China thoughts .....
Ali Moore talks with David Dollar
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Australian Broadcasting Corporation
Broadcast: 21/03/2007
Reporter: Ali Moore
Ali Moore talks with David Dollar from the World Bank about the Chinese economy.
Transcript
ALI MOORE: Well, as we heard earlier it's been a busy day for the Australian dollar on world currency markets. It remains at a 10-year high, hovering just over the 80 US cent barrier, while on commodity markets the price of gold and oil have both risen.
With the Australian dollar on the rise that's not good news for exporters, though our next guest certainly has a positive story for the resource sector, with China sucking up most of our commodity exports, Australia's interest in the China growth story is intense. One man who's optimistic about the outlook despite potential pitfalls is David Dollar, the World Bank country director for China based in Beijing nor the past three years. He joined me in our Sydney studio earlier this evening.
David Dollar, welcome to Lateline Business.
DAVID DOLLAR, WORLD BANK DIRECTOR, CHINA: Thank you.
ALI MOORE: We hear a lot about China's official efforts to slow their economy but if we look at the latest statistics out of Beijing, trade surplus for February was 10 times higher than the same time last year, exports were up 52 per cent, industrial production up 18 per cent, where's the slow-down?
DAVID DOLLAR: Well I think there is a little bit of a slow-down. They've taken some measure, raising interest rates and reserve requirements and so I think it's had a bit of an effect slowing the economy but there's a tremendous amount of momentum in the Chinese economy. There are a lot of good reasons why China's growing rapidly. Those reasons are still in place and so whatever they do we're likely to get pretty rapid growth over the next few years.
ALI MOORE: So do you see the government as still trying to slow things down? They haven't taken their foot off the brake so to speak it's just that the brake is taking quite a long time to work?
DAVID DOLLAR: I would say they've touched the brake fairly gently. So they've done a few modest increases in interest rates, they're reluctant to let the exchange rate appreciate very much, that would have a dampening effect on the economy. So I would say they've touched the brake pretty gently and there's some signs they've got a bit of slow down as a response but mostly the economy is still barreling ahead.
ALI MOORE: So where to from here? Do they do more? How do they slow things down?
DAVID DOLLAR: I think the main reason to be concerned would be the emergence of inflation and we don't see the emergence of inflation so it's hard to get too concerned about the rapid growth there. They would gradually like to see some slow down of exports and a shift towards more domestic needs and I don't think we see much of that yet.
ALI MOORE: But how do they get that? How do they achieve that?
DAVID DOLLAR: Allowing some more exchange rate appreciation would be one measure but they would seem somewhat reluctant. There's other things they could do. We encourage them to collect dividends from State enterprises. They seem to invest blindly in the same sectors. They're going to collect dividends and spend money on health and education. There are things that can do on the structural side to encourage service sectors and domestic consumption and we see some of that in the 2007 budget.
ALI MOORE: Do you see the current level of growth, I think we had 11 per cent in 2006, do you see it as sustainable?
DAVID DOLLAR: Our world bank forecast is a bit of slow down in 2007 to 9.6 per cent growth rate. The official target is 8 per cent but I think that's well known as a conservative target kinds of a planning target. For the next five years or so China certainly has the capacity to keep up this growth in that 8 per cent to 10 per cent range.
ALI MOORE: So all good for resources, particularly our mining industry?
DAVID DOLLAR: I think it's very likely that there will still be good news for Australian mining industry for the next few years.
ALI MOORE: At the same time, if they don't slow exports in particular, it's going to make their relationship with the US very difficult, isn't it?
DAVID DOLLAR: I think looking down the road it really is in China's interests to rebalance their economy. Their exports have been growing at faster than 20 per cent per year and they're now a big player in the world market. So it's very hard to just keep that up on economic grounds and then you bring in the political equation and there are real uncertainties. When I say I'm largely optimistic, I also want to say there are definite risks and problems out there and if China doesn't address those problems then you're less likely to get a good outcome.
ALI MOORE: On the export front, there’s a lot of talk about how China exports deflation, if you like, because its exports are so cheap, its products are so cheap. Can you see a day, though, where wages pressure will be there in China? Is this supply of cheap labour endless or will there be a day when they actually start to export inflation?
DAVID DOLLAR: I think we're already seeing significant rises in wages in Chinese cities. The data on wages are not that great, so we have to be careful about what we say, but the data suggests that wages have started going up at rates of 6 per cent to 10 per cent a year in major cities of China. Wages for ordinary workers in factories and construction. So we're seeing wage increases. For the moment there's still very rapid productivity growth so we don't see much price increase from Chinese producers but it's hard to imagine that they can keep up that productivity growth, you know, at such a high rate forever so I think we will start to see less price competitiveness from Chinese firms.
ALI MOORE: That's going to take a great deal of time when you look at the productivity. So how does China resolve this issue of massive trade surpluses with countries like the US, fundamentally if they don't revalue their currency?
DAVID DOLLAR: I think that some further revaluation of the currency is in China's interest. I'm sympathetic with their leaders who do not want a sharp increase very quickly, but I think some further increase in going to be necessary for them to reduce this trade imbalance.
ALI MOORE: Can you really see it though?
DAVID DOLLAR: They've allowed some exchange rate appreciation, about 3% per year.
ALI MOORE: But they seem determined to do it within their own bounds and not within the confines of what others would like them to do.
DAVID DOLLAR: They are definitely determined to do it in their own way, I think we can agree on that.
ALI MOORE: So that means it will take time?
DAVID DOLLAR: Yes.
ALI MOORE: The elephant in the room with China, if I can put it that way, is the environment. How seriously do you think the Chinese government takes the environment?
DAVID DOLLAR: Certainly China has paid a pretty high environmental price for the very rapid growth that it's achieved and I think the people of China, many urban people now I think are quite serious in their desire to see air pollution improved and water pollution improved. I think in the case of the government, the latest plan has some pretty difficult and serious targets. So I think there's a seriousness to address these issues. We see some examples of progress. Air pollution has improved in many major cities, water pollution has declined in the south. So it is possible to have progress on the environmental front.
ALI MOORE: So what does China make of carbon trading schemes like the one that operates in Europe? Do they take them seriously?
DAVID DOLLAR: China takes the carbon trading scheme very seriously because right now China's the largest seller in that market. So under the current Kyoto arrangement, the firms in Europe and Japan have commitments and they can meet those by buying carbon reduction from China. China doesn't have commitments but it can sell carbon reduction and it's the biggest player in the market. Last year it sold more than $1 billion of carbon reduction. So China's been drawn into this global framework initially as a seller that's basically introducing cleaner technologies in specific areas and is being subsidised by European and Japanese firms to do that. I think it's sensible. It's a good thing for the world.
ALI MOORE: So it is happening but would you argue potentially it's not happening fast enough?
DAVID DOLLAR: I think the problem is that the two big emitters are the United States and China and they're not - they don't have commitments under the - the United States did not sign and China does not have commitments under this current protocol. So the key issue is what kind of successor arrangement will there be and will the United States and China agree to some kind of commitments under that. And then a trading scheme can be a very efficient way of meeting those commitments.
ALI MOORE: One of the things I know you focused on is investment environment in China and we talked a lot in Australia about what we sell to China but is now a good time to put your toe in that water?
DAVID DOLLAR: I'm always cautious about giving investment advice but I'm, you know, I'm relatively optimistic that China will continue to grow rapidly for the next 10, 15 years and I can see private investors are earning a pretty healthy return in China so it seems a good investment opportunity for the foreseeable future.
ALI MOORE: David Dollar, many thanks for joining us.
DAVID DOLLAR: Thanks a lot.
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