:00:00. > :00:08.Donetsk. Now time for Talking Business.
:00:09. > :00:14.Is China the next economic super power? The world's second largest
:00:15. > :00:18.economy has the growth rate, but what else does it take with the
:00:19. > :00:21.global economy? Here in Singapore, these are my guests, and we are
:00:22. > :00:45.Talking Business. A warm welcome to the programme.
:00:46. > :00:49.China's remarkable growth rate's propelled it to become the world's
:00:50. > :00:54.second largest economy within three decades. It's expected by many to be
:00:55. > :00:57.the dominant economy in the world within a generation. It's an unusual
:00:58. > :01:08.situation for the world economy to have a country at a low level
:01:09. > :01:12.development be an economic engine. Is China the next economic super
:01:13. > :01:15.power then? Joining me to debate this are Bernard Young of the
:01:16. > :01:23.business school at the national University of Singapore, Michael
:01:24. > :01:26.Peddis Professor of Finance at a university and the Director of The
:01:27. > :01:30.Think`tank the national Economic Research Institute.
:01:31. > :01:35.Welcome to all of you. Let me start with you, Michael. Is
:01:36. > :01:40.China the next economic super power? Well, China is already an economic
:01:41. > :01:45.super power, but it's a huge economy. I would warn that we have
:01:46. > :01:51.to be very sceptical because we have seen this story many times before
:01:52. > :01:56.and this may sound like a surprising thing to say, but historically, the
:01:57. > :02:01.growth miracle is the easy part. The adjustment's always been the
:02:02. > :02:06.toughest part. We really don't know what China is going to look like 20
:02:07. > :02:16.years from now. You are nodding? I totally agree. China has launched an
:02:17. > :02:20.economic miracle. You can call it a miraculous economic revolution, or
:02:21. > :02:29.the economic renaissance. When you think through all the things in
:02:30. > :02:36.China, it's facing tough problems. Pollution, ageing population and
:02:37. > :02:40.many institutional developments. It has to advance a lot of
:02:41. > :02:46.institutional improvement so as to get out of the imminent, possible
:02:47. > :02:48.trap, in my opinion. That's basically referring to the fact that
:02:49. > :02:52.when a country becomes middle income, it's very hard to become
:02:53. > :02:59.rich and China's not quite there yet. Will it get there? Will China
:03:00. > :03:04.become the next economic super power, Fan? China is a large
:03:05. > :03:08.country, a large population. It's easy to get a large economy or a
:03:09. > :03:17.largest economy in the world, but when you talk about super powers,
:03:18. > :03:25.it's about quality. That is too far away for China. Per Capita GDP is
:03:26. > :03:33.less than 7,000 US Dollars now and the US is 50, some European
:03:34. > :03:43.countries is 80, 100, 1,000 US Dollars. China is still a developing
:03:44. > :03:46.country. Maybe one day it will become, in terms of quality and
:03:47. > :03:53.quantity a superpower but I would say it is still far away. Is
:03:54. > :03:57.superpower or something we have a definition of? If we're living in
:03:58. > :04:02.this world we think of the challenges in front of China, how it
:04:03. > :04:09.can allow more people to have a rising standard of living, how it
:04:10. > :04:13.can have more resources and create the changes in the positive way
:04:14. > :04:21.without creating shocks. Without creating concerns. That creating
:04:22. > :04:26.instability. To be a superpower is about moving forward. Meikle, you
:04:27. > :04:32.said China is already an economic superpower and it sounds like there
:04:33. > :04:36.is scepticism. It depends on what you mean by superpower. China,
:04:37. > :04:42.Japan, Germany and the United States are all economic superpowers, it is
:04:43. > :04:46.really a definition thing. We do not have a definition where we can see
:04:47. > :04:50.this is and this isn't. I would warn about one thing that many people
:04:51. > :04:54.ignore or forget, even though we have seen this before, I do not want
:04:55. > :04:58.to get too technical but let's say you make a bad loan to me and I am
:04:59. > :05:05.unable to repay you. The loan is written down, you take a loss and
:05:06. > :05:10.that shows up as lower GDP growth. China, there has been almost no
:05:11. > :05:13.writing down of bad loans. Under the circumstances there are two
:05:14. > :05:19.possibilities. One is Chinese bankers are the most disciplined
:05:20. > :05:24.bankers in history, or China's GDP compared to the US or England or
:05:25. > :05:30.Brazil is significantly overstated by as much as 30%. We really do not
:05:31. > :05:34.know what the sizes of these countries are. You have done a lot
:05:35. > :05:40.of measurement of the Chinese economy, do you agree with Michael?
:05:41. > :05:47.There are many countries that have a much higher ratio than that, and in
:05:48. > :05:52.those countries that is crisis. From that point of view China is not
:05:53. > :05:59.particularly bad or in a particular need to write off a lot of things.
:06:00. > :06:07.Governments over the GDP ratio including the central government and
:06:08. > :06:13.at a local platform borrowing are something where, 50% of GDP. Much
:06:14. > :06:17.lower than most of the countries. Most of the developed countries. So
:06:18. > :06:23.there is a lot of problems, of course. For a developing country we
:06:24. > :06:26.have more problems, of course. And that is just too shall be in a
:06:27. > :06:32.developing country. Does that mean we are not able to grow further?
:06:33. > :06:37.Because of the problem? I don't think so. We as a country needs to
:06:38. > :06:45.grow up with the problems and with many of the problems, so China is
:06:46. > :06:52.not special. China is similar to anyone else, you have to go through
:06:53. > :06:56.all of the stages, including this middle income stage. I would argue
:06:57. > :06:59.that in this stage it is the most difficult stage for the country and
:07:00. > :07:06.particularly for the developing countries because for the last
:07:07. > :07:10.country in his seat with their 5000 per capita income they were not the
:07:11. > :07:15.middle income, they were the highest. Now we have a comparison
:07:16. > :07:21.with those people, comparison with richer countries, more equal
:07:22. > :07:30.countries, better social welfare, better institutions and we have more
:07:31. > :07:38.problems with this reflection in the comparison. So it is difficult. Grow
:07:39. > :07:43.up, development becoming a superpower is a very difficult part
:07:44. > :07:47.but the problem does not mean you cannot grow. That you cannot
:07:48. > :07:52.continue to develop. Let me bring you in on the measurement issue, we
:07:53. > :07:55.are basing many of these forecasts in GDP measurement and if you look
:07:56. > :08:00.at the forecast as to when China will overtake the United States and
:08:01. > :08:04.it looks like it will happen pretty soon, but given what the other two
:08:05. > :08:13.men have said where you come down on this? I try not to look at the
:08:14. > :08:17.average GDP GDP per capita, I would rather think the medium, I would
:08:18. > :08:23.rather think about how solid the economy is. I think China, the
:08:24. > :08:29.embeddedness problem is there but it can be overcome. But there can be a
:08:30. > :08:31.lot of things that the government and private citizens and
:08:32. > :08:39.corporations now. The question in front of others is not about how,
:08:40. > :08:47.what kind of GDP we reach, how many people inclusively, included in this
:08:48. > :08:53.growth process, it is about how good, how smooth the transition is.
:08:54. > :08:57.How sharp the resource allocation is and how successful we are able to
:08:58. > :09:02.raise the productivity growth. So we get more and more benefit reach. Do
:09:03. > :09:07.you think that'll happen? Do you think the reforms are place? Reforms
:09:08. > :09:13.that can raise productivity, and growth so that it gets people out of
:09:14. > :09:18.the middle income trap? What is the point of being a superpower if you
:09:19. > :09:22.are not a prosperous country? I am really optimistic, if you look at
:09:23. > :09:27.this from an economics perspective the thing that catches my attention
:09:28. > :09:33.is, give the market a bigger role in the decision`making. Let me bring in
:09:34. > :09:36.Michael on this point, many of these reforms are what they say they are
:09:37. > :09:41.doing, but do you think they are doing the right kind of reforms that
:09:42. > :09:47.can they deliver on them? That is the million`dollar question. The
:09:48. > :09:50.reforms at the right ones. Among economists there might be some
:09:51. > :09:54.disagreements about sequencing but basically we all agree. All of the
:09:55. > :09:57.reforms one way or the other increase the relative size of the
:09:58. > :10:00.household sector and reduce the state sector and that is what China
:10:01. > :10:05.must do. Many countries have tried these reforms, almost all of them
:10:06. > :10:10.have failed and the reason they have feel this because there is blood ``
:10:11. > :10:13.it is politically very difficult to implement these kinds of reforms
:10:14. > :10:17.which almost by definition mean undermining the elite and in China
:10:18. > :10:22.it is well`known, that is the vested interests of the debate. We have
:10:23. > :10:27.been talking about this since 2007. We have had trouble moving forward.
:10:28. > :10:32.Can you prevent them? I totally agree. The directions are right but
:10:33. > :10:38.the adjustment process can be very painful for some. And whether we
:10:39. > :10:42.will have a transparent process, whether we will have the kind of
:10:43. > :10:48.independence that is needed so that people will have a smooth transition
:10:49. > :10:53.is challenging. It is not just growth rates that determine whether
:10:54. > :10:55.a country is an economic superpower, it is the institutions like
:10:56. > :11:00.democracy and legal protections such as those afforded to the middle
:11:01. > :11:05.class that matter. After all China Main Hanes `` remains a commonest
:11:06. > :11:18.system. An economic factors maintain a `` maintain China's position? And
:11:19. > :11:21.what with China look like? Bernardo, Michael and the director of the
:11:22. > :11:29.leading Chinese think tank remain with me. Let me put this to you,
:11:30. > :11:35.what kind of institutional reforms will China need to secure its
:11:36. > :11:41.position in the world economy? There are many things, the government has
:11:42. > :11:46.already come up with a big planned and it is very comprehensive, it
:11:47. > :11:53.includes all of the sectors of the economy, society, you just think,
:11:54. > :12:00.this economy is moving towards the modern economy, you need a lot of
:12:01. > :12:04.institutions to accommodate that. For example we are talking about
:12:05. > :12:13.legal protection and the rule of law, legal protection of
:12:14. > :12:20.intellectual property is. If China wants to have better industry, more
:12:21. > :12:26.innovative capability, this is a must. This is the very beginning of
:12:27. > :12:32.Chinese companies, Chinese industries are crying for this type
:12:33. > :12:38.of protection because they start to have elevations. Before they were
:12:39. > :12:46.just learning, they were in the early stage of development so they
:12:47. > :12:49.are trying to catch up. They do not have the capacity for innovation but
:12:50. > :12:58.now they are starting to and they are asking for the changes, for the
:12:59. > :13:02.institutions. This is just an example. Bernardo, where do you come
:13:03. > :13:07.in on this? What reforms do you think are needed for companies in
:13:08. > :13:16.order for them to sustain Chinese growth? More transparent, more
:13:17. > :13:21.stable, policy development process so we know the rules of the game.
:13:22. > :13:24.Whichever way it is, let us know. It would be useful. I visited some
:13:25. > :13:30.Chinese companies and I find that they are very entrepreneurial and I
:13:31. > :13:36.believe that they are able, they have the capability and there are
:13:37. > :13:40.people who will take advantage of the liberalised market both in terms
:13:41. > :13:45.of market space, in terms of capital market, but they must know what the
:13:46. > :13:49.future will be like. So I would say the town centres process, and number
:13:50. > :13:56.two more separation of government for business is very useful, too.
:13:57. > :14:01.And number three, as was mentioned, the relationship between the central
:14:02. > :14:06.and local business must be more transparent so there are no
:14:07. > :14:10.arbitrary new regulator is coming up to change the scene. Number four is
:14:11. > :14:13.really that I hope in some point in time there will be judiciary
:14:14. > :14:23.independence. That is tough because the judiciary in China as part of
:14:24. > :14:28.the administration. Do you think that one of the fundamental
:14:29. > :14:33.obstacles is the one party commonest system? Because these institutional
:14:34. > :14:39.reforms perhaps needs to happen but could they happen under the current
:14:40. > :14:44.political system? In principle it could happen. For example, you could
:14:45. > :14:47.have many of the adjustment processes associated with
:14:48. > :14:50.democracies within a one party system within China. If you
:14:51. > :14:57.implement the adjustment systems within the party itself. But I think
:14:58. > :15:00.we sometimes forget we look at inmow vagus and massive capital
:15:01. > :15:03.expenditures, we see machines and robots and we say, wow, innovation
:15:04. > :15:10.must be taking place there. That's not true. That's simply capital
:15:11. > :15:15.expendstures. Countries historically that have been very innovative,
:15:16. > :15:19.whether culturally, scientific or whatever, tend to have a series of
:15:20. > :15:22.institutions that were fairly clear. Legal institutions have been
:15:23. > :15:27.tremendously important. Financial property rights have been tremendous
:15:28. > :15:33.and important. Many people don't realise that in the United States,
:15:34. > :15:38.it was in the 19th century we started seriously implementing
:15:39. > :15:42.intellectual property rights. That's when American novels, music and
:15:43. > :15:46.science and technology took off. So we need a number of very important
:15:47. > :15:51.institutions. It's been difficult to implement them. I know I'm running
:15:52. > :15:56.on, but to me a fascinating question's always been this, about
:15:57. > :16:01.four or five years ago, someone told me, there are more French
:16:02. > :16:06.entrepreneurs in California than in France. Can't be because the French
:16:07. > :16:09.education was worse or the infrastructure was worse, can't be
:16:10. > :16:16.because they don't have a good legal system. But for some reason,
:16:17. > :16:21.entrepreneurialism drives in certain contexts and we need to understand
:16:22. > :16:27.why. It's a very difficult question. So far we haven't been able to
:16:28. > :16:30.impose those reforms. That's why I'm sceptical. Fan, Michael is
:16:31. > :16:36.` sceptical that China could implement the institution of reforms
:16:37. > :16:43.to help it to grow. Do you agree? Well, I'm already said the reforms
:16:44. > :16:51.is a process that cannot be done overnight. You cannot implement
:16:52. > :16:57.something that we don't have reactions from the practice. So the
:16:58. > :17:05.institutions will not become perfect without the long`term development
:17:06. > :17:15.with the cases and with the problems in the process. So it's not easy,
:17:16. > :17:19.you know. It's a process. It's a process with the development and
:17:20. > :17:23.with economic growth. I think that's why we need to be sceptical because
:17:24. > :17:27.China's not the first country's that had astonishing growth. It's not
:17:28. > :17:34.even the first country that was going to become the largest economy
:17:35. > :17:38.within the world within ten years. The Sovietdown`on, everyone knew it
:17:39. > :17:41.would overtake the US before the end of the century because they had gone
:17:42. > :17:46.through 20 years of spectacular growth. I don't need to remind you
:17:47. > :17:50.in Japan we had the same thing. It's very interesting because it's that
:17:51. > :17:56.adjustment process that's proven so difficult and we know so little
:17:57. > :18:02.about it which is why I say we have to be sceptical.
:18:03. > :18:05.We are talking about the scepticism, we are talking about if we can
:18:06. > :18:15.continue the growth. I would say at the very beginning of reform and
:18:16. > :18:22.opening up, that China takes off. I think there are very few people
:18:23. > :18:31.believe China will come to this way now. For us, we didn't really
:18:32. > :18:38.believe that China will come to this stage so we are still sceptical but
:18:39. > :18:43.at the same time I will say practice will work out something that we'll
:18:44. > :18:48.be able to work out. This is how I feel too. I think the roads are
:18:49. > :18:56.created with people. The desire is there. There are pockets of
:18:57. > :19:01.locations in China that they demonstrate creativity in, genuine
:19:02. > :19:07.creativity and they are able to develop something that develops the
:19:08. > :19:13.world. It takes a lot of great human capital and a collective desire for
:19:14. > :19:20.us to create this. Finally, say that China Jeffers comes these obstacles
:19:21. > :19:27.and becomes the dominant economy many the world, how would the global
:19:28. > :19:32.economy be different? Multiple choices. When you have multiple
:19:33. > :19:38.economies, each are having significant and very strong, I think
:19:39. > :19:44.the global world is safer and there would be complimenting. As an
:19:45. > :19:49.economist, you know that comparable advantage is a good thing. I think I
:19:50. > :19:56.would say that it would be a very positive world if China developed
:19:57. > :20:02.into a sound, healthy, resilient economy with strong productivity
:20:03. > :20:07.growth and is as significant as other economies. Michael? First of
:20:08. > :20:10.all, I don't think we should ever be arguing about whether China's going
:20:11. > :20:17.to grow or not grow. It's clearly going to grow over long periods of
:20:18. > :20:21.time. What's happened in the last four decades has been truly
:20:22. > :20:27.spectacular. In history I can only think of two other cases. Argentina
:20:28. > :20:34.and the four decades before 1914 and Japan in the four decades after 1945
:20:35. > :20:37.had such incredible growth. China's been very unique and that should
:20:38. > :20:41.give us a little bit of comfort that we are going to be moving in the
:20:42. > :20:45.right direction. I want to cop out on the question because you said
:20:46. > :20:48.what will the world look like when China's the dominant super power and
:20:49. > :20:53.my answer is going to be that for China to become the dominant super
:20:54. > :20:58.power, that is such a path dependent crossing that it will be a
:20:59. > :21:02.completely different China so it will be very hard to say what the
:21:03. > :21:06.world with that kind of China will look like. That will require you to
:21:07. > :21:12.defind what China will look like then. I can't give you an answer.
:21:13. > :21:16.Fan Gong, I will pose it to you. What would the world economy look
:21:17. > :21:23.like if China were the dominant economic super power? The world
:21:24. > :21:31.economy will look better and happen per because 1.4 billion population
:21:32. > :21:35.become rich, become healthier, more educated, more travelled, so the
:21:36. > :21:40.world will become better with the growth of China. I believe many
:21:41. > :21:47.other countries will grow together with China, including some Asian
:21:48. > :21:52.countries and other continents. Not only is it the story of China, it's
:21:53. > :21:57.the story of the emerging markets and the developing countries. And it
:21:58. > :22:06.gives the people the hope that poor countries can grow. The world will
:22:07. > :22:15.become more diversified and happier. Thank you all very much indeed. That
:22:16. > :22:29.was Bernard Yeung, Michael Pettis and fan Gong.
:22:30. > :22:33.China's economy is slowing down but its growth potential and `` the
:22:34. > :22:36.question we have been debating will probably continue to be debated for
:22:37. > :22:42.some time yet. That's all we have time for. Check out the website.
:22:43. > :22:58.Join us next time for more Talking Business with me, Linda Yueh.
:22:59. > :22:59.After a week or so of dry weather, some of us will