♪ stephen: welcome to the seaport of industrial northeast of china. the theme of the annual meeting this year is inclusive growth in the fourth industrial resolution, but geopolitics, mounting debt, and protectionism are threatening the global outlook. ♪ the summer edition of the world economic order prints -- economic forum brings together more than 2000 people from 80 countries. leaders in science, technology, and other innovative industries, searching for new ways to create meaningful jobs and sustainable

development. >> geopolitical risks are on the rise, and structural challenges still exist. as long as we stand committed, we will be able to respond and prevail. stephen: so what are the biggest risks to the global economy? we put that question to the twittersphere. 46% said geoeconomic tension. 30% said rising debt burdens. 15% foresaw weak productivity growth. the deputy secretary-general of the oecd, the deputy managing director of the imf, the economics professor at george mason university, and the head of chinese equities at blackrock. >> i think the respondents hit a really, really good topic, which is the geopolitical or

geoeconomic tension. i absolutely agree that things like productivity and debt burdens are a threat, but these are not things that were built up overnight. they were built up over a number of years, and to some extent we may even see -- let's say artificial intelligence, technology offset some of these concerns over the medium-term. i do believe that is the biggest issue to consider, the geoeconomic issues. that really brings us back to the unpredictable nature of some of these driving forces. for example, what's happening in north korea, what's happening in the middle east. a lot of unexpected things have arisen, and even with that aside, we still have all of trump's agenda in terms of protectionism and trade wars globally, which fortunately, so far, haven't really panned out to the extent he has talked about during the election. stephen: your views on the poll results? >> i think it is a mixture of

feelings. some see a short-term, imminent threat. there's geopolitical turmoil. others care more about structural issues, like climate change, destabilization. the poll reflects mixed feelings of the people, and government has to address both sides, paying attention to imminent threats. the current economic situation at this juncture, it is better than before. perhaps not the best timing, after the brexit, but the issue before the government is how to address normal structural issues. stephen: imminent threats turn into long-term threats if policies are not enacted appropriately.

your views on the results, geopolitical or geoeconomic risks to the global economy? you will probably know more of the chinese risks, the debt pile, which i believe is the second-biggest answer. >> clearly, you just named the top three. the way i saw it, first of all the outlook we saw at this moment, there's an increasing call for cautious optimism for the global economic outlook at this moment. and of course, there are risks. to begin, the risks from my perspective are the uncertainties associated with the inward looking policies.

stephen: protectionism. >> well, that is part of it. and of course, another one is the debt burden. in my view, this financial risk associated with -- for example, there could be more than expected rapid rising of interest rates. some of them are short-term risks, some are medium-term, and they need a different set of policies to respond. stephen: professor, from your global approach in virginia, how do you feel? >> first, i don't think china is the main risk. people have been talking about that for too long. when you have so many years to prepare for a debt problem, it tends to be manageable. the truly bad crises come as big surprises. number one by far is the risk of a cyber attack, and the fact that none of you mentioned it makes me think it is the bigger risk. the situation in the persian gulf with qatar and a possibility of an extension of the saudi-iran proxy war, and

the blockade with qatar is something hardly anyone predicted. you don't have a good model of the situation and the risk is probably quite high. third, the interaction between north korea and president trump. the north korean situation isn't new, but to have trump as president, which i think on the domestic front will be ok, even though he is erratic, in terms of foreign policy there are checks and balances. we still don't know how to model his temperament. people who know him don't know how to model his temperament when he is unconstrained. and how that interacts with the situation with south korea, china, japan, other parties doing their bit to shove him in different directions, those are the risks. stephen: let's pick up on cybersecurity and cyber threats. china just launched its new cybersecurity law. you're taking steps as well. how much of a threat to the

markets and to the economy is cyber? >> it could be incredibly disruptive, particularly depending on which area the cyber attack targets. i think the key issue here is that people will have very little sense of how to contain it, and whether it recurs and in what format. those issues will certainly increase the risk premium across asset classes and bring some short-term disruption, at least the cyclical aspects if not structural aspects. stephen: so does the oecd look at the risk profile of the global economy as it relates to cybercrime? do you drill into the? >> yes, we are worried about it. in terms of markets, we have of course a traditional established market like the stock exchange, but we are pushing financial

risks outside of the conventional market. many institutions and others are taking risks, so we're quite concerned about the dysfunction of players outside traditional, conventional market resistance. >> from our perspective at the imf, it has serious implications on financial stability, and things like the effort of counterterrorist financing efforts. we're working on it, and hopefully we can work together. stephen: coming up -- >> i can now go to a serious restaurant, and they won't take my credit card. not because they are backward, but because they have leapfrogged me, and want more

efficient payment mediums. ♪ ♪

stephen: it's a fascinating subject in itself which is both fascinating and provides great opportunity. it is amazing what has happened, but there's also a lot of risks associated with what some have said has been an under regulated industry, where you have ponzi schemes bilking $7.6 billion from people. how much of a risk and how much of an opportunity are we seeing right now in fintech? >> the word ponzi scheme in the word innovation are actually remarkably close concept. i see china as being in a highly innovative moment right now, financially more innovative in

the united states. what is striking to me is i can go to a serious restaurant in china, and they will not take my credit card. not because they are backward, but because they have leapfrogged to me, and in essence they want more efficient payment mediums. i think wealth management products in china are too risky, and something there will blow a. -- blow up. i suspect it can be contained. i think there is a resiliency and rigidity to the chinese system where explosions get localized, but a lot of outsiders don't understand. but from the consumer side i don't think there will be major problems. stephen: how can the equity markets and financial markets -- since this is an outlook discussion, how do you see fintech playing? >> it is definitely an area of phenomenal growth. it brings risks, because it is something new people haven't experienced, but i would guess that 99% of people in this room who have used alipay probably feel like it has really made their lives easier and made it

more convenient. i think the way we live today versus three to five years ago is evolving rapidly in china, mostly for the better. of course there are risks associated, but from that inclusive growth speech, he made it clear that china needs to be more open-minded on innovation and to accept that there will be risks and consequences that come with it, and react to it afterwards, rather than to not nurture the innovation in the first place. i think regulators have to act that way across the board. and i think innovation is definitely going to be a huge force, making our lives better, and hopefully we can contain the risks appropriately. stephen: how much more innovative does the japanese financial system need to be? when i lived there in the mid-1990's, no offense, but everyone called it byzantine

banking. atm's closed at 3:00 p.m. >> of course, the situation is now better. fintech has similar aspect. one is a chicken and egg. innovation creates fintech, and fintech is more flexible in supporting innovation, as compared to conventional banking. perhaps in japan, the imminent threat is in the banking industry. their business model is now becoming quickly obsolete. they have a huge presence in the economy, and their relevance is losing, and they have to reshuffle and restructure. but this is quite a regulated

industry. so it's forcing -- it would be a difficult time, hard time for banking industry and regulators how to adjust fintech. stephen: well we are talking about banking and the potential for a banking crisis, if you go to new york, you might hear a lot more talk about the risks in china's banking system, and what we don't know is off book or off-balance-sheet, and in the wealth management products from your perch, as a formal pboc official now with the imf, how would you see the risk to the chinese banking system right now? >> one of the main risks is the financial risk. certainly that is related to some of the risks within the financial sectors everywhere. this does include, for example, the battleship problems of the banks, and some of the other emerging markets as well. here, yes. we saw the increasing, larger amount of the off-balance-sheet

activities in the chinese financial markets. stephen: from your view, though, is the leveraging campaign we are in now, does it run the risk of ruining the stability? do you see this could potentially be a drag on growth further? >> well, i think the deleveraging issues have been discussed in many places, and we are also paying close attention to that. in general, this deleveraging, and you see there are different types across different sectors, and on the other hand they have to maintain to make sure there is adequate support for restructuring process and adequate support for social sectors.

stephen: right, and we have all heard about the bifurcation of the chinese economy, divided up more than just the halves. there are old state owned enterprises and there is overcapacity in steel and coal, zombie companies, if you will. what are the risks that are underlined? >> i think there's a productivity risk for china, even in the medium-term. much of that comes from the state owned enterprises. china is a big burst of fiscal policy, and mostly that goes through smes, making the chinese economy remarkably robust. but you keep on doing that, you invest 48% or 50% of gdp, it is hard to get that right for so many years on end. when you are doing sampling things, roads, bridges, high-speed rail, it is not hard to get it right. but now you are at margins were

the potential for decision quality decay is higher. i am not convinced how much much china has deleveraged so far. but things seem to be going well. stephen: do we have a risk of a local municipality? we have rising default on the corporate side which it seems the government is allowing, but are there risks of default, or is that out of the question? >> i think, on average, in an overall way, that's the case. but you have to look at issues case-by-case, locations, situations -- stephen: not one economy. >> the default is not always so well-defined. i think that is a key point. stephen: how do you mean?

>> the law is not clear on financial matters in the united states, where you have a lot of experience with municipal and other default. anything that might be a default, you can call not a default. stephen: coming up -- >> 2030, anyone want to look into the crystal ball? ♪ ♪

stephen: how about the united states? the imf was out recently with not a downgrade, but a lower outlook for growth, basically taking out the prospect for

stimulus, meaning tax cuts, because we haven't gotten the plan, and also infrastructure. at the same time, we are on a tightening cycle with the fed. >> one of the heresies that the fed does now doesn't matter much. if you think about the white house, trump as a domestic president is highly ineffective, and that with any policy there are three or four points of view, which are the administration policy that coexist and flow together, and this is already sapping consumer confidence as allies are worried and people are postponing investments, because they realize we have a government with three or four views and it which never seem to get resolved. i think most of western europe, japan, and much of the united states have the problem of complacency and just getting by, and life is good enough that on any given day you can do not very much, and in the short run

it is fine, and in the long run it is worrying. you increase aggregate risk. that is my worry about japan, too. stephen: you called mr. abe brave, you called mr. kuroda grave, or at least with break policies. do they need to take more risks? >> abenomics, the administration, the government products needs to take action against differentiation, and they are cheaper. we're staying afloat, not so bad situation. my point is, to step up their braveness to reform, to advance and reform, to prepare the future of japanese productivity. to change the structure of the society, it's an imminent issue.

the current situation is too - stephen: 2030, anyone want to look into the crystal ball? that's a long time for china. >> obviously, i believe and i'm confident that by 2030 life will be better. first of all, when the policy was put into place, that product will come back. i believe the policymakers and products sectors, with strong entrepreneurship, that will all support and make the economy grow.

and more importantly, these days people are after the financial crisis, particularly in the last couple years. people realized, we have to make sure that growth can benefit larger and larger portions of the population, so that the population can gain the wider-based support, moving forward. in terms of that particular openness. >> the one point i wanted to add, it depends on what we do from now until 2022, 2025. if we choose the easier path, no reform, keep kicking the can down the road, i think that means by 2030, life won't be as good as it is today. if we are willing to take some risks and implement a lot of changes that have been talked about on this panel, whether it is pension reforms in china, a

lot of the very difficult challenges that haven't yet been addressed -- if we can address these in a decisive manner, we have a bright outlook for 2030. stephen: people are dissatisfied. we saw in the united states, we talked about the erosion of the middle class. middle england voted brexit. there is protectionist sentiment in parts of europe as well. le pen was almost elected. how do we overcome the protectionist sentiment in getting those who feel left behind onto the gravy train? >> you have to show people that globalization can work. that's how, and that's why we're focused on. and i believe they will. >> no discussion of whether globalization is good or bad. the question for policymakers is how they can make globalization work.

we have many, many issues to make globalization work for all, and in that sense, policymakers are going to do their duty. we have to see the future work. we're working to make the world bright. stephen: ladies and gentlemen, i hope we tackled the global economic outlook. thank you very much, everyone. [applause] stephen: so there you have it. the prospect for global growth at a time of great uncertainty. from the northeastern chinese city of dalien, i'm stephen engle. thank you for watching. ♪

♪ jonathan: from new york city to our viewers worldwide, i am jonathan ferro. with 30 minutes dedicated to fixed-income, this is "bloomberg real yield." ♪ jonathan: coming up, president draghi's dovish words, coming up, but his words fall on deaf ears elsewhere. reflation trade struggles to find buyers. the 10 year tips auction draws the lowest number in five years, and counting down to the fed's decision. the long-run miss of its inflation goal undermining for another rate hike. we begin with a big issue, a dovish draghi doing his best to push back against markets. mario drhi