin toward growth?

What I-- just to be clear, what I'm saying is that as the rate of growth slows, and the complexion of the economy changes, and the demand's on the margin. That's a negative to growth.

I don't think right now, I don't think that we have a locomotive. I think that with the exchange rate rising in the United States, and also with the negative wealth effect that we're going to have because of the stock market going down, that we're going to, even in the United States,

experience a lower level of growth. So I don't-- my concern is that we don't have a locomotive. That's what I wanted to say as well. In this world, in fact, we have to-- all of the major countries and major economies simply have to work together a lot more and cooperate a lot more, in terms of policies.

Understand each other a lot more, in terms of overcoming our respective domestic difficulties, and realize that the economy is globalized. We are all on the same boat, and we just have to cooperate a lot more closely to overcome this soft patch going forward.

And just a follow through of that. Would that be monetary policy cooperation? Would that be fiscal policy cooperation? In what form will that cooperation take? All of that. [LAUGHS] Madame just told me. It will be a challenge.

It is. But again, I'll just add one sentence. One sentence that is, in terms of US-China cooperations, the monetary policy, and other issues, we are working we well with our US counterparts. All right.

A challenge, but doable. You're confident this will be done? I think monetary policies is not going to be as effective. That's a big change in the world, because we required monetary policies to be effective. I think that's-- and then I think on cooperation

on monetary policies, I think that because you can't move interest rates as much, you move currencies more. So I think that we're entering an environment in which there will be more currency volatility as a means of easing policies where they need to be eased. And that smacks of currency wars, not as much currency

cooperation. When I think of fiscal policy, I think fiscal policy is very politically sensitive. You get into a bad economic situation, and somebody will say, you need to be fiscally more responsible and cut.

And someone will say, you need fiscal stimulus. And when there is political shifts, particularly, let's say, the populism that's taking place in Europe, or even in the United States, those things may not be easy decisions to make on fiscal policy. Gary?

In 20 seconds. So I agree with chairman Jiang. I hope for China's success very much. I agree with Madame Lagarde. We all want clarity. I agree with the chairmans here that we're

hoping for success in all the policy areas. The one area where I would just throw my two cents in is China seems to be more receptive, in your point, to more trade policies. And getting some of the trade policies done with the United States would be very beneficial for both

in growing both economies. Yes. Zhang Xin, final words. 20 seconds. Well, I think that China is going through this transition period.

And that's going to be a lot of volatility and noise. And it is important that the policymakers and the media are not focused only on the short-term noise, but committed to the long-term reforms. Thank you.

Video Description


With a new Five-Year Plan being presented in 2016, how can the world’s second-largest economy shift gears without stalling its growth engine?

This session was developed in partnership with Bloomberg Television.

-Gary D. Cohn, President and Chief Operating Officer, Goldman Sachs, USA.
-Ray Dalio, Chairman and Chief Investment Officer, Bridgewater Associates, USA.
-Fang Xinghai, Director-General, International Economic Department, Office of the Central Leading Group for Financial and Economic Affairs of the People's Republic of China.
-Jiang Jianqing, Chairman of the Board, Industrial and Commercial Bank of China, People's Republic of China.
-Christine Lagarde, Managing Director, International Monetary Fund (IMF), Washington DC.
-Zhang Xin, Chief Executive Officer and Co-Founder, SOHO China, People's Republic of China.

Moderated by Francine Lacqua, Editor-at-Large and Presenter, Bloomberg Television, United Kingdom.