"on the move." we are counting you down to the european open. i'm guy johnson alongside jonathan ferro in davos. what are we watching? jonathan: this disconnect between markets and executives at davos. the bears have it in the market. global stocks extending losses from japan to brazil. barclays is set to cut more than 1000 jobs at its investment bank. and draghi's dilemma. how will the oil price play into this afternoon's ecb decision? here in switzerland, davos day

two. we will hear from christine lagarde, ray dalio, and gary cohn. an all-star discussion. day one dominated by the equity market selloff. it was the talk of the town. how are we looking this morning? a little bit edgy. we're not getting the bounceback some would have anticipated. let me show you the fair value calculations. at the moment, the euro stoxx called down by 0.4%. london flat. it has been softening. the cac 40 and the dax as well. wall street is softening too. we have the dow down 0.7%. called at the moment softer as well. it looks like we have another difficult day. maybe not as difficult as

yesterday, but not the bounceback you may have anticipated following such a difficult session. sub 27.ill dollar-yen, that is going to be critical. the ruble continues to march ever lower. remarkable,n't it you and i said here last year talking about the ecb, long equities, short the euro. over the last 12 months, timing was critical, but that's to start and end. would you have thought we would be where we are right now? guy: absolutely not. but some people are saying that maybe valuations are getting stretched. maybe equity markets need a correction. i've heard conversations from davos this morning, whether there is this connection between the financial markets and the real economy. oil is part of that story. do the equity markets feed across into the real story? jonathan: the feedback loop is

critical. i want to bring in a very important guest. icica.ef executive of the reality, where is it, the markets are the real economy? the market is all pessimism. isseems in davos everything ok. is it somewhere between? >> i think the reality is somewhere between. the situation is that everything is volatile. it is going to continue to remain uncertain and volatile as far as the global economy is concerned. there's going to be monetary policies. commodity prices are not going to go up in a hurry. it is going to be an uncertain and volatile year. jonathan: my colleague and i were talking about the feedback loop. i wonder what the feedback loop is from china, global financial markets, into india and your bank specifically. is standing out as a

very sweet spot currently. with what ever is happening globally, india's indicators are very stable. whether it is currencies relative to other currencies, the foreign exchange reserve, the current account deficit, and so on. level, we are now seeing a little bit of movement , these of the impact increase in coal production and so forth. there's some movement in the real economy on the positive side. we must remember that anything that happens in china, such a large economy, no country in the world cannot get impacted. clearly, we are seeing our exports not growing as much, even in value terms. this is a result of what happens in the large economies. jonathan: when you wake up and

you see the stock in the red, and performance of your bank hasn't changed, is that a reflection of the performance of your bank or a proxy for what is going on in the global economy? >> i think it's the result of what's happening globally. it is the result of what are the expectations in india about the growth pick up. we are still growing at 7.4%. we believe our potential is 9%. it is the expectation. as far as banks are concerned, it is also about, during this period when everybody's cash flow's are low, how will the companies service their debt? i think it's a multiplicity of factors. the feart's more about of the unknown. what can come next. jonathan: bad loans also an issue. the governor set a deadline to clean that up. for your bank, where are we and

can you meet that deadline? >> we must remember that in india, the stress on the loans is in certain sectors, certain companies, the retail loans, the small and medium sector continue to be very healthy. companies have capacities assuming a 9% growth rate. the growth rates came down. project implementations got delayed. the cash flows are much less than what were anticipated. that brings some amount of stress. banks, we are, as working with promoters to find -- solutions. into today's economy, everything is so slow. even though salvation's take time -- those solutions take time. i think we are all together moving in the right directions.

we must make sure that we go in the right manner. jonathan: talk to me about profitability of your bank. have you adjusted that based on what you've seen in the last few months? india, our financial year begins in april. whatever is happening in the global economy will have to be taken into account. jonathan: in terms of the euphoria around india, modi came into power and people were optimistic about what he would do. are you happy so far? >> in terms of reforms, a lot has been done. in terms of attracting foreign direct investment, in terms of very large transformative projects like digital india, and so on, which are actually going to have a huge, long-term impact on the economy. today, what people are really looking for is the gradual

improvement on the real economy. we are seeing -- we must remember, india is a very complex economy. to change, it takes long. we are going through that phase where things are getting implemented. it will be time as we see the results. jonathan: if prime minister modi called you now, what would be your advice to him? >> i think, given what is happening globally, we should actually see this as an opportunity for india. we should use this time to create capacities at low cost. this is the time where the government spending from the public sector will have to take the lead. as the private sector debt levels get adjusted, that is when their investments come. make those investments which are required, which can create the multiplier impact on the economy. jonathan: the ceo of icici bank.

back to you from a sunny davos, switzerland. guy: everything looked a bit chilly yesterday as the markets heated up. next, a panel of all-star guests to answer the question of the year. where is china heading? francine will be sitting down with the imf and bridgewater securities. china securities regulator commission also on that panel. we want answers to this question. you cannotcussion miss today. it is critical that you pay attention to that. something happening right now, that is the ruble, weakening sharply within the last two minutes. this is dollar-ruble, blowing past 84 within the last couple minutes. a really sharp move. the ruble has been under incredible pressure. this is an oil story. the ruble is really taking it on the chin right now.

we've blown past 84. let me show you what's happening with european equities as we prepare to count you down to the open. we are softer pretty much across the piece. looks as if european stocks are going to open 0.5% down. the great gets keep on coming. .et me get you back to davos let me get you back to jon ferro. in the hot seat now, vittorio grilli. great to have you with us. i've been saying all morning, the markets are telling me one thing. the chief executives in this chair telling me something else. what is the reality of what you see? >> the reality is something that is developing, which is not unexpected. there are big adjustments in the world economy. oil markets, asian markets, going through some structural,

medium-term readjustment. and markets are adjusting to that. markets, we know, are not always a smooth adjustment. they like to be bumpy. jonathan: what do you make of it, 40 bear markets globally? are we entering a protracted bear market or just a correction? >> too early to tell. i think that right now we can still be in this bumpy correction mode and it will take some time. jonathan: for italy, you guys have the ftse mib and you see italian banks down. what do you make of italian banks? >> it is part of a repricing of the sector in general, not just italian banks. worldwide banks are adjusting. italy has their own special problem. thisn -- they have

l problem accumulating over the years. finally, it looks like they are coming to some mutual agreement. jonathan: do you think the underperformance of italian banks is connected to the ecb's request for more data, more information on bad loans? >> i want to see it. i'm not sure what exactly it is going to be. i think that mostly, in a fragile, correcting market, the pl's is the main reason, frankly. jonathan: for the financial sector in italy, if anyone wanted to buy an italian bank, we're going to see consolidation. that doesn't look like it is going to happen soon. ascii,cally, fermented you look at that bank at the moment. does it goes a systemic risk? is there a buyer for that bank? >> i think it is too specific a

question. i'm not in that role any longer. systemic risk, i don't see that. i think the authority in italy and frankfurt are doing a great job. i wouldn't get into that. jonathan: what do you think needs to happen to see the consolidation that people have talked about for so long in italy? jonathan: i think it is happening. in europe and italy, things tend to be lower than you would like. we've seen that talks are protracted and as you said, during the turmoil, it is not easy to find the right agreement. 12 months ago, if you and i had a conversation, we be looking had great to the ecb meeting and mario draghi announcing qe. would you have thought european talks would be where they were

after a year of quantitative easing? the euro has come down, but maybe not the call people expected. would you be surprised if i told you that 12 months ago? >> we don't know what would have happened. i think this is really not a fair question. i think it was an important move. it was a very well-managed, and i think we are much better off. jonathan: what is clear is that the bang for the buck of qe, hsbc called it qe exhaustion. it does seem that we are seeing these diminishing effects of extra bond buying. you see that as well? >> of course, there is part of that. also, the challenge is also not going away. with low oil prices, commodity prices, the pressure going on the other side when you're trying to vital inflation, are all there. the tools are there. maybe there is some fatigue.

but i think the challenges are still pretty tough. jonathan: just want your view on china to wrap things up. the feedback loop has been through the markets. you see it in equities as well. as a man that knows a lot about finance, is there a risk that it goes through the credit channel as well? >> i don't see that coming right now. you point out financial transmission on those channels. they are really globally connected. credit channels are not so connected. then there is the real economy, which is even less connected. the economy is more and more a global economy. but the interconnection is quite different. jonathan: in terms of the feedback loop, from financial markets to the real economy, you wonder what the policy response would be. there's not much ammunition left in central banks. where do you see the policy response coming from? bei think that you have to

steady as you go. thatolicy in europe monetary authorities are implementing -- there is still the big issue of structural reform, but this is not a short-term measure. it is nonetheless still very necessary. grilli, thankorio you very much for joining us this morning. guy johnson, back to you. a very important panel coming up. guy: the key question that everyone's trying to figure out, that is, where is china going? to try and figure it out, we have assembled an all-star cast to answer that question. they are now seated on the stage in davos. lacqua,ague, francine moderating the session. we've got ray dalio from bridgewater. we've got christine lagarde on that panel as well.

we've got a chinese regulator. we've got goldman sachs. we have got the people you want to listen to. the critical question, the answer to which could be pivotal for your investment in 2016. we've seen incredible turbulence. it started in august with china and has carried on into this year. how will 2016 shape up? christine lagarde, ray dalio, fang xinghai joining us as well. we have got so many great names to tell us what they think is going to happen next. what is going to happen to the property sector? zhang xin is joining us to answer that question. goldman sachs gary cohn is going to be on that panel as well. we've got some great names. you really want to pay attention to this. we try and understand exactly what is going to happen in 2016, what is going to go on with the chinese economy, how is that

going to interact with the price of oil, how is it all going to ultimately fit together? that is the question we need answers to right now. francine lacqua in davos is going to take the panel now. she's going to try and answer that question. over to you, francine. francine: welcome to bloomberg's davos debate. i'm francine lacqua and we are talking china. where is the chinese economy headed? inh a new plan presented 2015, how can the world second largest economy shift gears without stalling? what does all the market volatility tell us about the perception of china and the task facing regulators? we have an all-star panel. thank you for coming on. zhang xin is chairman of the board industrial and commercial bank of china. christine lagarde, managing director at the imf. fang xinghai, vice chairman china securities regulatory

commission. gary cohn, president at goldman sachs. ray dalio, chairman and chief investment officer at bridgewater's associates. thank you for joining us. chinese markets have begun the year with a lot of volatility. what do you believe is the underlying cause? >> i do not believe that -- [inaudible] rate last year was 6.9%. all the economic indicators -- china is still the locomotive contributingnomy,

a quarter of the world growth since last year. , in terms of the market, there are certain volatility. of course, there are complicated reasons, one of which is the slow recovery of the world economy, so that the growth rate is flat. the world over. and the interest hike in the policy inhe economic the eu has led to volatility. commty prices are -- odity prices are facing pressure.

this has become a new situation in the world. the world over is facing volatility. some reasons are normal. some are abnormal. there is a certain degree of panic in the market. proceed all, we have to with structural reform so as to .ead economy out of the low-end i think that is the most fundamental reason. secondly, the regulatory authorities in the world should work together to reduce the volatility. thank you. francine: thank you so much, chairman. ray dalio, is there something the west misunderstands about chinese markets? does that excess of eight volatility?

lot thatink there's a westerners understand about the chinese markets. i think the essence of what's going on in china is an adjustment of major challenges. they have a debt restructuring challenge. they have an economic restructuring challenge. they have to come up with a new model for the economy. they have a capital markets challenge, to build capital markets in efficient ways, so it circulates capital through the system better. they have a balance of payments challenge, having to do with the pressure on the currency capital outflows and those things. these are things that have happened repeatedly through the rest of the world. the united states has had three major debt crises. we couldn't pay our debts in .971, in 1982 we've reshaped our economy many times. i remember when the steel

industry ended and heavy manufacturing has gone into other areas. we've had a number of balance of payments and currency issues. i think maybe one of the things being misunderstood is what is a normal, balance of payments, economic, too much debt restructuring and of recession. in japan, they used to define a recession as anything less than 3% growth. maybe in china, less than 5% growth. we're going through that. i think it is being confused with the longer-term picture. the reforms and the leadership in china is going to be very fundamentally good. you're looking at something that is a short-term challenge as distinct from something where we will be in five years, after the regeneration of new capital markets and new economy, with inrant, young entrepreneurs

that other economy that is now beginning to flourish. francine: why have we had so much volatility since the start of the year? ray: the volatility has been a result of, in the world, we have an easing of monetary policy around the world. we're not going to have the same effectiveness. with interest rates at zero, you can't cut interest rates. with asset prices having risen because of that easing, the risk premiums have gone down and there's a big vulnerability. when china is dealing with the rest of the world, china is a negative on the margins for the rest of the world, and the world is vulnerable because of the lack of monetary policy. fang, how do you explain the volatility? mr. fang: maybe there are two factors. one is that china is in the

midst of transitioning from an economy relying heavily on investment and exports, to an economy more reliant on domestic consumption. in this transition, a lot of assets get revalued in the process. i think this is the primary reason behind volatility. another factor is, the fed raised interest rates not long ago. a lot of emerging markets didn't perform very well. domestic reforms got stalled. you have the combination of chinese transition plus international influx. that caused volatility. you asked my a lot of volatility right at the beginning of the year. usuallyice adjustments

run by steps. it does not go away smoothly. we just hit that step at the beginning of this year. guy: met him -- francine: ms. lagarde, is there something we have learned about what the chinese are trying to do? ms. lagarde: at the imf, we don't look at the last two weeks. i'm a little bit embarrassed to comment on the last two weeks. i'd like to go back to more basics. second, ort that the first depending on how you calculate gdp, the second or first largest economy in the world is going through a list of transitions. ray has indicated that. you have indicated that as well. industry to service, export to consumption, lower-level investment, hopefully. i think there's another one happening at the moment, which is governance change, which has

begun, which is probably going to continue, which has to do with the anticorruption fight that president xu has highlighted -- president xi has highlighted as one of his key proposals. that is also a management change which has to be taken into account by chinese authorities, chinese operators, so that risk can be apprehended, risks can be taken in spite of this happening. i would say also that given those massive transitions that are undertaken pretty much at the same time and accepted as such, there is a communication issue. it's something that markets do not like. uncertainty, not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued.

is it the dollar? is it a basket of currencies? on the balance of payment and on the exchange rate matter, i think better and more communication would serve that transition better. dalio'so agree with mr. assessment, but we believe that all those changes are perfectly manageable if the right policies are taken, and given the large amount of reserves, the large amount of buffers the country has. from our perspective, we are forecasting a 6.5% growth rate for next year. we believe the chinese authorities can legitimately accept that this growth rate is fine for china, just as it is fine for the exchange rate to be aligned with a basket of currencies. francine: gary, does china need to decide whether they are a free market economy or not? have they decided but not

communicated enough? hang --agree with and i with everything our panel has said so far. many of these transition points are real. when you go from a capex economy, building infrastructure, to an economy where you have consumers drive your economy, that is a long transition. affectnot monitor or consumer discretionary spending. you can't affect it the way you can affect government spending. this transition is difficult. on the specific question of china's economy and whether it's a market-based economy, clearly this is a question that the market is dealing with. there have been signs that china wants to have an open, free economy, an open, free

marketplace. guy: european markets are just opening. we will be back to the panel in davos. first, let's get the open with caroline hyde. caroline: we are about five seconds away. we just can't catch a break. risk aversion once again crawling into the market. we saw asia moved from green to the red. wiped off 11%y from the european stoxx 600 so far this year. more than one trillion euros. we are looking a little more optimistic than futures are singling. cac 40 just trying to claw back from those losses we saw yesterday. clearly, we're also at the back and call up what is happening to oil. crude oil currently off by 1%. ramifications it spills into the fx market? you've been talking about this all morning.

we got the ruble sinking versus the dollar. we are at 84. clearly, the fx markets feeling the pain. we've got the risk aversion playing into the fx market. money moving into the again. dollar down, yen higher. 0.25%, coming off some highs. clearly, money moving into the havens. risk aversion playing on investors' minds. stocks opening tentatively higher in europe. have a look at remy cointreau. we were so worried about china. overall, seeing a beat. overall, they said their third quarter was flat in china. after so much negativity in that area of the region, remy cointreau pushing higher. up 3.2%. sab miller basically flat.

they've been taken over by ab inbev. it is notable that affects hurts their numbers. africa, asia, 45% of their sales. underlying sales look positive. they are still drinking beer. deutsche bank currently waiting for this to open. likely to drop as they post their overall -- they expected a loss of 1.2 billion euros. they fell 6% yesterday. now, back to that important panel in davos. to this point of transparency, what the markets promisedd, 2013, china to give the market a decisive role in the economy. we've had intervention in both currency and stock markets. when do you foresee china picking good on its pledge?

>> china will stick to the market economy. publicly todeclared the world, markets will play a decisive role in economic communication is indeed an important issue, especially where it economy is undergoing transformations. many things need to be communicated. in the past few years, chinese economy has undergone great transformations. some criticize that the growth led by invest and too high a level of investment, and it has

indeed happened in china. contributedion has to 65% of the growth has described on the housing market buildingser supply of in china. 10%.t accounted for only but the consumption of the housing market is increasing for our bank. are for buyings the assets, so it shows housing market. we need more communications. that misunderstanding, lack of

understanding of the policy, are information, some news understood from the old normal for china. in entering the stage of new normal, i think it is a test for china to have better preventation, so as to misunderstanding. >> i think there are three issues here. one is communication. is, is there a strategy, a real strategy, to transit from an investment

economy to a consumer economy? peopleue is that some question the execution of the strategy. themselves should not be worrisome for people. they know volatility very well. it is the things behind volatility that have worried investors. in terms of communications, you are right. we should do a better job. we are learning. we are doing it. i'm here today to communicate. [laughter] but we have to be patient, because our system is not structured in a way that can communicate, or is able to communicate seamlessly with the

market. we are learning. china can learn. i can assure you that. in terms of strategy, i think there is a strategy, and it's the right strategy, and that is to reduce investment, to expand consumption, to shift more income from the state-owned sector to the pockets of consumers, and to do what we supply-side structural reform. the purpose of that reform is to make our supply side of the economy a lot more responsive to consumer demands. china, consumers are not -- they are there. they are demanding goods and services. but the supply side of the economy is not providing them at a reasonable price. health care, education, entertainment, high-quality consumer goods, you can point at

everything. there lies a lot of opportunity. then, execution. if china is really transitioning tom a investment-led economy a consumer-led economy, if you piecethe financial times" , he seems to be saying that china is not transitioning at all. the economy still relies very much on investment for growth. on that, i disagree with him. as a share of gdp is shrinking. share of gdp is increasing. 52.5% last year. five years ago, it was only 49%. shift, just not large enough.

i agree. it could be faster. but we are moving to the right direction. ultimately, when you look at a country and decide your view about the country, you look at two things. one is the economic fundamentals that the country has. savings, education, hard-working , innovation, whatever. you look at the leadership. you have strong leadership, you have confidence in the country. if the country has weak leadership, despite good economic fundamentals, the performance will not be good. if you look at china's leadership, i think we have the strongest leadership in the world at this point. francine: a question on regulation, and then i want to get to ray dalio. last week, the chairman of china's stock regulator said there had been a staff exodus. he was basically indicating the department was having trouble

keeping up with market sophistication. is the market getting too complex for china to regulate properly? mr. fang: i understand what you're saying. these are short-term challenges. china has the talent. you have so many people going to universities and graduate schools. we have the people. government service, public service, still carries a very high esteem in china. i have no doubt that we have the talent. the market could have gotten a more complex. yet. we can learn. francine: gary? talkingu started out about the whole question of volatility. we morphed out of this discussion of communication and

free markets. i think these two concepts go together. when you look at what's going on in china, the chinese trying to move to more of a free market, and this inability to communicate more freely, that's somewhat where you are generating the volatility. the world standards today from publicly listed companies and publicly listed disclosure on balance sheet, audited financial statements, corporate governance, it's pretty high and getting higher everywhere in the world. moves at the speed of light today. people want access to chinese companies. they want chinese companies held to the same standards. number two, they want the marketplace to determine which chinese companies should have access to capital, not the chinese themselves deciding

which companies should have access to capitals. as the marketplace opens up, the marketplace will determine which chinese companies should be public and which ones shouldn't be public. to the extent you start getting more accepted financial statements, corporate governance, and the market determining which companies will and won't be public, you will dampen volatility. a little bit of this is just natural evolution and part of the communication problem. unfortunately for the chinese, they are doing this in 2014, 2015, and 2016, in a digital era, not the 1930's when we had a telegraphic era. the rest of the world did it in analog. they are doing it digital. we are watching it real-time. we just got through re-regulating all of the financial institutions around the world. we've taken an enormous the

amount of liquidity out of the markets. ray: i think the chinese policymakers are not getting the credit they deserve. i'm not speaking from a chinese perspective. you have to get into the nitty-gritty. if you take a look at the debt restructuring, just to put that in perspective, local government spending counts as about 30% of gdp. it is running a deficit, funding deficit, of about 20%. deficit,t that funding that is about 6% of gdp. if you look at the way that has been restructured and managed, it has been managed superbly. it is a difficult situation. if you just restructure and don't provide those capital, what will that spending that is

taking place won't take place. the same people doing that restructuring did it in 1998. they are the same people. if you know the mechanisms to be using these things, they are pursuing that. if you look at the economic restructuring, going from one economy that was like five banks and state-owned enterprises, ok, the development of the shadow vending system, that has been done with a lot of balance. it is a risky situation. but the free exchange of capital is getting capital to companies that never would have had to capital before. that is not producing volatility. that is quite an a congressman. if you look at the balance of payments, balance of payments is a difficult situation. if you look at how they are handling it, in terms of the stock market handling it, there have been problems.

some of the responses have not been by world standards. there was also a big order imbalance. when the order hit and everybody wants to sell and they have to respond quickly, it was that circumstance. when i speak to those policymakers, and those in the west, i find equal levels or even better sometimes of competence in terms of dealing with the things they are dealing with. if you compare the politics of the government, there are no loose cannons running china. these are people, if you look at the system of how it has to be chosen, you have to be a competent leader and devoted to the country. if you look at politics in the west, and we look at some of the leadership, that could be quite scary. [laughter] i think the commitment to market reforms is a very real commitment to market reforms.

think of the power that has going to have. basically, it's been an economy with money clogged at the top. the top 10% is where it is passing through. this will circulate. there's a new china. i think we're going through a cyclical -- you can't help but go over that cyclical adjustment. that will last maybe two or three years. it comes at a bad time for the rest of the world. when you look at its impact on commodity prices, not only commodity prices, the other economies of brazil and so on, and you look at the vulnerability of the rest of the world, that is a bad combination. but we will get past this in terms of china. a bad year in china is a great year in almost any other country. guy: metta month -- francine: madame lagarde, do you question their commitment to structural reform? mr. fang: we --

we went through intense discussions with chinese authorities. we were going to review the special drawing right baskets of currencies which define the value of the special drawing rights, which is that sort of elusive currency of the imf which central banks around the world use. if u.s. to me whether chinese authorities would complete the reforms they have to undertake to satisfy the criteria, i would have said i don't think so. yet, when the authorities put their mind and are determined to develop a strategy, implement reforms, certainly we seen in that particular case an absolute -- i wouldn't say perfection -- but an unbelievable determination and ability to deliver what frankly many would have considered as undeliverable to begin with. it is the same determination in

relation to the reform of state-owned enterprises. in relation to the clarity of messages concerning the thesition at play at moment. clarity of communication concerning the macroeconomic framework within which they will define their policies going forward. even if the growth rate is not 6.5%,and closer to 6% and i think it will take a little theyf time, but we believe will deliver. it's a massive undertaking. just reforming the state-owned aterprise is going to require special fund allocated to dealing with the issues. they've done that in the past already. it is part of the exercise, just ine the supply-side reforms beijing. it will happen.

francine: there is commitment. last month, we had a mysterious person quoted by the people's daily saying that china l must l-shapedto the recovery unless reform is pushed through. what are the dangers of waiting too long? reform to china is -- we have reached a point of no return. we have to avoid the middle income trap. for that, we have to deepen reform for the current reform. it would not only affect billions of population in china. it would also have major impact for the world economy. rateficially, the growth

has ranged 6.9%. it would maybe drop to 6.5%. from the point of view of economic growth, we are paying more attention to the quality, not quantity, of economic development. in the future, we cannot depend on investment. we have to rely on innovation to promote economic growth, economic reform. it is a huge task. as the authorities have undertaken supply-side reform, we think the debt ratio is not local government debt

for overcoming the debt measures -- foren taken to example, our bank has reduced 40% of such loans. so it would also increase the transparency. individual, personal debt ratio is also very low, or relatively low. this is another engine for future economic growth. what we have to do is, the debt ratio ofses, it is a very difficult task. we need courage to reduce, for example, overcapacity. steel and iron industry, all these industries were built

during the high-growth period. that's why we have overcapacity now. we have to reduce such capacity. it would be a painful process that will be a cost for such a reduction. so all in all, i think china has to undertake this reform. although it will be very finishing only by these reforms. how -- francine: how concerned are you about outright financial crisis? gary: as was said, the leverage levels are not intolerably high. but that is still growing significantly faster than income. that's and unsustainable

circumstance. it is also an understandable circumstance. changing that rate will have a negative effect on the economy. i think the issue of instability is more of a balance of payments , currency issue. that becomes one that i'm more concerned about. that might require more of an adjustment in the currency. because adjustment in the currency would have an effect on the rest of the world, which would also transmit deflationary pressures to the rest of the world. those exchange rates would essentially appreciate. an effect at a time when there is weakness in the rest of the world. we have to look at the impact china has on the rest of the world and the rest of the world has on china. create a risky situation.

mr. fang: there are a lot of issues i can address in this short time. let me take two. you mentioned stock market volatility and currency volatility at the start of this year. i would like to suggest that stock market volatility should not be something that people should be so concerned with. even at today's level, which i was told the shanghai stock isket declined by 2%, it around 2900. it is 40% down from the peak, but still 30% up from a year-and-a-half ago. valuations are still very rich. the stock market is rather isolated from the outside world. the impact on the outside world is minimal. currency volatility is something

you should pay attention to. since ms. lagarde is here, i would like to say a few words on that. china used to have what we call u.s.ling path against the dollar. now, the stated goal is to move toward a basket approach. that approach is a serious approach. at the when they look actual daily movement, they think, what is the pboc doing? think we should not focus the central bank strategy to much on just a few days movements. if you look at the strategy over a period of half a year or a year, you will realize that moving to the basket approach is the decided policy of china. the renminbi appreciate it quite

a lot against the u.s. dollar in the last few years. rmb joiningr to the the sdr. we have catch up in terms of the u.s. dollar-rmb exchange rate. once we're done with it, the rate when measured against a basket of currencies would be quite stable. there's really no basis for china to depreciate a currency. if you look at fundamentals of the economy, we still have a sizable current-account surplus. the economy is growing at about 6.5%. this is not the combination for a deep depreciation of the currency. no matter what, depreciation of the currency is not in the interest of china. too cheap currency is not so good for domestic consumption. imf for working

to admit the rmb into the sdr. worry that once china enters the sdr, it may not fulfill the commitment with respect to joining the sdr. i can assure you that worry is completely unnecessary. china's record of honoring international commitment is superb and we intend to honor all commitments with regard to joining the sdr. that's the issue on currency. financial, thend dreaded word, crisis. volatilities in chinese markets going forward. but can the government deal with it? i think we will. we can. our structure of the government is such that a response to any

financial risk is very swift. the decision is decisive. we want to make sure we deal with the issues when the issues are not very big. again, it always comes down to leadership. when you have steady, strong leadership, we will be able to deal with it. will there be volatilities, yes. thank you. just a couple things i would like to mention. in a way, having a certain degree of volatility is all right. it's compatible with this market-driven principal that china is adhering to. government can manage volatility, if volatility becomes excessive, intervening is legitimate. but a degree of volatility is ok. the market sorts out things

eventually. there should be at least some acceptance of the fact that there will be some, and there should be some. the second point in relation to exchange rates and the under currency, i think you are completely right. this is illusory pegging against the dollar has to be dismissed. there is a basket of currency. the renminbi has been quite stable against that basket of currencies. not just now, but for the last few months. that should be acknowledged and understood by markets and this complaint that there is depreciation against one currency, no, you are doing that against a basket of currency which includes the trading partners of china. again, communication on that front is important. >> i just wanted to remind

everyone that china's china built its massive reserve because of monetary prophecy. by the incredible entrepreneurship. it is not driven by the private sector. i think the government's commitment continues to support private sector is important. thatld like to remind you the promise of the fourth ward is a stock exchange that would enable a small or medium-sized enterprise to be listed and get funding without producing profit. a lot of the companies listed on nasdaq are not producing profit. anay, in china, if you are amazon, and you do not produce

profit, you're not qualified to be listed. that has to be kept. i think that the government came out of the policymakers talk a lot about the fourth quarter will come out. promised, i have a company and i need to slow this. i'm expecting to kamal is good news. [laughter] quickly, back to the currencies. has chinese palace and exactly done enough to reverse this market consensus that the yuan will be evaluate -- indeed evaluate -- devaluate? >> the decisive factor for the value of the currency is the

fundamental of a country. if china remains the engine of the world growth, the growth rate is higher than the rest of the world. it is already created the growth rate for the world. two countries abroad, we have a much higher growth rate. at this point, the fundamentals are kept at a stable level, i ofnk it would also take care -- of coarse, there will be certain fluctuations. we have just recently joined the chinese authority have decided

to link up with the basket of currencies. lack certain the worldings of economic situations. i think that in the past period, this is one of the reasons for the fluctuations after the increase in the u.s. interest rate. not only china, but the rest of the world. will betbere -- there more impact the to be seen. ratein lowering of the as an impact on the foreign reserve of many countries.

it would drive up the price of the u.s. treasury bond and i think that would be for the u.s. and the world economic recovery. furtherwe have also to intensify education on the investors. i agree much with you, madame lagarde, that the basic principle for a central bank has to be rely on the market. , andially after joining entering the market. if after some rational fluctuation, central bank.

i think that is nominal. secondse back up for 30 and recount when we were a year ago. economic situation where there were three currencies in the world willing to strengthen while the rest of the world was weakening. the swiss franc, the dollar, a year ago the swiss national bank decided that was not in the best interest. they no longer were that basket of currencies willing to be strong. that left the dollar and the r&b. if you see where the world was to the end of 2015-2016, you have a world of the d valuers. economy trying to lower interest rates and devalue their

currency. the two currencies willing to rally with the dollar and the rmb. they were linked to each other. it would make sense to me that if you were linked to a currency that is naturally rallying, because you're the one not lowering interest rates come you would decouple from that currency. you would them become more competitive in the currency world. that was exactly what china was doing. total rational sense to me. most market participants continue to believe that china theire -- devalue currency further. this is one of the areas of volatility. how will the devaluation go? will it be very slow, which i think most of us think it will be? very methodical, it will take a long time. it will not be the swiss national bank.

the vast majority of market participants and their globally vision of how they value economies in how they value currency crosses would have china at a lower value currency by the end of 2016 that the spot value is today. how much do you worry but foreign-exchange reserves? at what point does it become dangerous, and self inflict they confidence crisis? i think it is a big issue. the balance of payments, it is large. rate in hongre kong, the interest rate differentials are rising. that is a negative for the economy. it is a situation in which, if

you look at past evaluations, roughly they have taken place 10-30% when there is a decrease in reserves. that is been on average a 25% devaluation. i think that those are things to pay attention to. it is not always easy for governments to maintain clear control of their currency. -- francine: on to another point, the selection process of managing director when your term and in july. you have the support of both them and the u.k., do you want a second term? [laughter] you appreciate that i will be waiting a little bit before i say anything about that, but thank you for the question. a second if you do get

term, how much do you think we would be talking about china? ms. lagarde: in the next few years, given the growth rate of that country and the state of development, i think we will be talking a lot about china. it is one of the largest economies in the world. largest economy in the world in some terms, it will be crazy not to talk a lot about china and the transformations that are at play at the moment. they will be both fascinating and will matter a lot for the rest of the world. we have seen it over the summer, and we'll see it more going forward. there will be a fax in the facility because there is a china supply chain. we will see that across the world as well. significant reduction in the growth of the largest economy in the world of the second-largest economy depending on how you calculate it is going to impact the rest of the global economy. chinane: growth rates for

has fallen by four percentage point. looking at 2020, what do you think the growth rate will be? we keep, it is fast cynical people say china's growth has collapsed. output based on what it was six or seven years ago. we have the same growth rate. i'm sorry, i will stop here. [laughter] someerstand there is concern about this current year in china. some forecast the because of volatility's and so forth that somehow 2016 would be a bad year for china. i don't think that will happen. china, we cannot afford to

let growth rate dropped to sharply. that will ignite financial problems inside china. we will have appropriately supportive fiscal and financial policy. we will make sure that the growth rate is still appropriate. now, does china have the means to do so? particularly come on the fiscal side, we can expect quite a lot. aere is just no worry for sharp decline of china's growth rate. 6.9%people think you were is that just not accurate to begin with? i admit our numbers can always be more perfect and more accurate. let me give you a supportive , that was tax revenue to

china last year went up by 6.6%. that is not far with from the 6.9%. that means that the figure is not far away from the truth. id. lagarde also mentioned china's contribution to the rest of the world remained extremely large. that is true. if he talked to multilateral companies -- multinational companies, most of them tell you china is expanding quite well. is not the biggest car seller in china, but they still sold over one million cars in china. that is not a small number. china remains a huge contribution to the rest of the world. this is something that the rest of the world should appreciate a little bit more. [laughter]

it isne: you put something about of observers to underestimate which is the strength of consumer spending. two whenient are those you look at the chinese economy? i think the dynamic force of the chinese economy is it entrepreneurialism and its private sector. especially the small to medium-sized companies, not the gigantic ones. even though they commanded a lot of power. that matterllions the most. i think that regard reform still need to be more focused on getting them the support weather in the capital market support or taxes support, monetary support, for thee very important continued growth. that will continue to be the growth engine for china. from where i sit, i see

incredible innovation coming from the young internet and mobile companies. that really is an exciting part of our economy that very rarely gets featured into the news. we talk so much about the market don'tlity, most of these even get a chance to participate in the volatility. i think that is important that we remember, especially the policymakers. theseimportant to include -- they would reduce your volatility. comment? a i agreed to their great contributors to chinese growth. should have done a lot more to support growth.

it is doing quite a lot, by the way. last year, the chinese stock market raised 1.4 trillion in equity money for the chinese companies. that place the stock market number one in the world in terms of equity raised. we can certainly do much better. aboutne short sentence china is risk -- different from other developing countries. skeweredh is largely by domestic capital and savings. that gives us a confidence to deal with but never volatility and risk coming out of the financial market. if china was relying largely on foreign capital, any major financial risk can derail our --

china is different. that is a fact that people should pay attention to. how inclusive of china's growth be in the future? mr. jianqing: i would like to speak about two fronts following the sme, i think paying attention to the growth of s m be is important for china. has a huge- sme potential and vitality. it is important for solving unemployment. last year, we underwent an adjustment, but the year and result was better than the earlier predictions. paving the way for structural

reform. it is focused on the financial sector in china. banker, the loans to sme including inclusiveness in china andur financial statement, 1.8 trillion is spent on sme. of course, we could do better. include another aspect of environmental protection. which weconomy under can do much work. we are very determined and resolute on any industry. any sector.

withis not in line environmental protection we them resolutely not allow to be established. be able towould welcome new and better economics in china. francine: with global trade stagnant, when or will china take the role that the u.s. has had four years? was --arde: don't think we will: i don't think separate three years or more. china is going through an adjustment process. that is a three-year type of adjustment process. it is going to be a negative on the margin.

a negative for the world economy. that passes through to emerging countries particularly those that have a dependence on exports or have commodities. that is passing through to a number of countries. there is a world deflationary pressure that exists. that is why but we think about policies, there is not a country in the world that should not ease its monetary policy. maybe some should stay pat, but that selfge we have reinforcing negative circumstance in terms of growth that is a problem. the rest of the world also represents weakening in force for china. the exports for their demand, that is weakening.

the question will become where is the locomotive? francine: if you look at these deflationary pressures, from oil, how does janet yellen look at this? mr. dalio: i think the federal reserve thinks of the business cycle -- classic business cycle is that when demand is increasing, you are at a fairly high level of capacity, unemployment rates are low. you should tighten monetary policy. that is the policy that i figured overriding the feds issue. they are paying too much attention to the business cycle, and not enough to the long-term debt cycle. them is a long-term debt cycle that you can squeeze much more out of this because of lower interest rates. we are seeing that the world map is getting feedback is a

deflating world with asset prices coming down. i hope they will remain flexible in their thinking of monetary policy. be hesitant, there is asymmetric risk. them is no doubt that the federal reserve can be effective in tightening monetary policy. if they are a little bit late, i don't think that is a problem. they are not as effective in easing monetary policy like in the 1935 period. what they have to do is move away from the whites of the eyes oninflation before they err that because i don't think it will be so easy to be stimulative and moved to quantitative easing. mr. cohn: i do agree with that. i think one of the new paradigms going back to this digital world the fedin, a lot of

upony that we are relying is analog policy. it is a policy we had four generations. is world we live in today completely digitize. we are real time, we have a global workforce today. he of global free movement of currency. anyone with a handheld digital device can move any amount of currency around the world. on employment is interesting, but we have been unable to create wage inflation for multiple years. the fed has told us multiple come, but in will some respects when you think of the globe lights workforce -- i -- if you canthat

go higher, the incremental for less money in china than you can the united states, where does the wage price inflation come from? i think we are seeing that in the numbers. we can create the jobs in the knotted states. we can't create jobs that pay bill money. take most companies that we , theyent, client of ours will talk to me or will talk to our present is about how their optimizing the workforce. they are moving jobs to andalore, and china, warsaw, poland, because these are places where they can hire workers at huge discounts london, hong kong, new york. they are for -- therefore, they

will export the jobs. see the until you reality of this inflation in the system, i'm not sure assuming it is coming is a good assumption. francine: i will ask each of you to give me your best advice and your best prescription to bridge the divide that we were talking about between making market perception and what the policymakers in china want. mr. jianqing: firstly, we hope there will be a recovery. that this volatility will be .educed in scale i also hope that china will succeed in its a structural

reforms, and adjustment. ms. lagarde: number one is clarity of communication, the clarity of purpose, and implementation of the reforms that have been identified. or all of us, a bit of patience with the massive undertaking. i am honored, i'm very grateful, and i am extremely pleased to hear that. i thank you, those who have come up like that. mr. xinghai: china is on the margin a negative could jupiter to world growth they just said, it would be a positive contributor.

mr. cohn: just to be clear, as the rate of growth slows and the economy changes and demands of the economy are negative to growth. i don't think right now that we have a locomotive. with the exchange rate rising, also with the negative wealth effect will have because of the stock market going down, we will experience a lower level of growth. that was what i want to do said. to makeworld, we have economies have worked together a lot more. cooperate a lot more terms of policies. we have to understand each other a lot more in terms of

overcoming obstacles of domestic difficulty. theeed to realize that economies are globalized and we're all on the same boat. we just have to cooperate more closely to overcome this. mr. dalio: just to follow through, with the monetary policy? with the be fiscal policy? in one form of that cooperation take? mr. xinghai: all of that. mr. dalio: it will be a challenge. mr. xinghai: it is. in terms of china cooperation in monetary policy, and other issues, we are working very well with our u.s. counterparts. you're confident this will be done? mr. dalio: i think monetary policy will just be not as effective.

that is a big change in the world. cooperation, because you can't move interest rate as more.ou move currencies i think where entering an environment in which there will be more currency volatility as a means of easing policies with the need to be. wars,macks of currency not as much as currency cooperation. what i think of fiscal policy, i think fiscal policy is politically sensitive. when you get into a bad economic situation, somebody will say you need to be more fiscally responsible. some of the you need fiscal stimulus. when there is political shifts, particularly the populism taking place in europe, or the united states, those things may not be easy decisions to make on fiscal policy. francine: gary? mr. cohn: i agree, i agree with

madame lagarde, we all want clarity. i agree that we are hoping for success in all the policy areas. i would just throw my two cents in is china seems to be more receptive to more trade policies and getting some of the trade policies done with the united states would be very beneficial to both. francine: final word, 20 seconds? china is going through a transition. it is important because it makers and the media are not focused only on the short-term noise, but committed to the long-term reforms. [applause] francine: thank you so much.

,onathan: welcome to davos switzerland. it is day two of the world economic forum. asian stocks tumble. the rubles lies below 84 to the dollar as brent continues its fall. draghi's dilemma. how will the oil price play into this afternoon's rate decision? christine lagarde weighs in on the recent news. that is next right here on bloomberg tv. ♪ " live from"the pulse the world economic forum in davos. francine lacqua has been moderating a panel. she will