“Globalisation is Southern Europe’s source of agony”

Prof YAO

– Would it  be a catastrophe if China  growing by less than 7%?

The Chinese economy is rebalancing, as shown in my article you’ve read.  Growth will slow down, but not as low as many people have expected. I do not think that China will grow by less than 7% unless the government wants it by substantially slowing down credit expansion. Even if China’s economy grows below 7%, I do not think there will be a catastrophe. People’s expectations are adjusting; employment is not a big issue.

– Have you read The Economist commentary saying that “so far the signs are mixed about President Xi Jinping´s ability to carry out structural reforms…”? Can he really reverse inequalities and break the state monopolies on his own?

The reform process has actually been moving fast. The Economist has listed several key reforms. I would also add financial reform which has begun to loosen control of interest rates. China is also actively pursuing a BIT (Bilateral Investment Treaty) with the United States. The US has a template for these talks,  under which, China does not have much room to negotiate. If the US version is to be more or less adopted, China will have to undergo major reforms covering almost every aspect of the economy, including the monopoly of the SOEs. China is determined to conclude the BIT talks with the US by 2016, when the current American presidency ends. This shows that China will finish or at least start most of the reforms by then.

Inequality is actually falling in China since 2008. This is not only shown by the official data, but also data from independent surveys, like the longitudinal survey conducted by Peking University, which reveals that the Gini coefficient declined from 0.52 in 2010 to 0.50 in 2012. This trend will  likely continue as the Chinese economy continues to rebalance.


– Let’s talk about monetary policy. Do you think Beijing will finally replace its central bank’s chief Zhou Xiaochuan? How do you interpret that move and what consequences may that have on the financial system?

Zhou Xiaochuan’s term runs to 2016. He was elected as one of the vice chairpersons of National People’s Political Consultation Conference two years ago, which allowed him to serve one more term because he was over 65 at the time. But even if he were replaced by someone else, I do not think  monetary policy would change direction in a substantial way because it is primarily controlled by the State Council.


– The Chinese central bank injected 500 billion renminbi (about €63bn) to the five biggest lenders in the country. Is the economy in need of so much liquidity?

I think it is necessary for China’s central bank to adopt a more accommodating monetary policy. The economy badly needs liquidity. Inflation is low and asset prices are stable if not falling. Many people talk about China’s ever growing M2. But M2 is a stock, and much of it is not circulating in the economy. Using M2 as a benchmark for China’s monetary policy is inadequate.


– What do you think about the incentives for first home buyers? Will that really be useful to contain the housing bubble or is it a decaffeinated measure? Is the government really tackling the problem? It seems they are giving incentives to people to buy a house in Beijing  who still don’t have a hukou (residence permit) and cannot even go to the hospital?

Housing prices are stabilizing. However, people usually buy high and sell low. That is, they buy homes when prices are about to rise and sell homes when prices are about to decline. Therefore, people are waiting for prices to drop further. This is why home purchasing is not active today. Government measures to control house prices have been failures in most cases over the last ten years. Many of them went against basic economic logic. For local governments, higher property prices are good because that brings more local revenue. The hukou used to be a prerequisite to buy a home in large cities, but since this year, many cities have abandoned this policy in the hope to encourage more home buying.


– The euro has lost 7% since the summer. Is there a hidden currency war here?

I am not sure that I can answer this question.


– European banks have the feeling that it is impossible to enter China…

The reality on the ground is different, I think. Look at HSBC. I think it is an issue of willingness.


– A Spanish bank spent almost a decade trying and finally gave up after losing millions of Euros

It seems that BBVA sold its shares in CITIC to fulfill its own capital requirement under Basel III, which penalizes banks with more than 10% stakes in another bank. Apparently  BBVA was intending to open an independent branch in China because China will open up the market to solely foreign-owned operations.


-Shouldn’t we have an international accounting and banking global standards?

Yes, but  we should probably have different standards for different levels of banks and firms. There are many small banks and firms that are not comparable across borders.


– We talk about Chinese corruption a lot, but how do you see Western fiscal paradises?

Fiscal or tax paradises are a way to compete for investment. But I think it only works for small economies. For large economies, it is hardly an affordable strategy because tax revenues are important.


– Do Chinese companies use fiscal paradises?

Yes, many Chinese companies move their headquarters to tax havens such as the Virgin Islands or Hong Kong, but actually operate in China.


– The West is desperately trying to grow –in the right way?

This is a big question. Growth in the West ultimately needs technological breakthroughs. Several countries are trying to rebuild their manufacturing sectors. But that is only possible because manufacturing rests on some technological breakthroughs. Focussing solely on trying to compete with emerging economies is not going to work. Germany can be a model for other western countries to learn from. German companies control key technologies and are specialized in manufacturing high value-added components.


– Do you think Europe went too far with austerity?

My understanding is that austerity in Europe is a way to force the southern countries to take up real adjustments in their welfare system and regulatory frameworks. Southern countries, and probably also France, need to cut social spending and vastly deregulate their economy.


– In the south of Europe some economists think we are “too obedient” following whatever Chancellor Merkel says.

To a large extent, Chinese are similar to Germans. We both value hard work, personal achievements and savings. As I said above, austerity is a way to force changes in the southern countries. Probably what Chancellor Merkel can do more of is to encourage the youth in southern countries to work in Germany, a country that desperately needs more labor.


-After the crisis, the austerity measures, the budget cuts in southern Europe… What would you say to those who fear the degrading of labor conditions in the West and the outsourcing of jobs to China?

Globalisation means that every country has to find its comparative advantage. It just happens that China’s comparative advantage is in its relatively cheap, but also relatively well-educated labor force. The kind of jobs outsourced to China are those that fit into China’s comparative advantage. Germans do not complain much about losing jobs to China because German companies control key technologies that the Chinese labor force is not yet qualified to manage. That being said, I realize that it is a hard thing for some countries to adjust to this wave of globalisation. This is the source of agony in southern Europe.


About the Author

Ana Fuentes
Columnist for El País and a contributor to SER (Sociedad Española de Radiodifusión), was the first editor-in-chief of The Corner. Currently based in Madrid, she has been a correspondent in New York, Beijing and Paris for several international media outlets such as Prisa Radio, Radio Netherlands or CNN en español. Ana holds a degree in Journalism from the Complutense University in Madrid and the Sorbonne University in Paris, and a Master's in Journalism from Spanish newspaper El País.

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