Transcript
DR CHENG HOON LIM
We are now ready to take questions and I think I'm going to be like Oprah Winfrey and go down to the floor. The microphone is on. There are many of you here, I'm sure there is a question. Please wait, I'm sorry. Wait for the microphone.
TIM COLEBATCH
Tim Colebatch from The Age newspaper. Could I ask both speakers to elaborate on a point Dr Menon made about the risk of demographic change in the economies where population is slowing rapidly, in particular China, Japan, Korea, Taiwan, North East Asia? From this distance it seems that this problem is not being adequately addressed by policy. The governments have not put in place strategies to tackle what is going to be a very big demographic shock. Could you comment please?
DR JAYANT MENON
Thank you, Tim. I'll let He Fan speak about China where a lot of the action is, but I guess in terms of Japan, which is a country whose labour force is really ageing, this is a huge challenge in terms of sustaining the little growth that it has going forward and so the crunch on growth comes from a shrinking labour force and I guess the obvious remedy there, if you try and increase fertility rates or other things like that, is to open up to labour inflows. And despite perceptions of Japan being closed etc there is actually a lot of labour inflow that doesn't always get picked up in the data and I lived and worked in Japan for over two years and I could see this. It surprised me when I first arrived there that there were so many non-Japanese - or aliens, as they're called - working in so many different jobs and on a very long term basis. So I think they are addressing it and they recognise the constraints that it will pose on growth. Japan is also faced with providing for their age gain pensions. Of course they can increase the working age, but this will only help to some extent. The younger economies, I guess, of the region have a lot to offer if they would be allowed to move more freely, so this could actually be a win/win situation. India will have difficulty absorbing this huge increase in the labour force, as will some of the smaller Mekong countries in Indochina. The different sets of skills of course that countries like Japan and Singapore will acquire as they age, but certainly freeing up the labour flows, I think, will help reduce the impact, but overall I think this is certainly going to be a big factor in explaining the ranking of countries in 2050.
PROFESSOR HE FAN
Just to add a few words, the current one family, one child policy adopted by the Chinese government is heatedly debated now because in the early 1980s when we have this policy and the consensus is that this policy is a temporary policy, it will only last for one generation - you can say 28 years - and now it's already more than 30 years, but still you have this policy and it created a lot of social and economic problem, but the main resistance for policy change I think is from the vested interest group and you can see the government agency which is responsible for this, in charge of this birth control policy. And the economic implication of this ageing problem for China is, one, saving rate will drop for the household and, second, the labour cost will continue to increase and that will lead to your, for one thing, outsourcing of some of the Chinese manufacturing sector. And what I also worry is that now we have a shortage of labour, but imagine that the wage level increases further and then a demand of labour will drop - but a supply of this migrant labour will continue to increase, so at a certain point, at a certain stage, we may have a serious problem of unemployment of those migrant workers. And the third implication is the huge demand for healthcare. The retirement house in China, at the least we need another five million beds for these retirement house, so there's a huge investment opportunity. And finally the most serious impact is the drop of potential growth rate and we enter into the ageing society we may even lose the momentum for economic reform.
DR CHENG HOON LIM
Thank you for your question. Next question, the gentleman over there.
JAMES BOND
My name is James Bond. I can assure you I'm not an international superspy; I'm actually a boring columnist. I represent the Australian Services Roundtable and I'm Chief Economist of the Financial Services Council. It's heartening to hear Professor He Fan talk about the importance of services to the Australian economy, but I just want to ask... You talked about agriculture and manufacturing. I think the Department of Industry in Australia sees itself as promoting exports of Australian manufacturing, the same with the Department of Agriculture. I don't think there's anyone at Treasury working on promoting financial services, our largest single individual sector, as an export. I don't think there's anyone at the Department of Health who would see their job as doing that. I think maybe there's someone at the Department of Education who does, but it's only a recent phenomenon. I'd just like to ask Professor He Fan, I guess, what sort of things can the government do in services, especially if the market in China is so closed?
PROFESSOR HE FAN
That's a good question and a tough question because I don't know what the Australian government want to do and need to do, but basically I think the demand for Chinese people service will be different from those in Europe and the Americans, so you have to make some tailor-made service for the Chinese consumers and you have to think what they are thinking and then to have these local connections. And the first thing, you have to make your appearance in the Chinese market, letting Chinese people know the good service sectors - the healthcare and education and financial sector - in Australia. I think now many Chinese people are more familiar with education and tourism, but then in other areas like healthcare and service they're not so familiar with Australia. When they are thinking about the financial institutions what comes in their mind is definitely those global financial institutions located in United States or in Europe. So the first thing I think is you have to make your brand familiar in the Chinese market.
DR CHENG HOON LIM
Dr Menon, would you like to say a few words on that, on how Australia can make itself competitive in financial services?
DR JAYANT MENON
Maybe just a couple of very quick things. I guess I do a lot of work in Cambodia and Laos and in Cambodia now A&Z is increasingly becoming a key player in the financial services market and their competition actually, as I can see it, is coming from within the region - from Thailand, Malaysian banks etc. So there is a different environment I think taking place in the emerging markets of Asia where the traditional players now are giving way to a new set of new entrants and so Australia, I think, has a lot of potential to compete effectively with the new entrants from the region. And I also feel that a lot of the structural change factors and challenges we discussed earlier provide opportunities for Australian exports and services. There will be more architects required in town planning throughout the region. That's just one example, but the huge increase in demand for education I think can be satisfied by Australian institutions, either based outside Australia within the region - as in India and elsewhere - or increasing access to education services within Australia. So I think there's a lot of potential as to what more the Australian government can do. You probably have a better idea than
I do.
DR CHENG HOON LIM
Thank you. I think there is a gentleman over there. Can you please stand up when asking your question?
PROFESSOR PETER SHEEHAN
Thank you. Peter Sheehan's my name, from Victoria University in Melbourne. I wanted to follow-up the questions we've had today by asking a more specific question about health and particularly non-communicable diseases - diabetes, hypertension, cancer and so forth. When I and others look at the medium term for Asia and many other developing countries the really key issue is what people call the epidemic of non-communicable diseases. The WHO calls it an epidemic, we had a UN summit on it last year, the World Bank reported on China and this issue late last year. Now, I think we know generally that what's happening is that where the developed world got chronic diseases later in their development process when they had some money, as the current developing countries are quickly adjusting to western lifestyles at an earlier stage they are getting this epidemic without the resources to deal with it and this seems, to me at least and others, I think, to be a major question mark over the Asian century. And my question really is do you think... do you see prospects that some of these countries, such as China, will be able to martial the massive investment in health innovation and in health capacity which will be necessary to address this issue because, as several speakers have also said, this might be a way in which Australia can engage again? Thank you.
DR JAYANT MENON
Maybe I'll start and then you can come in. I think this is certainly a critical element that's not perhaps discussed often enough - the health investments required in sustaining a productive labour force and a healthy and happy population. In the Asia 2050 Report we talk about how inevitably Asia will have to start looking at having a better balance between work, lifestyles and leisure, so a return to so-called Asian values. I know this term is often used and abused, but a better balance, both in terms of ensuring happier livelihoods, living conditions, as well as reducing pressure on the environment. So I think a change in priorities and not simply emulating, if you like, western norms of consumption will have to play its part in the future of the Asian century for no other reason than where we find ourselves today is a much more constrained environment with resources and the availability of a lot of the inputs required for growth. So this will to some extent be forced upon, I think, society, but Asia does have a tradition of actually balancing growth in the pursuit of prosperity with other aspects of good living and hopefully that will offset some of the demands on the healthcare system if you can have a less stressed-out population and the pursuit of welfare.
PROFESSOR HE FAN
Yes, I think it's a very good comment that this problem will become more and more serious - for two reasons. One is because of the ageing problem and, second, because of the increase of the income level, so there will be a de-rising aspiration from the society. My guess is that for the next government these issues will be on the priority of their agenda. But then there is two problems which may become a barrier for the sufficient investment in this area - one is the government spending on healthcare. As I mentioned, especially central government in China is still reluctant to spend the money. They want to keep all the money in their pocket, but then also they want to invest on those visible projects - they want to invest in the highways and the railways - but then for education and healthcare they still haven't made up their mind and their worry is that if they invest heavily on healthcare and then where can they get the revenue. So a more fundamental problem is we need to facilitate the reform of the taxation system in China to let the government have enough revenue from taxation and then they will feel more comfortable to invest more in healthcare.
And the second barrier is regulation. It's a goldmine for investors, both in China and abroad, but now there's still very strict regulation, especially on the entry of private and foreign capital in this area. I always said to my American friends that China and the United States can have a [unclear] exchange from China's side where we are asking we need to invest in the United States, but actually that would be good for Americans because Chinese investment will create more job opportunities, and for Americans they can try to push Chinese government to open this service and actually that's good for Chinese people to increase the welfare of Chinese people. So I think the same advice is applicable to the Australian government. So what Australia can do is try to convince Chinese government that if you can open up your service sector, as what is happening in your manufacturing sector - China opened the manufacturing sector and then there is competition and because of the competition then the quality is improved and finally a lot of Chinese companies become very competitive on the international market. So competition makes the successful story. So if China further open up the service sector then that will create a win/win situation for both Chinese people and foreigners.
DR CHENG HOON LIM
Thank you. The gentleman over there, can you please stand up and wait for the microphone.
RORY ROBERTSON
Rory Robertson, Westpac Group Treasury. I'm also not at liberty to say whether I'm an international spy, nor will I talk about the Australian paradox involving obesity and diabetes. My question is about Chinese unemployment. Professor, you mentioned that if Chinese growth slows and unemployment rises then social unrest would grow. My problem as a far away observer is there doesn't seem to be many good measures of Chinese unemployment. So my question is are there some good indicators of Chinese unemployment? Is there any prospect of there being some good measures or do we need to look at the growth rates and look at the levels of unrest and infer measures of Chinese unemployment?
PROFESSOR HE FAN
That's a good question. For the time being there's no... Let me put it in this way, employment is the most important element the Chinese policymaker is thinking when they try to work out their macroeconomic policy, so in the past why they worry about the growth rate to be below 80% is because there's a conventional wisdom saying that if growth rate is below 80% and then you cannot create enough jobs for the migrant workers. But it's not the growth per se created job opportunity; it's more about the economic structure in the past because the manufacturing sector oversaw most of the migrant workers and for the time being there's no serious problem. We still have a shortage of labour and one signal is that the labour cost is increasing dramatically, but as I mentioned this may not continue in the long run. Take into consideration that all the manufacturing enterprises are investing machinery and try to change themselves from the labour intensive to capital intensive, and that means for the manufacturing sector there will be less and less jobs created in the future and the only way to absorb those migrant workers is in the service sector.
So we need to develop the modern service sector, like education, [unclear] and the financial sector, to absorb the newly graduated students, and we need the low-end service sector, like restaurants and home service, to absorb those unskilled migrant workers. So the end result is if the share of the service sector in China is further expanding and one implication is that the growth rate in China will further drop because the productivity in the manufacturing sector, other things being equal, will increase more rapidly than that in the service sector. But the reason why we need to develop the service sector is not because we need the high gro
wth; the reason why we need to develop the service sector is we have to provide enough job opportunities for those migrant workers and the service sector is the only way that we can solve the problem in the future.
DR CHENG HOON LIM
Dr Menon, would you like to add to that? Okay. Any other questions from the floor? Please, the microphone over here.
DAVID UREN
David Uren from the Australian Newspaper. The question for Professor He Fan. You express a confidence that China can continue to achieve growth around 8%, notwithstanding the very substantial structural challenges which you also illuminated very well in your presentation. It's something that one sees a lot, this confidence that China can continue to keep very high rates of growth and it often seems to portray a faith in the power of a command economy to dial up whatever level of growth is required in order to ensure social stability and I guess I'm just wondering do you think that the shift of China from the command economy that it was to a more capitalist economy, a more market economy, reduces or impacts upon the government's power to keep high growth in a time of great structural transition?
PROFESSOR HE FAN
A good question. Actually I think the Chinese government is not always a commanding economy. You can see the ebbs and the flows and sometimes the policy of the Chinese government is quite laissez-faire and sometimes is just the stated capitalist. For example, in the 1980s the growth is mainly driven by the newly emerged sectors, the private sector and also joint ventures, and in the 1980s it was also mainly driven by foreign investment and domestic private companies, and the current situation of the Chinese government put more and more emphasis on those large state-owned enterprises only happened less than ten years and the situation may change in the future. There's some very, I would say, radical proposal made by World Bank and together with Development Research Centre, which is affiliated to the State Council. I think that that's a clear signal that at least some of the policymakers in China are thinking very seriously on the reform of state-owned enterprises. It's not to say that they will split or sign a pact overnight or get rid of the China Telecom but, one, there will be I think a more... the strict on enterprises has to give more share of their profits to the government in order to strengthen the social security system and at the same time it may be possible that in some new sectors the Chinese government will open the door and invite more private capital and foreign capital because otherwise it will cause very serious problems.
Some of the manufacturing sector is already moving abroad. They are moving their factory to Vietnam or African countries, but not all manufacturing companies can move overseas because of this protection network and now the profit of the manufacturing company is really thin. So a lot of them just moved to the real estate sector. So some are Chinese export company, they still produce shoes and clothes, but in fact they already become developers. So some... I don't have the hard evidence, but when I am doing some field investigation in Zhejiang province, which is the most vigorous area in China - a lot of private companies are there - and they taught me that more than 80/90% of the large... the most successful private company now already became real excellent developers. Then you can imagine that it will further fuel the asset bubbly in China. So you have to find a channel for those private capital to invest in some meaningful area, very, very important area. My guess is that we are moving toward that direction, but then the style of China's policymaking is always a gradual approach - so be patient.
DR CHENG HOON LIM
Dr Menon?
DR JAYANT MENON
Can I just say I thought that was an interesting way to ask the question - how much trust can we place in China's growth numbers now and in the future? One experience I had recently in Cambodia was how Cambodia was the only country in the Mekong region that was really badly affected by the global financial crisis because of its heavy reliance on exports to the US and growth was anticipated to have fallen to about -2/-3% and the reported number was +0.01%.
Can I just add one more? Actually one of my colleagues in China has done very good research on the accountability of China's GDP data and the basic result is actually it's reliable and if you calculate the GDP from a different approach and then you come more or less the same number. But you can also say the Statistic Bureau is cooking the number to some extent, but they are not to make the number... just created the number. The way they are cooking the number is they try to smooth the number. So actually the GDP growth rate in China should be more volatile, but then the official data they try to make if we are overheating and they will sell them... announce that we have growth rate above 10%. But then if you see a number, say 8.1%, and that's also possible that the actual number is below 8%. Even the temperature, if the temperature is above 40 Fahrenheit in Beijing and the weather forecaster will say it's something around 39.
DR CHENG HOON LIM
That was interesting. Do we have time for another question? One last question. This is your last opportunity. Over there. Please stand up.
PROFESSOR ROSS GARNAUT
Ross Garnaut, University of Melbourne. He Fan, I'd like to push you a little bit further on the wage issue. You suggested that the rising wages which are resulting from the interaction of very strong growth in demand for labour with a static and soon-declining labour supply might cause unemployment. That suggests that the increase in wages, which are really being driven by market forces, will continue after a very large easing in demand for labour, but I'd like to ask you to say a little bit more about whether the current very rapid increase in wages which has been present since 2004, except during the financial crisis, is really problematic, as you suggest, or just an important part of the adjustment process?
PROFESSOR HE FAN
Good question. I think definitely the four trillion stimulus package helps this huge demand for migrant workers, but at the same time you cannot overestimate the importance of this stimulus package because, as I mentioned, the most of those investments flow into heavy industry and infrastructure building and those sectors will not use much workers, especially those unskilled labourers. Still the exporting sector is the main source to absorb the migrant worker and the government policy also accelerated the increase of the labour cost by putting some new policies, like asking the minimum wage level for those migrant workers has to increase at the same speed as the GDP growth rate. And also with the increase of minimum wage you can see that the... for wealth care for insurance and pension and everything will also increase and that's the reason why the real labour cost in China is increasing.
And another phenomenon is related to the demographic change. The reason why the wage level for migrant workers is very low is because in 1990s this the mainly what we call the first generation of migrant worker. So they went to the export factories and they will accept a very low wage level and they will do anything - the dirty work. They will do anything. And now it's the second generation. They're children of the first generation migrant worker and they are growing up in the urban area, like other kids, so they have different expectations as their fathers or brothers. So if now you offer them low wage level or welfare they will not accept that. Yes, they are asking more and more how much is your wage level and what are your welfare and do you have internet, do you have Wi-Fi? If you do not have Wi-Fi then they will not work in y
our factory. So, yes, that increasing expectation I think is inevitable.