♪ francine: welcome to bloomberg's davos debate. i am francine lacqua. and we are talking china. with the new five year plan being presented in 2016, how can the world's second-largest economy shift gears without stalling its growth engine? and what does the market volitility tell us about the perception of china, and the task facing chinese regulators? well, we have, i am pleased to say, an a-star panel. thank you so much for coming on. jiang jianqing, chairman of the board of the industrial & commercial bank of china. christine lagarde, the managing director at the imf. fang xinghai, vice chairman of china's securities regulatory commission and director general

at the intercontinental economic department. gary cohn, president at goldman sachs. zhang xin, chief executive officer and co-founder at soho china. and ray dalio, chairman and chief executive officer at -- chief investment officer at bridgewater associates. thank you so much for joining us. ray dalio, is there something that the west misunderstands about chinese markets? and does that exacerbate the volatility we have seen the last few weeks? mr. dalio: i think there is a lot the west does not understand about chinese markets. i think the essence of what's going on in china is an adjustment. they have four major challenges. they have a debt restructuring challenge. they have an economic restructuring challenge, so they have to come up with a new model for the economy. they have a capital markets challenge.

to build in an efficient way that circulates capital through the system better. they have a balance of payments challenge. having to do with the pressure on the currency. capital outflow, those types of things. these are things that have happened repeatedly throughout the rest of the world. the united states has had three major debt crises. we couldn't pay our debts in 1971. in 1982, we had a debt crisis. we had the s&l crisis. we've reshaped our economy many times. i remember when the steel industry ended, heavy manufacturing, and we have gone into other areas. we have had another of balance of payments and and currency issues. i think that one of the things being misunderstood is, what is a normal balance of payments and economic and too much debt restructuring kind of recession. in japan, they used to define recession is anything less than 3% growth. maybe in china, it is less than 5% growth. we are going through that.

i think it's being confused with the longer-term picture. in other words, i think the reforms going on in china and the leadership, in terms of where it's going, will be fundamentally good. you're looking at something that is a short-term challenge. as distinct from, looking at something where we will be five years after the generation of new markets and vibrant young entrepreneurs and the other economy that is trying to -- now beginning to flourish. francine: why have we had so much volatility since the start of the year? mr. dalio: well, the volatility has been primarily a result in the world as a whole, that we have an easing of monetary policy all around the world. we are 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 the quantitative easing, the risk premiums have gone down, and there is a big vulnerability. so, when china is dealing with the rest of the world, china is a negative on the margin for the rest of the world. the world is vulnerable, because of a lack of monetary policy, while asset prices are high. francine: how do you explain the volatility? is it something we need to learn to live with? >> maybe there are two factors going wrong. one is china is in the midst of an economy that relies heavily on investment and exports and they are shifting to consumption. in this transition, a lot of assets get devalued in the process. this is the primary reason behind volatility. another factor is the fed raised interest rates not long ago. a lot of emerging markets did

not perform very well. domestic reforms got stalled. you have a combination of chinese transition, plus international influx, and that caused volatility. now, you asked, why a lot of volatility right at the beginning of the year? well, asset price adjustments go by steps. it does not always go smoothly. we hit those steps at the beginning of the year. francine: if there's something we have learned about what the chinese are trying to do in the last few weeks, what is it? madame lagarde: at the imf we don't look at the last two weeks. i'm a little bit too embarrassed to comment on the last two weeks.

if you do not mind, i would like to go back to the basics. it is a fact that depending on how you calculate gdp, the largest or second-largest economy is going through a list of transitions. you have indicated that as well. industry to service, export to conception, lower investment. i think there is another one happening, which is also the governance change. that is probably going to continue to deal with the anticorruption fight as one of the key proposals. that has to trickle down. this is a management change. it has to be taken into account by chinese authorities and chinese operators. so that risk can be apprehended and 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. which, you know, is something that markets do not like. uncertainty -- not knowing what the policy is, exactly what the remedy is going to be valued against the dollar. the currencies -- which basket of currencies is it going to be? i think better and more communication would serve that transition better. i tend to agree with the assessment of mr. dalio, but we believe that all of those changes are perfectly manageable, if the right policies are taken. given the large amount of

reserves, the large amount of buffers that the country has. from our perspective, we are forecasting a 6.5% growth for, you know, next year. and we believe that the chinese authorities can legitimately accept that this growth rate as fine for china as it is for the exchange rate to be aligned with a basket of currencies. francine: does china need to decide if they are a free market or not? or have they decided, but have they not communicated enough? mr. cohn: many of these fundamental transitions that china is going through are real. when you go from an economy, where you're building infrastructure to consumers driving the economy, that is a long transition.

you cannot monitor or affect consumer discretionary spending. it is called consumer discretionary spending. you cannot affect it the way you can government spending. this transition is difficult. on the specific question of china, and whether it is a market-based economy, clearly this is a question the market as a whole is dealing with. there have been signs that china wants to have an open, free economy -- an open, free marketplace, but in certain situations, the chinese have intervened into their market, making it less than a free and open market. now, i must remind everyone that many of the things that the chinese have done in intervening in their market are the replicas that many other countries, including the united states, have done in certain parts of their modern history -- not even old history. whether it be circuit breakers or limits on certain trading

activity. i agree with madame christine lagarde. it's a communication issue. the communication is what is important. communicating what the chinese market is going to be and stick with that theory. no matter how painful it is in transition. transitions are difficult. you've got to stick through the transition. francine: how difficult is communication when you're dealing with such a huge and complex economy? ms. xin: i come from the real estate economy side. what i see is, a difference between the stock market, which is hugely discounted, and the real economy, where we see the easing of monetary policy is actually pushing the asset price up.

that is on the one side. in terms of transition from an investment-driven economy to consumption-driven economy, we used to build buildings. today, we just manage the leasing. leasing is going well. the cities i operate in, beijing and shanghai, we see a massive uptake of space by internet companies. not so much of the old economy, non-internet and traditional companies. by and large, we have new buildings coming up almost every other month, and they are all taken up. we have not seen a building sitting there empty.

i think there must be a communication issue. on the one hand, the real economy seems to be doing ok. on the other hand, the stock market is trading at a huge discount. obviously, the investors are not getting the same message as we operate in the economy. francine: again, to this point of transparency, china promised to give the market a decisive role. since we have had intervention in both the currency and the stock market, when do you foresee china making good on its pledge? mr. jianqing: china has declared publicly to the world that the market will play a decisive role in economic development.

on communication, it is indeed important. especially when the economy is undergoing transformations. many things need to be communicated. in fact, in the past few years, the chinese economy has undergone great transformations. some criticize the growth led by investment. too high a level of investment. it has indeed happened. in china, the consumption has contributed to 65% of the growth. as described by the housing market. there is an oversupply of buildings in china. but it has accounted for only 10%.

but, the consumption of the housing market is increasing. for our bank, 62% of our loans are for buying real assets. it shows the housing market. indeed, we need more communications, and reduce the lack of understanding of policy. some information, some views are understood from the old normal for china. in entering this age of new normal, it is a test for china to have better communication so as to prevent misunderstanding. indeed, there will be more maturity in the future.

mr. xinghai: there are three issues. one is communication. the other is a strategy to move from an investment-led economy to a consumer-led economy. the third is people questioned the execution of the strategy. volatilities by themselves, they should not be worrisome for people. they know volatility very well. it is the three issues behind the volatility, that has worried international investors.

in terms of communication, you're right. we should do a better job, and we are learning. we are doing it. i am here today to communicate. [laughter] mr. xinghai: but, you have to be patient. our system is not structured in a way that can communicate. we are not able to communicate seamlessly with the market. we are learning. china can learn it, i can assure you of that. ♪

♪ mr. cohn: you started out talking about the question of volatility. we moved on to free markets and communication. i think these concepts go together. when you look at what's going on in china, the chinese are trying to move to more free market, and there is an inability to communicate more freely.

that is generating volatility. the world's standards today for publicly listed companies and publicly listed disclosure on balance sheets and audited financial sheets is pretty high and getting higher everywhere in the world. people, investors, capital is fungible around the world. capital moves at the speed of light today. people want access to chinese companies, and they want chinese companies held to the same standards. number two, they want the market place to determine which chinese companies have access to capital. -- to the extent you start getting more accepted financial statements. corporate governance and a market that determines which companies will be public and which will not be public. i think you will see volatility. a little bit of this is natural evolution.

unfortunately, for the chinese, they are doing this in 2014, 15, 2016, in a digital era. they are not doing this in the 1930's. when we had a telegraphic era. the rest of the world did it in an analog world. they are doing it in the digital world. we're watching it in real-time. they are doing it in an era, where we just got done re-regulating all of the financial institutions around the world. and we have taken an enormous amount of liquidity out of the markets, and the chinese are suffering from this lack of equity. mr. dalio: i think the chinese policymakers are not getting as much credit as they deserve. i am not speaking from a chinese perspective. you have to get into the

nitty-gritty of what they are going through. so let's say a debt restructuring. if you take a look at the debt restructuring they are going through, local government spending accounts for 30% of gdp. they are running a funding deficit of about 20%. if you cut that, that's about 6% of gdp. if you look at the way it has been restructured and managed, it has been managed superbly. it's a difficult situation. you are in a situation, where you just restructure and you don't provide capital, all of that spending will take place. the same people who are doing that restructuring are the same people who did it in 1998. they know the mechanisms to be using. they are pursuing that. if you look at the economic restructuring, they are going from one economy.

ok, the development of the lending system, that's been done with a lot of balance. it's a risky situation. the free exchange of capital is getting it to companies that would not have that access to capital before. that's not producing volatility, that's quite an accomplishment. if you look at the balance of payments, the bounds of payments is a difficult situation. capital flows are what the capital flows are. in terms of the stock market, handling it, problems. there have been -- some of the responses have not been done by world standards. there has been a big order imbalance. when everyone wants to sell, it was that kind of circumstance. they have to respond quickly. when i speak to those policymakers, i find people with equal levels of competence for the things they are dealing with.

i would say that, if you compare also the politics of the government, there are no loose cannons that are going to be running china. i mean, these are people, if you look at the system of how it is chosen, you have to be a competent leader. you have to be devoted to the country. if you look at the politics in the west, some of the leadership there, that could be quite scary. [laughter] mr. dalio: i think the commitment to market reforms is a very real commitment. in other words, think of the power that's going to liberalize that economy. it's been an economy. the top 10% is where it is passing through. this will circulate. there is a new china. you can speak to that new china. the new board, the entrepreneurship. i think we are going through a

cyclical, you can't help but go over that adjustment. that will last two or three years. it comes at a bad time for the rest of the world, because when you look at its impact on commodity prices -- and not just commodity prices, but the other economies in brazil and so on -- and when you look at the vulnerability of the rest of the world, in terms of monetary policy, that's a bad combination. we'll get past that. a bad year in china is a great year in almost any other country. francine: do you question their commitment to structural reform? what are the dangers, if the structural reforms are not being pushed through? madame lagarde: we went through a couple of years of intense discussions with the chinese authorities, because we were going to review the baskets of currency that define the value. it is the elusive currency of the imf. if you asked me, if the chinese authorities would complete the reforms, that they had to take

in order to satisfy the criteria of that currency, i would've said i don't think so. yet, when the authorities put their mind, and are determined for strategy, we have seen in that case an absolute -- i would not say perfection, nothing is perfect in this world. but, determination and ability to deliver what frankly what have considered as undeliverable to begin with. so, if the same determination is applied to the reform of state-owned enterprises in relation to the clarity of messages concerning the transition, clarity of communication concerning the framework, in which they will define their policies going forward -- even if the growth rate is not 7% and closer to 6%, it will take a little bit of time as we said earlier.

but, we believe they will deliver. it's a massive undertaking. reforming state run enterprises is going to require a fund for these issues. they have done that in the past already with certain sectors. i have no doubt that it is part of the exercise, like the supply-side reforms in beijing. it will happen. francine: there is commitment? last month, we had a mysterious person quoted saying, "that china must get used to the l-shaped recovery, unless reform is pushed through now." what are the dangers of waiting too long?

mr. jianqing: reform, for china, we have reached a point of no return. we have to evolve. it would not only affect billions of the population in china. it would have major impact on the world economy. superficially, the growth rate has reached 6.9%. it would, maybe, drop to 6.5%, but, from the point of economic growth, we are paying more attention to the quality, not the quantity of economic development. we have to proceed to structural reform.

in the future, we cannot depend on investment. we have to rely on innovation. to promote economic growth, economic reform is, indeed, a huge task. as the chinese authorities have undertaken supply-site reforms, we think the debt ratio, including local debt, is not that high. local government debt for overcoming the debt, measures have been taken to reduce the rate. for example, our bank has reduced 40% of such loans. so that it would also increase the transparency of 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 of enterprises. it is indeed a very difficult task. to reduce, for example, overcapacity, the steel and iron industry, they were built during the high growth. that is why we have over-capacity. now, we have to reduce such capacity. it will be a bit of a painful process. so all in all, i think china has to undertake this reform, although it would be very difficult.