China's Vice President Reassures on Economic Growth: Transcript

The following is a transcript of a Bloomberg News interview with Vice President Li Yuanchao and other Chinese officials at the World Economic Forum in Davos on Jan. 21. It also includes comments from other Chinese officials who attended the interview.

On recent developments in China’s economy, Li said:

“China cannot grow its economy in isolation from the world and the world cannot achieve economic development without China and the international community now follows very closely the current state and the future trends of China’s economy. So today I hope that with this interview with Bloomberg News I can send some clear message to the rest of the world.”

“Recently there have been some fluctuations in China’s economy, its equity and foreign exchange markets and this has triggered some overreaction from the international community.”

“So today I have come to Davos to send on behalf of the Chinese government a clear message to the rest of the world that the contribution of China’s economic growth to world economic growth remains unchanged so do the long term trends of sound economic development in China and China’s policy of deepening reform and further opening up so I hope the rest of the world can boost confidence and have more confidence in China.”

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On China’s stock market turmoil:

“The stock market is a market mechanism and ups and downs in the stock market are only an innate feature of that mechanism.”

“If you look at the shares in the Chinese market at the end of 2013 and the end of 2014 and the end of 2015 they were basically at 3,000 points so the fluctuations are actually those happen in the market. And china’s stock market is less than 30 years old, it is not yet a mature stock market and the rules as well as the factors in the Chinese market are less than mature, so this has exaggerated or amplified the feature of fluctuations in China’s stock market.”

“Third, the Chinese government has made it very clear that we hope for steady development of stock markets because a steady stock market is one where most of the people will be able to benefit from, it is a market of investment but an excessively fluctuating market is a market of speculation where only the few will gain the most benefit when most people suffer.”

“The Chinese government is going to look after the interests of most of the people, most of the investors, that is why we believe we need to promote steady and healthy development of the stock market.”

“On the one hand we need to make the stock market more dynamic, but on the other hand we also need to strengthen regulation of the stock market and we resolve to do that. So on the one hand we need to handle systemic risk and on the other hand we need to ensure the steadier healthier growth of the stock markets.”

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On China’s currency:

“As for the currency market, actually the fluctuations in the currency market started with the raise of interest rates by the Fed. The fluctuations in China’s currency market are only moderate fluctuations. There are more severe fluctuations as well.
So on the one hand, what China’s trying to do is expand our RMB market. On the other hand we also need to ensure that the currency stays stable. The fluctuations in the currency market are as result of market forces and the Chinese government has no intention and no policy to devalue its currency.”

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On the economy’s performance in 2015:

“China’s economic performance in 2015 can be described as making steady progress while maintaining stability. The progress is reflected in three aspects: First, we have realized medium-high growth under the new normal. Second, consumption has become the main driver of growth. Third, the service sector has grown into the leading sector in the economy. I wish to share with you the following statistics: if we look at China itself, its GDP increased by about US$500 billion.”

“The growth rate was 6.9%, the highest among the major countries in the world. Such an increment is basically the size of the GDP of a medium-level country in Europe. Urban surveyed unemployment rate in 31 major cities was around 5.1%, the lowest since 2009. Contribution of consumption to economic growth was up 15.4 percentage points, making consumption the main engine of growth. The share of the service sector in GDP was 16.7 percentage points higher than that of the industrial sector, making service sector the leading sector in driving economic growth.”

“If we look at the impact of the Chinese economy on the world economy, China’s imports totaled $1.68 trillion, keeping its position as the world’s second-largest importer. Oil imports rose by 8 percent. Outbound investment stood at $127.6 billion, up by 10 percent year on year. China’s role as an important engine of world economic growth remains unchanged.”

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Looking ahead to 2016:

“The key phrase for China’s economic policy in 2016 is ‘unwavering commitment.’ We are unwavering in our commitment to the goal of building a moderately prosperous society in all respects, to the policy of shifting development model and adjusting economic structure, and to the direction of deepening reform and further opening up. We are working on the fiver-year plan for the decisive stage of building a moderately prosperous society in all respects.”

“By 2020, we need to realize the goal of doubling the 2010 GDP and per capita income of urban and rural residents. China’s total GDP has now exceeded $10 trillion. As its economy enters a new normal, it is shifting its focus from scale and speed towards qualify and efficiency. Some moderation in the growth rate is consistent with the law of economics. The insufficient global aggregate demand and China’s unreasonable production and supply structure is a big challenge to us. But China’s economy has enormous development potential.”

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On whether China can meet its economic goals:

“We are fully confident about reaching the goal of building a moderately prosperous society in all respects. Our confidence mainly comes from the objective assessment of China’s development conditions. First, we now have a stronger material foundation. China’s industrial system has become more full-fledged and its infrastructure network more efficient. We have over 220 kinds of industrial products that rank number one in the world in terms of output and also the world’s number one high-speed rail in operation. Second, we now have more high-end factors of production.”

“The new members of the workforce have received an average of 13 years of education. Every year, over 7 million college graduates will join the workforce. The R&D expenditures of the whole society have exceeded 1.4 trillion yuan, ranking second in the world. Our patents of invention outnumber any other country in the world. Third, we have huge markets. Consumption now contributes to 66.4 percent of economic growth, thus becoming the primary driver of economic growth.”

“There are as many as 680 million mobile Internet users and more than 100 million 4G network users in China, more than any other country in the world. China’s urbanization rate now stands at 56 percent. Every year 20 million rural residents will move into cities, creating huge demand for consumption and investment. The main research institutions in China and beyond believe that the annual trend growth rate of China’s economy during the 13th five-year-plan period will be between 6 percent to 7 percent. Therefore, the long-term trend of sound growth of the Chinese economy remains unchanged.”

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On China’s reform push:

“What also remains unchanged is China’s policy of opening up. Some policy changes that have been made are new measures to deepen reform and further open up in response to the changes at home and abroad. During the 13th five-year-plan period, China will seek innovative, coordinated, green, open and shared development, promote innovation-driven development strategy, strengthen supply-side structural reform, invigorate market players as much as possible and accelerate opening in an all-round way. We will stay committed to the policy of peace, development and win-win cooperation and continue to contribute to world economic growth.”

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On the U.S. presidential campaign and some candidates’ demand for more trade barriers:

“We certainly do not like new trade barriers. International cooperation, especially international trade and international investment, is a very important driving force for the development of the world. This happens every time during the election campaign. We have experienced that many times.”

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On global economic development:

“I believe there should be some new factors driving world economic development. In other words, there must be new drivers for world economic development, especially new drivers coming from scientific and ecological innovation.”

“And the world economic development also requires new mechanisms, especially those that are win-win in nature. And there should also be new rules for international economic cooperation especially rules based on wide consultation, shared benefits and rules that are fair and inclusive.”

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Other ministers also attended the interview and answered questions about the economy.

China Securities Regulatory Commission Deputy Chairman Fang Xinghai addressed a question about the future of China’s stock market:

“Last year when there were abnormal fluctuations in the Chinese stock market, the Chinese government intervened, and some people from outside China think what the Chinese government is trying to do is to bolster the market to boost the shares of the market but what we are trying to do is to give more liquidity to the market.”

“Actually, at that time some of the fund management companies are trying to sell their shares but at that time everyone was selling and no one was buying so when the investors come to collect their money from those management banks they cannot pay them. That has led to a problem with liquidity which could possibly lead to a systemic crisis at that time and that is why the Chinese government intervened but now some of the intervention measures taken by the government are being phased out and some of them have actually already been removed, for example the suspension on IPOs have been removed and we are also relaxing the restrictions on the major shareholders selling their shares.”

“The second point I’m trying to make is that we all know that since the start of 2016 the Chinese market has experienced some fluctuations and has dropped by some margin. Some people claim that the plunge in the international stock markets were caused by fluctuations in the Chinese stock market, I don’t think that is the right view and the right assessment because China’s stock market is relatively a closed one, and there weren’t a lot of Chinese investors investing money in overseas stock markets and there weren’t a lot of overseas investors making investments in the Chinese market either.”

“The fluctuations in Chinese stock market will not do huge damage to the assets of those investors. It wouldn’t reduce their ability to invest in overseas stock markets.”

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On whether China is deregulating at a time of stock-market upheaval, rather than adding more regulation, Fang said:

“Usually when systemic financial crisis hit a country, after the financial crisis there will be more regulation imposed by that particular country. But for China in particular, last summer China’s stock markets saw some abnormal ups and downs. But that did not lead to a systemic financial crisis. So we believe the problem is not that the stock market is too open, instead the problem is that the stock market is not open enough.”

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International & Commercial Bank of China Ltd. Chairman Jiang Jianqing spoke about China’s handling of the yuan:

“Over the last two years there have been a lot of fluctuations in the international markets, not just in the currency markets, but also in equities markets and commodities. And there are a number of reasons for that.”

“The international economy is quite sluggish in recent years, not just in this year but this trend may continue into the future, into the coming years. Another factor for the fluctuations is the spillover effect from the raise of interest rates by the U.S. Fed. Another factor is the market fluctuations in an number of countries. And all these factors are at play and that contributed to the fluctuations in the international markets and there are a lot of irrationalities involved.”

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On factors determining the yuan exchange rate:

“The exchange rate of RMB should be largely decided by china’s economic fundamentals. And china has now maintained a medium-high economic growth rate. The World Bank expects the world economy to grow by 3.4 percent for 2016 and China’s trend growth rate is expected to be about 6.5 percent to 7 percent which is still at a medium-high level. So the fundamentals for china’s economy are still quite strong, and that is a basis for the stability of china’s currency.”

“And there are also some new changes, mainly two changes. Last year the RMB was included in the IMF’s basket of SDR. And another change is that we have changed the RMB exchange rate regime. In the past it was strictly pegged to the U.S. dollar but now it is made in reference to a package of currencies.”

Where the exchange rate will go in the future:

“The RMB exchange rate will in the future be more decided by the market. So it will be normal to see some ups and downs in the exchange rate. We are now seeing some fluctuations in other parts of the world and other countries’ currencies. We have seen that some countries and their central banks also decided to intervene or announced their intention to intervene so that is a very common practice for the central banks.”

“In the past when China’s yuan is pegged to the U.S. dollar, it doesn’t really reflect the reality in China’s foreign trade. When we switched to this new model when we decided China’s exchange rates in reference to a package of currencies it can better reflect that reality.”

“Now that the renminbi is decided by a package of currencies, it will be more stable.”

“The RMB, there have been some changes to the exchange rate formation mechanism, as I mentioned, it is now pegged to a package of currencies instead of the U.S. dollar and it has joined the SDR and it will be more market-based in the future. So we hope to promote this idea to the rest of the world so that they will understand more the current state of the RMB exchange rate and I believe by tracking reference from a package of currencies the RMB exchange rate will be more stable.”

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Vice Commerce Minister Wang Shouwen on how China will make its economic decisions more transparent to global investors:

“The third plenum of the 18th CPC National Committee has made it very clear that the Chinese government will unify its laws and regulations for domestic and foreign investment so as to ensure that the foreign investment policies will be stable, transparent and predictable.”

“Therefore we are now revising and working on this foreign investment regulation and law so as to foster a model of management that is based on pre-establishment in national treatment and the negative list.”

“Now, in four pilot free-trade zones we are now exploring and piloting this management model based on pre-establishment national treatment and the negative list.
Foreign companies in China will also have questions about China’s policies regarding its trading goods, trading services, intellectual property and foreign exchange rate, but our policy is that we have made a pact that we will only implement laws and regulations that we have made public and we won’t implement those we haven’t published to the outside world.”

“Every two years the WTO in Geneva will carry out a review of China’s policy -- trade policies -- and such review has been conducted many times and the various parties are quite satisfactory about the progress we have made.”

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On China’s global economic expansion:

“Economic expansion is a negative-sounding word in Chinese. I don’t think that is the right word to describe China’s international economic cooperation. When China first joined the WTO back in 2001, China was at that time the sixth-largest trading nation in the world but now it has become the largest trading nation in the world. This has presented huge opportunities for the whole world.”

“When China first joined the WTO back in 2001, China was at that time the sixth-largest trading nation in the world but now it has become the largest trading nation in the world. This has presented huge opportunities for the whole world.”

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On commodities imports:

“China has purchased and imported a lot of oil, iron ore and soybeans from the rest of the world. Without such huge amounts of imports from China, the prices of oil and those commodities would be even lower than what they are today.”

“And China is now the largest trading partner of about 120 countries in the world and it is also the largest export market for the products of a lot of LDCs for six consecutive years. So we have created a lot opportunities for these less developed countries.”

“No matter what they say, both China and the United States are members of the World Trade Organization and we have to act in accordance with the relative rules of the WTO.”

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On outbound investment:

“China’s outbound investment is also growing quite fast in recent years. You know that direct foreign investment worldwide has been declining, so by investing overseas and setting up overseas factories and establishing trade and economic cooperation zones in other countries, China is also contributing its own share to world economic growth.”

“Our Belt and Road initiative has been very much welcomed by a lot of countries and the principle for advancing the belt and road, mainly wide consultation, joint contribution and win-win benefits, have also won a lot of support.”

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Wang Xiaotao, deputy director of the National Development and Reform Commission, on the economic reform agenda:

“China’s economy has entered the new normal and it is shifting its emphasis from scale and speed toward quality and efficiency. There has been some moderation in China’s growth rate but we are full of confidence about the prospect of the Chinese economy maintaining medium-high growth rate.”

“The Chinese economy has huge potential, strong resistance and ample room for policy adjustment and China enjoys full-fledged industrial system, highly efficient infrastructure network, it now has a stronger material foundation for its development. The contribution of high quality labor force as well as scientific and technological innovation to economic growth is rising rapidly and we have more high-end factors of production.”

“Consumption has become the primary driving force of the economic growth in China, and the development of urbanization and clusters of cities will bring about huge demand for investment and consumption. That will be a great market space for development in the future. Going forward, we will also need to prevent and resolve financial risks as well as the risks posed by local government debts and strengthen oversight in an overall way so on the whole the fundamental sustaining china’s long-term and sound economic growth remain unchanged.”

“We still have very clear comprehensive, comparative advantages and a very strong momentum for development and ample room for development. The main institutions in China and abroad all believe that the trend growth rate for China’s economic growth -during the 13th five year plan period will be around 6 percent to 7 percent.”

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On maintaining a balance between ensuring economic stability and giving the market a decisive role:

“The Chinese government is now advancing efforts for deeper reform in an overall way and the focus is on reform of the economic system and part of that reform is how to handle the relationship between the government and the market to allow the market to play a decisive role in allocation of resources and to better leverage the role of the government.”

“Over the past two years, and more we have actively advanced reform of the administration system and significantly streamlined administration and delegated government power. We are advancing reform in investment, financing, fiscal taxation, financial and business systems as well as pricing and reforms of the state owned enterprises. We have celebrated the implementation of the innovation-driven development strategy and ignited the people’s passion for innovation and entrepreneurship.”

“We’re also working to improve the supply of public services and provide equal access to public services. We will also open up wider to the outside world and build a new system of open economy. So by comprehensively deepening reform, we hope that the market vitality can be further unleashed and invigorated and the economy will be able to maintain steady growth.”

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On the question of changed expectations for economic growth under China’s “New Normal” plan:

“Under the new normal of economic development, we need to focus on strengthening supply side structural reform. So this mainly involves efforts to address overcapacity, destock, deleverage, lower the costs and strengthen our weak links. These are the five tasks that we need to focus on. We need to leverage the mechanism of the market to phase out outdated production capacities and actively resolve overcapacity. We also need to deepen reform of the housing system, expand effective demand and reduce excessive inventory in the property markets.”

“We also need to lower institutional transaction costs, labor costs and the tax burden of enterprises so as to enhance the competitiveness of those strong companies and businesses.”

“We also need to expand effective supply, increase our inputs and support companies upgrading their technologies and equipment, cultivate new industries and strengthen our short-falls in both soft and hard infrastructure and maintain intensity of effective investment.”

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On cutting capacity at state-owned enterprises:

“Going forward, the Chinese government will pursue innovative, coordinated green, open and shared development and will adapt actively master and guide new normal of economic development and stay committed to promoting steady growth, adjusting economic structure, including people’s well-being, preventing risks, and we need to implement steady macro economic policies targeted industrial policies, flexible macro policies, sound and concrete reform policies as well as favorable social policies that will cover basic needs of our people.”

“We will work to foster new momentum of development and keep the economy running within a reasonable range and China has the confidence and capability to maintain medium high growth of its economy for the enhanced equality of economic development, and I believe there will be more opportunities to the development of the whole world.”

— With assistance by Nick Wadhams

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