tv Discussion on China Global Economy CSPAN January 14, 2020 3:16pm-5:48pm EST
and an update on the impeachment of president trump. today house speaker nancy pelosi announced the house would appoint and vote on impeachment managers during wednesday aens house session. the approval of the manages will also automatically send the two articles of impeachment against president trump to the senate. the senate will then sit as a jury to adjudicate the two charges. abuse of power and obstruction of congress. a two-thirds majority of senators will be required to convict president trump and remove him from office. you can watch the house live on cspan and the senate live on cspan 2 and cover all of our impeachment coverage at
cspan.org slash impeachment. president trump holds a campaign rally in wimilwaukee, wisconsin live this evening. it's online at cspan.org or you can listen on the free cspan radio app. next, a look at china's economy and economic trends. this is two and a half hours. please be seated. good morning. i'm director and senior fellow of the china center here at brookings. it's my pleasure to welcome you to this important event on china's long-term economic outlook and its global implications. this event is unusual in present-day washington for at
least three reasons. first, as it has been widely perceived, people here have been preoccupied with current issues and immediate challenges, as the year 2020 has barely gun, there are already several pressing geopolitical dilemmas on which our policymakers must focus. as we cast into the new decade, it will be important to look ahead toward china's economic progress and the challenges it will present, both for china and for the world. china's rapid economic development has arguably been and will continue to be the most consequential global story of the 21st century, and it's ramifications surely go far beyond the economic domain. it is also important to note
that traditionally, and perhaps even today, china tends to take a long-term perspective and to outline its objectives. as the famous chinese saying goes, those who do not plan for the distant future will find trouble at their doorstep. second, in recent years, washington's course regarding china tends to look at the country in a monolithic way, and therefore overlook the internal debate and the multi dimensional assessments within the chinese community. of course the same observation may also be valid when it comes to the other side of the pacific. it is truly in valuable as we are going to hear from our chinese colleagues from beijing to have a comprehensive understanding of how they
perceive the demographic, economic and administrative challenges that china confronts in its drive for a fully developed country by 2049. a discussion of these challenges, china's aging population, growing economic disparity, potential middle class income trap, social dislocation due to rapid urbanization, and environment degradation. the list actually is quite long. this discussion will help us grasp the policy choices and social political restraints in beijing in the years and decades to come. the third and final reason that this is an unusual event is the fact that this conference today and soon to be released book reflects an impressive example of u.s.-china scholarly
collaboration. the book, which began in 2018, is an in-depth research and intel le intellectual partnership. it presents outcomes of two workshops in december 2018 and may 2019. i would like to extend my congratulations to the editors of the book, as well as the other contributors from both sides for their excellent scholarly work and the spirit of teamwork. especially at a time when some believe that the united states and china should decouple, even in the area of scholarly and educational exchanges. we are fortunate to have so many distinguished economists and experts in other academic fields to speak to us this morning,
especially our colleagues from the national school of development out of peking university, one of china's think tanks affiliated with one of china's most prestigious universities. bei will first present the main findings of this study and then be followed by two panels moderated by my esteemed colleagues. without further adieu, please join me in welcoming him to this stage and giving our participant a warm round of applause. thank you very much. >> thank you, dr. li, for the introduction. my name is yoyung of the
national school of government in peking university. as dr. li introduced, we have done a joint project, a book project with brookings, and finally at this stage we're happy to present the results of the project to the american audience. this actually, before we have done this in china. so before my colleagues, and also friends in brookings to prevent the main results of the book, let me take this opportunity to say a few words about the national school of government. national school of development was first created in 1994 with the name of china center for economic research. we were quite unique at that
time, because all of us were trained abroad. but now it is more than 25 years ago. and then by 2008 we changed our name to the national school of development. we did that because the center was expanded and had a much wider range of issues in china. so now the national school of development, of course we do teaching, we do research, but as dr. li said, we are also a major think tank in china. we do policy for the government, and this book project is the results of policy advising. so with that, i would also say a few words about our intention to
work with brookings on this project. china has an ambitious plan to make the country one of the rich country in 2049. it's so-called a second goal. so my take on becoming a rich country is that countries that have a gdp is going to be at least 45% of american level in real terms. today china's income is about 27% of american level in real terms. so this is going to mean that china will have to almost double the ratio in the next 30 years. that's a greater challenge
because china is already a huge economy. the size of the economy is $14 trillion u.s. dollars, so in order to grow, even by 3%, that's going to be hard because that means almost a medium sized country. so in this book project we looked at two sets of challenges facing china. one is domestic, the other one is international. domestically, for china to have further growth is going to be aging. aging is a major subject in our book project. my colleagues are going to present -- to me i think encouraging results, because most of the problems are aging, will be overcome by various
forces in the future. on the international front, china probably faces more challenges because the international environment has dramatically changed in the last decade. of course in the center is u.s.-china relations. so we may not want to take it, but in the end we have to look at the competition and the cooperation of those two largest economies, and in this book project we deal with that particularly like technological competition between the two countries, but we also look at
issues in which the two countries can cooperate together. in the next several decades on the world stage, the big play must be u.s.-china relations and manage well this relationship is going to be not just good for both countries, but also good for the whole world. so for that, i feel really thankful for brookings institute to work with us, and particular thanks for the team to work with us. as dr. li just said, the two sides can still work together, show the world that two countries still have a strong will to come together.
i'm david from the china center here in brookings and i'm going to moderate this panel. we called it domestic challenges that china's facing as it aspires fo >> good morning, i'm david dollar from the china center here at brookings and i'm going to moderate this panel. and we called it domestic challenges that china is facing as aspires for these goals for 2049. i'll just remind you there are a number of important issues we're not going to cover on this panel. we'll get into financial sector reform in the next panel and issues of state enterprise reform might come up there. but what we've chosen to do here is focus on four issues that generally fall in the category of social and environmental challenges.
as my colleague chung li mentioned, we have a lot of different discussions in washington concerning china. i don't think we have covered that much some of these important domestic issues. so i'm very happy that we're going to start with professor yen and she's going to talk about this critical issue of demographics. i wa i wanted to start with that because i think that's a defining issue for china. and then the research fellow -- all of the colleagues are from the national school of development at peking university and we're going to talk about the phenomenon of convergence and what are some of the paths and policies that will affect that. and then we're going to talk about consumption, and that may seem like a bit of an odd topic, but thinking about the different aspirations, part of which is about per capita income, in recent years most of china's growth on the demand side has come from consumption,
investment has slowed down dramatically, there are fewer and fewer good investment opportunities. there's not much potential for net ex sports to contribute to china's growth in the near future for a variety of reasons, so china has been growing based on consumption. so as it develops and ages, its natural to ask what's going to happen to consumption. and in all of these we want to think about what are some of the policies that will direct outcomes in a better direction. and then last but not least, professor tao is going to talk about the environmental issues, including climate change. so i've asked each of them to stick to about seven minutes to start, so we should have time to interact and open up in the audience and we're going to start with professor yen on demographics. >> thank you. so for the demographics, in this chapter we actually find five main trends of the population aging. so number one is population
aging, will deepen in the next 30 years. by 2049 the chinese population over age 55 will be close to 400 million, which accounts for more than a quarter of the population. the working age population, we will shrink. it started to shrink already and it will further shrink from 990 million to about 800 million. 990 million to 800 million, which is about 200 million reduction in this 30 years. number two, not only the total population trend of the aging, but also the composition, we will shift from the young/old to
the oldest/old. for young/old we mean 55 to 80. for oldest/old we mean age 80 and above. so by 2049 the propulsion of the oldest/old in the aging population will be about 35%. right now it's about 20%. so that is a very big increase. number three, the composition of the working age population will also change. by 2049, the propulsion of the older workforce will increase sharply from about 17% to 27%. for older workforce, we mean age 55 to 64. so the workers themselves will also become older.
number four, the total dependents ratio will increase to about 72 by 2049, and among the total dependents ratio, the major part of that will be the independence ratio. so the independence ratio will reach about 50. and the burden of care for the elderly will be much larger than the burden for child care. number five, the family size will decrease from about 2.9 currently to about 2.5. that means we will have greater propulsion of the elderly living alone. so the elderly people living alone, we will reach about 53
million. that will be about 10% of all of the households. so that's the main trend. so we will have challenges according to that. there are three major challenges we will face. number one, that is a challenge for economic growth, so the reduction in the working age population and the increase of the population aging will lead to increase the labor costs and contraction of profit margin. and also it may lower the rates of savings and investment, and of course my colleague will address the importance of consumption later. number two challenge is the financial pressure on the pension system. we will have the risk of a funding gap between -- it will become more dominant with
acceleration of the population aging, especially currently we talk about the individual accounts and also the burden. and with a sharp increasing of the number of pension recipients and the decreasing in the contributors, we will have more burden on pension system. number three challenge is the rising burden of elderly care. so according to the research, there will be about 30% of the elderly people, the oldest/old, we will have some sort of difficulty in activity of daily living, that means they will need elderly care, very intensive elderly care. but with the composition change, we will have more oldest/old and
also there will be more elderly people living alone and a shrinking of the number of children. that will become a big challenge in the future. so that's basically the three major challenges we face, yeah. >> so i think i would actually like to follow up immediately with a policy question. so in your chapter, among all those statistics, the one that really grabbed me is this rising share of the older workers, the 55-64-year-old cohort. so the labor force is going to decline pretty claumtl decline pretty dramatically, so what are the policy implications of that? what can you do to keep that group productive and in the labor force? >> i think there are at least two policy suggestions for this
part, the shrinking of the working age population. number one, is the retirement system. i think we need to reform the retirement system. currently for men, chinese men, we have a retirement, mandatory retirement age of 60, but for chinese women we have a retirement age of 50 for blue collar workers, and 55 for white collar workers. that is actually very young, depending on the current life expectancy. so we need to consider to extend the retirement age. that's the first one. and the second one, i think we should consider the education and the training program. so we are talking about the shrinking of demographic dividend, but now we may actually consider how to improve
the demographic bonus for that. so one way we think about that, you just mentioned we have the larger fraction of the elderly workers, the education of those elderly workers is quite low. so we may have to improve their education of them. not the regular education level, but through the training program. so not only the regular education of the relatively young, but also the training program for the relatively older workers. also, i think health is quite important. according to the retirement study, i am involved in, although we have longer life expectancy now, but the health is not so good. so we have to invest more in
health in order to improve the human capital, i think. >> thank you very much, professor. all of the topics in this panel are interrelated, so later we'll get to some of the air pollution issues and how that's affecting people's health. so all of our issues are interrelated. so thank you. so now i'm going to talk about convergence, as dean yao mentioned, one aspect is to reach 45% per capita by 2049 and that in general is what we think of as a convergence denom non. i believe it's up to 47 and the aspiration is for 2045 so let's talk about the flame work. >> good morning, everyone. glad to be here. i would like to talk about two
issues. one is the gross prospects and the other thing is successful convergence. the first one is the gross prospects. our gross projections is based on the convergence of per capita gdp in the economy. according to the gross theory and empirical evidence, it's lower per capita gdp worth as initial period, the faster it open up, the faster it grow in decades. actually, i will not go into detail about the techniques and i will go directly to the results. and on the basic assumption of successful convergence, we have found the following results.
number one is that the potential gdp growth of china in the next three decades will decline gradually from around 7% in 2015 to around 3% in 2049. and number two, is that the per capita gdp of china relative to that of the united states will rise gradually from 24% in 2015 to around 65% in 2049, according to the database -- actually, the database actually takes account the adjustment. number three is that the share in the world economy approaches 24% in the year of 2049.
and number four is that china is expected to surpass the u.s. in terms of gdp in the year around 2030. the second thing is the successful convergence, the following things are important. number one was suggested that especially the trade avenues is the prerequisite for developing countries to narrow the gap with leading economies. because it provides opportunities for developing countries to access technology spillover from the leading economy, and the access actually is vital for the economy to take
off. and also in the process of opening up, it is also important for developing countries to have protection of intellectual property rights, which will help create the sort of institutional environment conducive to innovation and technology transfer. number two is that as the professor said, aging population is increasingly becoming a drag on the system, china's economic growth. and number three is that with urbanization and the accumulation is quite important for china to catch up in the following decades. and we find that these two
cannot be achieved separately, because in the process of urbanization cities will become the recipients of the technology inflow and the capital actually is important for the ability of absorbing appropriate technology. but in most developing countries, the major fraction or higher fraction of the population is in the rural area. take china as an example. at the very beginning of china's opening up, actually 82% of the total population was concentrated in rural area. and at that time the human capital of china was less than
half than that of the united states, and only 55% of japan. and even now, after we have much improved in this area. so to sum up, number one is that china's gross potential will be a slowdown in industry, number two, to open up, actually it's important for china to catch up, and number three, china should promote the accumulation of human capital in the process of urbanization. >> that was very clear and concise. thank you very much. so these kind of historical convergence estimates, obviously it relies on historical experience. >> yes. >> so the world may change. we don't know if this will persist. but you emphasize in your chapter that you get this convergence among open economies. >> yes.
>> and my sense is when we look at this historical experience, that all of these economies, not only are they relatively open at any given moment compared to their other developing countries, but they've all tended to continue to open up over time. >> exactly. >> south korea has become much more open in terms of trade and foreign investment over time. >> yes. >> so my sense -- and i should have prefaced this by saying that the chapter has different scenarios, and whether china is on a high path or low path makes a pretty big difference by the time you get out to 2049. >> yes. >> so one message i took away was china continuing to open up is important to try to get onto the higher growth path. do you agree with that? >> yeah. i totally agree with that. and talking about the policy implications, i think china should further open up the
domestic market to both the foreign capitals and domestic and private capital and especially in the field of the financial system. and actually the process of opening up, you have the transparency of the domestic policies and the protection of both the intellectual property rights and the domestic, private property rights, which will help to reduce the policy uncertainty and enhance the inventive to innovate. and also i think china should adopt merits to help the mobility from the poor to rich, from rural to urban.
it should include a birth control policy and improvement in the education system, especially for the okay, thank you, so, we are going to turn to talk about consumption. the convergence analysis is looking at the supply side and as i mentioned, consumption is the main source of demand in china that will continue. we will look at consumption at 2049. actually, i think, this year, china will be the world's largest consumer market. so, and actually, in the past several years, consumption has already become the most important driving force for the economic world. so, look at the number of 2018.
the gdp growth rate was 6.6 percentage. and actually the consumption contradicts 77 percentage of the total gdp growth rate and the capitol investment contributes about 32 percentage of the gdp growth rate and the net export negatively contributes of total gdp growth rate. from the numbers you can see the consumption has become the most important factor in the future, it will continue to be the most important driver for the economic growth. so, in my -- so, we, for the future consumption, for 2049, we focus on actually, three factors of course, there's many that
affect consumptions, we focus on income growth, aging and the urbanization. the aging now is an important concern for many people. okay. we can see the media, a lot of news in the reports that okay, aging it's a bigger threat to china's future growth and on that hand, we can see also, in our study, we can show that income growth and urbanization affect is way larger than the negative effect than aging on the total consumption. the aging, the impact of aging -- so, because the older are consuming less. for the same side of the population, where there's more proportion of the older people, so the total consumption will be
reduced. okay. from our calculation, the size on the 2049, the aging will only contribute about negative four percentage of the increase of the whole consumption from now to 2049. only negative five percentage. but the urbanization, alone, we are contributing about 24 percentage of the increase of the total consumption from today to 2049. so, why urbanization, will have such a large impact on the consumption. that is two channels, actually, one is that, as, as they migrate to the cities, they will have a high income. so, there's basically the income affect. increase the consumption, on the other end, there's pure urbanization affect. so from the data, we look at the
household maco data, for two families, living in the house, rural, and living in the urban, if they have the same, exact same income the rural household will consume more. basically -- i'm sorry, urban, urban will consume more. for example, education. because in the city, in the urban, you have more consumption choices. so, there are two factors here. so, again, now, let's will look at the number of the urbanization rate in china. so, in 2018, the official number for the urbanization in china is about a 60 percentage. so, see the percentage. but, among the 60 percentage of the population that are working
and the liveing, about 200 and 3 million -- in the year, it's in the cities. the home, the family members still living in the rural areas. so the founders are -- and the thing about that, if you think about that, this size of the region can now 2/3 of total u.s. populations. 2/3 of the u.s. population that work temporarily in the cities. and those populations will not make investments in cities. especially like buying a house. so, so, and the year for year, we take it away, of those, low,
low migrants the urbanization rate is only 43 percentage, so, okay, and no,and okay, the other reason is for this, only temporary workers are in the cities, china has a -- system. it's like a green card city, or like urban citizenship, only the migrants get the -- they can assess is to the social welfare service including public educations, medicare and the social security, now, for those 230 million total migrants that work in the city, they cannot have the social welfare service, and as i mentioned, now, the
real urbanization rate, only 43 personal, but for a mature economy, like the u.s. and other eastern asia countries, the urbanization rate is as high as 80 percentage or 75 percentage, now china is way slower than that number. in the future, we are having a lot of, a lot of space for the urbanization rate. so, again, lastly, i want to share the number we forecasted for the 2049 total consumption. let's first look at the 2018 number. in 2018, the china's total consumption is about the 38 trillion in chinese yen. 38 trillion, the household consumption is 27 trillion. so, our study is only focusing
on the household consumption. now, in 2018, the household consumption is about 27 trillion in china, and if we assume that, that gdp growth rate is averaged about 4 percentage from now to 2049, and that the urbanization rate will reach as high as 80 percentage and giving the projection of the aging structure. in 2049, the total household consumption is going to be around, based on our estimatation is around 98 trillion from 27 to 98 trillion. and that there's an increase about -- so the increase size is about 70 trillion chinese yen of total consumption and the income growth of the country will be most. like around maybe 80 percentage. and as i mentioned, urbanization
will contribute about the 25 percentage of the total increase of the consumption and the aging will contribute negatively about a negative percentage of the increase. that's basically what we find. >> so, i heard an interesting symmetry through the last few presentations about the important issue of urbanization. on the supply side, you need for more productivity and higher gdp and on the demand side, you need more urban households to provide the demand, so that is win/win, so, what? i have heard about reforming the huko system for 20 years now, so why is it so difficult and what is actually happening in terms of reforming huko system? >> the difficulty is from the pressure from the local governments. now, the local government, maybe
you know, china's local government has very large debt. so, now there's many migrant workers in the city, but the city does not provide the social welfare of the local migrants. it's a lot of debt, but most of debt was invested in the infrastructure. so, in the -- the huko system was founded in the 1960s. so now it's almost 60 years old, and the, but only because of the local governments issue. but now, i want to share a very good news. just last week, the central government made a big push on the huko system, the central government just announced last week that all, for the cities, that with the mature population less than 3 million for those
cities, they just completed the, got rid of the h had uko system, that means that all migrant cities can get huko in the cities. but for the city with a metro population of 3 million, basically very big larger cities, they can keep it. and for those, but and so look at the number. how large is that affect? china now has a total of 293 cities, and for the cities with the metro population about three million is only 27. that means that 270 cities were just, you know, getting rid of the huko system, i think not immediately affect. because as i mention, there's a lot of pressure on the local government. they have to provide the public
education and social security and the medical service. it's a good signal, and the message for the local migrants, i can live permanently in the city without any discrimination. that is encouraging their investment, and that will encourage them to bring their kids and the families and come to the city and live together and maybe then they will have more incentive to buy a house in the city. so, all this, we are you know, boosting the consumption of the migrants. >> all right, thank you very much. and then last but not least professor, on the environmental issues. our center focused on the economic growth pattern change and basically the general feeling is that you cannot get growth pattern in china formerly in the past, for decades, it's no longer sustainable. we have to change it.
in that, you improve the environment as the very important component. we face a greater mental challenge. so, wide range of estimates. but, people generally learn that, environmental damage is caused severe economic cost, premature death and diseases and china is a major carbon emitting country in the world. for the world to achieve if goal of carbon reduction, china has to do a lot more. so, year 2020 is a critical, all major emitting countries have to revise their -- but there's particular high pressure on china to modify, basically
improving the goals, the efforts in carbon reduction. changing economic growth pattern is not important for china but important for the whole world. and we have a lot of aspirations in this respect. first, for -- for the future 30 years by mid this century. the environmental quality has to reach the who criteria, and related to a lot of health improvement. and in order to do that, we have to, to do two things. we have to change our industrial structure, we were too heavy industry, and heavy industry
leads china economic growth and also leads the export growth after who, but the carbon footprint has been too high. second, we have to change our energy structure. so, china environmental issue, carbon emission issue is mainly related to china's energy structure. used to rely on too much fossil fuel. and in the future, we have to increase use of renewables. and in order to achieve these two goals, two or three goals, we have institutional barriers to address. we have a price structure to improve. and we have to give local government, basically the policy implementing agencies, high incentive to implement
environmental regulation and the policies. and looking ahead. we see a lot of promises and recently our industry structure has been improving. but, it might be mainly because of economic, economic slow down. so the concern from the environmental sector is that, if there's a economic, economic recovery or -- or if is done, that structure might come back. we see improvement in renewable energies. our renewable energy grow fast, and the shares still low. but there's good development. recently we changed the scheme from -- to auctioning program. it has made major contribution to that development.
and the price has gone down again, dramatically. and there's new round of energy sector reforms. just like, was said, last week we had the new policy introducing higher involvement of market forces in to energy sector, oil, gas, it's a very major break through. and environmental tax was launched last year, but chinese government also announced next year, we will have a cap and trade scheme. a lot of market based instruments have been introduced recently. but just, still too slow to, yeah to my mind. but, the starting points are there. so, looking ing -- looking ahea i'm cautiously oft mystic.
>> what is the reaction to steeper environmental tax or the plan to have carbon trading? in general we distinguish from market based and what is the resistance to that? >> we have to do more imperica mr. analysis on that. the belief is that the environmental tax will provide the companies more incentive to do more environmental protection because the incentive will be more compatible with local government. yeah, incentive structure, and local government has, government has too many responsibilities, too little budget to give them incentive and for them to work
harder on environmental protection. i think generating revenue from the action, i think is a reasonable policy thinking. and i see probably carbon trade is not in that line. i think we need to make carbon trade scheme high incentive program for local governments so it will be more effective. so, for now, i personally prefer environmental tax and the carbon tax. so, it's a debate. >> can i ask who gets to keep the revenue from the environmental tax? >> local government, it's a local government tax. >> so, that should increase the incentive to take it seriously. >> yes. >> we have a good amount of time to open up to the audience, we will starts with our
distinguished friend fred burkston who has his hand up. we have microphones. we have microphones. uh had, yeah. >> david, thank you, and first of all, congratulations on -- all of you should be very proud of it and it's going to be extremely well received. and extremely important. i have a couple of questions on the convergence presentation. you mentioned that your projection was that china's growth in 2049 would be dropping to about 3%. >> yes. >> and david mention that you have different scenarios between now and then. i know how difficult these are, i would like to ask you for your best guess as to what the trajectory looks like between
now and 2049 over the next 30 years. will it be a gradual reduction from the 7% of 2015 to 3 or is it going to continue at the current 6 for a while? give us more flavor of the path that you see for the chinese economy over this period, and maybe what the key variables are in determining the difference between which scenario prevails? give us more flavor of both the quantity and the qualitative nature of the evolution over this period and a specific question. you mention that china's share of the world economy in 2049 is 24%. what is the u.s. share on your
projections? >> same. >> same? >> almost the same. >> so, rough equivalent. >> yes. >> that's my projection too. so that confirms it. tell us about the trajectory? >> can i amend it slightly? we have three decades. can we think of it as 2020s, 2030s. 2040s. how do you see the growth rate? >> in our up coming book of, especially in my chapter, actually, we date three scenarios. according to our projection framework, actually, the per capita gdp, it's a growth rate of per capita of china, actually, depends on three arguments. one is the growth rate of, it's a growth rate of per capita gdp
of the leading economy, actually the u.s. actually, for the leading economy, the leading economy actually is on the data. we have three scenarios for the leading economy for the united states, actually, one is 2%. the other one is 2.3%. and the third one is 2.6%. and the second argument actually, determining the process of convergence, actually, is the technically over. is the technology spill over and the third argument is relative to per capita of the, of the development. and to the, to the leading
economy. and so, according to our projection, in the decades, the growth rate of china per capita, will suffer from a sharp decline. it will decline gradually. if you look at the details in my chapt chapter, we have divided, you know, the three, it confirms the per capita gdp of china will decline gradual from, at maybe a 6.4% in the first year in to, i mean, between 19 -- 2016 to 2020 to gradually to maybe 3.5% in
the last 5 year intro. actually, as i said in the beginning, the projection results actually are based on the, a basic assumption of successful convergence. successful convergence, means there's two points about convergence. convergence means the growth rate of per capita gdp and that converts to the leading economy. and the relative of per capita gdp converts to, you know, one. per capita gdp of china converts to the per capita gdp of u.s. we have the best scenarios. for example, china just shut down the door to the outside world. we can't, you know, take the pre-reform period as a
reference. and rear finding that in the pre-reform period, the average growth rate -- i didn't remember exact figure -- maybe around 3.5 or so. in that case, in that case, the per capita gdp of china is relative to that of the united states, will, you know, grow gradually. actually from 24%, maybe to 33 -- let me see. less than 40% in that case. >> presume that convergence goes on between 2049. do you have projections for that? >> no. actually, no. you know that, our projection
actually we use a historical data of similar economies. and we want to use the data from world bank, but world bank has data of the data from the wdi, and goes back to 1960s. if we want to make a much longer projection, which we have a longer, a longer data set. so, we, you know, we are in 2000 and -- 9.1. 9.0. >> ken l had ieb-- >> again, congratulations on the study. i cannot wait to get book in hand and read it. it sounds like it will be tremendous. i have several questions for professor chu about your environmental considerations in the study. one, can you give us more detail
on the new environmental tax? how is that calculated? what is it actually taxing and what are the mandates on how it will be, how the revenues will be spent? and secondly, china is, argue ably the most vulnerable major country in the world to the impact of climate change and km china's own studies are showing that. are you figuring in sea level rise and the pro river delta region? and this is also a question for china's projections of economic growth. the implications of sea level rise for the most productive parts or productive economies are dramatic. same with the distribution of water availability in north and
south china. so, with your concern with the environment, are you also factoring in to your analysis the implications of what is going to happen to that environment over the coming 30 years for the, the array of issues that the book is considering? and finally, if i can abuse the privilege of asking more than two questions, with bri, belt and road initiative. one of the concerns that climate scientists have, is that a lot of the power generation facilities being built under bri, in fact are coal fired power plants that will have an effective life of 40 years or so and will therefore lock in, very likely, coal as a major source of co2 emissions in developing countries for decades to come.
and is that something that is being, is that somewhat concerned with climate change and the chinese environment? is that something you that see any way of reigning in or making the bri more of a clean power program? thank you. >> thank you for your questions. for the first one, yeah, basically we have some 40 years of experiences in pollution levy, we charge pollution emissions a fee, so, there had to be formulas the way of monitoring it. so, basically, so, the tax is legalization of that system. so, levies a sector, a fee, and the tax became fiscal revenue for the local governments so the
tax was calculated is based on what we call the pollution equivalent, they calculate pollution equivalent for your emissions by different pollutants. and calculate the, the tax and liability and then charge the highest one to you. and the revenue goes to local taxation brewe-- bureau. >> they like to see it as a ear mark tax revenue for protection. it makes better economic sense to make a general fiscal revenue for local government. so we want to keep local government incentives. the second that, our national need has strong support, climate action. recent, probably, if you pay
attention the recent five or six years the china government climate change has increased a lot because of the strong support from top leader of china. and a lot of considerations behind it, and i think that, probably the first one is, is co2 emission is highly correlated domestic pollutions. and the technology that is beneficial to reduce carbon emission is probably also beneficial to reduce criteria pollutants. basically it all came from the same energy structure. so, the need to improve the domestic environment probably has played an important role to china's improve the carbon climate position. and of course, there's a lot of sciences behind the change of
climate strategy, including sea level rise and from the world bank report in 2012, china, 2030, and -- so, it's a joint project between world bank and china's state council development and research council. it must have important impact on the decision makers. and sea level rise is -- so, china is also fide as the major country who -- china is also identified as the major country that suffers from sea level rise. and there's impact on sea level rise on agricultural, and our government stresses food security. damage to agricultural will be of major concern. there's a lot of sciences behind
china's climate strategy. the, in terms of the bri initiative. it's still in the early pilot stage. it seems to be, it's the major state company trying things in the belt road countries. and i think, and we did, we do see a lot of power plants built like in pakistan, a lot of countries and more, more thermal based power plants. but there's also renewable energies. look at pakistan's case. there's several renewable energy based power plants also built. and i think china has a comparative advantage on renewable energies. it can take an improved
integrateive approach from the decision making process to make sure that the belt and road initiative for the green growth, yeah. >> so, why don't we take the two questions together and then we will have to move on. can you introduce yourselves? >> thank you. i'm jeanie, voice of vietnamese americans. china and vietnam are close together as lips and tongue. all the difficulties you have in china have been transferred out to vietnam. the situation of the river and the sea level rise and the water flooding in to the rice patties of vietnam. i understand that the commission has asked china for long, long time for decades to stop the da --
dams and talk to the people that has not happened and for this year, there's significant drought affecting the lower river area. i would ask china to take action and to stop the dams and work with the world bank and the united nation, and the lower river commissions to mitigate your action and mitigate the very damaging affects. there's another concern in myanmar and the upper river. you diverted the water over to your own use. the water is unable to take the toxic waste now and out to the sea. so, high level of toxic waste is being kept in the upper level of the river, myanmar and the other
areas up there, including your area. and now, the toxic is getting in to food, in to rice and in many things that are dangerous to the people. we need to raise this, and i'm asking you all to take this in to account. there's a question regarding the carbon emissions mitigation. china has moved many many, many of its power plant run by coal to vietnam. and the, it has been clear that for the last few years vietnam suffer pollution higher than beiji beijing, because china is moving its old coal plants power to vietnam and so, the electricity to us is high, very high price. that is not acceptable and if china is thinking that you
helping us in climate change and other ways, we ask china to stop those coal plants in vietnam and other countries and at the most, spend some money and clean up what you have done. there are a lot of issues with toxic waste being pushed down to the south china sea through the vietnam coast and you heard that loud and clear, thousands and tons of fish were dying because of the steel industry from china being moved out and put on our seashores. cambodia refused to let it happen to them. but the vietnamese people have suffered. we ask you to change that and stop steel industry and now vietnam is suffering 450% on
steel because of your action. so, i'm know that you are scholars and economists. if you occasion about the world and china is stepping up as a leader in climate change and environmentals, please don't do that when you are talking a different way. you need to take actions and i'm suggesting that you bring this back to beijing. thank you. >> let's take one more, i will ask professor su to respond to that, we will take one more and then we have to wrap up. >> thanks very much, i'm tom from bloomburg, i have a question primarily on the convergence forecasts. so, before i ask the question, let me just briefly echo the remarks of the previous people who said this seems like a fascinating study and i really look forward to getting my hands on the book when it comes out in may. so, could i ask, what are the
assumptions on the supply side of the economy which are embedded in the forecasts for convergence? when i think of the supply side of china's economy, i think about some of the demographic challenges we heard about from the first speaker. a shrinking working age population, i think of productivity growth. where the big gains from the shift from the rural to the manufacturing workforce have already been used up and heightened trade tensions will make further productivity gains harder, harder to achieve. and i think about a capital, a capital stock, where there's always very, very significant over capacity in a large number of sectors and concerns that local governments and businesses have taken on too much debt. so, across demographics, productive it is and the capital stock, i see some reasons for
pessimism on china's capacity for convergence and i'm wondering how that thinking is factored in to your longer term forecasts? thank you. >> okay. so, we do need brief responses to she's, starting with professor su. >> in terms of the river issue. i'm not an expert or authority on that. but we had that same controversy inside china. because the dam building and the conservation issue had to be a major issue in china especially in the conservation world. i'm not directly involved but i'm very sympathetic to that fight basically. we have that similar issue in china too. we are trying to protect the water, waterway, trying to protect the bio diversity in the water environment. i'm sympathetic to that issue.
i th-- i think the china government is open to debate on collaboration and discussion. i'm not the authority to answer your question. but the second from the economic perspective, i think the shifting out of polluting industries seems to be pollution having an issue and 20 years ago, we had very similar cry for that, with the u.s., with the other developed countries. because seemingly you are cleaning up your environment, we are accepting all these polluting industries. and now, it's seems to be vietnam is having the same issue. and i do, have a clever idea about that, but i think eventually we all have to have much stronger environmental policy, both in china and in vietnam, and cambodia, in order to mitigate that issue.
and maybe a carbon, universal carbon tax will help to mitigate the pollution haven phenomenon. >> you have to be brief on the supply side assumptions. >> actually, i can divide this question in to two points. that is short-term and long-term. actually, for doing a long-term projection, actually, we do not take in to account, you know, short-term for occupations and other shocks. and actually, according to our projection, you know, the -- the most prominent risk in short-term actually is you know, the downside risk and also including other financial risks. we actually do not take this kind of factor in to our projection. and for me, our, the, the supply
side issues actually are institutional issues and i think they are at least three, one is that we should first opening of it. which was the domestic market as i said, especially you know, in the financial system. and so, number two, is is that we should eliminate, you know, the distorgzs in the economy. -- distortions in the economy, including the productive factor. the price of productive factors and third is that we should you know, enhance the transparency of the domestic economic policies and also you know, the policy of not just the intellectual property rights, but also the domestic --
>> yeah, professor lane wanted one last sentence. >> i want to add for the economic growth, i may just stress the shortage of the working population the labor shortage. i just forgot to mention the positive side, actually, in the other chapter of our book, we actually stress the technology change and a.i, that is part of the problem we face in the future about the labor shortage. and the other side is the consumption and the urbanization part. so, actually, looking only at the demographic change will be very pessimistic, if we look at the urbanization and the technology change, yeah, it looks more positive actually. >> so, we have had an interesting discussion of some of the important domestic chicago--
domestic challenges. we have discussed pension reform, huko reform and opening up the economy and environmental tax and pricing. let's give the group a big round of applause. don't move, you move -- audience don't move, we are going to go seamlessly in to the next panel. the colleagues please come forward.
name is -- i'm the director of the center of east asia studies at the brookings. and it's my pleasure to be look at the external environment a and -- we have a established group of speakers, we will discuss them briefly. one -- the professor, and picking university and who will discuss financial reform in china. then, with the nonresident senior fellow. and as for -- he is part of the
global development program here at brookings. we have a lot to cover and i will not engage in lengthy introduction. i want the speakers to have a chance to jump in. >> so, you just heard a relatively cautiously optimistic out look from my colleagues from the previous session. and one issue touched upon is how the finance works in supporting that kind of rise of the chinese economy. this is a particularly big issue for the moment, for whoever follows the development and policy in china. you would know, we have a bigger problem at the moment. two problems. number one, finance is not a support in the real economy, we having problems that smes are financing is not sufficiently provided and the households had difficulties in finding enough ways to investing their money.
so, this is a one big issue. how do we channel the money from the financial institutions to the real economy to support the growth? that's one issue we are facing. the other issue we are facing is it looks like financial risk is becoming more prominent. so, even the government officials and repeatedly say, we should try and control the financial risk and avert any potential final cries sis. a -- crisis, this is one assumption that we have to make and the challenge we have to look in to in order for somewhat more up beat scenarios, my colleague is painted for you. that really played out. for the financial sector itself, we have had 40 years of financial reform, but the starting point was just the one financial institution. the people's bank of china, which accounted for 93% of the
total financial assets in the country. in 1978. 40 years later. you look at the financial system, it's number one gigantic, and number two, very weak regulation and number three, the government still does a lot in intervening in the financial system. interest rate, exchange rate, the credit allocation, cross border capital flows and so on, these are the key features of the financial system we have today. as an economist when i look at it and my first reaction is well, this is not good. because, we are moving to a free market. there's still government interventions. the other thing had that you will immediately think of is about, well, this system might be a problem but it didn't start with the chinese economy from growing from more than 9% a year for four decades. we did not experience any major
financial crisis. so, let me ask you, if you do not like the financial system, what else do you like? or prefer better? so, that's one thing and we had an analysis in the book saying well, number one, some of the policy distortions are policy restrictions that remain for a while over time, and the gradually they have to be phased out. the second thing, actually, is because you, we have what we call market failure. the free market is the best only if the free market mechanism works best. and my colleague described about the environmental policy, climate change and so on. that's one particular area where free market itself will not be sufficient to solve all the problems. that's why you need the
government to take actions to over come the market failure. in the financial industry, it's the same. if you just liberalize and you think the market will work perfectly and normal, it doesn't. that's why many developing countries, liberalize the capital account and immediately suffer from financial crisis. in the case of china, my take was during the last 40 years it worked, mainly because well, yes, we had suffered some efficiency losses because of the government intervention. but it will work because if the market mechanism is not well developed, it's still was very effective and i can assure you, converting saving in to investment can be done overnight, with efficiency losses, it was very effective in supporting growth. that, i think was the key reason why we didn't really like it the way the financial system was operating. but it was a very effective.
however, we are having a bigger problem today. the main reason we are having a bigger problem today is because we are entering in to a new phase of development, the job for finance becomes different. in the past, what the data was, channelling saving in to investment and supporting extensive growth of low end manufacturing. the key driving force was low cost of the economy. now, the cost is rising and the world bank is saying, we need to innovate. that's why kwh the bank faces the small private enterprises. who are the driving force of innovation. the banks did not know what to do. in order to make a landing decision. the smes don't have any of these
and that's why, when the banks, the banks are finding it difficult to deal with them. so, this is why, we are having a lot of changes in the ch-- in t chinese economy. i will not get in to it. there's two things happening at the moment. one is market reform. we needed to treat the, the smes, the private enterprises as equal as the soes and many other companies. but we also needed to be innovative in terms of risk assessment. so, for instance, the new think tank economies in china. they are doing brilliant jobs. there's another xw bank that you can turn to. all three banks are extending more than 10 million sme or individual loans every year. that never happened. i could not even imagine.
like for any of the big banks that would be able to do this. and they do it based on big data analysis, based on machine learning approach. they don't even see the people. but they extend all these loans and control the risk well. the average npl ratio is around 1%. they found something that is unique and effective and now, what is happening now, as you can imagine, all the banks are trying to emulate what the think tank company is doing at the moment. so, that's one very important part of the story. the other part of the story is the push ahead with the further, further with market in to reform, interest rate liberalization, and there's one important part of the story, which i want to share with you. and then, that will conclude my opening remark. but that would also bridge what,
what peter and -- were discussing. financial opening. financial opening would be a very important step moving ahead, not just improving the, improving the investment efficiency. but improving the financial institutions. so we can do better jobs. importing capital is a secondary consideration and more or less, you look at the chinese investing more overseas than the money is coming. in terms of opening up, there's two areas that we are looking at. the last couple of years. this is actually accelerating. the first area is opening up of the financial services industry. and the policy makers take a relatively more aggressive approach. because that would have less implications of a financial stability. inviting foreign financial institutions to come to china and operate.
it's like direct investment in the chinese financial industry. you probably heard we have a lot of foreign banks in china. but recently, the nomura and the jpmorgan are getting the security licenses. paypal is getting in to china in the payment industry and american express is trying to get something in china. so, that is a juan area that the government is accelerating. opening up. there will be more foreign institutions in to china. i think that is very good. foreign institutions are coming in to china. number one increased competition. there for, it would add pressure on the domestic institution. the number one, they would bring more advance models and technology in terms of business. and that would also be beneficial for the domestic financial services. one thing, domestic people are often worrying, when foreign institutions are coming, would
that hurt our financial stability? my own is not. because, whether or not you are maintaining financial stability, it's up to the quality of financial, your financial regulation. it's a little bit like the story we heard about the vietnam pollution. i think that we should work together to improve the quality of the environment. but at the end of the day, whether or not you have allowed more coal burning power generators depending on what policies environmental standards you maintain. so, that's something we need to look at closely. the second thing is opening up the financial markets and we are seeing a lot of changes there. so, for instance, the chinese, that market is in the index of bloomburg, barkley, global index. jpmorgan index, standard & poors is doing the ratings also in china. so, i think this opening would
be useful and help improve quality of the chinese financial institution. but at the same time, obviously we need to be careful about potential implications for financial risks. i will stop here. here. >> thank you very much. next we're going to hear from professor petri who will discussion competition between the united states and china. >> yes, thank you. i want to make clear that our book really has two chapters on technology, one chapter which is looking at the domestic policy framework with which technology development can be stimulated and the other which is the one that i will talk about which is the international context. in this international context, obviously technology is a critical kind of core economic the issue. and it's not going away. in that sense, i think it's very good that we have a very long time horizon, this 2049 time
horizon because it allows us to look more carefully at the fundamental issues about the technology and the relationship between the two countries that present very challenging problems. it's not going away because the two countries are emerging as the dominant leaders of technology, at least for the foreseeable future. united states is ahead now. it probably will be generally ahead for much of this period. but china is developing its capacity very, very fast. and in some areas, it already has global leadership. so, this is obviously going to be an ever-tighter competition. and there are large consequences to it, large consequences obviously from the viewpoint of national security, also from the viewpoint of rents that you can learn in new large global industries, and finally from the viewpoint of growth itself because the other drivers of
growth are diminishing beside innovation. so, both countries emphasize innovation as critical drivers of growth. so, technological competition is inevitable, but so is at some level technological cooperation. it's fundamental to how industries develop and it's going to be part of the long picture if you look at how technology develops. so, i really find this decoupling story to be a very poor metaphor for thinking about what is going to have to happen in the next 30 years. it's not just competition or just cooperation. it's not just defensive or collaborative approaches to technology. it's the mix in almost all industries. it varies a lot by sec totor, a it varies a lot over time.
and i hope it will vary a lot over time because we are at kind of a low point in thinking about technology today. the second point that i want to make technological interdependence is very, very hard to manage and we're learning a lot about that just over the last couple of years, about efforts to try to separate some parts of the technology sector between the two countries. companies are very good at working around technologies that they are prohibited from getting or markets that they are proi object hads frprohibited fromm . in addition, the world say complicated, large place and they have technologies that can fill in for those denied to them. and they have ways of entering markets that might be under pressure to not be open to them. so, companies are very good at both getting the technology, signing the technology and getting access.
third, standards in a world which is very large and served by many different producers, standards in that kind of world are inevitably international. and chinese companies have been very good so far at making their impact on global standards. congress just passed actually requirements for the united states to become more active, in part to respond to china's work on global standards. controls are very hard to implement. we know u.s. standards are about a year late, and it looks like from the latest news they will be another year and a half before they are implemented. and in that process, they are narrowing back from the format of really kind of focusing on critical areas of technology that have to be defended.
the last point in this area is that decoupling is likely to be very, very expensive if taken to its extreme. i just read this in "the economist," i don't know how true it is, but they put a price tag of $2 trillion of trying to separate the hardware interdependence between the united states and china. so, the third point, my last point, is given the importance of the issue, given the difficulty of managing it, i see the key policy issue from the viewpoint of china as well as from the united states really over this next decade or two, managing this complicated mix of competition and cooperation in technology. what does that mean? well, part of it is building some of the frameworks that help management to work. what do i mean by that? first, it means having a risk
management mindset to dealing with technology issues. it means not having kind of absolutist viewpoints of what we can or cannot transfer but really trying to understand what it costs to put barriers in place and what are the most effective barriers that can be put in place. the second is to build a set of international guardrails that can be used, that are clear, that are understood, and that countries can enforce in implementing their technology policies. these might be rules about intellectual property, about cyber theft, about export and investment controls. the set of controls we now have but we have more or less abandoned in at least this kind of initial contentious space of the technology, discovery of technology competition. and we need to rebuild so that
they are clear and they are practically manageable by both governments. last point is -- and this is the hardest point -- is that we need to kind of go back to the fundamentals which make such a regime work well. that is, ultimately -- there's no other way to put it -- rebuilding trust. that means creating greater transparency about the policies that countries use to implement technology, developing new institutions, claollaborative checking of sensitive technologies and so on. maybe in china -- and this is kind of a big question. maybe in china drawing a kind of wider, clearer distinction between military and state technologies and private commercial technologies. that may make it easier for american and international partners to join them. so, i'll stop there. >> thank you very much.
we'll hear from eswar prasad who will discuss the international innovation. >> there are two aspects. one is what referred to, placed in global financial markets and the second is what china's capital, both the capital coming the in and coming out, will play in terms of what happens with china's role in international financial markets. let's start with the mmb. over the last ten years that mmb has followed an interesting arc, 2010 is where china seemed more committed to greater opening of the account and into the notion of creating a currency that would match china's stature on the international stage. for five years, the project worked remarkably well. it started gaining traction in international finance as a payments currency, even as a reserve currency. and then in 2015, things
changed. the mmb's progress as international currency stalled. the shine seems to have come off. so, what happens in the horizon we are looking at until 2049? as with most good questions with economics, the answer is it depends. it's going to depend to a large extent on what china does, starting with professor wang talked about, whether it gets finance right. if you think about what really makes a difference to a currency's prominence in international finance, it's the ability of financial markets to support the role. certainly china's sheer size, china's dom innoceninance in international training is going to mean that m&b could play a
greater role in international payments. and china's government does seem to be taking steps in that direction. you have an electronic payment system that is much more effective in terms of getting plugged into international payment systems, the china payment international system. you have other measures being taken within china itself to improve the stability of the payment system. china now has currency packed with many other countries that allow bilateral trading between the currencies. there are a host of countries which make it easier for trades between these two countries to be settled in their own currencies rather than going through currency such as the dollar. interestingly, china does not meet many of the prerequisites of the economy. china does not have a fully
market determined exchange rate. in fact it seems like the world wants china to have a market exchange rate every time the markets want to push the m&b up. so, every time the m&b starts depreciating, everybody says forget the whole thing. let's let china intervene and not let the m&b depreciate too much. you hear the same sentiments from washington and beijing seems more comfortable with managing the m&b on the way up rather than on the way down. to have a reserve currency that is a prominent one, you need a number of prerequisites in addition to the ones i mentioned. what is striking of course is that the m&b has become in defacto terms an important international reserved currency. right now according to the latest figures, the m&b amounts are 2% of global effects reserves. accounting for 2% of global
foreign exchange reserves right not seem like a great deal. but one must remember that china started from basically zero just a few years ago, and china still is a developing economy which is competing on a world stage against other major currencies. so, i think what is likely to happen if china plays its cards right in terms of improving its financial markets, in terms of opening up its capital account and creating a market determined exchange rate is that the chinese m&b will become a more important international payments currency. it is likely to become a somewhat more important reserve currency, although is it really going to challenge the dollar or the other dominant reserve currencies out there? there i have reservation. and in fact utsit's a reservati
where my colleagues and i have slight different points of view which makes things interesting. their view is an empirical one that's going to be tested by 2049 is that the rule of law is very important. but how you define the rule of law is where the difference comes. the chinese notion of the rule of law is that you have the rule of law such that market rights and contractural and property rights are dealt with very effectively. this is what is needed for the market economy to work well. this is what the chinese government recognizes and the legal reforms are working towards that. my view is different, subtly different but in an important way. i think what is necessary is for foreign masses to trust that the rule of law should be such that the rule of law is subservient to the point that the government
is subject to the rule of law. if you look at reserve currency economies around the world, not only do they have strong policies, open markets, flexible exchange rates, but in addition they have what i would consider the rule of law when even the governments are subject to the same set of rules that everybody else has to play by. certainly those rules can be changed by the government but not in an ad hoc manner. and this, i think, is really important in terms of maintaining the trust of international foreign investors. and i think this is what is going to prevent the mnb from becoming a safe haven currency. so, at some level what trajectory that mnb has for 2049 is going to dip into policies that are going to be very important for china itself. so, whether or not the mnb becomes a dominant currency, china needs to do the right thing. this is the very notion that i think pushed many reformers in the chinese government to take
the position that it might be good to think about the mnb playing a major role in international finance because in order to do that, you need to do a lot of things domestically which would be good for china irrespective of what happened to the mnb. this goes back to domestic financial reform but in addition institutional reform as well, including corporate government, circumscribed rule of law, and so on. so, i think the mnb is on its way to becoming an important currency, but on its present is highly unlikely to be a safe haven currency. what about broad financial markets? money can now go into china much more easily in equity markets and bond markets. so, china has impact in term of where money can go.
one thing that's far more important is the impact china can have through money going out of china. one very important change that we've already starting seeing is that the major source of capital outflow is no longer foreign exchange accumulation by the central bank which one can think about as official flows. over the last decade, what china's government has been trying to do is to take money out of china as well. you heard about the anticorruption drive, capital flight associated with fears that the mnb is on the way down. i think this all happened at the time when china was doing the right thing with the right intentions which is giving domestic investors the ability to invest abroad in order to get better returns, in order to get portfolio diversification, and to provide competition in order to get it to pick up its own
gear by a few notches. the amount of money locked into china, especially if you think about the banking system, is enormous. banking deposits in china account for about 165, 170% of gdp, so that adds up to about $10 trillion. if you think about 10% of that coming out for the right reasons, for diversification reasons, that's about a trillion or a trillion and a half dollars of money coming out. i think this is where china is going to have an important impact. it's not just debt assume la tif of the belt and road initiative, but i think the retail presence both house hold and corporate and what effect it has on global equity and fixed markets is important. and here again the way it plays out is going to a large extent
of how china itself plays its cards in terms of financial market development and what sort of channels it creates for money to flow in and out of china. so, the only thing i can say about what's going to happen through 2049 with any certainty is that it's going to be a heck of an interesting ride. thank you. >> thank you very much to all of you. really insightful presentations. and i would like to take the opportunity to ask each one of you a question. and i want to start with this notion as to whether china can get finance right or not. and i'm coming here from comparison that i'm making with japan, even though of course economic models between japan and china are very different. you could make the case that once upon a time, japan was a fast-growing economy that looked unstoppable. and after the bubble collapse, japan was saddled with a decade-long non-performing loan crisis in the banking sector. and that meant that japan
transitions to slow growth, deflation, and was largely eclipsed from its previous trajectory. is something like that in the cards for china from here to 2049? what are the chances of that? what can china do differently? >> my first observation is that i will feel very happy if we can reach japan's development level relying on our current system. i think it will be brilliant if we can be a very advanced z economy. japan might look like a bad story for you, but it's not so bad for us if we can rise in that way. but i do agree there are things that we should try to avoid. and one thing that is very similar, this is why i'll give you an example. we are talking about a very high leverage in china and the people are so worried that the high
leverage ratios in china could immediately lead to the so-called imminent minky moment. i look at it otherwise. you look at the high leverages. they actually concentrate into two areas, one is the soe and the other local government investment le investment vehicles. both are related to the central government fiscal budget which means imminent collapse is very unlikely. but the worst case scenario is like what happened in japan when the debt continued to accumulate, the efficiency declined. eventually we drive investment returns to zero which means at the end of the day we might see a period of stagnation. that's something we're trying to avoid. so, restructuring of the
financial sector, the government is talked about soe reform and so on. i think that is fundamental. the most important challenge facing us i think is the soe reform. so, for instance we all worry about the misallocation of credit in china and blame the bigger banks. they like the soes, don't like the private sector. but i've been focusing on researching this area. and after a while, i realize actually the bank manager's doing a good job managing their risk. if you're a bank manager, you're allocating credit, whom should you allocate most of your credit to? the soes. even as an economist, if i'm pointed to a job in a bank, i will do the same. the reason is not because i prefer soe over private sector but because the soe risks are just lower. if i extend money, if it fails, there are still ways to work out
and the money will still come back. if i extend money to the private sector, if it fails, the money disappear. so, another example as i just told you earlier, standard and poors is in china. i observed their ratings are in similar pattern. they favor soes. so, we thought we introduce foreign international standard agencies that help improve the quality of the debt market, but the rating patterns are almost the same as our bigger banks that credit allocation which really tells us the root problem is not in the financial industry but in we need to achieve so-called competitive neutrality, really treated the two kind of enterprises the same and we will see the deleveraging in the soes and the larger part
of the economy can be efficient. there must be things we need to do to avoid the japan scenario, but the most important challenge we're facing now is how to reform the soes. >> thank you very much. professor p professor pretric professor petri, i agree wholesale decoupling will be extremely expensive and i don't think there is a political appetite in this country to go forward with it. so, if it's going to be a more nuanced pattern of collaboration and competition in the technology sector, i wonder if you could give us some examples of where you think that the zero sum dynamics would dominate, where you think would be more positive sum. and you also alluded to international safeguards. but being a trade expert, i can only then think about the very worrisome condition of the world organization and the difficulty
generating such rules. and even though we have not yet seen the text of the phase one u.s.-china trade deal, it seems it will not deliver a lot on the structural issues and intellectual property. what is the hope we can get the international safeguards in place? >> well, first of all, between here and 2049 is a long time, and i think that's to some extent working in our advantage because we're caught up now in the middle of a period when we're discovering the problem but don't yet have solutions for it. in terms of, you know, first looking at the issue of where there is a possibility of kind of leaning more on the cooperation side rather than on the defensive protection of technology side, i sort of think of areas like biotechnology, of
environment-related engineering areas, and even of communications with appropriate safeguards for national security. so, all of those are areas where there isn't a kind of direct link to the very contentious national security issues there might be in some other areas. and i would think one can design a set of controls that make the guardrails, as i like to think of them, that sort of keep competition and cooperation within reasonable areas. now, the question of how you get there is troubling because many of these issues are of concerns not just to the united states or china but also obviously to europe and everybody who uses modern technology. and we don't have a mechanism for dealing with them. and the wto is struggling at a much lower level before getting to these hard levels of
technologies. i think the question is how do you get there. you know, here, given some time, i think the china-europe-united states triangle is, to me, a very promising avenue for moving. you know, how that happens, when it happens, i'm not sure. but i think we all have a large interest in making it happen. >> thank you very much. and my last question, you mentioned in passing the belt and road initiative. and i wonder if you could expand on it a little bit in the sense that one of the goals, i imagine, of this initiative is to increase the economic interconnection between china and older countries and therefore you think this could also be seen as a good strategy to encourage the use of the airbnb. what do you think this will add to? >> the belt and road initiative
is a complex matter. it's complex both economically and geopolitically, both from the perspective of china and the other countries involved. at some level, one might argue that the motives behind bri are very good ones that are creating better connections through infrastructure, through transfer of resources across countries. but it's not quite played out that way. first of all, the amount of resources that china has put behind the project. we saw large numbers to begin with but those got scaled back over time. the ambitions got scaled back somewhat. and i think there has been concern both among the countries involved and the countries who chose not to get involved, that this may be more about china's
geopolitical ambitions rather than creating economic connections. so, there's been some degree of reappraisal of the bri. to answer your specific question about whether the bri might have a role, was it seen as having a role in terms of promoting the r&b, there were discussions, but i think these two have proceeded on separate tracks. my sense is that china has not tried to act with a heavy hand in terms of trying to use money that is given to countries for bri projects to use the r&b. and there have been a couple of instances where the two are linked but i don't think there's any concerted effort to link the two. >> great. so, let's open it to the public. if you can please raise your hand, there will be a mic coming. please identify yourself and ask a concise question.
we'll start here. just wait, please, for the mic. >> fred burkeston. question for eswar, you advocated and it sounds like you expect over this period that china will substantially liberalize the controls on capital outflows. do you expect that to lead to a big depreciation of the exchange rate of the r&b? as you well know, that's what happened in 1980. at that time, it coexisted with reaganomics and u.s. fiscal monetary mix that pushed the dollar up also. but the result was a massive exchange rate disequilibrium between yen and dollar. could the same thing happen if china moves in that direction?
and parenthetically, going back to the first panel, what did you all assume about the exchange rate in 2049 when you were calculating your gdp numbers for china? >> so, fred, it depends. but actually before i start, i should say that fred was very generous. fred has an excellent book coming out on the china and u.s. relationship and how it will play out. when it comes out, i urge you to look at that. what we economists know about exchange rates is very limited. the one thing we can say with reasonable certainty as you well know, fred, is that over the long term by which i mean horizons of 20 years or longer is that ultimately the productive differentials that matter for real exchange rates, that is exchange rates adjusting for price differences across countries, china has remarkable
growth in the last two or three decades. that is slowing fast. a lot of what my colleagues and fellow authors spoke about is really going to be important for the answer to your question. if china gets finance right, if it gets demographic and other policies right and can generate good productivity growth, then over the long term, china's currency is going to appreciate relative to the u.s. registering low productivity growth. but for horizons that matter to us, to financial markets and so on, in the short term one could very welsey if china were to move forward with opening of the capital account without doing things on the domestic front you could see exchange rate depreciation. it's going to depend on how china opens up its capital account and whether china does the right things on the domestic front both on finance but also on the real side of the economy,
the supply side issues but also the soes in particular and the institution side. right now china's doors are open to foreign capital but you don't see money gushing in because there isn't the confidence that the institutional framework is in place. investing is still a bit of a wild gamble because the corporate governance, the auditing and accounting procedures are not in place. if china got all these things right in tandem, i don't think currency depletion yags, but just a notion that relatively closed capital account with inefficient financial system that generates no real terms, if you open it now, just diversification could give you outflows that would generate depreciation values in the short term. >> thank you. this gentleman here in the center. >> thank you very much.
very interesting discussion. my name is lawrence freeman. i work in economic policy for africa for the last 30 years. i just wanted to follow up on the moderator's question of the belt and road initiative. you answered the question in terms of the financial side. from my standpoint this is the best thing that's happened to africa in building energy and ports which the west has refused to do. i would say much of the push back that comes from washington has been somewhat disproven by a fellow agency down the road, john hopkins kerry institute puts out excellent figures on debt and trade. you answered one part, but isn't this going to -- if the belt and road continues to expand and 120 countries have contracts, $1 trillion, isn't this going to have major impact on its physical economy of china terms of export and trade? has this been worked into the
figures of this book of what you're expecting on convergence and other matters discussed in the morning? it would seem to me it's going to have a big effect and i don't see it, maybe a slow down, but i don't see it stopping by reading the speeches of xi jinping. this is his trademark from 2013 and his last book of speeches indicates this is the direction they're going. so, i see this as a big impact as we go into 2049. >> thank you. >> so, our esteems moderator has done a lot of work with belt and road initiatives, so maybe you should ask her. >> sure. i think first of all your first observation that china is doing what all the countries in the west are not doing, actually right now i'm writing a comparison of japan-china. because japan -- as much as i said japan did not get finance right and it costed dearly, they've been competitive on infrastructure finance. in southeast asia in particular.
i struggled with finding a really solid few years. but you can see japan is not a legacy power. it's not just riding on the past glory but putting investments as of today. you can describe this as more of competition. but a constructive competition in the sense that having china making these belt and road push, then compel japan to up its game and offer something called qualitati qualitative infrastructure with more resources, greater sol rans t tolerance to risk. so, i think it's very much at play and it's the kind of competition that we should be encouraging. as to how it will affect china's domestic economy, that i leave to the panelists here. >> i certainly think it's a very important part of the story going forward. i don't remember that we
expressly measure thermodyamd t from the belt and road initiative. but i think you look at this from two perspectives. number one, the reason china started this belt and road initiative apart from the international purpose of helping the africans and so on, there was also a big story about how it's going to -- how is china going to sustain growth going forward, especially external economic corporation. if you look at the last 40 years, you could say china was one of the main beneficiaries of globalization. trade and investment mainly with the developed world. we exported with the developed markets and developed countries invest a lot into the chinese economy. that was one big part of the globalization story. but we certainly do see some kind of change in the structure
of the global economy and the comparative advantage of the chinese economy opening and developing new areas of international corporation would also be important part of the chinese story. so, working with the middle east, africa, south asia, and so on. there are lots of new opportunities coming out. not just in trade corporation but also investment. i thought that was a very important part of the story. and in terms of the modeling work that was embedded in the assumption that continuous opening would be see and belt and road initiative would be one of the important factors. >> all right. other questions? let's go to the back. there's a lady in the back. >> i just wanted to ask you what you thought might be the structural challenges that
foreign investment funds might face as they enter china. >> what do you mean by structure? >> i think structural is just like a random adjective i chose but just in general the challenges that they might face. >> okay. well, certainly we -- i mean, as i said, fdi into china was one of the very important factors contributed to the chinese economic success during the past decade. you probably heard of some stories about the complaints by foreign companies at the moment in china. and i think that some of these issues we needed to look at very closely. protection of intellectual property rights and opening of the domestic market and so on, whether or not we can really provide national treatment. i think that's one big story. but i also want to alert you,
bring your attention to some of the changing environment in the domestic economy that might make the foreign companies feelings different. number one, for instance, the costs are really rising very quickly. so, some of the foreign companies in china did pretty well before and are now under pressure, competition pressure. and like the chinese companies, a lot of companies closing their shop and going somewhere. that's one thing i think foreign companies also fear. number two, at the beginning of the reform, the government provided lots of preferential policy treatment. that, i think, is gradually going away. because national treatment under the wto really means equal treatment, not means the preferential policies always for the foreign companies. in fact, we had so much
complaints from domestic companies, why the government are offering all these provincial policies and for foreign companies, not us. at the beginning it's understandable because we want to provide a confidence incentive for them to come. but after a while, that doesn't make sense. the further thing i think is related to intellectual property rise which is very important. wi we need to protect better. one of the reasons why this is becoming a bigger issue today, i would say protection of intellectual property rights 30 years ago is worse than it is today but why people didn't complain then and now people complaining. one of the key reasons is the technological gap between the domestic and foreign companies is narrowing. for instance, when they first moved to china to produce, they transferred technology to local partners that didn't have any concern at all. the reason was that the model
santana which used to be very popular and accounted for 80% of the chinese auto market because that model transported to china, they stopped producing anywhere in the world. so, that is already faced out model and took it to china and made a fortune. so, they didn't have any concern. but now the market is so upgraded and the local companies really very competitive. that becomes an issue. so, i do agree that we needed to protect the intellectual property rights better. but for foreign investors, you need to realize nowadays you get into china. it's not just like a country that it was 40 years ago. it's a high-middle income country. we have a lot of companies that could be at the cutting edge of the front of technology. so, there are lots of things you need to try to accommodate. the environment is a change. but i'm not going to get into
culture issue and the policy issue. these are the issues that you always have to pay attention to. >> good. i would like to go to the front of the room. this gentleman, please. >> nick peterson. i want to ask what are the constraints on the banks playing a greater role in the credit companies. you mentioned they're playing a big role, but there's a lot of problems with the private sector getting credit. >> specifically for these new online banks, they got the licenses. their main constraint at the moment is our regulators still do not allow remote opening of the bank account so which really means you can't take deposits. because all these online banks, they don't have branches around the country. they only have one office.
the maya bank is based in one place. they extend more than 10 million loans every year. that's a big job. they just don't have the facility to have a face to face signing of the signature and opening the bank account. this is why the funding cost for them is much higher than the other banks. i think the dream for this allowance of the opening of the bank accounts just online. but it looks like there are some security concerns. and i don't feel that the regulators is going to open up. so, that's one very big area of concern. for the tech as a whole, i think we're seeing significant progress. in many areas, they are leading the role. but the regulation is where you need to catch up. in some area -- we yuused to sa
one of the reasons the fin tech industry is doing so well in china is what we call tolerant regulatory attitude which is the regulators look around and see what you're doing and it looks interesting so they let you do it. on the positive side, it was good. alibaba could play around with the new financial products and we're all benefitting from it. the next side is sometimes you allow very weird things to come out and peer to peer lending is one interesting story. now it's collapsing. i think the regulators didn't really do a good job. if you already know these models would not work, you should go out early and stop some of the businesses. but that's not happening. so, i think innovation, spontaneous innovation, is happening and it's a very, very exciting area. actually i was talking to debbie. we hope the next project will be
the fin tech revolution in china. but the regulation needs to really needs to keep pace with the development. >> thank you. so, i would like to take two more questions. and after that -- together, and then i'll also leave minutes aside in case the panelists would like to make final comments before we wrap up. so, this gentleman and this lady, please. >> thanks very much. i'm still from bloomberg. question for professor wang and perhaps professor prasad will also have views on it. so, over the holidays, we had the peoples' bank of china making an announcement that they were transitioning from the benchmark loan rate to the loan prime rate as the kind of the anchor for monetary policy. so, i have two questions.
firstly, how should we interpret the significance of this? is this the completion of the long transition to market based interest rate system? does it give them significantly more control, more flexibility, or is there still a lot to do? and the second more immediate question is is this immediately going to trigger a drop in the cost of credit for chinese corporate sector, or do you expect loans to be repriced based on the prime rate but with an unchanged interest rate? thank you. >> so, let me take one more question before i ask the panelists to respond. >> thank you. >> reporter from "voice america." i know what you're talking about long-term trends here. but i have a question about what is happening now. so, china and u.s. is going to sign the phase one trade deal. so, my question is whether that will help end the trade war or
end what the coupling of the two economies? >> thank you very much. now let me go to the panelists who would like to answer those questions. >> let me say, it's wonderful to have a phase one trade agreement. it doesn't solve all the problems. i mean, it is a way of, i think, putting behind us what was very kind of frighteningly escalating relationship between the two countries. so, let's hope from here on, more cool relationships take hold. but many of the problems are pretty fundamental and they will not go away pretty quickly. i want to end, at the same time, on the note that we are beginning to realize the limits particularly to ideology but also to kind of quick impulsive reactions to problems that may
be very real. for example, i think there are real issues in technological competition. but the initial set of reactions has not been constructed. i just wanted to mention one which is i've sort of looked at how the company, huawei, has faired in 5g marketed around the world. and you can actually find something like 30 countries having had made their positions clear already in one way or another what they would do. of those 30, about 2/3 have basically said they will continue to work with huawei, in some cases a more limited wathan what they did before. at the same time, the united states has continued to build and that's the remaining 1/3 of countries that want to exclude huawei. but it gives you a sense of how complicated this world is. and my guess is that the initial policy makers as they entered into this policy didn't
anticipate that. so, i think we're kind of maturing into this second more complicated phase of the relationship where we have to take into account how markets react and what is ultimately in the long run to the advantage of both countries. >> well, i very much agree to what peter just said. i would regard it as signing of the phase one agreement as the end of the beginning. i think we are in for a very long ride about the disagreement. so, that's why i think it's way, way too early to make a concluding assessment on the decoupling phases. i think this will go on for a very long time. but i am very happy about signing of the phase one agreement. i think the great contribution this agreement might make is to cap the rising policy
uncertainty between the two countries. there will still be more discussions, but my own assessment is the policy uncertainties are much, much more damaging than tariffs on economic activities. this talk and agreement would certainly be reassuring to the market and investors, i hope, in the short term. on the interest rate, i feel that liberalization of the interest rate, we are probably still quite a way from the end of this process. certainly pushing quite heavily on liberalization of the interest rate. one of the critical issues we are still facing at the moment in addition to the lpis, primer rate, and so on and how or whether or not the banks could actually price the credit and
the money according to the market risks. that's something we still have some gaps in and that's something we call the transmission mechanism. so, i think it will take a bit longer before we sioee the end this process. in the near term, probably what will lead to downward moment of the capital. that's been one of the policy goals promoted by the state council, and so on particularly because the economy is facing downward pressure. so, i think the legal adjustment is understandable and expected. i just don't expect pboc to very aggressively ease the monetary policy in the coming year. >> thank you. and i would like to ask the panelists going in the opposite direction from where we started if you would have anything you
would like to add before we close? >> so, tying into mr. oligo's slightly wonky question, i think the important thing is to realize that china is stumbling its way towards get finance right. the difficulty in china is even if the financial regulators know what needs to be done and want to improve the system, the fact you don't have reforms in the real side of the economy and the institutional aspects creates enormous risks in the default process itself. so, i think over the next two or three decades we're going to see this very herky jerky sort of approach where there is reform. and there has been very modest but at least some reform on the financial sector, on the capital account, capital market issues more broadly. but many of these have created negative repercussions. the august 11, 2015 move towards
a regime was done without the right institutional context so it blew up in the pboc's face. so, i think we will continue to see the accidents but the intentions are what are interesting to observe. whether they will balance this out with reforms on the other side is the real issue. if that happens, i think china can look to a more prosperous future. if not, china might still have a prosperous future, but it's going to involve a lot more accidents along the way and could make the parts to 2049 a lot more interesting. on the minor point of the phase one deal, there are still five days left, that's about 120 hours worth of tweets that could still change things. but important thing to realize is what professor wang suggested is that even if we do get escalation, the fundamental
trade differences between the two countries have a thick cross threshold where it's going to be difficult to pull them back. if you think about the negative effects on the two countries especially in terms of investment and private investment in china, it's shown as not doing very well. in the u.s., investment is contracting. and that uncertainty is here with us to stay for a while. >> i have little to add. i thought the words that i'm thinking about is misunderstanding and transparency. i think there is -- we have a chance, now, i think for a period in which some of these fundamental misunderstandings can be eased. >> i will say a few words about the report as a whole. the report itself looks at the next three decades. and one key take away, if you like, is that it'll be different from the last four decades.
so, there will be a lot of new challenges, higher income which means higher costs, need for innovation, demographic clahang and also very different external environment. our forecast, however, as you can see, shows that gdp growth rate probably would moderate to between 2.7% to 4.4% by 2049. some people feel that that's very pessimistic because we are talking about this year whether or not we can maintain 6%. but i can tell you by 2049, these numbers are actually results of more optimistic forecasts because by then we will be relatively advanced economy. the gdp will be much higher than it is today but there are a lot of challenges we need to overcome. i'm not going to get into the
detail. just to summarize one message, i think china was successful during the last 14 years. there are many contributors to it. the most important, number one, reform domestically, number two, opening externally. i think if we continue to do these two, we will be there by 2049 to the numbers we predicted in the book. thank you. >> thank you very much. please join me in thanking the panelists. [ applause ] and an update on the impeachment of president trump. today house speaker nancy pelosi announced the house would appoint and vote on impeachment
managers during wednesday's house session. the approval of the managers will also automatically send the two articles of impeachment against president trump to the senate. the senate will then sit as a jury to adjudicate the two charges: abuse of power and obstruction of congress. a 2/3 majority of senators will be required to convict president trump and remove him from office. you can watch the house live on c-span and the senate live on c-span 2 and follow all of our impeachment coverage at c-span.org/impeachment. president trump holds a campaign rally in milwaukee, wisconsin live evening at 8:00 eastern on c-span, online on c-span.org, or listen live on the free c-span radio app. over the weekend, taiwan's president won a second term and the democratic progressive party kept its majority in the legislature. next, taiwan's representative to the u.s. and house foreign