13/09/2014 Talking Business with Linda Yueh


13/09/2014

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Donetsk. Now time for Talking Business.

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Is China the next economic super power? The world's second largest

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economy has the growth rate, but what else does it take with the

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global economy? Here in Singapore, these are my guests, and we are

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Talking Business. A warm welcome to the programme.

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China's remarkable growth rate's propelled it to become the world's

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second largest economy within three decades. It's expected by many to be

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the dominant economy in the world within a generation. It's an unusual

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situation for the world economy to have a country at a low level

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development be an economic engine. Is China the next economic super

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power then? Joining me to debate this are Bernard Young of the

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business school at the national University of Singapore, Michael

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Peddis Professor of Finance at a university and the Director of The

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Think`tank the national Economic Research Institute.

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Welcome to all of you. Let me start with you, Michael. Is

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China the next economic super power? Well, China is already an economic

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super power, but it's a huge economy. I would warn that we have

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to be very sceptical because we have seen this story many times before

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and this may sound like a surprising thing to say, but historically, the

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growth miracle is the easy part. The adjustment's always been the

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toughest part. We really don't know what China is going to look like 20

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years from now. You are nodding? I totally agree. China has launched an

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economic miracle. You can call it a miraculous economic revolution, or

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the economic renaissance. When you think through all the things in

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China, it's facing tough problems. Pollution, ageing population and

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many institutional developments. It has to advance a lot of

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institutional improvement so as to get out of the imminent, possible

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trap, in my opinion. That's basically referring to the fact that

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when a country becomes middle income, it's very hard to become

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rich and China's not quite there yet. Will it get there? Will China

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become the next economic super power, Fan? China is a large

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country, a large population. It's easy to get a large economy or a

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largest economy in the world, but when you talk about super powers,

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it's about quality. That is too far away for China. Per Capita GDP is

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less than 7,000 US Dollars now and the US is 50, some European

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countries is 80, 100, 1,000 US Dollars. China is still a developing

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country. Maybe one day it will become, in terms of quality and

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quantity a superpower but I would say it is still far away. Is

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superpower or something we have a definition of? If we're living in

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this world we think of the challenges in front of China, how it

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can allow more people to have a rising standard of living, how it

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can have more resources and create the changes in the positive way

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without creating shocks. Without creating concerns. That creating

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instability. To be a superpower is about moving forward. Meikle, you

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said China is already an economic superpower and it sounds like there

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is scepticism. It depends on what you mean by superpower. China,

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Japan, Germany and the United States are all economic superpowers, it is

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really a definition thing. We do not have a definition where we can see

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this is and this isn't. I would warn about one thing that many people

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ignore or forget, even though we have seen this before, I do not want

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to get too technical but let's say you make a bad loan to me and I am

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unable to repay you. The loan is written down, you take a loss and

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that shows up as lower GDP growth. China, there has been almost no

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writing down of bad loans. Under the circumstances there are two

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possibilities. One is Chinese bankers are the most disciplined

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bankers in history, or China's GDP compared to the US or England or

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Brazil is significantly overstated by as much as 30%. We really do not

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know what the sizes of these countries are. You have done a lot

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of measurement of the Chinese economy, do you agree with Michael?

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There are many countries that have a much higher ratio than that, and in

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those countries that is crisis. From that point of view China is not

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particularly bad or in a particular need to write off a lot of things.

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Governments over the GDP ratio including the central government and

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at a local platform borrowing are something where, 50% of GDP. Much

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lower than most of the countries. Most of the developed countries. So

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there is a lot of problems, of course. For a developing country we

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have more problems, of course. And that is just too shall be in a

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developing country. Does that mean we are not able to grow further?

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Because of the problem? I don't think so. We as a country needs to

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grow up with the problems and with many of the problems, so China is

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not special. China is similar to anyone else, you have to go through

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all of the stages, including this middle income stage. I would argue

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that in this stage it is the most difficult stage for the country and

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particularly for the developing countries because for the last

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country in his seat with their 5000 per capita income they were not the

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middle income, they were the highest. Now we have a comparison

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with those people, comparison with richer countries, more equal

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countries, better social welfare, better institutions and we have more

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problems with this reflection in the comparison. So it is difficult. Grow

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up, development becoming a superpower is a very difficult part

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but the problem does not mean you cannot grow. That you cannot

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continue to develop. Let me bring you in on the measurement issue, we

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are basing many of these forecasts in GDP measurement and if you look

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at the forecast as to when China will overtake the United States and

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it looks like it will happen pretty soon, but given what the other two

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men have said where you come down on this? I try not to look at the

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average GDP GDP per capita, I would rather think the medium, I would

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rather think about how solid the economy is. I think China, the

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embeddedness problem is there but it can be overcome. But there can be a

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lot of things that the government and private citizens and

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corporations now. The question in front of others is not about how,

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what kind of GDP we reach, how many people inclusively, included in this

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growth process, it is about how good, how smooth the transition is.

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How sharp the resource allocation is and how successful we are able to

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raise the productivity growth. So we get more and more benefit reach. Do

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you think that'll happen? Do you think the reforms are place? Reforms

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that can raise productivity, and growth so that it gets people out of

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the middle income trap? What is the point of being a superpower if you

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are not a prosperous country? I am really optimistic, if you look at

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this from an economics perspective the thing that catches my attention

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is, give the market a bigger role in the decision`making. Let me bring in

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Michael on this point, many of these reforms are what they say they are

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doing, but do you think they are doing the right kind of reforms that

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can they deliver on them? That is the million`dollar question. The

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reforms at the right ones. Among economists there might be some

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disagreements about sequencing but basically we all agree. All of the

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reforms one way or the other increase the relative size of the

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household sector and reduce the state sector and that is what China

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must do. Many countries have tried these reforms, almost all of them

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have failed and the reason they have feel this because there is blood ``

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it is politically very difficult to implement these kinds of reforms

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which almost by definition mean undermining the elite and in China

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it is well`known, that is the vested interests of the debate. We have

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been talking about this since 2007. We have had trouble moving forward.

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Can you prevent them? I totally agree. The directions are right but

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the adjustment process can be very painful for some. And whether we

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will have a transparent process, whether we will have the kind of

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independence that is needed so that people will have a smooth transition

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is challenging. It is not just growth rates that determine whether

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a country is an economic superpower, it is the institutions like

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democracy and legal protections such as those afforded to the middle

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class that matter. After all China Main Hanes `` remains a commonest

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system. An economic factors maintain a `` maintain China's position? And

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what with China look like? Bernardo, Michael and the director of the

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leading Chinese think tank remain with me. Let me put this to you,

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what kind of institutional reforms will China need to secure its

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position in the world economy? There are many things, the government has

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already come up with a big planned and it is very comprehensive, it

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includes all of the sectors of the economy, society, you just think,

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this economy is moving towards the modern economy, you need a lot of

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institutions to accommodate that. For example we are talking about

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legal protection and the rule of law, legal protection of

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intellectual property is. If China wants to have better industry, more

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innovative capability, this is a must. This is the very beginning of

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Chinese companies, Chinese industries are crying for this type

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of protection because they start to have elevations. Before they were

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just learning, they were in the early stage of development so they

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are trying to catch up. They do not have the capacity for innovation but

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now they are starting to and they are asking for the changes, for the

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institutions. This is just an example. Bernardo, where do you come

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in on this? What reforms do you think are needed for companies in

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order for them to sustain Chinese growth? More transparent, more

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stable, policy development process so we know the rules of the game.

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Whichever way it is, let us know. It would be useful. I visited some

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Chinese companies and I find that they are very entrepreneurial and I

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believe that they are able, they have the capability and there are

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people who will take advantage of the liberalised market both in terms

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of market space, in terms of capital market, but they must know what the

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future will be like. So I would say the town centres process, and number

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two more separation of government for business is very useful, too.

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And number three, as was mentioned, the relationship between the central

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and local business must be more transparent so there are no

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arbitrary new regulator is coming up to change the scene. Number four is

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really that I hope in some point in time there will be judiciary

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independence. That is tough because the judiciary in China as part of

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the administration. Do you think that one of the fundamental

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obstacles is the one party commonest system? Because these institutional

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reforms perhaps needs to happen but could they happen under the current

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political system? In principle it could happen. For example, you could

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have many of the adjustment processes associated with

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democracies within a one party system within China. If you

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implement the adjustment systems within the party itself. But I think

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we sometimes forget we look at inmow vagus and massive capital

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expenditures, we see machines and robots and we say, wow, innovation

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must be taking place there. That's not true. That's simply capital

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expendstures. Countries historically that have been very innovative,

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whether culturally, scientific or whatever, tend to have a series of

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institutions that were fairly clear. Legal institutions have been

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tremendously important. Financial property rights have been tremendous

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and important. Many people don't realise that in the United States,

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it was in the 19th century we started seriously implementing

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intellectual property rights. That's when American novels, music and

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science and technology took off. So we need a number of very important

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institutions. It's been difficult to implement them. I know I'm running

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on, but to me a fascinating question's always been this, about

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four or five years ago, someone told me, there are more French

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entrepreneurs in California than in France. Can't be because the French

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education was worse or the infrastructure was worse, can't be

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because they don't have a good legal system. But for some reason,

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entrepreneurialism drives in certain contexts and we need to understand

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why. It's a very difficult question. So far we haven't been able to

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impose those reforms. That's why I'm sceptical. Fan, Michael is

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` sceptical that China could implement the institution of reforms

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to help it to grow. Do you agree? Well, I'm already said the reforms

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is a process that cannot be done overnight. You cannot implement

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something that we don't have reactions from the practice. So the

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institutions will not become perfect without the long`term development

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with the cases and with the problems in the process. So it's not easy,

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you know. It's a process. It's a process with the development and

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with economic growth. I think that's why we need to be sceptical because

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China's not the first country's that had astonishing growth. It's not

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even the first country that was going to become the largest economy

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within the world within ten years. The Sovietdown`on, everyone knew it

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would overtake the US before the end of the century because they had gone

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through 20 years of spectacular growth. I don't need to remind you

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in Japan we had the same thing. It's very interesting because it's that

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adjustment process that's proven so difficult and we know so little

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about it which is why I say we have to be sceptical.

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We are talking about the scepticism, we are talking about if we can

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continue the growth. I would say at the very beginning of reform and

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opening up, that China takes off. I think there are very few people

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believe China will come to this way now. For us, we didn't really

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believe that China will come to this stage so we are still sceptical but

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at the same time I will say practice will work out something that we'll

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be able to work out. This is how I feel too. I think the roads are

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created with people. The desire is there. There are pockets of

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locations in China that they demonstrate creativity in, genuine

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creativity and they are able to develop something that develops the

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world. It takes a lot of great human capital and a collective desire for

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us to create this. Finally, say that China Jeffers comes these obstacles

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and becomes the dominant economy many the world, how would the global

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economy be different? Multiple choices. When you have multiple

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economies, each are having significant and very strong, I think

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the global world is safer and there would be complimenting. As an

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economist, you know that comparable advantage is a good thing. I think I

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would say that it would be a very positive world if China developed

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into a sound, healthy, resilient economy with strong productivity

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growth and is as significant as other economies. Michael? First of

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all, I don't think we should ever be arguing about whether China's going

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to grow or not grow. It's clearly going to grow over long periods of

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time. What's happened in the last four decades has been truly

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spectacular. In history I can only think of two other cases. Argentina

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and the four decades before 1914 and Japan in the four decades after 1945

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had such incredible growth. China's been very unique and that should

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give us a little bit of comfort that we are going to be moving in the

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right direction. I want to cop out on the question because you said

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what will the world look like when China's the dominant super power and

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my answer is going to be that for China to become the dominant super

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power, that is such a path dependent crossing that it will be a

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completely different China so it will be very hard to say what the

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world with that kind of China will look like. That will require you to

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defind what China will look like then. I can't give you an answer.

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Fan Gong, I will pose it to you. What would the world economy look

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like if China were the dominant economic super power? The world

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economy will look better and happen per because 1.4 billion population

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become rich, become healthier, more educated, more travelled, so the

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world will become better with the growth of China. I believe many

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other countries will grow together with China, including some Asian

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countries and other continents. Not only is it the story of China, it's

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the story of the emerging markets and the developing countries. And it

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gives the people the hope that poor countries can grow. The world will

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become more diversified and happier. Thank you all very much indeed. That

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was Bernard Yeung, Michael Pettis and fan Gong.

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China's economy is slowing down but its growth potential and `` the

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question we have been debating will probably continue to be debated for

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some time yet. That's all we have time for. Check out the website.

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Join us next time for more Talking Business with me, Linda Yueh.

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After a week or so of dry weather, some of us will

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