Kevin Rudd on How China Is ‘Learning the Difficulties of Handling a Market’

14 July 2015

Bloomberg

IAN BREMMER: We now turn to China. A massive 30% correction wiped out more than US$3 trillion in wealth. Beijing is working to turn it around but with government intervention that many argue is a large step backward in the Chinese Government’s plans for economic reform. In recent drama in the US-China relationship, the US Government Office of Personnel Management revealed details this week about one of the worst hacking scandals in US history, with Beijing alleged to have stolen confidential records on 21.5 million people. OPM Director Katherine Archuleta resigned today over the breach. Joining me now to discuss these issues is Kevin Rudd, he is President of the Asia Society Policy Institute and former Prime Minister of Australia. Welcome Kevin. KEVIN RUDD: Good to be here. BREMMER: The Economist just came out and Xi Jinping is doing his best, and apparently not very effectively in propping up the market. We’ve got 30% down and the last couple of days have been almost as dramatic going back up but intervention and how does that look for a government that is trying to actually open up the financial sector? RUDD: I think it is important to step back from it for a little bit and give it some context. 30% down since June. If you bought these stocks in June last year you’d probably be about 85% up. So let’s just understand that this is a significant correction of the market. You’ve got Chinese assets that have been overpriced, even against a basic analysis of their price-to-earnings ratios. But to draw too much of an implication from this in terms of, number one, the overall performance of the market in recent times, two, what it means for the market in general and, three, the direction of reform – I think we just need to take a calmer perspective. I think the economic reform programs is continuing. Let’s face it, the Chinese Government is not the first government in the world to intervene in markets. USA did so in ’87, I seem to remember. I think the Japanese did so in the early ‘90s if I remember correctly. And the Hong Kong Government did so in the late ‘90s. Those were larger orders of magnitude than this and this is a significant intervention by the Chinese Government but it is not unprecedented. BREMMER: As you say, the Chinese market was effectively in ‘bubble’ territory before this drop and in historical context it doesn’t look that big yet the statements made by Chinese leadership, the state media, interventions made certainly seemed both significant, a little bit alarmist domestically. Are they just acting too conservatively? Is the issue not that the investors are taking a hit but rather that they’re being protected from the markets actually becoming markets? RUDD: Again, if we step back from it all – China is in transition, the economy is in transition. 30 years or so ago this was a socialist economy where there was no market. 30 years later it’s a mixed economy where there some market and they are heading in a direction where they say the market will be the central organizing principle for economic behaviour. So this is the transition period and I think what you see in terms of these actions by the Chinese Government on the stockmarket is a government which is learning the difficulties of handling a market in very turbulent circumstances. I think this institution – the Shanghai Exchange – ain’t as old as the New York Stock Exchange and if we were to look at the history of the New York Stock Exchange over a long period of time you’d find some interesting gyrations as well. My overall point is this is a market in transition. It will take time. This has been a significant intervention and, yes, they have acted to seek to protect individual investors. BREMMER: Xi Jinping has been lauded both domestically and around the world for such strong leadership. Thus far is this the biggest knock on him as President that we have seen or would you point to something else? RUDD: Look if think if stand back from it all there is a great danger as we look at China that we are captured by the instantaneous rather than looking at where the country and the economy is going to in the longer time. I am much less concerned to be blunt, as an analyst of China, about what is happening in the stockmarket at present than I am about how sustainable the Chinese growth rate is over time. That I think is a much more legitimate basis for lengthy public policy debate around the world than the stockmarket, bearing in mind the stockmarket frankly occupies a fairly small proportion of Chinese total economic activity. It is not parallel to the role which is played by the NYSE in this country. Frankly, I think the real challenge they face, and if I was Xi Jinping the thing I’d most engaged on, is the sustainability of the growth rate at 7%. I think they can keep it north of 6% but it is going to get harder. Global demand, as you know as an analyst is down, Europe is bumping along the bottom with America a bit better. Secondly, Chinese consumers are not consuming as much as the Chinese Government would want – they are still saving like frenzy. These are the big questions that are on the minds of Chinese policy leaders, how do we engineer the deep economic transition in the growth model? The stockmarket, frankly, is a smaller concern than over here. BREMMER: Then why not let the markets slip further again? Small piece of the economy, 90 million investors, but short term people have taken massive gains in the run up, they’ve been told to do so and get in the markets, that they are trying to become more internationalized. In other words, is the danger here not that they’ve left it alone and this is a problem but rather intervening too much? Because if their problem long term is one of growth that requires opening the economy, doesn’t that mean you don’t want to see these sorts of interventions? RUDD: I think in an ideal world into the future you don’t want to see government interventions in markets of this order of magnitude but again Chinese actions are not unprecedented, it’s been done elsewhere. Within a decade or so ago it was done in Hong Kong which is a large bourse not far from Beijing. But the overall point is this, that this is a government dealing with the regulation of financial instruments and financial markets which historically they have not had to do because they’ve been a centrally planned economy. Secondly, sure they are concerned about the impact on individual investors and while they are not voters in the Chinese system they are concerned about public support for the government. They are not unique in that sense. I think this is, frankly, a stockmarket that is not mature. It is a stockmarket that only barely has 20-25 years worth of history and, as a consequence, it is a process of learning on the way through. American investors and investors in my country, Australia, have basically seen ups and downs and ups and downs over decades. You’re accustomed to swings and roundabouts when it comes to the stock exchange, Chinese investors do not have that experience so they’ve acted for political reasons to stabilize the market. Remember that this is a one-party state, it is a country that says, “We are not about to become a liberal democracy, we are an authoritarian state and we pursuing what could best be described as a state capitalist model.” It’s always going to be different to what we anticipate in our own countries. BREMMER: So we shouldn’t be focussing on the short term, this will be gone in a week, we’ll stop talking about it – but I wonder if we look at the longer term is there a danger that the Chinese Government is increasingly going to be not democratic but nonetheless is going to be increasingly caught up with the demands of Chinese constituents – a component here, a component there – it’s going to make them take their eye off the ball for these long-term structural changes that are so hard to actually implement? RUDD: Remember our Chinese friends are dealing with something unique in history. That is, they are seeking to prosecute a series of market based reforms in the economy which, as you know, has the effect of disseminating information right across society while remaining the fabric of a one-party state. We looking across the collective West would say, “Well that’s not actually sustainable longterm.” Xi Jinping’s determination and that of the Chinese Communist Party is to prove that he can ride against what we describe as the inevitable forces of history. So they are embarked in what is historically, in my judgement, a unique experiment. We are going to have this consistent, difficult interrelationship between a state apparatus which wishes to maintain political control and, on the other hand, realizing that the optimal use of resources in the Chinese economy lie in letting the market rip. That’s the dilemma, it’s writ large. How’s it is going to turn out in the next decade, difficult to tell but I do know what Xi Jinping’s game plan is. That’s that he believes that he can reconcile these two forces. BREMMER: So a very different stage in development as well as priorities as a consequence between the Chinese and where the Americans are right now. Also some challenges in the bilateral relationship, let me shift you for a second to that and again 21.5 million Americans with their records taken. There is a belief or an allegation from circles including in the US Government that this originally emanated from China, but not a lot of response from the Chinese Government on this front. What’s the US-China relationship look like to you right now and how much of a problem is this? RUDD: Cyber I think is a real problem, not of course just in the US-China relationship but in the US-Russia relationship as well as a range of other state and, dare I say it, non-state actors. It does point to the absolute need for what is called in the business now rules for the road, rules of the road – both in terms of state-to-state cyber activity and also state v. corporations or individuals on cyber activities. At present it is a bit like the Wild West out there, it’s kind of like Dodge City, 1860, without a Sheriff. That’s what cyber-land looks like at the moment in terms of protocols for how actors should behave. So in the overall spectrum of the US-China relationship this is one of three or four big ones looming at the moment, but we’d be wrong to conclude it is the only one. BREMMER: Others including the South China Sea? RUDD: If you’re putting it all together I would say the recent developments in the South China Sea have been obviously watched acutely by the United States and the region. The photographs and the footage posted by, I think it was, CNN coming off the back aerial surveillance by the United States of China’s land reclamation activities in the South China Sea, have I think taken the debate about China here in the US and America’s relationship with China out of the thinktanks and very much onto the main street as people see things which they believe and are concluding will impact the overall direction of the relationship. My argument is you need a framework for this relationship which can manage these sort of very large differences and incrementally resolve them over time, at the same time place primary emphasis on what you can do together in the world. Let me tell you there are a lot of those, starting with the Korean Peninsula. BREMMER: I will get to that but before I go to Korea let me talk just about US-China for a second. Sitting here in the United States it seems to me that you can look at a lot of what the Chinese are doing – whether it is cyber, whether it is the South China Sea, anti-monopoly issues – and frame it as ‘things the Chinese are doing to the Americans that we don’t like’. Is that an appropriate way to think about the challenges to the US-China relationship or should we be a little more balanced? RUDD: As a former Prime Minister of Australia I never come to another country and say, “Let me tell you what you should be doing.” I don’t think that’s polite and I don’t think it’s helpful. How America itself constructs its own policy responses to the People’s Republic is a matter for the US body politic. But what I have experienced in international relations is that the beginning of wisdom is to understand how the other person thinks. The American view of the Chinese behaviour in the South China Sea is clear. If we were sitting in a TV studio in Beijing having a similar conversation the questions would be like, “Why does the United States fly spy planes up and down our twelve mile limit every day of the year, and sometimes day in day out, collecting data on us? Why is it that the United States through its complex array of alliances in the West Pacific, why are they seeking to contain China’s freedom of policy movement and freedom of policy action? Surely this is all part, from the United States perspective, of keeping China contained within its boundaries and in fact hopefully at the end of the day seeing the Chinese Communist Party system fall.” Having just spend twelve days in China myself, frankly, that is very much the internal narrative in so many parts of the Chinese thinktanks about what motivates US policy that it is as negative about what the US is doing as I fear the reaction is to China in this country. If those two realities exist the real challenge for the future is, well is it a good thing that this relationship just continues to deteriorate into the future and slides or should it begin constructing a different way in which such radically different countries with different political systems can construct some common ground for the future. I’ve always been in the latter camp. BREMMER: One area of common ground you mentioned was in Korea, give us a sense of that? RUDD: Here in the US, and rightly so, you’ve been focussing on the Iranian nuclear negotiations – these are significant. Let me tell you if they are resolved and resolved successfully I believe the lens will increasingly go onto what’s happening with the North Korean nuclear weapons program. This is a state which has already got sufficient nuclear material to manufacture 5 to 10 bombs. Secondly, it has quite significant rocketry and, thirdly, it is in the business of trying to miniaturize weapons to put them on the ends of rockets. If you were sitting in South Korea, Japan – or in a larger radius the United States if they manage to perfect ICBM technologies – then frankly this looms as a much more acute strategic threat for the wider region than perhaps even does Iran. So as this unfolds over time I believe there is going to be an increasing basis for strategic cooperation between the United States and China on how do you achieve the denuclearization of North Korea. Ten years ago, very little common ground but now I think Xi Jinping would see the North Korean weapons program as potentially derailing so much of what he is seeking to achieve for his country and in the region. BREMMER: And now even I willingness do you believe on the part of Chinese leadership to engage with the Americans and talk strategically about the peninsula if that was on the table? RUDD: I believe so, very much so. I think these kinds of dialogues are very important. Bear in mind if you are looking at the world again through the lens of Beijing – you’re trying to develop your economy, managing this market transition with all the bumps and the twists in the road like a stockmarket which goes out of control for a few weeks, and with the objective of raising living standards elsewhere in China where you’ve still got hundreds of millions of people in poverty. The main name of your game is to complete the development of your economy and over here you’ve got this lot in Pyongyang who have not exhibited the most stable qualities of statecraft in the past and whose leader has demonstrated his attitude to nuclear non-proliferation through his consistent underground testing program. From Xi Jinping’s point of view this is bad. Therefore, the commonality of the interests I think is becoming sharper. Having, therefore, the US and the Chinese engage in this sort of dialogue is, I know, in both countries’ interests and there is large constituency in both Beijing and Washington who think the same. So when I point to the future, yes we can talk about the pace of market based reform in the economy and its implications for Chinese growth into the future and its impact on the global economy – that is important. Cyber – critically important. When I look at the North Korean nuclear weapons program, this is an area where the two countries US and China have so much in common. BREMMER: Kevin Rudd thank you very much for joining me. RUDD: Thanks for having me on the program Ian.