 Good afternoon everybody and welcome and a very special welcome to our special guests and I will do some introductions in just a moment Please be seated I'm Susan Collins the Joan and Sanford Wildein here at the Gerald R. Ford School of Public Policy And it's really wonderful to see so many of you here for our special program this afternoon Before we begin I would like to acknowledge our co-sponsor the Lieberthal Robles Center for Chinese Studies and its director Mary Gallagher. We're delighted to have you here with us, and I know there are a number of affiliates of the Center who are here as well Welcome Our special guest today is the Lieberthal Robles Center's distinguished visitor Professor Justin Yifu Lin We're so pleased to have you here at the University and also to welcome you to the Ford School. It's great to have you here Well Justin Lin is a man of many firsts He was the first from a developing country or emerging market economy to hold the World Bank's top economist position He was also one of the first in his generation from the People's Republic of China to earn a PhD in economics from an American University As a young man He left Taiwan his birthplace to cast his lot with China Which was then on the brink of economic reform and modernization The University of Chicago taught Justin Lin to approach economics with a scientific method and a focus on Hypothesis testing rather than ideology and when he returned to China He brought this approach first to his teaching for many years at Peking University and later as a key advisor to the State Council China's cabinet He served as founding director to the very influential China Center for Economic Research a top government think tank based at Peking University and Robert Zalek in 2008 Appointed him as the World Bank's chief economist his tenure there advanced what he labeled the new structural economics which was informed by very successful growth experiences in many Asian countries and this approach really promotes economic growth through a portfolio of policy choices That combines a key role for markets in allocating scarce resources with a strategic targeting of government resources based on a country's comparative Advantage and that approach broke with what many saw as the World Bank's prior alliance on the so-called Washington Consensus That prioritized a neoclassical approach with very little role for strategic targeting Well, China is now the second largest economy in the world after the United States and is navigating a growth slowdown The question for today's conversation What's next for us China economic relations is a really critical one not just for the US and China But globally Dr. Lin is especially well-placed to provide both a substantive and very insightful perspective Next I would like to very briefly introduce my colleague the director of the Ford schools international policy center associate professor John Trichari and I'll refer you to his bio in the program and Simply say that it's because of his very deep expertise in a range of foreign policy issues that we have selected him as host for today's Conversation for today's event. We will follow the conversation format That's often used at the council on foreign relations And so John will kick things off with a series of questions and after about 30 minutes of their conversation He'll open up two questions from the audience So beginning at around 440 members of our staff will be walking the aisles to collect question cards that you should have Received when you came in there's certainly an opportunity to get additional cards if you would like them And professor Ford school professor and Lynn together with Ford school students Maisie Lee and Jennifer Chang will facilitate the question and answer session for those of you who are watching online Please send us your questions via Twitter using the hashtag policy talks And now please join me in a very warm welcome to Justin Lynn and to John Trichari Professor Lynn, thank you so much for joining us at the Ford school We're delighted to have you here today and as Dean Collins mentioned I'd like to start off with some some framing questions and conversation to get some of the key issues on the table What I'd like to do is to start with a soliciting a few of your thoughts on the general state of the Chinese and US Economies and then talk a bit about some of the key areas in which they interact trade currency and Development policy or finance and then of course we'll turn to what I'm sure will be a good set of questions from the audience So let's start with the state of the Chinese economy after this remarkable prolonged period of growth China's economy still growing well at about six and a half percent, but like all economies it faces Challenges which has led some analysts to bridge to hard landing I want to ask you first about some of those challenges and then turn to some bright spots and opportunities One of the challenges is how to is how to maintain growth in this environment of weaker global demand for exports Which have been such important contributors to Chinese growth over the years? The Chinese government as you know has set stronger domestic consumption as a goal for many years and recently announced some short-term measures that it will use to spur Consumption in the near term. I want to first ask you whether you agree with that as as the appropriate near-term Goal for for Chinese policy and then whether or not you think that the recent measures announced Are appropriate ways to try to spur consumption in the months ahead? The first one is that Chinese economy has been disarrayton since 2010 and You know that the average annual growth rate from 1979 to 2015 was 9.7% and Last year The annual growth rate was 6.9% and it was the lowest since 1990 And not only it was the lowest since 1990 It was the first time for China to experience Six years of disarray Because as I mentioned the average annual growth rate in the past 37 years Was 9.7% Certainly does not mean that China grew at the 9.7% per year There was some fluctuation Sometimes higher than 10% sometimes lower than 10% But in the past the growth rate Well would have Rebounded up to two or three years of disarrayton This time it was 16 six years already But the downward pressure Is still very large and as you know the Chinese government just announced The growth rate in a certain quarters of this year It was 6.7% the first quarter 6.7 second quarter 6.7 and the third quarters The 6.7 was a substantial government support In August and in September And so there's a lot of discuss about Where does China is going to have a high-lending or sublending Very much depends on the understanding of the reason For the disarrayton in the past Now almost seven years Well most people They argued That the disarrayton Was mainly due to domestic structural the growth pattern and So it's internal Rooted including what you mentioned that China should have switched From investment debt growth to consumption debt growth But to me yes China is a transition economy China is a developing country China certainly has many many structural problem Development pattern and so on those kind of problems there But to me China paid cost for those problems however The main reason For this disarrayton It's external and a secret code and Why I'm so confident to say the main reason For the disarrayton is external and a secret code because we can see other Emerging market economies There at the same stage of development at China They also Have a similar pattern of disarrayton And that disarrayton It's even sharper than China For example 2010 the growth rate in China was 10.6% 2015 6.9% But For Brazil 2010 The growth rate Was 7.5% And in 2015 Negative 3.8% For Russia 2010 4.5% 2015 Negative 3.7% Similar disarrayton and much sharper than China India 2010 Its growth rate was 10.3% China 10.6% 2015 7.6% Seem to be higher than China But the pattern was similar Disarrayton And if you look into the reality in India Actually 2015 The growth rate was higher than China for two main reasons One was In 2012 Its growth rate dropped from 10.3% down to 5.1% China from 10.6% Down to 7.7% So That disarrayton was much sharper And as a result There must be some rebounds Secondly we know that In 2014 India adjusted its Statistic method And that adjustment allowed India To have 1% higher In its growth rate So if you took those two considerations Into Another picture India's growth rate in 2015 Was lower than 7% Like China And they did not have the similar problem Some people say The disarrayton in China was due to The state-owned sectors in China were still so heavy They did not have the state-owned sectors Some people refer to the disarrayton as China invests too much But all the other countries I mentioned Their investment was not large But they had similar pattern And the best way to prove my position Is to look into other East Asian High-income, high-performing Export-oriented economies For Singapore 2010 Its growth rate was 15.2% And Last year 2% Sharp disarrayton Korea 2010's growth rate was 6.5% And 2015 2.6% Again, sharp disarrayton They are high-income, high-performing Economies They are not supposed to have those structural problems Referred in China But they had exactly similar pattern So the only way to explain how can This group of economies No matter their emerging economies Or their high-income, high-performing economies They all have a similar pattern And not only so They continue to drop For example, most likely Singapore this year is going to have Negative growth rate So the only way is external Because high-income countries have not recovered And the trade has been slowing down Internationally And also in 2008 Every country adopted a certain kind Of counter-seq interventions To support investment Now after 6, 7 years Those kind of projects completed But global economy has not completed Unless you have another run Of government-support investment Investment growth will drop So I think those are the main reasons And Understanding that Will put us in a better position To understand whether China is going to have A sub-lending or high-lending It's a convincing case that you make About the global environment Clearly there are external pressures On the Chinese economy But the question remains how to respond to those And one of the possible responses And they're not mutually exclusive To stimulate consumption And another one which I'll get to next Is investment But coming back to consumption for a moment Are the recent plans announced By the Chinese government Is that sufficient in your view To generate the necessary consumption Over the coming months? Yeah, exactly. It has been a popular view If China wants to sustain its growth China Should switch from investment To growth To consumption like growth For that I disagree Consumption is very important But if you want to make consumption As a driver of growth What should be the precondition? Income needs to grow continuously If household income does not grow And only household consumption Increase, what would be the result? It's an open invitation of crisis It's a recipe for crisis And under the current situation Certainly increasing in consumption Is desirable But we need to increase household income first How to increase household income? We need to raise level of productivity first What's the way to raise level of productivity? We need to have a technological innovation We need to have industrial upgrading So we can relocate resources From low value added sectors to high value added sectors Both technological innovation And industrial upgrading require investment Not only in the production sectors We need to reduce the transaction cost During the process of economic development And mainly related to the infrastructure So we also need to make investment in infrastructure All those things require investment Only by investment You can ensure level of productivity Continues to grow And with the growth of level of productivity Certainly household income will increase Consumption will increase Many people criticize That investment in China has been too high But they forget Household consumption in China has been increasing Roughly Each year around 8% And especially during those years with high investment The household consumption increased even further From 8% to 9% to 10% So I don't think that investment is an issue I think the issue is whether we can have good investment In areas which I described Technological innovation, industrial upgrading Was an improvement in infrastructure And for me China still has plenty of opportunity For making those kinds of investments Fundamentally China is a developing country The sector that China currently occupies In general Low value added Mid-range technology Mid-range value added China can still do industrial upgrading China can still do infrastructure investment And those kinds of investments Will generate jobs Income to households Support their consumption growth So I think that the issue is not investment that grows The issue is whether China has good investment opportunity And from my study China still has plenty of room for good investment opportunities You've anticipated my next question Which is how to make that high level Especially government investment effective And related to that By a number of metrics China's investment has been less efficient In recent years than it had been in the past That may be a natural process In the course of development But I wonder if, in addition to sharing with us The ideas that you just did on what are some opportunities For productive investment Are the reforms that you think need to be made To make some of the existing investments more effective In the SOEs In the so-called old economy and so forth I think another here is that There's some empirical study to show The return to investment in China has been slow in that And people think it's alarming And for me That kind of study did that And put the secret business cycle into consideration Because now we are in the global business cycle And certainly because of the demand globally reduced And certainly you have some kind of exit capacity In the economy And under the kind of situation with exit capacity The private sector's investment incentive has been replaced And under this kind of situation It should be a good opportunity for the government To make investment in infrastructure And to make investment in infrastructure First, especially for developing countries like China There's still bottleneck in infrastructure In environment protection Those kind of investments can release the bottleneck of the growth And especially those kind of investments In general private sectors will not have incentive to make And so the government should be responsible For the infrastructure, for the environment And if the government should be responsible for that What would be the best time to make those kind of investments Under the downturn in the business cycle Would be the best time The reason to make investment in a downturn Is because first, it creates a job Reduce the need for unemployment benefit And opportunity caused by making those kind of investments Will be lower Secondly, the raw material The construction material during the downturn Will be cheaper And so you make those kind of investments And the best time is to do the investment during Sometime like now But those kind of investments in general are long term And by definition, their return will be lower If their return is not lower Private sector will do that already And so if it's a government responsibility And the return will be lower Even the strategic show The return to investment is lower But it's the best time to do it And so if we understand this Dynamics to stimulate the private sector investment The most important thing is to increase the confidence Of the private sector for the future of the Chinese economy For the private sector Whether they are going to make investment or not Very much depends on their prospect of the future And that's the reason why I start with my intervention To understand what is the cost For the so-in-tang in the Chinese economy Because if you think the so-in-tang in the Chinese economy Is mainly internal structure Then you get to be very pessimistic Because to make adjustment in the economic structure It's a very loop code Everyone understands the US economy needs to have structural reform The European economy has to have structural reform Now it has been eight years Structural reform has not been in place Japan, everyone knows They need to have structural reform So Abe, after he took office He wanted to carry out structural reform And Abe has three errors And the last one is related to the structural reform But it has not been implemented yet If you think the so-in-tang is mainly structural Then you get to be very pessimistic And if people think that it's structural, they are pessimistic They are not going to make investment So it's very important to understand the true causes Understand yes, we have some structural problems But the main reason for the dissolution is secret code And as secret code, the government needs to have interventions And for China, we still have many good opportunities For making interventions Because we still have many structural We still have structural deficit in China Environmental deficit in China And those are good investment opportunities It has those kind of investment We have high economic return and social return And China is still in a very good position to make those kind of investment Because the government debt, as a percentage of GDP Is only 57% And the Chinese debt, actually the net is much lower than that Because in other countries, the government debt Was used to support consumption In China, the government debt Was used to make investment So there's a real asset Net debt is much lower than that And so that gives the opportunity for China to expand its debt To support the investment And as long as we support the investment Then the economic growth will be maintained And if the government, you know, the economic growth will be maintained The private sector has a lot of business opportunity there They will have more confidence So for that, I think that, you know If we truly understand that, convey that message Then, I think the private sector will have more, you know Idea, more witness to making investment And that will support the growth target that China Hope to achieve 6.5% and above And for that, I have not thought that China will be able to achieve One other thing that is a concern arising From high levels of investment and debt Is the possibility of a housing bubble Which has been frequently discussed And also the possibility that as non-performing loans Pile up in the banks that there could be some form of financial crisis How concerned are you about those contingencies And do you think the government is taking the right steps to address them? Those two sectors, we need to pay high attention to that High leverage in a corporate sector In a government sector, certainly We need to pay high attention to that But the key issue is that Whether they were turning into some kind of systemic crisis For that, I'm quite sure they were not The main reason, the first one Is that high leverage of corporate sectors The government debt is quite low, household debt is quite low And the corporate debt in China is high But corporate debt has some kind of secret situation Because we know China is a bank-based financial system Corporate sector borrow to make investment And before they realize their revenue They are going to have high leverage And if you look into the Chinese economy Now the sectors which have alarming high corporate debt Are the sectors in the construction material sectors Steel, cement, aluminum, and grasses They're all related to construction materials And so that's the reason why I think it's very important For China to support the fiscal expansion To engage in infrastructure investment Because they ever created demand for those kind of construction material And as long as the demand in those kind of sectors Maintained profitability in the sector will be maintained And they will be able to pay back their debt Then reduce the corporate leverage And this was something I'm arguing in the past years and months And the evidence support me For example, I mentioned the last three quarters In July the investment reduced a lot So people talked a lot about excess capacity, high corporate leverage And the government increased its investment in August and September Immediately the excess capacity situation turned into shortage And the prices of cement, steel, and coal increased And they become profitable Once they become profitable, they pay back their debt So that's some sectors that we need to pay attention to But as long as we maintain reasonable high growth rate Then they will be able to repay their debt And they will not turn into a crisis That's one thing And secondly, it will not be a crisis also because All the debts are in Chinese currencies As long as it's in Chinese currencies Even some banks may have some problems But the government can easily come to rescue And so the government will have the ability To meet these kind of sporadical challenges in certain areas Even that kind of situation occurred And I think most likely they will not occur And so for this area, we need to pay attention to But it's not so scary as some people describe That is for the corporate debt Then the housing bubble and so, for that is that To me housing sectors, real estate sectors Will continue to be the pillar industry in China For two reasons The urbanization rate in China today is 56% of the population To become a high income country, in general The urbanization rate will exceed 80% So China is still in the urbanization process People will continue to move from rural areas To urban areas As long as they move to the urban area They need to have housing And so we are going to have a continued housing construction Second, the income in China is still increased very rapidly Because even China maintains 6.5% growth rate Population growth rate in China is only half a percent And so that means the household income will increase About 6% per year About every 11 years The income will double The household income will double And under the connection with the high income They would like to have a larger house They would like to have a better house For these two reasons I think in our construction in the real estate will continue There will be a main source of investment in China continuously But certainly housing in real estate Not only for the purpose of living People use that as a way for speculation And so the speculation can cause some trouble China needs to pay attention to that And you can see the Chinese government adjusted the policy When the housing price increased too rapidly But whether it will be a bubble or not It's very hard for me to predict 20 years ago I already said housing price in China is too high And if I do not convince the housing price in China was too high 20 years ago I would be billionaire now You've shared a number of thoughts on challenges China's economy is facing And also some opportunities and ways the government can manage it I'd like to turn very briefly to the U.S. And ask you a similar question of what you see As sort of the principal near term vulnerabilities In the U.S. market that are concerned to China And then in the sort of medium term What are a couple of the key structural barriers To sustain U.S. economic growth Well, U.S. economy certainly still is the largest economy Major market exchange rate And the growth in China in the U.S. will be very important Not only for the U.S. but also for the world U.S. is the largest importer in the world And if U.S. can maintain the growth Then the market for the exporter in the world will be larger And so it's very important for the U.S. and for the world And the issue is that U.S. used to grow at about 3.5% Now even after almost eight years The growth rate in the U.S. is only about 2.5% And so I'm afraid that the U.S. will bounce back to the 3.5% Will be crucial And how come after eight years The U.S. economy has not fully recovered When I was in the World Bank Many people at that time argue If you look in the past experiences Any crisis originated from high-income countries It was not only 3.5% to 7.5% And now it's almost eight years So the reason why the U.S. economy has not fully recovered Is because you have not really carried out the necessary structural reform And how come the structural reform is so hard Because structural reform If you carry that out in the long run Good for the economy Increase your competitiveness Increase your resilience That certainly should be good But in the short run In general structural reforms are constructionary And it will put down the economic growth rate It will raise the unemployment rate And politically it's very hard to carry out But is there a way to carry out a structural reform If you look into the financial crisis In other countries in the world in the past Because in the past mostly the crisis occurred in developing countries And then when they have the crisis They come to the IMF for rescue And the IMF will recommend three policies The first one, structural reform With the understanding of structural reform is constructionary And you already have a very high employment rate How to carry out that The second one is sharp devaluation of the currency To increase the export And the export increase will create a job Offset the construction of the structural reform And so they can carry out the structural reform To create a room for structural reform And the third policy is certainly to give some kind of fun To weather through the period But this time it's hard to use devaluation As a way to create a space for structural reform Because the crisis hit all the high income countries In a high income country In a similar stage of development Their production structure are similar Their export markets are competing with each other And under this kind of situation If you want to use devaluation To create a space for structural reform You are going to have competitive devaluation In Eurozone, in Japan Whether Eurozone want to have devaluation As a way to create a space for structural reform US will have a competitive devaluation And under this kind of situation We need to have a region We need to have a new innovative way To make the structural reform In a high income country feasible And that requires political leadership Requires vision And if we do not have those kind of vision And political leadership, I'm afraid The scenario in Japan Could be a scenario in the US It's not good for the US It's not good for the rest of the world I want to tease out a little bit of your argument When you are characterizing the causes For China's slower growth You emphasize the external pressures on the economy With the US emphasizing sort of shortcomings In domestic structural reform To what extent do you think That external factors are also responsible For the slowdown in US growth? Certainly we are in a ratio cycle Because the crisis started in the US In a high income country The slowdown started to happen In a high income country And so the expo that was hit And a high income country has now fully recovered So the growth of expo In the course of war Were suffering We know that before 2008 The global trade growth Was more than twice as high As the GDP growth in the world But after 2008 Now, first The real GDP growth rate has been reduced But the trade growth now is lower Than the GDP growth For example, at the beginning of this year WTO predicts This year's trade growth will be about 2.8% But now the downward revised that to 1.7% Sharply reduction in the trade And certainly the income In the high income country has now recovered Contribute to the reduction in the export From the developing world And because the reduction of the export In the developing world Their growth rate dropped And that reduced their demand For input from the high income country So we are in some kind of visual circle But if we try to trace what would be the roots Because that we know Developing country recovered quite well After 2008 and 2009 After 2009, most developing country Has recovered to their pre-crisis growth But because high income country has now recovered And the trade growth has been substantially reduced And that was the main reason for the developing country To be unable to maintain their growth A momentum So it's not I want to point fingers But the statistical analysis Advised me Unless the high income country fully recovered Otherwise, not only the high income country Will suffer The developing country will also suffer Fundamentally, high income country still Contribute more than 50% of global GDP They contribute to about More than two-thirds of global demand In a trade And your comment about a slower rate Of growth of trade Brings me to the next topic I want to ask you about Which is the Trans-Pacific Partnership As our audience members probably know This is a 12-country trade deal That includes a number of Asia-Pacific states Including the U.S. and Japan, but not China There's still a chance that it'll pass In the lame duck Congress If the TPP comes to fruition What do you expect to the economic effects Of that to be on China and on the region? The first thing that I think is that To exclude China from TPP Is not desirable Because China now is the last Trading country in the world And the country now involved in TPP Their trade with China is intense China is either the Large trading partner Or the second largest trading partner Of those member countries in the TPP negotiation And we know the idea of TPP Is to improve the quality of trade And investment Those certainly are desirable But if you exclude China from that And China is the largest trading country in the world And the most important trading partner With all the members If you exclude the elephant in the room And so under that kind of situation I don't think that this Economically it's, you know It's advisable It's, you know, good Not only it's not good for China It's not good for all the partners That's one thing But secondly, supposedly This TPP agreement Get approved in a congress in every country It's not going to hurt China so much I think that mostly psychologically In reality Because if you look into Like Vietnam, like a few countries Which are really compete with China In a trade They already get some kind of preferential treatment In a trade relations With the US So the reduction In the trade barrier to them Is insignificant And so the TPP May marginally benefit them In the competitiveness with China But I don't think it's going to be substantial It's mostly psychological Not so economically in reality Great The TPP discussion of course is linked to Currency issues between the US and China Lately Although the value of the renminbi Has slumped against the dollar It's increased against some other currencies Like the euro and the Korean won So there are some incentives for the Chinese authorities To reduce the value of the currency in the near term But of course we're in a US election season Where there's a lot of talk about the need To get tougher on China's currency As he would name China's currency manipulator Hillary Clinton is also talking tough Without making that specific threat What do you think that the Chinese authorities Should and will do in this context? I think that every politician always has Some political needs to find a specific goal For the Problem domestically And I can understand they use China as a specific goal And especially now with the devaluation of China's currency Then easily to say a lot of things about China But that can do with the reality But look into the realities It has been recommended that China needs To adopt flexible exchange rate And it has been recognized A developing country should adopt management protein Managed protein And to pack into a basket of currency Not used to the US dollar alone To a basket of currency The reason for the devaluation In the last month of the Chinese currency Is because of the sharp devaluation Of the British pound, of the euro Of the Japanese yen And China pack Chinese currency To a basket of currency Certainly US dollar is the most important component Of this basket But British pound, euro, and Japanese yen Are all in a basket And they are all sharply devalued Against the US And under the current situation Certainly the Chinese currency Need to devalued to reflect The valuation of this basket I think that's the reality And to use the devaluation To say China manipulate the currency Actually if China do not devalued That means China manipulate the currency Devaluation is a natural consequence Of this kind of global currency Policy currency situation Part of this of course is And there are a whole host of arguments Made about China's bilateral trade surplus With the US in goods and so forth That that would be evidence of currency manipulation But even those in the US Who are friendliest to the Chinese government's point of view On this would say that the easiest way To sort of resolve this once and for all Is to have a fully convertible currency And market determined rate and so forth This is an express goal of the people's bank What in your view are the key remaining steps To be taken to both make the Remain be fully convertible And also to internationalize the currency I think that the model look into Is that sometimes people forget Currency valuation is not only determined by trade But also determined by capital inflow and outflow And so you cannot only look into trade To decide what would be the market level Of the exchange rate And because the large Short-term capital inflow and outflow That's going to have a large impact On the short-term valuation of the currency But short-term inflow, large inflow and outflow Is not good for the economies So in the past, like IMF Arguing the fully counter-probabilities And a fully capital account liberalization And 2014 they changed the position They think a full developing country As long as their currencies Are not reserve currency It's desirable to have a capital account In the past called capital account control Now they do not use the term control They use the term management Especially when a high-income country Has a very loose monetary policy Now zero interest rate or negative interest rate Under the kind of situation Because the cost of capital in a high-income country Is so low Investment opportunity in a high-income country Is limited And you're going to see a large outflow of capital And short-term capital Flooding the other country And any kind of indication of interest rate hike Will cause a large inflow Return back of those kind of capital That's going to cause a lot of trouble In the developing world So under the kind of situation There's some kind of management of capital account And under the kind of situation As long as you manage the capital account Certainly it will affect the inflow And upflow of the capital And it will affect some kind of exchange rate So we need to come to the new realities Fully capital account liberalization Is not consistent with the goal Of maintaining stability And dynamic growth in the world And so to have certain management Will be desirable It's worth noting that the International Monetary Fund staff Produced the paper a few years ago Concealing that there would be certain cases In which it would countenance that kind of management In a way that it hadn't in the past Let me ask you one more question Just to get an issue on the table And then I'm going to turn to Jennifer and Maisie For some questions from the audience And that is moving from sort of the IMF topic To more broadly international financial institutions The advent of these new bodies That have been led by China The BRICS New Development Bank The Asian Infrastructure Investment Bank The Contingent Reserve Arrangement These have been seen by some audiences In the United States as a direct challenge To U.S. leadership of the international Economic governance system In what respects are these new bodies Actually intended as a challenge To the existing institutions And in what ways do you see them as most complementary I think it's mostly complementary The U.S. leadership in the world I think the motivation is to promote Economic development Economic stability Economic growth Improvement of well-being of the rest of the world That's the meaning of leadership And then I look into what is the bottleneck What is the main barrier for the developing world to grow Infrastructure deficit And so it will be desirable For the growth in the developing world To have more investment in infrastructure Certainly we have multilateral development institutions Like the World Bank Like the Regional Development Bank And they are responsible For the infrastructure investment In the developing world But the amount of the resources They can commend Compared to the needs It's too small And according to the Asian Development Bank In Asia alone each year Require $800 billion of infrastructure investment And in Africa About $500 billion In the world about $2 trillion And compared to the resources the World Bank has And the Regional Development Bank They also have a tiny portion of that But we have a lot of new resources That we can tap into China and the emerging markets They have In a position to contribute more But if you ask China, Brazil, India To contribute more to the World Bank To the Regional Development Bank Certainly you need to allow them to have A larger voice No text, no vote, right? No vote, no text And so You have to adjust the governance structure In current existing multilateral institutions But the high income countries including the U.S. Are very reluctant to adjust the governance structure And so with the principle of no vote, no text Then it's very hard to convince China And other developing countries to contribute more But we have a huge need in the developing world So under that kind of situation If we have a new institution Which allows China to have more resources That would be desirable That's one thing from the resources point of view The second one, there are some competition Is always desirable Because now the multilateral institutions In effect, they are very inefficient For example, they all have a residence ball We have many people from the corporate If your ball is resident Overwatch you on a daily basis It's hard to manage Operate in another kind of situation So it should allow some new governance New ways to compete In another kind of situation The efficiency of every institution can be improved So from those kind of angles of point of view If you really worry If you really concern about the global growth The global well-being Then the new institution like AIIB And the new development bank should be welcome Jennifer, amazing We'll now take a few questions from the audience Hello, hi Excuse me Hi, I'm Maisie I'm an MPP, MA dual, second year Our first question is from the audience And it says the GDP of China May exceed U.S. in the future year And the U.S. government has set up Some barriers to stop Or lengthen that period So do you think it is possible to reduce The conflicts between these two countries And how to build up the trust and confidence Between U.S. and China? Yeah, I think that first we need to recognize The U.S.-China relations Is winging to China and the U.S. Because if you look into the relation The most important relation should be economic relations Because what we people care about Actually is our living, our improvement And that's all most related to trade Related to the economic relations And if you look into China and the U.S. Currently the Pockella GDP in China Is about 8,000 U.S. dollars U.S. 57 U.S. dollars And there is such a difference In the Pockella GDP That means the labor productivity In China and the U.S. are different The sectors that U.S. produce Are much higher value added And the sector that China produces Are lower value added So actually it's complementary to each other We are not competing with each other And to maintain good economic relations Certainly is good for China And good for the U.S. China expo, lower value added Type of products Related to the different necessities Most like those kind of things And reduce cost of living For the people in the U.S. Certainly that's good for the U.S. people And the U.S. produce higher value added goods Mostly with embodied Higher technology That can help China to improve the productivity And also those kind of higher value High tech type Capital intensity is good for China That's also good for China So we need to understand There's no fundamental conflicts In the relation between China and the U.S. And it's a win-win relationship But certainly as I mentioned Politicians sometimes always like To find a scapegoat For the domestic issue And the best way to overcome Is to increase understanding China should be, you know Better present itself Help people to understand China And Chinese people Also need to understand the U.S. And with a better understanding Then we have a lot of common ground So basically I'm an optimistic people I think that fundamentally People care about their livings Their life, their well-being And the relation between China and the U.S. Will help us to improve our well-being Both in China and the U.S. Hi, my name is Hi, my name is Jennifer Cheng Hi, my name is Jennifer Cheng And I'm a senior in the undergrad program at Ford Our next question is also from the audience What has been the economic effect Of the structural division of China's workforce Into distinct urban and rural labor markets Is the urban rural gap in externality Or an engine of China's growth? I did not forget the questions Yeah, the urban rural What has been the economic effect Of the structural division of China's workforce Into distinct urban and rural labor markets Is the urban rural gap in externality Or an engine of China's growth? In China's labor market It basically utilized The rural levels They can migrate to urban areas Without much restriction Although we have some kind of household residents Who can assist them on their own And it has some cost for rural people To stay in the cities But it's not a barrier for them To migrate to work in the urban areas And that's the reason why I'm sure you heard the report China has about 300 million Floating populations Migrate from rural areas To work in the urban areas So in terms of the In terms of the labor market It's not such a big issue But income in the rural area And urban areas The gap is quite large And I think it's because in rural areas They work in agricultural sectors Labor productivity in the agricultural sectors Is lower than the labor productivity In the urban areas And because of that It attracts a lot of migration From rural areas to urban areas And under the current situation I think the government should be responsible To provide more support To the social protection And also show some benefit To the people behind in rural areas In order to reduce the urban-rural divide So the issue is not in the labor market The issue is in the disparity of income And the disparity in the public services In urban areas and rural areas And for those kinds of disparity Both the central government And the local government Should be responsible To narrowing the gaps Okay, the next question Is about your opinion of the degree To which military development In the South China Sea And is that an economic negotiating tool? What are your thoughts on that? The South China issue Yeah, certainly the hot topics I think that Deng Xiaoping Has a best approach to the issue Put aside the sovereignty And jointly explore the opportunity economically Because the sovereignty issue is hard to argue Because China can have a lot of historical evidence Historical claim, historical evidence to show That China has some kind of ownership In the South China Sea Islands and so on And certainly in the surrounding country They will say they are so close to us So we should have some sovereignty issue there In a claim there So I think the best way Because most importantly it's economic And the best way is to jointly explore the opportunity Together While government investment is efficient In promoting productivity It creates great uncertainty In transaction costs for private sectors As private firms may find it hard To anticipate government decisions What do you think about this cost Of government-led investment? The government that investment The government in general would not invest In industrial sectors anymore The government investment is mainly In the infrastructure And the reason why the government Make investment in infrastructure Is because private sectors Their incentive to make investment In the infrastructure is so low You know, it was Some kind of change in ideologies Before the 1980s It was a conviction that The government should be responsible For infrastructure And the multilateral development institution Like the World Bank Like the regional development bank They were also supporting the government To make investment in infrastructure To give one example, the World Bank Before the 1980s The largest department in the World Bank The infrastructure department But after the 1980s With the rising of neoliberalism People started to argue If infrastructure is economic development It's an investment Based on economic principle The market should take care of that And so it changed from The government to be responsible For the infrastructure investment To that it's an economic activity So the private sector should be responsible With this kind of change of ideology Certainly the infrastructure development A department in the World Bank Gradually dying out So when I went to the World Bank in 2008 There was no department responsible For infrastructure But what is the consequence of that? The consequence is that It will go to the developing world For 30 years There's only one type of infrastructure Private sectors are keen to make investment Mobile form Telecommunication Other than that The private sectors are not interested And the reason why they are interested In the mobile telecommunication Because first It's very easy to collect the money Secondly, they have some kind of Mobile monopoly So for the monopoly rent And easy to collect other places The private sector is keen Other than that The private sector are not interested And that is the reason why It will go to a developing country No matter the Latin America South Asia or Africa You can see the infrastructure Show teaching everywhere China is in a better position Because China is still to make Investment in infrastructure And so if you see The investment by the government Mostly in the infrastructure Not in the industrial sector It should be desirable And especially with the downturn In the business cycle It's the best time for the government To make investment in infrastructure So 2014 The IMF published In October issue Or 2014 Of World Economic Outlook IMF Alavocate It's the best time For the government to make investment In infrastructure Because of the business Sold down in the world So I don't think that So the observation now The government investment Is a percentage of investment in China Increase Is a big issue It only reflects The slowing down in the economy And it's the best time for the government To make investment in infrastructure As long as the government investment Is mainly in infrastructure It's not an issue to worry about Earlier you talked about China's debt And said that most of the debt Is R&B Thus even if major crisis happens The government can easily intervene So in terms of the tools for intervention Is increasing money supply an option And will that affect the exchange rate considerably? The increase in the money supply Will that affect the exchange rate compatibility Is that your question, right? Yeah Well The exchange rate compatibility May not so much related to the money Monetary supply We see the high income country In the past seven and six years Seven or eight years They all adopted quantitative e-gene Law in a zero interest rate Now negative interest rate But those kind of reduced money policy Does not affect the country Continue to adopt the Fully compatibility It does not affect them to make their currency Fully comfortable I think that the consideration should be more Whether China should adopt Fully compatibility I think I'm mainly dedicated to Whether yuan will become a reserve currency And secondly also very much depends on Whether the financial sector in China Is well developed I think of that If financial sector in China is well developed And with the gradual internationalization Of China's currency China's yuan become one of the major reserve currency Then that will be a good time for China To make the currency fully convertible May I ask a quick follow up on that If you could share with the audience A couple of specifics of the kinds of things That you mean by having the financial market Be well developed Well, the financial market developed Means the equity markets Is further independent For their enlargement The debt market The corporate debt The government debt markets Is large enough and well functioning And this kind of development Also depends on the stage of development Because the financial structure Actually should reflect the economic structure Because the main purpose of finance Is to support, to serve the real sectors And the real sector in China Is that China currently With a particular GDP of 8,000 US dollars Most of the production activity in China today Are still in agricultural sectors And in small and medium sized enterprises In manufacturing and services And in general they are still In mostly traditional sectors And for them the best way to serve them Is banking and bank arrangement Instead of equity market or debt market And because of that The financial sectors in China Cannot be as well developed As high income countries like the US Like the European countries Because in high income countries The main production sectors Are capital intensive, technology intensive sectors And for them they need to They are riskier And the best way to serve them Will be the equity markets And also those kind of large companies Corporate sectors, they are large companies They are better structured And they can use that to serve them also And also the government with high income The government debt market will be larger So those kind of the depths of the financial structure Very much reflect the state of development And China has not reached that stage yet And now in 2000 After finishing my job In 2012 I published a book against the consensus And for that I have several chapters to discuss The global financial arrangement Global monetary arrangement And that discuss a lot of the issue You know, related to what you ask Whether China can have a fully developed Financial sectors Whether currency can really become Global reserve currencies And I think China is not ready yet This will be our last question China is experiencing a rapid growth In its growing population How will population aging affect its economy And how will the government respond to that? The aging issue has attracted Quite a substantial attention And where the aging will become A factor that causes the Chinese growth You know, slow down significantly I think that may not For several reasons One, aging reduces the working population That's a main concern But China currently has an extremely early retirement age For female workers They retire at the age of 50 For male workers They retire at the age of 55 With the aging reduced working population We can extend the retirement age To upset that That's one way And more importantly It's not the quantity of the labor force count It's the quality of the labor force count And the quality of the labor force Depends on the education, the human capital accumulation So aging is a slow factor It can be predicted And to upset that We can invest more in education And to increase the quality of the working population And as you know, China invests Very aggressively in education I can still remember in 2000 The tertiary graduate each year Is less than one million Now last year The tertiary graduate students last year Was 7.5 million Seven time increase And I think that that kind of accumulation Of human capital Can offset the impact from aging But you know, I think that it's one factor Many people discuss a lot But I don't think it will have such an adverse effect As many people, you know, predict Thank you so much To Justin Lin and John Trichard Thank you