Where is the world's second-largest economy heading?



hi there we have classic questions about the Chinese economy for example between January and the May we saw a steady rise in foreign direct investment in China as the world economy undergoes uncertainties and the Chinese domestic economy experiences a critical period of a changing its development model optimizing its structure and transforming its growth drivers exploring economic potentials in the third and fourth tier cities could be a good option to get China smoothly through this critical transition so where is the world's second largest economy heading what could be the economic potential and challenges in China's a third and fourth tier cities how will that influence China's economic and social transformation and what does China's economic performance mean to the rest of the world to discuss these issues and more and we're happy to be joined in the studio by Professor Liu Belgium at the university of international business in konami and andy morgue senior research fellow with the Center for China and globalization we will also speak to whom how chief strategist at the Bank of Communications International based in Hong Kong why our satellite that's our topic this is a dialogue I'm John ray welcome to our discussion here first of all Andy what do you think of the figures concerning the foreign direct investment in China well I think it's not surprising because on the one hand it's very easy to get caught up in the news cycle and the mainstream media is focused maniacally on the us-china relationship g20 etc etc but it's easy to overlook that China's still growing is six plus percent a year which is adding 800 billion a year in economic activity which is the equivalent of Switzerland a turkey or two Nigeria's I think that's one point that explains why we're seeing an increase in FBI the other part I think that explains helps explain this is that the world is more than just us in China so look at the US are the China Russia relations trade between Russia and China has exceeded 100 billion dollars this year same with Africa as well so there are other growth areas in the world that I think China is participating in this is helping to drive this increase in FDI so the tweet war between United States and China is definitely good news for Russia the benefits are so much to fund this export of energy to China it could also be good news for employment but what do you think of what's the FDI foreign direct investment in the first five months of 2019 professor Liu well it has to do with the continuous improvement of the Chinese business environment because some business have their own calculations they do not really follow the swings of politicians because the are market driven and he used to that you know foreign investment are here to search for cheaper labor and even lower environmental fender but now it is really the China's buying power that is the most attractive point for foreign investment so over the first half of the year and the inflow direct investment can parallel with Chinese GDP growth and also the it is really the size that really matters for individual investment is not really the number and in the meantime they are participating more into the high-end service sector high-tech sector instead of simply parked in those manufacturing sector so they are contributing and also they are participating within the Chinese a broad strategy of transition until quality growth thank you very much let me go to who how who's standing by your Hong Kong mr. Hall I was surprised that the major economies such as the United States Japan the EU and the South Korea have increased their direct investment in the Chinese mainland instead of the other way around against the people's expectations between January and May this year yeah well I think you know it is a nice for change but then at the same time mission you know be using short-term fluctuations in investment trends as an indicator for the long longer term but having said that I think China still represents one of the major investment opportunities with very good infrastructure in China and also you know this year by the way the investments FDI going into the US actually decreased and talking about you know bringing jobs back to the US valid Donald Trump what happened is the you know the jobs section actually not returning to the US and is there allocating somewhere else so I think you know those are the newly emerging trends is the early days but I would say that you know it is still very nice for a change let's look at the latest development from the White House most Chinese work hold and prepared by yet another tweet of President Donald Trump last time Beijing time he said Vietnam was even worse than the PRC because and lastly the noise been able to outsource Muslim jobs and investment from Chinese mainland and that's where against the target of the Trump administration whom how what I were thoughts yeah I think probably not many people will be surprised by history's anymore you know he said you know he attended Europe tend to be a populist that used exaggerated words to express his views I think this year our exports from Vietnam to the u.s. increased by close to 40% year a year while Chinese exports to the u.s. decreased by about 12 to 15 percent year-on-year so you know clearly the center of gravity is shifting and the venom is expose it's gaining – what's going to the US so I'm not entirely surprised by this at this kind of comment you know because clearly now the US trade deficit relative to venom probably has brought up well I just said that uh yes the Venice are the export to the United States has really searched over the half the year I would say quite a portion are really the investment by Chinese firms over there because the several entrepreneurs that I I met the talk about splitting the risk by a relocating a portion of their production line for example garments and some of the labor-intensive areas to Vienna so that's also quite a contribution it means that even if the u.s. really trying to escalate the tariffs by blocking made in China many men them by Chinese companies still have to work I wonder if some of the Americans are still recovering from the aftershocks of Vietnam War well part if I can maybe jump in on that another geeks with me Andy I saw eyes I'm concerned one Vietnamese American guy was arrested on charges of espionage do you think this is a direct response er to the presidential tweet of Donald Trump um you know the alleged outsourcing of jobs and the investment from Chinese which has become the target of the trade disputes well I would certainly hope not I mean of course anything is possible but I mean I think these are two separate issues but you know one thing I wanted to add about this was I was in a meeting with a former senior government official today actually talking about the trump administration's trade policy and if we take it to its natural conclusion we based on what President Trump says that while most conventional classically trained economists would disagree but the trade deficits are bad and you know China gets a lot of negative attention because of the large trade deficit but if this goes down a Vietnam gets attacked Germany gets attacked Japan gets attacked that the logical conclusion of this would be if we had the US has zero trade deficits what does that mean is that it stops trading with everybody and whether we can reach this if this is this is the logical conclusion of the Trump administration's policy but whether the u.s. can get there or not is another question let me correct am i asleep of town a little bit in fact to be more precise that Vietnamese American guy was arrested on charges of North s ganache but on sabotaging and seeking to subvert the legitimate government in Hanoi now let's say come back to examine the current account professor Liu between January in the April the current account is making a comeback why well its competitiveness so the Chinese export drive is still very strong and it continues to be very resilient despite of the negative pressure from the biggest export destination and now we also see that there's more added value in made in China for export so you see there are the complete machineries the computers many other electronic gauges are led by artificial intelligence they are on the horizon the world really needed and they pay a fair price whereas reasonably good quality actually last week I was cleaning a bunch of the African government officials and they just like I love what is really made in China or the mobile phones or the home appliances etc so it is really the market that really makes China's current a context right so it's very much an issue of it being market driven let me go back to home how what do you think of the slight rise in a far X Reserve well I think the Forex reserve is largely stabilized you know after losing about a trillion US dollars in reserves into South in the 2016 episode so basically if you estimate the money flow that it cannot be explained by capital flow and also by trade flow and it is about one trillion u.s. dollars in size you know which is term as hot money so I say you know once those harmonies you know has exited the border the reserve tend to be mostly belies than before so I think now you know the the small increase in in the foreign currency reserve is really a reflection of the Chinese exports remain resilient while import seems weak ish and also you know some currency revaluation as well just a second look at what you call money flow how do you rate our tight control on the capital account I'm not talking about a free exchange rate between RMB and the US dollars but look at a pretty draconian policy of tightening the capital account to prevent outbound capital flight yeah well I think it's really the impossible Trinity that we have to deal with you know we need to have money Paula Terry Paula's independence and also we need to sort of you know target the the inflation rate and therefore you know the capital flow seems to be of lesser importance in this equation so I think that's why you know for so many years you know China tend to maintain a certain amount of capital flow control and also you know it has been one of the key issue for foreign investors in the past to invest in China I think you know since last year you know with the financial market in China gradually open you know with the stock market being included in the global index MSCI infancy so I think you know we have to a certain extent resolve some of the issues in terms of cross cross-border capital flow you know for example nowadays you know foreigners can you know sell off their stock portfolio you know take the take the king and then you know within a reasonable amount of time they can repeat the capital back to their home country thank you so much Andy and professor Liu since 2017 some of China's second-tier cities have begun to launch favorable policies to attract skilled labor now latest development shows that up to 66 cities with a population between 1 million and 3 million have completely eliminated the barriers for the free flow of human resources between different regions of this country now it means the obstacle of a hukou or household registration system has been completely eliminated by authorities at the local level to lay groundwork for further urbanization that's a big surprise does it reflect more of an issue concerning aging population labor shortage or what what was your arm worth your judgement about the latest policy change I think there's several reasons for this so first of all we look at these tier 1 cities in particular Beijing and Shanghai that large cities in excess of 20 million population very the highest per capita GDP in China about 20 thousand US dollars so one of the issues at the national level is income economic disparity so we see places like smaller cities I was in unit 1 ending shop a few months ago less than five thousand US dollar per capita team so with one of the goals of economic development in China is to minimize this inequality the second is to foster regional economic developments so I think by the removal of who close at second third tier cities makes it easier for people to own property to pursue a career there and I think that's one of the main drivers I'm sure there's others that we'll touch on but at least for now I mentioned those two very good points professor Liu those 66 cities not only cover a group of capital cities in different provinces such as guru mu Qi ish in younger young strong Fudo Nanchang Lando hooker how to she need Jillian they have also included a Shantou Jew high in the Pearl River Delta region as well as the Russia in jeongsu the tangent River Delta region and again tie in you know northern China so do you think this is due to the boom of high-speed railway our construction of the infrastructure so that the free flow of human resources have been made lot easier well I think one primary driver is policy because the central government is really weaving the flag without their permission I do not think the local government can really do that job so second reason is I you know we are pushing for towards regional integration at home and by allowing freer flow of all economic factors of course you know the people are the most of them dynamic factors of production and third is that a you know when integration is taking place the resources tend to even off within the defined area right now it is still on a regional originally defined basis so and then the pressure in living in member cities like Beijing Shanghai politically in terms of housing another social welfare yes as you mentioned that uh you know the improvement of logistics the you know fast trains cetera makes the distances flora and people can really travel freely at a very convenient pace so all of this can really mean that a China is no longer there to maintain a very strong foothold in terms of the household race registration system and Plus this is not politically wrong you know to segregate people by simply by the level of birth so this is the right thing that we have to move into I I'm not really surprised I really feel gratitude about the government decision and don't you think Andy this is a in fact an important policy option to elevate people out of poverty by encouraging migrant workers to settle down in the third and fourth tier cities absolutely I mean so again I think it addresses multiple policy challenges for China so the first of course we touched on which is the regional disparities of economic development so we're looking at more than four times so Beijing at about 21,000 per capita US dollar GDP places like say God sue with less than 5,000 so it addresses that issue but also one of the important drivers still of China's economic growth is infrastructure investment because it's discretionary fiscal policy especially when the external global environment is very uncertain the ability to make productive infrastructure investments in cities outside of the children cities I think is also a positive as well and we can also incorporate these ideas of sustainable development as well smart cities so I think this really is a very elegant policy solution that's being pursued and you're right young ray it also helps these in Beijing like we would call them the baby out right so the migrant floating population they come here because they can make more money but now they can go back to their hometown your third fourth to your city and if there is affordable housing good education good health care certainly I think it promotes a better life for the people while again accomplishing these broader national objectives thank you so much you're right you put your finger on a very interesting issue about the flow of human resources from the first year cities such as Beijing back to their home towns for restructure of a place where they grew up now let me get back to whom how look at Beijing the population of Beijing turns out to be lower measured over the same time same period of time according to the latest blue paper on Beijing social governance and development jointly launched by the Beijing Academy of Social Sciences and Social Sciences Academy Prosser what does that mean for the prospects of Beijing remaining the most dynamic first year city yeah I probably wouldn't worry too much about that for now you know probably you know very high property price in Beijing and also a reallocation of some of the Beijing's responsibilities to other to other cities and you know and on top of that you know a velocity of City Planning probably or have contributed to a small reduction in Beijing's population but having said that uniting you know one has to look at the determinant residents of Beijing and also the floating population you know there are many people going in and out of Beijing every day I and so you know if you're in Beijing you probably would have experienced that the traffic jam has an you know it's just a just as bad as before so I would say that you know it's more decrease in population is not a cause for concern for now it is probably a reflection of City Planning better City Planning and also a very high property price and also opportunities emerging from other Chinese cities as well regarding the issue of poverty elevation and full employment let's look at the latest controversial policy option by some of the local authorities to close down corner shops which sell food and other small groceries this has caused a lot of public anger do you think this helps streamline law and order or do you think this is about very much about the Sanitation of the food because this remains a chronic issue if you encourage it a small restaurant – on the one hand benefit the white-collar workers of a companies in the first and second year cities on the other hand most such small restaurants fell well below the standard of a food sanitation a public debates are quite divided professor Leo what your immediate response well of course for safety is the most important issue but you can still maintain food safety by allowing corner crops granddaddy the files etc so right now you know if you interview people what group of people you dislike in China it's those people who are driving or what yeah you know the vendors are along the road it cetera so it is really a cultural phenomenon and if you look at human in Paris in London there are still you know lending jobs aren't even you know mobile vending shops are along the road etc it really add to the dynamism and vitality of a city so right now you know those people who are not really very educated who are not very cultivated they are doing the job and they just wanted to see that okay you know everything every street is clear and my boss would be happy and so this is really you know the alienating city with real life so I do not really like those people yeah there's a strong voice coming out of this public debate on whether closure of the corner shops should be justified this voice says well they have a fixed issue of employment for house cleaners for the logistics in age of e-commerce but but for example in the first three decades of China's development we arrived on control the chaos with more policy measures being rolled out to clarify regulations for example to drive those alleged low and low income groups disadvantaged social groups out of first gear cities that you think this helps helps a fixed issue of employment because the employment isn't very much a political issue for politicians sure well employment is the basis of social stability so at a national level of course this is an important issue but I think maybe to localize it a bit and let's look at Beijing so the way I think I mean having a background in having worked in real estate private equity you know looking at Beijing even the country as a massive real estate project with a master plan so Beijing the plan is for it to be a capital city so meaning some capital city functions are to happen in Beijing the rest of it should be moved out including municipal government which has now been moved out to todo right so I think that it's part of a plan and this goes back to your point youngberry about the decrease in population that it's not a negative in that this is what the goal was to I think reduced to a degree the population to put less strain on the infrastructure but also to make the city better managed and we lose something in terms of the chaos I mean it adds a certain character but on the other hand it's not just food safety even there's other issues as well zoning issues fire safety these types of issues as well that are being addressed and yes I think Beijing loses a little bit of its charm but on the other hand everything has trade-offs especially political decisions that's the price we have to pay for the evolution of magazines such as Beijing well we all know that let me get back to home how what's your prediction for the outcome of trade war ahead of g20 that's underway in Osaka Japan I mean I'm talking about Chinese economy yeah it seemed right right yeah well it seems that you know some progress is being made and also you know both sides are ready to talk again I think before the meetings the negotiators from both sides already engage in some preparation work as well and from the US I you know this you know there seems to be a softening of the hawkish stance from previously so I would say that the market is liking it and that's why you're seeing a strong positive response from both the Chinese market and in Hong Kong market as well so I would say that going forward the market is really looking forward to some good results but you know one has to be prepared because of the unpredictability of Donald you know you cannot rule out the possibility of another disappointment from this meeting thank you so much mr. Hong how it seems the professor of the American economy is gradually feeling the pinch the casualties and therefore probably the team of Donald Trump is reflecting seriously upon whether their policy options are wise and therefore the apparent softening of their tone ahead of the g20 ahead of the summit between presidency and his American counterpart on Sunrise what do you think of the alleged pains of the American economy well I think the beginning to realize there is really significant underestimation of many of those are the interactions are Connor options one is that oh they said okay we're going to other what is going to be easily won so they do not really want they were not really prepared that China could be so resilient and they thought they could cross China and China once China could capitulate in a few months though Americans do not feel the pain but right now they begin to realize it is really the China's retaliation murderers and also it is really the boycott of many other countries because you know he's weaving animosity with many of those who are trading partners even you know with allies across the Pacific across the Atlantic Atlantic so now by estimation every household will help to pay in an actor of two thousand dollars because of a war with China an American farmers are screaming and the the American bull workers who really support him into his obviously the 70 retina hearing in United States is really testified to the brutal fact the American economy is indeed suffering a lot and there's louder noise from the business community that hopes the trade war could grant to a halt at least for the moment I'll see you next time goodbye you




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