 Welcome to Bloomberg's Davos debate. I'm Francine Lacroix and we're talking China over like 75 minutes. We ask, where is the Chinese economy headed with the new five-year plan being presented in 2016? How can the world's second largest economy shift gears without stalling its growth engine? And what does all the market volatility tell us about the perception of China and of course the task facing Chinese regulators? Well, we have, I'm very pleased to say, an A-star panel. Thank you so much for coming on. Zhang Xing, he's Chairman of the Board, Industrial and Commercial Bank of China. Christine Lagarde, Managing Director at the IMF. Fang Xing Hai, Vice Chairman China Securities Regulatory Commission, of course Director General at the Intercontinental Economic Department. Gary Cohn, President at Goldman Sachs. Zhang Xing, of course Chief Executive Officer and Co-Founder at Soho China. And Ray Dalio, Chairman and Chief Investment Officer at Bridgewater's Associates. So thank you so much for joining us. Chairman Zhang, let me start off with you. China's markets, of course, have begun the year with a lot of volatility. What do you believe is the underlying cause of this? I think it's all about China's economy. It's still the cause of global economic growth. The contribution to global economic growth last year was almost one-fourth. Of course, since this year, China has been like the world. In the market, there has been a lot of volatility. Of course, the cause is very complicated. There is the global economy. It's been a difficult year these years. It's like entering a era of economic balance. The difference in global currency policy is also huge. The U.S. cashier, like the European region, like Japan, the expansion of this policy has also led to the波 of the market. As you can see in these two days, the rise and fall of the market has become a new situation in the world. This year is the beginning of a wave year. I think some of these problems are normal. But some of them are very normal. Some of these problems are in the market. Of course, we have to continue the reform of the global economy. We have to promote economic growth and the growth of the economy. This is the most important basic aspect. Secondly, I think that the world is a manager. The management department has to work together to prevent the excessive activities of the market and bring harm to the economy. That's my opinion. Thank you so much, Chairman. Ray Daliu, is there something that the West misunderstands about Chinese markets? And does that, of course, exacerbate the volatility we saw over the last two weeks? I think there's a lot that the West misunderstands about the Chinese markets. But I think the essence of what's going on in China is an adjustment. Four major challenges. They have a debt restructuring challenge. They have an economic restructuring challenge, so they have to come up with a new model for the economy. They have a capital markets challenge to build the capital markets in an efficient way so that it circulates capital through the system better. And right now they have also a balance of payments challenge having to do with the pressure on the currency, the capital outflows and those types of things. These are things that have happened repeatedly through the rest of the world. The United States has had three major debt crises. We couldn't pay our debts in 1971. We had it in 1982. We had a debt crisis. We had the SNL crisis. We've reshaped our economy many times. I remember when the steel industry ended and heavy manufacturing and we've gone into other areas. We've had a number of balance of payments and currency issues. So I think that maybe one of the things that is being misunderstood is what is a normal balance of payments, economic, too much debt restructuring, kind of recession. In Japan they used to define a recession as anything less than 3% growth. Maybe in China the described recession as less than 5% growth. We're going through that. I think it's being confused with the longer term picture. In other words, I think that the reforms that are going on in China and the leadership in China in terms of where it's moving is going to be very fundamentally good. And so you're looking at something that is a short term challenge as distinct from something of where we will be in five years after the regeneration of new capital markets and new economy with vibrant young entrepreneurs and that other economy that's now beginning to flourish. But why have we had so much volatility since the start of the year? Well, the volatility has been primarily a result of in the world as a whole that we have a need of easing a monetary policy all around the world. And we're not going to have the same effectiveness in that easing of monetary policy because with interest rates at zero you can't cut interest rates and with asset prices having risen because of that quantitative easing. There is risk, the risk premiums have gone down and there's a big vulnerability. So when China is dealing with the rest of the world China is a negative on the margin for the rest of the world and the world is vulnerable because of the lack of monetary policy while asset prices are comparatively high. Mr. Fang, how do you explain the volatility? Is it something that we just need to learn to live with? Well, maybe there are two factors that are going on. One is that China is in the midst of transiting from an economy relying heavily on investment and exports to an economy a lot more dependent on domestic consumption. And in this transition, a lot of assets get revalued in the process. So I think this is the primary reason lying behind volatility. Now another factor is that I mean the fat-raised interest rates not long ago a lot of emerging markets didn't perform very well, their domestic reforms got stored. So you have a combination of Chinese transition plus international influx. And that caused volatility. Now, you asked why a lot of volatility right at the beginning of the year? Well, asset price adjustments usually went by steps, right? It does not go always smoothly. And we just hit that step at the beginning of this year. Madame Lagarde, if you look at the fluctuation, what have we learned? Is there something that we have learned about what the Chinese are trying to do in the last two weeks? You know, at the IMF we don't look at the last two weeks. So I'm a little bit embarrassed to comment on the last two weeks. If you don't mind, I'd like to just go back to more basics. It is a fact, as has been indicated, that the second or first, depending on how you calculate GDP, the second or first largest economy in the world is going through a list of transitions. Reyes indicated that, you have indicated that as well. Industry to service, export to consumption, lower level of investment, hopefully. And I think there's another one, which is happening at the moment, which is also a governance change, which has begun, which is probably going to continue to roll out, which has to do with the anti-corruption fight that President Xi has highlighted as one of his key proposals, which has to sort of trickle all the way down to the provinces. And that is also a management change, which has to be taken into account by Chinese authorities, Chinese operators, so that risk can be apprehended, risks can be taken in spite of this happening. I would say also that, given those massive transitions that are undertaken pretty much at the same time and accepted as such, there is a communication issue, which, you know, it's something that markets do not like, uncertainty, not knowing exactly what the policy is, not knowing exactly against what the remin B is going to be valued. Is it the dollar? Is it a basket of currencies? Which basket is it going to be? On the, I think on the balance of payment and on the exchange rate matter, I think better and more communication, which certainly serve that transition better. I tend to agree with Mr. Dalio's assessment, but from our perspective, we believe that all those changes are perfectly manageable if the right policies are taken and given the large amount of reserves, the large amount of buffers that the country has. So from our perspective, we are, you know, forecasting a 6.5 growth rate for next year. And we believe that the Chinese authorities can perfectly legitimately accept that this growth rate is fine for China, just as it is fine for the exchange rate to be aligned with the basket of currencies. Gary, does China actually need to decide whether they are a free market economy or not, or have they decided, but not communicated enough? So, look, I agree with everything our panelists have said so far. I mean, many of these fundamental transition points that China is going through are real. When you go from a CAPEX economy, where you're building infrastructure to an OPEX economy, where you're basically having consumers drive your economy, that's a long transition. You cannot, you know, monitor or affect consumer discretionary spending. It's called consumer discretionary spending. You can't affect it the way you can affect government spending. So this transition is difficult. On the specific question of China's economy and whether it's a market-based economy, you know, clearly this is a question that the market in the market as a whole is dealing with. There have been signs that China wants to have a open, free economy, an open, free marketplace. But in certain situations, the Chinese have intervened into their market, making it less than a free and open market. Now, I must remind everyone that many of the things that the Chinese have done in intervening in their market are the exact replicas that many other countries, including the United States, have done. It's certain parts in their modern history, not even in their old history, whether it be circuit breakers or restrictions on certain type of trading activity. So I agree with Madam Lagarde, who basically said, you know, it's a communication issue. You know, the communication is really what's important here. Communicating what the Chinese market is going to be and sticking with that theory no matter how painful it is in the transition. Transitions are very difficult and you've got to stick through the transition. Xanxing, how difficult is communication when you're dealing with such a huge and complex economy? I come from the real economy side, you know, being a real estate developer. So what I see is that there's a total decoupled between the stock market trading the stocks of the real estate developer, which is hugely discounted. And the real economy, where we see that the easing of the monetary policy is actually pushing the asset price up. And so that's on the one side. And also in terms of transition from investment-driven economy to consumption-driven economy, for real estate it means that we're used to build buildings. Today we just manage the leasing. And in terms of leasing actually is going quite well. At least in the cities I operate in Beijing and Shanghai, we're seeing a massive take up of new space from internet companies, mostly internet companies. We're seeing not so much new take up from the old economy, like non-internet traditional economy. But by and large, we have new buildings coming up to the market almost every other month and they're all been taken up. We haven't seen a single building sitting there empty not being taken up. So I think that there must be a communication issues because on the one hand the real economy seemed to be doing okay, but on the other hand the stock market is trading at a huge discount. And obviously the investors are not getting the same message as we operating economy is doing. Chairman Zhen, again to this point of transparency what the markets understand. In 2013 China, of course, promised to give the market a decisive role in the economy. And then since we've had intervention in both the currency but also the stock market, when do you foresee China making good on its pledge? This is a very important issue. When our economy is making huge changes, there are many aspects I think we need to communicate. This communication is a transparency you just mentioned. So in fact, China's economy has made a very big change in the past few years. In the past, we often mentioned to China your investment ratio is too high, your investment movement, your second or third industry should develop and so on. Even in the past year, China has shown this kind of situation. The consumption has reached 66% for the economic movement. Just now, Ms. Zhang Xin mentioned the real estate market. On the one hand, we saw the process of real estate. The actual growth of real estate in the past year was only about 10% of the stock market's investment ratio. The average growth of real estate is only 1% but the consumption of real estate is very fast. For example, I gave an example of a new loan of 62% last year which is used in the consumer loan of the private loan of real estate. This means that the economy is very strong. But I think we need to strengthen the communication of all these changes. The current situation of the current situation is still very serious. Some good news will even be read by some bad news. Some news, some changes are still used to use an old-fashioned way of view or this style. So I think for China we need to strengthen the communication of these new normal situations and I think it's a challenge for China. How can we use a better system of management to adapt to the market's changes? I think China will learn a lot in the middle of this wave. It will become more mature in the future. Yeah, I think there are three issues here. One is communication, as Christie just said. The other is that is there a strategy, a real strategy to transit from an investment-led economy to a consumer-consumption-led economy? The third issue is that some people question the execution of the strategy. Now, volatilities by themselves should not be worrisome for people like Gary and Ray and Chairman Jiang as well. They know volatilities very well. It's the three issues behind the volatilities that somehow have worried a lot of international investors. In terms of communication, you're right. We should do a better job. And we are learning and we are doing it. I'm here today to communicate. But you have to be patient because our system is not structured in a way that can communicate or is able to communicate seamlessly with the market. We are learning and China can learn. I can assure you that. In terms of strategy, I think there is a strategy and it's the right strategy. And that is to reduce investments, to expand consumption, to shift more income from the state-owned sector to the pockets of consumers and to do what we call supply-side structural reform. And the purpose of that reform is to make our supply side of the economy a lot more responsive to consumer demands. Because right now in China, it is not that consumers are not there. They are there. They are demanding a lot of goods and services. But the supply side of the economy is not providing them at a reasonable price. And healthcare, education, entertainment, high-quality consumer goods, you can point it to everything. So there, it lies a lot of opportunity. Then execution. Now, is China really transiting from an investment-led economy to a consumer-led economy? I mean, if you read Martin Wolf yesterday in the Financial Time piece, Martin is a good friend of mine, he seems to be saying that China is not transiting at all. The economy still relies very much on investment for growth. Now, on that score, I disagree with him. Investment as a share of GDP is shrinking and consumption, domestic consumption as a share of GDP is increasing. It reached 52.2%. 52.5% last year, and five years ago it was only 49%. Now, people say, oh my goodness, 3% shift is just not large enough. I agree. It could be faster. It could be bigger. But we are moving toward the right direction. And ultimately, when you look at a country and decide your views about the country, you look at two things. One is the fundamentals, the economic fundamentals that the country has. Saving, education, hard-working, innovation, whatever. The other thing is you look at the leadership. If you have a strong leadership, you have confidence in the country. If the country has weak leadership, despite very good economic fundamentals, the performance will not be good. And if you look at China's leadership, I think we have the strongest leadership in the world at this point. Mr. Frank, a question on regulation. And then I want to get to Ray and Daliu. Last week, the chairman of China's stock regulator said there has been a staff exodus, and he was basically indicating that the department was having trouble keeping up with market sophistication. Is the market getting too complex for China to regulate properly? Because this is what people are concerned about. I understand what you're saying. These are short-term challenges. China has the talent. I mean, you have so many people going to universities, going to graduate schools, going to good Chinese universities, going to good Western universities. We have the people. And government service, public service, still carries a very high esteem in China. So I have no doubt that we have the talent. The market, of course, has gotten a lot more complex. And sometimes we don't know how to deal with the market very well yet. But I mean, you bet. We can learn. Gary? So look, Francine, you started out talking about the whole question of volatility. And we morphed onto this discussion of communication and free markets. And I think these two concepts go together. And so when you look at what's going on in China and the Chinese trying to move to more of a free market and this inability to communicate more freely, that's somewhat where you're generating the volatility. The world standards today for publicly-listed companies and publicly-listed disclosure on balance sheets, audited financial statements, corporate governance is pretty high in getting higher everywhere in the world. People, investors, capital is fungible around the world. Capital moves at the speed of light today. People want access to Chinese companies. They want Chinese companies held to the same standards. Number two is they want the marketplace to determine which Chinese companies should have access to capital, not the Chinese themselves deciding which companies should have access to capital. So as the Chinese market opens up and becomes more freer, the marketplace will determine which Chinese companies should be public and which ones shouldn't be public. And to the extent you start getting more world-accepted financial statements, corporate governance, and the market determining which companies will be public and which companies won't be public, I think you will dampen volatility. So a little bit of this is just natural evolution and part of the communication problem as you're evolving a market real-time. Unfortunately for the Chinese, they're doing this in 2014, 15, and 16 in a digital era. They're not doing this in the 1930s when we had a telegraphic era. The rest of the world did it in the analog world. They're doing it in a digital world. So we're watching it real-time. They're also doing it in an era when we just got through re-regulating all of the financial institutions around the world. And we've taken an enormous amount of liquidity out of the markets and the Chinese are suffering from this lack of liquidity that exists out there. I think that the Chinese policymakers are not getting nearly as much credit as they deserve. And I have the benefit of seeing it from the outside. So I'm not speaking from a Chinese perspective. I think you have to get into the nitty gritty of what they're going through. So let's say a debt restructuring. If you take a look at the debt restructuring that they're having to go through, just to put that in perspective, local government spending counts with about 30% of GDP. It's running a deficit, funding deficit, of about 20%. That means if you cut that funding deficit, that's about 6% of GDP, a hacking of 6% GDP. If you look at the way that that has been restructured and managed, it's been managed really superbly. It's a very difficult situation because you're in a situation where if you just restructure and you don't provide those capital, all of that spending that is taking place through there won't take place. And the same people who are doing that restructuring are the same people who did it in 98 with Zhu Rung Ji. They're the same experienced people. If you know the mechanisms, the type of mechanisms, literally to be using these things, they're pursuing that. If you look at the economic restructuring, in other words, they're going from one economy to basically was like five banks lends the state on enterprises and lends to local governments. OK, the development of a shadow lending system. That's been done with a lot of balance because in other words, it's a risky situation, but the free exchange of capital in a certain way is getting capital to companies that never would have had access to capital before. And that's not producing a volatility. That's quite an accomplishment. And if you look at, OK, the balance of payments. The balance payments is a very difficult situation. Capital flows are what the capital flows are. And if you look at how they're handling it, I think in terms of the stock market handling it, there have been problems. And some of the responses have not been by world standards. But there was also a big order imbalance. In other words, when the order in everybody wants to sell and then they have to respond quickly, there was that sort of circumstances. When I speak to those policymakers and I speak to those in the West, I find equal levels of, or even better sometimes, equal levels of competence in terms of dealing with the things that they're dealing with. I would say that if you compare also the politics of the government, there are no loose cannons that are going to be running China. I mean, these are people, if you look at the system, of how it has to be chosen and how you get to there. You have to be a competent leader and devoted to the country. If you look at the politics in the West and we look at some of the leadership there, that could be quite scary. So I think this commitment, I think the commitment to market reforms is a very real commitment to market reforms. In other words, and think of the power that that's going to have to liberalize that economy. Basically, it's been an economy with the money clogged at the top. Top 10% is where it's passing through. This will circulate and there's a new China. You could speak to that new China, the new board and the entrepreneurship. So I think we're going through a cyclical, you can't help but go over that cyclical adjustment. And that'll last probably maybe two or three years. It comes at a bad time for the rest of the world because when you look at its impact on commodity prices and then not only just commodity prices, the other economies of Brazil and so on. And you look at the vulnerability of the rest of the world in terms of monetary policy. That's a bad combination. But we'll get past this, I think, in terms of China. A bad year in China is going to be a great year in almost any other country. Madame Lagarde, do you question at all their commitment to structural reform and what are the dangers if these structural reforms are not being pushed through? You know, we went through a couple of years of very intense discussions with the Chinese authorities because we were going to review the composition of the special drawing rights baskets of currencies which define the value of the special drawing rights, which is that sort of elusive currency of the IMF, which central banks around the world use. And if you had asked me whether the Chinese authorities would actually complete the reforms that they had to undertake in order to satisfy the criteria of that freely usable currency, I would have said I don't think so. Yet when the authorities actually put their mind and are determined to develop a strategy, implement reforms, certainly we've seen in that particular case an absolute, I wouldn't say perfection, nothing is perfect in this world, but an unbelievable determination and ability to deliver what, frankly, many would have considered as undeliverable to begin with. So if the same determination is applied in relation to the reform of state-owned enterprises, for instance, in relation to the clarity of messages concerning the transitions that are at play at the moment, clarity of communication concerning the macroeconomic framework within which they will define their policies going forward, even if the growth rate is not at seven-ish percent and closer to anywhere between six and 6.5, I think that it will take a little bit of time, as was said earlier, but we believe that they will deliver. It's a massive undertaking, let's face it. And just reforming the state-owned enterprises is going to require a special fund allocated to dealing with the issues. They've done that in the past already with certain sectors and I have no doubt that as it is part of the exercise, just like the supply side reforms that is the buzzword at the moment in Beijing, it will happen. Chairman Chen, there is commitment because last month we had a mysterious authoritative person quoted by the People's Daily saying that China must get used to the L-shaped recovery unless reform is pushed through. Now, what are the dangers of waiting too long? This reform is a thing that is not retreating from China. Because China has to cross the boundary of the middle class and have to make full and deep reforms. Now, I think this reform will not only affect China's population, but also the global impact on the world. Look at China's reform. On the surface, you can see that the growth of the economy is a bit down. It's 6.9% or 6.5% in the future or even higher. But the most important thing is that from the growth of the economy, China is more important than the number of economic growth rather than the number of economic growth. In the middle of the economic growth, there is a major change. The economic growth is the active force. It is no longer a simple investment and the active force that is needed in the past. There will be a lot of movement in the middle of this reform. Like, the reform of the economy is not a very easy thing. China has recently talked about the reform of the economy. Let me review this reform. For example, the question of investment and debt rate. China's government debt rate is not very high in this reform. It includes some of the debt rate of local governments. Now, the government's debt rate has begun to take some financial development measures to reduce the financing of their banks. For example, the financing of our government platform has been reduced to 40% in the past two years. This part has been transferred to some government debt that is more transparent and open. So the debt rate of the individual is actually very low in China. China is still low. There is a lot of potential here. Only China's economy has an active force. China needs to solve some of the problems because of the high unemployment rate. The middle of the reform process of the high unemployment rate is very difficult. You need to go to Kucheng, Ganggang, and go to the產能過剩. In the past, many industries such as steel, cement, electricity, etc. were developing when China invested in high-speed growth. After China's growth has changed, there will be a lot of problems. You need to go to Kucheng, Ganggang, and go to Kucheng. This process is a painful process. You need to have capital. Whether it is financial capital, financial capital, or other capital, this is how you can change things. So I think that China has to make a reform. Although this reform is very difficult, only by completing this reform can China's economy have a brighter future. Thank you, Chairman. Ray, given the Chairman's comments on debt, how concerned are you about an outright financial crisis given the amount of leverage in China? As was said, the leverage levels are not intolerably high. The problem is that debt is still growing at a rate that's significantly faster than income. That's an unsustainable circumstance. It's also an understandable circumstance because changing that rate abruptly will have a negative effect on the economy. I think the issue of instability is more of a balance of payments currency issue. That becomes one that I'm more concerned about. That might require more of an adjustment in the currency. And that adjustment in the currency would have an effect on the rest of the world, which would also transmit deflationary pressures to the rest of the world because those exchange rates would essentially appreciate. And that has an effect at a time when there is a weakness in the rest of the world. We have to look at the impact that China has on the rest of the world and the rest of the world has on China and the fact that there is not much of an effectiveness in monetary policy. Those two things combined create for a risky situation. There are a lot of issues that I can address in this short period of time, but let me pick two. One is that, for a scene when you mentioned the stock market volatility and then currency volatility at the start of this year, I would like to suggest that stock market volatility should not be something that people should be so concerned with because even at today's level, which I was told the Shanghai stock market declined by about 2%, it's now standing at around 2900. It's 40% down from the peak, but it's still 30% up from a year and a half ago. And valuation is still very rich. And since the stock market is rather isolated from the outside world, the impact on the outside world is very minimal. Currency volatility is something, yes, you should pay attention to. And since Mr. Lagarde is here, I just would like to say a few words on that. China used to have what we call a crawling pack against the US dollar. Now the stated goal is to move toward a basket approach. And that approach is a serious approach. It's not something that we just say, we do it now. People, when they look at the actual daily movement, they think, my goodness, what is the PBOC doing? Sometimes they kind of move back to crawling pack. I think there's, you should not focus the central bank's strategy too much on just a few days' movement. If you look at the strategy over a period of say half a year or a year, you will realize that moving toward a basket approach is the decided policy of China. Now, the IMB appreciated quite a lot against the US dollar during the last few years, right? And passed prior to the IMB joining the SDR. So you have a little bit, what we could catch up to do in terms of US dollar IMB exchange rate. But once we've done the visit, the rate when measured against a basket of currencies would be quite stable. And there's really no basis for China to depreciate the currency. Because if you look at fundamentals of the economy, we still have a very sizable current account surplus. The economy is growing at about 6.5%. These are not a combination for a deep depreciation of the currency. And no matter what, depreciation of the currency is not in the interest of China in terms of carrying out our transition strategy. Because two cheap currencies, not for good, good for domestic consumption. And we thank the IMF for working to admit the IMB into the SDR. Some people worry that once China enters into the SDR, it may not fulfill the commitment with respect to joining the SDR. I can assure you that worry is completely unnecessary. China's record of honoring international commitment is superb. And we intended to honor all the commitments with regard to joining the SDR. So that's the issue of our currency. Very briefly on debt and the financial, the dreaded word crisis. You will see volatility in Chinese market going forward. But can the government deal with it? I think we will. We are able to deal with it. We can because our structure of the government is such that the response to any financial risk is very swift. The decision is decisive. And we wanna make sure that we deal with the issues when the issues are not very big. And again, it always comes down to leadership. When you have steady, strong leadership, we will be able to deal with it. Will there be volatilities? Yes. Yeah, thank you. Just a couple of things that I would like to mention in response to your points. In a way, having a certain degree of volatility is all right. And it's compatible with this market-driven principles that China is adhering to. And when you say governments can manage volatility, if volatility becomes excessive, yes, intervening is legitimate. But a degree of volatility is okay. As Gary mentioned earlier, market sorts out things eventually. Not that it's, you know, primus interparis, but there should be at least an acceptance of the fact that there will be some and there should be some. The second point on in relation to exchange rate and the currency. I think you completely right. And I think that this illusionary pegging against the dollar has to be dismissed. There is a basket of currency. In effective term, the Bremen B has been quite stable against that basket of currency. And not just now, but for the last few months. And that should be just acknowledged and understood by markets. And this complaint that there is depreciation against one currency. No, you're doing that against a basket of currency which includes the trading partners of China. So, again, communication on that one, I think is an important one. So I just wanted to remind everyone that China's built its massive reserve not because of monetary policy, because of the last 30 years of incredible reforms and is really driven by the incredible entrepreneurship and largely driven by private sector. So I think the government's commitment to continuous reform and continuously to support the private sector is important. Now, as Mr. Fang is here, I'd like to just remind you that the promise of the force board of a SNAS that style of a stock exchange that would enable the small to medium-sized enterprises to be listed to get funding without producing profit. Because a lot of the companies listed on NASDAQ are not producing profit, remember. And today in China, if you are a Amazon and if you do not, you can be as good as Amazon, but if you do not produce profit, you are not qualified to be listed. Now that commitment has to be, you know, has to be kept. And I think that was, the government came out, the policy makers talk a lot about the force board is gonna come out. We'd love to see it coming out as promised, probably the force board of this year. I have a company I needed to float it and I'm expecting you to come out with a good news. There you go. I hear it. Quickly back to the currencies, Chairman Jian and then Gary, I'll ask you the same question. Do you have policy, have Chinese policy makers actually done enough to reverse this market consensus that the yuan will devalue it? The international currency initiative has already made a prediction of the global economy next year. The average growth is 3.4%. So I think China's economic operation is still higher than the global one. This is the resolution of the exchange rate, the fundamental rule. So from this point of view, I think China's exchange rate, its basic level, is kept at a reasonable balance level, I think it's certain. Of course, some changes occurred to China's exchange rate. Of course, the time is short. We just joined the SDR. China's private bank has announced that we are going to withdraw from Yilan. We don't want to follow the dollar in the past. We are going to follow Yilan. I think many people in China still don't fully understand this. Or they are not fully aware of the information. They are more aware of the whole world. So in this case, I think many people's concern is still based on the dollar to make this decision about the exchange rate. This is also one of the reasons that the dollar has been moving a bit recently. Of course, we also saw the effect of the dollar after the acceleration. Not only the impact on China's market exchange rate, but I think this kind of effect may bring back the effect in the future. Because now, you can see that not only the general product price but also the exchange rate. It must be at a certain level that the foreign exchange rate in each country is also going down. The outcome of the foreign exchange rate going down may be the price of the US dollar in the long term. This also brings a new global financial benefit to the US economy. So I think the economy will be balanced in the end. So how can the exchange rate be stable as soon as possible? I think it is very important to strengthen investors' education and communication. But I also think I will talk about the same thing that Ms. Gaga just said. The basic point of the central bank is to rely on market capital to promote exchange rate. I think China is determined to do this. Especially after joining SDR, I think it's all about the market value of the exchange rate of RMB. But on the other hand, if the market is too active or unreasonable, the central bank will expose its teeth and its claws. I think it's the same thing. So let me back up for 30 seconds and recount where we were a year ago. A year ago, we were in an economic situation where there were three currencies in the world that were willing to strengthen while the rest of the world was weakening. We had the Swiss franc, we had the RMB, we had the dollar. Literally a year ago, the Swiss National Bank decided that was not in their best interest. I think it was 52 weeks ago now that they decided that was not in their best interest. So they no longer were in that basket of currencies that was willing to be strong. Left the dollar and left the RMB. So if you see where the world was through the end of 2015, 2016, you had a world of devaluers, economies trying to lower interest rate, devalue their currency, grow at the expense of other economies. And the two currencies that were willing to rally were the dollar and Chinese and the RMB. Now they were linked to each other. It would make sense to me that if you were linked to a currency that's naturally rallying because you're the one not lowering your interest rates that you would decouple from that currency and become more competitive in the currency world, which is exactly what China's doing, makes total rational sense to me. Most market participants continue to believe that China will devalue their currency further. This is one of the areas of volatility. How will the devaluation go? Will it be very, very, very slow? Which I think most of us think it will be very slow and very methodical and take a long period of time. It will not be the Swiss national bank move the peg one night. But I think the vast majority of market participants in their global equation of how they value economies and how they value currency crosses would have China at a lower value currency by the end of 2016 than the spot value is today. Ray, how much do you worry about foreign exchange reserves? We understand figures that they dropped by half a trillion dollars last year. At what point does it become dangerous and actually self-inflicted confidence crisis? I think it's a big issue. The balance of payments in balance is large. And as you're referring to reflected in that, the on the offshore rate in Hong Kong, the interest rate differentials are rising. So that's a negative for the economy in an economy in which interest rates should be lowered. And it's a situation in which if you look at their past evaluations, roughly they've taken place between when there's a 10 to 30% decrease in reserves, there's been on average a 25% devaluation that's been in the past. So I think that those are things to pay attention to. It's not always easy for governments to maintain clear control of their currency. Madame Lagarde, on to another point, because we actually also have some news. The IMF opened its selection process for the managing director when your term ends in July. You've had the support of both France and the UK. Do you want a second term? You will appreciate that. I'll be waiting a little bit before I say anything about that. Thank you for the question. If you do get a second term, how much do you think we'll be talking about China in the next four years? Well, in the next few years, given the growth rate of that country and given the state of development it is at, I think we'll be talking a lot about China. It is one of the two largest economies in the world. If you define in PPP terms, it is the largest economy in the world. I think we would be crazy not to talk a lot about China. The transformations that are at play at the moment are going to be both fascinating and will matter a lot for the rest of the world. We've seen it over the summer, surprise, surprise, but we're going to see it more going forward because there will be spillover effects in the vicinity because there is a China supply chain. We'll see it across the world as well. Any significant reduction in the growth of the largest economy in the world or the second largest economy in the world, depending on how you calculate it, is obviously going to impact the rest of the global economy. From 2010 to 2015, growth rate for China has fallen by four percentage points. Looking at 2020, what do you think the growth rate will be? Okay, before you answer that, if I may, it's fascinating. Many people say, oh, China's growth has collapsed at 6.9%. Well, if we look at the output relative to what the output was back six, seven years ago with a 12 or 13% growth rate, we have the same. So give us... No, sorry, I'll stop here. No, I understand that there's some concern about this current year in China. Some people forecast that because of the volatility and so forth. Somehow, 2016 would be a very bad year for China. Growth rate will slow down dramatically. I don't think that will happen because in China, we cannot afford to let growth rate to drop too sharply because that will ignite a lot of financial problems inside China. So we will have a what we call appropriately, expansionary, supportive, physical and financial policy in this current year to make sure that growth rate is still appropriate. Now, does China have the means to do so? Obviously, we have the means to do so, particularly on the fiscal side and we can expand quite a lot, right? So there's just no worry for a somehow, sharp decline of China's growth rate. Now, some people think, well, your 6.9% is perhaps just not accurate to begin with, right? Now, I admit, our numbers can always be more perfect, more accurate, but let me give you a sort of supportive figure and that is tax revenues in China last year went up by 6.6%. So that's not very far away from the 6.9%. And which means that the figure is not far away from the 2s. And Madam Lagado also mentioned China's contributions to the rest of the world remains extremely large, which is true. I mean, if you talk to all these multinational company CEOs having business in China, most of them tell you that their business in China are still expanding quite well. Ford motors, for example, right? Ford is not the biggest car seller in China, but it sold 1.07 million cars in China last year. 1.07 million, it's not a small number. So China remains a huge contribution to the rest of the world and this is something that the rest of the world should appreciate a little bit more. Thank you, and you were pointing to something that also a lot of observers do underestimate, which is the strength of consumer spending and it's the strength of services. How resilient are those two when you look at the Chinese economy? What I think still the dynamic force for the Chinese economy is its entrepreneurialism and its private sector, and especially the small to medium-sized companies, not the gigantic SOEs, or even though they command a lot of power, but it is the millions and millions of SOEs that matter the most. And I think in that regard, the reform still need to be more focused on giving them the support, whether it's a capital market support or tax support, monetary support. Those are very important for the continuous growth because that will continue to be the growth engine for China. And now from where I sit, I see incredible innovation coming from the young internet, mobile companies, and that really is an exciting part of our economy that very rarely it gets featured into the news because we talk so much about the market volatility and so on. In fact, most of these SOEs don't even get a chance to participate in the volatility. I think it's important that we remember that especially the policymakers like Mr. Fan and important to include these SMEs, and they would reduce your volatility. Mr. Fan, a comment? You take it. No, I agree that the SMEs are a great contributor to Chinese growth. Our stock market should have done a lot more to support growth. It is doing quite a lot, by the way. I mean, just take last year, right? People focused so much on the generations in the stock market last year. But last year, the Chinese stock market raised 1.4 trillion IMB in equity money for the Chinese companies. That placed the Chinese stock market number one in the world in terms of equity raised. But we can certainly do much better. And just one very short sentence about financial risk. China is different from other developing countries, in a sense. Our growth is largely fueled by domestic savings, by domestic capital. That gives us a confidence in our ability to deal with whatever volatility, risks coming out of the financial market. If China was a country relying largely on foreign capital for growth, any major financial risk can derail our growth. But China is different. This is a fact that a lot of people should pay attention to. Chairman Chen, how inclusive will China's growth be in the future? I want to talk about two aspects. One is the issue of the SMEs. I want to pay attention to the growth of SMEs. It is important to China. Because SMEs have a huge growth potential and vitality. And it is one of the most important aspects to solve the employment. Last year, the Chinese economy had a major adjustment. But as you can see, the employment situation is very good. And the results are even better than expected. It has ensured that China's economy can successfully adjust and reform. Of course, in terms of supporting SMEs, Zhang Xingyu has also criticized China's financial field. Of course, as an employee of a bank, I think the support for SMEs is a very important aspect. Last year, about 1.8 million people were forced to support SMEs. Of course, we should do better. If Zhang Xingyu needs help, she can talk to me later. Secondly, I think the economy is growing. There is also a environmental protection and green generation. Of course, we have done a lot of work on this. China's financial industry is very determined in terms of green generation. If there is anything that is not compatible with environmental protection, of course, we are based on environmental protection. Their evaluation is for our standards. As long as environmental protection is not compatible with any other companies, we are determined. So I think what we need is a better growth. We need a better world. I think China's economic development can bring a better future for people to be more welcome. Following on from that, with global trade stagnant, when or will China take the role that the US has had for years in spurring demand? I don't think we're going to see that for three years or more. We're going to see China is going through this adjustment process, and it'll be, I think, a three-year type of adjustment process. It's the equivalent of a lot of these structural things. So it's going to be a negative on the margin, a negative for world economy. And that passes through to emerging countries, particularly those that have a dependence on exports to China or have commodities. And then that is passing through in turn to a number of countries. So there's a world deflationary pressure that exists. And that's why when we think about the Fed's policies, Fed's policies, there's not a country in the world that should not ease its monetary policies. Maybe some should stay pat, maybe the UK should stay pat. But by and large, we have that self-reinforcing negative circumstance in terms of growth that is a problem because the rest of the world also represents weakening in force for China, for the exports, for their demand. That is also weakening. So I don't think that, I think the question will be, where is the locomotive? Where is it and what does it mean for Fed policy? If you look at these deflationary pressures coming from a possible yuan devaluation from oil, how does Janet Yellen look at this? I think the Federal Reserve thinks of the business cycle. A classic business cycle is that when your demand is increasing faster than your capacity and you're at a fairly high level of capacity, unemployment rates are low, GDP gap is fairly tight, you should tighten monetary policy. And that's the policy I think that's overriding the Fed's issue. I think they're paying too much attention to the business cycle and not enough attention to the long-term debt cycle. There is a long-term debt cycle that you can't squeeze much more out of this because of the lower interest rates and that. And so we're seeing that the world that they're getting feedback about is a deflating world with asset prices coming down. And I hope that they'll remain flexible in their thinking of monetary policy. Be hesitant. There's asymmetric risks because there's no doubt that the Federal Reserve can be effective in tightening monetary policy. So if they're a little bit late and then they type monetary policy, I don't think that's a problem. But they're not as effective in easing monetary policy, the pushing on a string, like in the 1935 period is a real issue. And so what they have to do is more wait for the whites or the eyes of inflation before they err on that because I don't think it's going to be so easy to be stimulative and move to quantitative easing and create that reversal. Gary, do you agree with that? Yeah, I do agree with that. I think that one of the new paradigms, again, going back to this digital world we live in versus the analog world, a lot of the Fed policy that we're relying upon is analog policy. I mean, it's the same policy we've had for generations and generations and generations. The world we live in today is completely digitized, meaning that we're real time. We've got a global workforce today. We've got global free movement of currency. Anyone with a handheld digital device, one of those, can move any amount of currency they want around the world, can trade any bond they want around the world. So fixating on employment in the United States is interesting, but we've been unable to create wage inflation now for multiple years where the Fed has told us multiple times that it will come every year. It will come. But in some respects, when you think of a globalized workforce today, which I think we have a globalized workforce, and China is part of our globalized workforce, if you can go hire the incremental worker for less money in China than you can in the United States, where does the wage price inflation come from? And I think we're seeing that in the numbers. We see that we can create jobs in the United States, but we can't create jobs that pay real money. And you take most companies that we represent are clients of ours, and we talk to them about how they're running their company. They will talk to me, or they will talk to our representatives, about how they're optimizing their workforce, how they're moving jobs to Bangalore, how they're moving jobs and opportunities to China, how they're moving jobs or opportunities to Warsaw, Poland, because these are places where they can hire workers at huge discounts relative to a London, a Hong Kong, a New York, and so therefore, to the extent that they would have to pay incrementally more for the next worker, they'll export the job. And so I agree with Ray, until you see the reality of this inflation in the system, I'm not sure assuming it's coming is a good assumption. We're almost running out of time, so I'm just going to ask each of you to give me your best advice or best prescription to try and bridge the divide that we were talking about between making market perception and what the policymakers in China want, Chairman Zhang. This is a hope that the world's economy will be getting better and better. I hope that the extreme wave, the extreme wave of the market, will be as fast as possible, will be as fast as possible. At the same time, I also hope that China can successfully implement the changes in our structure, the changes that can successfully cross the line of middle and middle income. Thank you, Mr. McGarr. I would say, number one, clarity of communication. I would say, number two, clarity of purpose. And I would say, number three, implementation of the reforms that have been identified. And for all of us, a bit of patience with the massive undertaking. But, Mr. McGarr, Germany has also disbacked you for a second term. So can you say a comment that you would at least consider it? I'm getting breaking news. Look, I'm honored. I'm very grateful. And I'm extremely pleased to hear that. And I thank you. I thank those who have come up like that. Thank you. Mr. Feinfeld. Ray just said that China is, on the margin, a negative contributor to world growth. I was thinking who in your mind would be a positive contributor on the margin to world growth? Just to be clear, what I'm saying is that, as the rate of growth slows, and the complexion of the economy changes, and the demands on the margin that's a negative to growth, I don't think right now, I don't think that we have a locomotive. I think that with the exchange rate rising in the United States, and also with a negative wealth effect that we're going to have because of the stock market going down, that we're going to, even in the United States, experience a lower level of growth. So my concern is that we don't have a locomotive. That's what I wanted to say as well. In this world, in fact, we have to, all the major countries, major economies, perhaps simply have to work together a lot more and cooperate a lot more in terms of policies, understand each other a lot more in terms of overcoming our respective domestic difficulties, and realize that the economy is globalized, we are all on the same boat, and we just have to cooperate a lot more closely to overcome this soft patch going forward. And just to follow through with that, would that be monetary policy cooperation? Would that be fiscal policy cooperation? In what form will that cooperation take? All of that. Madam just told me. It'll be a challenge. It is. But just to add one sentence, that in terms of US-China corporations, in monetary policy and other issues, we are working very well with our US counterparts. Right, a challenge but doable. You're confident this will be done? I think monetary policies is not going to be as effective. That's a big change in the world, because we've required monetary policies to be effective. And then I think on cooperation on monetary policies, I think that because you can't move interest rates as much, you move currencies more. So I think that we're entering an environment in which there will be more currency volatility as a means of easing policies where they need to be eased. And that smacks of currency wars, not as much currency cooperation. When I think of fiscal policy, I think fiscal policy is very politically sensitive. You know, you get into a bad economic situation and somebody will say, you need to be fiscally more responsible and cut. And someone will say, you need fiscal stimulus. And when there's political shifts, that particularly, let's say, the populism that's taking place in Europe or even in the United States, those things may not be easy decisions to make on fiscal policy. Gary, in 20 seconds? So I agree with Chairman Zhang. I hope for China's success very much. I agree with Madam Lagarde. We all want clarity. I agree with the Chairman's here that we're hoping for success in all the policy areas. The one area where I would just throw my two cents in is China seems to be more receptive, in your point, to more trade policies. And getting some of the trade policies done with the United States would be very beneficial for both in growing both economies. Zhang, final words, 20 seconds. I think that China is going through this transition period. And that's going to be a lot of volatility and noise. And it's important that the policymakers and the media are not focused only on the short-term noise but committed to the long-term reforms. Thank you.