Ambassador FU Ying & the Economist

A for the Ambassador

E for the Economist

E: Ambassador thank you very much for joining us for Tea with the Economist. We are here to talk about the Chinese economy. Well it’s the largest emerging market, it’s fastest growing. I guess if we met a year ago, it would have been full of doom and gloom, but how is the economy doing now, what projections you have for this year?

A: The economy is showing some signs of stabilising and growing again; in the first six months, the growth is 7.1%, creating about over 6 million jobs. And the fiscal deficit is kept at about 3% of the GDP, and national debt about 20%. So generally speaking it’s okay. The banks are quite healthy; the non-performing loan rate is about 1.8%. But it hasn’t been easy, like the Premier said in Dalian, the achievement did not come from the sky.

E. Why is it so important that growth remain so high in China? I know this is idea that it has to be 8% or more each year. Why is it so important it keeps up that really very rapid rate?

A: Not necessarily 8% every year, but 8% is the healthy trend. Because we have a big population, and our economy is at the very early stage of industrialization, and to keep the country growing, and to keep the majority of the people living standards coming up, I think we need certain level of growth. And last year when the financial crisis hit China, it hit hard. It’s probably the first time now in China’s experience that China has been so directly affected by external reasons.

E: Indeed, I think in the outside world China, of course, is known as the place in which makes almost everything we buy. So of course we would expect China to ought to be very seriously affected by the crisis. In a way, it is astonishing that it’s growing so fast, despite this must have been quite a big drop in exports. What explains that?

A: The export that was very much affected last year. I remember hearing our finance minister, who was here, Xie Xuren, he came here for the G-20 Financial Ministers’ Conference. And he briefed us about what’s going on in China, and he said last year he went to visit one of the, I think, the biggest container manufacturer in China. He went to see the factory, and all the orders were just cancelled, there was no order at all. So lots of factories were on verge of bankruptcy, lots of workers went home. So what happened was, I think the government was quite quick in responding to the crisis, it put together a package of four trillion Chinese Yuan, that is about 600 billion US Dollars, of a package stimulus, measures about over a quarter comes from the central government, rest will be matched by the local government.

E: In what sort of areas was that spent, that huge amount of money?

A: The focus is to stimulate domestic demand and consumption, and to help rural development. For example, there is considerable raise of the school teachers’ salaries, especially in the countryside; the minimum price for the grain purchase is increased to give the farmers more incentives; there is housing scheme for the low income people. In China, there is no slum, but there are areas where people living in very difficult conditions, family in one room, for example, so lots of living quarters will be developed for these kinds of people.

We also use this opportunity to readjust the industries. We’ve identified ten sectors, including the steel, including the main industrial sectors, to encourage them to renovate themselves through technological development, to upgrade themselves, to make themselves more competitive. Of the total package, over 52% has gone into the area for rural development, for improving people’s livelihood, about over 24% has gone into environmentally-related, technologically-related area, and the rest is for infrastructure development, like roads, airports.

E: You were mentioning earlier that a lot of jobs have been created, 6 million, I think you said.

A: This 6 months.

E: In just 6 months. We also read, I think, that as export got hit last winter, an enormous number of jobs, some 20 million, was the figure widely quoted, were lost. Has it been possible for most of those people to be reemployed? What has happened to them?

A: I think half of them came back after the New Year, most of them, by now, have found jobs, either where they’d worked, or new jobs, new areas. I think in China, when the migrant workers went back to China (home?), there was fear that there will be social problems, but people may not know that in China, when we had this property law, private property, the law on private properties adopted, passed, it took about seven years of debating, and one of the key issue that was debated that whether the farmers could sell their land. Now that the state owns the land, farmers have the right to use the land, and maybe forever, but they cannot sell the land. Lots of people opposed to allowing the farmers to sell their land, now during a crisis, the wisdom is evident. Because when the farmers went back home, they have the form back, they have the land, that’s why you don’t see such a major social problems when we have a lot more than 20 million farmers went back home.

E: So the implication is that the crisis to make the land reform less likely?

A: Land reform, I think land reform has been going on and it will not be stopped, the whole reform scheme will carry on. But I think it is wise for us to make the farmers keeping their land, although many of the young farmers are moving into the cities, finding jobs, still having land at home is kind of a safety net, in a way. But the package, a big part of the package is also going into the rural development, like providing medical care, improving medical care, providing old-aged care in the countryside.

E: Indeed, because I think many foreign economists look at China and identify as one of the problems, that people save too much, rather than consume. One of the reasons they save too much is because they worried about healthcare, they worried about educating their children. I mean, is that an analysis shared in China? Is it been tackled? Is the economy being re-balanced towards consumption?

A: There is certainly an agreement in China , understanding in China, that we should encourage more domestic consumption, and domestic demand should gradually, not completely, I think, replace export, but definitely domestic demand should come into play a greater role in the economic growth. But it will take time, it will take time. And I think saving is in the culture, in the oriental culture. And that’s why I can’t resist the temptation of showing one of the reasons, I think China has been out of this poverty just in the past decade, this year marks the sixtieth anniversary, we are celebrating this important moment. Sixty years is very important in Chinese Lunar Calendar, it is one full cycle. And I’ve been reading on the web a lot, and I found the whole country is in the mood of nostalgia, looking back about what happened in China. China has changed so much in one life span. And I, too, found myself joining the nostalgia, and I want to show you I brought you something my mother left me. From all the things she left me, there is a package of…you could see she packed them carefully, she left them for me, and she thinks maybe one day, I would need them again. These are the coupons.

E: Ration coupons?

A: These are coupons for Huhhot, coupons for Inner Mongolia:

E: Where you were brought up.

A: And coupons we call universal coupon. You can use it in the whole country. And the last coupons I want to show you, that was printed 1990. So until 1990, food was rationed. The country was still not being able to fully provide the need for food. So for a country of this kind of development, we are at different stage of development, compared with UK, for example. So the sense of being prepared for the rainy days, and the sense of saving, is very strong, because we just came out of this kind of poverty, we are just starting to feel that we not only can meet what we need, for food and clothing, we can think a bit about more consumption.

E: I supposed one of the other things that’s changed, isn’t it, is when you grew up, presumably, healthcare, education, was all free, whereas now people do have to pay for it, which is another reason why they would have to save?

A: This is Yes and No. When you said that healthcare is free, but it’s not available to everybody. About 600 million Chinese in the rural areas have never been into the hospital. And the healthcare reform now is aimed at making it reach greater number of people. So in the countryside, for example, there are some pilot projects of healthcare. And farmers, maybe the subsidy is very low, about maybe, I think three pounds or seven pounds, but it’s enough for the farmers to have a basic safety, basic assurance of going to see doctors when they are ill. The slogan of the party is,’ for everybody to have a house, every children going to school, everybody who is sick can go to the hospital’. But it’s gonna take a long time. Of the package scheme, I think, many of the measures are aimed at long term objectives, aimed at the basic need of the people, so when we talk about exit, I think a lot of, a big part of it will be carried on. And at this moment, we don’t think it’s time to exit. We think we’ll carry on, we’ll persist in what we have, the policy we set will carry on with the current stimulus efforts.

E: Is it concerned that economy might become too dependent on the stimulus, and that when one day it has to stop presumably, the economy will not be on a sustainable footing. You might be risk building up bubbles in the property market and elsewhere, that will unwind as have in the west in recent years.

A: There is definitely concern of a bubble about inflation down the road. But we don’t see it now, we don’t see it happening now, and at this stage, the economy is coming back, but mostly dependent on the governmental efforts. We are not seeing strong enough private investment, for example, that’s why we think the government should keep on putting efforts, investing into stimulating the economy, and trying to pull around the private sectors. And also, at this stage, some of the sectors are still very weak, and as I said, the domestic demand is not strong enough. So I think is important that we keep on making the effort in this direction, and to make sure that the economy should not dependent totally on the government. It’s only when the private sector, when the domestic consumption comes up. But these measures which are aimed at stimulating domestic consumption will see greater results down the road, I think.

E: What do you see as the main dangers to China’s continuous rapid gowth? Are they internal problem, as sort of things you have just been talking about, or is it external threat, the protectionism as the world economy continuing to grow sluggish as a whole, or, to shrink?

A: Protectionism is a certainly a concern, we don’t want to see countries starting blocking each other, and we’ve seen the lessons in the past. And there was very strong commitment by the G20 countries in London during the London summit; we hope countries will stay according to what they are committed to. And the recent dispute on the tyre, the special safeguard measures by the US against Chinese tyres, is seen from our side, it’s a move in the direction of protectionism, and we don’t think it is in the interest of the common, the concerted effort to bring about economic recovery in the world. So we would like to talk with the Americans, talk with other countries to find a good solution. Because this will affect about 100 thousand jobs in China, it’s 39% of the total tyre export of this variety to the world, so we hope we’ll find a good solution. But on the whole in the long run, you talked about what the main concern is, I think there are lots of challenges in China, lots of lots of, on the environmental side, as the premier said, at this stage of economy, economic recovery is not stable, is not balanced. And in the long run, the economic growth is not balanced in the whole country, so I think it’s important China being aware of the challenges, and always try to tackle the challenges, not to brush them aside, not to ignore them. And as long as, I think, the success of the reform is that we’ve been incremental, we’ve been listening to opinions from all sectors, we’ve been making the right decisions, we haven’t made lots of mistakes over the past three decades, so I think we should always be on our toes, and always be sensitive to the challenges.

E: Do you think that China has a big enough voice in the international economic management? You’ve mentioned the G-20 which has become a very important forum in this crisis. But should China have a bigger say in the IMF, in all sorts of global forums, ’cause the Chinese economy is both so big now, and so fast growing, so much of world growth.

A: I think at the 60 year anniversary, one of the things we celebrate is being part of the world, being a constructive part of the world all. But for China’s it’s a gradual realisation, I think we are building of the confidence of playing a role in the world. But Chinese are modest people, and we don’t want to play a role bigger than we can, we don’t want to strive for things that we cannot achieve. So I think it will also be an incremental process for China to play a role in the world. As for the voice of China in the world, it is a learning process, of course if IMF wants more contribution from China, they should give China more share. Now our voting power is under 4%, but they want us to provide more funding to IMF, we think it’s not fair. Of course we found our way out, we are buying bonds, but in the long run, if they want us to play a greater role, and then there should be greater say. But we understand that the international financial system to reform will take time, and we are patient. But on the whole, I think the developing countries, including the emerging market are not given enough voice. At this financial ministers’ conference, there was discussion of transferring 5% of the voting power of IMF to the developing countries from the developed countries. Of course if it can be done it’s good, but maybe those who would be losing power, losing shares, would find it difficult. It will take time.

E: Thank you very much ambassador!

A: Thank you!