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Interview: Victor Chu

Jan. 9, 2014

Chinese President Xi Jinping says he'll push ahead this year with his plans for reform. The Chinese are putting the brakes on rapid growth. And they'll ease the decades-old one-child policy.

Victor Chu is the chairman of First Eastern Investment Group. And he advises the World Economic Forum on the Chinese economy. He spoke with NHK WORLD's Ron Madison about the outlook for the world's second largest economy.

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Victor Chu

Chairman, First Eastern Investment Group

We've got a fresh, brand New Year underway now. Let's start by getting your outlook for the Chinese economy in 2014.

I think the economy is going to grow significantly slower this year, partly because of the global slowdown, partly because China is also adjusting its own economic structure.

Last year was the first full year under the new leadership there in China. On the economic front really, how would you grade the performance of the leaders?

I think they've done reasonably well. It's a very difficult year because of the global slowdown and it was a changeover year in China. The new leadership has to consolidate their authority and they are really just getting on into a situation where they have a free hand to institute some of the new initiatives.

The Chinese government really did seem to commit itself to embracing reform. I'm wondering if it can actually follow through though, with some of its ambitious goals?

Whether they can be executed in full force and effect, only time will tell. It will probably take 3 to 5 years to tell its effectiveness. But I think looking at the personalities of the new leadership, these are people who are serious, who have a track record in running big provinces and they are in a hurry. They know that things need to be done, they need to be urgently done and that's why some of the details that are gradually coming through are quite positive.

What efforts really do you see by the government at this time to do that?

You can't really tackle vested interests and dominance of state enterprise without being serious in the anti-corruption campaign. You can't really tackle the demography and the working age population without really relaxing the one child policy in real.In Asia, we all have a problem, not just China. I think Japan, Singapore, Hong Kong and Thailand, we all have really under-par fertility rates but in China's situation they really need to culturally encourage people to have bigger families from now on. Otherwise the working age population will decline fairly significantly in the next few years.Politically they are being fairly conservative right now but in terms of reforms on the social and economic front, they're beginning to see a quite daring agenda. In the past, a reform commission or super planning commission normally was really chaired by the Prime Minister or one of the Vice Premiers. This time the President himself is chairing that so it shows how serious this particular agenda is. Rightly or wrongly, he sees that he has to be at the forefront of pushing this reform himself, otherwise vested interests are going to block these agendas and the risk of derailing the whole reform program.

Highly leveraged credit saw a surge last year with so-called shadow-banking, and that's despite a string of new rules. How much of a systemic risk is this, and can the government get it under control?

I think the starting point is that this shadow banking industry in China is in its infancy, on the ground floor of development and we should not assume that they are all high-risk institutions. We have to differentiate, that there could be better ones and there are some which are not so good. Time will tell who are the big boys and who are the small brothers that need to be supervised much more closely.And they are indeed a breath of fresh air in the context of Chinese conservative and out-dated financial systems. They provide sources of funding which the traditional banking system does not look after, and these are people in the private sector, enterprises, these are the non-stick sector which in the West these are the most vibrant part of the industrial economy. And China is now encouraging new banks to be formed, formalizing the legitimacy of the secondary banking and financial institutions but at the same time providing closer potential supervision to make sure that toxic products are not being introduced by them into the market and also requiring a higher benchmark of supervision on them on a day-to-day basis. When we talk about shadow banks in China, we should not automatically assume that every one of them is high risk and every one of them will create trouble to the banking system. That is not the case.

Chinese auditors revealed last week that local governments are carrying debts of nearly 3 trillion dollars. Leaders in Beijing admit they need to tackle the problem. At the same time, they're trying to manage some difficult relations with their neighbors.

I think the most serious problem is local government debt, which has risen 70% in the last three years according to the latest statistics announced by the Chinese government. That has surprised most people so they will need to come up with some resolution in order to make sure that local governments don't get hard landing.

It really is a sensitive time right now for diplomacy in the region. How do you think the leaders will balance foreign policy against reform goals there? And how much do growing tensions really threaten to destabilize economies in the region?

That's a very good question because political stability both domestically and internationally is a vital part of this reform agenda because if you are distracted by instability, whether it's external relations or domestic instability, you don't really have the backdrop to execute your reform program. So I think it is important that China redoubles its efforts to create a better relationship and environment with its neighbours so that problems can be frankly explored. But again, some of its neighbours also have to redevelop their efforts too because it takes two to dance.It's also important for the region, including China, that Japan really benefits from this assess of the initial stages, Abenomics, to allow real structural reform to take place because the renaissance of the Japanese economy is also important to regions including China.


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