tv Bloomberg Debate Davos 2016 Bloomberg January 23, 2016 11:00am-12:01pm EST
christine lagarde is the managing director of the imf and thank you so much for joining us. is there something that the west misunderstands about chinese markets and does that exacerbate volatility? >> i think there is a lot the west does not understand about chinese markets. the essence of what's going on in china is an adjustment. they have a debt restructuring challenge. they have an economic restructuring challenge and they have to come up with a new model.
they have a capital markets challenge. to build in an efficient way that circulates capital through the system better. they have a balance of payments challenge. that will pressure on the currency. capital outflows -- 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. in 1982, we had a debt crisis. we had the s&l crisis. we've reshaped our economy many times. i remember when the steel industry ended, heavy manufacturing, and we have gone into other areas. we have had another of talents -- balance of payments and and currency issues. one of the things being misunderstood is what is a normal balance of payments and economic and too much debt restructuring kind of recession?
in japan, they used to define recession is anything less than 3% growth. maybe in china, it is less than 5% growth. we are going through that. i think it's been confused with the longer-term feature. i think the reforms going on in china and the leadership in terms of where it's going will -- be very fundamentally fundamentally good. you're looking at something that is a short-term challenge. looking at something where we will be five years after the generation of new markets and vibrant young entrepreneurs and the other economy that is trying to flourish. francine: why we had so much volatility? mr. dalio: well, the volatility result inrimarily a the world as a whole that we have an easing of monetary policy all around the world. we are not going to have the
same effect. with interest rates at zero, you can't cut interest rates. with asset prices having risen, because of the quantitative haveg, the risk premiums gone down, and there is a big vulnerability. so when china is dealing with , the rest of the world, china is a negative on the margin of for the rest of the world. and the world is vulnerable because of a lack of monetary policy while asset prices are , high. francine: how do you explain of volatility? is it something we need to learn to live with? >> maybe there are two factors going wrong. one is china is in the midst of an economy that relies heavily on investment and exports and they are shifting to consumption. in this transition, a lot of assets get devalued in the process.
this is the primary reason behind volatility. another factor is the fed raised interest rates not long ago. a lot of emerging markets did not perform very well. reforms got stalled. you have a combination of chinese transition plus international influx and that caused volatility. of, you asked why a lot volatility, right at the beginning of the year, asset price adjustments go by steps. it does not always go smoothly. we had the steps at the beginning of the year. francine: what have we learned? is there something we have learned to balance? lagarde: at the imf we
don't look at the last two weeks. i'm a little bit embarrassed to comment on the last two weeks. if you do not mind, i would like to go back to the basics. it is a fact that depending on gdp, thealculate largest or second-largest economy is going through a list of transitions. you have indicated that as well. industry to service, export to conception, lower investment. i think there is another one happening which is also the governance change. that is probably going to continue to deal with the anticorruption fight as one of the key proposals. that has to trickle down. this is a management change. that has to be taken into account by chinese authorities
and chinese operators. the risk can be apprehended and taken in spite of this happening. i would say also that given those massive transitions, there -- that are undertaken pretty much at the same time and accepted as such there is a , communication issue, which, you know, is something that markets do not like. not knowing what the policy is, exactly what the rent and the is going to be valued against the dollar, the currencies -- which basket of currencies is it going to be? i think better and more communication would serve that transition better. i tend to agree with the dalio, but we mr.
believe that all of those changes are perfectly manageable if the right policies are taken. given the large amount of reserves at the country has, from our perspective, we are forecasting a 6.5% growth for , you know, next year. and we believe that the chinese authorities can legitimately that -- accept that this growth rate as fine for china as it is for the exchange rate to be aligned with a basket of currencies. francine: does china need to decide if they are a free market or not? have they not communicated enough? mr. cohn: many of these
fundamental transitions that china is going through are real. when you go from a economy where your building infrastructure to consumers driving the economy, that is a long transition. you cannot monitor or affect consumer discretionary spending. you can't affected the way you can government spending. this transition is difficult. on the specific question of , and whether it is a market-based economy, clearly this is a question the market in the hole 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 ends the chinese have done in intervening in their market are the replicas that many other countries
, including the united states, have done in certain parts of their modern history -- not even old history. whether it be circuit breakers or limits on certain trading activity. i agree with madame lagardere -- with madame christine lagarde it's a communication issue. , the communication is what is important. communicating what the chinese market is going to be and stick with that theory. transitions are difficult. you've got to stick through the transition. francine: how difficult this communication when you're dealing with such a huge and complex economy?
ms. xin: i come from the real estate economy side. what i see is a difference between the stock market which is hugely discounted and the real economy where we see the easing of monetary policy is pushing the active price up. in terms of transition from investment driven economy to consumption driven economy, we build holdings. today we just manage the lease. leasing is going well. the cities i operate in beijing and shanghai, we see a massive uptake of internet companies. the old economy, non-internet and traditional. we have new buildings coming up almost every other month and they are all taken up.
we have not seen the building sitting there empty. i think there must be a communication issue. the real economy seems to be doing ok. the stock market is trading at a huge discount. obviously, the investors are not getting the same message as we operative the economy. francine: again to this point of transparency, china promised to give the market a decisive role. since we have had intervention , in both the currency and the stock market. when do you foresee china taking good on its pledge?
mr. jianqing: china has declared publicly to the world the market will play a decisive role in economic development. it's important, especially when the economy is undergoing transformations. many think this needs to be communicated. in fact in the past few years, , the chinese economy has undergone great transformations. some criticize the growth led by investment. too high a level of investment. it has indeed happened. in china, the consumption has contributed to 65% of the growth. as described described the housing market. there is oversupply of buildings
in china. but it accounted for only 10%. but, the consumption of the housing market is increasing. 62% of our loans are for buying real assets. it shows the housing market. we need more communications and the lack of understanding of policy. some information, some views are understood from the old normal for china. the age of new normal is a test for china to have better communication so as to prevent misunderstanding. we will be more mature in the
if the three reasons behind the volatility that has worried international investors. in terms of communication you're , right. we should do a better job , and we are learning. we are doing it. i am here today to communicate. [laughter] mr. xinghai: but, you have to be patient. our system is not structured that can communicate. we are not able to communicate seamlessly with the market. we are learning. china can learn it, i can assure you that. ♪
when you look at what's going on in china, the chinese are trying to move to more free market and there is an inability to communicate more freely, that is generating volatility. the world's standards today for publicly listed companies and disclosure on balance sheets and audited financial sheets is pretty high in getting higher -- 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 and they want chinese companies held to the same a standards. number two, they want the market place to determine which chinese capital -- companies have access to capital. to capital. -- not the chinese government haveing which companies access to capital. if the chinese market opens up and becomes freer, the marketplace will determine which companies should be public and
which ones shouldn't. you get more world accepted financial statements and the market determines which companies will be public. i think you will dampen volatility. so, a little bit of this is natural evolution when it comes to the communication problem. unfortunately, for the chinese, they are doing this in 2014, 15 in a digital era. , 2016, they are not doing this in the 1930's. the rest of the world did it in an analog world. they are doing it in the digital world. we're watching it in real-time. they are doing it in an era where we just got re-regulating all of the financial institutions around the world. and we have taken an enormous amount of liquidity out of the markets and the chinese are suffering from this lack of equity.
mr. dalio: i think the chinese policymakers are not getting as much credit as they deserve. i am not speaking from a chinese perspective. you have to get into the newly ready of what they are going through. if you take a look at the debt restructuring they are going through, local government spending accounts for 30% of gdp. they are running at deficit. that is about the percent. if you cut that, that's sent of -- 6% of gdp. if you look at the way it has been restructured and managed, it has been managed superbly. it's a difficult situation. you were in a situation where you just restructure and you don't provide capital, all of that spending will take place. the same people who are doing that restructuring are the same people who did it in 1998. you know the mechanisms to be using. they are pursuing that.
if you look at the economic restructuring, they are going from one economy. the development of the lending system, that's been done with a lot of balance. it's a risky situation. the free exchange of capital is getting it to companies that would not have that access to capital before. that's not producing volatility and that's quite an a cop. -- quite an account the schmidt. -- quite an accomplishment. the passive payments is a difficult situation. capital flows are what the capital flows are. in terms of the stock market, handling it, problems. there have been problems. some of the responses have not done by world standards. there has been a big water -- order imbalance. when everyone wants to sell, it was that kind of circumstance. they have to respond quickly. when i speak to those policymakers, i find people with equal levels of competence for
the things they are dealing with. i would say that if you compare 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 is chosen, you have to be a competent leader. if you look at the politics in the west, some of the leadership there, that could be quite scary. [laughter] i think the commitment to market reforms is a very real commitment. think of the power that's going to liberalize that economy. it's been an economy. the top 10% is where it is passing through. this will circulate. there is a new china. you can speak to that new china.
the new board, the entrepreneurship. i think we are going through a cyclical, you can't help but go over that adjustment. that last 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 not just commodity prices, but the other economies in brazil and so on, and when you look at the vulnerability of the rest of the world in terms of monetary policy, that's a bad combination. we'll get past that. a bad year in china is a great year in almost any other country. francine: do you question their commitment to structural reform? what are the dangers if the structural reforms are not being pushed through? we went through a couple of years of intense discussions with the chinese of parties because we were going to review the baskets of currency
that define the value. this is what central banks around the world use. if you asked me if the chinese of 40's would complete the forms they had to take in order to satisfy the criteria of that currency, i would've said i don't think so. when the authorities put their mind, and are determined for strategy, we have seen in that case an absolute determination and ability to deliver what frankly what have had -- considered as undeliverable to begin with. so, if the same determination is applied to the reform of state-owned enterprises in relation to the clarity of messages concerning the transition, clarity of communication concerning the
framework in which they will do define policies going forward, even if the growth weight -- rate is not 7% and closer to 6%, it will take a little bit of time as we said earlier. but we believe. , it's a massive undertaking. reforming the state is going to require a fund for these issues. they have done that in the past already with certain sectors. i have no doubt that it is part of the exercise like the supply-side reforms in beijing, it will happen. francine: there is commitment? china must get used to the -- last month, we had a mysterious person quoted saying that china must get used to the l-shaped recovery unless reform
is pushed through now. waiting the dangers of too long? mr. jianqing: if we have reached a point of no return, we have to evolve. it would not only affect billions of population, it would have major impact economy. superficially the growth rate , has reached 69%. maybe, dropped dress but from the 6.5%, point of economic growth, we are paying more attention to the
quality, not the quantity of economic development. we proceed to structural reform. in the future we cannot depend , on investment. we have to rely on innovation. growth,te economic economic reform, is, indeed a , huge task. as the chinese authorities have undertaken supply-site reforms, ratio,k the debt including local debt, is not that high. local government debt for overcoming the debt, measures of -- measures have been taken to reduce the rate. for example our bank has reduced , 40% of such loans. so that it would also increase
the transparency as individual -- transparency. individual, personal debt ratio is also very low or relatively low. this is another engine for future economic growth. what we have to do is the debt ratio of enterprises. it is indeed a very difficult task. we need courage to reduce global --for example, over-capacity steel and iron industry, they were built during the high growth. that is why we have over-capacity. now, we have over capacity. to reduce the capacity would be a painful process of course for such a reduction. so all in all, i think china
has to undertake this reform, although it would be very finishing ut only by the reform could we succeed. >> how concerned are you about an outright financial crisis given the amount of leverage in china? >> the leverage levels are not intolerabley 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. 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 we fectiveness in monetary policy. those two things combined create a risky situation. >> in relation to exchange rates and the under currency. i think you're completely right nd i think that this illusionary pegging against the dollar has to be dismissed. here is a basket of currency in an effective term it 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 and understood by markets. and this complaint that there is depreciation against one currency, no. you're doing that against the basket of currency which includes the trading partners of china. so again, communication on that front i think is an important one. >> i just wanted to remind everyone that china built its massive reserve not because of monetary policy, because of the last 30 years of incredible reforms and mainly driven by the incredible entrepreneurship and largely driven by private sector. so i think the government's commitment to continue its reform and to support the private sector is important. now, as i would just thrike remind you that the promise of the board is not that style of stock exchange that would enable the smart, medium sized
enterprises to be listed to get funding without producing profit. a lot of the companies listed on nasdaq are not producing profit. remember. nd today in china if you are a n amazon and you can be as good as amazon but if you do not produce profit you're not qualified to be listed. now, that commitment has to be, you know, has to be kept. i think that the government came out, policy makers talk a lot about the fourth board is going to come out. we'd love to see them coming out as promised. probably the fourth quarter of this year. i have a company i need to float it and i expect you to come out with good news. ♪
>> on to another point we 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 u.k. do you want a second term? [laughter] >> you'll appreciate that i'll be waiting a little bit before i'll be saying anything about that but thank you for the
question. >> if you do get a second term, how much do you think we'll be talking about china in the next four years? >> well, the next -- in the next few years, you know, given the growth rate of that country and given the state of the development i think we'll be talking a lot about china. it is one of the two largest conomies in the world. 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. we're going to see it more going forward because there will be spill over effects in the vicinity because there is a china supply chain. we'll see it across the world as well. and any, you know, significant reduction in the growth of the largest economy in the world or the second largest economy in the world depending how you calculate it is obviously going
to impact the rest of the global economy. >> from 2010 to 2015, growth rates, for china have fallen by four percentage points. looking at 2020 what do you think the growth rate will be? >> now, okay. let me -- >> before you answer that -- >> go ahead. >> it's fascinating. people say, oh, china's growth has collapsed at 6.9%. ll, look at the output relative to six or seven years ago with 12% or 13% growth rate. e have the same. so give us -- sorry. i'll stop here. >> i understand there is some concern about this coming year in china. some people forecast that because of the volatility and so forth somehow 2016 would be a very bad year for china.
growth rate slowed down dramatically. i don't think that will happen, because in china we cannot afford to let growth rate to job go sharply because that will ignite a lot of financial problems inside china. so we will have a, what we call appropriately expansionary, supportive, physical and financial policy in this current year to make sure that growth rate is still appropriate. we have the means to do so and can expect quite a lot. there is no worry for a sharp decline of china's growth rate. some people think, well, you are 6.9% and it's just not ccurate to begin with. i admit our numbers can't
always be more, more perfect, more accurate. let me give awe supportive figure. that is taxes in china last year went up by 67.6%. that is not far from the 6.9%. the figure is ot far away and madame lagarde mentioned china's contributions to the rest of the world remain extremely large which is true. you talk to these multi national company c.e.o.'s most business in china, tell you their businesses in china are still expanding quite well. ford motors for example. ford is not the biggest car seller in china but if so 1.70 million cars in china last year. so china remains a huge contribution to the rest of the world and this is something the rest of the
world should appreciate more. >> you pointed to something also a lot of observers do under estimate which is the strength of consumer spending and it is the strength of ervices. how resilient are those two when you look at the chinese economy? >> i think, still, the dynamic force of the chinese economy is its entrepreneurialism and its private sector and especially the low to medium sized companies. the gigantic s.o.e.'s though they come out with a lot of ower, it is the millions and millions -- that matter the most. in that regard the reforms still need to be more focused on giving them the support whether a capital market support or tax support, monetary support. those are very important for the continuous growth.
that will continue to be the growth engine for china and now from where i sit i see incredible innovation coming from the internet, mobile companies. that really is an exciting part of our economy that very rarely gets featured in the news because we talked so much about the market volatility and so on. in fact, most of these soe's don't even get a chance to participate in the volatility. i think it is important that we remember that especially the policy makers like mr. fang and it is important to include these s.m.e.'s and they would reduce your volatility. >> a comment? s.m.e.'s that the are a great contributor to chinese growth.
our stock market should have doon lot more to support growth. it is doing quite a lot by the way. i mean, just take last year. people focused so much on the jy rations in the stock market last year but last year the chinese stock markets raised 1.4 trillion imb in money for the chinese companies. that placed the chinese stock market number one in the world so we can certainly do much better. and just one, you know, very short sentence about financial risk. china's different from other developing countries in the sense our growth is largely fueled by domestic savings, by domestic capital. that gave us a confidence in our ability to deal with whatever volume tilts and risk come out of the financial market. if china was a country relying
largely on foreign capital for growth you bet. any major financial risk can derail our growth. china is different. there is that factor a lot of people should pay attention to. >> how inclusive will china's growth be in the future? on two ld like to speak lines. i think paying attention to the growth of s.m.e. is important for china. s.m.e. has a huge potential and vitality and it's an important sector for solving nemployment. last year we underwent an
adjustment but the year end result was better than the earlier predictions, paving the form as tructural re has been criticized on this financial sector in china. as a banker, the loans to s.m.a. is a manifestation of inclusiveness in china, in our and 1.8 statement trillion to spend on s.m.e. f course we could do better. inclusiveness includes another aspect. , any very determined
industry, any sector that is environmental protection we would resolutely not allow them to be established. able to klum a new and greater economy in china. >> we'll follow that with when trade is stagnant, or will china take the role the u.s. has had for years in spurring demand? >> i don't think we're going to see that for three years or ore. china is going through this ment process and it'll be
i think a three-year type of adjustment process with a lot of these structural things. so it is going to be a negative, on the margin a negative for the world economy and that passes through merging countries clarl those who have the dependence on exports to china or commodities and that is passing through in turn to a number of countries. so there is a world of pressure that's in existence. that is why when we think about the fed's policies, there's not a country in the world that should not ease its monetary policies. maybe some should stay pat, maybe e.k. but by and large we have that self-reinforcing negative circumstance in terms of growth that is a problem because the st of the world also represents a weakening in china
for the exports for their demand. that is also weakening. so i don't think -- 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 inflationary pressures, you have a valuation for oil, how do you look at this? i think the federal reserve thinks the business cycle, classic business cycle is that when your demand is increasing faster than your capacity and you are at a fairly high capacity, unemployment rates are low, g.d.p. gap is tight, you should tighten monetary policy and that is the policy over riding the fed's issue. they're paying too much attention to the business cycle and not the long-term debt cycle. you can't squeeze much more out
of this because of the lower interest rates and that. we're seeing the world that they're getting feedback about is a deflating world with asset prices coming down and i hope they'll remain flexible in their thinking of monetary policy. be hesitant. there are asymetric risks because there is no doubt the federal reserve can be effective in tightening monetary policy. so if they are a little bit late and then they tie it to monetary policy i don't think that is a problem. they are not as effective in easing monetary policy. the pushing on a string like in real issue iod is a so they have to wait for the whites of the eyes of inflation before they enter on that because i don't think it is going to be so easy to be stimulative and move to quantitative easing and create that reversal. >> do you agree? >> i do. i think one of the new paradigms again going back to
this digital world we live in vs. the analog world, a lot of he fed policy that we're relying upon is analog policy. it is the same policy for generations and generations. the world we live in today is completely digitized meaning we're real time. we've got a global workforce today. free movement of currency. anyone with a hand held digital device can move any amount of currency they want around the world, trade any bond they want around the world. o, you know, fixating on employment in the united states is interesting but we've been nable to create wage inflation now for multiple years where the fed has told us multiple every year.l come it will come. but in some respects when you
think of a globalized work force today which i think we have a globalized work force and china is part of our globalized work force, if you can go higher the incremental worker for less money in china than you can in the united states, where does the wage price inflation come from? 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. you take most companies that we represent are clients of ours and we talk to them about how they're running their company. they will talk to me or talk to our representatives about how they're opt micing their work force. 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, hong
kong, new york and so therefore to the extent they have to pay ifpblg metraally more for the next worker they'll export the job. 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 out of time so i'll just ask each of you. give me your best advice or prescription to try and bridge the divide that we were talking about between making market perceptions and what the policy akers in china want. >> certainly. we hope there will be a economy in the world that this volatility, volatility would be reduced. and i also hope that china
would succeed in its reform and adjustment and to avoid the middle income trap. >> i would say number one clarity of communication. i would say number two clarity of purpose. i would say number three implementation of the reforms and have been identified for all of us a bit of patience for the massive undertaking. >> can you say -- germany has backed you for a second term. can you say you would consider it? >> look. i'm honored and very grateful and extremely, you know, pleased to hear that and i thank you. i thank those who have come out like that. thank you. >> they just said that china is on a margin a negative contributor toward growth. i was thinking who in your mind
ould be a positive contributor ? >> just to be clear what i'm saying is as the rate of growth slows and the complexion of the economy changes and demands on the margin that's a negative to growth, i don't think right now that we have a locomotive. i think that would be exchange rate rising in the united states and also with the negative wealth effect 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. my concern is that we don't have a locomotive. >> that's what i wanted to say as well. we have orld, in fact, to -- all the major countries and economies have, simply have to work together a lot more and cooperate a lot more in terms of policies and understand each
other a lot more in terms of overcoming respective domestic difficulties and realize that, you know, we are -- 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. >> just to follow through with that, would that be monetary policy cooperation, fiscal policy cooperation? in what form will that cooperation take? > all of that. >> it'll be a challenge. >> it is. >> but, you know, just one sentence, in terms of u.s./china operations and other ssues, we are working very well with our u.s. counterpart. >> a challenge but do-able. you are confident this will be done? >> i think monetary policies
will not be as effective. that is a big change in the world because we required monetary policies to be effective. and then i think on cooperation on monetary policies, because you can't move interest rates as much you move currencies more. i think we are entering an environment in which there will be more currency volatility as a means of easing policies where they need to be eased. 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 someone will say you need fiscal stimulus. when there are political shifts, particularly let's say the populism taking place in europe or even in the united states, those things may not be easy decisions to make on fiscal policy.
>> gary, 20 seconds? so i agree with the chairman. i want success very much. i agree with madame lagarde we all want clarity. i agree with the chairman we're hoping for success in all the policy areas. one area i would 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. > final words, 20 seconds. >> china is going through this transition period and there is going to be a lot of volatility and noise and it is important policy makers and the media are not focused only on the short-term noise but committed to the long-term reform. thank you. [applause]
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