Editor’s note: The Boao Asia forum 2009 annual meetings are held on April 17th- 19th in Boao, Hainan, this annual meeting subject is “the economic crisis and Asia: The challenge and the forecast”, the following is the factual record of the Central Europe International Industry and Commerce Institute Professor Xu Xiaonian’s answers to the reporter’s questions.
Interviewee: Xu Xiaonian (许小年), Professor of Central Europe International Industry and commerce Institute
Reporter: Professor Xu, after the economic data comes out in the first quarter this year, possibly the economists think China’s economy has started to have the recovery sign, but you seem to be a little bit of pessimistic, can you speak more specific about it?
Xu Xiaonian: This year’s data seems quite inspiring is investment, but in my opinion this kind of investment, is exactly we do not want. Because China’s economy’s structure is the investment is overweight. The investment proportion is too high, the consumption proportion is too low, but this quarter the investment growth was much faster than the consumption, which explains that the Chinese economic structure is further twisted. GDP6.1%, the industrial production is lower than GDP, the electricity consumption is lower than the industrial production, the electricity consumption growth is negative. Therefore you said that this adjustment had ended, I think it hasn’t finished by far.
Reporter: How long do you anticipate this to have a real recovery?
Xu Xiaonian: How long can it have a real recovery depending on when we start to adjust our economic structure, if the economic structure does not adjust for one day, then it does not have the recovery hope for one day.
Reporter: Professor Xu, is this stock market’s bounce not a sign of the economical fundamental aspect ahead of time?
Xu Xiaonian: The stock market currently has two strengths. One strength is the fund impetus another strength is the company gains. The fund impetus pushes it upward goes against it, but company’s profit pulls it downward, therefore these two strength’s combined action, makes the present stock market’s condition. You cannot say that it will anticipate the future economy once the stock market goes up, it is not like this, because there are too much money, too much fund.
Reporter: Was this a viewpoint of the vice-president of Securities Supervisory Association the evening before yesterday?
Xu Xiaonian: I don’t know that, you have to ask him.
Reporter: Professor Xu, do you think Shanghai can become a financial center sooner than 2020?
Xu Xiaonian: Shanghai forever cannot catch up with Hong Kong, did you come from Hong Kong?
Reporter: I came from Hong Kong.
Xu Xiaonian: Hong Kong doesn’t have to worry. An international financial center doesn’t need GDP, your harbors, airports, your developed computer system, the number of your office buildings. What is it to achieve an international financial center? It is the soft strength, is the legal framework, is the supervision system, is the credit, the internationalized credit, is the international operation trail connection, is the internationalized talent, is the internationalized business process.
OK, which item of these things does Shanghai have as you count? You do the counting, which one does Shanghai have? Therefore Shanghai wants to overtake Hong Kong to be the international financial center, which is a wonderful dream. However, this wonderful dream’s realization needs first to reform the legal framework and to reform the supervision system. OK, it needs to reform all these rules and regulations which are unsuitable for international finance operations and so on, which means to enhance Shanghai’s soft strength. What can achieve a financial center is not the hardware, it is the software.
Reporter: From the international angle, how do you think about Renminbi’s internationalization?
Xu Xiaonian: Renminbi internationalization is very necessary.
Reporter: What should we do at next step?
Xu Xiaonian: We have already done some; we and various countries’ central bank have the currency exchange, now we start the experiment site in five cities which makes Renminbi international trade to settle accounts, this kind of experimental step is the very good. You make a guess of next step is to make more world governments and more bilateral trades to accept Renminbi with as the reserve currency.
But at the same time if you want various countries to accept Renminbi as the reserve currency, you must guarantee that the value of Renminbi currency is stable. You cannot issue the currency arbitrarily like the US Federal Reserve issues the currency. That requires your monetary policy to be extremely cautious and strict. If Renminbi turns into an international reserve currency, then it also requires us to open the capital market.
Otherwise I have a big pile of Renminbi, right, I want invest, China’s foreign exchange reserve is invested in US’s bond market, then in where will the foreign country invest China’s Renminbi in the future? He wants to invest Renminbi in the bond market, which will require you to open the domestic capital market. There are a lot of works to do in this, but this direction is correct. Otherwise we are always under the control of others. the US Federal Reserve over-issues the bill. When US dollar depreciates, we suffer the loss. In order to reduce our loss, we must enhance Renminbi’s international standing unceasingly.
Reporter: How does Professor Xu think about the stock market? Now?
Xu Xiaonian: I had said a moment ago already, I won’t say it the second time.
Reporter: Residential Construction Bureau official said that 32% of 4,000,000,000,000 had a direct relation with the real estate.
Xu Xiaonian: I don’t know that I do not have the data, I don’t know.
Reporter: Undertaking board?
Xu Xiaonian: I had already said many times about the undertaking board. I talked about the undertaking board matter five years ago. The undertaking board can not solve the financing problems of small and medium-sized enterprises. It needs the massive grass roots, the community, and the low cost to solve the small and medium-sized enterprises’ financing problems. In local operation these middle and small scale credit institutions are financing basis for small and medium-sized enterprises. The legalization of these underground private banks is the most convenient mean I can see to finance small and medium-sized enterprises. But an undertaking is unable to solve the small and medium-sized enterprises’ financing problems. How many enterprises are lining up now, and waiting to go on the market, how many enterprises on the main board are waiting to go on the market, if in the future the undertaking board will also control the release rhythm, and also line up, then what is to be done, can it solve the small and medium-sized enterprises’ financing problems?
Reporter: Will its releasing further attack the current main board market?
Xu Xiaonian: I don’t know, I have not done the research.
Reporter: Do you think that we also need to rescue the exporting enterprises?
Xu Xiaonian: This market competition rule of exporting like human, human has life and death; the enterprise has life and death. If this enterprise in the new environment, it already can not survive, must go out of business, then let it go out of business, why should rescue it? Were US’s three big auto makers revived? They couldn’t be revived, then why did you rescue it. Moreover to the entire national economy, these business failures, on the contrary, possibly lead the industrial’s upgrade and turning to a new generation.
Reporter: What about before the rise of new industrial point of growth?
Xu Xiaonian: I had said a moment ago already, as long as the government decontrols, the new point of growth will come out immediately. The reason that it cannot find the new point of growth is because the government controls too strictly, we are all controlled too strictly.
Reporter: Professor Xu, what speed does GDP maintain is the safest bottom line, must it guarantee eight?
Xu Xiaonian: It’s not necessary to guarantee eight.
Reporter: What do you think?
Xu Xiaonian: I thought that the slogan of guaranteeing the growth to be inappropriate. We should raise the slogan of guaranteeing the employment now, not guaranteeing the growth. Because only you have preserved the employment, then you can preserve the social stability, but guaranteeing the growth is not necessarily able to preserve the employment. For our growth, the government investment projects have invested so much, but how many workers are hired, how many employments can be created? Therefore guaranteeing the growth is not a very appropriate policy goal. I think that is not suitable in the present stage to raise growth guarantee the again, but should raise employment guarantee.
Reporter: Then currently what is the most effective way to guarantee the employment?
Xu Xiaonian: The most effective way is to decontrol, let more funds enter the market, and create new employment opportunities. I had said a moment ago already that the financial profession can create many employment opportunities.
Reporter: Cite an example, what type of control?
Xu Xiaonian: What type of control, for example our small and medium-sized enterprises now need the financial organ like Bangladesh Poor People Bank. Such financial organ may serve the small and medium-sized enterprises, may serve the poor people, and may serve the low income crowd. But our current control seizes it now, examines and approvals are required, moreover the quota control is required. What is good about control, the folk has the demand, has the fund, let him do it. After such financial organ gets up, the credit can create many employments, can help local the small and medium-sized enterprise development, these small and medium-sized enterprises can create many employments.
Medical treatment and health are also controlled now. Are you able to construct a hospital? You let everybody build the hospital, the hospital is so crowded, the medical conditions are so poor, and the supplies are seriously insufficient. To open up the medical health department, and let folk fund enter freely, it creates employments, it creates nurses, it creates sanitation workers, and it creates is application interns. Every year we have several million university students graduate cannot find work. I believed that professions like the medical schools, many educational, and culture educational services may open, and may create employments.
Why only can the state-owned businesses make 3G, and 3G related products? Why can’t the private enterprises make 3G? Why does it open 3G related investments only to the state-owned businesses, but does not it open them to the private enterprises? After you open, how many opportunities for investment it can create, how many employment opportunities can it create? Moreover Mr. Fan Gang also said a moment ago, the folk investments are more effective than the government.
Reporter: But ten big industrial plans have included the steel and iron industry.
Xu Xiaonian: The steel and iron industry production already had surplus, what are you planning for? The steel and iron industry must reduce overproduction, what are you supporting for? Is it a healthy tendency that the country is going forward but the people are drawing back?
Xu Xiaonian: It is a very unhealthy tendency, so planning for what, these enterprises must shrink, because of overproduction, these enterprises are the problems for upgrading to a new generation. It is not a planning problem, so planning for what. It is a completely planned economy mentality, the entire plan is unnecessary; it doesn’t need to be done, it is fooling the common people.
Reporter: US’s inflation will be seen at the end of the year, or it will appear 2 or 3 years later?
Xu Xiaonian: Must observe closely, US’s inflation must be observed closely.
Reporter: Observing economic inflection point?
Xu Xiaonian: Once after the economy recovers, once the common people restore their confidence to financial system’s health, money turnover rate will possibly speed up, which will cause inflation.
Reporter: Professor Xu, through this financial crisis, will China’s nationalization become more and more serious?
Xu Xiaonian: At present we have seen this is the tendency, this financial crisis from all sides that is the country is going forward and the people are drawing back, this tendency is against the past 30 years reform and open-up policy, we need to stop this tendency as soon as possible.
Reporter: You said let loose the medical service, now the privately operated hospitals have many problems, now many problems are exposed.
Xu Xiaonian: Do you think that the public hospitals have fewer problems? Do you think that the public hospitals have fewer problems?
Reporter: Have you seen hopes in the medical reform plan?
Xu Xiaonian: I have not seen the hope, the medical reform plan is still dominated by the government, I have not seen the hope, if dominated by the government, the resource deployment cannot be effective.
Reporter: How is the current commodity price trend in China?
Reporter: Is there inflation?
Xu Xiaonian: There is no inflation now, no inflation for short-term.
Reporter: Is there deflation, CPI, PPI?
Xu Xiaonian: What does it explain, you think about it, what does it explain? You only ask questions, but don’t ponder questions.
Reporter: Everyone has no money to spend.
Xu Xiaonian: It explains that supply and demand are unbalanced, it shows supply exceeds demand.
Reporter: If monetary policy is adjusted?
Xu Xiaonian: Monetary policy adjustment.
Reporter: Will it reduces slightly more?
Reporter: Now the central bank is lending so much money in the market.
Xu Xiaonian: If I do it, I will be a little tighter. this first quarter’s loan’s lending is a very dangerous signal, possibly we will have the massive bad bank accounts in the future, this kind of short-term behavior doesn’t consider the financial system’s long-term health, doesn’t consider the state economy’s long-term health, pursues short-term achievements, this is very bad.
Reporter: I think that we should take a look of Liu Mingkang’s view again.
Xu Xiaonian: Very bad, I was with Liu Mingkang in the morning.
Reporter: What did he say?
Xu Xiaonian: He is an official, what can he say.
Reporter: You give everybody a caption, can the stock market rise?
Xu Xiaonian: OK, I cannot forecast again that it will rise, or fall, I can not predict, analyzing it yourself.
Reporter: Then the two strengths you said?
Xu Xiaonian: Two strengths may change momentarily, if the fund supply’s situation changes momentarily, then what’s the result?
Reporter: Then you meant that it has no economical fundamental aspect’s support?
Xu Xiaonian: The economical fundamental aspect’s support, you look at the number, in the first quarter industrial enterprises’ profit dropped 30%, and you should know that where the fundamental aspect is, you should know where it is.
Reporter: Does it suggest it will fall, right? Does it suggest it is continuously going downward?
Xu Xiaonian: Enterprise short-term profit will not change for the better, you see that this price has been falling.
Reporter: How long is the short-term?
Xu Xiaonian: The short-term is two or three quarters.
Reporter: It seems that the electricity consumption has started to return to increase.
Xu Xiaonian: The electricity consumption’s drop is not that drastic, but first quarter was still negative growth; electricity consumption is still negative growth.
Reporter: Do you think that the first quarter is at the economical bottom?
Xu Xiaonian: I did not think it is the bottom.
Reporter: Then it is possibly to be lower in the future, for that quarter’s growth rate.
Xu Xiaonian: It has the possibility.
Reporter: Also will have the possibility to be lower?
Xu Xiaonian: Has the possibility.
Reporter: Then is further economic stimulus needed?
Xu Xiaonian: I already said early, economic stimulus is not necessary at all.
Reporter: Because it is useless, right?
Xu Xiaonian: Keynesism, useless. Because in 1998 we had already experienced, I did not have the time to say a moment ago, in 1998 what did we depend on to go out of this low ebb? Although in 1998 the government adopted the expanding financial policy, but in 1998 for us going out the low ebb, the first reason was called housing reform, how many opportunities for investment a housing reform has created, how many folk demands a housing reform has released, we have the numbers. The second year investment in real estates bounced back right the way, from the negative number a year ago bounced to 15%, the housing reform released private investments.
The second matter was in 2001 China joined WTO, the overseas demand pulled the Chinese economy up, and the housing demand, the housing investment’s rise had greatly driven other professions. Therefore we do not need the government to pay out money, the folk is very rich, the government needs to let loose, to give a market an opportunity, to give the common people an opportunity, then China’s economy is very hopeful. (This article originates: Shanghai Securities Newspaper)