 Good morning. Welcome to CSIS. My name is Matthew Goodman. I am Senior Advisor for Asian Economics and I hold the William E. Simon Chair in Political Economy here at CSIS. Delighted to have you with us this morning. Thank you all for coming. Welcome also to our online viewers. We have a loyal following around the world and hello to friends who I know are watching in Beijing, Connecticut, Toronto and other exotic places and we are delighted to have you watching us. You can all follow us on Twitter at CSIS live. Before we begin let me make a few administrative announcements. First in case of fire or emergency you can head back down those main stairs and out in the lobby out to Rhode Island Avenue or you can also go through these doors behind me and there's a staircase on this side that goes down to the alley over there so please follow my team if such a thing in the unlikely event that such an emergency occurs. Restrooms are down the hall to my right your left over here. Coffee is available on the Samnon Terrace behind you throughout the morning and we'll take a short break around 11.15 if you want to fill up then. Lunch will be served after the program if you'd like to stick around for that. We have a nice lunch ready for you and finally please set your phasers and other electronic devices on stun. With that let's get started. Today the Simon Chair is releasing a new report examining China's economic decision making. You should have received the executive summary of the report when you entered and you can access the full 107 page version online via our website csas.org it should be posted now. We're very grateful to the Smith Richardson Foundation Alcoa Foundation the Japan External Trade Relations Organization JETRO and the GE Foundation for their generous support of our study. We would also like to thank the many eminent scholars officials and many other experts both in China and in the United States who offered us invaluable insights throughout our two year study. Some of these people are acknowledged in the report but countless others deserve credit for helping us get to this point so thank you. Finally let me also acknowledge my team who have worked so hard on this project over the last two years. My deputy Amy Stuttered I don't know where she is but somewhere here there she is. Our program manager Grace Hardy who I think is working as we speak so isn't in here but I think you all met Grace and especially our research associate there she is. David Parker who did first-rate work researching challenging topic and drafting most of the final reports so thank you David. This report is the final product of a study we began shortly after China's current leadership moved into office in March 2013. As those of you who attended our midterm event one year ago with former Treasury Secretary Hank Paulson may remember we had set out to explore the institutions and processes of Chinese economic policymaking at a time when China was facing a challenging transition from a rapid investment and export led growth model to a more modest but sustainable consumption led growth model. Our goal was to map the key institutions and processes of economic decision-making in China their enduring characteristics and how they have changed under current President and Communist Party leader Xi Jinping and to try to answer a central question in a more pluralized political economy in China with multiple policy objectives and with numerous actors vying for policy space. Do China's decision makers have the right stuff to navigate China's economy towards sustainable balanced growth? The answer to this question has enormous significance for the United States. Whether Beijing succeeds or fails in its efforts China's economic trajectory in coming years will have a substantial impact on the prospects for U.S. growth as well as on broader American interests in the Asia Pacific region and beyond. Accordingly we end the study with some recommendations for U.S. policymakers so to cut to the punchline our answer to the question of whether China's current leadership will be able to navigate a challenging economic transition is a qualified yes. Chinese economic policymakers have long demonstrated a remarkable pragmatism and flexibility in rising to various challenges and delivering on growth and they still have a number of tools a combination of incentives controls and resources at their disposal. Moreover we think the actions Xi Jinping has taken over the past two years including laying out a comprehensive reform agenda restructuring the policy making apparatus and driving forward an intensive anti-corruption campaign have on balance improved the odds of a successful transition. However there are some tensions and contradictions in Xi's approach and the challenges today are qualitatively and quantitatively greater than any China has experienced since the reform and open opening period began 35 years ago. Moreover the clear weakening trend of China's economic data in recent months and the growing risks in the economy not least those posed by China's rapid buildup of debt in recent years have frankly lowered our confidence in our assessment even since we finished the report but on balance we still see the odds in Beijing's favor. I'll elaborate on this in a moment and we'll certainly debate it in our upcoming expert panel but first let me provide some context on where China's economy is today. The story of China's economic miracle over the past three plus decades is well known to this audience but it's worth repeating a few of the more striking statistics. Since Deng Xiaoping launched the reform and opening strategy in 1979 China's economy has expanded more than 25 times in real terms. According to the World Bank over that period more than 600 million Chinese have been lifted out of poverty starting from a state of near autarky China has become the world's largest trading nation its largest exporter its second largest importer the second largest destination for foreign direct investment and the third largest source of outbound investment. Within a decade the OECD predicts that China will be the largest economy in the world at current exchange rates in purchasing parity terms this is probably already occurred yet after more than 30 years of spectacular growth it is universally agreed that China has hit a wall. The country's old model of export investment and industry led growth has clearly run its course and China now appears stuck in the so called middle income trap. The current leadership under Xi Jinping recognizes this problem which is more than you can say about many governments and has acknowledged that future growth will need to come from rebalancing of the economy toward a new model of consumption services and innovation led growth. This was the backdrop to the sweeping reform agenda presented by the 18th Communist Party Central Committee at its third plenum in November 2013 and personally endorsed by Xi Jinping. The goal of the 300 plus measure plan was to give markets a so called decisive role in resource allocation and to turn China into a moderately prosperous society by 2020. Yet this transition will inevitably involve what Beijing calls a new normal of slower growth far below the double digit rates of the past 30 years. Last year Dan Rosen a senior associate here with the Simon chair and his colleagues at rhodium group estimated that even in a best case scenario where Beijing achieves major progress on implementing the third plenum reform agenda China's potential growth rate will fall to six percent. On the other hand if Xi Jinping does not make significant progress on implementing his reform agenda Dan and his colleagues estimate China's growth could fall below one percent within the same time frame and of course China's challenges are not only economic Beijing is also dealing with a host of social environmental and governance issues. Thus the demands on economic policy have burgeoned from a single-minded focus on growth to a multitude of goals including clean air clean government and greater equality. Moreover China's political economy has become increasingly pluralized over the last decade. The range of actors competing to influence economic policy from state-owned enterprises to environmental activists has expanded enormously. All of this has made policymaking far more challenging than it was under Deng Xiaoping. Facing these challenges is a Chinese policymaking apparatus that reflects as much the legacy of Mao Zedong as that of Deng Xiaoping one based on a Leninist party state with a top-down hierarchical structure and prone to secrecy and poor internal coordination. The party exerts a strong pressure toward the centralization of policymaking but at the same time China's sheer size and the diversity of local interests exert an opposing force in favor of greater decentralization. The most durable description of China's policymaking system developed in the 1980s by Ken Lieberthal and the late Michael Achsenberg is one of fragmented authoritarianism. We're thrilled to have Ken with us today and he'll be up here shortly. Drawing heavily on Ken and Mike's seminal work for our own research we zeroed in on four enduring characteristics of Chinese economic decision-making which are described in the report. The first is persistent coordination challenges. Despite outside impressions of China's policymaking apparatus is monolithic bureaucratic competition and poor coordination are endemic. This is enabled by a number of factors not least the sheer number of ministry ranked agencies and the fact that equal ranked officials or agencies cannot issue binding orders to one another creating a natural tendency toward gridlock. The second is the importance of central local relations. China is a massive country despite the unitary nature of the Chinese state Beijing cannot simply disregard provincial interests and indeed has had to establish an elaborate system of incentives centered around advancement in the Communist Party to ensure policy implementation at the local level. The third characteristic is use of experimentation a key feature of China's policymaking pioneered under Deng Xiaoping is localized policy experiments. Some top down some bottom up. Experimentation creates competition to determine which reforms will go nationwide and limits the political and economic risks should an initiative go awry. This suits Beijing's long-standing preference for incremental rather than decisive reforms known in China as crossing the river by feeling the stones. Fourth is the reliance on external pressure as a tool of reform. This was the tactic former Premier Zhu Rongji relied on heavily in the 1990s using China's WTO accession process to push an aggressive campaign to downsize the state sector and restructure China's insolvent banking sector. Echoes of this can be seen today in Beijing's growing interest in a bilateral investment treaty with the United States and even in the Trans-Pacific Partnership. While these four characteristics have in many ways persisted under the Xi Jinping administration in his first two years in office Xi has also put his own distinctive stamp on policymaking. The most obvious and important shift has been Xi's centralization of the economic of economic decision-making and the particular way he has gone about this. Xi has consolidated control over the key levers of power more decisively than any leader in decades. Compared with his immediate predecessors Xi has adopted a more rigid, I'm sorry, a more rapid opaque and personalized style of economic decision-making and relied more on Communist Party rather than state mechanisms. He has used party bodies to sidestep China's official state apparatus and in effect to create a counter bureaucracy for coordinating his reform agenda. The so-called comprehensively deepening reform leading small group, which is quite a mouthful but an important body, established following the third plenum has now become the command center for China's economic reform program. We elaborate on Xi's policymaking changes in our report. For today's purposes I want to focus on what Xi's style and approach say about the prospects for reform and a successful economic transition. On the plus side Xi's personal decision-making style and heavy use of party institutions have allowed him to sidestep bureaucratic gridlock, empower a trusted and talented team of technocrats, and assert greater direct control over the economic policymaking process. The breadth of the third plenum reforms illustrates that Xi and his advisors understand the interrelatedness between seemingly disparate policy issues. In this and in his use of external pressure to help organize and push his agenda, Xi is also clearly borrowing from the playbook used in earlier successful reform drives, such as the one orchestrated by former Premier Zhu Rongji in the 1990s. Finally there is a serious case to be made that despite the rather limited visible progress on economic reform to date, Xi is deliberately taking a sequenced approach that begins with an overhaul of China's governance system and a move to rule of law, rule by law. His vigorous anti-corruption campaign can be seen in this light as an effort to lay the foundations for reform. In other ways, however, Xi's approach entails significant risks that could undermine China's transition toward a modern, harmonious, and creative high-income society, which is the statement of the goal. Empowering the Communist Party at the expense of the state runs counter to earlier reform drives, including that overseen by Zhu, and reinforces a tendency towards secrecy, unpredictability, and heavy-handed controls that sit uncomfortably alongside Beijing's stated goal of transitioning toward a more market-based economic and financial system. Previous leadership's emphasis on consensus-based decision making was an impediment to rapid change, but also an effective tool for gaining buy-in from the bureaucracy and troubleshooting proposed policy measures. Xi's approach may be generating other unintended consequences. Importantly, in the context of our study, the anti-corruption campaign appears to have produced near paralysis in local decision making, which is key to implementation of reform, and this is likely to have dampened growth in the short term. Moreover, Xi's efforts to purge so-called Western values and measures aimed at indigenizing China's information technology infrastructure are not only making China's relations with trading partners more contentious, but could also have negative consequences for future innovation, productivity growth, and China's ability to generate unique intellectual property. In sum, there remains an unresolved tension, really the central tension of our study, between Xi's grasp for greater political control, on the one hand, and the imperative of letting go economically on the other. But as we say in the report, this does not mean it's time to count China out. Successful generations of Chinese leaders have proven themselves pragmatic, flexible, and capable politicians, adapting well to changing circumstances over the course of China's decades-long economic miracle. Xi has demonstrated particular confidence in his approach, and on balance, we believe the new mechanisms of economic decision making he has adopted will strengthen his ability to implement the reforms needed to produce stable, sustainable growth. 2015 is likely to be an important year to test this conclusion. Roughly halfway into Xi's presumed first term, this year may be the last chance to make a major push for reform before the political wrangling ahead of the next party congress in 2017. Again, we're going to talk about all of this more in the expert panel, so feel free to build up your questions for that. Now let me talk about recommendations for the U.S. government. As I mentioned earlier, China's success or failure at managing its economic transition will have enormous consequences for the United States economically and in terms of American policy interests. Thus, in the final chapter of our report, we argue that policymakers in Washington should spend more time understanding economic decision making and reform in China and shaping appropriate policies in response. We offer a dozen mostly procedural and organizational ideas for how to better engage with China on economic policy issues and how to organize the U.S. government to do so. You can see the full list in the summary report you have in front of you but let me just highlight a few here. Our first pair of recommendations is that Washington support China's economic reforms where they align with U.S. interests and not be afraid to challenge Beijing when its policies are out of step with our interests. From an American perspective, there is much to like about the third plenum reforms from giving the market a decisive role in the Chinese economy to prioritizing financial reform. We should encourage these changes citing the win-win benefits to China and the United States. At the same time, as our study shows, external pressure is an important tool of Chinese decision making and the U.S. should look for carrots and sticks to shape Chinese behavior in a way that advances U.S. interests from pursuing initiatives like TPP to filing WTO dispute settlement cases where appropriate. In doing all this, we need to be smarter about the way we communicate our interests to China and the world and I think you know what I'm going to say next. So this, and I'm offline here, but this incident with the Asian Infrastructure Investment Bank has obviously been a significant failure of U.S. public diplomacy. I actually think it's also a failure of economic statecraft because we did not think through what the implications of this new institution were and come up with a smart strategy. There were some legitimate questions from a U.S. perspective about this bank. There still are about governance and lending standards and so forth, but the right way to have done that was to have gotten a group together and decided on a comprehensive strategy for asking those questions to the Chinese directly and through our allies and partners rather than through a distinguished pink newspaper. So I think that this is a case study in why the U.S. needs to do economic statecraft better and bring the economic and foreign policy worlds together and this is a major theme of what the Simon Chair works on, not just in China but on other issues. Incidentally, one of our other recommendations, number four in the list, is that the U.S. and China should establish that the White House in Zhongnanhai, effectively China's White House, should establish an informal back channel to discuss issues like this. This has been noted by observers on both sides, widely as something that's missing in the relationship right now, and we believe strongly that such a channel is very important. It's existed in the past and it should be a matter of course in U.S.-China relations today. Okay, back on the script. Among our recommendations for organizing the U.S. government, we propose that the White House convene an interagency process to develop a comprehensive written strategy on China, ideally codified in a national security presidential directive or the like. The process alone would be useful in underscoring the priority that the White House places on China policy and ensuring that all agencies are aligned on strategy and messaging. Writing the strategy down would be even better to help ensure consistency of approach across agencies and across time. As far as we know, no such presidential strategy document on China has ever been produced. Finally, let me highlight one more recommendation, number eight in the report, namely that Washington engaged fully in institution building and norm setting in the Asia-Pacific region and globally, working with our allies and partners and directly with China. This means being active in bodies like APEC, I'm not going to spell it out for this crowd, pursuing and completing regional economic integration initiatives like TPP and continuing to seek cooperation from China in the G20, which incidentally Beijing will be hosting in 2016. It also means following through on commitments to reform of existing institutions of global economic governance like the IMF and engaging constructively with China on establishment of new institutions, as I said, like the AIIB. The goal of all these efforts is to incentivize China to work constructively within the existing rules-based order by demonstrating that the order basically works for China and has worked for China, certainly for those 600 million Chinese. Let me end with a point we make at the start of the recommendations chapter, which is that Washington needs a new mindset in dealing with the China of 2015 and beyond. This is not the China of a decade ago, nor is it just another country with which the United States has a few opportunities to be seized and tensions to be managed. After 30 plus years of rapid growth, China has resumed its historical place as the largest economy in Asia and Beijing has made clear that it intends to play a greater role in the regional and global order. The U.S. needs to respond to this changing reality in a way that acknowledges China's return to prominence, but also advances and protects U.S. interests. Thus, we argue that senior U.S. policymakers need to devote far more time, resources, and policy bandwidth to China than they have to date and to do so in a smarter way. The starting point is to understand what's going on inside China, which is what we hope our report has made a small contribution to doing. So, with that, I will stop talking and invite our distinguished panel of experts up on stage to help shed more light on all these issues. Thank you. Backwards. You're there, Scott. Hey, if I'm fine, you're over there. I'm going to do the same, sorry. A lot of words. Okay, so, well, I am really honored and now you get the real money here, not just me, but you get the real pros up on stage. So, I'm delighted to be joined by this fantastic panel of experts here. I think some of them, at least, are very well known to a Washington audience. Some maybe not so much, but they're all real professionals and real experts in their respective fields and bring a lot of light to shine on these issues that we've been looking at in our report. So, to my immediate right is Ken Lieberthal, who I know you all know, senior fellow for Foreign Policy Studies at the Brookings Institution, and as I mentioned before, really the man who wrote the book from our point of view, literally on this topic back in the 1980s and has written on this subject many times since. To his right is Hufan, who is Dr. Hufan, who is senior research fellow from the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, and senior economics fellow at the Institute for New Economic Thinking in New York. To my immediate left is Charlene Chu, who is partner in charge of China banks at Autonomous Research in New York. There's more biographical information in your packet, so I'm not going to go through all of it here. And to her left, your right, is Scott Kennedy, my colleague, Deputy Director of the Freeman Chair in China Studies and Director on the Project on China Business and Political Economy here at CSAS. And I've already introduced myself, right, Matt Goodman. So, let me start. We're going to talk for about 30 minutes and then I'm going to open up the floor to to your questions and real discussion, I hope. So, please prepare those questions. Let me start on the kind of economics and then we'll get to the policy and the policymaking. But let me start with Hufan and ask what's going on in China? How it's clear the growth is slowing down. Is this something that is, you know, a natural part of the transition process, the adjustment process? Is there something more going on and what do you think is the outlook for the sort of near to medium term? Okay. Thanks, Matthew, for inviting me. And I learned quite a lot from your very important and insightful report. Yes, it is true. I think the main challenge China is facing now is the downside risk for economic growth. This is inevitable because mainly because of the change of the fundamentals. One is we are losing the population dividend because of the rapid change of demographic profile. The second, because we are moving more close to the frontier of technology. So that makes that more difficult for the Chinese economy to catch up. And also the policymaker in China, I think that they are having a very difficult time because it's kind of a tree lemma, which means Chinese policymaker has three most important goals, but whichever goal you choose, it may have conflict with the other two. So the first important goal is economic growth. But then in order to maintain high growth, the most convenient way is you adopt the traditional growth model, which rely heavily on investment, especially government investment on infrastructure and heavy industry. But that will not create enough job because those are capital intensive sectors. And then because of the expansionary physical policy and the monetary policy after the global financial crisis, it created overcapacity and the non-performing loans in the banking system and local government debt, all the problems. So we know we cannot do that. And if we want to create a more job opportunity, the most important thing is to open up the service sector. But then because the service sector in general, especially the traditional service sector, the increase of productivity in service sector cannot catch up with that in the manufacturing sector. So the natural result is within this structural reform, with a higher share of service sector in Chinese economy, and the result will be the potential growth rate in China will fall continually. And at the same time, I don't think a Chinese financial system has well prepared for this sea change in the Chinese economic structure. They have experience dealing with the manufacturing sectors when in the past, that's their main clients for the commercial banks. So if there's all kinds of new startups in the service sector, I doubt whether they can very successfully distinguish which is a good investment opportunity, which is not. And the financial stability, the main concern is after the global financial crisis, and there isn't this very expansionary monetary policy. And now we have to force the corporate sector to have a de-leveraging. So they have to keep tight monetary policy. But then if you tighten your monetary policy too much, and then that you may have a hot landing risk for the Chinese economy. So it's really very difficult to balance. But recently there's a buzzword in China. People are talking about the resilience of Chinese economy. And I do believe that we have reasons, good reasons to believe that China still have potentials. You know in the last two decades, there was dramatic change of macroeconomic policy in China. In Zhu Rongji's period, Zhu Rongji stepped on the brake. And in Wenjiabao's period, Wenjiabao stepped on gas. And now in Li Keqiang's period, Li Keqiang stepped on the gas and the brake at the same time. But still China, the Chinese economy is to a great extent functioning well. And what we need to do is we need to accelerate this strategy reform to unleash the great potential of the Chinese economy. So I'm not worried too much about the decline of the GDP growth rate per se. Which is more important is how we can maintain a relatively high but sustainable growth rate in the long run, say 10 years or 20 years. And then we have a very good chance to grow out all the problems. You don't think there's any magic number that China has to grow in order to preserve jobs or stability? There's one you know often heavily discussed the issue in China whether China can overcome this middle income trap. And if you take this as the goal for Chinese government and then you want to you know from the current per capita level and then you can join the high-income country club which means probably in the coming one or two decades we should maintain a growth rate above five percent. But that's I think that's achievable for China. In the last 50 years the average growth rate in China is something around five point five percent. Okay all right thank you I have some follow-up questions but let me turn to Charlene because you have spent many years both in your current job and previously at a ratings agency looking in detail at the balance sheets of Chinese banks and their other activities. I'm almost afraid to ask this question because of the possible answer we may get here and people may run for the exits but how worried should we be about the debt problems in China which have clearly expanded quite rapidly but nobody seems to have a quite handle quite a handle on how big the problem is and whether the Chinese government you know has a good handle on it or not but talk about the problem and what it means for growth. Okay I think you know the bottom line to whether or not we should be worried is absolutely. I do find that people in DC are less familiar with some of the economic data so probably the numbers that encapsulate this the most are the fact that banking sector assets in China grew from nine trillion US dollars at the end of 2008 to 28 trillion US dollars at the end of last year. That's a rate of growth that the world has never seen. The entire size of the US banking sector is about 15 trillion dollars so China replicated the US banking system in less than six years and added another two to three on top of that we are still growing at a pace where we're adding two and a half to three trillion US dollars in assets every year and this is happening at the same time that economic growth is slowing so the reason why I'm so concerned about this is we are in this dynamic where regardless of what you read in the headlines about shadow banking growth or deleveraging and this type of thing happening in China the bottom line is credit growth is still twice as fast as GDP and you are not going to grow out of this problem in that dynamic. You cannot have something that is twice as big as something else so credit the GDP is about 230% at the end of last year. You cannot have something that's twice as big as something else and growing twice as fast and expect to get out of that problem. So there's no doubt that the authorities are doing a lot on the reform side but what they've done is identify the problems and come up with solutions and we actually haven't seen a whole lot of progress in terms of implementation and I think on top of that it's very important to keep in mind that they are trying to and I know this paper was focused on financial liberalization they are trying to undertake what is an incredibly complicated reform program in any context in any country in the middle of the biggest debt boom the world has ever seen at a time when economic growth is slowing and slowing economic growth means slowing profit growth for Chinese corporates which means they have less and less ability to repay this stuff and we've also got declining bank profits. So you know just I think ending on that note the growth of credit I said is twice as fast as GDP it's now three times as fast as bank profitability. So you're also not going to be able to get the banks to earn their way out of this problem. Thank you for mentioning that a major part of our report it does focus on financial reform we we decided to sort of dive in a little more deeply there to look at how these policy making mechanisms work in finance because it's so critical to the overall judgment about making this transition and because frankly it's a little easier to get your handle on this area of public policy because it's you know largely driven by a couple of institutions in Beijing so thank you for mentioning that it's you can read that in the full report on and I do think that this question is really difficult in terms of reform because it is so important to reform and yet the sequencing of of changing these policies in in finance is is critically important whether you you know raise interest whether you deregulate interest rates open the capital account let the the exchange rate become more market-determined all these things if you do them in the wrong order it could create real substantial risks and yet you know they so far seem to be managing a process of moving forward the agenda and there have been some interesting developments in financial reform maybe you could talk about a couple of those before I turn to others about the reform process what do you think the authorities are doing to grapple with this probably the one of the more significant ones in the announcement just came overnight which was the implementation of deposit insurance and this is quite important the authorities have said that this in their view is a precursor to full interest rate liberalization and it does help address this very long-standing problem in china of moral hazard and the fact that everybody just thinks the government is going to bail everything out and this for the first time put some parameters around what they're willing to support in the banking sector so i do think that is quite important the other area where they've been doing a lot but i actually think the effects of this are incredibly negative and underappreciated is deposit rate liberalization through this rapid growth of shadow credit they're essentially allowing this parallel financial system to come online and they can offer yields and returns to investors that are above deposit rates and it's creating this huge competitive pressure on the banking system and the last thing you need when you're in the middle of a big credit boom is a loss of funding the last thing you want is a large migration of deposits out of the formal system into the informal system okay well i want to come back to that too but let me turn to sort of the the broader decision-making issues that we addressed in our report and ken so we noted i don't think we were arguing i think noted that china no longer is pursuing just one objective which is growth and rising incomes which seems to have been the organizing force for the reform process for 30 years and now there are multiple objectives that you know they're trying to achieve yet the system of incentivizing local officials to who have to do the implementation of reform was really built around this single metric that you could measure and so talk to us about how they're dealing with this change with multiple objectives how they're changing the incentives to get the local level to respond in the way they want them to respond well it's it's a very very difficult issue let's keep excuse me let's keep in mind that china has 40,000 little almost 43,000 local political jurisdictions from the provincial level 31 units to the municipal level over 700 to the county level nearly 2,500 to the township level 40,000 and the system has worked all along under the reforms on the basis of recognizing the importance of allowing some room for adaptation flexibility and initiative within each of those localities within each of those jurisdictions in order to move the economy forward move it along broadly the directions that the top leadership articulates but with a lot of flexibility and a lot of power in the hands of the top political leadership within each locality and as matt mentioned they've given them an array of goals but at the end of the day the thing that has produced the the highest performance evaluations has been growing your GDP every year and they're evaluated every year and that has accounted for more of the valuation than any other single item or even group of items now they're shifting they're shifting in an array of ways that are both critical for macroeconomic sustainability but very difficult for most local leaders difficult for leaders in part because they're moving from issues that were relatively measurable GDP growth to ones that are much less amenable to accurate and easy measurement especially on an annual basis and so local local officials are being told now to pursue qualitative changes and aren't quite sure what's going to be rewarded and how it will be measured a lot of the things in the reform agenda don't line up neatly with each other you know increase urbanization reduce unemployment but don't pursue high GDP growth as a key goal you know there are a lot of things that just require adjustments that make them difficult to do together and there's been very little guidance to this point as to what the priorities are and how you will be evaluated on the basis of those priorities this is also occurring at the same time that one thing that is relatively measurable is being pursued very very dramatically and that's the anti-corruption campaign which creates disincentives to kind of stand out make changes in localities by local leaders in ways that may call attention to themselves and get others interested in pointing out past past problems that those leaders have had in terms of sources of income on how they've gotten things done so you've got a very complicated process here on the one hand really strengthening the authority of the local party leaders who have been the key drivers of this but at the same time making it more difficult for them to know what to do more difficult for the top leaders to know whether they're doing it because the key metrics are changing in directions that are harder to the system in the past is not focused on how you quantify and how you collect data on and an anti-corruption campaign that really disincentivizes taking a great deal of initiative and the internal party processes as you mentioned in your summary of your report are less visible and less subject to external validation external supervision than are the government processes so as the party assumes a stronger role this makes the whole thing a little bit murky so again i kind of come out where hafondas these changes are very difficult there's a lot of downside risk here this is a system that has shown tremendous resiliency over time but the changes that are now being pursued are ones that are really very very very challenging and i don't think they have yet figured out how to evaluate local officials in a way that local officials know how to act and the higher levels know whether they're doing what they want those officials to do right it's interesting we were sort of kicking this around yesterday and thinking that you know to really address these multiple conflicting objectives i mean in our system you would have a an outlet for evaluating people through the you know through an election because you you know if the mayor wasn't collecting your trash or doing all the things that the multiple things that that are expected then you can throw the bum out and get a new guy you obviously can't do that in china and doesn't look like that's in in prospect that there's going to be that sort of outlet that's meaningful for these matters and anytime in fact it's actually been moving in the opposite direction in the last couple of years under Xi Jinping there had been increasing use of NGOs of civil society groupings of various sorts of social media even of you know even of the the established media to point out where policies weren't being implemented properly where different kinds of problems were arising now we're seeing a lot of risk attached to criticizing what is happening in localities even where the criticism is directly in line with the goals that the top leadership is wants to pursue essentially what we see is a leadership that now really does not want the population to get out ahead and to begin to drive the timing or focus of the agenda they really want to do it in terms of what Xi Jinping is called top-level design so that we maintain not only the shape of the overall program but the pacing of it and prioritization of it and don't let other sources of information come in and push us at a speed or with with a shift in relative priorities that we don't want to grapple with that makes it even more difficult to get checks on what's happening because remember this is just a vast system and most information goes up and most orders go down level by level through five levels with adjustments made at each level and so to reduce the external checks on this has a price okay lots of food for discussion there as well but let me turn to Scott because you mentioned Ken some of these other stakeholders and participants in the policy making process and let me ask about one that you've spent a lot of time working on Scott which is interest groups and the corporate sector and how they have come to get more involved in policy making what is their role and how are they helping or hindering the reform process sure thanks Matt the short answer is that interest groups can supplement an analysis on the role of the elite leadership and the bureaucracy central and local and partly explain the extent of recent changes to China's financial policies which are subject to your report but the role of interest groups and what you assign to them depends on your belief and your judgment about how significant those reforms are let me just elaborate a little bit in general about interest groups you know from the communist parties perspective they represent everybody and there aren't differences there shouldn't be differences and they keep a very big tent in their view that's why industry associations and chambers of commerce in China are often state controlled there's some more independent associations in sectors where there are lots of private companies and foreign companies but overall associations tend to be retirement homes for cadres at the end of their career and some of these associations can only become powerful by weaning away regulatory authority from government institutions China also relatedly has very weak laws related to conflict of interest and the party now recognizes that there are actual differences and conflicts of interest between different stakeholders in the country but the way they describe it is in highly negative terms only as entrenched interests that's the the key word that you hear talked about China the last few years that's what we would call special interests state-owned enterprises in protected sectors central state agencies local governments essentially opponents of reform folks who don't represent the supposed general interest so interest groups aren't seen as positive they're seen as negative factions working against the party and so even though Li Keqiang has called for in his original plans liberalizing industry associations they've made zero progress on that as Ken has pointed out in every sphere of dealing with the the governance over society so as a result of this interest group conflict in China that does exist as hidden it's opaque it's it's hard to track and it often doesn't occur via groups it often just occurs individually single company to single regulator so in the financial sector there's obviously plenty of of interest groups that one could point out the probably the most important are the large state-owned banks and you but you could also look at the insurance companies and others who have benefited tremendously from the growth in credit there are a variety of associations in the financial sector from the China banking association to the national association of financial market institutional investors and others all of those associations are government controlled and you should use the word association with quote marks around them for these organizations you have the regulators that these associations come out of like the People's Bank of China the China Banking Regulatory Commission and the party as well the the leading group on economics and finance and also the leading group on deepening economic reform that you mentioned in your initial remarks I think what's two things that are interesting about this one is the regulators of the financial sector are consistently more liberal than the industry they regulate you meet some of the most liberal thinkers people with world-class educations from around the world who clearly have identified the problems that China face in the financial sector in the state and in the party you're talking about like in the PBOC in the regulatory commission yes the Chinese the People's Bank of China also in these leading groups the experts that work on those groups they are very clear headed about what's going on and have come up with a lot of this proposed reform suggestions but at the same time you also have this revolving door between the regulators and the financial institutions actually that you don't have in most of the rest of the economy there is at the lower level of large revolving door of folks leaving the regular regulators going to work in banks and securities firms at the higher level you that occurs as well and actually they go back and forth Joe Xiaochuan the central bank governor obviously he was originally the head of the China Construction Bank and this is quite different than most sectors of the economy where there is some amount of revolving door but not to the extent most in most state most sectors particularly where the state owned companies dominate the leadership of those firms rise up through the companies over the course of their career with some movement perhaps into government or the other direction but not to the extent in the financial sector so what have these interest groups done if they're powerful in finance well if we just focus on banks banks have always been a strong advocate for a loose monetary policy expanding the money supply they've been strong advocates opposing interest rate liberalization because they benefit from the essentially guaranteed positive credit spread between loan and deposit rates they've been long-term opponents of deposit insurance and of course opponents of market entry of genuine private banks and foreign banks foreign banks in China have less than two percent of the business well recently as your report describes and has already been mentioned there have been some policy changes policy now as Huffan said much tighter monetary policy to some extent there's been some liberalization of deposit rates recently of the widening of the band just yesterday the announcement about deposit insurance that'll take effect beginning May 1st and a gradual legalization of the gray market and potential approval of more private banks so what accounts for these trends I think again it depends on what your what your what you how you view these reforms if you think these are token reforms that don't add up to much that really don't get at the heart of the system then this looks like business capture of the policy process this interest group basically staving off reform and it's interesting to note that although there's been a wide anti-corruption campaign there's been almost no attention of that campaign on the financial sector a couple bank heads the the head of China Mingsheng bank has been investigated but nowhere near as in other other sectors so that would show the power potentially of this of these interest groups on the other hand if you think these policy changes matter a lot and they are significant and are leading China to have a more commercial oriented banking sector then an interest group explanation really doesn't explain why we have the change because you don't see that change coming you can't imagine that private companies or foreign companies are have been able to you know log role Xi Jinping instead you're going to the initiative if these are significant comes from Xi Jinping the new sheriff in town his advisors that he has around him give both in the government and the party and then the way they've changed the bureaucracies to sideline those old parts of the bureaucracy in that regard they've been able to do it without an anti-corruption campaign which would be surprising but it's less surprising if you understand that even though these are potentially powerful interest groups because of that revolving door they are also representatives of the state as well and so in that in that regard you get state capture of interest groups the opposite conclusion that you'd have if you think that these are relatively insignificant reforms wow okay interesting the state you say they haven't gone after the financial sector i thought they were starting to move and it seems logical that they might because they've been going after some of the other pillars of of the state-owned sector particularly in energy is there is there no sign they're going after finance because that would seem to me quite significant in terms of well what you said and in terms of the what it means for their their focus on on reform more broadly you would you would think so and sharlane can probably speak better than me but you know if there's corruption anywhere in the chinese political economy you'd ought to find it in the financial sector so that they haven't started on that seems to me a strange thing unless they figure what they're going to go after first are SOEs in the manufacturing sectors like oil and in other places where we've seen more of this in shanshi in the coal industry and maybe they're going step by step and that we'll see this i i don't know if these reforms are considered significant then maybe you don't have to also maybe it's just too close to home for some of these these leaders it seems and so maybe what they're doing is they're focusing on other parts of the system instead of directly on the financial sector and by changing the broad incentives around the shape behavior with related relation to interest rates the money supply deposit insurance maybe that's the way they feel that they could squeeze the rents out of the banking system without actually having to take down individual officials do you have a view on that and how they're viewing the the state-owned banks in the context of you know the anti-corruption drive and its relationship to i mean it's definitely a question everybody's been asking and i'll just tell you what one government official told me a few weeks ago which is that nobody is immune and this is not ending anytime soon so i think they've got phases of this campaign the financial sector clearly has not been on the table yet but it's not clear to me that it is not going to happen i do think at some point there is definitely a risk that the focus shifts to the financial sector and i think you know i think hope on probably knows better than all of us here the likelihood of that but it could be quite destabilizing for this whole debt issue that we're talking about because the last thing you want i mean as ken was talking about the corruption campaign has caused has screwed up the incentives at the local level we're starting to have people just not want to do anything the last thing you want is that to happen in the financial sector because the only reason this hasn't fallen apart yet is because they just keep rolling all of the debt they keep extending new credit every year on the order of a couple trillion u.s. dollars so if you're going to start going after people and making them afraid they're going to start getting worried about lending new money continuing to roll over some of those sketchy exposures that they undertook a few years ago i don't know if that's part of the thinking now in terms of why they they have been hesitant but i do agree with scott there's no way you have corruption at the level we do in the financial sector or in the country without financial sector participation fine you've been very patient waiting there and a lot has been said here you can react to any of this but in particular the issue of whether well the financial sector and how how serious you think that the concerns are in that sector and whether this is something that is it does pose a risk how much of a risk does it pose to grow first response to scott i don't think commercial banks even if it's a state-owned commercial banks can get any special protection in this anti-corruption campaign you know the head of the central party discipline inspection department of Wang Xishan you know all the tricks he used to work in commercial banks and he is so he's very familiar with that business so we wait and see and for commercial for the financial system it is true that the non-performing loans is accumulating and then the local government debt that's a very serious problem that we need to solve in here as quickly as possible and also you can see the profitability of major state-owned commercial banks is dropped dramatically in recent years but financial crisis in essence is not the insolvency it's liquidity so in that concern i think for the time being the situation is still under control but the problem is China needs to you know solve the problem of too big to fail because we have all those very large state-owned commercial banks in one way that we can do in the traditional Chinese way is they call to kill the chicken to frighten the monkey but then the trick is by killing how much chicken you can frighten the monkey if you kill too much chicken then you create a systematic crisis but then if you only pick up one or two chicken and then monkey will not be frightened so that's the problem you have to strike a balance between this to a more radical and more conservative approach yes it's worth keeping in mind that the anti-corruption campaign has been targeted a very substantial percentage of officials at every level of this system given the way the system has functioned have had to engage in corrupt activity some have become kleptomaniacs many are very good you know professional people but the system requires going beyond you know strict boundaries and the therefore who you target and the sequence sectors sequence localities and so forth is a matter in part of choice and i think we've seen that in part you know when you say the energy sector well Zhou Yun Kong had a good part of his career in the energy sector and son of a gun you know the firm that he was most associated with in the energy sector got clobbered first and so some of this has been consolidating power against the networks of folks that really you had good reason to be very concerned about at the top of the system some provinces have barely been touched others have really been focused on very hard i think whoever mentioned it was correct when when you said that they have affirmed that this is not going to stop anytime soon so the past is just a prelude to what's yet to come so we don't know what the eventual scope will be but it is not simply a matter of anywhere you find corruption you go after it there's a there's a strategy behind this and the question in part is whether strategy will develop a dynamic of its own and it begins to spill out in ways that become difficult to to control were you going to say something to that or because i was going to ask and is this strategy in context of what we're talking about the economic reform and the economic transition is it is it a means to an end in your view to that end or is it got its own corruption have become predatory it reached a scale where they really and had social repercussions and political repercussions that you know that they became very worried about so i absolutely think it was important to attack the issue whether they will end up having done that in an effective fashion or whether they will end up having created disincentives for for experimentation and for reform and also created let's keep in mind the corruption effort to date regardless of the fourth plan on decision on strengthening the judiciary and making it less subject to interference from local level party leaders and that kind of thing at the end of the day every of every one of the major corruption cases has been intra-party in terms of the the preliminary investigations that identify who to go after in terms of the investigations of the people who become targets in terms of the determination of guilt in terms of punishment of them and those with them they now say that something like as i recall 40 some odd percent of those who have received who have been found to have violated the party rules sufficiently to warrant substantial punishment something like 40 percent have been kicked out of the party and turned over to the courts the rest are handled totally within the party the courts get them only after for some of them there are violations of particular state laws that can be clearly identified and for one reason or another they turned them over for judicial punishment so this is a political process it's not a legal process it's a political process as within the party targeting a small percentage of those who are potentially guilty and handling the degree of punishment in an internal party process i'm not sure that's a good way to promote reform over the long term and to institutionalize new norms and rules in a way that will be consistently followed okay i want to let the audience come in but i i feel i need to ask one question about the u.s perspective on this and Ken having been in the white house working on on china policy for previous administration you don't have to endorse any of our recommendations i'd be interested in what you think is the most important thing the u.s could take away from this discussion from this study and and and what it should be doing about this or is it none of our business well no it's not none of our business and uh i think the report the report is really worth reading i encourage people to sit down and really go through the check is in the mail uh does it require my signature to get the the uh overall as i think matt noted and as public remark certainly is noted in the report the directions of economic reform that the top leadership is seeking to uh to accomplish are in u.s interest they're broadly directions that we have encouraged for years and so it's good to see that you know these folks are thinking in those terms a lot of your uh i guess two points i would take away one is that we do need better understanding in our at a policy level in the united states that have the chinese system functions that there is still too little understanding of the politics within the chinese system the policy process the different levels of the system how that affects implementation so the things that we just assume anyone would know about the united states and that's why we aren't accomplishing this and are doing this but many chinese really don't understand it is true in spades in the other direction too and so it creates both misunderstanding and a misattribution of what is what are the intentions and how how effectively can you deal with people and who should you be talking to and how should you nurture that i think your report moves that long but your recommendation to get much more expertise at a policy level in the united states i think is very valuable but the second part of it is uh it's a huge problem to do that when you add on the different staff positions that your report recommends and that kind of thing you create bureaucratic conflicts in the us that are very very difficult to manage and there are already a lot of those so uh i think the recommendations on the whole are very much worth thinking about for how you can make them work but uh past efforts to do them past administrations have sometimes been effective and sometimes just created more and more coordination problems and bringing debates uh into the nsc that for example that or between nsc and nec that slow down policy making lose a strategic perspective because again the bureaucratic compromises and that kind of thing you bring the agents you bring the departments debates into the nsc at that granular level it doesn't necessarily help policy making so i think it's just i mean they're just real tensions and how do you bring greater attention and greater expertise to a policy level to have a strategic perspective where you can then follow a nuance and consistent policy it's just okay all right um excellent again food for thought thank you and thank you i didn't say at the beginning that everybody here contributed to this report and gave us a lot of helpful insight long before this conversation and and we really appreciate that you know uh ken and others um okay but they don't own any of our recommendations or anything we said in here by the way it's clear this is our report and uh so we appreciate it okay if you have a question uh raise your hand as someone in the back is doing wait for the microphone please identify yourself and um and ask a question if you want to direct it to anybody in particular please say so otherwise i'll choose them thank you very much for your great conversation my name is takahiro motegi i'm a visiting fellow of the css japan chair i'd like to ask you especially i want to ask who fan laoshi her sherry ensign one question so shijin pin just almost a years ago mentioned comprehensive security so at the first meeting of chinese nsc and he mentioned 11 social sorry comprehensive security include economic and financial security so i want to ask you is what kind of role is chinese nsc praying for making economic the policy make when chinese government decide their policy decision what kind of role is playing chinese nsc is playing what kind of role i'm sorry my english is not good okay does it make sense i understood the um we focused mostly on the other big new body that was set up at the third plenum the comprehensively deepening economic reform commission but there was this national security commission set up as well and it's a good question does it deal with any of these economic issues or is it only dealing with um foreign policy or internal security for that matter well i think mainly it's internal and foreign um security but um uh the uh uh diplomacy and probably they will also take economic issue into consideration you know i see okay i think it is asking uh the uh different role that the party and the government play on this matter is that and uh that i highly recommend that you read uh Matthew's report because uh one um um point uh that he made in this report is that you know for a lot of foreigners they look at the policy making in china they'll focus on government but then in this report and they um emphasize the role played by the central party and this is um even more relevant for this new leadership because we can see that um in the past it's mainly the state council in charge of the macroeconomic policy but now the central party they also are concerned about the macroeconomic policy and the uh the overall plan for strategy reform so that's a dramatic new change for the policy making in china right good okay yes sir up here guys thank you uh i'm tom wreckford with the foreign policy discussion group and i wonder if ken Lieberthal would like to go a little deeper into the fairness of the corruption anti-corruption campaign i recall lots of anti-corruption campaigns over the last 35 years and generally they targeted uh people that the leaders of the party wanted to bring down uh bozhi lie may have fitted into this category is this anti-corruption campaign different from all these others is it more fair more honest more balanced it's reaching much farther so i think that initially you know bozhi lie joe young kind et cetera your description fits quite well but i think that the sense and i think those of us all of us were in china before the uh 18th party congress where she jingping you know some of the top leadership posts you know i have heard complaints about corruption whatever i've been to china for many years but the the vehemence of the complaints the scorn with which comments were made even among strangers to how this place was falling apart because of corruption the uh comment at a conference i was at people i didn't know uh and they didn't know me chinese sitting at a table and i was just at the table with them talking about this the current situation like the guomindang before the second world war the four big families right and i said you literally mean like the four big families and the guomindang absolutely maybe worse right so and i think she jingping understood this so i think that there and wang chi shan certainly understood as ho fang indicated wang chi shan knows all the tricks given his career and i think there really is a determination to change behaviors here whether it is being pursued in a way that is fair given the distribution of offending folks i don't think there's any way to judge and i think there is certainly a risk that a lot of scores will be settled at lower levels a lot of unjust things will occur but you know at a popular level i think this is very popular at this point you know a lot of people think those guys are finally getting theirs you know i am not aware let me say in past campaigns one thing that has been particularly obnoxious is the use of quotas you know in this unit you will find you know x number of rightists or y number of this or that in a strike hard campaign you'll have x number of people convicted of this kind of crime within you know this period of time i'm not aware that there are quotas here i mean that's that really does foster very unjust cases but whether this is really fair whether or end up on balance being fair is not a judgment i i think we have the metrics to even begin to make hyping thank you my name is john hyping i'm visiting scholar in the csis freeman chair firstly congratulation one full drop for your you know research my first question to the panelists is about you know the title of this report is navigating choppy water choppy is means uncertainties so my question is from your perspective what do you think about the most turbulent factor in the president's decision making typically in the economic sector my second questions goes to the mess of good man as i know you your research group did a lot of field study interviews more than 100 percent scholars officials so from your perspective what's your comments on the shanghai pilot free trade zone do you think it's still meaningful for china's whole economic reform if compared 30 years ago thank you okay thank you hyping and hyping is one of those hundreds of people that we interviewed and was very helpful to us she's from the shanghai institutes of international studies and i really appreciate all the support they've they've given us throughout this project first i should explain the navigating metaphor because it's my own and i'm responsible for it i thought of this challenge that china's facing as a ride down the yangxi river and for 30 years china was on the kind of wide part of the river where it had all the advantages of you know in cheap labor and high savings and markets to sell you know relatively low value added products into and one objective growth and all of that is gone and they're now in the narrow part of the river and the question we're asking is whether the guys on the back of the boat can manage this turbulent transition to another wider part of the river with sustained growth so we call this navigator's project i'll let others address the the point about what they think is the biggest sort of uncertainty about shijian ping's style but let me answer your shanghai ftz question and then i'll come back so we did a couple of trips to shanghai and happened to be there the day before i think the shanghai ftz was was announced at the end of two that are in the fall of 2013 and it was explained to us at the time by various people as being driven by three basic motivations and not necessarily mutually exclusive but but depending on who you asked they'd have a slightly different emphasis on it one was shanghai needed some new source of dynamism and growth as a financial center and needed some something to sort of shake shanghai's innovativeness and ability to compete frankly with other other financial centers in the region so that was one it was a sort of a shanghai bottom up driven initiative another was that the that the center wanted to use this beijing wanted to use this as a you know in a sort of deng shao ping like way of using the way he used shanjian to as an experiment as a place to to launch reform as a test bed for some national reforms and so it was really top down driven from beijing and the other was that this was sort of an externally driven thing because of tpp and other developments going on in the in the region in the world china needed to have a competitive sort of response to that and hence you know the negative list was developed in shanghai as part of the and then introduced into the bilateral u.s. bilateral investment treaty negotiations again this is a little like sorry a japanese reference but the like the movie rashomon where depending on who you were asking they'd have a different emphasis on those three factors but it seemed to be based on those three things i have not been back there in in in almost a year and so i've lost the thread a little bit my sense is there's some disappointment with what has happened to the shanghai ftz that it hasn't really fulfilled any of those objectives at least yet partly i think this is because i think it was there was a lack of ownership in terms of who really owned this thing and was was wanted to drive it and partly i think because what they're trying to do in a zone is today is very different from what dungsheng ping was trying to do where you know if you're producing you know cheap glasses from cbs um uh you know you can you can create a zone and create incentives to do to do that um but you know with financial services you can't put them in a box an experiment it seems like you have to do all or nothing and i think they've realized now that it's not a really good test bed for for broader reforms at least in some of these services sectors that are more porous um i you know i could say a lot more about the shanghai ftz we do talk about it i think we at least have a sidebar in our report about it and it's fed into a couple of things we write about um but if if scott or anybody else wants to add to that and then maybe take on the other question as well well i can speak to the the choppy waters part of this and obviously the most important are first of all the problems as hufan mentioned this trilemma massive debt while you're trying to keep growth going environmental problems a whole variety of issues a very full plate for any leadership and then you've got a political system that um essentially uh ground to gridlock that wasn't able to deal with these things and so what they've done is they've gone around that system by moving by creating new leading groups and pushing policy making into the party uh and then the anti-corruption campaign and so all of this feels like a big broad campaign that you can't sustain forever you can't forever just do this outside the standard bureaucracy that needs to be reformed and so that's that's quite risky when i think about uh i've also used a boat analogy as well and just a little twist i think of chinese policy making more like a sailboat uh and when in choppy waters how does the sailboat move ahead they tack back and forth and so you never feel like they're directly head on solving some problems sometimes it looks like they're making reforms and other times it feels like they're you're backtracking uh but you can't tell until you wait some time and then you look back and say oh i've actually moved some distance in addressing this so in that regard it's both there's there's other ways to think about that and given the challenges that they face uh and the complexity of the political system i think that back and forth tacking is something we're going to see for quite some time i would just add two things one in terms of what worries me i think one of the biggest challenges china faces is environmental and it is uh you know everyone talks about air pollution it's especially water pollution pollution of the soil you know it's huge you know that it is growth constraining and potentially much worse than that i'm not aware of any high income country in the world uh that has successfully dealt with environmental problems without permitting the development of a green political movement of environment you know non-governmental organizations that can organize and pursue political pressure uh china has moved in the opposite direction on that and so that worries me quite a bit and then secondly the stress on innovation i think very rightly so trying to go from extensive to intensive growth but at the same time a strong political atmosphere of uh reducing what you bring into the system from the west western values there are more protectionist measures in technology all kinds of things that you know i don't know where the balance has to be here but the the contradiction between kind of this political thrust and the the recognition of the importance of becoming much more elevated uh is one that is i mean it's going to be tested in a very serious way uh in the last few years in china good couldn't have answered it better yes sir over there yeah bill jones from executive intelligence review i'd like to comment on what mrs choux said uh about the uh the credit to gdp ratio uh the numbers are very dramatic of course but it's really a question of where that credit goes to because if that credit is going into increasingly physical production uh that credit is solvent uh if it's going to uh paying off all debt or gambling casino or things like that then of course you're you're really in trouble uh but we did that in the united states hamilton did the same thing and there was the same debate do we pay off the debt or we keep it or we increase it he said keep it we'll increase it and we'll use it and we'll direct it towards building our economy and i know that there are problems in china with on the local level and elsewhere about the uh inflation and bad investment of that sort but the recent moves by the party leadership around these new funds the ai i b the new development bank are all directed towards infrastructure not to anything else not to paying off all debt and it seems to me that if that infrastructure is indeed realized then that's a very secure investment and i think the fact that most of the world is running now to join the ai i b in spite of the very you know arm twisting going on by the u.s indicates that they feel that that perhaps is a more solid investment than what they're getting in the london new york system and if you want to look at debt to uh debt to gdp ratios and you look at the the debt in in that system uh it's astronomical so it really does represent kind of a new model and to the extent that china is consistent in using this for that type of increase of the physical economy i think that the numbers are not important what's important is where it's being directed maybe you want to comment on that so charlene is there in your view a connection between you know sort of the the ai b and all that and dealing with some of these financial problems and is it going to actually help right um i would say the issue because we do you know i get this back a lot where people say well 230 credit to gdp what's the problem with that we've got a lot of countries at that level um and that's absolutely true the issue is not that we're at 230 percent of gdp it's that we have increased 19 trillion u.s dollars in six years and that is something that the world has never seen and when you think about the credit to gdp ratio you have to keep in mind that that credit is propping up the gdp number right so you're actually yes the two are going up and over time it's not going to look that out of balance but it's because of that rapid growth of the numerator that you're getting the growth in the denominator um in terms of how much of this stuff has been going into um you know real investment that actually is going to have returns um you know without a doubt china has gotten growth out of this it's not that we've you know had a ton of money that's just gone into um people's pockets and and you know things that haven't generated any growth but the problem is the returns are just not large enough to actually repay this stuff so we are going to have a significant amount of bad debt in the system infrastructure does generate growth it is something that economies need but there's a reason why in most countries around the world infrastructure is funded by the public sector not the private sector and that's one of the big mistakes china has made in this whole thing is that they've undertaken this huge infrastructure push and they've leaned on the private sector to essentially do that and there's this ambiguous question that all of us have in terms of are they actually going to stand behind the banks and bail them out for doing what was really public sector type of function in terms of the a i b um you know i think it helps on the margins to the extent that we're saying we have over capacity in certain sectors in china and we you know we've got cement we've got steel we've got all this stuff that's way beyond what we need and can we direct that into other places where um there's actually demand and you know i think that's certainly one way to do it um the problem is we're talking about a 10 trillion u.s. dollar economy that needs to grow at about seven or eight percent nominal every year right so this tiny little asian investment bank is going to it's going to take a very long time for that to make any real difference in terms of the economic picture in china okay fun i don't want to get too far off on the a i b because we'll do other programs i'm sure this is going to be a long running uh movie but but just in terms of the connection to economic foreign to what extent do you think the a i b was motivated by a need for you know shifting some of the excess capacity and supporting you know chinese domestic growth and how much of it was not about that and about you know geopolitics or other things i think the a i b is still at a very early stage so i agree with uh achieved that um it um may not have very significant impact on china's economic growth but the most important thing for a i b is you know for china uh in the past uh it always wants to have more saying in the international uh economic system so we tried to reform on imf and the world bank but then even the tiny reform of the quota system in imf cannot be implemented so china is trying another way and they tried the bricks bank now called the new development bank and they tried other before the a i b and there's a proposal of the north east asia development bank uh kind of that so um i think for china the most important thing for a i b is they feel more confident they don't want to have the final saying the veto power in in in this new organization but as long as china is one of the founding member of a new international institution and they will feel that for any negotiation for any discussion they'll be on the table to know they know what is happening so that may give more confidence for china to play a more positive role in the international community so i think that that's the good news for a i b okay um yes ma'am in the back with the thank you i'm jennifer lee with hong kong phoenix tv a follow-up question about the a i b as well for dr levitho and dr scottie so um so far we have more than 45 countries designed to join the a i b including the united states allies um do you see that as a recognition of china's willingness to take on the global leadership or is there are other reasons that intrigue those countries join what's your observation on all this a i b development including their interaction with the united states and at the same time the president she also proposing to do the one belt one row we would which will help to build the infrastructure infrastructure across the asia europe and even africa um do you from united states perspective do you think it's more like a threat or actually can become a source of the stability thank you okay well as i say these are big topics and ones that we're going to explore in other forms but i'll allow because it's an interesting topic to me and relevant also here a quick answer if anybody wants to take on either halves of that sure um there i b is meant to be a development bank and if you look around asia there's a huge need for development assistance and infrastructure development uh seven to eight billion by some counts or trillion excuse me so i think the chinese decided that rather than trying to reform the world bank or the asian development bank which they have their voices relatively small in those institutions to create a different bank and where they get both reputational benefits and practice of leading an international institution whether regardless of whether they have the veto or not but but having a larger role and this is a clear component of Xi Jinping's more active international foreign policy that he originally outlined last november in the foreign policy work conference in china so we're going to see this is not the last chinese initiative you're going to see lots of chinese initiatives globally speaking this is not the most important area of global governance it's relatively safe compared to other areas they could they could operate in and i think you saw other countries join because there's no real downside to them not joining there's an potential upside it improves their relationship with china since it's a very high priority for Xi Jinping and the leadership and may provide some type of benefits to their countries since they're mostly in asia so uh and i think most of those countries did not see this as an as a choose as a necessary choice between a chinese-dominated system or an american-led system but participating in both and i think that's the way the chinese saw AIB as well that wasn't how it was interpreted here in the united states just one comment on this on the silk road that is a huge potential growth area and also a high priority for for Xi Jinping that links domestic the domestic economy globally and the policies that were outlined a few days ago at the boyao forum that released at the same time long on goals short on specifics so actually i'm a i'm a little bit worried that without doing the due diligence and feasibility studies this is going to be eventually a lot of investment that will not work out the type of investment that charlene and others have analyzed in china not working out so they really will need to do their homework okay thank you just one quick gloss of the AIIB it is clearly the gift that we'll keep on giving to washington think tanks that want to hold the program uh i don't want to comment on the u.s side what i would associate myself with what Matt said earlier about that but for china i think that the there's been a little bit my guess is the chinese have been a little bit surprised at the array of countries that have now signed up and it's kicking this up into a new level it may be a little bit of uh watch what you wish for because the chinese are now going to have a lot of demands with a lot of people watching as to what the governing standards are what the standards of you know for making bones are how effectively you can establish solid credit rating how that enables or get or creates frictions with the adb with the world bank and others this is a new game and they may end up learning a great deal and really moving up the ladder a great deal which frankly would be good for everyone as far as i'm concerned or this may create problems in governance and eventually in reputation that they really will uh will not see as a complete win by quite a bit we'll have to see how it plays out okay thanks i will if there are two more hands yes ma'am and then and then uh yes ma'am okay and the gentleman in the back really quick but very quick questions please because we're running out of time i'm jiang yujuan with xinhua news agency and my question is about the foreign direct investment in china and some foreign foreign companies are closing their factory in china and some foreign companies are complaining rising difficulty in doing business in china such as lower profit margin and unclear regulation and so how the panelists evaluate to china's current invite business in climate and do the uh will these challenges affect the overall fdi to china and for companies they returning their business in china so why they make such choices thank you okay thanks so we'll keep note of these folks and then um thank you um speakers this is paula stern the stern group uh and i think it was kin who used the term innovation economy or innovation and um i know there's been major focus and it's a wonderful discussion on kind of today and decision making in china today but i am wondering um if uh in your navigating chopping choppy waters um or this morning you might comment on china's preparatory basis for being a leader in innovation there's always this comparison between how much DARPA gets funded versus how much the government in china is funding basic research and really fundamental uh processes that uh are the basis for innovation and an innovation economy did you go into that at all um would you if not in the paper comment on it today okay thanks and then one more gentleman in the back thank you very much my name is jam chai independent reporter i had a quick look at your summary um recommendation to our point in two part one is engaged with china the other is organizing u.s government then i have a quick telephone conversation with the u.s uh china watcher and it hey pause the moment i read the to our point and eight for china and nine for china and um and three points for the u.s government and he had a quick pause the moment and he said okay in short he said organizing u.s government to support china that's what us have been doing in the last 40 years and you supported rising china now at this point that it divide your allies and conquer them what do you respond thank you okay um um scott do you want to take on the first question no not that question we'll we'll think about that one let that one settle in yes so the first of it is the first from our reporter from shinhua so um foreign businesses particularly american companies uh originally went to china because as an export platform to elsewhere as part of their global production chain to export elsewhere and those are the types of companies that are most sensitive to rising costs in china labor costs who would potentially consider moving elsewhere uh but most american companies who invest in china are in china for the china market they want to get uh for a variety reasons they need to be in china because they need to be close to their customers because transportation costs are high because they're barriers protectionist barriers or other types of things that make it make sense to be there to sell into china and they are less likely to look at moving to other places uh because china is where they want to be because of that market uh the american chamber of commerce in china released a report uh in february uh in which they had polled their members uh and about 15 percent of their members said that they were considering uh potentially moving some of their production facilities in china elsewhere because of rising labor costs now they're all that they only asked about rising labor costs you have a whole variety of other things uh a general feeling of less welcome well foreign companies feeling less welcome uh that was demonstrated in that survey so there may be other reasons why they'd want to potentially move but given the size of the china market the importance of these firms the likelihood of massively abandoning china for producing elsewhere is very unlikely unless uh some of the problems we talked about here come to fruition in terms of financial crisis or other types of political dilemmas that companies would face that would then force their hand to think about the plan b which they never wanted to implement okay very quickly the two of you want to comment on the fdi innovation uh yeah on fdi briefly if you look at the u.s after differentiated course stock and flow uh the stock of u.s direct investment in china is decreasing uh the flow remains substantial but the firms are facing you know slower economic growth rising labor costs and that kind of thing so uh the big attraction is to sell into china now or to participate in that market i think the big thing about and the atmosphere is more difficult uh i think the big thing that's going to shape the future is going to be in addition to the bilateral investment treaty whether china really opens up high value added services uh to foreign direct participation if so that is a huge open end in areas of where the u.s does best if that remains very constrained uh then i think that you know foreign direct u.s direct investment in china is not going to not going to be a shining part of our relationship okay i don't think that china can be the leader for innovation on all the areas but i'm quite confident in many areas china can do very successfully uh one um advantage of china is the market potential so take the high-speed railway the original technology was developed by germany and japan but finally the market is in china and by the same token i'm quite confident in the future the most cut on the edge technology on dealing with air pollution will be in china because you don't have market here and second advantage china has is um we have a huge army of um of um uh enterprise the engineer it takes us almost 20 years to reduce the salary level of engineer below that of the nanny so we have a huge army of well-trained hard-working and um enterprise the engineer if we can combine this human resources with the market potential and in many areas china can then quite successfully okay um great i just i i'm not sure i understood the thrust of the gentleman's question back there but let me say to the extent i understood it i i think what i would say is that um the u.s strategy since nixon and crossing eight administrations now has been basically consistent which is to pull china more deeply into the global rules-based order and i think that's the that was the right strategy and it's been a hugely successful strategy for china and for the united states and i would expect that that would be the basic thrust of the continued strategy in future administrations and the u.s has an interest in a strong stable successful china and we have lots to work on together and we have obviously competition we have to manage but but that's always going to be a part of the relationship and and that's what our recommendations were aimed at whether they were under one category or the other so let me end here because we're already a little over time and we're going to have to cut into the to the break but first let me thank the panelists for joining me up here for a great discussion thank you all and as i said please do go online you can find the whole pdf of our report there the the hard copy report will also be ready in a in a week or two if you'd like that version meanwhile there's coffee on the samnon terrace but we really need you back here by 11 29 and a half because we have to start at 11 30 okay thank you so much