INET lecture – Will China continue to rush forward?
INET lecture – Will China continue to rush forward?
In the last five years China has slowed down. However, the potential economic growth of the second largest economy in the world is still over 6% a year. Nevertheless, it is necessary to find the right mixture of structural reforms and expansive fiscal and monetary policy in order to achieve this potential. Only in this way can China continue to drive the global economy.
dreams everything come on this time thank you foreign uh oh all right with me oh so my name is federico fubini i'm a deputy editor-in-chief at cohere de la siga and i will share this very interesting very promising session on the present and the future of the chinese economy 17 17.1 percent of the world economy the second largest economy in the world uh a big question mark as well maybe an economy that is bifurcating between traditional heavy industry and a very promising high-tech sector uh i've been trying to to see what uh mr eugene has to say but first of all let me introduce the person to whom uh that that we have uh to thank uh to thank first of all for this opportunity to uh having yu jung ding here with us rob johnson is president of inet and it is a very important institution in in the uh in the global economic debate institute for new economic thinking it was founded uh by rob johnson himself i think it was six years back in the aftermath of the great recession in the aftermath of the collapse of lehman and it really inspired a lot a lot of new thinking about economic theory and not only that so rob you have the floor thank you federico so institute for new economic thinking about a year and a half ago somebody asked me what's new and different and they asked me to write an article with four points where we might not understand what was happening pick the most important four points they said and so i picked four regions italy because it's at the fulcrum both north and south of the tensions that will affect the eurozone it has a very large sovereign bond market very competitive in manufacturing and fashion was the first india for reasons i won't explore too much today but it is large and the role of government in a very uh concentrated corporate and very poor country at the same time portends great challenge the third place i picked is the place where i grew up which is detroit because of the tensions in american politics and how that is manifest when the economy is in transition and declining as detroit has and where the issues of race become very very important and polarizing related to the politics which we're experiencing a great deal of this year and the fourth was the question of china china which comes from a different philosophical tradition than the uh which you might call enlightenment tradition of descartes and those who followed and while their chinese people you have taught me are very knowledgeable they don't always agree with the enlightenment perspective and this affects their economic thinking so there is a prospect of new economic thinking emanating from china that i think is very exciting having said that it is as many people feel mysterious and difficult to comprehend and i had the good fortune in about uh 2009 before inet was formed to work on the stiglitz commission as commissioner and one of my colleagues was who taught us all and and me particularly a great deal about china and he's continued to serve as my teacher uh to this day uh he and his i believe graduate school classmate wang hui who we brought here and he made the opening speech two years ago in roberto for this festival uh have been great allies to inet and i can think of nothing i would rather do than bring someone who's been my teacher to share with all of you so that we can enjoy this learning and his insights together uh yu yong ding is the president or has been the president of the chinese uh what is it called society of world economics and he was at the chinese academy of social science where he was the director for many years of the institute of world economics and politics uh he served on the uh pboc uh people's bank of china monetary policy committee he's a leading spokesman both at home and internationally uh about both what is happening in china and also how chinese perceive the western economies he did his doctorate uh doctor philosophy in economics at oxford university and as i said he's been a great teacher to all of us and helping us to better understand and both what you might call the structures and the evolution of china and so i'll turn it over to you today to help us understand these challenges within your country good evening ladies and gentlemen thank you very much rob and thank you very much for you for your kind introduction it's a great pleasure for me to to come to italy i shall say i love italy very much i never hesitate to accept uh invitation to go to italy actually i was in sabino last month at my age i should not travel so often but i will not declare any imitation from italy anyway i can guarantee that in this afternoon i just want to uh you uh you use something like 14 minutes to give you some brief introduction about china's past achievement and challenges china now is facing and also debate within china about how to face china's current challenges first of all i think we should recognize that china's achievement over the past 35 years is truly amazing i think it's miracle miracle means something god made it's really very rare and here some figures you see in 2000 sorry in 1980 china's gdp is just less than 200 billion u.s dollars and last year china used 800 billion dollars to pump up china's exchange rate you see the change now china's gdp is more than 10 trillion u.s dollars the second largest in the world in 2004 china was on the par with japan china just catch up with japan but five years later china's gdp is more than doubled in japan you can see that's truly amazing here you can see the dramatic rise of a chinese economy especially after 90s this is really very very fast china's gp actually i think it's more than 50 times as large as in 2018 and so it's something really horrible especially for my american friends they they fear that china is cutting up very quickly and you see now china's gdp is more than uh 60 percent of the u.s gdp and if china can peak can keep can't go to momentum then perhaps uh within uh 30 years china will be catch up with the united states unfortunately i'm too old to see this day but anything can happen as uh lali summers rightly point out regression to the mean because this miracle means a miracle cannot last forever so there must be changes the worst of the changes most of the challenges chinese facing that is something we within china really worry very much about here you see the change in shanghai pudung area the first picture is about 30 years and you see the the the the east side of uh this uh uh hong kong river not basic village but now you can see these sky creeps and so on uh i think other perhaps part with the new york this is something a very uh dramatic change in china and now we are facing problems after 30 years uh breaking net high goals china's growth rate has been falling now in china there are different views about china's potential growth rate and over the past 30 years the articles rate of chinese economy is 10 percent 10 percent now it has been falling quite significantly people uh like just dean for the chief economist of world bank argued that the chinese gross potential should be still as high as eight to nine percent but for most chinese economies and gun officials china's potential growth rate is something like six point five percent in china's uh uh certain five years plan i was one of uh advisor to this planning committee according to this committee china's potential growth rate has been fallen from uh 10 to 6.5 to 7 this is a consensus view in china why china's high growth rate has been falling there are lots of causes one of the very important causes i can use sort of a chinese saying in chinese there's a word that there's a phrase calling uh the failure is the mod of success in in khan china's situation i can say uh the failure sorry that is success is the failure of the is the model of failure because we are too successful in the past 30 years now we are getting some fruit of that success to this again there are a lot of reasons i just named some of those reasons why china's ghost potential has been falling number one that's a gnaring narrowing space for strike structure reforms why china start to take off in early 80s it's very simple not just liberalization until later 70s all farmers were working at the collective farm people's congo i work there uh each morning at six o'clock six six o'clock they'll bail then you you got up then you go to field to do whatever you were asked to do then uh in 12 o'clock you go back to have some lunch very simple then in 2 o'clock you go to field again then at 7 you come not home you come to a meeting room to summarize the achievement that you did this day so we repeat this decades so very naturally it's it's kind of be very productive so it's very simple a chinese gum disband people's confidence to allow farmers to make decisions to produce what to allow them to sell their products so overnight people are incentivized they work much harder and because chinese are very hard working so if they found if they work very hard they can get something returned then they really work very very hard so certainly just because this very simple reform china's productivity increases quite dramatically i will not name all those examples there are lots of examples reform is extremely important but after 30 years those easy reforms we have been accomplished it's uh now we are facing much more difficult reforms for example how to reform state-owned enterprises it's become much more difficult so you cannot hope that by just do some further structural reform then chance economic growth will increase quite dramatically those days has gone and also there are a lot of reasons i will not elaborate secondly i i i i name here that is a diminishing return of scale because the chinese economic scale become much larger and the room for catching up by lending and copying becomes smaller and smaller so all these sort of factors have a negative impact on china's long-term potential growth rate so it's very natural after 30 years high speed with a 10 percent growth rate chinese economy will become slowing down that is inevitable so at this moment chinese scam and trans people are worried about so-called middle-income chop when china's reform started per capita income is 200 us dollars now china's capital capital income is something like 80 thousand uh dollars so reward if china's economy continue to grow if people's income continue to grow whether china will feel will fall into so-called mid-income trouble so this is really a very uh challenge the answer to this long-term slowdown is that chinese gum will continue to carry out structural reform so that china will be able to maintain a much slower but still decent growth rate if china in the next decade or two you'll be able to maintain goals of say five to six percent per capita sorry per year then hopefully within 30 years china will be able to catch up with the united states so why recognize the fact that china's long-term growth potential has been has been falling at the same time we worry more about the china's current growth rate from this figure you can see that china's actual growth rate has been falling steadily gradually since uh 2010. in 2010 the grocery store something like 12 now the ghost rate is less than 6.7 last quarter is just six point seven percent i think this quarter the ghost rate will be slower so you can see the slowdown of china's uh gross potential so recently uh a chinese official as a mysterious uh authoritative insider said that as a whole china's econo economic trajectory will be l-shaped rather than u-shaped he said i must unscore that the l-shaped curve is projected to last appeared rather than to last appeared rather than a year or two meaning that chinese authority realized in next few years how many years nobody knows but anyway in next few years maybe three years four years five years chinese china's economic growth will be rather slow a very important question among chinese economies that whether the economy at this moment is operating at full capacity this is a very controversial issues within china let me explain because as i just said chinese recognize china's long-term growth potential has been falling to something like six point five to seven percent okay this is one thing another thing is can't go straight uh can't go through street is something like 6.7 percent so if we believe these two figures even we believe china's gross potential is something like 6.5 percent you will believe the figure of chance can't go through it is 6.7 then you will think china now is growing after its potential growth rate if this case then there's no need for gum to take any expansionary physical margin policy to a stimulant economy because economy is already growing at its potential right but this is a very questionable proposition what is reality what is china's real growth rate to be honest i do not believe that china's growth rate at this moment is something like 6.7 as shown by official statistic the problem is that at this moment china is suffering from china's actual growth rate is below the so-called potential growth rate and there are many measures to see whether economy is growing at its potential inflation china's cpi poor cpi for many years is just one percent as a developing country extremely low and we also know cpi tended to be overestimated if us countries cbs one percent private the country's cbi is less than one percent perhaps zero percent there always overestimation uh more importantly china's ppi that's a producer price producer price index has been in negative territory for 15 months almost five years it's a long time and china's gdp deflated larger was negative so in terms of a price level you can say that china chinese economy is growing below its potential okay and also we need to check employment in china the statistic about employment is not very reliable because china is a solid dual economy farmers will go to the city to find a job after three months or several months they return to countryside it's very difficult to to figure out what is employment rate then we can use so-called uh facilitate utilization rate and in china there is an official statistic about this uh facilitated rate but there are some surveys made by industrial intellectualist association according to their statistic the utilization rate is less than seventy percent okay less than seventy percent in normal time the rate should be more than eighty percent here is a chinese ppi i'll just show you that for 15 months cpa have been dropping you can see here this is a ppi sometimes more than minus 5 continuously this is very important side of deflation in china we are suffering from deflation cpi is also low here okay so this figure actually i just mentioned according to industrial survey for whole industrial sector facility utilizing utilization rate is 67.8 and also 40. so there are also other evidence showing that the chinese economy is operating under capacity for example china's imports has strength by 13 percent larger when people are talking about the china is engine of global growth actually people are talking about china import a lot of things oil gasoline goods so on so forth but last year the absolute amount of imports for why this is because china's growth rate has dropped in in in invalid yeah i i think so i need to check okay so there are a lot of sites showing that china's uh economy is suffering from overcome over capacity and so the logical conclusion is that in my view either china's growth potential is underestimated as i said according to official view chance uh potential growth rate is six point five percent percent and all the actual growth rate is always meant because the over according to a statistic uh actual groceries 6.7 so that do not add up so either overestimate actual growth rate or underestimate the potential goals or both uh i think both and especially we all estimate actual growth rate so the true growth rate may be lower than uh official figure shows so the challenge being china what is challenging uh i i think there are two tools two kinds of challenges the one is china's potential growth rate has been falling this big challenge from 10 to lower to maybe eight percent or seven percent anyway is selling that this is a long-term challenge the second challenge is uh actual growth rate is too low compared with the china's potential growth so in order to uh so china has to try to prove to improve the potential by further china's structure adjustment because there are still rooms for china to complete its structure reforms for example we need to reform state-owned enterprises we should introduce competitive competition policies we should continue to deregulation about lots of things and also uh china need to make the gun more efficient to play a better role and for the short run and china need to use um exponentially microeconomic policy to prompt the economy to to to prevent the economy from sliding further actually uh in in china there are lots of very good plan about econ reforms especially in the third plenary 18th party congress there is a very compensable plan about the reform of china's whole economic structure but the problem is that after showing up a very comprehensible very encouraging reform program and people tend to sell those programs because there isn't action plans how to uh implement those reforms there are no time tables for each reforms so i think there's still a very large room for chinese government to implement those structural reforms as a result of these structural reforms i think china will be able to stabilize its ghost potential and also there's hope in the next few decades china will be able to make this potential growth rate even a little bit higher so this is one thing and the second thing uh i think is to reduce the kind of gap between actual growth rate and the potential growth growth rate through micro economic management so this at this moment i think is very serious problem in china because in china everybody agreed that china should carry out with the structural reforms but very few people now are discussing how to use expansionary physical policy and monetary policy to stream the economy why it is case because in 2008 china introduced a very famous so-called 4 trillion stimulus package which was very successful in stock the economy from falling but unfortunately because the gum introduced this plant in a rush so uh create a lot of oil capacity make lots of waste and especially because this four trillion stimulus package was financed by bank credit so the credit increased very dramatically and china's corporate debt has become a very serious problem so there's sort of a stigma about using uh expansionary physical policy so people especially economists do not want to talk about it i think this is not the right attitude in my view this fortune in program the basic direction is correct the problem is in implementation the problem is chinese grant should use its own money china should use gum expenditure to finance these four children rather than rely on credit expansion but that is enough story in order to persuade the gum to use expansionary physical policy to stimulate economy you need to analyze what's the cause of chance slow down the kansa here you can see that this is a this is a about chance the growth rate of a chinese investment in china investment can be divided into three major categories the number one is manufacturing investment number two is infrastructure investment number three is real estate investment china's problem is that investment share the share of investment account a very large proportion of the economy is too large china's investment investment rate is more than 46 percent it's way too high okay but more importantly among these very high investment infras estate investment is is has been increased too fast here you can see this real this this is a real estate investment in 2010 the growth rate of real estate investment is 40 percent something like 40 percent real estate investment account for more than 14 of gdp uh i think uh in europe spain is very famous by very high real estate investment i think the share is much less than this maybe eight percent but in china fourteen percent way too high and creates lots of problems so the chinese come try to climb down on real estate uh investment so here you can see the real estate investment have been falling steadily steadily by the end of a large share the growth rate for real estate investment is one percent from 40 percent down to one percent and also uh the investment real estate investment account for forty percent uh fourteen percent of gdp you can imagine just because the slow down the dramatic slowdown of real estate investment the down pressure on growth will be very very large okay so ideally okay this is some comparison of china's real estate investment with the asian countries one is japan another is uh korea and for japan in their bubble time the growth the the share of real estate investment is something like eight percent of gdp but china here you see here uh 14 it's also way too high compared with other countries so house house more houses this is a very famous phenomenon in china these skyscrapers in shanghai i think is comparable to new york and there are some figures and three years ago when i was invited by a chicago council to talk about chinese economic growth i told my american friends you don't need to uh to worry too much about the chinese catching up i don't know whether i can see this catching up in my lifetime but i can guarantee that very soon in terms of a number of uh skyscrapers and intensive five stars five star hotels china will catch up very soon okay this is the figures in china this by end of 2016 sky crisp eclipse in china is 470 and also 332 under construction okay so this is a did i mean versus china's uh the number of sky scriptures uh you will surpass uh united states and five star hotels by the end of 2013 there are 696 five-star hotels and 500 under structured so in this regard the china is also catching up with the united states and but don't forget china's per capita income last year is something is eight thousand years dollars in united states i think of 50 000 u.s dollars right and so uh according to some report in china home ownership is more than more than 90 more than 90 percent in beijing affordable house the standard food food floor is 90 square meters for affordable house don't remember china is a poor country so i think in this regard the china really has gone mad so it's absolutely right for the gov to calm down on on real estate investment because to spend so much to use so much resources to build houses is a vast misallocation of resources this is not just an economic problem and also a problem with the corruption here there are some materials i thought when i first saw this photo i thought this was in geneva back to north this is in a local province okay in a very poor province this is a official building for provincial government this for a district guam building a small district okay not a city not a province this is a small country i thought it's capital hill but this is small county and you can see a lot of this over the thing so this is not only a waste of money but also it's sort of a corruption and because real estate investment plays such an important role and so the whole economy will be influenced if you calm down on real estate investment steel industry is example china's steel production capacity is a 1.2 billion top 1.2 billion time and china's oil capacity at this moment i think in steel industry it's larger the whole output of the world and so because calm down on real estate investment so demand for steel four quite dramatically so as early as in 2000 2000 2012 and the old capacity in steel industry has become very serious now it's even more serious as a result the profitability of this industry extremely law is not point not four percent now perhaps uh last year negative okay the profitability and also this very telling story is that the profit on two tons of steel was just about enough to buy a lollipop in 2012 large share is something similar to the price of a cabbage cabbage so this is the problem with the over capacity so the question is how china can deal with this situation some people argue that we just stop intervention if we stop stop intervention then because over capacity the price will fall because price will fall then demand will increase supply will be reduced so the economy will reach to equilibrium but that is not the case because now we are facing a differentially spiral in china we have two type of different diffusionary uh spiral vice over capacity deflation spiral another is classical dead diffusion spiral now we are facing these two spiral here i give you some example as a result of this over investment so we have over capacity here right because our capacity ppi is falling because the falling over prices so profitability of the enterprise floor so in response to the falling profitability enterprises will deliver and also reduce its investment because you reduce investment so over capacity becomes more serious and there's another channel that's falling pp ppi means that the uh that the real debt has been increasing okay real debt has been increasing in in enterprises because the real debt has been increasing so the enterprise has to deliver it the enterprise has to cut their investment as a result we have a more of a capacity so this will cause reduction in production and this will fall so it will not stabilize unless you take some action so this is a chinese corporate profitability actually this is the total corporate of profits largely become negative the total profit has been falling okay and also to make things worse chances are real real insurance is very high because negative ppi so real interest is something like a 507 so this also caused huge problems for for chinese corporate so as a result uh chance corporate debt to gp ratio has been increasing very dramatically we did some simulation according to our simulation by 2020 chance the corporate debt to gdp show will be something like 200 i think it's extremely high maybe the highest in the world this is our problem no no just uh industrial corporations no financial so what should be the policy responses now the grant emphasize the importance of a supply side structure reform i think this is important and necessary but this can solve long-term issues it will not solve the shortened problem so in order to solve the thought short-term problem in order to breathe to break this deflation deflationary spirals china need to introduce expansionary microeconomic policy especially use expensive physical policy and to invest to increase invest in infrastructure only by this way china will stabilize economic growth and also will help to improve growth potential in the future and so my formula is that physical increased physical deficit to financial infrastructure investment i think this most important policy we should adopt of course uh munch policy should accommodate him then exchange rate policy my view is that china should stop intervention in a fun exchange market to allow rb to flow and at the same time china should strengthen the management of cross-border capital flows i think it is very important why am i arguing to use extensionally fiscal policy to increase investment in infrastructure because china's physical procedure is very good according to uh to to the minister for finance uh he makes a statement last week china's total total public debt obg ratio is 41.5 including local gum debt compared with the italy and many european countries that is extremely comfortable position so there's tremendous room for gum to increase its budget deficit china's current budget depth ogde ratio is less than three percent in my view it will cause no problem whatsoever if a chinese budget deficit og visual becomes five percent no problem if we increase this budget deficit to use budget deficit to finance infrastructure investment china's economic growth can get a very larger boost and this will be also beneficial to the rest of the world actually we have lots of projects which need investment give one example in beijing in summertime if there's heavy rain you can be drawn in city center this happened three years ago a driver get into a a a bridge and a bridge in a highway then because the sewage system is it stopped working so that gentleman was drunk so which means that there's nothing we we can do and in italy i was impressed very impressed by your surgery system i was frightened that i looked through this this uh i'm back to see how deep is the sewage system in china man cannot go through this serious system rats come this is very big problem so china can invest in a very big way so anyway we have a very good plans for example this is a china's filter road system okay every town with the population more than 200 000 will be connected by highway and also china's a high-speed rail system is very good uh ten thousand uh ten thousand kilometers very comfortable i think better than most european uh fast train okay and this is a chinese uh uh uh network uh real real system and also i i don't have time to elaborate about china so-called one belt one road system this kind of system will expand to the central asia and hopefully this real system will connect with the europe so a so-called eurasia land bridge could be built so we need money also china has lots of problems this is a smart very serious in order to save to solve this problem we need huge amount of investment and so on so investment is not just in physical infrastructure it's also in social structure social infrastructure so this is a primary school in china so we have very good school very beautiful buildings but we have this kind of primary school it's really a pity so social security system bad so i called for better for worse for richard for poor uh so this old pensioner and so on so we have a tremendous room for future investment and this not only will pump up the economic goals to allow china to grow at its potential but also create uh lay a solid foundation for further growth so that in next decade or two china will be able to maintain a decent goals grocery some like five to six percent so uh even in my lifetime i will not be able to see china catching up the united states but in my son's time they will definitely see that the only problem is whether we can come up with the right policy mix if we can have a right policy response to a chinese problem i'm confident chinese economy will be able to maintain its kind of ghost momentum i think i can end here thank you uh professor you thank thank you so much uh very enlightening uh i think uh we have many questions and i guess i would start with rob a very large comprehensive presentation do you have any further questions on that thank you frederico a couple of things occurred to me first of all i don't know whether to accuse him of plagiarism or to worship bob dylan's knowledge of chinese parables because in his song love minus zero no limits he said there's no success like failure and failures no success at all and so as you started i wondered if bob dylan has not studied the chinese sages and writing themselves more more to the point you talked about a few american friends uh who might be disappointed if china overcame the united states and while most people in great britain assured me that they got a better sense of humor once america passed them and that there are some positive developments as well there is a reaction right now some people refer to donald trump others refer to the tpp or the opposition to the asian infrastructure investment bank others would talk about for instance council on foreign relations an internationalist institution has a very bellicose and aggressive anti-chinese report that was released at the end of last year uh is there a chance that the fiscal stimulus that you're talking about will end up being the result of an arms race will be directed more towards the military than environment infrastructure and education because of a breakdown in u.s chinese uh relations leading to the kind of which you might call fiscal response that america experienced at the end of the depression and going into world war ii do you need a honest answer okay yes if china and united states fail to make a compromise to respect each other's interests yes we may enter a new round of i'm raised very unfortunately and and with your excess capacity there would be people cheering for that for purely sure that's very natural can i take the opportunity to to ask you a just marginally more peaceful question uh and i say just marginally because it's about banks uh among uh the many uh areas where china is second to the united states uh funnily enough it's not second in terms of uh banks balance sheet assets i i think the assets of chinese banks are about i don't know 40 of world gdp extremely large um do you see any danger that that might be uh break down there at some point and that might have some domino effects around the world i think uh china's uh the balance sheet of chinese bank system really is really too large and it's uh dangerous so this is why the chinese can't emphasize the importance of delivery okay and and but the the trick is how to to make this delivery smooth without causing interruption this is kind of my major concern and out of all good intention in order to reduce this leverage ratio you can try to persuade the banks to stop lending to enterprises or you can persuade enterprises to refrain from borrowing from banks then you'll reduce this leverage ratio but this will cause slow down the goals so i think this is very dangerous if the growth is falling then this leverage ratio will be increased which will cause a serious problem so in china's context i think we should combine long and short-term solutions to solve this problem number one i mean for the longer run you have to increase your uh capital efficiency so that you don't need to invest too much in order to get a very high gross rate if you invest too much you have to borrow okay and then another very important is to carry out corporate reform to make empty enterprises more efficient so that they have a higher profitability so they don't need to borrow and also we need to further reform china's capital market and if you have a very good capital market then enterprise can raise money from from say by selling shares but unfortunately china did bad job last year and destroyed the credibility of the capital market so nobody wants to buy shares so these are also problems you need to solve this problem and in terms of a short term policy you need to lower interest rate interest way too high and also you try you should try to use eventually um physical policy to to pump up the inflation so that you reduce the real uh uh real uh real debt so we need to combine long-term certain solution and so on so with all those sort of things i think china can reduce its liberty ratio and to reduce this kind of a horrible high debt of a corporate and at the same time because china is a very high saving country similar it's extremely high and china uh has a very large conservators china has more than six trillion for the assets at the same time we have something like a three or four trading uh foreign liabilities so we are net credit to the rest of the world and china is still uh basically uh so so-called socialist capital uh social uh market economy we still have a very large uh amount of state-owned enterprises and street assets so if there's something wrong the gum has the physical capacity to prevent the asset price from falling and if acid price falling chinese gum has the capacity to inject capital and also because capital control there's no way for people to run or bank they have to buy they have to put money on the bank so we don't need to panic i think the problem is serious but there are still many ways to solve this problem so given time i think we can solve this problem we have about maybe another half an hour or so i would take questions from the floor i just stress questions not speeches try to say who you are and and keep it short in the interest of the debate so i see uh three questions here one two and three and we we take them in bundles and and so we can answer go ahead okay so we talked about uh overcapacity and the real estate and i have a question i'm a development economist and i have a question about um the two child policy so basically i read that on the 29th of october 2015 there was a change in the existing law regarding the one child policy so basically the new policy allows chinese couples to have two children and it was proposed to address the aging issue in china so i have two questions the first question is do you think that the um this decrease in the growth was probably caused by a uh by the aging of the population because we know that when the population ages this uh this creates a an obvious burden on the government finances and secondly uh how do you think this change in one child policy will affect growth if it if at all basically yeah okay i think these are very i i'm old i may forget the questions okay hi professor you um noyah i wrote my master's on shadow banking system in china so i'm quite curious about over capacity you should talk about do you think in china right now the banking competition policy is not enough maybe we should let the banks feel so that they would understand there is a limit um budget borrowing with the local governments and then we would have a control of the over capacity at the local level rather than letting it grow and grow and get out of control um hi thank you very much for your talk um my question is um there is a topic that for a lot of our societies today it's one of the key topics and you win your whole talk without even mentioning it that is inequality i was wondering if for the chinese society displays any role and for the political leadership does it play any role thank you okay okay about this ageing definitely this is a very important factor which has neck negative impact on china econ growth and actually since uh 2012 working population in china decreased by 3 million a year and so with some time lag the labor supply will decrease so you know potential growth rate is equal to growth rate of labor productivity plus growth rate of labor supply so given gross rate of labor productivity the decline in labor supply of course will have a negative impact on china this uh actually is quite large and it will become larger in the future because it's difficult to reverse this demographic change but i don't i can't give you figures because in china there's so many different societies with a different result but the definite this is serious problem for china and also uh china should abandon this bank policy actually china did abandon but in my view it's too late actually we have been calling for abandoning this uh one child policy for a long time it's really very late and after uh i mean government now actually is trying to encourage young people to have more than one child two or even three who knows but the situation is that well educated young couples do not want to have a more than one child many of my colleagues young colleagues do not have any children they have no plan to have children so this is something very serious we don't know how to solve it i think this is sort of a asian program in japan in korea and in singapore in hong kong have an area we are facing this challenge about the banks i think the problems with banks are many i think at this stage the problem is north bank are not well protected the thing is that the banks are very very cautious in providing lending even though some banks has to give loans under certain pressure but uh i think uh the the truth is that they are too well protected and they i think there are more than uh 40 percent of bank rooms are with the crutch role not based on credit that is not bank right and then they also ask people provide credit for the creditor there are lots of current guarantees and then the guarantee need more guarantees so if one guy failed to pay then many guys also will fail so i think bank is over protected i think this problem and also chinese scams should further crowd the liberalization in creating financial institutions for example in locality who knows who is credit worth only local people will know so you should allow small banks and so on so forth in this regard i think china still need to do a lot of things because chinese gum is very cautious very timid they fear this cause huge problems i think they should take more risk in encouraging to establish more financial institutions especially at the grassroots level otherwise uh china's financial problems will not be able to solve i didn't implicitly mention equality but in my my photos actually i show how serious it is for those high-end condominiums and poor people will not be able to to buy and also for for for a lot of uh uh people in rurals they are not really uh treated very well i think uh construction workers from rural made tremendous contribution to china's economic of the past 30 years when they grow up grow older they come back to a countryside without a decent protection i think the chinese come realize the importance of the perfection of social security system know the importance of providing decent public goods to the poor and so on but uh to be honest i think it's far from satisfactory really but the directions very care you have to do so and now i think there's new development that is the pressure groups lots of pressure groups actually they are demanding higher pay they demand better protection and so on so the chinese government should really facilitate this kind of public pressure to improve its system so that we can reduce this inequality otherwise chinese calm goals will will will not be possible even social stability stability will not be able to make to be maintained so this is a very important issue perhaps i should really emphasize this in my presentation shall we take another round of questions uh any hands raised again okay one this is one and then another in the back of the room and three okay so you imagine your presentation like the cp and ppi are actually dropping so china is on the verge of deflation but then you also said your colleagues don't want to raise children maybe because i lived in china for so long i know that raising a child in china is really expensive so how could you explain these contradictory facts that inflation is going down but then young people won't be able to raise their children because the expenses are so high especially you know real estate good afternoon how does it work with the shadow biking thanks a lot and another question about inequality what do you think about the divergence between the coastal and the inner part of china and also about poverty uh as a world within china do you think that the growth of the wages are part of the problem or part of the solution because you said that it is important for for the social stability uh to help to aid the poors but is it economically viable in your opinion okay okay this latest question is uh interesting and also uh it's right question when we are talking about the tbi we are talking about a medium manufacturing goods prices actually we are talking about the living cost i also mentioned the core ppi is core cpi without the food and the gasoline and diesel thing it's rather low right and i also mentioned another factor the housing bubble the housing price is very high so why you feel is difficult to stay in china because you have to buy houses it will cost huge amount of money i think the number one issue for young chinese and also service price is very high you send your children to kindergarten you have to pay money you send your children to prime school officially it should be a free free flow of charge but in order to bribe teachers then you have to give some some bonus to teacher and so on so all these add up so you feel uh the life is hard and and so on i think that's the right uh right i think this can complain also uh uh uh i mean is uh legitimate but on the other hand what i'm trying to say is that ppi has been falling and this will cause china's goals to drop i think this is a separate problem for example i mentioned that because people is falling so enterprises the real debt has been increasing right but i didn't mention that china cbs still positive why china is cbs still positive just because aging just because service sectors price has been increasing but the trouble is that no trouble the thing is that service sector is mainly consists of a small enterprises they do not borrow heavily from uh from the banks or so even you have a positive cbi it will have no big impact on the real debt because the money go to manufacturing sector state-owned sector zones force so there the price of their products actually are falling so and also they borrow a lot so this situation make this so-called debt deflation more serious which make a chinese economy slowing down so this is a separate issue from cpi from cpi from your cost of living so this is two separate things but on the one hand we realize china should stop the falling of pbi but on the other hand the chinese gum should pay more attention to these very high housing prices you should really take action to calm down on housing prices which will make your life happier and also china should carry out anti-corruption campaign which also will make your life easier of course china following the economic growth some price of uh manufacturing goods which are related with the life will be uh slower which will able to be able to improve your living standards so i do not see contradiction between your example under my argument my description about the problem with the falling p by causing higher debt depletion spiral okay and might it also be the case that the falling ppi and fear of debt deflation make people less secure in their feelings about their employment that with a slump economy they might get laid off they might become unemployed theoretically this is the case but so far i think it's not casey yet okay okay so far because still very few uh redundancy and so on but the gun perhaps is is prepared to take action to do this like jung did in later 80s and 90s late 80s and 90s but this has not happened yet at least uh in in the whole country not yet but definitely that this will play certainly in the future now charter banking i think this is a very complicated issue i need to prepare for another presentation basically basically this is because uh sort of a regulatory rules and so on so lots of people want to evade these regulations and they find a chance to to to to invest in some shady projects and after two years come down on shadow banking activities i think the situation has been improved very much because most shadow bank activity activities is off the balance sheet now the gum asks all those banks to uh to put all those activities within the balance sheet so that they can have a better supervision i think a situation has been improved so until last year shadow bank activity regard is one of the major threat to china's financial stability this year i think shallow bank activity has retreated to the rank second or third the most worrying problem is a corporate debt and non-profit loans related with corporate debt but anyway each year there's change of topics who knows what will be the most important threat to china's finance stability next year and regional uh development that is really it's a very serious problem so one of the important motivations for chinese gum to propose a one belt railroad project is to solve these regional imbalances because over the past 30 years east coastal areas develop very rapidly because they have access to sea and it's very easy for them to transfer their products to europe to united states but in hinderland area is difficult it's difficult to to trade while central asia so on so forth so in order to solve this problem now chinese come i think one of the most important motivation of the chinese gum to propose one road one belt one road is to help those hinterland regions to get equal chance but i think that's difficult it's really very difficult whether this will solve their problem i don't know but anyway intentionally good about last question about wage this very controversial issue in china uh many people argue that we should against the populism because if you allow wages to increase too fast to surpass goals of labor productivity and china will lose its competitiveness so until last year our means of finance argued very strongly we should constrain this right increase in wages actual the growth of wages has been quite rapidly in china for many years until recently the minimum wage should grow at 13 percent by law in each area 13 percent each year of course it will be faster than gross rate of labor productivity but my personal view is that china should allow people to increase their region to catch up because in in the past the goals is too slow and when chinese economy is suffering from over capacity increase in wages will help they spend more which will become a very important drive for economic growth so i'm not sympathetic with the view of anti-publishing i think if we increase wages the labor productivity will increase and under pressure of labor wage increase enterprise will try the best to seek goals in arab innovation creation so so forth that will be a positive development in china can i can i ask you one question i have been trying to review a few facts or factoids you correct me if i'm wrong but i think china is producing today about 300 000 engineers every year that compares with i think 30 000 in italy um if you project current trends probably china will overtake italy in terms of the share of tertiary graduated people over the total population uh about to about 25 to 30 percent in in the mid uh 2020s and it's fast becoming also a technological country think about alibaba think about huawei and many other examples how important is this tech sector to china today and in in perspective i think it's a very very important i didn't mention it because lack of statistics this sort of undercurrent it's extremely important especially in shenzhen and in many other places lots of young people they are highly motivated we are treated and they go to that place just like americans go to silicon valley in china there are quite a lot of these kind of things and also in terms of id technology alibaba i know mine personally and these guys are extremely creative very clever and many young people told me that in the future chinese economy really will grow again very strongly because of this sort of development and also chinese come pay great attention to encourage creation and innovation especially this is a mantra of premier league whenever he he he goes he will talk about this so he shows the things this contains extremely important but comparative with china's whole economy is still a very small section so at least in short run the contribution of this sector to chinese economic growth is not that large but we pin hope in the future i have two in the front row and then maybe a third one up there could i simply ask about a bit more information about the relation of the state-owned enterprises and these newer private sector firms if i'm a state-owned enterprise do i try to get into that sector can i do it or do i just sort of sit there and cut excess capacity just i mean what it's a little hard for me to quite imagine how these relate and when i saw all your price indices i mean i asked myself gee it looks like you've got a kind of monopolistic sectors there that could very well take cash out and then pour the money into something else and does that turn the way i mean we're used to thinking of the tech sector in china along the lines of silicon valley but as i study this i begin to wonder if that is not yet one more illusion in the west about how china actually works i i think this question uh is uh rather complicated can we talk later okay there are companies like google or facebook yes which want to do much more in your country yes what would you recommend in which way should foreign investment be fostered in china i think this is really political in my view i will welcome those enterprise heart and soul because i'm a researcher i need to get to know information as quickly as cheaply as possible but i feel very difficult sometimes i have to send an email to london to ask my son to collect data so then send back to me it's really very reasonable i think chinese gum needs to change its mentality you you you should believe in in the people believe in people's judgment but i think this because this political problem are not commercial not commercial not because fear competition mainly because of political so i i i am not very optimistic for any big change in foreseeable future but definitely chinese intellectuals and the public wish that this kind of change will should happen as soon as possible we are running out of time out of time so we have just time for one last question i think it was up there in europe we are really really worried about the pollution of china in december we saw pictures of beijing and the red red fog of beijing so i wonder if is it important for china uh for the public thinking of china to promote to implement other kind of investments further than investments on uh infrastructure investments on green energy or renovate renewable energies yes and actually event we are talking about talking about the investment in in in infrastructures actually we are also talking about building facilities which can purify air water so and so forth this is the part of important component of infrastructure investment i think the awareness of the importance of pollution in china has increased very dramatically chinese people are very serious you know there are some demonstrations and so on i think most of those demonstrations are related with the pollution and so uh even though gum want to build what that's called px factor it's a chemical factory it's very difficult because always cause demonstration so the local gum has to cancel those projects even though those projects are very beneficial to the economic growth in those regions and also in this regard we are grateful for us embassy for for the rest we are not so grateful because they publish this kind of statistic of a small particle i think this makes tremendous contribution to the awareness of pollution among chinese public thank you so uh that was the last question thank you so much professor you thank you rob for this opportunity and thank you you