:00:00. > :00:00.Westminster and also Glasgow and Edinburgh. Now it's time for Talking
:00:00. > :00:08.Business. How worrying is the slowdown in
:00:09. > :00:12.China's economy? And what kind of business environment can we expect
:00:13. > :00:20.as China's leaders push forward with their reforms. Here at the world
:00:21. > :00:42.economic form we're talking business.
:00:43. > :00:49.A warm welcome to the programme. China's economy is expanding at the
:00:50. > :00:54.slowest pace in two decades. But is it all part of the government's plan
:00:55. > :01:00.to foster a better quality of growth? One that is driven less by
:01:01. > :01:06.investment, such as in real estate, and more by innovation? To find out
:01:07. > :01:09.I sat down by the chief economist of the World Bank to discuss China's
:01:10. > :01:14.economy. It's a small slowdown. It's a
:01:15. > :01:21.slowdown given China's own very, very rapid growth in the past. So,
:01:22. > :01:25.yes, it's no longer at the 10% that we were getting used to because
:01:26. > :01:33.China did that for about 30`year run, which was a spectacular run.
:01:34. > :01:39.For an economy with 30 years of unprecedented growth, 7% to 7. 5% is
:01:40. > :01:43.very good performance. The risk is there will have to be some
:01:44. > :01:49.structural adjustments in the slowing down. When you make
:01:50. > :01:53.structural adjustments, economics is not yet a hard science where you
:01:54. > :01:57.know, from what you do, exactly what will happen on the ground. When you
:01:58. > :02:00.begin to make those corrections, there is a possibility that the
:02:01. > :02:06.economy takes a bit a dip and then picks up again. China is such an
:02:07. > :02:10.important rival for it `` driver for the global economy that if there is
:02:11. > :02:17.turbulence during the adjustment from the 10% to 7. 5% growth, that
:02:18. > :02:23.will be troubling, but the prognosis in the medium term, long`term is
:02:24. > :02:27.between 7% to 7. 5% growth, which is a slowdown but only compared to
:02:28. > :02:32.China itself. Of those adjustments, there's quite a lot of concern
:02:33. > :02:40.whether China could transform its economy away from say investment`led
:02:41. > :02:44.growth, away from using credit to boost spending, versus what they're
:02:45. > :02:49.trying to do ` to upgrade industry, focus much more on raising incomes
:02:50. > :02:54.and boosting consumption. Do you think that's a transformation that
:02:55. > :02:58.is happening in terms `` correctly, I should say? We are really at the
:02:59. > :03:01.foot hills of those changes. To that extent, it's difficult to give you
:03:02. > :03:05.absolute assurance that it's happening in the right way. The
:03:06. > :03:09.first steps that have been taken, the announcements coming from the
:03:10. > :03:13.Chinese leaders are hopeful that there is awareness of this. It is
:03:14. > :03:17.true that the amount that China invests, it cannot continue like
:03:18. > :03:21.that for too long. It's done very well, but the marginal return to
:03:22. > :03:27.investment has begun to come now because there's a lot of investment,
:03:28. > :03:32.so the returns go down. It will have to move over to greater consumption
:03:33. > :03:37.and Before we get innovation. To innovation, on the point of
:03:38. > :03:40.investment, are there risks on the road China is still going down?
:03:41. > :03:45.There's still a lot of investment, especially in real estate and
:03:46. > :03:52.construction sectors. There are some recks. The risk comes from the fact
:03:53. > :03:58.that China has a lot of credit out there, roughly 250% of its GDP is
:03:59. > :04:02.overall credit, private and public. That, for another country, at this
:04:03. > :04:06.level of growth, would have been extremely worrying. For China, it's
:04:07. > :04:10.much less worrying, but there is still some concern. It's less
:04:11. > :04:15.worrying because if you look at the composition of the debt, the state
:04:16. > :04:17.debt, the government debt is much smaller. So, the government is in a
:04:18. > :04:24.very strong position. If you look at the foreign exchange reserves with
:04:25. > :04:38.the Chinese government and the people's bank, it's $4 Dr.
:04:39. > :04:42.of `` $4 trillion. When you begin to pull this in, it is possible there
:04:43. > :04:46.will be some turbulence and in another country, where the
:04:47. > :04:47.government was weaker, I would have said, yes, be very careful because
:04:48. > :04:52.this is going to happen. of China, there will be adjustments,
:04:53. > :04:57.but the Government is strong enough. It should be able to weather that
:04:58. > :05:00.well enough. There's a lot of talk of China becoming the world's
:05:01. > :05:05.biggest economy. What's your assessment of that? I've done a
:05:06. > :05:11.little calculation. I can tell you what is expected from this.
:05:12. > :05:17.Purchasing power parity corrected GDP, we do know that China will
:05:18. > :05:22.expect, will overtake the United States this year, some time. PPP
:05:23. > :05:27.corrected GDP, not just pure GDP. Back of the envelope calculation
:05:28. > :05:32.that we have done, I can put a date to it, it's a fun date more than
:05:33. > :05:37.anything else, 29th September, that's the expected date. This is
:05:38. > :05:40.the calculation, that's based on all numbers which are available. You
:05:41. > :05:44.take China's growth rate, United States' growth rate. Take the new
:05:45. > :05:48.purchasing power parity numbers for 2011, which came out. Make those
:05:49. > :05:58.corrections and project on growth trade, the crossover happened 29th
:05:59. > :06:03.September. This is GDP with the PPP correction. But really,
:06:04. > :06:04.the PPP correction is extremely important and on that, the United
:06:05. > :06:11.position for quite some time still. So in terms of pure GDP, United
:06:12. > :06:19.States will still be the dominant economy for quite some time. Wages
:06:20. > :06:24.are rising in China which can support more consumption by its
:06:25. > :06:27.middle class. But higher labour costs mean that China is a less
:06:28. > :06:34.competitive place for businesses to invest their cash. I spoke with the
:06:35. > :06:38.executive chairman of the Man Power Group to discuss China's
:06:39. > :06:42.fast`changing labour market. Plane and simple, wages are going
:06:43. > :06:45.up. There's no surprise to that. The government put actions in place with
:06:46. > :06:50.labour reforms that said, you know what, we're going to make a
:06:51. > :06:56.conscious decision. That decision is we cannot live off being labour
:06:57. > :07:01.arbitraged and grow the middle class. Some of the labour reforms on
:07:02. > :07:06.the number of workers, you can put in what their pay is, has clearly
:07:07. > :07:10.made the impact. 20% increase on some increase that's were there
:07:11. > :07:13.before. Annual increases? Yes. And 20%, you know, for some of those
:07:14. > :07:19.companies that are actually doing the math in a tight way, with 4,000
:07:20. > :07:23.workers in a facility, after giving 15% for the last three years and now
:07:24. > :07:27.20% on top of that, so we looked at that and said this is going to
:07:28. > :07:34.change the market. It will be a time of change, however, if you do not
:07:35. > :07:37.change that, you are never going to build high quality, high efficient,
:07:38. > :07:42.high productivity middle class. The shoe that has not really dropped yet
:07:43. > :07:46.is the factories have not gotten that much more productive.
:07:47. > :07:50.Efficiency, productivity, technology hasn't gotten into the factories and
:07:51. > :07:54.if you want to really create value added manufacturing, let some of the
:07:55. > :08:01.others go to vote Newham, Cambodia, you will have to bring `` Vietnam,
:08:02. > :08:06.Cambodia, you will to do bring that in. Normally in a market economy, it
:08:07. > :08:09.works the other way. A company becomes more efficient and
:08:10. > :08:12.productive and raise wages to encourage workers to work. In China
:08:13. > :08:19.it sounds like they've designed it, it sounds like there's going to be a
:08:20. > :08:24.few challenges there. Yes, it may be the shortest way from here to, there
:08:25. > :08:30.but it is not the most organic. As you say, normally this happens in an
:08:31. > :08:34.organic fashion. This happens in an inorganic fashion here. Really what
:08:35. > :08:37.has to occur out of that and we're starting to see that, is that it
:08:38. > :08:42.becomes more of a domestic market. It becomes a consumer market. Now
:08:43. > :08:46.you've created disposable income. This increase of 20% is going
:08:47. > :08:51.somewhere, right? It's going back into the economy. It goes from
:08:52. > :08:56.there. I would suggest that the challenges are that part of the
:08:57. > :09:01.answer to that is "That's in the east." We will help you by this
:09:02. > :09:06.moving to the West. We're feeling some resistance. You know people are
:09:07. > :09:09.saying, well, why would I want to work in the West, I have a relative
:09:10. > :09:13.over here and I know they make more money. I think it will be a
:09:14. > :09:18.challenge to get this to be spread out as much as the government hopes.
:09:19. > :09:27.If it works, it absolutely is the best plan. There is an aim to raise
:09:28. > :09:30.incomes, to raise domestic spending through boosting consumption. Labour
:09:31. > :09:37.market reforms are so challenging in China. What are key reforms that are
:09:38. > :09:42.needed to make the labour market work better, be more flexible, be
:09:43. > :09:45.able to reward skills and productivity and make it work for
:09:46. > :09:50.employers? It is going to be the challenge. I think the education
:09:51. > :09:56.system is putting out the amount of people, but maybe not what the
:09:57. > :09:59.economy needs. So, you put out five or six million people and put
:10:00. > :10:03.500,000 of them getting the new jobs, it becomes a little bit of a
:10:04. > :10:06.challenge. I think the education system and reform in there to be
:10:07. > :10:13.more relevant to what companies are looking for. The other is this
:10:14. > :10:16.notion of how do you drive and get innovation, which is what we're
:10:17. > :10:20.talking about here at the conference. The premiere spoke about
:10:21. > :10:23.innovation, but getting it to be part of the culture and getting it
:10:24. > :10:27.to be part of where growth is coming from, I think that's a big part of
:10:28. > :10:30.the labour market, because without that, without leaders, without
:10:31. > :10:33.innovation and without the right kind of education and training,
:10:34. > :10:38.there's going to be a lot of missteps. The faster those things
:10:39. > :10:44.can be done, which are very systemic and difficult to do, the more
:10:45. > :10:51.successful it will be. Are employers more the same or less excited about
:10:52. > :10:56.setting up in China than before? I would say they are more cautious. It
:10:57. > :11:04.was, I'm sorry to use a US term, but it works so well, it was a gold
:11:05. > :11:08.rush. It was like the Wild West where ` get in there. If you sell
:11:09. > :11:15.one to every person, that's billions. All of that thinking. Now
:11:16. > :11:19.it's more about SOEs are becoming more powerful. Much more
:11:20. > :11:25.sophisticated. Their wages rib creases. Their Ben `` wages are
:11:26. > :11:31.increases. Their benefits are increasing. And then acquisition.
:11:32. > :11:37.And what's happening is it's not this ` I can almost make any mistake
:11:38. > :11:42.and I'll succeed in China. No. What assets should I put on the ground?
:11:43. > :11:46.Can I be a win sner how is winner defined, because I most likely will
:11:47. > :11:50.not be number one. There will be an SOE who will be one and two. How do
:11:51. > :11:54.I feel at three or four? What can I do in that market? There's much more
:11:55. > :11:58.planning and thought going into when you come into the China market than
:11:59. > :12:07.before, which was literally the gold rush. Amidst rising labour costs,
:12:08. > :12:13.China has to rely more on innovation to grow. But how technologically
:12:14. > :12:20.advanced is China? And got the prospective of one of the largest
:12:21. > :12:26.biotech companies in the world when I said down with the chairman and
:12:27. > :12:29.Chief Executive of Royal DSM. China's economic growth is very
:12:30. > :12:37.important for China and the world. China needs to grow economically.
:12:38. > :12:40.People say it is slowing down, but 7% is still huge. And the economic
:12:41. > :12:45.growth on the West Coast, the reserve and Isaac in. And that goes
:12:46. > :12:52.together with issues with food security, energy and it. China needs
:12:53. > :12:56.innovation. My company can provide that innovation, better food and
:12:57. > :13:00.better climate, new energy. In terms of their own innovation, are they
:13:01. > :13:03.not they are yet? It sounds like you were saying that you can provide
:13:04. > :13:10.something they do not have. That is true. China's economic development
:13:11. > :13:15.is based on manufacturing strengths. They developed those very strongly
:13:16. > :13:18.over the years. They developed a competitive market, and all that
:13:19. > :13:23.stuff. And now they have something new. That is more difficult because
:13:24. > :13:29.you need to rely on the strengths that you have developed. You need to
:13:30. > :13:35.add something new. For every country in the world, it is difficult to
:13:36. > :13:40.rely less on that which caused prosperity for you in the past.
:13:41. > :13:46.Changes needed. In the biotech industry, where does China rank? In
:13:47. > :13:53.terms of how far they are from, say, being innovative? China is becoming
:13:54. > :13:58.more innovative everyday. We see it ourselves at DSM. Ten years ago, we
:13:59. > :14:02.had no research or development and now we have hundreds of people in
:14:03. > :14:08.our research campus. We are collaborating with the
:14:09. > :14:11.universities. China is ramping up innovation. It is putting in more
:14:12. > :14:17.innovation. At the moment, China is already the largest issuer of
:14:18. > :14:25.biotech pattern is in the European Union, out of all the European
:14:26. > :14:30.countries. `` patents. In some areas, they are catching up and we
:14:31. > :14:32.should not neglect that. Is that surprisingly, is it multinationals
:14:33. > :14:40.collaborating with Chinese firms? is both. China is welcoming
:14:41. > :14:45.international companies to elaborate with but also pushing on their own
:14:46. > :14:48.universities to drive for innovation. To a degree, it is
:14:49. > :14:53.remarkable because people have the idea about China infringing on
:14:54. > :14:59.patents and all that stuff but it is developing increasingly themselves.
:15:00. > :15:02.I expect that they will respect patents more and more out of
:15:03. > :15:07.self`interest because they will have a lot themselves. Finally, what are
:15:08. > :15:12.your expansion plans for China? Would you put in more investment
:15:13. > :15:22.into RND? `` research and develop it. Or are you looking at its
:15:23. > :15:26.predominantly as a market? At this moment, we have $2 billion
:15:27. > :15:36.in China, which is important with 25 locations on the East Coast and the
:15:37. > :15:41.West. We are this year investing around $500 million in China. Mainly
:15:42. > :15:48.in manufacturing. We are adding research people, but if you look at
:15:49. > :15:50.the investments, it is mainly manufacturing driven. We are
:15:51. > :15:55.carefully building our research and development to see what we can do to
:15:56. > :16:04.be innovative. New energy is very important and the hunger for energy
:16:05. > :16:05.is huge in this country. We are 50% solar. We have new coatings that
:16:06. > :16:18.boost performance. The into fuel. We have a new factory in
:16:19. > :16:24.the United States. We hope to reported that in China.
:16:25. > :16:31.More competition produces innovation. So China is making it
:16:32. > :16:35.easier for its firms to operate overseas and the Chinese premier has
:16:36. > :16:40.pledged to open more of its vast markets to competition. To find out
:16:41. > :16:46.how the landscape is changing, I sat down with the Chairman and Chief
:16:47. > :16:55.Executive of civic capital, partly owned by China's wealth fund. The
:16:56. > :17:06.Chinese companies have overall at `` are overall at a very early stage in
:17:07. > :17:10.terms of becoming multinational. China features about a hundred
:17:11. > :17:11.companies on the Fortune 500 list but if you look at the nature of
:17:12. > :17:16.their business, claim to be multinational. Chinese
:17:17. > :17:22.companies like yours which have global reach, there is a lot
:17:23. > :17:25.excitement and anticipation about how the world economy is going to
:17:26. > :17:33.change, with more Chinese companies coming out. What kind of trend
:17:34. > :17:38.should we expect? Globally, it would be a different corporate environment
:17:39. > :17:43.if there were more Chinese companies like yours in different sectors.
:17:44. > :17:46.Give us a sense as to how you think the global corporate environment
:17:47. > :17:54.will change with more Chinese companies. China is clearly part of
:17:55. > :18:08.the global economy now. Mostly through trade. Not so much through
:18:09. > :18:15.capital integration. I think for the globalisation of the world, when
:18:16. > :18:19.that day comes, China is an integral part of the world economy. I think
:18:20. > :18:31.we will be better for it. During that process, I think many people in
:18:32. > :18:35.the West will overcome the fear that is frequently incited by the press
:18:36. > :18:40.that there is a threat from China. I remember the 80s in the US, and when
:18:41. > :18:48.the Japanese were buying up the Rockefeller centre Tom many people
:18:49. > :18:56.thought that it was a Japanese invasion. At the end of the day,
:18:57. > :19:01.people get over those fears. When they see that there is no ulterior
:19:02. > :19:12.motive behind these investments. We are all living in a globalised
:19:13. > :19:16.world. I'd guess one source of that anxiety is because firms from
:19:17. > :19:22.China, the big ones, are owned by the state. So it is not that they
:19:23. > :19:27.have cheaper access to financing so it is not a level playing field. You
:19:28. > :19:31.think that justifies worries on the part of people in the rest of the
:19:32. > :19:36.world, when they see Chinese firms coming in? There are a lot of
:19:37. > :19:41.savings in China. The savings have been accessible, some of the highest
:19:42. > :19:49.in the world. The cost of capital overall is a lot lower. Just because
:19:50. > :19:54.they have cheaper costs for capital, you cannot say that it is
:19:55. > :20:04.not a living will field. `` level playing field. I think that the
:20:05. > :20:06.anxiety has to do with, because a lot of the companies are
:20:07. > :20:14.state`owned, which is very foreign to most countries in the world, the
:20:15. > :20:22.economy is dominated by the private sector. I think that is a challenge
:20:23. > :20:34.for the Chinese government to present their story, to make people
:20:35. > :20:38.see that these may be state`owned companies, but in the main, the only
:20:39. > :20:46.execute a directive from the state. A lot of time, they are profit
:20:47. > :20:53.making companies, and they abide by commercial rules. I'd guess that is
:20:54. > :20:57.the concern. That the firms just do what the government wants. What kind
:20:58. > :21:08.of assurance could be given in that sense? Chinese government is trying
:21:09. > :21:18.to reform the SOEs sector, and make it more market orientated. The
:21:19. > :21:25.overall reform objectives outlined by the party Congress last year, it
:21:26. > :21:34.was to try to let the market become the decisive factor. From that
:21:35. > :21:42.respective, SOEs should be treated like any other market player, as
:21:43. > :21:51.long as, like you said, the overall environment is fear and there is a
:21:52. > :21:58.level playing field. `` the overall environment is fair. How we get to
:21:59. > :22:04.that point, it is a work in progress. But overall, I am
:22:05. > :22:13.confident that there has to be a direction, and that is the way to
:22:14. > :22:18.go. China wants growth to be driven more by innovation and to be more
:22:19. > :22:22.sustainable. Key to that is technologically advanced firms. If
:22:23. > :22:25.Chinese companies work globally competitive, that is a good sign
:22:26. > :22:31.that China will achieve its aims. That is all we have time for. Check
:22:32. > :22:33.out our website, and follow me on Twitter. Join me next time, for more
:22:34. > :22:49.Talking Business With Linda Yueh. We have had some relatively dry and
:22:50. > :22:52.warm weather so far in September of things are shifting over the next
:22:53. > :22:54.day four hours. Turning fresher. We will see some scattered showers
:22:55. > :22:58.developing for some areas. Many of us avoiding the showers altogether.
:22:59. > :23:02.It will be brightening up through the rest of the day. The radar
:23:03. > :23:03.picture shows where we have had some showers and