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China: the past 40 years. A conversation with Martin Lee-Warner

15 June 2015
Giada Vercelli

The World Bank forecasts that China will be the world’s largest economy in purchasing power parity terms by the end of this year, and in 20 years, it will have grown by three to four times. New generations are increasingly urbanised, educated, and technologically-savvy. “The change is so evident in every dimension of life”, says Martin Lee-Warner, Senior Advisor Management Board, Raiffeisen Bank International, who has been engaged with China for 40 years, starting with his first visit as a special guest of Bank of China in 1974. Since then, he has been working closely with the central bank, government agencies, IFIs and banks at a senior strategic relationship level. China owes to Martin the organisation of the 1979 tennis Exhibition match Bjorn Borg v John Alexander - the Aussie glory who was a top ten player at the time - in Canton (Guangdong).  In this occasion Martin shared with the then Chinese Minister of Sport, a few tips on how to demonstrating appreciation or supporting good play in the Western fashion.

Lee-Warner says that “China must be careful not to be too China-centric, as counterparts still retain a certain amount of scepticism” in a conversation with Euromoney’s Giada Vercelli, outlining how the country and its much smaller neighbours should manage their relations for them to retain their independence and strategic space.

EC: Can China transform its society to meet the new social needs and expectations of a new generation? Where will China be 20 years from now?

MLW: Yes it can, but China will need to keep working at public and economic diplomacy in forging closer relationships to make sure that the foreigner understands Chinese culture.

EC: Second-tier Chinese cities will join Shanghai and Beijing among the world’s leading metropolitan areas. More Chinese companies are likely to become new global leaders, following the steps of Alibaba. In which sectors will they rise?

MLW: In such a vast country with diverse regions it is difficult to single out particular business sectors as global leaders. However, industry will be significantly further enhanced. Already with 23 million cars manufactured last year (versus 16 million in the US), it is the world’s largest auto market.  But, there are still only 107 cars for every 1,000 people. That figure is expected to rise to 252 cars in the next 10 years. With such internal demand for transportation infrastructure, it is likely that the locomotive sector will be globally recognised. Waste water treatment for urban cities is high on the agenda and here technical knowhow will be transferred. Agri-sectoral industries will also be at the forefront.

EC: Xi Jinping’s administration seems serious in tackling their problems: they are restructuring the SOEs despite displacing millions of workers and are curbing corruption even at the highest levels. What are the top priorities to be tackled?

MLW: Asia has a need for US$ trillions for energy, telecoms, transportation, and other infrastructure projects - these new institutions will play an important role. Competition is good for development lending. The US should encourage the World Bank and other multi-national lenders to cooperate closely. Of course there will be an important role for the Chinese policy banks; a number of these banks are already building their international platforms where they will form alliances with other international financial institutions. It will not be easy for non-Chinese entities to gain a material percentage of business.

EC: The People’s Bank of China moved to free up cash to lend to businesses by cutting its RRR (reserve requirement ratio) by 1% after the country’s economy expanded at its slowest pace for six years in the first quarter. How do you read this sharp cut of the level of cash commercial banks must hold with the central bank?

MLW: The significant basis points cut (double the usual size and the first move on this scale since 2008) certainly signals a significant stepping up of policy support. It was a move made in response to weak data, growth slowdown, consumer indicators and the decline of housing investment. There will quite clearly be further RRR cuts and a relaxation of quantitative constraints on bank lending. China’s RRR has been one of the highest in the world. Liquidity in China’s banking system is not a pressing problem. China’s banks do not appear to need much of an incentive to boost lending. Maybe more control is needed in directing lending to designated sectors (e.g. reduce the % to the real estate sector).

EC: The Obama administration’s rebalancing towards Asia shows that the US has been, and will always want to be, a Pacific power. China’s GDP will likely exceed America’s in absolute terms, but not in per capita terms, keeping the US at the helm of global superpowers. How is China’s influence and power affecting its relations with the US?

MLW: There has been a resonant cry that a clash between China over leadership of the global economy is the last thing that the world wants now. Failure to allow a bigger voice for China (and indeed other emerging states) at the IMF, World Bank and other similar institutions, has prompted the Chinese to set up rival institutions such as the AIIB. Here Obama has urged a stance against this, showing concern for governance and lending standards. My own take is that participation of advanced countries (e.g. European) can only favour good governance. There are indeed security concerns in the region that are high on the US agenda: inter alia security in the South China Sea; South Korea and a defence alliance. However, over time China will have the strength and capacity to establish economic partnerships with countries that also maintain strong relationships with the US.

EC: The AIIB seems a clear case of the US shooting itself in the foot: with the UK joining up, others did not want to be left out. Russia, Australia, Denmark, Brazil and the Netherlands are the latest to signal intentions to join. What are these developments telling us about global power shifts?

MLW: I have already partly responded to the above. Washington’s angry response to the UK (and others) committing to join reflects a serious mistake at a Bank aimed at helping to meet Asia’s vast needs. The amount of infrastructure needed annually in Asia is US$750 billion (quoted by the ADB). What is interesting to note is that China’s boost to its export credit agency is in contrast to the US, where the Eximbank is fighting for survival. China is clearly looking to exercise constructive global leadership.

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