Dr. Markus Rodlauer is the Deputy Director of the International Monetary Fund (IMF) Asia and Pacific Department, based out of Washington DC. Dr. Rodlauer is also the Chief of the IMF mission to China. He regularly travels to China as a part of his work, and is responsible for evaluating the future possibilities for China’s economy from the IMF’s point of view. Dr. Rodlauer has been at the IMF for over ten years, and received his degrees from BEA Saalfelden, the University of Innsbruck, the Diplomatic Academy Vienna, and George Washington University in Washington DC.
The Politic: China recently overtook the US in the PPP. What does this mean for Chinese citizens and American citizens?
It’s just one measure of what is happening which means that it is important, but it is also not that important. Of course, the fact that China is the largest economy in terms of PPP confers lots of prestige. PPP as you know is a measure of welfare, how much each citizen can buy. But we are comparing 1.3 billion Chinese citizens to 350 million American ones. For each individual citizen, the purchasing power in China still equals one quarter of what it is in the United States. It is the measure of the weight of the economy in the global welfare economy, but it is limited by the fact that there are lots of Chinese, so the per capita welfare is still significantly less than in the US. On the current exchange rate, not PPP but on a dollar by dollar basis it comes to even less than that, around one-eighth. So if you measure the weight of China’s economy in terms of dollars, in terms of international financial relations, in terms of financial flows, then it is better to use the dollar exchange rate and on that measure China is much smaller than the US. Although, it is rising on that measure as well so it is just a matter of years when China will overtake the US on a current exchange basis. In ten years from now it will also be the largest economy on the GDP at current exchange rate basis. But [the fact that China recently overtook the US on a PPP basis] is of course significant of the increased weight of China in the global economy.
The Politic: Let’s talk about the recent leadership transition in China. What do you see as the main difference in Xi Jinping’s China compared to that of the pervious leadership? What do you think about Xi Jinping’s leadership style and what is its impact on the Chinese economy?
The IMF is an economic institution, so our mandate is to analyse economic trends and policies and is not to speak about politics and political style because we are not political scientists and it is not our forte, but what I can say is the strategy of reforming the economy is very much influenced by Xi Jinping himself. He has made himself a leader in terms of strategy but also implementation. He is the head of the reform commission that has been established that is very important to carry through the reforms. He put his personal stamp and his personal prestige on these reforms and on their implementation. Clearly, it is due to a different style of leadership. It is more centralised and focused on rejuvenating the Communist Party and making sure that the central organ of implementation is directed clearly and aligned directly with the reforms he wants to accomplish.
The Politic: The increasingly low returns on investment in China seem to pose a big problem to the Chinese economy. Should China try to improve its growth to investment ratio or should it gradually move away from investment to build its growth on a different sector of the economy?
It means both. It means first of all that you have to change the kind of investment that you are doing, which state-led investment in manufacturing plant and infrastructure in a massive scale, 50% of GDP. That is both too high and it is not the right kind of investment. That does not mean that China does not need investment in the future. If you look at the relative size of capital stock in China, it is very low. By various measures it is 13% to 15% percent relative to each worker so the capital stock per worker in China is about 15% of what it is in the US, which means that there is a huge amount of capital stock catch up that still has to be done. The question is always in what direction and how fast, because if you invest in such massive amounts as the Chinese have done in the recent years it is very likely that you create inefficiencies, that you create corruption, create debt overhangs and crisis risks in the near term. So you need to go more slowly, bring the investment ration down to something like 14% of GDP over the medium term. But also you need to change the investment from investing heavily in plants, in manufacturing for export production, to now open up and give space for investment in the industries of the future for the Chinese economy – which are in the services sector. Service sectors that are heavily under-serviced at this point are, for example, healthcare in China, which has a tremendous potential to grow and you need investment for that but also telecommunication or transport, which are currently controlled by state-owned enterprises. Will the state be the one that invests most? No, again, it must change to private investment from state-led, local government, government-directed investment in plant and manufacturing to private sector investment in these new major areas of growth and therefore you need to open up these sectors private investment and private ownership, both domestic and foreign. That will then give you the space for growth in the services sector, new jobs, new incomes, which can then be consumed. It is not only shifting from investment to consumption, it is also redirecting investment to create growth in areas, which will create the incomes so that you can consume what you produce rather than having to export.
The Politic: During the US-Africa Summit last August, the US signed multimillion-dollar trade deals with African countries. It seems like China already had these deals in place before the US. What’s your take on the massive Chinese investment in Africa? Is Africa a new economic battleground between China and the US?
As you said China has tremendously increased its outreach to Africa, especially foreign direct investment to Africa and financing growth in Africa by China has grown very rapidly. The relationships are intensifying. I think is part of China’s outreach effort to secure access to raw materials and inputs for their industries. It is of course good for Africa and for the global economy to have this additional financing available and to have this additional investment. We at the Fund and globally are always encouraged by that trend and hope that it can be folded into the international rules of the game for global financing, global investment and global restructuring of finance if that needs to be done. It is part of China expanding its footprint globally. It is also part of China becoming increasingly a relevant player in the global financial and investment area. China progressively assumes the responsibilities that come with becoming a global player, shaping, following and being part of the global rules of the game in those areas.
The Politic: Do you think that further democratization of China would stimulate growth? Is there really an absolute tradeoff between democracy and economic growth?
I don’t see it this way, frankly. I think we must recognize that two things are important in China. One is the long history that China has and the long-term historical perspectives that they have and we should see in the evolution. It is not an issue of two or ten years for China. It is an issue for much longer perspectives. And, second thing I want to say, China today is different from China ten years ago, and is certainly different from China 30 years ago. Let’s not forget that today, 66% of the population has their jobs in the private sector, whereas just two or three decades ago it was entirely public sector employment – which means your livelihood is totally dependent on the state. If you go on the streets of China today, you see that the lives of the people are totally different from what they used to be. So it is a process of evolution, it is not a rapid process but it is a long-term process and it will go its way. We are however very encouraged by the strategy of the Third Plenum, which explicitly recognizes that the market will, over time, play a decisive role in resource allocation and economic decisions in governing China. That is an incredibly important principle that will hopefully ramify in many directions – and of course, as you said, there are potential contradictions in the strategy that emphasizes the role of the center, the Communist Party, in achieving these changes. How will we come to a system in which the Party itself delivers a system that will be based on the role of the market, not the Party, and the rule of law, not the Party? Those are the sort of issues that will still have to be resolved in the future, but particularly in the short-term I do not see a contradiction in growth and – well, you call it democratization, but I would call it, from an economic point of view, increasing role of market forces. On the contrary, I think they themselves have realized that the times of totally state-led economic development by local governments directing resources into certain areas – which has delivered a lot for China – but the time is running out for that. They need to shift towards more market-based, more decentralized, more globally integrated ways of growing, sustaining and creating incomes.
The Politic: More on current news now for a second – we are sure you are following the recent “Occupy” movement that took place in Hong Kong. Stripping away from the politics for a minute – of course, one can see there are clashes with Beijing and the people on the ground in Hong Kong – but economically, do you see what is happening in Hong Kong right now to have a major change on bilateral economic ties between mainland China and Hong Kong?
This of course is very sensitive, so I can only give you an answer in economic terms. As of yet, we have not changed our forecast for Hong Kong for this year – which is around 3 to 3 and a half percent economic growth. Obviously, the events of the last few weeks will have an impact in terms of things like consumer spending in Hong Kong, however, the financial markets which really are the lifeblood of the Chinese economy, particularly in Hong Kong which is a hub for investment in and out of China, have not really been affected – in fact, they have been virtually undisturbed. Frankly in the near term I do not see this becoming an issue – unless, of course, the issue exacerbates. We also know Hong Kong markets are very resilient. Earlier this year we did a major exercise in analyzing Hong Kong markets, and understanding how robust and resilient they are – its published on the IMF website, the assessment of the financial sector in Hong Kong – and we have found it to be extremely resilient and robust, even against major shocks. So at this point, this is not an important concern. I am convinced though, that the recent trend of progressive integration between Hong Kong and the mainland will continue. Already a lot of the exposures of the Hong Kong financial centers are not in Hong Kong or elsewhere in the world, but increasingly Hong Kong-based financial institutions are lending to China and to the rest of the mainland. There is no doubt that this will continue, and the major underpinning of that is that Hong Kong is different from the rest of the mainland. It has its own rule of law, it has its very clear and sound structural accounting systems, transparency, reliability, common law, really all the attributes needed to make Hong Kong so competitive as a hub to feed the mainland and the rest of the world. That will continue, the drive to business will continue, and as China rises many people think that eventually there will be competition and Shanghai will beat out Hong Kong – this is likely to happen as investment and growth continue in China, and as integration rises, this is really an enormous amount of cake that Hong Kong can continue to eat. Hong Kong will rise too rather than fall, as Shanghai and the rest of China will rise.
The Politic: You have been quoted as saying that “what is good for China is good for the rest of the world”. Could you explain that to our readers?
Whenever something happens in China, global markets react immediately – but not always rationally. For example, if growth slows down in China, global markets become nervous and go into a tailspin. Sometimes, people pull back from China – but no, we say, and that’s the point we want to get out – that if China reforms successfully, then growth in China will be higher than it is in other places. This is not just for today, but in 1 year, 3 years, 5 years as well. So the first order of business is that we all should be very interested in China reforming successfully and solidifying its economy. This is because much of our exports, much of our growth, much of our welfare, much of our children’s jobs, all depend on whether China will do well not just today but going into future years. So if there is a cost in the near-term of China reforming successfully – if there is a bit of a slow-down this year or next year in order to solidify its economy in the long-term – then we should all welcome it. It is very important that we look at events in China, we look at slow-downs, and perhaps some beginning defaults in the financial sector – which are very important for China becoming a normal financial system. This is because in every financial system we have defaults and bankruptcies all the time, and we are able to deal with it. It is part of the normal cleansing of a system, which becomes better and better with time. The same has to happen in China, and really if we see one or two defaults in China we should actually welcome it.
The Politic: Professor Roach [Stephen Roach, who teaches “The Next China” (cross-listed in Economics, Global Affairs, and the School of Management)] has written a book on the unbalanced relationship between the United States and China with a focus on the economic sphere. To expand this idea to our readers – why should people in America care about reform in China?
Well, I would like to say that everybody should read Stephen Roach’s book. This is not only because they will understand China but more importantly, it will help them understand the United States better, and what is needed here in the United States [economically]. So in the book he says not only is it critical for China to reform, but also the United States needs to reform – they need to increase their savings rate, and they have to make their own contribution to becoming much more balanced in order to provide an underpinning to this bilateral relationship. And really, what I’ve said before is exactly what he says – China is tremendously important for the United States. It is important for jobs, it is important for financial stability – let us not forget that China basically finances most of the United States fiscal deficit by buying U.S. treasury bonds all the time. So the two economies are, I think, incredibly linked on a financial and on a real economic basis. They are also linked, I think, on a “confidence basis” – after all, our mantra at the IMF and indeed of the world financial system is dialogue and cooperation, not conflict. Besides being important from a financial stability point of view, were China to experience a crisis, you may well see a spike in interest rates here, and a major decline in growth and a rise in unemployment as a result. This is because of those financial and trade linkages that we have been talking about. If China became, say, more inward-oriented or became more confrontational in the region – then there is a greater risk of regional conflicts. The commitment of the United States in the region is also very important, and that would potentially create some political problems that undermine solid growth, jobs, income, welfare and well-being for all of the people of both countries.
The Politic: And to wrap up – what advice do you have for Yalies who one day wish to work in transnational financial institutions?
Work hard, study hard and read Professor Roach’s book! (laughs)