 Well, ladies and gentlemen, good morning. I'd like to welcome you all to CSIS. I'm Ernie Bauer, the CIMITRO Chair for Southeast Asian Studies, and it's a real pleasure to be here this morning. We're amidst the cherry blossoms, although it's a very cold day here in Washington. It's supposed to get warmer, and I think we'll definitely heat things up for our discussion this afternoon about economics in Asia. It's a very timely discussion with TPP about to hit the hill next week, and our TPA about to hit the hill next week. Prime Minister Abe on his way to the United States. A lot of debate over the Asia Infrastructure Investment Bank. We've got some terrific people lined up today to talk with you. I'd like to first thank Jess Balbindra and Vasuki Shastri from Standard Charter Bank for their partnership in devising this concept and supporting the conference. Thank you very much for your support. And I would like to just go through a couple housekeeping items before I introduce the President and CEO of CSIS. The conference today is Financing Growth in the Asia Pacific, and we are broadcasting today's conference live on our website, CSIS.org, and we invite you to connect with us through our Facebook page, CSIS Chair for Southeast Asia Studies, and on Twitter at Southeast Asia DC and at CSIS. We welcome audience participation from outside by using the tweet hashtag, hashtag CSIS live. And in case of emergency, we want you to know that the exits are located behind you here, and here I feel like an airline steward when I do that, but we're required by the building standards to make sure that you're safe, and that's very important to us. So if there is an issue, I will be your guide and we'll meet and go outside and meet across the street. So please follow me or a member of the CSIS staff if there is any issue. So without further ado, let me introduce you to our President and CEO, Dr. John Hamry. John? Good morning everybody. We're delighted to have you here. I mean it's kind of a gray day, but the cherry blossoms are livening everything. It's just fabulous. This is probably the nicest year we've had in 40 years I've been in Washington. It's just splendid. This is really, this is a very important conference for us and an important initiative. I too want to thank our friends at Standard Charter. I mean it's very, for them to make it possible for us to bring this to the Washington policy. Community is very important and we're grateful for that. I think this is, it's important to say this is, I personally believe the premier agenda when it comes to Asia these days. There are a lot of issues in Asia and we're in the middle of a debate. It's not very well formed up because we've got so many things going on in this town. I mean right now the weekend we'll probably be spending a lot of time talking about the Iran deal, etc. But if you look at strategically the most important things that we're working on, it certainly is this. It is helping to define the economic architecture for Asia, which I think is going to be defining the success and prosperity of this entire century. And it's really up in the air. We'll talk a little bit about it later today. I thought that we made a big mistake to oppose this Asia infrastructure bank. I mean because it's clear that it's an important initiative. It's well received within the region. America is defining itself outside. It doesn't make a lot of sense for us. At the same time I think we're pushing hard, finally pushing hard on TPP. I think we're going to see some real progress over the next couple of weeks. And I think that's very good. So we're, it's uneven because we have so many competing interests and activities. But it is, we're moving in the right direction. And this is the, I think, the defining issue of this certainly of the next, the rest of this decade. And I think we'll be defining how we proceed through the century, honestly. So we're very lucky to have Gita Wirowanta be our keynote speaker today. He's a man who knows us well enough to know how to talk to us. But he brings an honest and fresh perspective from Indonesia that comes from his very, very deep professional experience in Indonesia. Finance minister, trade minister, successful businessman. Even though I think right now he'd tell you he's far more interested in his golf courses that he's building around Indonesia than he is in his businesses. So I mean, this is certainly, he's got the most fascinating personal set of interests of music and the arts. And yet he's become a statesman and a very successful businessman. I think he's the perfect individual to give us here in Washington a reflection on the dynamics, not only in Indonesia. I think we'll hear some of that today, but also the region in general. And he has been, I'm very proud to say, he's a senior advisor with us at CSIS. So with your applause, would you please welcome Gita Wirowanta. Very good morning to all of us. I want to say thanks to Dr. John Ambry and Ernie Bauer from CSIS for inviting me to be here this morning. And of course, big thanks to CSIS and the sponsor of this event, Standard Chartered. Many of which employees I'm very dear friends with, including the ones standing or sitting in front of me here. I know some of you would rather be watching Jordan Spieth or Tiger Woods tee off this morning, you know. But I'll try to spend the next few minutes talking a little bit about Indonesia, Asia and a little bit about Asia. I think we've seen the era of quantitative easing, ending in this part of the world. But it has somehow shifted to other parts of the world, in Europe and the developed Japan and Asia. And it's also led to a new kind of environment of low interest rate and low inflation. Intuitively it's good for the world and particularly for Asia because all of a sudden you've got access to capital that's cheap. And it's well needed by people who want to undertake a lot more economic activities in the near foreseeable future or the distant future. Cheap or low cost of capital should be able to finance lots of things, provided that the financial intermediation works the way it's supposed to. Sometimes as we have seen, it hasn't. And it's good to be able to move capital from institutions that are well in excess off to those that are bereft or needed. And it's good to be able to move capital from countries that have a lot of it to those that need it. The same time we're seeing China having moved from the paradigm of high octane investment thesis to that of a much higher domestic consumption propensity. And I think it's going to be good for China provided that the demographics will support it in the long run. And that I think has been the challenge that we have been in discussions with including the Chinese and the world over. The deceleration of growth in China has entailed new deflationary environment, which has entailed rate cuts being done by the monetary policy makers in China. And again, building the case for a sustainable low interest rate, low inflation environment for China and the greater part of Asia. We've seen initiatives that Dr. Henry had mentioned with respect to not just the Asian Infrastructure Bank, which gladly has been participated by people from or countries from Asia and beyond, but also the BRICS Development Bank, which I think has helped as an initiative to bridge the gap between those that have money and those that need money. We've seen a couple of rate cuts recently in India by way of a new kind of deflationary environment. That's also good for not just India, but Asia in general. But is this really good for Asia? You've got a region that has a wide spectrum or range of GDP per capita from less than $1,000 in some countries to more than $50,000 in some others. You've got a region that has a perennial thirst to become even more marginally productive. You've got a region that's in need of spending about $7 trillion US dollars for infrastructure, development purposes in the next 20 years. You've got a region that's got a growth trajectory of about 6% per annum as compared to the global growth trajectory of about 3% per annum. That differential serves as a competitive advantage. You've got a region that has an aspiration to increase its makeup of the global economy from 35% to 50% where the region used to espouse until about 200 years ago when Asia was making up around 50% of the global economy. You've got a burning desire to do lots of things on the back off a very disciplined borrowing behavior with a debt to GDP ratio of around 40% as compared to some others which may be borrowing at more than 100% to the GDP. Also on the back of high savings propensity, these are all the good things about Asia. Such intuitively a low interest rate and a low inflation environment should be an excellent platform for financing Asia's economic activities in the short to long run. Nonetheless, it may not be that straightforward. Some of the challenges can be seen in a country like Indonesia which certainly has scale and typifies some of the aspirations of Asia that I've noted before. Indonesia is characterized by a number of attributes, one of which is that it's the third largest democracy in the world. It's the fourth most populous country in the world. It's the 15th largest economy in the world at a trillion dollars. It's a member of the G20. It also represents about 43% of ASEAN's 2.5 trillion dollar economy. It represents about 43% of ASEAN's population. So it's got critical mass. It's got a banking asset of about 500 billion US dollars. Not very big for a trillion dollar economy. You take the assumption of the banking system growing at about 20% per year. It's only got an ability of lending 100 billion US dollars per year. You put that in a box where a country needs to be spending about 4 to 4.5 trillion dollars worth of infrastructure in the next 20 years. It works out to about 200 billion dollars per year when the bank can only lend 100 billion a year for everything. So there is a mismatch between what's required and what's available. Thereby necessitating a better economic investment climate. In order to better intertwine itself with the global community and the global economy, it simply needs to become more marginally productive by way of significant investment thesis on two things. The first being the soft infrastructure, i.e. education, where in my calculation I think the country needs to be spending between 2 to 2.5 trillion US dollars in the next 20 years if we were to be able to properly move up the value chain from where we are. And where we are is not far off from just being able to extract things from the ground. We want to be able to make iPhones. We want to be able to make certain things that other countries in Asia are capable of. The other thing that we have to do is to build a massive hard infrastructure, which will take about 4 to 4.5 trillions that I've mentioned. It's a massive undertaking. But who knows, with proper financial intermediation, we will be able to access the low-cost capital that's prevalent in many parts of the world today. If we peel the onion a little bit more, some challenges surface, and they need to be thought off and addressed. From a monetary standpoint, we've seen pressure on our currency. As with other Southeast Asian currencies, our currency has depreciated more than 20% in the last few months by way of, more significantly, the posturing of the monetary policymaker in the US. Expectation of interest rate increase in the US has translated to certain behavior. And this has caused a bit of a difficulty. Even though a few weeks ago we decided to lower interest rate by 25 basis points, I'm not sure if that's sustainable in the absence of a compensating fiscal posture. And this is where I think the challenge is. We've got a budget of less than 200 billion US, of which tax collection has been underpinned mostly by the energy sector, which this year obviously is going to come down. So you're going to see, I think, a bit more pressure on the fiscal space of Indonesia by way of slower demand from China and other countries for our commodities and the other challenges of basically doing the non-all in gas and non-energy stuff in Indonesia. A potential consequence of this pressure on the fiscal space would be the widening of the budget deficit. It's likely to go up to probably above 200 trillion groups, which is unprecedented. We've seen in each of the 10 years before a budget deficit of around 100 trillion groups. In US dollars 100 trillion, that's a mere 7 to 8 billion US. 200 trillion is a mere 16 billion US. To some of us in Indonesia, it's a lot of donuts. I'm surprised you guys are not eating donuts. But it's an issue that needs to be addressed. It can only be realistically addressed by doing a few things. Perhaps holding back on the infrastructure development projects that we've seen the sound bites from the government, the rhetoric from the government in the last few months. Holding back on the capital infusion by the government into the state on entities and perhaps reducing further the energy subsidies that we saw a few months ago. This is probably not going to be enough not to mention a more proactive approach by the tax officers on those who have been paying taxes. And I've been advocating that I think we should try to be shifting or moving from the paradigm of hunting in the zoo to hunting in the jungle. We only have fewer than 30 million people and institutions paying taxes in Indonesia. You put that in a basket of 250 million people. It's not that efficient. It's a country that has a tax ratio of still less than 14%. Developed country has a tax ratio of more than 30%. We've got to do something about increasing the tax base. And the way to do it is not to knock on the doors of those that have been paying taxes but to actually create a new space. And the creation of this new space could involve a legislation like a tax amnesty which I've been advocating for quite a while. And if this were to happen I think this is going to game change the number of taxpayers, the tax base and who knows hopefully the variability of Indonesia to even lower tax rates. Imagine a country with only 30 million people paying taxes were already able to charge a tax rate of 20% to any company that's publicly listed. Almost as competitively as Hong Kong and Singapore are doing already to corporates. If we were to game change the tax base we could maybe be more competitive in terms of our tax rates. And that combined with the low cost capital that's in front of us is going to be just staggering in terms of promoting economic activities in Indonesia. It's a possibility but it's a possibility that requires legislation. And ladies and gentlemen when we talk about legislation unfortunately it requires a political process. And I'm not here to talk about politics of Indonesia. I'm just here to talk about the economy and I think the economy of Indonesia is going to be challenged by the factors that I've already talked about. In addition to those challenges that I've talked about we're seeing a deceleration of investment growth. We're seeing compression of consumption. We're continuing to see the trade account being exposed. As a result of which we're probably going to see the current account being exposed. As a result of which we're probably going to see possibilities of the exchange rate being further exposed. I'm not here to scare you but I'm just here to paint you the realities on the ground. All these will probably translate to a growth rate of 5% to some people in Europe it sounds like Nirvana. But is that good enough? You put this in a box where a country that democratized 17 years ago needs to stay as a democracy and for a democracy to stay or sustain needs to be creating at least 2.5 to 3 million jobs a year. And if you're growing only 5% you're only going to be able to create about a million and a half jobs. Let's not forget we're still at the low end of the value chain. So it poses some risk to our ability to sustain democracy if we don't get it right. Getting it right means growing at more than 5%. And that is part of the broad Asian aspirations that I talked to you about earlier. We've seen some positivity in terms of financing growth, the Asian infrastructure, the BRICS bank. These are all institutions that are going to be providing capital. But as you all would know, capital provision is not just about having capital. It's about having the right framework, the right structure, the right environment, the right climate. And we need to make sure that the right climate is there and the right climate continues to improve. It's not likely to improve if the labor market has not changed. It's not likely to improve if we continue to do things that perhaps may make some of our neighbors in Southeast Asia nervous. And that is something that needs to be addressed going forward. We're seeing new paradigms of trade agreements involving Asia. The TPP aptly pointed out by Dr. Hamry. I think the next couple of weeks will be defining moment for the Asia-Pacific region. And Asia does aspire to have its trade value over the Pacific Ocean being symmetric with that of the Atlantic Ocean. That will take us back to where things used to be 200 years ago. That's a real possibility, but at the same time it is a diverging issue. It is a divisive issue for some members of Asia, some members of ASEAN even, because some members of ASEAN are on a different level of thinking. They're thinking of intellectual property because they're earning more than $50,000 GDP per capita. How about those guys that are still earning less than $1,000? They're still trying to worry about whether or not the factory for textile could be built in the nearest village. But this needs to be amalgamated so that we get together and grow together. And I think it's possible. If you take a look at ASEAN, which is a $2.5 trillion dollar economy, the intra-trade of ASEAN is less than a trillion dollars. When you know some members of ASEAN are trading at more than 100% of their GDP. So there's room for improvement for ASEAN. And it's not acceptable for us to be intra-trading only at a trillion dollars or less when our economy collectively is at $2.5 trillion US dollars. Are we adequately invested? No. We're absolutely inadequately invested. Indonesia has a fixed capital formation ratio of only 30%. China, near 50%. Some other countries in ASEAN have a fixed capital formation ratio of close to 40%. But you've got countries in ASEAN that are barely investing at less than 20% of their GDP. But this is all going to go up if that money flows. That money could flow from here in the US, could flow from China, could flow from Japan. And this is all that we have to work on to make sure that we grow. We grow at more than 6% per year for ASEAN, for Asia as a whole, so that we can compete, so that we can be marginally productive than ever. The challenges are there. You peel the onion a little bit more. You know, democracy is great. But it's also challenging when you can't put food on the table the way you want it, the way it should be. And you've got countries in ASEAN that are going through somewhat of a political process, and this could have some implication on growth. But if you take a look back the last 50 years, the beauty about ASEAN, which is very different from the European Union, is that we have not had hostilities. We've been able to keep peace for the last 50 years. And peace, as some people take it for granted, is a necessary commodity for growth. Stability is a necessary commodity for growth. And I think we've got a real chance at keeping this sustainable for a much longer time. So the delta will be not just making sure that peace is there, stability is there, but the delta will be taking advantage of the access to this low cost of capital that's prevalent. Thank you very much. Will you take some questions? Paquita has kindly agreed to take some questions, so I'd just invite you to raise your hand, identify yourself and your organization, and be happy to answer some questions. In the front here. Hi, I'm Anne Gaylor. I was wondering, do you have any concrete suggestions about how to bridge that gap you described between the country that wants to establish a textile factory and the other that's imposing intellectual property laws? Look, I'm not proud of standing up here and saying that Indonesia is not participating in the TPP discussions. And my days in the government previously were interesting in the sense that, you know, it was my first lesson to learn about politics. And being in politics, sometimes life gets to be a little more complicated than being outside politics. And my pitch has always been, you know, Indonesia is not at a point to be able to ascertain as to whether or not this would be net beneficial for us to dwell into discussions like a TPP, to dwell into discussions that are very, very 21st or 22nd century in trade discussions. Because of not just where we are in terms of the value chain, but in terms of where we are in terms of the politics, because there's still a lot of people in Indonesia who don't understand things the way they should. And it does take time. So my pitch when we were trying to attract money to come to Indonesia was always to give the most realistic picture of what's happening. Yes, it is a corrupt country. Yes, it is an uneducated country. But if you were to take a 20-year view of this country, the question is whether or not this is going to be less corrupt five years from today. Whether or not it's going to be more corrupt five years from today. Whether or not it's going to be more educated five years from today. And it dovetails back to your question. Countries that are earning $1,000 or less a year will have a lot of people relatively speaking or absolutely speaking that don't get the kinds of discussions that many people here in this part of the world are engaged in. But it doesn't mean that they will not get it. It only means that it's going to take more time for them to get it. And the time will be accelerated if collectively we take a view on how to make sure that we stay together and how we improve welfare together. And I think ASEAN has been a very good example. We don't have tax unionization. We don't have fiscal unionization nor immigration unionization. But we have a union on three pillars, security, politics, culture and economy, slash. And all these three pillars have kept us together in ways that we can actually achieve a pretty modestly, if not modestly, robust growth. And that's good for the region. So, yes, we may not be able to understand it now, but we will understand it. And you've got to take a view on the trajectory as to whether or not we're going to be there in the next few years. Thank you. I'm Paul Cadario from the University of Toronto. I'd be interested in your thoughts about the evolution of rule of law in Indonesia. Certainly there's been some advance on the ability of the courts of Jakarta to deal with corruption issues and to follow up the government's activities, PKK. But at the same time, I think there's still questions that investors and indeed people wanting to do business within Indonesia would raise about both protection and private property and the behavior of the criminal courts, most recently with the Canadian teacher. And while I know you won't comment on a specific case, I'd be interested in your thoughts on the general question of what needs to be done to the legal system. Well, the good thing is I'm no longer in the government. So I'm not on the spot here as much as I used to be. You write, there have been cases where you tend to question as to whether or not Indonesia is going to be able to get its act together on being able to enforce laws, rules, and regulations. But then I again go back to directionality, right? You're going to see bad cases for the next 10 to 20 years. But the quality of badness is I think what you're going to be questioning more. Ever since I've lived in Indonesia, we haven't seen a time where we didn't have any corruption cases. But let's not forget, we had the anti-corruption agency set up in 2004. It came into effect in 2005. We've put behind bars more people than ever compared to the preceding 30 to 40 years. Inclusive of ministers, bupates, mayors, governors, business community members, you name it. More than a thousand have been put behind bars. Is that good for business? That's not good for business. Because you know that if you're a bad guy, you're not going to survive. But there are still some bad guys who survive. There are still some questions about enforcement of rules, which unfortunately involve multinationals in Indonesia. Again, my answer is invest in the soft part. This is a country that only has 30,000 PhDs, right? Indonesia has only 30,000 PhDs in a context of 250 million people. India has close to a million PhDs. China has close to a million PhDs. India is able to produce a million engineers a year. We're not near that number. And this is a country which has been able to improve the welfare of its government officials pretty dramatically in the last 10 years. And I'll tell you this, you know how much I was making when I was a minister? I was making $1,800 a month plus a sack of rice, right? Luckily I was able to play golf before I joined the government and make a living. So I could say and do whatever probably most of you or all of you could say and do. But some of my friends in a government didn't come from the same kind of background that I did. It's going to be tough when you've got five kids, two of which are sick. They need to go to the hospitals. Let's not mention your wife wants a Gucci bag. The temptations are there. And I do believe that with the creation of the fiscal space in Indonesia in the long run where we're going to be able to go from 14% tax ratio to hopefully in the next 10 to 20 years, 25% tax ratio vis-a-vis the GDP. Oh boy, I mean it's staggering in terms of how much the future minister is going to be able to make. I think they're going to be able to make as much as my Singaporean counterparts are making. You know, they're making millions. Now when that happens, combine that with our ability to produce a much better investment climate, better labor market, better financial intermediation. I think the future could be a little bit better. But you're right, there are some realities that hurt. But are those realities going to diminish or decrease over time? I'm quite optimistic. We have time for one more short answer to one more question. In the front here. They're going to bring a microphone to you. I have a loud American voice. Suzanne Kelly-Leil. Thanks so much for this great presentation. I have a question about the tension between robust economic growth and governance. And it's related to what you've just said. In Indonesia, governance is very decentralized. And I think one of the great challenges, no matter how solid fiscal policy is in the center, whether it reaches outside is a different question. Do you have some concrete suggestions about how that might be enhanced? I'm not a believer of the strong center. But I'm a believer of the strong fiscal center. And Indonesia, I think, typifies the strong fiscal center. If you take a look at the budget of each one of the 497 regencies, municipalities and provinces, on average, 70% of their budget comes from the center. It's actually net good. Why it's net good? Because if you've got a sensible guy in Jakarta, he or she could tell anybody in Papua, in Aceh, Kalimantan, Sulawesi, or Nusa Tenggara. Hang on, I gave you that money to build that school. How come there is no student? How come there is no teacher? I'm going to do one of two things. I'm going to send you to the Anti-Corruption Agency. Or I'm not going to give you this money again next year. So there is actually a word with all to shape the behavior of people within the regions. Now it would be a lot different if much less than 70% on average, all of their respective budgets come from the center. But it's staggering 70%. And you're right, I don't think it is managed to the extent that it should be. Now you can mismanage it, or you can under manage it. But all I'm saying is I think we've got to manage it just a little bit better so that you can actually shape governance, behavior in the 497 municipalities, provinces, and regional governments. Gita, thank you very much. Ladies and gentlemen, please join me in thanking him for his presentation. Thank you. We are going to transition now. We've got a panel coming up that will be led by my colleague Matt Goodman, our Simon chair for political economy. We're going to look at the slowdown in growth in Japan and China. So if I could call that panel up. And again, thank you Gita for your presentation. You and I can exit stage left. Thank you. Well, good morning. My name is Matthew Goodman. I am senior advisor for Asian economics here at CSAS. And I hold the William Simon chair in political economy. Delighted to see you all here this morning on a rainy but improving day. I hope it's going to get warmer and the weekend is going to be lovely. So please enjoy the cherry blossoms if you're visiting from out of town. So we're the macro group. We're going to try to lay down some of the macro story, the big macro story in the Asia Pacific and use that as a context for understanding the discussions that will follow on infrastructure and finance and trade. So we have a powerhouse panel here. In fact, when I look at this panel, yesterday my youngest child turned 18. And so I'm getting nostalgic about childhood memories for my children. And I think about going to Kitty Land in Rehoboth Beach where there are a bunch of different machines. And if you put in a quarter in some machines, you get lots of tickets that come out. And other machines are much harder to score on. Well, we've got a machine here that one quarter is going to deliver a lot of tickets, I think. This is an easy panel to moderate. So I'm very fortunate to be joined by such a powerhouse group. Moving down the line, which I think is going to be the speaking order here, to my immediate right is Stephen Barnett, who's familiar here at CSIS. He's division chief for China at the International Monetary Fund. And we're delighted to have Steve with us. There's more biographical information in your packet, so I'm not going to go through their very distinguished careers here. So Stephen's right here. And then Adam Posems, I think very familiar to a Washington audience, president of the Peterson Institute for International Economics and among other distinctions and a real expert on the Japanese economy. And so that's what he's going to focus on today. And then next to him is Manu Bhaskaran, who is CEO of Centennial Asia Advisors in Singapore. And he's an expert on economic and political risk assessment and forecasting and will give us a perspective from kind of the rest of the region about China and Japan's growth outlook. And then finally, Mr. Jaspal Bindra, who is group executive director and CEO for Asia, for the entire Asia region at Standard Chartered Bank. And he will give a perspective from the market from a major financial institution in the region about these macro developments. He's based in Hong Kong, I should have said. So both Manu and Jaspal have come a long way today, so we appreciate their participation in particular. Okay, I'm going to just put in the quarter and let Steve kick us off. Thank you very much. It's a pleasure and honor for me to be here today with such distinguished panelists and guests. So let me thank the organizers for having me. I'm just going to make one key point today, and that is we should welcome, not fear, the slowdown in China. Why is that? Or put differently, it's because it's good for China and it's good for the world. So simple talk, one point. Actually, it's two points, good for China and good for the world. So let me start with why it's good for China. It's good for China because it marks a move to a slower, but safer and more sustainable growth path. There's three S's there, slower, safer and sustainable. So I'm going to cover all three of those S's in the next part. First off is slower. It's true that growth in China is indeed slowing. China's had a remarkable track record. For about three decades, they've averaged around 10% growth. Last year, growth slowed to 7.4%, which when you think about it really isn't too shabby. And this year, it's expected to slow further. We forecast growth this year to be around 6.75%. Sort of natural to use adjectives like disappointing, soft, weak when we describe a slowdown. Let me argue that those type of terms should not apply in this case. In fact, since last May, we at the Fund have been arguing for slower growth in China and have been calling for growth of about 6.5% to 7%. That's the slower. Now let me turn to the safer. Since the global financial crisis in 2008, the pattern of growth in China has been unsustainable. This in effect has led to rising vulnerabilities. So the slowdown we're seeing in effect reflects progress in containing these vulnerabilities and thus the movement to a safer growth path. That's the safer. Perhaps the best indicator of the vulnerabilities is the rise in credit. China uses this very broad measure of credit called total social financing, often called TSF. If we look during China's real boom years in the mid-2000s, early and mid-2000s, total social financing was averaging about 130% of GDP. It didn't rise as China was growing well over double digit. However, since the global financial crisis in 2008, that broad measure of credit has gone from 130% of GDP to over 200% of GDP. So that's a rise of over 70% points of GDP in just six years or about a 50% increase. Credit is just one indicator of how the pattern of growth is unsustainable. Others include the rapid rise in investment, sizable increase in local government debt, strong growth in shadow banking, and strong growth in the real estate market. I'm not going to illustrate all of these points. You can just take my word for it that these are all vulnerabilities. Addressing these vulnerabilities in effect means accepting slower growth. So if we think about it, if we have slower credit growth, especially because of reduction in shadow banking, less investment, especially because of an adjustment in the real estate market, and strength and management and oversight of local government finances, all of these things point in the same direction of slower growth at the risk of some oversimplification. In essence, it's less stimulus equals less growth. But also safer growth. The good news here is China recognizes this and has lowered their growth forecast to around 7% this year. So last year it was around 7.5%. The around is in quotes. I didn't make that up. That's the target. And this year it's around 7%. And China still has considerable buffers to manage this process of slowing growth. Okay, that's safer and slower now to sustainable. Clearly, slower growth is not a goal unto itself. The goal has to be to grow at the fastest possible sustainable rate. The fastest sustainable rate, though, is not exogenous. In the end of the day, that depends on reforms. So here, too, there's good news. China has a comprehensive reform agenda that was announced in late 2013. It's called the third plenum reform agenda, or we just like to call it the reform agenda. It will transform the economy to a more balanced and sustainable growth path. So the result of the growth that is more sustainable, also more inclusive, and more environmentally friendly. There's clearly been progress in implementing the reform agenda. If we look at the financial sector, we've seen strengthened regulation and supervision, especially of shadow banks. We've seen a lot of progress in near completion of interest rate liberalization. On the fiscal front, the authorities passed a landmark new budget law that will strengthen the oversight and management of local government finances. However, there's a lot more work to be done as well. And consistent with the stated principle of giving the market a more decisive role in the economy, I would highlight two areas for further reform. There's many more, but I'll just pick two in the nature of time. One is further progress on financial sector reform. What does this mean? This includes finishing interest rate liberalization, introducing a policy interest rate, and perhaps the toughest one, the web of implicit guarantees between savers, intermediaries, and borrowers. This last one, breaking the implicit guarantees, is really critical to improving the allocation of credit, which, if you think about it in turn, is critical for improving the allocation of resources. That's what's going to fuel growth, a better allocation of resources. But removing the implicit guarantees also requires greater tolerance of corporate defaults and bankruptcies, including in state-owned enterprises, or SOEs, as we say, a good segue to the second point. The next critical area of reform is SOE reform. The goal here is to level the playing field to ensure that there's room for the dynamic private sector firms to compete, grow, and create jobs, especially in the service sector. And if we look back at China's remarkable track record, where I started this story, we see that China's success is not an accident. China's success reflects the willingness at critical junctures to undertake bold reforms. If we look in the late 1990s, there was SOE reform, where China laid off tens of millions of workers. Then China joined the WTO. And if we look at the really strong growth in the mid to early 2000s, it was almost all fueled by private sector manufacturing, which in turn created even more tens of millions of jobs. So in real simple terms, what we need today is another wave of similar type reforms, this time in the service sector. I'm almost done. That was the good for China. Let me just conclude with the thought that it's also good for the world. How could slower growth in China be good for the world? After all, China's been contributing about one quarter, more than one quarter of global growth since the global financial crisis. Here the thought is really simple. Slower growth in China today, as part of a move to a more sustainable growth path, means much higher income in China in the future. So if we look at 2020, our model suggests that compared to scenario with no reforms, income would easily be 5% higher in China. Given China's size in the global economy, that's about 1% of global GDP. Seems like a price worth paying, a little bit slower growth today for much higher income in the future. And that's why we should welcome, not fear the slowdown in China, because it's good for China and good for the world. Wonderful. Okay, thank you, Steve, for that very clear and concise presentation, and I don't need to sum it up, because I think his bottom line was pretty clear at the beginning and end, and an encouraging one. I should just engage in one little piece of shameless advertising, which is that we just completed a report last week on Chinese economic decision making, and it's up on the CSS website and echoes many of the themes that Steve just portrayed. So I agree with his assessment, and I think it's, as I say, encouraging for the region that the largest economy in the region is slowing in a sustainable way, if that's true. So let's move to the second largest economy in the region, still a very important one, and where the messages are sort of mixed. I think some things about Japan seem to be getting better. In some other areas, there still remain to be a number of questions about the outlook. So Adam, can you take us through that? Thank you, Matt. My thanks to Ernie Bauer for including me in today's panel. It's always an honor to play the palace on Rhode Island Avenue and to see this crowd. I'm going to indulge in a bit about China before I turn to Japan. The Pearson Institute also does quite a bit of work on China, and we just released our semi-annual economic forecasts on Tuesday this week. Nick Lardi, our expert, spoke about the Chinese slowdown, again in similar terms to what Stephen did, but that puts us all, all of us on this end of the table, at least, in a very different place than the consensus, which is a statement that there isn't this financial risk or rather the risk is small and we're not seeing a downward cascade in China. And I think a piece that was implicit in what Stephen said that Nick, it's available on our website, Nick made more explicit, and Stephen as colleagues have made more explicit in other places, is that part of the sustainability change in China is a rebalancing towards domestically led growth. And domestically led growth, in addition, of course, means more imports from the region. It means China moving up the value chain rather than trying to stay in the lower value added parts of the value chain, which of course should mean more investment in the region, and it means a less resource intensive, in terms of natural resource per unit GDP going forward, although there will obviously continue to be great resource demand. And those three components of the Chinese shift, I think, are the ones that matter most, in addition to the fact that China gets on a path of say six and a half to six percent growth for a sustained multi-year period. And so I just wanted to affirm that our own analysis at the Peterson Institute, Nick Lardi and our team, generally agrees with that of Steve on this, and the IMF. The second point, and I'm fiddling with this, not because I'm playing email, but I actually have a stopwatch to keep me from going over, is now a turn to Japan. And I was making a bit of a face-at-map, because I think the whole idea of the mixed bag in Japan is just too much of a cop-out. Things are actually much better in Japan than people give it credit for. And we just, essentially, they have undertaken and successfully done the single most important structural reform they could do, which was to mobilize female labor force participation. As Stephen's colleagues at the Japan desk in the IMF have noted, and I've done some work on, Japan has added in the last two years 600,000 women to the workforce over Trent. This increased the workforce by roughly one percent. And that means they offset the demographic decline in the workforce for at least a span of five years. And then they got a boost to productivity because they've been underutilizing well-educated women for decades. There's been parity in education, but not parity in employment, so bringing women into the workforce raises the average skill level of the workforce. Now, why is this, this is simply bigger than anything else Japan could have done. However, in itself, as the Bank of Japan has made clear, it clouds the good performance in Japan because you're having a positive increase in labor supply and bringing in people who partly for sexism and partly for seniority reasons get paid less than the average worker. And so this pushes downward on wages. And so even though it's a long term or even near term positive for the economy, in the short term it's a deflationary pressure. And so this is part of the reason it looks like the first arrow of monetary policy isn't working and you're getting low inflation readouts is because they've actually made this positive structural reform, which combined with the energy price drop, similarly a positive supply shock that in the short term is deflationary, makes things look worse in Japan than they are. And so in our forecast that came out this week, we still think Japan actually grows 0.9% in 2015. I actually think there's upside risk in there and well above 1% towards 1.5% in 2016. And the important parallel with China is this is again a move towards a more sustainable growth rate. This is about having a functioning labor market. This is about being out from outright deflation and this is about not having it be fueled totally by fiscal policy. There is of course much room for further improvement in Japan as in every economy, but I want to stress that the story, oops my stopwatch keeps going away, the story is much more positive and much more sustainable than people think. And importantly, although the trade and investment issues will come up from my colleagues here and later in the day, Japan has finally looked like it's going to step up on agriculture in the necessary way to make TPP come together. And that of course is the linchpin to all this because they can't get the US deal without doing the agriculture reform. And if you have a bilateral US-Japan deal, then together, going off of our opening speaker, you start having common standards and IPR and other things, but the opening of Japan's market and agriculture provides access for less developed countries to get in. And so I think we should be on good basis much more positive about Japan going forward. And so then when we think about a China as pictured by Stephen or my colleague, and a Japan, both of which are going on for a sustainable growth rate, a solid growth rate with less fluctuation arguably. And both of them going on less of a simple export-oriented strategy. In Japan's case, it's about continuing the shift from made in Japan to made by Japan, outsourcing, investing abroad and shifting technology and brands. You end up with a really good backbone backbone for East Asian, Southeast Asian, and arguably, depending how China plays it, Central Asian development. And I think this is a macro picture that's quite solid. Now, some of my American friends will, of course, say, ah, but this all takes place against the background where the yen has fallen a lot, where the yuan, the U.S. Treasury claims is undervalued. Isn't that what's really going on? It's certainly contributing, but if you think about, in Japan's case, how overvalued the yuan, I mean, excuse me, the yen was for an extremely long period in the 2000s. This still remains within the realm of healthy correction. And frankly speaking, I think the U.S. Treasury is wrong in their assessment of the undervaluation of the renminbi. They're right about Korea, but that's another story. So this is not simply an export boom. So the question then comes upon our colleagues in the private sector, the people in the rest of Asia, notably in Indonesia, whether they are able and willing to take advantage of this, and whether in the official sector we can get past some of the nonsense that the U.S. created about the AIIB to have a more fruitful support for cross-border investment flows. On the macro picture, I think we're actually in surprisingly good shape. Okay, thanks. I knew whatever I said to frame Adam's remarks would provoke a response, a correction. So I could have said anything, but seriously, I agree with your assessment. I mean, I think broadly things are looking better in Japan. And I do think the structural form, I'm interested that you focused on the structural issues because I assumed you were gonna talk mostly about the macro, but the structural is really important. And I think there are some things happening there that certainly in 30 years of watching Japan, I haven't seen before in corporate governance reform and in the labor markets in agriculture. So I think there are definitely some positive trends there. Okay, let's shift to the rest of the region. And first of all, I'm interested, Manu, if you want, to comment on what you think about this relatively benign view of the two biggest economies in the region and then take it from there. Thank you, Matthew. And morning, everyone. It's good to be here with so many old friends in the audience as well. I'd like to look at China first because the impact of China and the way it works its way through to the rest of Asia is very different from Japan. Talk about Japan and then end with some conclusions about policy and vulnerabilities in the rest of Asia. On China, I think the baseline view that we have is, yes, growth is gonna slow, but that is only part of the picture. The question for us is the texture of that slowdown, what it means. And a couple of issues come out here. I think it's very difficult to transit to a new model very smoothly. And our baseline scenario is really one of episodic stresses. So it's not a crash and burn collapse scenario, but it's a scenario where every few months there are minor little explosions all over the Chinese economy, which they have the buffers and the ability to manage, but it does make for fairly mediocre economic outlook and changes the perception of risk in emerging markets, which then affects all of us. Within that, I think the key part of the slowdown is going to be investment. And if investment slows and savings will not slow as quickly, then clearly there's gonna be a huge impact on the current count surplus, which will increase significantly, and thereby contribute to global imbalances. So with that scenario in mind, what's the impact on the rest of Asia? First thing I'd say is the immediate impact is really on global investors' perception of risk in the rest of Asia. If they see a big problem in China, this series of little episodic stresses or whatever, then their worries about risk in other emerging economies will become sharper and it will precipitate, I think, capital outflows from the likes of India, Indonesia, and so on. And if that happens, I think my main concern is Indonesia, and I completely agree with what Gita Viriawan said earlier. In fact, I'd put it more starkly. I think economies where the current count deficit has not been bought under control compared to two years ago, countries where there are some question marks about central bank policy and its credibility, countries where their political stresses will suffer more than others in that context. And I think Indonesia, with its history of sudden devaluations and spikes in inflation, expectations of the exchange rate, expectations of inflation are extremely volatile in Indonesia, and things can destabilize very quickly there. So I'm a bit concerned what this impact would have on Indonesia. The second transmission mechanism is really to export of goods and services. And here, if it is the case that it is really capital goods imports that will come down more sharply, then I would guess that Southeast Asia will be less impacted than Korea, Japan, Germany, the US, which are the main capital goods exporters to China. In Southeast Asia, the main exports to Indonesia would be food-related raw materials like palm oil and intermediate goods. I would guess that the majority of those intermediate goods are really for the export processing platforms in China, not for production for domestic indigenous demand, and that would be less impacted. So I think Southeast Asia will of course be hurt if Chinese growth slows, but I think in a relative sense, it will not be as hurt as much as others. But a different transmission mechanism is the export of services, and tourism has become a very important way in which China affects developing Asia. Countries like Singapore and Thailand depend for more than 20% of their tourists on the Chinese market. And if there's an income shock of some kind in China and Chinese tourists start cutting back on their overseas travel, then a lot of Asia will suffer, but Singapore and Thailand will probably suffer more. The final transmission mechanism is currency expectations. For quite a while, the Chinese have maintained virtually a peg against the US dollar as the Asian peer currencies have depreciated significantly and the Chinese real effective exchange rate has actually appreciated significantly, which is why I agree with Adam that it seems a strange thing to say that the RMB is undervalued. However, if the Chinese economy does encounter significant difficulties, financial market expectations of the currency and how China manages its currency I think will change. There'll be more question marks about what that would mean for Asian currencies and that would lead to more volatility in financial markets. Very quickly to Japan, I completely agree with Adam. What we are seeing in Asia is actually real structural changes, but in the old Japanese way of it coming through consensus slowly, incrementally, but the important lesson that we've taken from looking at what happened to Germany, for instance, 10, 15 years ago, is that in advanced, mature, developed economies, incremental changes that are sustained can have very outsized effects and that is what is happening in Japan. And for us, the demographics of Japan and the geopolitical necessity for Japan to be diversified out of China are going to be extremely positive for ASEAN. And that's the main impact that Japan I think will have on the rest of us, I think it's a very positive one. So just to conclude very quickly, what does this mean for this part of Asia? I think if there's one thing that Asian policymakers consistently get wrong, it is to underestimate the financial dimension of the economy and the risks posed by not allowing central banks to build their own credibility and to build sound monetary policies and that's a huge vulnerability, a huge mistake that we keep making and I think that needs to be addressed. Secondly, if we are to take advantage of the positive impact of China and which Stephen outlined and of Japan, I think the Japanese want to invest much more greatly in, say, Southeast Asia and it's not a question of intent, it's a question of whether the business environment in Southeast Asia actually allows them to make that investment. So things like labor laws, ease of doing business and so on, these need to be improved if we are to really benefit from that growth. So let me end here, thank you very much. Okay, thank you Manu, a very helpful contrasting perspective from the rest of the region and one that I think leads to a couple of questions which I'll maybe pose if I have time. But let's move on to Jaspel, go ahead. Thank you, Mathias, good morning. And firstly, on behalf of Standard Chartered, I would like to thank Dr. Hamre and Anibar and the CSIS staff for having put this conference together. I'm delighted to be on this panel, distinguished one to discuss Asia. And before I address Mathias' question about the impact of the slowdown on the two largest economies in Asia, on the rest of it, I would briefly tell you a little bit about Standard Chartered in the sense that it is a unique organization in the way it's headquartered in the UK but does very little else in the UK in terms of business. It does more than two thirds of its business in Asia. And it is present in every Asian country other than North Korea. That's how we would like to stay. And we have 150 years of presence in many of those markets, over a hundred years in every Asian market. So we bring a unique perspective to Asia. Let me start by saying that the slowdown in both China and Japan are for real. And we heard from Stephen and Adam that that might be a good thing. But it is real. There is over capacity across several sectors. But there is clearly a decline in their export trajectory and there is slowdown in their domestic investment. The two most obvious things that come out of that, which impact not just the rest of Asia but almost everywhere else in the world is the historic lows in commodity prices, particularly metals and coal. And I think that has plagued the world for the last couple of years and it's likely to stay that way for some more time, even though these commodities are at their historic lows. The other big factor for the rest of Asia is that for almost every Asian country, Japan and China are the two major trading partners in trade. And clearly that volume and that value has suffered. Volume just because of the slowdown and value because of the reduction in commodity prices largely. So clearly we are seeing that hurt the rest of Asia negatively. The one consequence of the slowdown which is very obvious now and it's likely to sustain for some time and as we heard not for a bad reason is that both Japan and China are feeling more compelled to invest outside of their domestic boundary, both in terms of financing and in terms of real investments. And you're seeing that happen bilaterally, government to government. We're seeing that happen through state-owned enterprises and private sector corporations. We hope to see more of it when the Asia investment and infrastructure bank is up and later the BRICS development bank is up. So clearly every which way you see there will be more capital flowing in to the other emerging markets around Asia. And as a keynote speaker, Geeta mentioned earlier in the morning, there is a huge gap of credit and capital in most of the Asian markets which might get now complemented through China and Japan. And it's happening already. We're seeing it happen. The Japanese banks are very aggressive and generous much to our dismay in competitive terms. But clearly it's all happening as we speak. The other fallout which could be positive for emerging Asia is not largely related to the slowdown but different reasons for the two different markets. For China the labor cost is now forcing industry to move out to more competitive manufacturing grounds. Particularly the low cost, the low value manufacturing elements. And I can give you some sort of general statistics. The cost of labor per month in China is $700. US dollars which is still cheap by global standards. But the cost of doing it in Vietnam or Bangladesh or Sri Lanka or Cambodia is less than $250 a month. So there's a great incentive to move things out to that part. And that is going to benefit a large part of the emerging Asia because they're gonna see this continue. Japan for a very different reason has to hollow out its manufacturing over time because of demographics. Japan has now reached the point where they're adding negatively to their working labor force. So they're losing more from their labor force, productive labor force than they're adding to it. And I think that factor itself is going to make that happen. So I think there will be a large benefit to markets outside of Asia. What it will however do, it won't let China and Japan stand still on that sort of pattern. They are going to focus a lot more on the service industry because that has been a missing complement of their economy for a long time. And I think they are going to enter the service sector. It requires less labor. It's kind of more the high value end. And I think that's where they're going to come and play. And to some extent it will hurt some of the other emerging Asian markets which have had a far better run on the service sector than China and Japan or they've had a far better run without the competition from China and Japan and now might face the heat a bit from there. Let me sort of boil it down to an overall Asia conclusion and the reason you should still be looking at it outside in from the US, you should still be reasonably optimistic on Asia. I think demographics in most of the Asian markets, particularly the emerging Asian markets are far too attractive to ignore. For the multinationals from here, for consumer goods and demand, et cetera, they are fantastic markets whether it's India or there's Indonesia, it's Vietnam, it's Myanmar, it's Philippines, they are fantastic. If you look at urbanization, most of Asia is still much below 40% urbanized. They're all headed towards 60, 70% urbanization. And the reason I say that with some certainty, being present as a bank, having worked myself there for the last 20 years in Asia, the mindset of the people who are rural or semi-rural today is already urban because of the global connectivity, because of the awareness that media has created, social media and otherwise. And so that process is getting accelerated, not just by how much the government wants to do but by the aspiration of the people. So I think urbanization is going to be a very big factor. The third out of the four factors I was gonna talk about, the third is, in my estimation, going to be the single largest factor which is going to be productivity increase. It might surprise you to know that the best, most efficient economy in Asia is today only 30% as efficient as the United States. And most economies are 15% or less efficient as the United States. In today's leapfrogging stage of global economy, I think that will move much quicker. And every percentage point there is a humongous number. And I think that's what's gonna happen. And my last point would be on consumption. Consumption is going to be mega out of Asia. The numbers are that in 2009, 28% of the world's consumption came from Asia. In 2030, which is 15 years away, 66% of the world's consumption will come out of Asia. It's just the numbers game. It's the under penetration. It's the growing wealth accumulation, et cetera. And I think there is no doubt in my mind, however biased I am coming from that part of the world, coming from an institution which has very strong presence in those markets that the center of economic gravity is shifting east. Thank you. Okay, thank you, Just about. Well, really rich food for thought there and across the panel. I'm gonna, because of the time, we only have such a limited time, I'm gonna forgo my burning desire to ask a couple of questions and let you guys ask questions on my behalf because I wanna challenge this end of the table in particular Steve and Adam on some of the, although as I say, I broadly agree with their perspectives they laid out. There are risks and there are questions about both China and Japan, financial risks in China and whether they can escape the middle income trap because not many countries have done it and they're up against quite a lot and in some ways there's some tensions between what they're trying to do economically, what they're trying to do politically that raise further questions. And in Japan, Adam, you wanna counter. Matt, just for the record, we've published a bunch of stuff saying the econometrics claiming there's a middle income trap or garbage. Okay, well that's one answer. All right, well you can spell that out. In Japan, the questions are of course the usual ones about whether there's gonna be real follow through, sustained follow through on some of the structural form but I'm also interested, Adam, in your view on the second arrow and the tension inherent in that between the need to address this huge debt overhang in Japan and the risks of moving too quickly on that and not providing fiscal support for the economy as we saw with the consumption tax events that that can create some shorter term risks in itself. So I didn't ask a question, did I? But let me turn it open to the floor. There are microphones. Please wait for the microphone. When you're called on, please identify yourself and please do try to ask a question. There's a gentleman way back there who I saw first. Stanley Kober. Yesterday in her speech, the IMF managing director, Christine Lagarde said, quote, the bottom line is that risks to global financial stability are rising. The new mediocre growth environment is not a comfortable place with respect to financial stability, unquote. Now this is to the panel because I'm hearing what seems to be very positive outlook and especially to Mr. Barnett, because she is your boss. How do you reconcile what I'm hearing that's very positive with her very bleak, and I would say even somewhat alarming assessment of financial stability, global financial stability. I like my job, so I'm not gonna disagree with my boss. But I think that statement or that statement was not with regard to China. It was a broader statement about the global economy in particular advanced economies. Think if we look at the financial stability risks in China, there's a lot of very China specific characteristics. Credit growth in China, as I argued, has been up a lot and it's almost, if we look kind of a across countries and across history, it's almost an unprecedented increase. At the same time, if we look at the stock of credit in China, it's still well below the levels you see in advanced economies. So what's happening in China is a combination of rapid credit growth, raising some financial stability risks and financial market deepening, which is quite a welcome development. The key challenge is to manage that. And if we look over the past year, the flow of credit in China last year was negative. We don't usually think of credit in the flow, not the stock, but the amount of new credit in 2014 was actually less than the amount of new credit in 2013. If we look at so-called shadow banking, that also was shrinking rapidly. The very technical way of saying China, for which I'm most qualified to speak about, has done a lot to contain the risks of financial stability. Since Christine Lagarde isn't my boss, let me just throw in a bit more. It is nowadays perceived as the people in responsible positions, of which she is one of the most prominent, that you always have to say there's terrible financial risks around the corner. It's kind of like with the terrorist threat warnings in the U.S. that they never go below yellow. It makes one sound very prudent and in line with small-sea conservative thinking, it doesn't mean it's right. Okay, thanks. I saw a gentleman over there who was... Hi, my name is Brian Yanando, and I'm with the Amosin Education and Cultural Exchange Foundation. Given China's downward growth trajectory, what effects will this have on their outbound direct investment to the United States? Investment into the United States. I mean, maybe one of you, Manu or Jaspal, can talk about Chinese outbound investment in the region and in the United States if you can. Sure. I think we shouldn't get too deceived by percentages and numbers because we are talking about a slowdown, not a terrible growth. It's still way above the peak rates of growth in the developed world at their best. What you must realize just sort of conceptually in your head is that China adds Australia's economy every year and every three years it adds an Indian economy to its growth. So that is the kind of trajectory. They will, their resources are among us and they're sitting on huge amount of foreign reserves. So clearly, their challenge is more to find the avenues to invest rather than the willingness or desire. They are compelled. They have no choice but to invest and really what makes them more attractive? Is it their food security? Is it their commodity security? Is it energy security? Is it their diplomacy, gaining friends around the big table? It will be some combination of all of that. Well, just that the US retains, the underlying forces are exactly as Jaspal said. I mean, he's much more in touch with that. It's just the US retains the ability to make itself a unattractive destination for China if Congress chooses to put pressure on the CFIUS process. So we've seen things like, for example, Huawei being treated as a company non grata in the US and putting huge amounts of R&D investment in Western Europe. So in addition to all the economic fundamentals US politicization can make us a less attractive investment destination. Although as a former Treasury person, I have to say, I mean, I think it's important to distinguish between CFIUS process itself, which I think is not as prone to that pressure as outsiders think and the general political environment here and Congress's role in that, which I think does have that effect of querying the debate. But anyway, we can have a separate conversation. Smithfield Ham, Matthew. That was, as I recall, was approved, but Vikram up there in the front. Oh, all right, okay, go ahead. I'm Andre Silverzo and I'm the partner and director for Vietnam Southeast Asia and Washington, DC for the Interstate Traveller Company in Michigan. Now, my question is probably directed mostly towards Dr. Hosen because if I understood you correctly, you said that Japan is going to loosen its protectionist policies on agricultural products. Great, so if they're gonna do that, my question is, do you have sort of an estimate of how soon they'll do it? Because if they'll do it soon, it could help President Obama persuade Congress to give fast track for TPP. That's correct, that's the whole reason they're doing it. I mean, that's the explicit deal, is that they're doing it to get the TPP. And so the U.S. and Japanese negotiators are explicitly talking about, they're still leaving rice protected, but they're explicitly talking about what are the reductions in tariffs going to be on dairy, pork, and beef, and replacing the very complicated pork price support system in Japan with a straight up tariff probably in the single digits. And Japan has been told explicitly and Minister Amari, who is the trade negotiator for Japan, knows this, that if they don't deliver this, Congress will not vote for TPP. And so the expectation is Prime Minister Abe's visit later this month will include a bilateral handshake between the President and the Prime Minister. And if it doesn't, TPP is dead. I agree with every word of that, which is just for the record, I do agree with every word there, Adam. Vikram now. Thank you very much, Matt. Vikram Nehru from the Carnegie Endowment. A lot of the analysis that we've heard right now has been on the current account consequences, the growth slowdown, and I'm very glad that the previous questioner raised the issue of outward FDI to the United States, but I want to raise a broader question about the fact that as Manu suggested, there will continue to be high savings within China, and you're expecting a rebalancing which will bring down the share of investment GDP over time, which will lead to a larger current account surplus. So there's enormous pressure in China for excess savings to leave the country. So the question actually is to Steve, what is the current policy of the NDRC, which is responsible for this part, for the controls on the exports of capital? What exactly is the thinking within NDRC about this? How do they expect to manage this? And with regard to this, you know, the bilateral investment treaty discussion of the United States is going to be very, very important because if it's successful, it could set the gold standard for investment treaties with other countries and would facilitate the exports of Chinese capital, and that would have an importance for the rate of return for Chinese investment, but also have an impact on the exchange rate. So there are so many factors that are going on in the capital account in China which really we haven't explored very deeply in this discussion, so I'd like your reactions, please. Thank you. A couple of questions in there. Let me take these zero ones first. First on the NDRC thinking, let me punt on that, but give it our thinking and our assessment of the reform agenda. And I think as you pointed out, Vikram, we look at the, typically you think of the current account equals savings minus investment. China's trying to rebalance. Investment's gonna fall, consumption's gonna rise. It's not gonna lead to a rise in the current account surplus. And that's a partial story. Actually what the reforms in China are gonna do that Dr. Pozen mentioned earlier is boost consumption and reduce savings. So in fact, things like social security reform to give more certainty to people's pensions, lowering social security contributions to give households more income, expanding the service sector which is much more labor intensive. All of those reforms will actually cause savings to fall by even more than investment. So we view that the comprehensive package of reforms that China has will promote both domestic rebalancing and I'm glad you raised that point in your remarks. That is a key issue of the IMF. And that domestic rebalancing or domestic balance will equate to external balance. On the ODI and the BIT, the bilateral investment treaty, one could with a bit of maybe exaggeration make an analogy to China joining the WTO that the bilateral investment treaty can provide the kind of catalyst to facilitate reforms that allow China to go out and allow others to come in to China. And in terms of China going out, the ODI, actually ODI last year topped 100 billion. It's rising very, very fast in China. I suspect that'll continue to happen despite the slow in growth in China. Just to follow up, I need to do a bit of advertising. Peterson Institute published a very detailed up-to-date study on the bilateral investment treaty and we published a parallel study from the China Development Forum last month. And very much in the spirit of what Stephen was saying. And I think it is the low hanging fruit, but the biggest thing in the spirit of what Stephen was saying is China for the first time is gonna be talking in terms of a negative list. Now we're still wondering how limited that negative list is versus infinite, but the move to speaking in terms of a negative list is a very big shift in investment behavior for businesses. And the second thing on savings, I completely agree with what Stephen said, it so happens. But I think another lesson from Japan that's relevant to China is there was this tendency to always assume Japan would for all its various cultural, political, nasty reasons run trade surpluses forever. But there were people, including my colleague, Marcus Noland, including the distinguished academic Charles Yuji Horioka, who 20 plus years ago said, no, it's demographics. And when Japan gets old enough, they'll start dissaving and they'll run current account deficits. And that is indeed what is happening. And the demographics in China aren't great. So the idea that in addition to everything else that Stephen has mentioned, you're going to have demographics pushing in a set direction of lower savings in China in the near future. Hi, Pengal with the China-Singhua New Agency. I heard Adam just said the US Treasury is right on what he said, it's wrong, yeah. What he said, China's currency remains significant on the value, but it's right on for sure career one to appreciation. So could you elaborate more about this country issue? Thanks. Well, I can ask also Manu to think about maybe expanding on your point about currency as well. Yeah, I'll try to be brief. As a number of my colleagues at Pearson Institute have pointed out, and I completely agree, it doesn't make any sense to talk about the Chinese currency being overvalued in 2004, 2005, when China was running a 10% of GDP current account surplus and was intervening ridiculously and offensively in the exchange rate market, and then use the same adjectives in the same language in 2015 when they've got a 2% current account surplus and they basically are not intervening at all. In addition, since as we just discussed, China is slowing down and arguably in a good direction for good reason to say that normally you'd expect a currency to depreciate some when the economy slows down versus trend. So I don't disagree with the right of the US Treasury to make these decisions, and I support many times in the past when the US Treasury has criticized Chinese exchange rate policy, but at the moment, I don't think the use of the term significantly undervalued is justified by the facts of the situation, and so I do not support it right now. I think the Chinese government, as the Treasury to be fair acknowledges in the report, has been abiding by the SED agreement not to be intervening directly bilaterally in an unreasonable way, and I think the US Treasury report does acknowledge that. So I mean, I don't wanna overdo my criticism of Treasury, they're not completely unreasonable, but I just don't think it's justified. The Korean won is different. Korean won has out and out been a case of a country that already had a trade surplus just intervening against the yen, against the dollar in extreme fashion when their economy was doing fine, and they did this in the height of the crisis when global demand was going down, and the US should have been hammering the Koreans on this three or four years ago, and it is ill timed from a variety of tactical perspectives for them to mention this now, but again, as an analytic point, if you had asked me to name the single biggest manipulator and harmful person on this, not person, a government on this front of currency manipulation over the last five years, it would be Korea. Yeah, just very quickly, I mean, the other measure of whether a country's manipulating exchange rate is foreign exchange reserves, and China has not been accumulating foreign exchange reserves anymore. In fact, reserves have been declining, which suggests it's not intervening, but taking a step back and looking at the overall picture of currencies in Asia, over the time, Chinese productivity growth is probably gonna exceed average productivity growth of its trading partners, and that probably allows the Chinese to be able to appreciate over time, but that's the long-term picture. What happens over the next 12 to 18 months when China is going to go through a very difficult patch? As I said, my baseline scenario is one of episodic stresses and where you could get financial stresses, you could get sudden slowdowns in the economy. For instance, the province around Beijing, Hebei, is actually contracting right now. Its GDP is falling, and there are many pockets of such contraction in parts of the Chinese economy. So there are great vulnerabilities in the Chinese economy, and over the next year, year and a half, I think some of these will become more visible, and that's gonna affect confidence in the currency. It's gonna affect the way policy makers in China look at how they should be managing the currency. In that kind of context, does it make sense to continue to allow this real and this very considerable real exchange rate appreciation of the renminbi that we have seen in the last year and a half? And I don't think that's sustainable. So in the near term, there could be a change in the perception of the renminbi, and that could be destabilizing for the rest of Asia because the rest of Asia would be seen as losers from renminbi depreciation, and that could lead to extraordinary volatility in our exchange rates, particularly those countries where they have not particularly well managed their monetary policy and the credibility of the central bank is in question. The final question, I think, because we're running out of time, unfortunately, but there was a gentleman right there. Hi, my name is Daniel Lume from Peace of Quest. My question is, given the restructuring that's happening in Asia, particularly in China, what countries will be the next winners? Because before when there were a lot of commodities, countries were benefiting from sending their commodities to China, and now that China is really making a big push toward the consumer sector, there will be some losers and there will be some winners. What countries do you see as the winners going forward next five years? Thank you. The one line answer to that would be countries that can attract manufacturing sectors which are going to move out of China and countries that can attract the investments that China will forcibly have to do outside since they're not seeing the growth domestically. I would say those two categories would be the winners. Okay, I think Southeast Asia is going to be a huge winner. There's a confluence of positives which I think would bring the ASEAN region back as a premier destination for foreign investment. You're seeing rising synergies from economic integration. You're seeing the return of once laggard economies like the Philippines and Myanmar, and that's good not just for those two countries but for all of ASEAN. You're seeing after 15 years of gross underinvestment in infrastructure, the beginnings of an infrastructure boom, not just in Indonesia where it's slow but in Thailand, even in Singapore, Malaysia, this is happening. So the investment share of GDP is going to rise and that's going to lead to higher economic growth. So for a whole set of reasons, I think ASEAN is going to look much better. Of course, when you look at the country's specific situations, there are issues with politics, issues with financial management in the short term, but I think the real supply-side factors argue for a much stronger growth performance in ASEAN relative to the rest of the emerging market world. Okay, well with that, unfortunately, we are out of time. That was a brief but insight-filled hour and please join me in thanking our panel for terrific presentations. We'll need to continue that and hopefully we'll get a little more into it and some of the other panels. Well, thanks very much for your attention and stay tuned. Do we have a short break before the next panel? Yes, which starts at 11 o'clock.