20/09/2014 Talking Business with Linda Yueh

Westminster and also Glasgow and Edinburgh. Now it's time for Talking

Business. How worrying is the slowdown in

China's economy? And what kind of business environment can we expect

as China's leaders push forward with their reforms. Here at the world

economic form we're talking business.

A warm welcome to the programme. China's economy is expanding at the

slowest pace in two decades. But is it all part of the government's plan

to foster a better quality of growth? One that is driven less by

investment, such as in real estate, and more by innovation? To find out

I sat down by the chief economist of the World Bank to discuss China's

economy. It's a small slowdown. It's a

slowdown given China's own very, very rapid growth in the past. So,

yes, it's no longer at the 10% that we were getting used to because

China did that for about 30`year run, which was a spectacular run.

For an economy with 30 years of unprecedented growth, 7% to 7. 5% is

very good performance. The risk is there will have to be some

structural adjustments in the slowing down. When you make

structural adjustments, economics is not yet a hard science where you

know, from what you do, exactly what will happen on the ground. When you

begin to make those corrections, there is a possibility that the

economy takes a bit a dip and then picks up again. China is such an

important rival for it `` driver for the global economy that if there is

turbulence during the adjustment from the 10% to 7. 5% growth, that

will be troubling, but the prognosis in the medium term, long`term is

between 7% to 7. 5% growth, which is a slowdown but only compared to

China itself. Of those adjustments, there's quite a lot of concern

whether China could transform its economy away from say investment`led

growth, away from using credit to boost spending, versus what they're

trying to do ` to upgrade industry, focus much more on raising incomes

and boosting consumption. Do you think that's a transformation that

is happening in terms `` correctly, I should say? We are really at the

foot hills of those changes. To that extent, it's difficult to give you

absolute assurance that it's happening in the right way. The

first steps that have been taken, the announcements coming from the

Chinese leaders are hopeful that there is awareness of this. It is

true that the amount that China invests, it cannot continue like

that for too long. It's done very well, but the marginal return to

investment has begun to come now because there's a lot of investment,

so the returns go down. It will have to move over to greater consumption

and Before we get innovation. To innovation, on the point of

investment, are there risks on the road China is still going down?

There's still a lot of investment, especially in real estate and

construction sectors. There are some recks. The risk comes from the fact

that China has a lot of credit out there, roughly 250% of its GDP is

overall credit, private and public. That, for another country, at this

level of growth, would have been extremely worrying. For China, it's

much less worrying, but there is still some concern. It's less

worrying because if you look at the composition of the debt, the state

debt, the government debt is much smaller. So, the government is in a

very strong position. If you look at the foreign exchange reserves with

the Chinese government and the people's bank, it's $4 Dr.

of `` $4 trillion. When you begin to pull this in, it is possible there

will be some turbulence and in another country, where the

government was weaker, I would have said, yes, be very careful because

this is going to happen. of China, there will be adjustments,

but the Government is strong enough. It should be able to weather that

well enough. There's a lot of talk of China becoming the world's

biggest economy. What's your assessment of that? I've done a

little calculation. I can tell you what is expected from this.

Purchasing power parity corrected GDP, we do know that China will

expect, will overtake the United States this year, some time. PPP

corrected GDP, not just pure GDP. Back of the envelope calculation

that we have done, I can put a date to it, it's a fun date more than

anything else, 29th September, that's the expected date. This is

the calculation, that's based on all numbers which are available. You

take China's growth rate, United States' growth rate. Take the new

purchasing power parity numbers for 2011, which came out. Make those

corrections and project on growth trade, the crossover happened 29th

September. This is GDP with the PPP correction. But really,

the PPP correction is extremely important and on that, the United

position for quite some time still. So in terms of pure GDP, United

States will still be the dominant economy for quite some time. Wages

are rising in China which can support more consumption by its

middle class. But higher labour costs mean that China is a less

competitive place for businesses to invest their cash. I spoke with the

executive chairman of the Man Power Group to discuss China's

fast`changing labour market. Plane and simple, wages are going

up. There's no surprise to that. The government put actions in place with

labour reforms that said, you know what, we're going to make a

conscious decision. That decision is we cannot live off being labour

arbitraged and grow the middle class. Some of the labour reforms on

the number of workers, you can put in what their pay is, has clearly

made the impact. 20% increase on some increase that's were there

before. Annual increases? Yes. And 20%, you know, for some of those

companies that are actually doing the math in a tight way, with 4,000

workers in a facility, after giving 15% for the last three years and now

20% on top of that, so we looked at that and said this is going to

change the market. It will be a time of change, however, if you do not

change that, you are never going to build high quality, high efficient,

high productivity middle class. The shoe that has not really dropped yet

is the factories have not gotten that much more productive.

Efficiency, productivity, technology hasn't gotten into the factories and

if you want to really create value added manufacturing, let some of the

others go to vote Newham, Cambodia, you will have to bring `` Vietnam,

Cambodia, you will to do bring that in. Normally in a market economy, it

works the other way. A company becomes more efficient and

productive and raise wages to encourage workers to work. In China

it sounds like they've designed it, it sounds like there's going to be a

few challenges there. Yes, it may be the shortest way from here to, there

but it is not the most organic. As you say, normally this happens in an

organic fashion. This happens in an inorganic fashion here. Really what

has to occur out of that and we're starting to see that, is that it

becomes more of a domestic market. It becomes a consumer market. Now

you've created disposable income. This increase of 20% is going

somewhere, right? It's going back into the economy. It goes from

there. I would suggest that the challenges are that part of the

answer to that is "That's in the east." We will help you by this

moving to the West. We're feeling some resistance. You know people are

saying, well, why would I want to work in the West, I have a relative

over here and I know they make more money. I think it will be a

challenge to get this to be spread out as much as the government hopes.

If it works, it absolutely is the best plan. There is an aim to raise

incomes, to raise domestic spending through boosting consumption. Labour

market reforms are so challenging in China. What are key reforms that are

needed to make the labour market work better, be more flexible, be

able to reward skills and productivity and make it work for

employers? It is going to be the challenge. I think the education

system is putting out the amount of people, but maybe not what the

economy needs. So, you put out five or six million people and put

500,000 of them getting the new jobs, it becomes a little bit of a

challenge. I think the education system and reform in there to be

more relevant to what companies are looking for. The other is this

notion of how do you drive and get innovation, which is what we're

talking about here at the conference. The premiere spoke about

innovation, but getting it to be part of the culture and getting it

to be part of where growth is coming from, I think that's a big part of

the labour market, because without that, without leaders, without

innovation and without the right kind of education and training,

there's going to be a lot of missteps. The faster those things

can be done, which are very systemic and difficult to do, the more

successful it will be. Are employers more the same or less excited about

setting up in China than before? I would say they are more cautious. It

was, I'm sorry to use a US term, but it works so well, it was a gold

rush. It was like the Wild West where ` get in there. If you sell

one to every person, that's billions. All of that thinking. Now

it's more about SOEs are becoming more powerful. Much more

sophisticated. Their wages rib creases. Their Ben `` wages are

increases. Their benefits are increasing. And then acquisition.

And what's happening is it's not this ` I can almost make any mistake

and I'll succeed in China. No. What assets should I put on the ground?

Can I be a win sner how is winner defined, because I most likely will

not be number one. There will be an SOE who will be one and two. How do

I feel at three or four? What can I do in that market? There's much more

planning and thought going into when you come into the China market than

before, which was literally the gold rush. Amidst rising labour costs,

China has to rely more on innovation to grow. But how technologically

advanced is China? And got the prospective of one of the largest

biotech companies in the world when I said down with the chairman and

Chief Executive of Royal DSM. China's economic growth is very

important for China and the world. China needs to grow economically.

People say it is slowing down, but 7% is still huge. And the economic

growth on the West Coast, the reserve and Isaac in. And that goes

together with issues with food security, energy and it. China needs

innovation. My company can provide that innovation, better food and

better climate, new energy. In terms of their own innovation, are they

not they are yet? It sounds like you were saying that you can provide

something they do not have. That is true. China's economic development

is based on manufacturing strengths. They developed those very strongly

over the years. They developed a competitive market, and all that

stuff. And now they have something new. That is more difficult because

you need to rely on the strengths that you have developed. You need to

add something new. For every country in the world, it is difficult to

rely less on that which caused prosperity for you in the past.

Changes needed. In the biotech industry, where does China rank? In

terms of how far they are from, say, being innovative? China is becoming

more innovative everyday. We see it ourselves at DSM. Ten years ago, we

had no research or development and now we have hundreds of people in

our research campus. We are collaborating with the

universities. China is ramping up innovation. It is putting in more

innovation. At the moment, China is already the largest issuer of

biotech pattern is in the European Union, out of all the European

countries. `` patents. In some areas, they are catching up and we

should not neglect that. Is that surprisingly, is it multinationals

collaborating with Chinese firms? is both. China is welcoming

international companies to elaborate with but also pushing on their own

universities to drive for innovation. To a degree, it is

remarkable because people have the idea about China infringing on

patents and all that stuff but it is developing increasingly themselves.

I expect that they will respect patents more and more out of

self`interest because they will have a lot themselves. Finally, what are

your expansion plans for China? Would you put in more investment

into RND? `` research and develop it. Or are you looking at its

predominantly as a market? At this moment, we have $2 billion

in China, which is important with 25 locations on the East Coast and the

West. We are this year investing around $500 million in China. Mainly

in manufacturing. We are adding research people, but if you look at

the investments, it is mainly manufacturing driven. We are

carefully building our research and development to see what we can do to

be innovative. New energy is very important and the hunger for energy

is huge in this country. We are 50% solar. We have new coatings that

boost performance. The into fuel. We have a new factory in

the United States. We hope to reported that in China.

More competition produces innovation. So China is making it

easier for its firms to operate overseas and the Chinese premier has

pledged to open more of its vast markets to competition. To find out

how the landscape is changing, I sat down with the Chairman and Chief

Executive of civic capital, partly owned by China's wealth fund. The

Chinese companies have overall at `` are overall at a very early stage in

terms of becoming multinational. China features about a hundred

companies on the Fortune 500 list but if you look at the nature of

their business, claim to be multinational. Chinese

companies like yours which have global reach, there is a lot

excitement and anticipation about how the world economy is going to

change, with more Chinese companies coming out. What kind of trend

should we expect? Globally, it would be a different corporate environment

if there were more Chinese companies like yours in different sectors.

Give us a sense as to how you think the global corporate environment

will change with more Chinese companies. China is clearly part of

the global economy now. Mostly through trade. Not so much through

capital integration. I think for the globalisation of the world, when

that day comes, China is an integral part of the world economy. I think

we will be better for it. During that process, I think many people in

the West will overcome the fear that is frequently incited by the press

that there is a threat from China. I remember the 80s in the US, and when

the Japanese were buying up the Rockefeller centre Tom many people

thought that it was a Japanese invasion. At the end of the day,

people get over those fears. When they see that there is no ulterior

motive behind these investments. We are all living in a globalised

world. I'd guess one source of that anxiety is because firms from

China, the big ones, are owned by the state. So it is not that they

have cheaper access to financing so it is not a level playing field. You

think that justifies worries on the part of people in the rest of the

world, when they see Chinese firms coming in? There are a lot of

savings in China. The savings have been accessible, some of the highest

in the world. The cost of capital overall is a lot lower. Just because

they have cheaper costs for capital, you cannot say that it is

not a living will field. `` level playing field. I think that the

anxiety has to do with, because a lot of the companies are

state`owned, which is very foreign to most countries in the world, the

economy is dominated by the private sector. I think that is a challenge

for the Chinese government to present their story, to make people

see that these may be state`owned companies, but in the main, the only

execute a directive from the state. A lot of time, they are profit

making companies, and they abide by commercial rules. I'd guess that is

the concern. That the firms just do what the government wants. What kind

of assurance could be given in that sense? Chinese government is trying

to reform the SOEs sector, and make it more market orientated. The

overall reform objectives outlined by the party Congress last year, it

was to try to let the market become the decisive factor. From that

respective, SOEs should be treated like any other market player, as

long as, like you said, the overall environment is fear and there is a

level playing field. `` the overall environment is fair. How we get to

that point, it is a work in progress. But overall, I am

confident that there has to be a direction, and that is the way to

go. China wants growth to be driven more by innovation and to be more

sustainable. Key to that is technologically advanced firms. If

Chinese companies work globally competitive, that is a good sign

that China will achieve its aims. That is all we have time for. Check

out our website, and follow me on Twitter. Join me next time, for more

Talking Business With Linda Yueh. We have had some relatively dry and

warm weather so far in September of things are shifting over the next

day four hours. Turning fresher. We will see some scattered showers

developing for some areas. Many of us avoiding the showers altogether.

It will be brightening up through the rest of the day. The radar

picture shows where we have had some showers and