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The Boao Asian Forum held in Hainan at the beginning of April was attended by many prominent politicians, economists, financial experts and celebrities. Professor John Quelch, Vice President and Dean of China Europe International Business School(CEIBS), was one of them. On April 2nd, the journalists of China Business Focus had an interview with him about several issues of China’s economy.
With pure, slow and mild British English, Mr. Quelch, who was once Dean of London Business School and Senior As- sociate Dean of Harvard Business School, has typical features of a British. But he is also quite familiar with the status quo of China’s economy. During the interview, he gave out a “prescription” to address several major economic issues in China.
Chinese people’s savings rate remains high
“Economics is politics with numbers. You cannot separate the concept of economic reform from political reform.”
In Mr. Quelch’s opinion, the Chinese economy, Chinese mainstream finance, and the Chinese central bank are well run organizations. “I remember when I was the dean at the London Business School in 1998, there is a very strong master’s program in finance at the school. And each year the Chinese government sent two people from its central bank to this program. That was 13 years ago. So the Chinese government has invested in training and developing its best talents for many years and the result is the very high quality of management in the central government when it comes to finance and economics.”
But Mr. Quelch did not mean that the financial and economic management in China was flawless. “China is a vast country. It’s impossible to ask any central government to run an economy that vast and that large. There has to be a some decentralization to local authority and local decision-makers. The major concern I have is with respect to the implementation of policy, not the policy itself,” he said. “The other principal concern I have is around the issue of consumption – to what degree will domestic consumption increase to compensate for the fact that China’s competitiveness as the world factory is inevitably diminishing”
As for how to boost the domestic consumption in China, Mr. Quelch listed three points: a), as the economy continues to grow, people have more money to buy more; b), you can reduce import tariffs to facilitate the import of goods at lower prices which may be directly sold in China or the raw materials and ingredients for manufacturing – in this connection, the management of the exchange rate has some significance – and c), tax policies could be adjusted to reduce sales taxes and promote consumption.
“An important problem in China is that the savings rate remains high because people have no security. In most cases, they have no adequate pension, no adequate healthcare coverage. Therefore they have to save for the rainy day. If healthcare and medical costs increase faster than the rate of inflation, that further motivates savings and further puts the brake on consumption. So I believe that the Chinese government has to invest in provision of basic social services and a pension system to a level where average consumers can feel secure enough to spend more and save less,” Mr. Quelch stated.
Mr. Quelch attributed the high level of savings rate in China to the following factors. Firstly, the Chinese people prefer saving to consumption. Secondly, many Chinese have made a lot of money quickly but have not yet adjusted their consumption behaviors so they still have the cash. Thirdly, alternative investments are not very attractive in terms of the return, and the risk-return ratio in some fields in China is out of balance. Due to under-regulation, the risk is higher than it should be.
Defendants for high house prices
The house price in China, which is extraordinarily high, is always a concern for many economists. It is the same for Mr. Quelch, who believes that the huge profits of banks are related with the extraordinary house price.
“Presently, Chinese banks are flush with cash and they may inevitably be tempted to make loans that are not prudent. It is very important that bank officials should take seriously their responsibility as steward of the funds of their depositors and not invest these funds irresponsibly in speculative projects,” he said sternly.
One speculative project refers to real estate. Mr. Quelch told CBF journalists that the savings rate which he assumes he can receive from the retail banks was artificially low, because of the government’s diversion of resources into state-owned enterprises, and some of the state-owned enterprises have invested in real estate outside of their field of expertise.
Of course, banks, or state-owned enterprises, should not be simply blamed for the extraordinary house prices in China. In Mr. Quelch’s opinion, the lack of other credible investment channels is also a curse. “The Chinese stock market is under-regulated, perhaps even less well regulated than an American casino. Given this state of affairs plus China’s strong economic growth, there is a tremendous amount of cash looking for a place to be invested. Much of the cash has found its way into real estate and many individuals own multiple apartments,” he said.
Mr. Quelch also gave his opinions on the attempt to influence real estate by the Chinese government. “I think it is very important that the government controls the availability of credit to limit speculation. At the same time the government has to delicately balance its intervention so that it does not drive real estate prices down so much that the industry is destabilized.”
Shanghai’s way to the international financial center
Shanghai had already put forward the goal of becoming an international financial center. Mr. Quelch believes that there are two important factors determining Shanghai’s success as an international financial center.
Firstly, the regulatory, supervisory and taxation environment regarding investment activity must be a global standard of excellence in policy implementation and compliance. Secondly, the quality of life for globally mobile financial service executives has to improve. While Shanghai is doing well in provision of education and healthcare reaching Western standards, it is surprisingly weak in culture and art relative to Beijing. Hong Kong and Singapore obviously compete well against Shanghai on both dimensions. Shanghai has a lot of work to do, but things are improving so quite a few financial talents here moved from Hong Kong and Singapore to Shanghai.
It is obvious that Shanghai plays a strategic role in China’s financial markets. “Shanghai might be better equipped than in Beijing and Hong Kong,” Mr. Quelch said. Though it is likely that overall financial services policy will flow from decisions in Beijing, if you look at the United States, there are some financial services areas that Chicago does very well – not everything is concentrated in New York.”
Another important issue about Shanghai’s development as an international financial market is how to make the international financial markets believe that Shanghai can do better than other cities. Mr. Quelch gave us an example: “If the Europeans heavily regulate hedge funds and derivatives trading, it’s possible that those activities might migrate to Shanghai, especially as Asian investors become wealthier and develop a bigger appetite for these kinds of investments. However, to accommodate these services, Shanghai will have to provide high-level confidence for investors. And that confidence can only come from an even-handed application of the rule of law, equal treatment for foreign and domestic capital that is invested through Shanghai, and a level of transparency and integrity that is greater than at present.”
As the Vice President and Dean of CEIBS, Mr. Quelch believes that international-level financial, economic and management talents are indispensable to China’s success. He discussed the strengths and weakness of Chinese executives that are receiving training at CEIBS.
“Most of Chinese students are quite proficient in math and they usually can handle accounting, finance, economics or what we called hard skill courses. Where the Chinese students need more help and where we add more value is in the soft skills, like, leadership, change management, team building and HR development. Of course, U.S. and European students have weaknesses as well, but their EQ skills are better developed than Chinese counterparts though their IQ skills are similar. We have outstanding faculty who work very hard with our students on their EQ skills.”