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Interview with Former Chairman of China Merchants Group Qin Xiao

Observer, page 33, Issue 491, October 25
Translated by Tang Xiangyang
Original article:

China Merchants Group's (CMG) head office is located in Shenzhen's New Times Square. Chinese calligraphy and paintings hang from the walls of the entrance hall and the name plates of various CMG subsidiaries are also on display. As you enter the buildings elevators, you're just as likely to bump into a foreigner as a Chinese person.

"Duality" might also be the defining characteristic of the building's former "owner," Qin Xiao, the recently retired chairman of China Merchants Group.

As he met with our reporter, Qin sat drinking a famous brand of Oolong tea with a Marlboro between his fingers. He spoke standard mandarin well, though it was difficult for him to stop himself from slipping into fluent English throughout the course of the interview. As the former chairman of CMG, he is still seen as being a succesful entrepreneur at a state owned company, at the same time he is also seen as being an independent thinker who is not afraid to speak his mind - a responsible intellectual if you will. He also has a taste for the finer things in life, he loves playing Go, and is a seasoned connoisseur of tea and wine.

"People have reminded me to be prudent when speaking in public, and not to be so critical. I will not talk about something really sensitive or divisive." Qin Xiao does not think of his opinions as being controversial.

After leaving CMG, Qin Xiao has now focused his considerable energies on a new project - the Boyuan Foundation (博源基金). The organiztion is focused on economic and social research. It seeks solutions for the problems that emerge during China's shift from an agricultural to a post-industrial society.

The two words that Qin Xiao loves to repeat are "elite" and "responsibility." but this scholar and businessman who has been influenced by his experience in both China and the West - as a youth he was sent to work as a rural laborer in Inner Mongolia and at the age of 55, he obtained a PhD in economics from Cambridge University - describes himself as a "reformer working from inside the establishment."

The Interview

EO: You delivered a speech at Tsinghua University in July in which you said, "state-owned enterprises are a legacy of the planned economy and they should have their assets dispersed equally among the people in an orderly fashion." How can you manage a state-owned company when you believe it belongs to the public?

Qin Xiao:
Someone may be employed to do some work, but at the same time they're also members of society and are social actors. You've got to be clear about your roles. When I was managing a company, I had to try my best to run it well and make it a competitive company. At that time I should act in the best interests of the company. However, when I consider myself as a citizen, as an educated person, I'm free to comment on social events. What is politics? Politics is public affairs; people are supposed to comment on these affairs. If public affairs are monopolised by a minority and the public cannot have their own opinions, then society is not at its best.

EO: How can state-owned assets be shared among the people?

Qin Xiao: State-owned enterprises are a legacy of the planned economy. They are now well-integrated and the quality of their assets is good and they have some market value. The government may withdraw from these enterprises gradually, passing on the funds to the social security fund and distribute the wealth fairly, effectively and orderly among the masses.

EO: In recent years, private companies have been strongly critical of the "advance of the state and the retreat of private capital (国进民退)," what can we do to alter this kind of situation?

Qin Xiao: Managers of state-owned enterprises don't really ask such questions. They don't consider whether the running of their business contributes to the "advance of the state and the retreat of private capital." But if I consider this question as an intellectual or a responsible citizen, I think we should pay attention to private companies, after all, in our constitution it says that we should firmly support private enterprises. We have done too much in some places and too little in others. Retreating from areas where we have done too much and making up for those areas where there are inadequacies, wouldn't this be a reasonable response?

Housing Prices and Tax Reform

EO:High housing prices have been troubling ordinary citizens for a long time now and despite government measures, they are still surging. What do you think is at the cause of the problem?

Qin Xiao: There are two main reasons that housing prices are so high. The first is problems with the tax system, after the tax reforms of 1993, local governments have been required to do more while their revenues remained stagnant; consequently, they have relied on land sales to raise revenue. They have no choice. In 2009, the tax revenue of the whole nation was 6.3 trillion yuan, of this total, land grant fees accounted for 1.8 trillion yuan. The problem is that local governments have to live off these land grant fees. If land prices are high, it is impossible for property prices to be low. The second major reason is excessive liquidity. Last year, we issued 9.7 trillion yuan in new loans and the M2 measure of money supply increased by 28%. Asset prices have soared as a result of this excessive liquidity.

EO: In order to rein in the property market, the government has issued tough policies and local governments have set restrictions on the amount of properties that people can purchase. How do you react these restrictive measures?

Qin Xiao: I think we should resolve the problem by remedying its root cause instead of interrupting the market via administrative measures that may even violate the constitution. If people are buying houses with their own legal income, what right does the government have to stop them?

EO: If we want the problem be completely resolved, what should we do?

Qin Xiao: We should reform the tax system and direct profits from land sales back to the farmers who have lost their land. Profits should be prohibited from being spent on anything else, for example we could establish a special fund. This could be used to regulate local governments, improve farmers' living standards an increase their purchasing power. The government can expropriate farmers land for public welfare, but, if their land is auctioned off to commerical property developers, it is unreasonable if the farmers do not get a share of the profits.

The government imposes heavy taxes on developers. I estimate that the profit gained by developers is roughly equal to what the governments make in tax revenue. This tax income should be used to construct low-rent public housing instead of flowing to the government's coffers. This is a way to resolve the problem at its source. If this is done, no one will be criticized even if there are record prices paid by developers for the rights to develop a plot of land as, in the end, all the record prices being paid will flow through to fund the construction of low-rent public housing.

RMB Appreciation: A Free Floating Exchange Rate

EO: The appreciation of the RMB has accelerated recently, and our government is facing more pressure from the US. Why?

Qin Xiao: Every time there is a global recession, all the countries will first try to tackle it by alterning fiscal and monetary policy. But when the recession reaches a certain stage, there must be a country that will pull out of the recession earlier than the others. This is time is no exception. The emerging economies, led by China, have been the first to recover.

Europe and the America are experiencing a slow recovery and they've already done all they can through the use of fiscal policy, but problems concerning national debt, with fiscal deficit as a percentage of GDP and national debt as a percentage of GDP at historical highs, the US is left facing a dilemma: it can't survive without a new stimulus package, but budget constraints mean they don't have the strength to implement a new round of stimulus measures. It can't further loosen monetary policy either as interest rates are already close to zero.

So America begins turning to other countries to solve the problem. The "exchange rate problem" could not have been avoided. The worst thing they did was to politicize it. Yes, it is political, but you can't "politicize" it, otherwise you change the essence of the problem.

EO: Is the undervalued RMB one of the causes of the economic imbalance between the U.S. and China? Will the balance of trade change if the RMB appreciates?

Qin Xiao: Everyone knows that changes to China's exchange rate policy won't resolve America's problems. To put it simply, even if Chinese products are no longer sold in America, the U.S. still won't produce such items domestically. The gap between labor costs in China and America is huge, much larger than that of the exchange rate. This problem has been politicized, it's become a bit of a problem and it's global.

But, should China promote the gradual reform of its exchange rate mechanism? I think it should.  Regardless of whether it is undervalued or overvalued, it should be market-oriented and involve the gradual adoption of being determined in relation to a currency basket. The final goal should be making the RMB freely convertible in the market. We should continue to carry out this reform while avoiding any risks along the way.

EO: Recently, some market players have said that the RMB is actually overvalued rather than undervalued, what do you think?

Qin Xiao
: The exchange rate is an asset price, a factor price, the cost of factors of production should also be more market-oriented, otherwise it will also be distorted. I have insisted that we first make sure that all the factor prices are determined by the market and only then discuss the problem of the exchange rate because determining the exchange rate involves capital flows, which are all too uncertain.

We still impose regulations on many production elements, including energy, power and land. The price of public land is still cheap. The wage system for the labor market still needs improvement even though we have new labor laws. We haven't invested enough in production safety. Many accidents happen, not only because of human mistakes, but also because of inadequate investment. Additionally, we have not paid enough attention to reducing carbon emissions and protecting the environment. Only when we have the pricing system of all these production elements corrected will we know how to reform the exchange rate system. We will never figure it out when everything is mixed up.

If we have reformed the pricing system this way, our economic growth might slow a little, export may fall a little and the trade surplus will not be as large as it is now. Then, we will make a final decision about the problem of how to determine the exchange rate. In the meantime, we let the RMB appreciate slowly, we don't want to let it rise to quickly but at the same time we don't want to stop it rising either.

The Demographic Dividend has Peaked

EO: China's GDP has been growing by over nine percent for many years, will we be able to maintian such a high growth rate in the future?

Qin Xiao: After The 12th Five-Year Plan is released, it will be the starting point for the next 30 years of development. Elements that have supported the high growth rate have changed. For example, the urbanization rate is 46% now. Some people say China has reached the Lewis Point and the demographic dividend will cease to increase, and will even decrease steadily. I agree that the demographic dividend has already peaked.

With rapid urbanization and industrialization, the capable men in rural areas have poured into cities in the last 15 to 20 years. Even though the rural population decreased by 150 million now, agricultural production efficiency will not drop. However, since the 150 million farmers are not that young, skilled nor well-educated, the speed of urbanization will slow and the demographic dividend will begin to decrease.

This process will last longer than the 12th Five-Year Plan period and will perhaps gradually unfold over the next 10, 15, 20 or even 30 years, because China's economic growth is linked to population growth.

China has based the goal of achieving a minimum of eight percent economic growth based on past experience when growth rates of more than nine percent have been common. In the future growth rates are sure to decrease to six or seven percent. Of course, there you need to pay attention to what's nominal and what's real growth. China's inflation rate has been restrained by many factors. It has been three percent and 3.5% for a long time. Is this a reasonable level and what will be the price of this level of inflation?

This article was edited by Ruoji Tang and Paul Pennay


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