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