 Hello everybody. Okay. Thank you all very much for coming. We want to get started. When people come on time, you want to reward them for doing that and there are others that will come a little later and we'll welcome them when they get here but we're not going to punish ourselves because they're not here. Thank you all for coming. My name is John Hamry. I'm the president here at CSS and I'm delighted to have you here this afternoon. Very important, very very important subject. We'll explain in a minute. First I'd like to say thanks to our friends from Alcoa who have decided to make this as a series possible for us to present it to the policy community in Washington and I'm very very grateful for that. It's, everyone knows what a absolutely remarkable transition has occurred over the last 30 years in China and it's it's been a spectacular rise and it's been good for us. It's a very good thing for the world and it's good for the United States. We want China to succeed and I must say personally I'm impressed at the enormous pragmatism you know of the Chinese people and the Chinese government to manage through really complicated problems for being in a town right now that can't get anything done you know it's and you see what China's doing and we ought to be pretty humble about it. So holding a conference on Chinese financial reform is not a criticism. It is an expectation and a hope that we can help with a very important thing. It's like I say it's important for us. It's important for the West. It's important for China. China is facing some enormous challenges of course. This recession has not exempted them. It's shown up in different ways and there are other enormous challenges. A demographic challenge. A you know the migration challenge which is enormous. Environmental issues which are huge and needing to retool the entire approach to an economy away from an export-based economy to a consumption-based economy. These are big big things and of course for that to happen it needs to have a very very solid foundation in the finance industry and there are some issues here and there are some challenges here. We're going to explore that this afternoon and I'm grateful all of you can come. I'm especially grateful that my very good friend and colleague Tim Adams is going to lead this off with a keynote speech for it. I've known Tim for five, six years. He of course was Undersecretary for International Affairs in the Treasury Department in the Bush administration and then was out for a time and has now taken over as a CEO for the Institute for International Finance and I'm glad I don't have his job. First of all I wouldn't be competent to handle it but he's also meant to be a leader for all of the most sophisticated finance houses in the world and I surely would fail in that job but he will not. He will succeed and he's an enormous talent. We're delighted to have him here and I'm delighted to say he's also decided he could still stay on as a senior advisor to us here at CSIS. So Tim thank you and we welcome and why don't you get this off for real. Thank you. Please welcome Tim Adams. Thank you John. If I could do as good a job at IAF as you have done with CSIS I would consider myself very fortunate, very lucky and I also want to thank Alcoa. I worked for Paul O'Neill for a couple years, former chairman CEO of Alcoa. I learned a lot about molten metal from John, from Paul and we spent a lot of time touring factories around the world in which he would always give it a judgment, a numerical ranking on its cleanliness and safety. I learned a lot from Paul O'Neill as we all did beyond just safety and metal. He was a good guy. In fact I saw him on CNBC yesterday and he hasn't changed a bit. Also I want to acknowledge our great panelists today, Marcus Reiler from IMF. It's always good to have our friends from down the street here. Bob Donner my former colleague from Treasury who kept me out of trouble as much as he could. John Deerey from the Financial Service Forum which is one of the premier financial trade associations in town and CSIS' own Matt Goodman who has the great combination of charm and intelligence and that's hard to find sometimes in Washington. So I'm sure whatever deficiencies that I exhibit today or things that I leave out these four gentlemen will do a magnificent job filling in the holes and taking my comments and actually giving them some life. It's timely to be here and talk about this issue. I was in Beijing about six or seven days ago. I was invited to speak at the China Development Forum and it was my first visit there and for those of you who don't know Chinese officials bring in the 60 or 70 largest multinational corporation CEOs and there's a discussion about the common challenges that they face but also about begin to think about what China's development strategy looks like and of course this is an interesting time because it's just at the beginning of the start of a new leadership. In fact we saw the premier who came and spent some time with us and laid out in kind of rough order his vision for the assembled crowd and then the CEOs had divided themselves in four or five different working groups and offered some suggestions for Chinese officials and what they might and it was all standard fare intellectual property right protection some of the things we've all been working on for some time but there's also this this idea that you know transitioning China from big growth fast growth to smarter more intelligent growth and I think that's probably right. I don't want to short change big growth it's been incredibly beneficial John if you think about the statistics that they've racked up over 30 years John alluded to and not only just the track record but the macro management that they put in place I was actually in Beijing the day when the former administration and former officials announced the four trillion Yuan response to the financial crisis I don't know how much it actually really was but there was a headline effect that was pretty impressive and helped I think begin to insulate China a little bit from the crises that gripped the U.S. and really instill grip our friends on the continent of Europe but you know it it's not without some challenges the economy has slowed over the past year more sharply and and longer lasting than many expected certainly longer than I had expected nominal GDP the key determinant of corporate and government revenues in the banks ability to grow out of their large mostly invisible NPL problem has plummeted from 17 percent average in the 04 to 2011 period to something close to nine or 10 percent but I think for those who have been predicting the the big crash of China and they're numerous we see them all the time turn on CNBC once a week and there's someone who's uh uh prognosticating about the coming doom and gloom of China I think uh I think they're proven wrong and even going back and look at some of my treasury memos from 2004-2005 you know even we were at the time probably exaggerating the near term challenges or likely changes in the trajectory of the economy but 2013 will continue to remain difficult there is some pickup and investment property prices have certainly heard a lot about property when I was there transactions have picked up a little bit but the labor market remains soft in external demand faces extraordinary headwinds especially from Europe which remains China's number one export market and there are there are a lot of inventories that need to be worked off and obviously there is excess capacity which continues to be put in place I don't know what the latest capacity utilization rate is but I'm I'm sure Bob's got that statistic at hand but it's large and it continues to grow especially in some key sectors but beyond the cyclical factors there are structural shifts wages and capital costs are rising and the economy is shifting to a new and lower probably more sustainable growth pattern the challenges are large namely the threat of the middle income trap of growing old before growing rich and the numerous imbalances that I and some of my colleagues have been talking about for many of these years to address these challenges China must shift away from a strategy of artificially low interest rates artificially low exchange rates although the exchange rate has certainly become less misaligned than it was back when I was at treasury and there has been progress and we should note that progress and I want to applaud the progress the over investment especially in state owned enterprises questionable infrastructure spending and still a reliance on that export led growth and shift away from this to something much more consumption driven but more higher quality of investment this is all the more urgent because investments ability to drive growth is diminishing the so-called marginal efficiency of capital is falling what we're seeing is investments contribution to growth is declining despite the fact that China still invests increasing amounts and so it just tells you that the quality of that investment is declining and then as I mentioned the top export markets remained in questionable condition as Jumen the IMF deputy managing director and a good friend said recently the key for China is not just growth it's quality of growth and its reform and I'm going to talk about four five reforms and none of these are are unique or controversial in fact I think if you were looking to the various five year plans or white papers that have been put out or the kinds of documents that are negotiated as part of the S&ED it's all fairly standard fare and what I the point I want to make the macro point is that these are the these are the elements for reform they're doing some of these things but they need to be accelerated the first one is interest rate liberalization deposit rates are negative which is drive helping drive savers to the shadow banking sector in search for yield that's not an unusual phenomenon it's happening all over the world shadow banking credit expense expansion is surging trust products alone jump by seven fold in January seven fold in January and the shadow credit expansion grew by 40 percent in January year-over-year there's a massive explosion in non-bank credit and that encompasses a whole host of different kinds of products but what worries me most is some of these trust elements these trust products that are being sold at the retail level with not a lot of transparency liberalizing interest rates will help attract back some of these flows into deposit accounts and help raise household income in a more broad based more manner which in turn can help support consumption again shifting from investment to more consumption led growth higher lending rates can help better allocate capital those investments with higher returns and again that's important because of growing excess capacity at one of the sessions I attended at the china development forum the person sitting next to me was the is the ceo of mitchell and tire and we I was asking about the the tire industry in china he said it's it's very crowded there's lots of producers a lot of low-cost low-quality producers here the problem is is that there's massive additional expansion every single day every major chinese tire producer is adding expansion even though there's questionable demand and the fact is there's just not the market signals there's not the sense and the and the the capital cost threshold that has to be overcome that would regulate or modulate that kind of expansion and so what we'll see not only tires but a whole host of products too much capacity and when that happens usually countries like to export their excess capacity so higher lending rates will help better allocate capital those investments with higher returns will help shift capital from state to private companies and potentially ideally to small and medium-sized enterprises it will also move national income from the corporate sector to the household sector without it without the income shift the household sector can't consume now squeezing interest rate margins will impact bank earnings i have 23 of the largest chinese financial institutions as clients so i'm gonna be a little careful about uh not being too critical but it will certainly squeeze bank earnings and some of them have had tremendous quarterly returns i was at the agriculture bank of china last week and they're reporting all the returns late last week so many of them were in hong kong uh and i think uh we the numbers are around 1920 for abc and some of the other firms i i cbc and others had even more spectacular returns so these banks are generating a tremendous amount of cash and returns a lot of this is just off interest rate margins changing that changes the the business model for many of these banks but in many ways it forces efficiency and forces them into other revenue sources fee based income which is more reflective of us or western-based institutions the second issue for reform and i would be remiss if i didn't offer my thoughts on it is exchange rate liberalization so bob it's probably 10 years now i've been talking about this uh i'll be the as i said earlier i'm the first admit that there is progress and um and the currency testing new highs i didn't see what today's rate was but uh looking earlier in the week we continue to to test new highs continued liberalization will reduce the subsidy for exporters push investment from the tradable to the non-tradable sector and services which would be tough there's enormous vested interest in the export sector but what i did hear from the premier when i saw him uh a week or so ago is a lot of focus on service sector reform broadly speaking but also with respect to financial services you know i think that's quite positive the employment growth opportunities in the service sector are enormous and it's better jobs more interesting jobs and a higher value added the third area is capital account liberalization and the internet internationalization of the r&b we certainly see that and we're going to see this even more so no matter where i travel around the world my clients and officials continue to ask me how quickly will the r&b internationalize what's occurring what infrastructure changes are occurring it is uh it is an object of interest from uh from brussels to to brazilia uh capital controls are becoming less necessary as interest rate exchange rates liberalize and officials seek to make the r&b more actively used for international trade investment the quick and robust market response this effort certainly validates the initiative advancing reform in this area includes enlarging the quota and broadening the scope of the qualified foreign institutional investor the qfe uh program which provides a window for foreign uh public portfolio investment in china into china and the qualified domestic institutional investor program which allows residents investment abroad i think this is an incredibly important phenomenon because it allows domestic savers the capacity to diversify their risk and look for greater returns and if i were a chinese citizen i would want to diversify away from uh concrete savings which is real estate and in a stock market which gyrates with questionable dynamics and again a savings uh passbook savings at a positive accounts with negative real interest rates but to do that they're going to have to open the capital account more they're going to have to strengthen the banking sector to be able to withstand the capital sloshing in and out as they open up so it means we need a more durable banking system and that's in all of our interest the fourth is competition from and opening up to foreign institutions foreign financial institutions uh can help bring in new technology systems human capital business models they're all less reliant on spreads and better risk management we're actually the ifs doing some training in china with chinese institutions and private wealth management and those practices and those uh protocols that we're using are imported from a variety of different places including a number of asset management firms in switzerland so there is the capacity for human uh capital development but also institutional infrastructure development where that foreign institutions can bring and lastly just the one i want to focus on a little bit is uh capital market development and certainly heard this repeatedly when i was in beijing uh bond and stock markets will allow improving capital pricing put competitive pressures on banks and create alternative sources of capital funding which improve and valuables given uh funding sources if the banking sector becomes impaired and that's what we're learning from europe because europe is incredibly banked economy and when the banking system is impaired for a variety of reasons european banks are uh deleveraging they've got regulatory regimes that are requiring greater liquidity greater greater capital that because of that there are no mechanisms for credit extension in europe uh and capital market development allows an alternative to that it u.s capital markets have been an important alternative whenever we've had banking crises in the u.s not only the current one but also the s and l crisis in the late eighties early nineties capital market development will create new financial and savings instruments that allows for maturity transfer making savings more stable more durable as well as more diversified thus households can reduce their precautionary savings and experience greater protection from downside risks from accidents and illness a developed capital market is necessary for a social safety net for example life insurance penetration is only 1.8 percent of gdp in china compared with seven percent in south korea and the chinese people have two-thirds of their assets and bank deposits versus 23 in hong kong and six percent in the u.s a more fully developed capital market allows for risk mitigation instruments and strategies to help firms hedge risks and a more fully developed capital market can also provide long-term financing for capital projects and infrastructure certainly using capital market instruments to fund infrastructure makes more sense than using short-term bank lending or short-term inflows from abroad let me just take this one step deeper and i want to focus just on the bond market because here i think that what i certainly heard in my message for for bob and others at treasuries i think there's i think the door is open for further bond market development in fact i've heard that throughout asia and bob and i used to work on local bond market development in southeast asia and i think there's enormous opportunity as many countries are looking to develop capital markets but specifically bond markets the bond market is playing an increasingly important role in in the financial system in china from about 825 billion in 2004 to four trillion dollars four trillions of dollars at the end of 2012 but still small relative to gdp and 70 of outstanding bonds were issued in the government sector with the corporate sector comparatively small the ministry of finance the moff accounted for about half of the government sector 32 percent of total and the policy banks predominantly the china development bank accounted for the other large share and that's to finance infrastructure although they've grown rapidly during the past year corporate bonds remain relatively small with respect to market share and they have grown extraordinarily over the past year growing by in dollar terms by 60 percent that's 60 percent but still relatively small market share about 25 percent of overall market share and corporate bond issuance is dominated by state-owned enterprises the ministry of railways is the single largest corporate bond issuer most of the issuance of short medium term is partly due rather than long term is partly due to the onerous approval process for longer term issuance so you have the corporate a lot of commercial paper but very short term corporate debt and official debt and so you end up with a maturity mismatch that is what makes the banks somewhat vulnerable bond issuance has become an increasingly popular tool but not yet immersed as an official channel for the rapidly growing private sector and hopefully this will change over the coming years commercial banks are the dominant investor in the bond market generally holding about two-thirds of outstanding debt the end of 2012 and state-owned enterprises are the largest investor in corporate debt so the direct the direct participation of foreigners is fairly small and limited to advance financial sector reform and prove the functioning of the domestic bond market the government has launched over the last year several interesting efforts the emergence of a high yield bond market i think is is intriguing and then a pilot municipal bond market which can allow municipalities to move away from bank borrowing or getting in the development land development business which obviously is fraught with lots of challenges i certainly applaud these efforts i assume that official washington does as well the rapid expansion of the bond market during the past few years demonstrate the great potential for financing in both official and private sectors bonds offer a viable alternative to come the economy's traditional reliance on bank loans it could also boost the finances of local governments moreover developing a large source of long-term funding will be crucial for carrying out the country's urbanization drive underpinning the next phase of development as well as i said developing a social safety net certainly the issue of urbanization as a driver of growth was repeated frequently noting that the level of urbanization in china is somewhere around 50 percent the ideas you'll get to 70 75 percent which is a fairly standard for the surrounding region that's between 200 and 250 million people that will move from rural to urban areas and that can be a big driver of growth also means a lot more traffic in cities and having said and Beijing traffic last week i'm not sure that's a positive thing but it is a driver of growth but to do a capital market development and bond market development i didn't talk much about the equity side you also need the institutional the framework the infrastructure that allows institutional and retail investors to to judge and to uh a rate that credit you need a counting counting standards and auditing firms you need appropriate disclosure and you need regulation and better corporate governance you know the way to do it and in my comments at the csrc and the cbrc is uh regulation's important supervision's important you shouldn't you know one should uh should take away from us or western views that they should expand the capital markets rapidly no one should equate with a view that should do it without an appropriate regulatory framework they should but also a better corporate governance framework and of course you need rating agencies you need the infrastructure so these things have to develop uh in parallel to the markets themselves uh to conclude let me just say the last generation of leaders started the process of reform the new generation just now taking over will hopefully advance that effort it certainly won't be easy entrenched interests and inertia are powerful inhibitors of change that's not unique to washington or to china we have it in washington a whole host of other places but those invested interests will uh prove a challenging obstacle external pressures and focus can help and it's here where i think the sned which i guess is slated for june or july uh can apply pressure and it's not only us but pressure from other places and i do think pressure and influence and uh and prioritization of capital market development in the bond market specifically uh can make a big difference uh why don't i stop there and and thank you again my host and see if we have some questions thank you very much thank you so much tim really appreciate it but i'm matthew goodman the simon chair here at csas and delighted to have all of you and join uh john hammering welcoming you and uh thank you tim you really validated our decision to invite you to start this off because i think you've really uh laid down uh the all the kind of key elements of reform which is a in this important sector which is uh a very uh complex set of issues and you've really boiled them down to some of the core elements i really appreciate that um let me invite questions but let me ask take advantage of having jumped up here and grab the microphone to ask a question in hindsight um when you were uh under secretary things were still going swimmingly here it was before the uh before the the financial um crisis and we were you know urging china to do some of these things then i mean in hindsight what do you think we uh we could have said that was different or or uh more than what we said before less than what we said before different from what we said before that could have helped uh encourage you know positive reform or you know are we not that important in this process that's a great question i remember sitting at a dinner with alan greenspan and giron g and chairman greenspan went on for an hour about the importance of markets pricing risk and how we price risk appropriately and we had through structured finance and securitization and we had spread risk around the world and therefore there was less risk and we were wrong you know uh and my concern is that because of the crisis maybe chinese authorities took away some of the wrong lessons which is well let's slow everything down and let's be very careful about reliance on markets i think markets are still important to send signals and allocate capital more efficiently but i think the lesson is you need to ensure you have the appropriate regulatory regime in place a supervisor regime and the right set of incentives in place uh so uh you know i i think there are lessons to be learned i think you can't dismiss our advice or our proposal simply because of christ we had i think it's a combination of listening to what we had to offer but also learning from our experiences too great thanks all right if you have a question please uh raise your hand there is a microphone or a couple of microphones and please identify yourself and ask a question anybody bold enough there we go uh gentlemen back there thanks um don clark from george washington university law school uh so you began your talk by i guess throwing a little bit of cold water it seemed on the on the china bears um because they haven't been proved right yet but you know if i were china bear i have to say i wouldn't have having now listened to your whole talk i didn't hear a lot of grounds for changing the view of the china bears in other words um i i didn't hear you identify any kind of major financial system reforms that would suggest that things are different from in the past for example you know interest rates remain repressed uh you mentioned the bond market but if your description of it is accurate it seems to be pretty much a closed system you know the uh banks buy uh government bonds and so is by so e bonds so it doesn't look like much has happened there so i mean can you identify some uh you know major changes in the financial system that would suggest you know the things are going to be different going forward from how they've been in the past all those areas i mentioned there's a continuum of progress that's occurring so it's not as if there's a steady state there that interest rates there are no uh there is no interest rate liberalization in fact there are some movements and i think with the rise in the shadow banking the non bank credit lending which is exploding it's going to create pressure uh by the banks and some of the lending and trust products are being done off balance sheet some of the banks have reputational risk because of that uh some of them are real some of it's questionable but it does put pressure by the banks to free them up to be able to to attract back some of those deposits you know i'm i'm neither a bear or a bull per se i i i guess i was on a panel with marty feldstein and marty has been you know talking about china collapsing as have others for 10 years you know someday they may be right but uh there's been a tremendous amount of money that's been made and deals done and growth occurred and jobs created and uh in the meantime and i think we can spend a lot of time calling for the collapse of of a whole host of different systems the euro crisis being also a popular pundits uh attack line without missing that there are some fundamental structural drivers and i mentioned urbanization being won but to truly achieve i think you know the next two decades of growth i do believe that better allocation of capital and more efficient allocation and a financial system that provides diversified risk and gives households the capacity to have more reliance and more diversification would indeed support growth but that doesn't mean they're going to collapse without it they certainly have proven the bears wrong for a long time if we're glad to let panelists ask questions i guess that's fair enough yeah that's all right timmy did a great uh is timmy did a great job in terms of um a laying out um john dearie the financial services forum um you did a great job in in in in laying out the full range of challenges particularly in the financial space um uh these this shift of course that china is trying to pull off from a manufacturing for export and fixed investment model to a consumption based model uh uh this is something that they've they've highlighted in at least the last two five year plans they seem deeply committed to it certainly after the world bank a 2030 report came out last year that there was a perceptible increase in the rhetoric from uh not only the regulators but also from the political leadership in terms of their commitment to financial reform but it's hard it's it's a very very hard thing to do it it's in a certain sense it's analogous to the challenge that we have in terms of getting our fiscal house in order everybody sort of agrees but it's it's really hard um there's been a change in leadership of course and i'm just curious as to your perceptions and what you've been hearing in china in terms of the people you you've talked with and met with in china what their perceptions are as to the new leadership's commitment to financial reform a great question you mentioned the the the world bank 2030 report uh that was handed out to everyone at the china development forum but i'm also told it's just now been released in china in mandarin so you know i agree with you that you could fill this room with the number of studies white papers reports that say the things i talked about should be done so we're we're in heated agreement the question is always about implementation the pace of implementation and there are always political obstacles and i said there's vested interest associated with the export uh industry with with state-owned enterprises all those entities that don't want to give up whatever monopolistic rents or rents that they're that that are accruing to them i you know i think everyone's hopeful that you have a new team in place the premier said all the right things uh the question is can you actually implement can you implement from central authorities at the local and provincial level it's always the biggest challenge and it's creating the right incentives and i think they try to create the right incentives but it's uh it's a big place with lots of people and lots of different levels of power and lots of different power centers so whatever change happens is probably an incremental change the idea of a big bang i think is unlikely but i think we should be satisfied with the best case scenario which is slow increment changes and if some of the things i described developing the bond market allowing more outside investment investment to flow out i i think it'd be the best we can hope for and we should be satisfied with it we should ask for more but we should manage our expectations okay i saw hank did you still want to ask your same question okay sir right there i'll go to the wings next hi uh good afternoon thanks for your comments i'm john fey with the rand corporation and i had a more kind of technical question perhaps um china just recently had a trade deficit um not relative to us but relative to the world and i was wondering if you could comment on that and the nominal versus the real exchange rate that there's a lot of politics around perceptions of the nominal exchange rate being either undervalued or overvalued if there's inflation going on in china then what is the what's the perception of the real exchange rate is it actually stronger than we think it is or weaker was well represented at the china development forum you know what i i'm gonna defer to my good friend bob donor who's done more work on nominal and real exchange rates and then i ever will do so i'm gonna leave it for bob i don't know what the public perception is i don't know if investors or households or the corporate sector are affected more by uh nominal or real i'm i'm sure there's a tremendous amount of academic research that shows one or the other i don't know and i'm happy to take questions on anything other than anywhere as well on cyprus i was going to say other parts of the world from your back um go ahead that item uh jangir as he's uh jp mogen um you know we've been talking about this you know excessive investment growth in china for the longest period of time um but if you compare you know per capita investment per capita capital stock yes sure uh you let's take us versus china it's just a fraction of it and if you look at the kind of urbanization etc the china needs you talked about the traffic jams etc so is it the case that china probably needs as much investment but a different kind of investment not anymore the kind of you know just adding capacity to tire factories but hospitals schools uh in you know urban infrastructure etc a great question and that statistic about capital stock per capita is often cited relative to other neighboring countries is being low and and if you if you are a if you're a china bull and you go to the urbanization store you think well they've got a long way to go before they reach equivalents of the neighborhood but i think you hit the point which is it's the mix and we need fewer aluminum smelters and steel mills and entire production factories and we need more as you said hospitals or capital stock that's associated with infrastructure so i i think it's a mix not about the total amount but we do see we do see investments force driving force and growth is diminishing and dropping pretty rapidly so it tells you something about the quality of investment thank you don't we with china reveal news agency of hong kong thank you team we often heard your statement on chinese currency issue when you were under secretary of bush administration comparing with obama's administration's approach to this issue uh what do you think the appreciation of them in b has reached a turning point that it could also be uh depreciating and how should obama's second turn handle the currency issue with china thank you thanks for that secretary lu was just out there he was out there a few days ahead of me and i assume if i wasn't mistaken it was on his talking list of talking points and i suspect it will be for the foreseeable future i think what's shifted is that we have seen uh real adjustments we have seen uh any reasonable estimation of misalignment has also shows that there's progress been made and we see that reserve accumulation is certainly adjusted and the external accounts have adjusted so there's less of the analytical case that one made and we did make in 2006 and 2007 the dynamics look very different but the politics the politics aren't as acute as they were then either which is kind of remarkable i would have said uh tell me what the u.s unemployment rate is and i'll tell you the the the noise factor that one would be hearing from capitol hill and in fact it's diminished over time and i think there's a whole host of reasons for that certainly we're heard a little bit about during the presidential election uh the republican nominee mit romney said on day one he would cite them as a currency manipulator that was certainly a play for ohio but if you spend time on the hill now there's just not much uh of hearing the kind of pressure and rhetoric that you heard four or five years ago i when was the last time chuck schumer mentioned you probably hear it but i don't see it it doesn't have the resonance it did uh in 2007 2008 and there was a gentleman over there thank you i'm matthew robinson i write for the epic times my question is sort of about um whether there's a kind of a tension between um i mean i was just reading um walter and howie's red capitalism and they they say that basically um they're interested in the communist party that don't benefit from financial reform so is there ever a sort of a tension where the reforms that um you advocate would be good for china but perhaps not good for a certain interest in the party or for the party itself and so how do you sort of manage that tension well there's always winners and losers and that tension exists everywhere so the question is uh can you make the case uh the general case that uh and the and the losers tend to be fairly defined and and tend to congregate and tend to be more politically vocal whereas the benefits tend to be much more dispersed and diffuse and so that's that's not china that's every political system uh and so it's it just requires you know leadership and finding the right coalition and the right timing to pursue the general over the the political power of the specific and it's it's true with all of our trade deals you need to look at uh u.s uh korea free trade agreement and the auto industry uh pushing back uh the uh uh the trans-pacific partnership which matt goodman's an expert on the japanese have now decided that they're going to participate or certainly in the negotiations the question is what does that mean for agricultural production in japan it wasn't mean for for rice producers where the subsidy is enormous uh there will obviously be losers in those negotiations but the question is do you have the political leadership and you can you create the right political dynamic that you can push the generalized benefits over the uh the opposition of the fairly defined losers any of those negotiations i you know i'm not in a position to make that that decision i think that's a decision would be made domestically but again it's about it's about winners and losers and what's the net effect and if you make the case that the country is generally better off that they are uh raising incomes and and you're making the transition to a more sustainable growth trajectory than i would argue and the communist party is able to pull this off i don't know why it wouldn't strengthen their position right because their legitimacy is really based on their capacity to do economic management and if they can put in place things that actually allow them to better manage it can produce the kind of prosperity that they promised and they need given all the challenges it seems to me despite potential losing sectors that it strengthens their it strengthens their uh their capacity to govern other question right there and then the gentleman a few rows behind yes hello roberto peña i'm with the european union delegation um was wondering if you might be able to elaborate on the level of non-performing loans in china and how these are impacting bank balance sheets and if you've been noticing that they've been manifested on the ground with uh higher rates of foreclosure or vacant commercial real estate yeah you know the fact is we don't know i was at a couple of institutions last week banks uh big banks they were telling me that uh as a ratio and in total normal terms and npls are dropping and dropping quickly i you know it it remains to be seen that there's definitional issues that how do you categorize it uh and if you're just rolling a particular loan over year after year after year it's not really non-performing you just continue rolling it so i think there's a categorization definition problem it's obviously larger than anyone wants to talk about but and and some of this is a result of the the crisis response and you know using the banking system to fund infrastructure as someone said to me a couple years ago even if even if the losses are 10 percent of GDP it's worth it and given the pace of growth will grow out of it and after 10 years you know it it's just a blip so i think it's large but i that's why i mentioned the nominal GDP which is more important but if they can sustain growth over a period of time and and they don't continue repeating questionable lending then then it's more manageable but the question is no one knows and i you know look there's a lot of empty buildings but uh each one of those has a story behind it i don't know and that's when the the the china bears are always saying you've got you know this massive real estate overhanging lots of empty buildings yes but when you got urbanization of between 200 and 250 million people moving to cities the housing stock that has to be built alongside that the infrastructure you know there's still an enormous demand so it's it's hard to know the statistics on real estate as you know is questionable non-existent hi i'm charlie i'm from george washington university to alia school uh so i have a question as you mentioned that urbanization is going to be a really important mechanism for china economic growth and i was at the postings forum at which our school two days ago and he also mentioned that the the main character that's going to force like china's economic growth is urbanizations so my question is so how can the if so like how can the like financial reform help the urbanization process in china well one way is the way it's funded if you can use the bond market and longer dated debt that's more uh that has a maturity that's more consistent with the asset that you're funding then it's more efficient than trying to fund long term projects with short-term bank debt so there is a way you know for example highway is built in united states usually built by uh by issuing bonds and what you need is this this maturity match which just doesn't occur so uh you said it was at the paulson forum i learned a long time ago never disagree with hank paulson so if he says it's true it has to be true okay maybe one two more and then we'll let him leo lou from voice from voice of america um there have been some talks about currency wars um the piterson institute recently had a conference on this subject i'm curious to know uh your view on this i'm also wondering when you are talking with the chinese leaders in beijing recently have they raised this issue of these major global currencies depreciated well everyone has raised the issue i was in santiago chili a few weeks ago and i heard from chilean authorities concerned about quanta of easing in the u.s uh chinese authorities uh raised questions about the bank of japan the new central bank had uh mr corota in fact they just met today and as some had expected the bank of japan is going to be much more aggressive and uh and uh their open market operations uh which will have an effect in weakening the yen much of the when yen weakness has occurred in anticipation so all those countries that are pursuing uh non-traditional or extraordinary uh monetary policy uh is seen as engaging in policies that uh that are harming other places uh and uh are of question of value you know what i heard from the chileans is that uh the marginal or the the the the marginal benefit of additional quanta of easing the u.s is is fairly low they would argue it's negative but it has implications for their exports and so i you know it was it was uh montega from brazil who first coined the phrase uh currency wars i don't think there's a currency war i think you have central banks taking extraordinary measures in extraordinary times there are obvious spillover effects and those who are subject to those spillover effects are just voicing their their unhappiness and we're going to see more certainly out of japan i'm not going to ask doysan to explain the bank of japan's uh recent moves but uh yes sir and then this will be the last one on on china but i wanted to ask one about cyprus thanks i'm nick constanary from your asia group i actually had a follow-on question to that and i was i was going to ask about the boj but specifically what what advice would you give to the chinese government when they look at the global liquidity environment it's clearly changing in a way that actually makes things like capital account reforms currency liberalization more difficult to navigate right so that's that's what i'd like to hear is the connection specific to the china story i mean how do they address this in a context of trying to pursue these reforms over the next couple years i think you do it slowly i think you do it in a choreographed fashion i think you have to ensure that as you liberalize the capital account that you've got a durable banking system that can withstand capital flows in and out and i think you have to have in having durable banking system means that you've got to have transparency about npl's and other activities and you've got to have a very robust regulatory and supervisory regime so it's all these things have to occur together and my advice is you know do it in a measured fashion and and and do it slowly and ensure that all the pieces are there rather than just rushing open but that's exactly what they're doing you know we can argue should they accelerate 20 percent or decelerate the direction is correct uh we would like to see it maybe occur more quickly but the key is to ensure that you've got all the pieces together you had a question about the boj oh oh okay all right um that is it but since you whispered to me you'd be willing to take questions on on cypress let me ask one how worried are your members about the cypress situation how worried should the rest of us be about it is it getting better under control it's it's cypress is a is despite its diminutive size i think the decisions that were made are precedent setting the way in which depositors were treated non non-insured depositors are certainly taking a massive haircut but the initial response and that was the the sypriots themselves went after insured deposits and if if you look at the fragility of the banking system and the economy in the euro area was seven out of 17 countries in recession and continue to face recessionary pressures it sent the wrong signal because what it says to depositors in in spain and italy and other vulnerable places is that this explicit guarantee of protecting your deposits may not be worth much and it's only worth as much as your own country's balance sheet and your own country's balance sheet is of questionable nature then if i were in one of those countries i would put my deposit somewhere else and doing so you create bank runs and then you have a fulfilling situation where banks begin to fail so i worry about the precedent setting it's not the size of cypress it's quite tiny actually but it's it's the signal that it sends to other peripheral countries they're facing enormous challenges and we've seen that from from european officials who've come out since then the germans and others saying this is a one-off affair this is unique we're not going to replicate that but if i were still a small saver in barcelona and i would have to think hard about how long i'm keeping my savings in the local bank okay i think what it says is that europeans need to accelerate banking reform they need to uh euro wide deposit insurance at least reinsurance that backs up the sovereign balance sheet and they need a resolution mechanism they need to continue the project they've started and i think they will but i think this particular crisis and who knows what the next one or the slovenia or are you know the italians still don't have a government but it just tells me that again directionally correct but they need to accelerate banking union as quickly as possible okay thanks tim you know that may sound like an not a related topic but but uh the global financial system is is uh so integrated that that this is actually very relevant and frankly the other way around china's financial reform is relevant to the to what happens in europe so i appreciate you're taking that question if you could join me in thanking tim for an excellent presentation and thank you really appreciate it and you're welcome to stay all right you're welcome to stay and um if i can invite the panelists to come up we'll we'll move right on i think we uh you know we we're being efficient so we may even let you get out of here early but we want to make sure we we cover all the ground uh it goes straight on well um as i say feel free to get drinks but we're gonna we're gonna carry on um so uh again thank you all for coming and uh and uh we're now moving on to the panel discussion and uh again want this to be participatory so look forward to your thoughts and questions after our our panel but we really have a a superstar panel that that i think will give a really useful complimentary set of presentations to tim's uh because uh they they each bring each of our panelists bring something very important to this story um so first next to me closest to me marcus rodlauer from the imf he's the deputy director of the asian pacific department and has particular responsibility for china and has been very focused on their financial sector i'm not going to go into the full bios because you have packets which have have more detail marcus will go first but next to him is bob donor my former colleague at treasury who is the deputy assistant secretary for asia at the treasury department and has been in that position for for some time now and he oversees all of asia including including china so he'll be able i think to talk to us about the u.s. government's uh views of these issues and and its policies uh towards uh towards china on these issues uh and then finally john dere from the financial services forum he's executive vice president for policy there um and he is also part of a an effort called engage china the engage china coalition which brings together about a dozen trade associations um and to focus particularly specifically on this issue of chinese financial reform and i'm sure he's going to talk to us a little bit about that effort and their positions uh so i'm not going to say anything of substance at this point but i may ask a few questions when we get to that stage i'll let marcus start and you're welcome to stay there or come up here whichever is more comfortable colleagues over there i speak from here if that's okay thanks a lot for um for for the opportunity to be part of this roundtable compliments to tim who has kind of already laid out the broad parameters and tested a lot of things that i will maybe partly repeat although from a slightly more narrow angle i speak about the financial sector so i will not go in detail into exchange rate liberalization and and and the capital account liberalization load we can we can maybe talk about this later on so two broad points that i'm covering the rationale for financial sector reform for continuing this building on the steps that have already been taken and second the priorities that we at the fund together with our colleagues from the bank of course are advocating in this in this area a bit of context first uh as a background to the rationale the stock of credit in china is close to 175 percent of gdp it is among the highest if not the highest in the world of a normal economy that's not a financial center like hong kong who of course has claims which are much higher uh and and it's not just high but it's also growing rapidly banks still dominate the system and their on-balance sheet operations are still guided largely by administered interest rates and by quantitative controls or maybe not legally controls but guidance or indications or allocation of of credit in the meantime lending outside the traditional bank lending channel to state-owned enterprises um both by banks but also by non-banks such as trusts and insurance firms those non-bank credit flows have expanded at a very fast pace as tim has has mentioned in recent years although from a very low base and um it just last year flows through these non-typical credit channels have been uh on the order 40 percent of total financial intermediation so it's not trivial anymore it's significant part of the flows uh and uh it's growing further the first quarter probably will be even even higher um so these developments of course are in part supportive of the very strong growth performance that we have seen in recent years and that have not only helped china but also helped globally to mitigate the the global recession uh in that sense has been very positive but it's very uh it's it's clearly that this rapidly changing environment is raising some very important concerns for one since the 2008 to 2010 stimulus program the reliance on credit to support high growth has become ever more important associated with this investment as Tim also has mentioned has risen now to close to half of GDP from around 40 percent a decade ago and in the meantime average GDP growth has actually fallen from around 10 to 11 to 7 to 8 by several percentage points so this combination of more credit higher investment and slower growth really suggests that this current model is already facing diminishing returns and that the continued reliance on this credit fueled investment let growth poses risks to the financial system so it has run its course as an engine of growth but it also increasingly poses risks in this in the system what are those risks well uh clearly credit quality is the first thing that comes to mind this surge of bank lending activity in the last five years raises the risks of a deterioration of credit quality the expansion in bank balance sheets has been quite remarkable um stripping out interbank loans so just really looking at the net credit outside of the banking system this growth in in lending is equivalent to about 60 percent of the entire stock of US domestically chartered banks now we know of course the US banking system is really small compared to other markets but to think of that almost that 60 percent of the US domestic banks that's the credit flows over the last four years in china it's not trivial um credit expansion of this kind is almost it's almost always associated with significant mispricing of risk and often of course do not end well so our assessment of that quality risk is that if the financial system continues on this path it will be hard to escape and eventually very costly cleanup there is still time npls are still low particularly of course in the in the numbers but perhaps even in reality they are still in a manageable level growth is still high and the fiscal space to absorb these losses is ample but the longer the current trends continue the higher the risk and costs of a eventually much sharper correction so another new category of risks has emerged with the rapid growth in non-traditional savings and investment vehicles that i have just mentioned before as is well known the banks are facing increased competition for funds with this rapid growth of non-bank intermediaries who offer much more attractive yields than the banks themselves so in response to this increased competition the bank the banks themselves now have taken increasingly to raising funds so the issues of these wealth management products now this is in a way a very positive development because the authorities themselves and the government sees this as part of sort of an interest liberalization underground in line with the sort of very often followed to track reform progress where they keep a control system and open up the system there is a lot of liberalization and market activity going on there but the concern of course also is well known these products are issued at short maturities as Tim has mentioned and the underlying the funds are invested in longer term longer duration projects and not just a maturity mismatch but often invested in very opaque asset classes now some 30 percent of these products wealth management products are carrying a principal guarantee and for those with principal guarantee it's quite well regulated their deposit type system so they have to have capital charges they have to have provisioning so this is not what it's concerned but even for the remaining 70 percent which do not have a formal guarantee there is a perception in the system that in fact the banks really eventually make sure that investors will get their money back so there is this wide spread perception of implicit government guarantees around which to our mind and to my money is perhaps one of the most nefarious aspects of the risks that's there we have seen this in many other tradition the transition economies where you start giving increased latitude and reforming the systems and opening up while at the same time maintaining these implicit guarantees and the combination of both are really a recipe where you could could could could could produce very difficult situations going forward so this combination of liquidity risk the perception of implicit widespread guarantees in the system rapid growth of new instruments both is really quite formidable challenges for the regulation for the supervision as we have seen in many other countries before so what's our assessment of this risk at this point the scale of the world wealth management products around 7 percent of the deposit base is still relatively manageable it's not yet a systemic risk but if this activity continues to grow rapidly the potential risk for broader financial stress clearly will increase and the third concern and this is sort of the end of my rationale for reforms is broader and is systemic so to speak as we have said there has been significant reform and a lot of innovation many aspects of the financial sector are still characterized by this inefficient credit allocation and mispricing of credit and thereby it does extend and support and foster even the continuation of an ultimately unsustainable credit fueled investment based growth model and our assessment here of course is that this current system tends to prolong the use of this manufacturing oriented growth model and and and the limits of that is already becoming apparent and as long as the longer you continue with that the longer the more you will raise the eventual costs of adjusting to a more sustainable growth model so the rationale for reforms are clear the risk of a more difficult correction it will only grow along the current path and the longer additional reform is deferred the costlier it will be to adjust to a more sustainable model so let me now turn quickly to reform priorities the goal is clear to foster a more robust inclusive economic growth model to facilitate internal rebalancing as Tim has said from export investment growth to more consumption led growth and to also importantly move to a more more market-based monetary policy framework which currently still relies a lot on quantity of controls to a more traditional central bank policy framework now because this transformation will take time and often involves a lot of learning by doing a renewed focus on early start and an early reinvigoration is critical to make sure in our view that this reform keeps pace with the very rapidly changing financial landscape and we see the need therefore for accelerated reforms now in the financial sector on along four macro dimensions so to speak interested liberalization as Tim has mentioned supervision and regulation institutional setting and revamping the monetary framework I'll get to these in a bit more detail down in addition and one should never forget that there is the very arduous maybe boring but equally and perhaps even more critical micro task of continuing to reform the institutions on the ground so to speak especially the four large state banks when you sort of speak with the most senior Chinese officials and you talk to them about interest liberalization I don't think they see it in the same way as ours they question what does interest rate liberalization mean for institution that has 350 000 bureaucrats on the ground and doing banking as they are used to doing it so reforming the individual institutions in order to be able to implement this liberalized and reformed framework I think is equally critical for success so on interest liberalization as we all know progress has already been made quite significantly more than traditionally be appreciated lending rates there's no more constraint there's the upward margin as you know all know of the downward flexibility from the benchmark rate of 30 percent there's no upper limit the key issue is the deposit rate which has a 10 percent margin currently over the benchmark so as the next step we do see room to raise the maximum deposit rate from the benchmark plus 10 percent to a higher higher flexibility margin which will hopefully reduce this tremendous regulatory arbitrage that's currently going on by moving funds from the control system into the wealth management products and it will also by contributing to generally higher interest rate in the system to reduce this bias for investing in in real assets particularly into housing and other investment liberal a complete liberalization of deposit and lending rates can then be completed gradually over time parry puzzle with experience in actually making sure that the institutions on the ground can implement it well the credit offices and so forth second supervision and regulation the priority is to further strengthen the regulation and supervision of non-bank and off-balance sheet in the mediation the authorities are already very focused on that you may have seen the recent announcement they have taken a number of steps recently the point is now to ensure that these risks really are properly disclosed that there is transparency that the institutions hold adequate buffers particularly when they give implicit or clear or principal guarantees that the markets operate transparently and that the pace of growth also does not result in systemic risks very often when I hear you know Jahangir mentioned of course the credits the capital stock is still nine percent only what it is at the U.S. it's true no matter where it is the speed of convergence also is a critical factor in how well countries can absorb the credit flows and manage them and we have seen thousands of many hundreds of cases where convergence to an appropriate level maybe over time evolved at a speed that just created a lot of accidents along the way. So third reforms to the institutional setting clearly as you liberalize interest rates and let banks compete more freely the question of how you how you resolve institutions that may over compete and therefore get into trouble how you protect depositors in that context and therefore deposit insurance resolution framework is critical but also again and this comes up sometimes in statements by the by the authority is now you know the question of how in a more liberalized system you then establish appropriate budget constraints what's the new anchor in the system once you remove credit controls and once you remove the exchange rate and once you remove the interest rate you have to have a new anchor that pins the system down which in our system tends to be ownership and the accountability for failure and bankruptcy system and exit mechanisms and in a system that is still has widespread government guarantees that is a critical issue to resolve before you go fully and let the system go and fourth revamping the monetary framework an important issue for us from the fund as more and more financial intermediation takes place outside of the banks last year as I said the flow of bank lending outside the critical credit channels was 60 percent it will be important now more and more to use the interest rate as the primary instrument of monetary control rather than quantity controls and that entails continuing to move away from these quantitative administrative mechanisms and rely increasingly on money market interest rates and that entails a whole range of reforms to the monetary system and to the shorter money markets that they need to put into place so this sums up what needs to be done clearly a lot is on the minds of the authorities this is an ongoing process still the question of you know how you design a roadmap going forward what what's next is a complex one and and you know vested interest is one issue the other issue is of course stability financial liberalizations around the world have been littered with accidents almost like the road to Mount Everest and there's lots of corpses left and right and it's something that the authorities cannot afford and don't want to afford so therefore in a way clearly planned careful reforms but again now is probably the time with the new leadership to make a new push into those areas thank you very much thank you thank you very much Marcus that was a really good lay down and we'll move right on to Bob and then go from there you want to come up as well great well I want to thank Matthew very much for the invitation I've worked with Matthew for years but in the government and outside the government I also want to thank Tim Adams for whom I worked I benefited enormously when I worked with Tim both on China and on Asia I go to listen to him every chance I get and I want to thank him for his kind references to things I know and also things I don't know that'll come in apparent if you look at the podium I'm sandwiched between the IMF and the U.S. Financial Services Forum I think that that's appropriate since the work of the Treasury straddles both worlds I just got back from visiting Beijing with Secretary Liu I'm now very focused on the strategic and economic dialogue Sharon Yuan is my colleague is the coordinator of the dialogue but I'm heavily involved in it I want to echo something that John Hamry said at the beginning which is that the United States has a huge interest in strong sustained growth of the Chinese economy as as we have made clear as President Xi emphasized when we were in Beijing the United States and China have enormous shared interests we also have our own interests things we want in the dialogue things that they want in the dialogue but it's important to keep in mind the the the shared interest in the that we have in the health of the global economy and the health of our own economies our objectives the US government the Treasury's objectives in the strategic and economic dialogue is to support US growth to support Chinese growth and to support growth of the global economy it's also to assure as much as possible that the United States benefits to the full extent from the economic relationship that we have with China that it creates new employment and new opportunities for American firms and workers I tend to divide what we do in the dialogue what what we do in Treasury into two broad approaches the first is the sort of standard trade market opening negotiation type approach to create additional markets access opportunities and a level playing field for US firms and workers now the strategic and economic dialogue covers a variety of issues we're here to discuss the financial sector which is also the responsibility of the Treasury and so I'll talk about financial services but I don't want to leave the impression that it's the only thing that matters the United States is a highly competitive financial services sector and a substantial part of our dialogue is has been focused on opening up new opportunities for US financial services providers and for foreign financial services providers generally that's good for us it's also good for China and bringing the kind of technology market expertise operational experience that can lead to the development of the Chinese financial services market the work that we do here is specific often highly technical but also valuable to the firms and to the industries involved I grouped it quickly into three broad categories not entirely distinct opening up new markets so the ability of insurance firms to offer mandatory third-party auto liability insurance or for US firms to participate in the credit backed assets sorry the credit backed securitization process pilot in China or the ability to establish joint venture commodity and financial futures brokerages my second broad area is the expansion of the range of activities available to foreign financial services providers allowing security company joint ventures to enter brokerage proprietary trading and fund management is a good example allowing banks to distribute mutual funds and to underwrite corporate bonds or increasing the size of the qualified foreign institutional intermediaries is another the third that I'll mention is increasing the flexibility and the ownership available to foreign financial services providers China is distinctive in that it has very restrictive limits on the equity participation of foreign financial services providers increasing the ability of foreign firms to participate in an equity ownership basis in particular the ability to establish controlled ventures within China has been a priority of the United States since the forming of the strategic economic dialogue renamed as the strategic and economic dialogue last summer with the first break in the this dam the Chinese agreed to allow foreign securities joint ventures to increase their equity ownership stake to 49% up from the 33% that they China committed to in the WTO it's not the end of this story but it's an important step that's one thrust of what we do the other thrust is something that tim talked about mark has talked about and you'll detect a great deal of uniformity of approach and and view in that and that's supporting strong sustained Chinese us and global growth in the future the way that I describe this writing down my notes for this section I think the you can phrase the issue for China is the following how can China sustain growth in the future with a declining labor force rising costs declining investment returns and weaker global demand growth certainly weaker than we've had in the past decade or the decade before the crisis particularly since China has depended so heavily on exports and on an increasing share of investment in GDP for growth mark has referred to a 10 percentage point increase in the investment share of GDP in the 10 years prior to the I guess prior to now since 2006 it's been about a seven percentage point increase in investment to GDP so how can China sustain growth but also particular interest to the United States and to the global economy how can China sustain growth in a way that adds to global aggregate demand and supports global growth without having the large trade and current account imbalances that characterize the period just before the crisis without having those imbalances reemerge financial reform and development is intimately tied up I'm sorry the the diagnosis or the discussion that we do the fund does Chinese authorities do is focused on changing the Chinese growth model or growth strategy to have a greater dependence on household consumption for growth and a smaller reliance on exports and on investment to shift from heavy trade oriented industry towards more domestically focused industries particularly services and to shift from a reliance or emphasis on state-owned enterprises to supporting smaller more nimble private owned enterprises in the future financial development and reform is intimately tied up with all of these these goals it will require achieving them will require a liberalized market driven financial services industry one is Marcus mentioned that depends much more on interest rate or price signals and much less on quantity controls on credit one that's no longer skewed towards state owned enterprises but is able to effectively channel firms to small new profitable private enterprises liberalization the financial system would also assist in many of the other goals in changing the the growth model raising deposit interest rates would raise household income on the primary financial asset that they own a wider range of financial services products would give households the means and the flexibility to ensure against catastrophic risk and also to finance rather than save in advance for major expenditures like home purchase or education and finally something that's become important in our discussions recently changing the way the financial operations of the enterprise sector in particularly in particular increasing the dividend payout of enterprises both privately owned and state owned would raise the incomes of households either directly or indirectly by financing government services and a stronger social safety net our discussions in the s ed and the s and ed over the past few years have emphasized the market opening aspect of financial services they've emphasized the broad macro characteristics of the chinese economy including exchange rate policy that i'll talk about in a minute but in the past couple of s and eds we've opened up discussion with china on two key issues one is broad financial sector reform including interest rate liberalization and the second is level playing field issues surrounding the state owned enterprises and in addition the payment of dividends by state owned enterprises to the uh to the other sectors of the economy in the last s and ed i'm a government official so i tend to quote these things officially uh the chinese agreed to increase the dividend payout ratio of state owned enterprises to increase the number of central and provincial state owned enterprises that paid dividends and also to increase the amount of dividend payments that went directly into the general account budget as opposed to being remitted to the the sasic the state owned holding companies um china also agreed to steadily promote market based reform of interest rates to enhance the role of interest rates in optimizing resource allocation and monetary policy transmission and the chinese government also committed to developing a market environment of fair competition for enterprises of all kinds of ownership and providing non-discriminatory treatment for enterprises of all ownerships in terms of credit provision taxation incentives and regulatory policies financial sector reform liberalization development is inextricably bound up with the goals that the chinese government have for themselves that they're things that they need to do to sustain growth um moving to a market-oriented exchange rate will also greatly assist in this process both within financial services and more broadly within the chinese economy continued appreciation of the exchange rate will raise household incomes it will help shift domestic resources away from tradeable goods heavy industry sectors toward more domestically focused industries sectors like services and the failure to adopt a more market-oriented exchange rate policy and to avoid the kind of management and extensive intervention to prevent appreciation of the currency would be a tremendous constraint to financial liberalization to interest rate reform and also to liberalization of the capital account kind of reforms that china needs to to carry forward the next strategic and economic dialogue will take place sometime in the summer i say sometime because i'm quite aware of the difficulties of scheduling with four principles and the president of the united states it'll be here in washington secretary lu will lead for the united states in the econ track secretary harry in the strategic track uh the chinese government has just formed a couple weeks ago and we're waiting for them to name their principles are counterparts for for our two secretaries we look forward to seeing them to hosting them in the summer uh in the econ track the issues i've described and many more but will be uh be uh quite extensively discussed thank you thank you very much bob i'm rapidly running out of questions for the for the post panel discussion because everything i was going to ask is being addressed but but i'll try uh so let's move on to uh to john i was just going to say that the the burden and the blessing of being the last speaker is that everybody else has pretty much said what you were going to say and and the audience is desperate for you to be brief and sit down and so i will try to be i will try to obey that and take a slightly different approach first thank you to csis thank you to matthew for the invitation to come a special thank you to bob um the the important work uh of the sned that that he just described in some of the progress that has been achieved in recent sneds and over the years since 2006 i think was the first one bob bob and sharen hwan and their colleagues at treasury little brainer these are the people who do the really really hard arduous work that goes into each sned um and that has uh has yielded what we think is really meaningful progress over the year so uh to to the benefit of both uh china and the united states and we certainly appreciate it um i thought i would i would uh matthew mentioned at the beginning that uh the forum chairs a group here in town called engage china and i thought i might explain how that came to be and what our interests what the financial services forums interest is in china and in the role that we're trying to play uh when hank paulson became the treasury the secretary uh secretary of the treasury um uh he was as you know at the time the chief executive of of goldman sacks uh he was also the chairman of the financial services forum at the time uh the forum is a uh a financial and economic policy group here in town that is comprised of the chief executives of currently 19 of the largest financial institutions in the united states uh it is not a trade group in the conventional sense it doesn't tend to focus on the on what you might think of as the narrow parochial interest of the industry but rather on on big broad issues of financial and economic policy that are important to the CEOs of these large financial institutions they felt that as a group they have important things to share with policymakers based on the privileged vantage point that they uh their their viewpoint on the u.s and global economies and what they see in uh in the uh day to day as the uh as the CEOs of these institutions so china has been a major interest and a major concern of the forum for uh for years and took on a special interest when when when hank paulson what was our chairman given hanks of uh long and abiding uh experience and interest in in china so when when hank went to treasury it was not surprising to us that he that he brought that that interest uh and made china and made financial sector reform and modernization in china a real priority uh of his of his time at treasury and it was not long after he was there of course that um uh treasury announced along with the chinese the president bush and president hujintowl had established what was then called the strategic economic dialogue which was meant to uh provide a a a very senior level a framework of dialogue an overarching kind of framework of dialogue to to further enhance the uh communication and understanding on both sides and to manage a very multifaceted uh relationship uh in a in a better and more productive and more effective way uh secretary paulson on on behalf of the united states and madame wu yi on behalf of the chinese uh were the uh two leads um we thought uh uh uh given the development of the s e d and how important it was and in our interest at the forum in china and and knowing and understanding how important um a financial sector reform and modernization was not only in china but uh it was our view as it was secretary paulson's view that uh a financial sector reform in china was not just important in terms of china being able to realize and achieve its own uh macroeconomic ambitions uh uh specifically or most importantly more sustained long-term growth but also was really the key uh to many of the of the issues and some of the difficulties that had defined the bilateral relationship for so many years and in particular the currency issue and the trade imbalance issue uh so uh we after thinking about it for a while came up with the idea of creating engaged china which is a coalition of the major of the major trade groups here in town uh to provide what you might call a private sector echo uh to what secretary paulson and bob and their colleagues were trying to accomplish at treasury vis-a-vis the chinese uh and uh we had two basic messages for uh two different audiences uh one was uh that that actually gave rise to the very clever name of the coalition engaged china our first constituency was was was congress of policymakers on the hill and our point to them and and has been our point to them for for seven years is is to continuously remind them that constructive engagement in china is fundamentally uh the way to go uh that uh uh a number one it has worked uh it seems sometimes that progress with china on the whole range of issues sometimes can be frustratingly slow from our standpoint it can be it can seem very incremental but that in fact if you look back over the years particularly you know say going back to 1979 uh if you look back at what has been accomplished by the two nations it's really quite remarkable especially you know i think the first major milestone of course was china's accession to the wto but but uh since then some really uh meaningful progress some of which you uh heard about today from tim and from bob um uh so we have we spent a lot of time on the hill reminding policymakers of that and encouraging them to avoid some of the more punitive uh measures that tend to come up from time to time and of course i'm i'm thinking specifically about the currency legislation and try to focus on more positive aspects of the relationship and bringing to bear some of the pressure uh that sometimes is brought uh we think in a little too heated away on things like currency and really focus it on on other areas that we think are more important specifically market ask access expanded market access uh for us participation in china uh our second um targeted audience is the chinese themselves uh in in this is the sense uh i think that engage china tries to play something of a private sector a private sector echo to um what's trying to be done uh at the official level uh in our principle our principal message is you've heard a lot today about uh how china uh has committed to uh pulling off achieving this this this quite uh ambitious goal very difficult but very essential goal of a shift from their traditional uh economic model of uh of manufacturing for export and fixed investment to a much more consumption based internally driven economic model they are convinced i think most folks who who are china watchers are convinced this needs to be done as tim talked about earlier the old model has sort of reached a stage of diminishing returns and is actually creating problems so uh uh we are very very supportive of of their goal that they've articulated in at least the last couple of five-year plans of wanting to pull off this shift that have become a much more consumer based and internally driven uh a model of demand our in that context our message to them is doing that is is is so challenging it it is virtually impossible to conceive of how that can be done without a financial sector that can serve that transition um you've heard about a lot of the problems today in in the financial sector about how bank based it is about how the capital markets are underdeveloped you know small and underdeveloped even by emerging market standards a tremendous amount of progress has been made in years in in recent years and yet there still are are profound problems on the consumer side most chinese do not have access to the kinds of products and services that we all take for granted in terms of personal consumption products mortgage products even things like credit cards uh a retirement security products products that allow us to save and invest effectively uh and and then of course insurance products to mitigate the risks of life everything from property and casualty to life insurance most chinese don't have ready access to those products uh and because that they don't uh many of them engage in what's called precautionary savings uh a chinese household save 30 40 sometimes even 50 of their incomes uh this uh amounts to a structural obstacle to the shift to a more consumption based uh chinese economy so our message to the chinese is is is is financial sector reform and modernization is absolutely key to your macroeconomic goal of shifting from a manufacturing for export model to a more consumption based uh model and and in order to achieve that kind of reform and modernization of the financial sector a major priority from our standpoint as as bob alluded to earlier is is greater foreign participation in the chinese marketplace you heard tim earlier talk about the penetration rates in terms of banking and insurance a foreign banks account for less than 2% of the chinese banking sector i think i think the number he mentioned in terms of insurance was less than one and a half bob mentioned some of the restrictions in terms of in terms of ownership um a foreign investment in in bank securities firms asset management firms insurance um uh tim had mentioned earlier the value of some of the value that expanded to greater foreign participation in chinese and the chinese financial sector would bring best practices and expertise in terms of products and services in terms of credit analysis internal controls corporate governance etc etc we feel that china is in need of a world-class financial system it doesn't have a world-class financial system and the best and the fastest way to get it is to in effect import it so our uh uh our that's our principal message to the chinese are our top line priorities in that context are as you might imagine uh to lift uh raise or or uh or possibly even lift the ownership restrictions on on on banking and securities asset management and insurance um uh national treatment with regard to licensing and corporate form uh in china national treatment in terms of products and services that are permitted national treatment with regard to regulation and supervision a regulatory uh and procedural transparency um and then further expansion in the um qualified foreign investment program uh we think all of these all of this is very much in china's interest given their their their long-range uh macroeconomic objectives it's certainly in the interest of the united states as bob and others have mentioned uh uh the futures and the fortunes of the u.s. and and and chinese economy are are very much intertwined we think that this is a win-win from both sides um i'll stop there that thank you very much thank you as i said uh really um comprehensive uh coverage of a lot of the issues um that i was again going to ask about um i will ask a question but um let me just say as a comment that um because all the speakers i think addressed really the underlying rationale for uh financial reform in china which i think broadly cluster around three such of issues sets of issues one of which is to promote uh strong sustainable balance growth in china another is to avoid risks to manage risks to mitigate risks and the third is to provide uh more opportunities for foreign institutions in china which could provide a more competition a more efficient system um and i think um those are all important and they're all intertwined i do think that the growth imperative is the one that that matters most to all of us uh and that's why we call this or we put this under our uh simon share growth forum because really uh the success or otherwise in the chinese government's ability to manage this transition and and undertake these reforms is critical to chinese growth as as everyone has said and and that matters a lot to all of us um because we need china to grow and we need uh we need that source of demand uh uh in the world um and uh so that's really sort of a comment to reinforce what everybody has said in one form or another um i guess the question is to start to kick it off is with with mark to marcus about um about the sequencing of reforms um to what extent does it matter uh what order they do this in and to what extent are there risks in uh doing it in the wrong order or doing some particular thing uh and not some other particular thing that's going to cause the whole house of cards to fall down is there anything in particular that you'd be worried about if they got it out of order yeah thank you uh clearly sequencing matters um there are a few ground rules i think that are quite well known for example don't open your capital account too much before you show that you have a domestic system make sure that before you fully liberalize interest rates you you have the supervision and the institutions in place um so uh now the question always is does that mean we have to have a very detailed clear roadmap spread out that does that maps everything down um just recently we had a conference in china on capital account liberalization two weeks ago and the question from the chinese was clear so do you advise us to have a very detailed clear roadmap plan that is laid out so our generally we had experts from 15 other emerging markets who had gone through capital account liberalization and their experience basically has been in a way paraphrasing what a very senior u.s official once said about war planning which means plans are useless but planning is essential so clearly i think they are now in the process of of writing down for themselves a very clear detailed roadmap for the first one two years of what to be done but they are never going to announce that no should they because you know things change and you don't want to announce a plan so uh again sequencing is important you know we can talk about details there's a five or six rules that you want to make sure you you observe but then again things continuously change on the ground they are also idiosyncrasies of china where for example normally you would think of liberalizing the capital account sort of in in in in terms of categories where you where you go first with foreign direct investment and then you go with maybe long term portfolio investment and at the very end you do short term portfolio that's fine and good for china the way they are going to do it is is however they have a tradition of for example authorizing a few institutions where they have confidence where they can monitor give them a certain quota and then raise these quotas for example you will not allow domestic depositors give them a blanket whoever has a a deposit over three months can move these deposits offshore i think rather than doing it this way they will authorize a number of institutions who can channel those savings within quotas so that they can keep and i think that's a good approach that has served them well in in other areas so it's as much a question of sequencing as it is about carefully sort of opening up various valves let them move and as things as things evolve monitor very closely and open up more okay thanks no i really think actually i'm steven canna retired from treasury and the us council for international business and i think my question is for bob donor you just came back from china you said with the secretary and you talked a lot about what we're pushing china on in the sned could you share with us other what the chinese want from us other than getting rid of sypheus and we have some financial issues too that they have a stake in so it takes two to tango tell us something i mean they the chinese government is interested in the health of the us economy the continued growth of having the united states navigate our way through our our fiscal challenges they're also interested in increased access both continued and increased access to the us market for trade for investment they're interested in us investment policy negotiating a bilateral investment treaty with the united states they're interested in us export control regime in achieving market economy status for trade remedy matters in the ability sorry in increased opportunities to invest in the united states particularly infrastructure projects so these are a variety of things we've discussed with the chinese and and does that i mean are there sort of trade-offs here i mean does that give you leverage when you talk to them about these the financial services issues or why i guess the more fundamental questions why do they listen to us why i mean i'm interested that they're willing to engage on they're interested they're willing to engage even on interest rate deregulation i think you said understand why they would sort of feel they had to engage on the question of foreign firms access or us firms access but but why would they talk to us about some of these sort of fundamental issues of reform i i think two reasons i mean why why do they do the strategic economic dialogue at all and the answer is that the us and china the two largest economies in the world i think the largest bilateral national trade relationship china exports more to the european union but exports more to the united states trades more with the united states than any single country we have had a trade relationship that has been unbalanced substantial bilateral deficit uh there have been issues in the trade relationship the exchange rate is a particularly hot issue over the last few years so that the process of discussion making progress on individual issues creating new market access opportunities is a way of addressing the concerns and the critics of the trade relationship that allows it to continue to go forward and benefit both sides i i would like to think that our chinese colleagues are interested in what we have to say about about the china's challenges that china faces i'm thinking many times they are many times they've probably heard it all before but um and actually one one last thing one thing that i didn't mention in my remarks we've talked a lot about financial sector risks and managing financial sector risks one thing that the crisis has done and the the development of the g20 as an organization the financial stability board is an organization it has brought chinese officials chinese regulators into international discussions of regulatory practice and financial sector risk in a way that i think has benefited china certainly has benefited the global economy the fact that china agreed to have a financial sector stability assessment agreed to publish the assessment this is a financial sector diagnostic undertaken by the imf and the world bank the fact that they agreed to publish the assessment and the detailed assessment reports i think is a real step forward in understanding the chinese financial system both on their part and our part and on um so we've addressing concerns about financial sector risk i would you know say that my impression is that that uh is is one of the values of the g20 conversations that you have with china as well because you're doing a lot of uh discussion of some of the underlying uh elements of a uh a sound you know financial regulatory regime and not to mention talking about strong sustainable balance growth and i think that's got to be of benefit and they probably recognize that but that's that's good okay so who else over here the gentleman in the second row there thank you akira chief of the japanese embassy and my question goes to mr roald lover who uh mentioned that the tasks china faces are similar to other transitional economies if i heard him right so my question is uh is there any similar example in the past and if so what lessons can be drawn from such previous experience i mentioned it mainly in the context of the challenge of um liberalizing a system while the remnants of a certain governance model which is state-owned enterprises with widespread state-owned uh financial institutions and large public guarantees in the system that has been a challenge that has vexed many many uh other transition economies uh and particularly in early stages of big bang liberalization except perhaps the one in poland but many others were infected by the persistence of state guarantees which allowed these units and entrepreneurs and uh and entities to to go out and and lend and borrow without facing budget constraints and without facing the consequences and that has created huge problems i think so you know the way this has been solved is different in in in in in in in poland for example the combination of of bankruptcy regimes that were biting and very rigorous control by the financial of the nine large state-owned banks by the state commissars who basically made sure that these banks didn't go wild in competing for funds in the newly liberalized environment so it was mainly in that context that i mentioned it so thank you don't go you with china reveal news agency of hong kong my question is for mr robert and i still remember that secretary geithner linked the us implementation of his commitments to giving chinese companies a fair treatment and releasing the high tech control to the china's achievements of addressing u.s concerns so what could we expect from the coming as an ed what achievement what delivery could the both sides could reach and secondly you just came back from china and had a contact with chinese new leaders what's your impact on about chinese new leaders how would you evaluate their incentive to continue the economic reform particularly in financial center thank you let me do the second one first i mean i i had a very brief introduction to china's new leaders when i went to to china with the secretary my impressions of them i think our impressions of them are they very impressive very determined very clear in their desire to pursue economic reform to to continue chinese growth very clear on their desire to work with the united states and and the global community it's very early in their administration and this was a short visit there was very little discussion about specific measures or or timing as as one would expect but um you know i think we we came away with a very clear and favorable impression of the the leaders we leaders the secretary met um on the sned and what we we hope to accomplish um it's a little early for me to say um since we were just it's not that we're just beginning because we have worked with ministry of finance officials in anticipation of new leaders on our side and on china's side but now the hard work begins on both organizing the discussion and on the individual items in the discussion um we will continue our efforts to assure that both sides have implemented the commitments that they've made in the past and the sned and will also try to reach new new commitments new new outcomes in in that discussion the topics that we will pursue not surprisingly will be topics that we've we've pursued in the past both in the u.s. side all the chinese side although we you know we always look for and hope for new things that are that are possible and doable in the context of the the sned okay i'm keita Miyaki uh student from john's hoping size i'd like to listen to your ideas i'd like to know your ideas on the implication of china chinese financial reform on the debt service of the united states and the status of the usd in the future just the question was the impact of chinese financial reform on the debt service of the united states and whether china is going to continue buying our treasuries is that what you are asking i'm sure bob would love to answer that question no seriously but maybe maybe marcus would be a little more uh neutral is there an impact is there a concern you can do it well i mean let me talk about about us treasuries and and uh and demand for treasuries our concern is and always has been assuring the the fundamentals that of the u.s economy and financial system that would make us treasuries a safe and attractive investment opportunity for foreign buyers but also for american buyers and in fact americans own the majority of u.s treasury securities we in our policy recommendations have recommended changes in chinese economic policy changes in global economic policy that would actually reduce current account deficit current account imbalances globally we have argued for a greater market determination of exchange rate and reduced intervention reduced foreign exchange reserve accumulation broadly um but that's within the context of a general equilibrium system in which we in the united states increase our national saving consolidate our fiscal deficit which is already taking place to a large degree and um you know where a broader a broad range of investors by our securities um less ideally through foreign exchange intervention than through um investment more broadly uh no pop basically uh mentioned what i was going to say rebalancing is not just for china to save less but for others to save more obviously and if you were to just do a scenario in fact we've done that what's the impact of chinese rebalancing on the on the world it's actually negative if you think that savings declining just let's go up global growth is lower but that's not the idea of rebalancing the idea is rebalancing that others save more and obviously as pop said there's important tasks for advanced economies not just in the u.s but in japan and europe sure i'll take a stab at the question in a different sort of way the the vast holdings on the part of the chinese of of of us treasuries in a in a very real sense is a manifestation of the of the trade imbalance um uh and so if you uh if you think that that's a problem uh then clearly part of the solution is a rebalancing of the trade relationship um clearly the united states needs to save more but i think it's also a reasonable to argue and i think even the chinese would agree with this this is the reason why they're trying to uh achieve this shift in their economy that that we've been talking about is for china to consume more and let me just give you a back of the of the napkin you know sort of analysis of what of the uh of the potential of this shift in strategy in the context of the of the trade relationship last year in 2012 the united states exported to china about 110 billion dollars worth of stuff we exported to japan about 70 billion but china of course is 10 times the size of japan um if china were to eventually consume american made products and services at the same rate that the japanese currently do that implies that the united states would export on on the order of about 700 billion dollars worth to china which would all else being equal turn a approximately 350 billion dollar trade deficit into a 350 billion dollar trade surplus um and if you if you if you think that that's a fanciful goal which on first blush it seems quite fanciful if you look back at the extent to which us exports have uh to china have grown over the last 10 years they've grown at about an average annual rate of 18 percent some some years have been better than others you know some years are 30 percent some are six percent but uh on average over the last 10 years about an 18 percent uh growth rate in terms of us exports to china if you apply that rate of growth that average annual rate of growth but to future years off of the base that we exported 110 billion to china last year you get to 700 billion in 11 years so that this is not something in our view that that is is impossible at all and and this just goes to show you uh how what the chinese have identified they need to do in terms of putting themselves on a on a long term and more sustainable path to growth is also very very good for the united states uh and by the way it if you apply the commerce department's metric of you know for every billion dollars in additional us exports creates about 5 000 new american jobs expanding us exports to china from 110 billion to 700 billion over the next 10 years translates into 3 million new american jobs so i think that's a perfect example of how you know working together what is good for china could be very good for the united states okay thanks so i'm going to take three questions vikram the gentleman there and uh was joe or bill or both of you wanted to ask bill joe you're pointing to each other you're gonna ask half the question each no vikram right here in the front i'm sorry well thank you very much for your presentations and for holding the session map um we're almost coming to the end of the session and i haven't heard from any of the speakers so far any discussion of the link between financial sector reforms and fiscal policy now financials the financial sector's objective is to intermediate between savers and investors the fiscal systems objective is to raise resources to provide public goods and services and partly to provide some redistribution and china to some extent those two objectives are conflated in the financial sector when you introduce interest rate liberalization as virtually all of you have have have recommended you are taking away some of the fiscal burdens of the financial sector away from the financial sector now presumably those fiscal burdens have to be transferred to the fiscal system is the fiscal system capable of assuming those burdens how long will it take for the fiscal system to take on those additional responsibilities because isn't the fiscal system itself facing challenges and what does that mean for the pace of reforms in the financial sector thank you i should just to before you say anything i just say vikram narrow was also i'm glad to say this publicly now right now that it's been published in in mandarin uh was the author when he was at the world bank of the china 2030 report and i commend it to you now that it's available in public thanks don clark gw law school um this is a question for um uh dr don donor about uh dividends and um it's a simple question but i have to preface it a little bit because we need to distinguish two types of dividends depending on why we care about dividends if it's about rebalancing then we need to be asking about listed company dividends you know which are going to go to households but the part of listed company dividends that doesn't go to households does not go to say sack or the ministry of finance it goes to you know intermediate level so ease or these holding companies that are in turn owned by uh say sack and and the ministry of finance so um if we're concerned about uh rebalancing and and funds going to households and getting out of the state and corporate sector then we should be asking about the level of listed company dividends if china is saying making promises and saying things about what they're going to do about dividends going up to say sack or mof that has nothing to do with this issue of rebalancing that's just a question of you know redistribution of money within the state sector so my question about dividends is about the first kind that is listed company dividends it's going to households and you know everybody in china says they're too low you know that's sort of the common mantra and i'm not i don't know for a fact whether that's right or wrong but my question is how do we determine what kind of level is too low or too high what's our kind of methodology for saying this is what uh listed companies should be distributing to shareholders and has anybody done a study actually to find out how much are listed companies distributing to shareholders where are we in china with relation to that kind of ideal level now joe do you want to ask her bill i saw bill first but but happy to take both of them if they're different well i have to say that i am not settlement i'm not a an economist or a financial expert by any means but listening to the conversation here you have a lot of prescriptions for china and you noted that china is not it should be more of a consumer-based economy i think and you also notice that they should have financial various kinds of financial reform in view of the fact that that we are a consumer-based economy and incomes are going down uh and the fact that we had an enormous financial collapse five years ago what kind of credibility do we have in lecturing to china okay i think um vicram you raise a very very good point the quasi-fiscal role of the current financial system in fact a little bit chidellas you know makes that point very well that what's wrong or he opposes this question with or what's wrong with the system that collects vast amount of resources through the financial sector taxing depositors taking away their wealth and moving that into investment and therefore growing very fast um and what once you stop that what you do how do you get those resources i think first it's not a zero sum game but i want to say that second there is of course a big issue of that the current tax and revenue system in in china is broken they know that very well the last reform was i don't know 94 94 which is um almost 20 years ago for example the vat works very well for them but it also goes to the center local governments have no resources for the vast experiences they have to implement um you know so there's an issue of a redistributing the tax resources they have and finding new ones local government local government taxation property taxes etc so there is scope to raise more revenues to the tax system but as i said it's not a zero sum game because our view is that capital is too cheap and too many resources are being moved into capital and the resources that they're moving are allocated in an inefficient way so there's both scope to reduce the amount of resources and to raise and to invest more efficiently for example if you open up the service sectors and allow millions of small enterprises to start little shops in the service sectors and or allow new initiatives in many of these current you will raise funds again through the financial sector on a competitive level for investments that are competitive enough to earn the return so again it's not that you need to replace all this with new tax system part of it is true but it's not a zero sum game okay um on on dividends a very good question and a very good point i um when i think about dividends and their role in the economy their role in imbalancing i tend to take a macroeconomic sectoral approach distinguishing households the government sector and enterprises um the problem with with or the reason that this is an issue for chinese enterprises is that dividend payments have been generally very low by international comparisons particularly for state-owned enterprises many of the dividends that are paid by state-owned enterprises you point out particularly the non-listed enterprises are transferred from one pocket of the enterprise sector to another pocket of the enterprise sector and used to fund enterprise investment generally although not necessarily by the dividend paying enterprise um listed companies paying dividends to uh private owners can directly feed into the incomes of the household sector and directly into consumption dividends paid to the state as owner can feed directly into household incomes by increasing the resources of the state allowing opportunities for reducing fees state fees uh reducing taxation strengthen increasing transfer payments or strengthening social welfare system so that's that's the way in which we've thought about the enterprise state-owned enterprise dividend payment uh not that it's valuable to put it into the general budget per se but that if you're interested in rebalancing once it's in the general budget it can be used for other for the other purposes um on on lecturing china and and consumption based um what what credibility do we have um the united states had a financial crisis but it did not have a financial crisis because it was a consumption based economy um you know the consumption in the united states is is high because household incomes are high and because household wealth accumulation has been high in fact if you look at the period leading up to the crisis uh the financial wealth of american households increased relative disposable income all out of bounds of historical experience much of that disappeared during the crisis which is why us household saving rates rose so sharply and a good part of the reason why we went into a to a recession the reason that discussion of raising household consumption in china has credibility and we're not the only ones to make the argument i mean it's it's been a clear goal of the five-year plans both the current one the past two is that both one i think of of sustainability of growth and also if if you're an economist broadly it's a question of what are you growing for china has seen a gradual but very substantial rise in the share of of national income of gdp that's devoted to and investment to increasing productive resources there are clear indications that the returns to that investment are falling and may in fact be be negative in in some cases and it would be very hard to sustain an investment rate in an economy where growth falls because the labor force uh begins to fall certainly increases at a slower rate if you look at at white household consumption is is low in china in fact it's it's extraordinary low it's by measurement about 35 percent of gdp which is maybe half what it is in the united states and a little bit more than what half what it is in india or germany or any country it's in part due to the fact that chinese households are high savers their reasons that they save because they are a few financial services products but it is in large part because household income has gradually declined as a share of national income as income has shifted primarily to the the enterprise sector i mean it's it's a value judgment but an economist from any country looking at what has happened in china would say there's something strangely out of whack here and it's not surprising certainly not surprising to me as an economist that official chinese discussion and planning has focused on shifting the balance back towards greater consumption and in national income i could say something very quickly i i interpreted your question to mean less a discussion about the wisdom of china shifting to a consumption based economy but how can how can we lecture them specifically on financial sector reform when we just went through this horrific financial crisis isn't this a little ironic to say the least i think it's a very fair point and in fact where in in our annual trips to china i can i can tell you that there was a discernible drop-off in the interest of what we had to say in 2009 ish in 10 relative to what you know the you know the receptivity that we experienced in 2006 say and in fact we had a very a very revealing as bob knows the chinese can be a breathtakingly refer a breathtakingly direct at times and we had a very revealing meeting with the number two gentleman at the shanghai stock exchange who said to us you know your financial crisis has been very upsetting for us because it's very upsetting when you realize that that the master is a fool and and and and he was very straightforward and said you know we we have held you know these institutions like liman brothers and maryl lynch and et cetera et cetera in very high regard we we send some of our best students and government officials over to work in these institutions and learn and learn you know to try to discern and absorb some of the expertise and then and then these institutions fail and go away and it's been very upsetting for us because we now have to ask ourselves what are we trying to achieve you know if this financial system that we admired for so long has is as vulnerable as it is where where does that leave us in terms of what our future is so i i think that i think that these are all very very fair points and very understandable our our response was you know look we we we have learned some very important lessons ourselves from the financial crisis obviously and and we made some very fundamental errors i i i think it is fair to say our experiences and i wonder if it's bobs that that they watched the reform process that went on here very very carefully in terms of how we dealt with the crisis how we responded to it and it's it's our understanding and by way of the conversations that we've had that they were impressed with how quickly the country dealt with the problem and responded to the problem and were impressed with the substance of the reforms and there is a i can tell you that that in recent trips there has been a renewed interest in in our council in our our input in terms of their financial reform so fair point but you know it's an ongoing and dynamic dialogue okay on that note i was gonna now i did think of a actually interesting line of questioning but i'm not gonna ask it because because we're at this time but but we will we will do this again but let me before we thank the panelists let me thank you for your patience and staying for a you know relatively long event on a relatively complex set of issues that isn't for everyone but is is very important and i appreciate your staying and and thanks to our online viewers includes including at least one hearty person in beijing who i know has been watching but may have fallen asleep by now but thank you all and please thank the the panelists for their terrific presentations