The full transcript of the interview follows:
Chinese Economy and the new Leadership
Q: What do you think of China’s economic performance in the past year?
A: Since 2008, when the financial crisis started in the US, China became the motor of the global economy. It became the driving force moving global economy forward. China’s economy is much smaller still than the US. It is smaller than the US consumer [economy]. Therefore, the growth has been slower since 2008 than it was before. So I rate China’s contribution quite high.
Q: What are the main threats to the Chinese economy?
A: They are partly external, because of the slow growth, and the inability of the global economy to continue to absorb the ever-increasing Chinese exports. And internal, because China has to change its growth model. China has to reorient itself from export and investments to domestic consumption.
It is going to be a very difficult transformation, because the household consumption is only 1/3 of the Chinese economy. Exports and investments are 2/3. The growth of 1/3 cannot make up for the slower growth in the 2/3. Therefore, the overall growth rate will have to be significantly slower than it has been up to now. That is a very important point.
I don’t have enough knowledge to have an estimate [of China’s GDP growth rate this year], but the official estimate is 7.5 per cent. The important point is that it is less than the 8 per cent which was considered sacrosanct until now. It was in fact significantly exceeded in reality. That means significantly lower growth.
Q: What will China’s economic transformation be like in a few years?
A: I think the period of rapid growth when the overall economy was growing more than 10 per cent in reality is over, and it is unlikely to recur. It is a phase of growth that occurs at the early stage of economic transformation, and it does not occur in the more mature phase that China is today entering.
Q: What do you expect from the new government after the new leadership took power?
A: I believe they are aware of the need to make this change. I should have said earlier that this change doesn’t necessarily have to occur today -- the old model can last for another year or so, but it cannot last another 10 years. Therefore, the new leadership that has to think in terms of 10 years must embark on this change, especially that, in my opinion, the change was already delayed by the previous leadership which only had one or two years to go, and therefore they extended the life of the old model. That actually creates additional problems for the new leadership because with the extension, some serious imbalances have developed in the last year or so.
Q: What are the imbalances?
A: By stimulating investments, the capacity of industry increased, but the market didn’t increase enough. Therefore, the profitability of production, both of export and of investment themselves, declined. That creates financial problems -- it increases the bad loans that banks have made. And also, the government has started cutting back on the availability of cheap credit. Therefore, particularly the real estate companies were forced to borrow in the quasi-bank markets. And that borrowing cost is much higher, at a time when the investments were less profitable. When it comes to repaying the loans, there may be some difficulties in collecting the money.
The quasi bank market is mainly in the hands of state-owned banks, which have wealth management subsidiaries. And there is an implicit guarantee by the banks, so when the wealth management companies have difficulties in collecting the loans, the state-owned banks will have to make up for the difference.
On a few occasions when this has occurred so far, the state-owned banks have always made up for the losses. But if they are very big, maybe one of the non-state-owned banks cannot meet its obligation, and then you could have a run on that bank.
So this is somewhat similar to what happened in the United States with the subprime mortgages that eventually, of course, led to a serious financial crisis.
Now, I think the authorities are aware of the problem, and they also have very substantial resources available to deal with the problem. They also know what happened in America in 2008. So I think they will be able to deflate this incipient bubble without a serious financial crisis. This is the problem the new leadership now faces.
China’s Financial Regulation
Q: What is your assessment of how China’s policies worked in 2008-2009? Were they successful?
A: China was very successful in 2008 when there was a very large, sudden drop in export of more than 25 per cent, to stimulate the economy. And they had the resources to do it. So China sailed through the crisis of 2008.
Q: Do you think China’s financial regulatory system operates effectively?
A: I hold China’s financial regulatory system in very high regard. And I have actually met them in the past, so actually know them. I think they understand the problems, and they have learned lessons from the mistakes that were made in the West.
I think the Chinese regulators have a much closer and more intimate knowledge of what goes on inside the banks. The lack of detailed knowledge in the West is quite amazing. And that was the reason why things went so wrong.
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