00:00Dr. Huang, you spoke at a panel yesterday where you really warned against this unbalanced growth
00:05in China's economy. What do you think we need to see from the government to really boost
00:10domestic consumption right now? Well, I think we'll probably need to focus on two things.
00:16The fact that the consumption is relatively weak means that the household needs to have
00:22more income and they also need to have more confidence. So this is why I think we probably
00:29need to push ahead with market-oriented reform to give more income, national income at the
00:36hands of the household. At the same time, we probably need to accelerate our efforts trying
00:44to improve the social security system. We are maybe weeks away from that July
00:50Politburo meeting. Are you expecting the government to be injecting further stimulus?
00:54Well, I think if you look at the policy messages in June, we already saw quite a range of the
01:03policy efforts from the fiscal policy, monetary policy, the real estate sector, also the new
01:12infrastructure investment and so on. So I think the government is already taking efforts trying
01:19to stabilize the growth, stabilizing the expectation. I certainly would expect the July meeting you
01:26just mentioned would certainly further accelerate in that direction.
01:32Do you think what they have announced so far is enough though? Because last month's retail sales
01:37contracted for the first time in years and that's quite a worrying sign. Goldman Sachs have cut the growth
01:43forecast for China this year. Where do you see things going? Well, weakening consumption is a matter of
01:49concern for sure. But the fact that we are seeing negative growth in the total retail sales is partly
01:58reflected in the base effect. Last year, we rolled out the trading policies encouraging consumers to buy
02:06the electronics and so on. So there was a big boost last year and that effect was not sustainable. So
02:13that's
02:14why my argument or suggest recommendation is that we should focus on more fundamental measures like
02:23focusing on income and confidence instead of short-term subsidy. So far we have heard the government
02:30talk a lot about, once again, subsidies, but for the services sector. When it comes to income
02:35distribution, it seems like it's not quite enough. We're talking about what, 20 yuan for the yang lao jing,
02:43the pension system. The pension system. Yeah. Do you think what is preventing the government
02:48from doing more on that front? Well, I think the policy framework is already here. We are trying to rule
02:56out
02:56expanding the government, expanding the coverage, number one, of the social protection for not only
03:02people in the urban area, but also for these migrant workers, the villagers and so on. That's the
03:08first step. And I think it needs to be covered much more broadly. The second thing is we needed to
03:17have
03:17more funding in that system scheme. Where is the money going to come from? Well, the government already had a
03:24policy trying to inject the state-owned assets into these social security funds. We have money. But we just
03:32needed to do in a much more aggressive fashion. The fiscal deficit actually shrunk earlier this year. Why
03:40do you think the government is cutting spending? The fiscal deficit officially was not shrinking. Four
03:48percent of GDP. That's in line with what we call proactive fiscal policy. The issue, I think, is not
03:56at the central government level. It's more at the local level because they are burdened with lots of debt
04:05problems. And the fiscal revenue is much more constrained. So that, I think, is the problem that we are not
04:12seeing much more aggressive fiscal expansion. That's an issue we needed to fix.
04:18So how is that going to be addressed? Because property is not really coming back in a big way.
04:23How can local governments boost their coffers to spend more? Well, I think there are two things.
04:28Number one is we probably need a more comprehensive restructuring or reconfiguration of the central
04:37local fiscal relations. Because at the moment, what the local government is facing is they have a lot of
04:44spending responsibilities, but the revenue is much more constrained. So I think we probably need to
04:51realign the system, giving more revenue to the local government. That's the first step. But the second
04:58thing we should also recognize that maybe the local government behavior should change from here.
05:04Previously, we relied on local government to invest in infrastructure, large projects, and so on.
05:11These were very important. But now we are in a new stage of economic development, relying more on
05:18innovation. And I feel that this is the time to implement what the government already announced, the
05:25policy reform to let markets play decisive roles in allocating resources, especially when you want to
05:33support innovation. I certainly think the local government can still play a role in facilitating
05:40innovation like slow industrial policy. But you should only use that industrial policy if you're
05:47actually overcoming market failure, not to distort or replace the roles of entrepreneurs or the market.
05:55Right. And innovation needs capital. But right now, last week, the PBOC Governor Pang Gongsheng said that
06:01credit growth is not likely to return to the pace of previous years. It's likely to stay at this level.
06:07Yeah. So then what's going to drive growth if we see a structural downshift?
06:11Well, there are a couple of things here. Number one is the new innovation probably are not as capital
06:19intensive as the previous industries, traditional industries like steel, aluminum, cement, and so on.
06:26So they're probably somewhat different. When you like look at the new startups, they need a smart money.
06:32They don't necessarily need bank credit. This is why the second thing we need to look at is the
06:39transformation of the financial system. What do you mean by smart money?
06:42Well, capital markets need to play a bigger role in supporting innovation. We can't rely on bank credit to
06:51support innovation because the kind of information asymmetry is quite different when you look at the
07:00massive industrial development and the innovation we're talking about, the AI, robots, biotech, and so on.
07:06They require a lot more efforts and a skill in dealing with information asymmetry. We need a specialized
07:14talent and direct finance channel. So I do think that what we need is not just to boast credit growth,
07:24but much more importantly,
07:27we need to raise the proportion of direct financing and the VCs and so on in supporting this innovation.
07:35Do you see a rate cut coming this year?
07:38Rate cut could still be on the table, but I'm not particularly sure if that is something that definitely will
07:46happen.
07:47The main reason is, well, we are seeing the inflation rate picking up, although it's still below 2%.
07:54So that's not a bigger concern. But I think that what we probably will really need is more targeted measures
08:02supporting specific sectors,
08:04like the innovation, new quality productive force. And hopefully the government can also do something in terms of relending or
08:15structural monetary policy supporting what we call investing in people, not just the investing in material products.
08:24I want to ask about the RMB because the fix has been set weaker for the fourth straight day now.
08:29And this is coming as the German Chancellor at the G7 raised the issue of currency devaluation.
08:35He didn't name China, but it's sort of hinted at. Do you think the Chinese Yuan is devalued against the
08:41US dollar, the euro?
08:42Well, I think the RMB, by and large, it's a result of market forces.
08:50So we have an exchange with the regime called Manage the Float.
08:55So it's affected, it's determined by the demand and the supply relations.
09:01And obviously the policymakers have some influence on the level of it.
09:06The overall goal is that it should be left to the market forces, but avoid very volatile fluctuations in exchange
09:16rate.
09:17I'm aware that there are many people arguing that the currency is undervalued.
09:22When they look at the external account surplus, especially trade surplus, which was like around 6% of GDP last
09:31year.
09:32And that's the basis from which people arguing that currency is undervalued.
09:38However, we should probably look at a more broad picture.
09:42When we say the currency is undervalued or overvalued and focusing on the trade balance,
09:48that is the case when the financial sector is not open. And that's not the case anymore.
09:54If you're seeing like a capital flowing out and flowing in, that is becoming a more important factor determining the
10:01level of the exchange rate.
10:03And particularly at the time as we start to discuss weakening of the economic growth momentum.
10:10And that is a very important factor affecting people's interest in holding the currency.
10:16The key point is to be the source of the currency price.
10:16So for the currency, if you have the power the currency, if you are using the currency-based power,
10:17If the currency you have the currency, you can get the price over the currency.
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