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28 Aug, 2015

Interview: Volatilities are “natural consequence” of China’s economic transition

by Xinhua writers Zheng Qihang, Guan Jianwu

WASHINGTON, Aug. 26 (Xinhua) — Recent volatilities of Chinese stock markets and the currency depreciation are “natural” in such an economic transition as China is undergoing, chairman of the Principal Financial Group said.

Larry Zimpleman, also chief executive officer of the Principal Financial Group, said in a recent interview with Xinhua that he remains confident about China’s economy as the government has long been “trying to re-engineer the economy.”

In his eyes, China’s economy in the past three to four decades was built on low cost manufacturing and exports which has brought hundreds of millions of Chinese people into the middle class with rising incomes.

“But clearly at some point, China isn’t necessarily going to be the lowest cost place for manufacturing. Other countries are naturally going to begin to take part of that,” he said.

The economic transition pushed by the Chinese government will transfer China from an export driven manufacturing economy to an economy based on internal consumption, saving and investment, said Zimpleman.

“This is a difficult transition,” he said. “The natural consequence of that is there is going to be volatility. This transition can’t be made smoothly. It will involve volatility and therefore we shouldn’t be surprised when we see that happen.”

The Chinese stock markets experienced their two worst days on Monday and Tuesday in eight years, crashing to the lowest level since December 2014. It is the first time in 10 months that the benchmark Shanghai Composite Index has been below 3,000 points.

According to the General Administration of Customs (GAC) data, China’s foreign trade posted a 6-percent decrease in the first quarter, falling to 5.54 trillion RMB (about 864.2 billion U.S. dollars), with exports rising 4.9 percent and imports dropping 17.3 percent.

The growth of China’s value-added industrial output, which measures the final value of industrial production has also experienced obvious up-and-down this year. The annual growth rate fell to 5.6 percent in March then gradually rebounded to 6.8 percent in June and dropped to 6 percent in July.

Though the transition is difficult, it is “the right thing to do” and “the right shift of the economy,” Zimpleman said, as it will make China’s development more sustainable and depend more on China’s domestic market instead of the overseas one.

“China will be successful in ultimately re-engineering its economy,” said Zimpleman, adding China will become the world’s largest economy in 20 to 30 years with an economic model more like Germany, France, the United States and other developed economies.

Talking about the recent rising concerns about Chinese government’s intervention in the stock market and the depreciation of Chinese currency RMB against the U.S. dollar, Zimpleman said those interventions are “not unusual for government” and “perfectly logical” as the government has a role to support the economy and manage the capital market and exchange rate.

Chinese stock market has witnessed a quick rise since the end of last year and reached a peak of 5,166.35 points on June 12. After that the stock index began to fall and the Chinese government has taken several measures to stem the panic, including reducing the number of new shares to avoid a shares glut, a police crackdown on short-selling and a six-month ban on big shareholders selling stocks.

“The United States government through Federal Reserve has been involved into the capital market for the last seven years. They were influencing single interest rate, pushing interest rate down,” said Zimpleman, adding “the European Central Bank in Europe is doing the same thing.”

Zimpleman, said “every government to some extent is watching its currency. And in fact if they get outside what they think it is reasonable area they start to take steps to manage that,” referring to the recent depreciation of RMB against U.S. dollar.

“At this point I would say I don’t see anything that causes me great concern,” said Zimpleman, as the actions taken by China’s central bank is “almost like using a tire pump to push a little more air into the tire because the tire was going to be a little bit flat.”

Zimpleman also said “it is quite common” for pension fund to go into the stock market in developed countries,” referring to the current discussion of pension fund to invest in the stock market in China.

“I would also say a more robust retirement system is more helpful for the economy of China because it will provide more stable and long term source of capital,” he said.