>> rose: welcome to the program. tonight we take a look at the middle east with ben wedeman of cnn ander if as in fassihi of the "wall street journal." >> many syrians will tell you they find the means of the regime distasteful over the years, over the decades. but they realize if this regime falls that the floodgates are open for some of the worst elements in syrian society to ta revenge. and wilbe very nasty. and i think that there's no great love for bashar al-assad or the ba'ath party or the alawites among those that are loyal to the regime. it's fear. >> rose: we conclude with nobel laureate michael spence and former hong kong chief executive tung cheeeir new report looks at

u.s./china relations over the next ten years. >> in so far as level of trust is concerned, i think we need to look at it two ways. they are individual companies. both sides who arenhappy with thr treatmt and therefore the trust is much less. but then if you look at foreign direct investment going one way or going the other or the portfolio investment going one way or the other, there's plenty of trust. so my view is that on the whole things are moving well but the areas of discontent we need to manage them, look at them squarely face them, the most importantly to look at the future wrote where is it going to be e ne ten years. >> rose: the middle east and china. what's next?

captioning sponsored by rose communications from our studios in new york city, this is charlie rose.

>> rose: we begin with a look at the changing nature of the civil war in syria. amongst the rebel forces islamics are taking an increasingly powerful role. last week they lost control of key areas in the country. it's reported that president's bashar al-assad forces are taking back a city. the war is taking a toll on neighboring turkey and lebanon and jordan as well. after meeting with turkey's prime minister last week, president obama rejected any unilateral u.s. action. joining me are two correspondents to who reported on the effects in the region. ben wedeman is cnn's international correspondent and he originally reported from turkey's border with syria where ten days ago over 50 people were killed in two car bombings. he's in new york to collect a peabody award for his effort covering the war. farnaz fassihi is a deputy middle east bureau chief for the "wall street journal." she has reported on the impact of the war in lebanon. i am pleased to have both of them here at this table. welcome. >> thank you. >> rose: and congratulations, sir. >> thank you very much. >> rose: just tell me where we are today. we've seen ebbs and flows in

this. we've seen increased participation, it seems by people who are on the outside, whether it's saudi arabia and qatar or whether it's hezbollah. and iran. >> well, i think what we're seeing is that bashar al-assad has gotten his second wind and i think from the beginning we tended to underestimate the extent that many syrians actually do support the regime and i think they've managed to sort of bring in those who do have an interest in seeing this regime continue and putting them in t field to fht effectively against what is increasingly very divided opposition. i've read that as many as 300 individual groups compose the opposition, the armed opposition. and they seem to be running into some serious resis difference a regime that i think is starting to push back. >> rose: clearly that would be

true about the alawites. i mean, because they have got so much invested there. and the other groups that make up the -- supportiveof bashar al-assad, is it primary not loyalty to him and the government but a fear of what would happen if he's overthrown? >> of course. i don't think -- many syrians will tell you they find the means of the regime distasteful over the years, over the decades. but they realize that if this regime falls that the floodgates are open for some of the worst elements in syrian society to take revenge. and it will be very nasty. and i think that there's no great love for bashar al-assad or the ba'ath party or the alawites among those that are loyal to the regime. it's fear. >> rose: do we expect to see, you know, a slogan -- slog, as they say?

or are do we look at anticipation of some events that could change dramatically the velocity of the world. >> i think situation is incredibly fluid. i think that if something dramatic doesn't happen likean sassatioor se sort of intervention, a military intervention that we're looking at a slow slog of war. >> rose: over several sgrerz >> over a stretch of years perhaps or -- you know, every year we think this is the last year and it continues. this said, you know, the more this drags on, the more complicated the situation gets. the harder it gets to intervene militarily or politically. the more difficult it gets to also build syria after the eventual fall of assad. so i think there is a stake to see whatever is supposed to happen happen as quickly as possible. also the situation of refugees is quite dire.

there are millions of refugees in bordering countries in turkey in lebanon, in syria. imagine if they're going through several other winters that way i think there will be international pressure building up on that front as well. >> rose: do what? to have a conference or to intervene? >> that's a good question. i think this is a dilemma. do you ierve or try to put pressure or talk to iran and china and russia? particularly iran and russia which are supporting mr. assad. >> rose: but i thought they were in favor of a conference. or not? >> in favor of a conference? they're in favor of a conference but they're not in favor of assad's removal from power. >> rose: as a condition to a conference. >> as a condition to a conference. and the opposition say we will not -- we can't imagine a future where assad or his government are part of a transitional government. so i think this needs to -- this block needto be overcomed for the to find some sorf a solution. >> rose: you both have been on

the border. how bad is it, these refugee camps? >> they're bad. now -- i was just there just a week ago and the weather is nice and i think that makes a huge difference. obviously there's camps in jordan on the border out in completionly exposed territory. it's been two very rainy winters in a row in the middle east. it's muddy, there aren't enough health facilities, there's not enough in terms of keeping people busy. >> rose: and speaking of the jordanian camps, what is the threat to that to the jordanian government? >> well, let's keep in mind that jordan has had over the deck wades wave after wave of refugees. first the palestinians who make up well over 50% of the population. then there were the iraqis. now there are the syrians and we've seen estimates that at this point the syrian refugees in jordan make up as much as 10% of the population. this is a small country of four and a half to five million

people with very limited resources. they desperate need the help of the international community just to keep people housed and clothed and fed and now it's -- >> rose: why is that hard? mef money. >> rose: well, there's the bureaucracy of actually getting the money and the help to refugees. we've seen this. i saw this in afghanistan in iraq and now -- >> rose: there's also the question of -- what is the level of participation? we know where saudi arabia is and we know where qatar is. we know where iran is and we know where -- but is there is there any commitment to say look we -- as a humanitarian choice we have to do something. >> well, i think if you look at jordan which is a strategic friend of the united states they cannot afford to let syria just blow the regime off the map.

just the instability. so they understand that jordan is a country, a regime that needto be prected at very high cost if necessary. so i don't think that the americans are going to let the monarchy fall over this. but it's -- it shakes. it feel it is tremors from syria whether it's the refugees, the military situation, the political situation because we have to keep in mind that the middle east for two and a half years now has been shaking, a constant earthquake. libya, egypt, it is, syria. it's shaking -- tunisia it's shaking the foundations of the whole regime system. >> rose: i want to come back to, that especially egypt. let me stay with the composition of the rebels and how many groups there were and the composition of -- how powerful -- i mean, i think i'm right in saying that the most influential

fighters may be al nusra? >> yes, i mean, they're gaining ground, charlie. they're very well funded and some of the funding is coming from private individuals in places like -- some places like saudi arabia and kuwait. >> rose: this is all about religion and about sunni versus something? >> sunni versus shi'a. it's about the rise of the salafi version of islam that we've also seen gain ground in egypt. so they're very organized, they're getting money and they're good fighters because a lot of them have experience fighting in places like libya and afghanistan and chechnya. so they're all coming in and the question is what are they going to do after? >> it's said that some of the other forces are joining them because they have weapons and they're more effective fighting forces therefore this is kind of saying, look, they're doing beer a i wt help them. >> you go with the winner. >> rose: go with the winner is the better way to put it. >> what i saw in aleppo was despite all of that there is a real gap between the people of

the city and the salafis who've come in from the country side. >> rose: a little bit like al qaeda in iraq? >> to a certain extent, yes. maybe not quite as stark but there's resentment. there's fear. there's a feeling among many people in aleppo, for instance, that one form of dtatorship has been replaced with another whicmay even more dystasteful. so i wouldn't rule out the possibility as time goes on that the differences between city people and al nusra become more and more stark. >> but they're not going to disappear. >> no, no. >> they will have a presence in post-assad syria and they might continue fighting with the alawites. they might stage suicide bombs the way we see in iraq. >> rose: is this too far gone crte any kd of unity among

forces fighting and is it too far gone to have some -- >> it's very, very difficult. even among the non-islamists. even if you take the opposition that's non-islamist that's secular minded that their vision is to create some sort of a democracy after assad, even those sides are divided. there's a lot of rivalry amongst them and back stabbing. so it just seems like a hodgepodge on the ground. >> rose: >> and i think it's all these divisions which have strengthened the assad regime. p.m. how divided, how ideologically they're all over the map and they don't want everyone -- >> it's becoming a self-fulfill prophesy for iran and hezbollah and you see a shift in the way that iran and hezbollah are now actually acknowledging that they're helping the assad regime because there's al qaeda fighting there. because they're islamists, because the shi'as are under threat, the alawites are under threat. whereas a year ago it was very covert that they wouldn't publicly come out and say yes,

because they were embarrassed to say they're supporting an pressor. but events on the grnd have shifted to such a large degree that they're no longer ashamed of saying we support assad. >> rose: and what role are the russians playing? >> well, there's is-300s. but i think more than anything i think the russians realize that they've seen their friend in libya fall. syria is really central to the middle east. whoever controls it. and for russians to lose their friend in damascus and have it replaced with god knows what they don't want to do it. i think they're willi to snd politically, militarily, economically what it takes to keep this regime in power or some grand bargain to ease it out. but i think that that's -- >> rose: something to replace it it would not be the rebels. >> some hybrid transitional government. but it doesn't work in these situations. >> i think the same is true for iran.

i think iran put all its stakes into keeping assad in power: money, weapons, fighters and it just wasn't to see this regime go because its influence in the region will be significantly diminished. >> rose: all these reasonsre why assad seems to be doing better right now. >> exactly. he has friends. powerful friends and this is why he's managed to stay in power, i think. >> rose: and then there are chemical weapons. and what's the fear today. we obviously know about the stories that came up about a red line and the use of what a level of chemical weapons by the regime -- i assume that's been proven and everybody accepts that now? or not. >> not necessarily. it's sort of all anecdotal and spread all over the place and the use doesn't necsari -- chicaleapo arey their nature a weapon of mass destruction. if you're killing two people here, three people there, it doesn't necessarily make a lot of sense and what we saw, for instance, in places like libya is that when the rebels would overrun a base they ransacked

the place. they don't know what they're touching, what they're looking at. i mean, i'm -- you know, i think that we have to be skeptical about these claims until solid proof is presented. >> rose: what is your assessment of what circumstances that bashar al-assad would use them? >> it would really be desperate sort of berlin bunker scenario. >> rose: there was an assumption when he first came to power that he certainly was not his father and he was not even his brother. >> yes. i think that his image has been completely tarnished. i don't think that he can ever say that i'm not responsible for the killing of the 80, thousand plus have that have died so far in syria. or that he didn't order the bombings. he is at the end of the day the president of syria and with that comes some sort of responsibility. >> rose: well, the other part of that is people have more respect for his toughness, is my point,

too. >> do they have respect for his toughness? his supporters might. i think his supporters probably think his toughness is a good thing in the twisted way that the middle easterner things that -- i remember in iraq people would say "we need a light saddam." >> rose: saddam light. >> a saddam light, right. we need another dictator to sort that out. saws so there is a sense because it's a tribal society. they're always used to awering to one person, having a sort of -- >> i think it's important to keep in mind that there is a consensus within the top leadership behind him. it's not that he's an absolute dictator who can snap his fingers. he has to consult with his generals. i was. >> even him. you have to have the agreement of your top intelligence military men before you take any course of action. >> rose: and share analysis of the problem. >> yes. and he's sort of the figure head but i wouldn't call him an absolute dictator in the sense that -- he's not -- >>rose: butnot a figure ned

the sense that people ma imagined he might be in the beginning. >> yeah. >> rose: lebanon. what's going on in lebanon? >> lebanon has remarkably stayed away from the syrian conflict in terms of seeing, you know, a renewal of civil war or sunni fighting but there are plaerups of violence all over. there's been pillover violence in the northern border of lebanon. the government's been very unstable. the prime minister just recently resigned and they named a new e. so syria has had a profound impact on lebanon. >> rose: you can say that again. (laughs) >> the worst is still to come. the economy is devastated because there's not -- it's not coming. a lot of refugees -- >> rose: syria's becoming lebanon? >> lebanon -- the roles are reversed. syria always used to host the lebanese refugees escaping from war, now it's the reverse. >> rose: now let me move to egypt.

we now have the president appointing mor islamists. anhing surprise yoabout what's going noncairo? >> i think a lot of people are surprised because during the era of mubarak people looked at the muslim brotherhood as opposition real opposition that had sort of stuck by its guns and gone through prison and been tortured and what not and they had been able to carry on all the way through. and people expected them to do a bit better than they did. >> rose: at governance. because they were organized? >> ty we oganid and the top leadership tends to be western educated, very sort of modern in their thinking. >> rose: but why weren't they? >> well, i think that first of all they're paranoid. they don't trust the army. they don't trust the police. they don't trust intelligence. >> rose: they changed the top of the army, didn't they? >> yeah, but that's just the guys at the top. what egyptians like to tell you about the deep state, the real

state with interests -- not the rank-and-file but the bureaucratic corporate interests of the state which will not be touched. so the brotherhood is paranoid about them. yes, they removed the top generals. but the officer corps is still there. they can't touch the intelligence services. they know the police are unhappy. so on the one hand they're worried about the state, the deep state. on the other they know there's constant unhappiness with their performance economically. the young revolutionaries, those who haven't become completely depressed are constantly agitating against the brotherhood, ainst mohed morsi. so they have sort of a siege mentality that have is not helping the day to day running of the country. and we see the economy is just in constant freefall. the egyptian pound reached a

historic low the other day. and confidence in the government is eroding daily. but --. >> rose: so is there a reflection point? at some point they say the center cannot hold? >> but you have release valves that didn't exist before. you do have elections coming up. and so i think people are looking to those elections as an opportunity to change and opinion polls have shown that a lot of the people who voted for the brotherhood say they won't vote next time. >> rose: will not vote or will not vote for the brotherhood? >> will not vote for the brotherhood. but then you always get back to the fact that the brotherhood has sort of given up on a lot of the urban areas: alexandria, cairo, and have always focused on organizing, patronage in the countryside. and they're very good at on election day getting federal reserve this village, that village, on the bus go vote and -- >> rose: there was a great hope

in the begin by some who suggest that having power would moderate the brotherhood. that they would understand that it's one thing to engage in rhetoric but it's something else when you've got to -- you know, educate and pave the streets and do all the things that -- and rais revenue ando allhe things tt a government has to do. that have that would in a sense cause them to moderate. didn't happen? >> it didn't happen. on the other hand, i think that sometimes we listen too much to the fluent english speaking intelligentsia who's highly critical. a lot of egyptians say "i don't care who runs the country at this point. just please run the country." >> rose: (laughs) that's why we like having you here. we won't get wrapped up in what all these pundits say we want somebody who'seen on the groundnd talked to real

people. iranian elections are coming up. rafsanjani is in. >> rafsanjani is in. tomorrow they're going to announce which one of these candidates made it through the guardian council's vetting system. >> rose: who might not make it? >> there's ahmadinejad's right hand man and very close aide. there's a lot of talk he might not make it. >> rose: if he doesn't make it, it's a slan at ahmadinejad? >> but i don't think the fight will be over. i think aadinad will do evythi in his power, including spilling some political secrets, threatening to resign. >> rose: that's the kind of man he is? >> that's the kind of man he is. he's equally provocative at home as he has been abroad. >> rose: what about the former nuclear negotiator? is he going to run? >> he's running. i'm sure he's going to be accepted. >> rose: some say he's the ayatollah's favorite. >> he's probably going to be the ayatollah's favorite. it's between him and a man who used to be a foreign minister seasoned a now khomeini's

foreign advisor. so it's between -- >> rose: so they will choose between the two of them? >> i think they might both run and depending on how voters -- >> rose: if there's a runoff -- >> right. but it's going to be very interesting because we're really for the first time seeing just infighting out in the open. >> rose: where are the moderates? >> the moderates -- >> rose: under house arrest? (laughs) >> the moderates are under house arrest. the two leaders are in prison. that seems to be where most of the reformers are. in terms of voters i think that bringing rafsanjani in was actually very cleverby the part of mr. ameneibecae it will excite voter base here. >> it brought anymore? >> without his approval rafsanjani would not have come out. he's a cleric and he's by no means a reformer but he's more

of a pragmatic person and i think that he will excite the voter base. he will bring the boycott crowd. the reformers who won't going to come. >> rose: theywillupport him? they'll think he's better than the alternative? >> exactly. >> rose: ands where the revolutionary guard? >> they have their hands in from oil wells to the telecommunication to anything. you name , they have their hands there. what's happening, foreign policy? syria, they run the show. their candidate will be whoever khamenei sports. homony. >> rose:. >> rose: is there no link between the revolutionar guard and -- whoever becomes the president it went make a difference between iran's grander policies. the nuclear negotiations, talking to the u.s., what happens in syria. these are determined above the presidential level by the revolutionary guard and

>> rose: one solut t fascinates me is qatar. >> qatar and the saudi royal family have a rocky relationship going back many years and i think they realize the only way to maintain their independence, maintain their sovereignty is to really throw that money out there, buy the influence, whether it's financing the muslim brother heed part of the syrian revolution just to make sure they maintain -- >> no matter who wins they've got -- >> rose: they've got a stake. >> and i think that explains it because otherwise, yes, it's the mystery of the modern world, a tiny country basically buying itself a big seat at the table. >> rose: if someone said to you-- as i'm saying now-- so wither the arab spring. who would you say? >> if you asked me that question o years ago i would have given a cautiously optimistic assessment.

today i'm much less optimistic. i see that the momentum that we saw, tunisia, egypt, libya has hid a brick wall in syria. and the whole sectarian issue-- which has always been out there but started in iraq following the american invasion-- has really come to the fore. and so you find this absurd situation where dipl dictatorships in the gulf say they're financing democracy in the rest of the world arab is laughable. and i think that's where the contradictions become obvious. where is it going? god only knows. i think that we are at a historic turning point much like after the fall of the ottoman empire and the aftermath of world war i. i think all those artificial borders that were written up by the british and the french are evaporating or under threat at

ast. the differences in syria -- and i think that as the situation deteriorates in places like libya, places like egypt, places like tunisia i think there will be a secular backlash and there will be disillusionment with the islamist tendency which for decades enjoyed sort of a glow of purity. they were thought of as the people who were uncorruptible. well, we've seen in places like egypt, in gaza where hamas runs that they are just as susceptible to the temptations of power and money as everybody else. >> rose: no surprise there. >> and i think you're starting to see in egypt little glimmers of disillusionment with this and it may take years. so on the one hand you have to sectarian conflict. on the others, secular versus religious. it's getting very messy. >> but middle easterners have a long-term view. they have several thousands of

years in history in most places so they see, i think, that ultimately it might be messy, as we've seen and experienced with e iranian revolution. and it might take decades to sort out but perhaps ultimately in the next00 years maybe the arab spring will be a good turning point because these countries need to go through islamists, they need to go through shifts and changes in order to come out -- >> rose: a lot of blood -- >> -- differently. to have a democracy. >> they're going through their terrible twos. >> (laughs) that's a good one. >> rose: finally this. is the united states relevant? >> i think that the arab spring has given a sense of empowerment and then they look at the places where the u.s. intervene, like in iraq and affidavits. and they saw they left behind a mess and ten years on you still have sectarian problems in iraq, you still have car bombs blowing people up everywhere.

and in some sense i think what the u.s. does is not as relevant as perhaps a decade ago because, you know, people don't have as much stock in u.s. foreign policy being able to improve things for them on the ground. there's a sense of disillusionment. >> rose: do you believe the iranians, if -- believe that the americans and the israelis or some combination thereof would attack if they thought iran was within months of having a nuclear capability? >> i think that they do. >> rose: they do take that seriously? >> i think they take that very seriously and i think a lot of the crackdown inside iran, a lot of the positioning we see with iran positioning militarily, the military air shows that they have, the persian gulf presence that they've increased and even their involvement in syria i

think is a signal to say that we are -- we are a force and if you come and attack us and mess with us we're going to put up a difficult fight. and you see in the past year or so as sort of the israel and the u.s. officials have increased the rhetoric on iran, iranians have come back and pretty much regularlin iranian media there are comments from security officials saying "we will attack u.s. interests in iraq and in afghanistan." we will make america pay. so i think that they do take it seriously charlie. this is the one big fear and i think this will more than the sanctions will force them to concede. i think the threat of the military strike and perhaps a threat of the regime somehow being upended is very real. >> rose: most of all they want to stay in power. >> exactly. tnk even if they are and i don't know about their nuclear program, but even if they want the know how i think it's more

survival. >> rose: this is so a cheap trick. what's the one question that you would most like to see answered in the middle east? what is it that you -- you know -- >> i think the thing that i find most vexing-- and we haven't touched on it-- is the arab -- the palestinian/israeli conflict. whyonarth can'this be sorted out? >> rose: i do, too. >> it's gone on forever. >> rose: it's in everybody's >> it's all about process, not about peace. and secretary kerry is pushing again. we see that he's very interested. >> rose: do you think that's reason to believe there can be movement? you? >> all other things being equal, no. no. i think that there doesn't seem to be on the israeli side much inclination to really sort of stop what they're doing and

reconsider. >> rose: you mean the settlements? >> settlements. and the palestinians have no cards in their hands. they have a bunch of 2s. >> rose: it's a pleasure to have you here. >> my pleasure. >> rose: and you, good to see you again. >> thank you. >> rose: back in a moment we'll talk about china and the united states. stay with us. >> rose: before we turn to our next segment on china we have this interesting development. after the interview you are about to see took place, we heard from the white house that they have scheduled on june 7 d june 8 in cliforn a bilatel meeting between the president of china and the president of the united states. clearly what they will talk about are many of the things that we talk about in the interview you're about to see we did not know that meeting was going to take place until after we finished the interview and the two guests had left the building. here is a conversation taked earlier today. the relationship between china, the united states is widely considered the most important

bilateral relationship in the world. they are the world's largest economies and each of the second-larst trading partner. while there are significant economic opportunity there is's sizable challenges ahead for both. a new study charts a forward path. it's called "u.s.-china: 2022, economic relations in the next ten years." michael spence teaches at the n.y.u. school of business. it was conceived by tung chee hwa. he was formerly chief executive of hong kong. i'm pleased to have them both at this table. welcome. >> thank you. >> rose: so what's the genesis of this study? is this you or michael? or both? what did you think was necessary c.snvplt >> what do i think is necessary here? i think we have had this economic relationship which started from being totally non-existent to becoming what it

is today. a reasonably important economic relationship. >> rose: reasonably important it? that's what you would describe it as? reasonably important? >> it's going to be -- >> rose: your report does not sa "reasonably important." (laughter) >> well, charlie, what we tried to do was look at that relationship, how often benefit each of us have received, united states or china, look at some of the difficulties that have arisen since the economic relationship becoming broader and deeper. you can almost say some of it would be inevitable. >> rose: how would you measure the level of trust? >> and then in so far as the level of trust is concerned, think we need to look at it two ways. there are individual companies, both sides, who are unhappy with their treatment and therefore the trust is much less than what it is. but then if you look at the foreign direct investment going

one way or going the other or the portfolio investment going one or the other, there's plenty of trust, you know? so my view is that on the whole things are moving well but the areas of discontent need to manage them, look at them, squarely fac them. but most imptantly t look at the future. where is it going to be the next ten years. and that's what mainly we're trying to do. >> rose: this is from the "new york times" today. may, 19, 2013, yesterday. "three months after hackers working for a cyber unit of the chinese people's liberation army went silent amid evidence that they had stolen data from scores of american companies they appear to have resumed their attacks using different techniques according to computer industry security experts and american officials. the obama administrati had be at namin and shaming the groups first in industry reports and then in the pent develop's own detailed survey of chinese

military capability might prompt china's new leadership to crack down on the military's highly organized team of hackers or at least urged them become more subtle." that's a problem. it's a problem when the united states believes that the most deep and pervasive spying against him, as well as hacking, come from china. >> i think, charlie, the chinese government and the military have time and again denied their involvement and emphasized that china herself is a victim to hacking and wanting to work with the united states to find solution to this problem. china does not deny there are individuals in china who could be doing these things and we need to be getting on top of it. so from that point of view i'm pleased that during secretary key's visit in april to china

there was extensive discussion on this subject and the fact is that in the strategic and economic dialogue there is going to be a special working group looking at this. they are meeting in july in washington and before that lots of preparation will go on. >> rose: michael, do you think this is enough? >> i think this is an issue we have to get under ntro bilarally causit that ha potential to contaminate the rest of the relationship on the business side, on the intergovernmental side. so i think c.h. is right. the authorities on both sides are going to have to take it seriously. >> rose: the report says it really is an urgent call to action. an imperative to act now. why do you say that? >> because both economies face

very large challenges. they're different. but ours is out-of-bounds struggling to find a sustainab path of gwth that deals with employment and the distribution, the last facts of our pattern of growth and the chinese have been -- >> rose: and drawing down our debt. >> and drawing down our debt is part of that, for sure. over a sensible time path so we don't kill the growth. and the chinese have made very substantial massive structural change coming in their economy. if it's $6,000 per capita income they aren't going to be the low-cost cpetir in a number ofindustry so tha's just the trade in the economy. so what we believed after we spent some time with each other is that the old relationship is changing very fast and what we needed to do was to bilaterally understand the challenges in both economies and then go after the places where we can make a

material positive difference. >> rose: you once said to me that america understands china less than china understands america. >> rose: >> china do not understand america well enough. ani alwaysmake the poin america understands china even less. as a result of this, you know, the mistrust goes both ways. but the relationship is now so important. both countries the leaders of both countries understand this we need to really work on this issue. we need to work on this issue. and we almost have to start from the bottom, you know? there are now 130,000 chinese students in america. i think it's a wonderful thing. the two administrations agree that there should be over the next five years hundred thousand american students in china. which we hope we can achieve those targets.

and then on top of that the business to business thing we're talking about, these the areas where really trust building can -- >> rose: three areas: science and technology, trade in additions and rebuilding a u.s. infrastructure in which chinese investors can provide funding. >> yes. >> rose: that'spossible? all of that have? >> yes. >> absolutely. >> rose: when you look at your relationship -- >> charlie, there's one other piece. the estimates of the chinese middle-class is that there are 230 million rising to 630 million -- >> rose: by 2022. >> yeah. this is a gigantic market. >> rose: for everybody. >> including us. >> rose: you know, the rise in middle-class in china is a net plus for everybody because it provides a market and will ablehina tourn its economy from an exporting model to a domestic consumption model.

that part of the five-year plan, how is it going? >> well, it's already started. >> rose: right. >> it's going. the first year seemed to be going well. i think, you know, if you look at all these five-year plans and this next one coming, 7.5% growth, the challenges are many, many the restructuring of the economy is a huge task. if you look at the last 30 years, the chinese government has gone through much more difficult challenges. challenges all the time. they succeeded in the past and i have to believe they will succeed. but europe is staggering. but i think we would be able to manage it. but charlie, let me say this on this middle-class issue here, the number of things which is very important to notice is that

china in the next ten years will be the largest importing nation of american goods we will replace canada as number one importing american goods because of the potential of consumption. and that's one. the other is that there are firms in china like wal-mart, like general motors, they're all at the top end of the market share anyway. think of the benefit they will have because of the grth of the middle-class in china and then on top of that i think it's not just multinationals. what we need to be doing for both countries, how do we get a median small-sized businesses to get involved in this economic activity? and that may be through the likes of ali be be or amazon or

something. we need to be thinking about these things so that it not just goes to the multinaonals but to people all over the place. >> rose: i'm told that china is lessening the advantages of state-controlled enterprises. much to the pleasure of non--state enterprises in china. is that true? >> well, the chinese state-owned enterprises -- >> rose: have huge advantages. >> have huge advantages. they have -- they have essentially controlled state-owned enterprises and local controlled state-owned enterprises accounng for 35% to 40% of the economy. it has declined quite a lot. so the private sector has now gone up to about 60% of the economy and this will continue to be the trend growing. >> rose: let me interrupt you. if that continues, how will it

change china? >> you know, the key part of -- so the state-owned enterprises probably won't be privatized any time soon, but they will be subjected to competition. >> rose: right. >> and the competition will increase the innovator in the economy. so china's economy -- this is just a crucial component of innovation anyway, charlie. so the chinese economy will start to generate important innovations that then drive not only that economy but get shared in the way innovations always die do. >> rose: you were advising a standing committee-- and maybe you do-- what should they be worried about? where is -- where are the land mines for china? >> the one that worries me the most-- and i ink some ofhe policymars there--s not the supply-side. because it's a flexible, dynamic economy. it's the demand side. this is an economy in which household income is below 60% of

national income and the savings rate is 30%. so that's an economy where most of the estimates of consumption are below 40%. now -- >> rose: is the savings rate 30% because there is no social safety net? >> in part. and there may be a cultural element. >> rose: cultural, too. >> so this is not going to wo if you want touild a big domestic market really quickly. now, i'm not saying anything the policymakers-- and a lot of smart people there-- don't already know. but transforming the demand side of the economy fast enough to generate this domestic -- >> rose: how do they do that? >> well, they've got to move the income around. now, they've got a tail wind, charlie. >> rose: redistribute it? >> partly that, but the wages are going up. >> rose: and if wages go up, what -- what's the threat of that in terms of china? if wages rise -- >> if wages rise without productivity you have inflation and this is where the challenges are over the last five years th.

over the next ten years wages will be doubled again, okay? so five the last five years inflation seems to be under control. now the next five years, let's see what happens. this is the plan. >> rose: china has a huge investment in africa. china wants its voice to be heard. we heard that fro xi jinping saidn the speeches at the time of his taking the presidency. did we not? >> yes. but, charlie, you know -- >> rose: he says that to the company, "charlie, you know --" >> 600 years ago when ming dynasty was in china, china had 30% of the g.d.p. of the world. >> rose: 30%? >> 30% of the g.d.p. of the world. the center of the world. but china never tried to flex its muscles overseas.

they did sd fleets ofhips all over the pla, but always for trading and so on so forth. never take -- never took territories. >> rose: it was not imperialistic. >> they're not imperialistic. >> rose: take these three issues: cyber security which is a big issue and recognized by both governments. intellectual property protection. is there progress there? >> yes, i believe there' progress there. for a number of reass, e chinese authorities are taking it seriously and, two, there's domestic intellectual property being produced that will require protection. >> so in other words -- >> rose: the other thing that comes up with respect to -- with respect to the -- china's attitude about us is that some people you talk to in china believe that the united states wants to contain them.

is that a deep feeling? is that a feeling of the leadership? or is that a feeling of sort of the population in general? >> i think they are -- like in every other country they always -- there are always groups of people who believe certain things. there are certain people in china who believe america is out there to contain china. >> rose: do you think that's the view of the military leadership? >> not necessarily. maybe. but i want to tell you that this -- it happens, for instance, when you say i'm coming back to the pacific and that -- so people read this, why are you coming back to the pacific? you're trying to contain china? i think there is this sort of feeling on the other hand that the two leaders of the two

countries and the senior government officials of the two countries, they are talking with each other a great deal but they understand each other very well. i think that is important, you know? and we need to keep on talking to each other and making sure that thepropessages are out there. >> rose: other than the president and the secretary of state, who do you think is the principal official in the u.s. government who has the "china card"? is it tom donelan? >> i think, you know, -- you would be surprised over the last four years of -- the last administration. i ministerial level meetings, there were 63 ministerial level meetings. >> rose: including national security? >> including national security. >> rose: especially national security. >> there were many, many of them. and now you know, for instance, that the minister in charge of

climate change, he is very much involving direct dialogue with administration here. the science and technology minister directly involving dialogue. they're all over the place. >> rose: that's an interesting question in terms of those kinds of issues that are across the spectrum of anybody who is a big player in th worl todayt is thability to deal with those issues that transcend national borders. like environmental issues, like climate change. >> absolutely. >> rose: is china prepared-- and we might ask are we we prepared-- to have a common mission? to do something about those issues because of the power of the two countries? >> can i just say this to you, what i learned recently? you know, china, united states, we are the two largest producers of energy and consume of energy. we are also the two largest

emitter of greenhouse gases, okay? so we just have to work together to improve energy efficiency, to use more renewable energy, less carbon. we need -- we just need to do all these things if we are going to solve the overall problem. and there is now a real desire, i believe, onoth gornments to do this. now very little notice but, again, secretary kerry was in china in april. there were discussions on this subject. at the end of the discussion there was a joint committee that was issued on this particular surgeon general about energy, about climate change, committing to work together to move forward together and put this on the july agenda. >> rose: stephen colbert made a

graduation -- commencement speech over the weekend at the university of virginia and as you may have noted, he said with a sense of humor, said to them "you owe a lot not to your parents but to china." as a reflection of the u.s. debt. what role does that play in terms of the relationship between the two countries? >> well, from my point of view it's relatively small. i was going to mention before, treasury is a very important player in these biteral discsionbecae of the international monetary system, exchange rates and capital flows i don't have any doubt that the chinese holdings go along with the perception that the responsible management of these is terribly important both for the united states but also china. this is almost mutually certain destruction if you mismanage it.

so it's true that it's a gigantic amount of money. >> rose: it is! arthey owly tryingto reduce the amount of the debt that they hold of american debt? >> i think it's not a slowly trying to reduce but what is going to happen is that that as the world trade increases some part of the world trade will be done in currencies other than u.s. dollars. >> rose: right. >> and this sort of thing could happen. this sort of thing could happen. >> it also moves into riskier asset, charlie. they don't have to hold us in sovereign debt. >> rose: like what would they move into? >> equities, infrastructure. >> rose: okay, right. >> foreign direct investment. >> rose: i wondered how much risk you were talking about. >> but, you know, charlie, i will say this to you that the

future is so much bound together eountries and for america, shell gas is a guam changer. you happened to restore fiscal discipline. i think theurrent account deficit will be gradually under order. and this is -- really, this -- i hope i'm not talking out of tune. i think this is a game changer for you. >> rose: yeah, well, you're not the only foreign say that. americans say that as well as others. this report is called "u.s.-china economic relations in the next ten years: towards deeper engagement and mutual benefits." thank you. good to see you. >> thank you. >> rose: michael, thank you thank you for joining us. see you next time.