16/11/2013

Download Subtitles

Transcript

:00:00. > :00:07.suspicion of murder. No odd BBC News it is time for

:00:08. > :00:15.talking business. `` now on BBC News.

:00:16. > :00:19.Welcome to Hong Kong. Debt is the new normal for people in China.

:00:20. > :00:27.Since the crash, companies, banks and even household have borrowed at

:00:28. > :00:28.unprecedented levels. The big question is, is China headed for a

:00:29. > :00:54.debt crisis? Joining me today for a special

:00:55. > :01:01.debate to discuss whether China is facing a debt crisis are the

:01:02. > :01:04.chairman of the movie capital group and the former chairman of Goldman

:01:05. > :01:11.Sachs in China, also advises the Chinese government on financial

:01:12. > :01:16.reform. The chief financial economist who for `` who once worked

:01:17. > :01:21.at the financial authority and warns that the debt crisis is very real.

:01:22. > :01:24.Jim models, one of the most respected investors in the world who

:01:25. > :01:30.has declared that Asia is the place to be in the future. Welcome to all

:01:31. > :01:34.of you. Fred, I will start with you. Everyone thinks of China as a nation

:01:35. > :01:39.of savers, but we have also seen estimates of private and public debt

:01:40. > :01:49.rating something like 200% of GDP. What has caused this increase? There

:01:50. > :01:54.has been a rapid build`up in the overall level of debt in China.

:01:55. > :01:59.China was not really the episode of the global financial crisis but the

:02:00. > :02:10.magnitudes, the size, China responded overwhelmingly so clearly

:02:11. > :02:14.China is one of the most indebted economies in the world. But to put

:02:15. > :02:22.into perspective, even at that level, China is still below

:02:23. > :02:28.Australia and South Korea. Jen, do you agree? You have warned that the

:02:29. > :02:37.rising debt is dangerous. As Fed said, China's current debt level is

:02:38. > :02:44.still lower than those levels of the other economies and is higher than

:02:45. > :02:48.most of the emerging market. Not only is the level very high for the

:02:49. > :02:54.judge percent, but also the rapid pace of this level is build`up over

:02:55. > :03:02.the past five years, it has risen I think by estimates by 70% of GDP

:03:03. > :03:09.since 2008 two 2012. This place is much faster than the pace that we

:03:10. > :03:17.had heading into the financial crisis and higher than the US before

:03:18. > :03:21.2007. Gym, where do you, this? I hear there is a rapid build`up of

:03:22. > :03:26.debt and as a function of the list of government spending in Britain

:03:27. > :03:30.after the global crisis, so maybe you `` maybe there is not much

:03:31. > :03:39.concern but in Jen's view the pace is worrisome. I am not sure anyone

:03:40. > :03:42.really knows. China is a gigantic country and I am not sure anyone

:03:43. > :03:47.knows. Yes there was a rapid... Debt because of the conditions which fed

:03:48. > :03:52.and Jian talked about, but China has huge assets. They are the largest

:03:53. > :03:56.order of foreign currency reserves in the world, unless someone is

:03:57. > :04:01.lying, and they have a huge savings rate. The save and invest over 35%

:04:02. > :04:07.of the income. Other nations like the United States sees 2% of their

:04:08. > :04:11.income to the Chinese have huge reserves backing up whatever debt

:04:12. > :04:15.there is. The government in Beijing and know they have a debt problem

:04:16. > :04:19.with too much acceleration of debt and are trying to do something about

:04:20. > :04:24.it. I wish in the United States they were trying to do something about

:04:25. > :04:27.it. They are increasing debt. In the United States today they say the

:04:28. > :04:33.solution to too much debt is more debt. Grown`ups say things like that

:04:34. > :04:38.out loud. I would rather be in China with the creditors than in the US

:04:39. > :04:46.with the debtors. Jian, can the government to do something about

:04:47. > :04:51.this? I am not looking for an imminent debt crisis, and partly for

:04:52. > :04:56.the reasons Jim has mentioned that the Chinese government still holds a

:04:57. > :05:02.large middle assets. Even local government has a lot of land at

:05:03. > :05:06.their disposal. But such a level of debt in the pace of the build`up is

:05:07. > :05:11.very concerning and as we discovered particularly this year, despite the

:05:12. > :05:15.rapid rise in H, economic growth has continued to slow and this

:05:16. > :05:22.diminishing return on investment is also a source of concern. Jian,

:05:23. > :05:26.let's say we have bankruptcies in China, I think that's how capitalism

:05:27. > :05:31.works. That is the economics is supposed to work. People got

:05:32. > :05:36.overextended and go bankrupt, cultured people come in and we start

:05:37. > :05:41.over. You are right, but the problem though is that there is no default,

:05:42. > :05:47.no bankruptcy has been around. This is my poll `` this is my proposal to

:05:48. > :05:49.regulators, we must allow default thing and bankruptcy to happen

:05:50. > :05:56.because there are significant moral issues. It is not just China, in the

:05:57. > :06:04.west we don't let people go bankrupt either, or in Europe. Fred, let me

:06:05. > :06:12.bring you in. Where do you stand on this? Is the possibility of removing

:06:13. > :06:17.these hazards, the idea that the state can still guarantee all of the

:06:18. > :06:26.debt, can that be addressed in an effective way? Hazard is real and

:06:27. > :06:33.risk and the underlying cost is state ownership. And also local

:06:34. > :06:42.governments. Somebody is going to clean up your mess. The new

:06:43. > :06:47.leadership, they really need to focus on the fundamental. To reform.

:06:48. > :06:52.Jian, I want to back`up a local governments debt, because clearly

:06:53. > :06:56.this is an area, you see this as the key source of worries about

:06:57. > :07:00.continuing debt build`up veteran Mark we have written in a report in

:07:01. > :07:07.the past year that local governments debt not only opposed the biggest

:07:08. > :07:10.fiscal risk but especially combined with less rapid growing of the

:07:11. > :07:15.shadow banking system it also causes significant financial risk. What is

:07:16. > :07:21.to my comfort is that the Chinese government, despite a lot of market

:07:22. > :07:25.economists and people arguing, it is not a big concern, the Chinese

:07:26. > :07:29.government are actually concerned about it. The president highlighted

:07:30. > :07:34.local governments debt and overcapacity. Help us understand

:07:35. > :07:39.the, why is local governments debt such a worry? If central government

:07:40. > :07:46.can do something about it, why is it still continuing to build up and

:07:47. > :07:51.oppose this risk? We need to go back a little bit to why we get to where

:07:52. > :07:56.we are, in 2010 the National audit office announced that the local

:07:57. > :08:01.governments debt level is 10.7 trillion, close to 30% of GDP and

:08:02. > :08:05.many people believe that number is probably underestimated. I think one

:08:06. > :08:11.reason for this is because the local government, the chance of promotion

:08:12. > :08:15.is highly related to GDP growth so they will be very enthusiastic to

:08:16. > :08:21.grow and develop. The current fiscal system in China actually leads to a

:08:22. > :08:26.mismatch between the revenue source for local government and also the

:08:27. > :08:32.expenditure responsibility which is one of the reasons the local

:08:33. > :08:36.government must rely heavily on revenues in the previous years, when

:08:37. > :08:40.the property market was booming. In the past two years they have

:08:41. > :08:45.resorted to trust financing and also the end ERC observed a lot of local

:08:46. > :08:48.governor debt. It sounds to me that one of the problems is the fiscal

:08:49. > :08:53.system in China is not rationally structured. Local governments are

:08:54. > :08:56.responsible for a lot of spending, they do not get allocated a lot of

:08:57. > :09:00.revenue. They are limited in terms of borrowing because there isn't it

:09:01. > :09:07.fully fledged immiscible bond market and therefore the end of doing

:09:08. > :09:10.things which rely on banks and create off balance sheet stuff. We

:09:11. > :09:18.have learned terms like trust companies. Does this sound too good?

:09:19. > :09:24.This is the way you rising countries work. In America in the 19th`century

:09:25. > :09:27.we had 15 depressions, as recently as 1907, the whole system collapsed

:09:28. > :09:33.because everyone was running around doing crazy things. America was a

:09:34. > :09:37.huge debtor nation. China is a huge creditor nation and it has been

:09:38. > :09:40.spending a lot of money but much of it has been going into productive

:09:41. > :09:44.capacity, whether it is highways or schools or whatever, I am sure some

:09:45. > :09:50.of it has been wasted but in the West they are borrowing money for

:09:51. > :09:53.nonproductive assets. So let's see China collapses, let's say China has

:09:54. > :09:57.a recession, at least they look about other side with more

:09:58. > :10:02.productive assets in contrast to Greece, Portugal, the United

:10:03. > :10:08.States, where they will come out with more bureaucrats. Jim has

:10:09. > :10:15.brought a crucial point. This is where financial innovation can fuel

:10:16. > :10:21.the industrial relation in England and in North America and now in

:10:22. > :10:24.China. When the money is used efficiently and productively,

:10:25. > :10:38.projects that will generate a deterrent. There was excessive rapid

:10:39. > :10:40.tool box of debt and I suspect and I believe that state`owned enterprise

:10:41. > :10:49.borrowing and the in the local government borrows might have been

:10:50. > :10:54.down to not only inefficient but donate whistle projects. You will be

:10:55. > :10:59.called any position of not being to service the debt. Jian I want to

:11:00. > :11:05.bring you in. What estimate have you been looking at? In terms of whether

:11:06. > :11:10.or not there has been bad step in the system. Isn't contributing to a

:11:11. > :11:15.property bubble? We can always look at the glass half full or half empty

:11:16. > :11:18.and I can see Jim clearly look at the glass half`full and at least

:11:19. > :11:28.half of the productive investment but for me, I come down on the other

:11:29. > :11:34.side on this. The least conservative estimates are 20 to 30% of the local

:11:35. > :11:42.government debt, bubbly running the risk of turning bad or turning

:11:43. > :11:47.unproductive. I am also a supporter for infrastructure investment. If it

:11:48. > :11:55.is any good area. For example I always like to use the example of

:11:56. > :11:58.high`speed rail between Beijing and Shanghai. It is clearly includes the

:11:59. > :12:04.consumption around the region and travel and tourism and business.

:12:05. > :12:07.Shanghai is a great example. But at the places there. Chinese people

:12:08. > :12:12.can't actually afford to buy homes there. Is there a bubble in the big

:12:13. > :12:18.cities? How was it impacting normal people? Since 2009 we have been

:12:19. > :12:23.talking about the property bubble in China, there is less of a consensus

:12:24. > :12:28.and agreement but in the past few years if you go to China even

:12:29. > :12:32.anecdotally you can see in many places there is oversupply of

:12:33. > :12:35.properties. That is a waste of resources. Like Fred mentioned,

:12:36. > :12:42.Chinese people are hard`working. We have huge savings. But they get

:12:43. > :12:46.negative interest rates with them so Chinese people spend their money

:12:47. > :12:49.domestically in the property and they have lowered the borrowing

:12:50. > :12:54.costs. These have supported, I think, a lot of the waste and

:12:55. > :13:01.brought forward spending of local government and banks. Jim, you have

:13:02. > :13:07.a view on how China can address this? One of the things they can do

:13:08. > :13:12.is make the currency compatible. This money is trapped in China so

:13:13. > :13:17.they do not have any choice. Other than to buy more property. The

:13:18. > :13:22.bubble will eventually pop and the crisis will come down. Some people

:13:23. > :13:27.will lose a lot of money and we can start over. But also, if they make

:13:28. > :13:29.the currency convertible, it will make a more normal flow of capital

:13:30. > :13:37.and then people can do other things. You just mentioned is the

:13:38. > :13:43.bubble bursting. Two lots of people who went through the sub`prime

:13:44. > :13:49.crisis that sends ominous. Why? It is the way the world works. People

:13:50. > :13:53.get overextended and some people lose money. That is opportunity for

:13:54. > :13:58.others. You are Chinese, you must know the term gain and yang. I'm

:13:59. > :14:05.sure my pronunciation is abysmal. `` yin. Crisis is opportunity. Some

:14:06. > :14:09.people suffer, other people will benefit. That is how the world

:14:10. > :14:15.works. I know what happened in the US and that was an insane situation

:14:16. > :14:19.with hopeless regulation. You cannot buy five or six houses in China with

:14:20. > :14:23.no job and no down payment. That is what people in America were doing,

:14:24. > :14:26.so it is an entirely different situation. It does not mean that

:14:27. > :14:34.some people will not suffer. But don't worry. I'm not worried. I

:14:35. > :14:40.think the Chinese government's tolerance for property price

:14:41. > :14:42.correction is probably at 20 or 30% at most. Property prices have

:14:43. > :14:51.continued to increase over the past year, Spike the government holding a

:14:52. > :14:56.firm stance on the market. On the property sector, I think the

:14:57. > :15:02.government's policy has been trying to balance between containing the

:15:03. > :15:05.rapid property price increase, and avoiding a sharp deceleration in

:15:06. > :15:11.investment. Because that is very important. And if you ask me, that

:15:12. > :15:14.is where they are making a mistake. They should let the chips fall where

:15:15. > :15:19.they may. You are right, they keep letting the prices go higher. They

:15:20. > :15:24.say we have a problem and they do nothing about it. They need to be

:15:25. > :15:27.tough and crackdown. There is a few things here that I'd want to hear

:15:28. > :15:34.your views on, things that are beginning to worry me. The property

:15:35. > :15:40.bubble, if it exists, 20 or 30% deceleration is quite a lot. The

:15:41. > :15:44.sub`prime crisis, maybe that is something that China will face or

:15:45. > :15:49.maybe not. But shadow banking, we have not spoken about that, the

:15:50. > :15:54.unregulated lending in the system not captured by the official balance

:15:55. > :15:59.sheets. This and the property bubble, is that a recipe for

:16:00. > :16:06.disaster? I would argue that shadow banking, for all its faults, it has

:16:07. > :16:13.played a useful function in economic development, in spreading credit

:16:14. > :16:17.more equitably across people and firms who would otherwise have been

:16:18. > :16:25.denied access to capital. But I worry that there are issues of

:16:26. > :16:29.disclosure and mis`selling. There is going to be corruption, no question.

:16:30. > :16:38.Hopefully there will be more people going to jail accountability.

:16:39. > :16:43.Gigantic growth, and not much good to me, that is part of the system.

:16:44. > :16:47.The differences, in the US that was essentially no regulation. The red

:16:48. > :16:50.letters did not know what they were doing and they were totally over

:16:51. > :16:55.their heads. Secondly, there was a massive amount of leveraged which

:16:56. > :16:58.cannot take place in China. You cannot buy a lot of houses. You can

:16:59. > :17:03.borrow too much and you can go to the shadow banks, but if you borrow

:17:04. > :17:07.money, maybe you will go to the casino. But most of the money that

:17:08. > :17:12.is borrowed in China is not going into crazy housing bubbles and

:17:13. > :17:18.things that are not so productive. I want to bring you in on this. To me,

:17:19. > :17:23.this sounds reassuring. We do not have to eat too much of a shadow

:17:24. > :17:25.banks, because of the state dominated banking system. Consumers

:17:26. > :17:30.and small businesses have to go somewhere for financing. If

:17:31. > :17:35.something goes down, somebody will come in and rescue at? Is that about

:17:36. > :17:41.right? What is concerning is the rapid growth of shadow banking. I

:17:42. > :17:48.think a few years ago, if we use the broad definition to include trust

:17:49. > :17:54.and acceptance of private lending, it was less than 20% of the GDP. But

:17:55. > :18:03.by today, it could well reach 40% of GDP. That itself is probably came if

:18:04. > :18:07.the economy can continue to grow at 15% on a nominal basis. But we know

:18:08. > :18:14.that the Chinese economy, in my view, the potential economic growth

:18:15. > :18:21.rate has already lowered from 10% to 7%. I'm not seeing any imminent

:18:22. > :18:28.financial crisis. Even the banks have 20% reserve required in law.

:18:29. > :18:33.That can be used to ease any financial stress. Can get you on

:18:34. > :18:36.this? Lots of people have been watching what happens to the rate at

:18:37. > :18:42.which banks lend to each other. It is now shot up in two double

:18:43. > :18:48.digits. `` into. Was that just a botched attempt to try to crack down

:18:49. > :18:53.on shadow banking? Not at all. It was an accidental credit mistake on

:18:54. > :18:59.the half of Japan. It should not have happened. I'd guarantee that it

:19:00. > :19:06.will not happen again. Whatever banks do, loans, to the private

:19:07. > :19:11.sector or whoever, they are funded by a deposit liability. It is not

:19:12. > :19:17.relying on wholesale funding. This risk is really remote. I would like

:19:18. > :19:23.for Fred to be right. But I'm afraid there will be a crisis in China. In

:19:24. > :19:28.America, we had 15 depressions as we rose, and we still became the most

:19:29. > :19:31.successful country of the 20th century. China is better regulated

:19:32. > :19:36.and better managed than America was in the 19th century, but the Chinese

:19:37. > :19:39.are not perfect. We have 300 million people with a huge amount of money.

:19:40. > :19:43.Somebody is making a mistake and somebody's going to suffer. Crisis

:19:44. > :19:51.is human nature. Every economy if you look at the history of humans,

:19:52. > :19:58.we see so many, like Jim mentioned, so many crises during the business

:19:59. > :20:02.cycle. But I worry about two things. One is deposit insurance. Will

:20:03. > :20:06.people lose their shirts? Will back is a huge problem if the banks fail?

:20:07. > :20:11.And secondly, given the thing you have said, about bad loans and not

:20:12. > :20:16.knowing how much is going to rise, can China afford to rescue the

:20:17. > :20:27.banks? Which banks will fail? Crisis? Crisis means opportunity for

:20:28. > :20:29.a smart investor. The Chinese government has a huge was

:20:30. > :20:38.possibility on their shoulder. It has 1.3 billion people, many of them

:20:39. > :20:40.living on less than $2 a day. Social stability and enhanced economic

:20:41. > :20:44.stability is very important for China and also, not only for China

:20:45. > :20:49.domestically, but globally, international communities are

:20:50. > :20:58.demanding China to be responsible. That means that Chinese growth needs

:20:59. > :21:01.to be capped at a stable base. So it does not drag down the global

:21:02. > :21:04.economy. The Chinese government is in a difficult situation. They

:21:05. > :21:12.cannot just do what they would like to do to clean up access, to restart

:21:13. > :21:18.the system to put the country into a more balanced situation. Have to

:21:19. > :21:24.take gradual steps and that is difficult. `` they have to take.

:21:25. > :21:27.That is a good point trust to do a summation. Why will try this and

:21:28. > :21:31.bear with me because it is going to have to be yes or no in the interest

:21:32. > :21:35.of time. `` I will try this. If I was good to ask each of you, if we

:21:36. > :21:41.are going to have a financial crisis, will it drag the rest of the

:21:42. > :21:45.world down with it? Will it have a global impact? You have got it

:21:46. > :21:50.backwards. The crisis will come from the West and the developed world,

:21:51. > :21:55.which will affect China. China is one tenth the size of the American,

:21:56. > :21:58.European and Japanese economy, no matter what it does write to the

:21:59. > :22:01.rest of the world is going to have an effect. It is going to cause

:22:02. > :22:06.problems in China. But I would rather be with the creditors than

:22:07. > :22:09.the debtors any day. I think the Chinese government will do

:22:10. > :22:16.everything they can to try to prevent a financial crisis or a debt

:22:17. > :22:19.crisis or the burst of the property bubble from happening. But they are

:22:20. > :22:25.walking a fine line and the chances of friction could be very high. So

:22:26. > :22:30.that is a yes? And it will have a global impact? Clearly. Fred, the

:22:31. > :22:35.final word for you. What is happening in China will have a

:22:36. > :22:43.meaningful impact on the rest of the world. We're close trading

:22:44. > :22:47.partners. But I think with new leadership committed to fundamental

:22:48. > :22:53.structural reform Tom I believe China has a good chance of

:22:54. > :22:59.containing its problems, dealing with them, and making a meaningful

:23:00. > :23:05.and revision to global growth. On that note, that is it for this

:23:06. > :23:08.week's debate. `` meaningful contribution. We have had an

:23:09. > :23:13.interesting discussion about the drivers and causes of the debt

:23:14. > :23:17.worries in China. It is fair to say that the panel is hopeful that the

:23:18. > :23:21.Chinese government is on top of the situation. But I've fear that if

:23:22. > :23:29.China sneezes, the rest of the world may just catch a little bit of a

:23:30. > :23:31.cold. My thanks to my panel, and thank you all for watching. Join me

:23:32. > :24:04.next week for more. Good evening. 15 degrees today in

:24:05. > :24:07.north`eastern Scotland. But it was predominantly cloudy and cool for

:24:08. > :24:13.the rest of us. Cold is featuring quite predominantly over the next

:24:14. > :24:16.few days. We have cloud sat across us at the moment, that is this

:24:17. > :24:18.weather system here, and that is