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tv   Bloomberg Debate Davos 2016  Bloomberg  January 23, 2016 9:00am-10:01am EST

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francine: welcome to bloomberg's os debate.ebate -- dav economythe chinese shift without stalling? have an a star panel. is thene lagarde
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managing director of the imf and thank you so much for joining us. is there something that the west misunderstands about chinese exacerbate does that volatility? the think there is a lot west does not understand about chinese markets. the essence of what's going on in china is an adjustment. they have a debt restructuring challenge. they have an economic restructuring challenge and they have to come up with a new model. they have a capital markets challenge.
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they need to build in addition ways that circulates capital through the system better. they have a balance of payments challenge. that will pressure on the currency. that havethings happened repeatedly through the rest of the world. the united states has had three major debt crises. s&l crisis. we've reshaped our economy many times. we have gone into other areas. we have had another of talents of payments and currency issues. one of the things being misunderstood is what is a normal balance of payments and too much debt restructuring kind of recession?
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define recession is anything less than 3% growth. i think it's been confused with the longer-term feature. i think the reforms going on in china and the leadership in terms of where it's going will be fundamentally good. you're looking at something that is a short-term challenge. this is five years after the generation of new markets and vibrant young entrepreneurs and the other economy that is trying to flourish. francine: why we had so much volatility? of ant's been the result easing of monetary policy around the world. we are not going to have the same effect. with interest rates at zero, you
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can't cut interest rates. with asset prices having risen, there is risk that has gone down. when china is dealing with the rest of the world, china is a negative on the margin of for the rest of the world. the world is vulnerable because of a lack of monetary policy while asset prices are high. francine: how do you explain of volatility? maybe there are two factors going wrong. one is china is in the midst of an economy that relies heavily on investment and exports and they are shifting to consumption. in this transition, a lot of assets get devalued in the process. this is the primary reason
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behind volatility. the fed raisedis interest rates not long ago. didt of emerging markets not perform very well. reforms got stalled. you have a combination of chinese transition plus international influx and that caused volatility. year,the beginning of the asset price adjustments go by steps. it does not always go smoothly. we had the steps at the beginning of the year. francine: what have we learned? is there something we have learned to balance? at the imf we don't look at the last two weeks.
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-- i would like to go back to more a six. the second orhat aird gdp is going through list of transitions. you have indicated that as well. industry to service, export to conception, lower investment. i think there is another one happening which is also the governance change. that is probably going to continue to deal with the one ofruption fight as the key proposals. that has to trickle down. this is a management change. to be taken into
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account by chinese authorities and chinese operators. the risk can be apprehended and taken it. that given also theremassive transitions, is a communication issue. that something that markets do not like. there is uncertainty. is at the dollar? which ask it of currency is it going to be western mark --? i think better and more communication would serve that transition better. with the agree assessment, but we believe that all of those changes are perfectly manageable if the
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right policies are taken. given the large amount of reserves at the country has, from our perspective, we are forecasting a 6.5% growth for next year. we think the chinese authorities can legitimately except this growth rate as fine for china as it is for the exchange rate to be aligned with a basket of currencies area francine: does china need to decide if they are a free market or not? have they not communicated enough western mark --? >> many of these fundamental transitions that china is going through are real. a economy where your building infrastructure to consumers driving the economy, that is a long transition.
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affectnot monitor or consumer discretionary spending. you can't affected the way you can government spending. this transition is difficult area --. clearly, this is a question that the market is dealing with. there have been signed that china wants to have an open, free economy and an open, free arc in place. -- marketplace. they intervened in the market, making it less than a free and open market. i must remind everyone that many of the ends the chinese have done in intervening in their thatt are the replicas many other countries including the united states have done in modern history.
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whether it be circuit breakers or limits on certain trading activity. i agree. it's a communication issue. the communication is what is important. communicating what the chinese market is going to be and stick with that theory. transitions are difficult. you've got to stick through the transition. francine: how difficult this communication when you're dealing with complex economies? i come from the real economy side. a difference between the stock market which is hugely discounted and the real economy where we see the
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easing of monetary policy is pushing the active price up. in terms of transition from investment driven economy to consumption driven economy, we build holdings. today we just manage the lease. leasing is going well. seeing a massive take-up of. much theeing not so old economy, non-internet and traditional. uphave new buildings coming almost every other month and they are all taken up. we have not seen the building sitting there empty. i think there must be a communication issue.
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the real economy seems to be doing ok. the stock market is creating a huge discount. investors are not getting the same message as we operative the economy. francine: again to this point of transparency, china promised to give the market a decisive role. we have had intervention in both the currency and the stock market. when do you foresee china taking good on its pledge? has declared publicly to the world the market will play a decisive role in economic development.
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vacation, it's important, especially when the economy is undergoing transformations. many think this needs to be mitigated it. in the past few years, the chinese economy has undergone three transformations. some criticize the growth led by investment. it has indeed happened. the consumption has contributed to 65% of the growth. she described the housing market. the time of buildings in china.
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10%.counts for only the consumption of the housing market is increasing. 62% of our loans are people buying real assets. the housing market. andeed more communications the lack of understanding of policy. , some views are understood from the old normal for china. normal is a test for china to have better
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communication so as to prepare misunderstanding. we will be more mature in the future. >> there are three issues. one is communication. is a strategy to move a consumption economy. the third is people questioned the execution of the strategy. themselves, that will be worrisome for people. they know volatility very well.
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if the three reasons behind the volatility that has worried people internationally. you're right. we should do a better job communication. we are learning. i am here today to communicate. [laughter] we have to be patient. our system is not structured that can communicate. to communicate seamlessly with the market. we are learning. china can learn it, i can assure you that. ♪
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>> you start out talking about the question of volatility. we moved on to free markets and communication. i think these concepts go together. when you look at what's going on the chinese are trying to move to more free market and there is an inability to
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communicate more freely, that is generating volatility. the world's standards today for publicly listed companies and disclosure on balance sheets and audited financial sheets is pretty high in getting higher everywhere in the world are in capital moves at the speed of light today. people want access to chinese companies and they want chinese companies held to the same a standards. toy want the market place determine which chinese capital -- companies have access to capital. if the chinese market opens up and becomes freer, the marketplace will determine which companies should be public and which ones shouldn't. world accepted financial statements and the
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market determines which companies will be public. i think you will dampen volatility. some of this is natural evolution when it comes to the communication problem. unfortunately, they are doing in 2016 in a digital era. they are not doing this in the 1930's. they are doing it in the digital world. we're watching it in real-time. they are doing it in an era where we just got re-regulating all of the financial institutions around the world. we took an enormous amount of liquidity out of the markets and the chinese are suffering from this lack of equity. chinesenk the policymakers are not getting as much credit as they deserve.
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i am not speaking from a chinese perspective. you have to get into the newly ready of what they are going through. if you take a look at the debt restructuring they are going through, local government spending accounts for 30% of gdp. they are running at deficit. that is about the percent. ofyou cut that, that's sent gdp. -- 6% of gdp. managed some late. it's a difficult situation. you were in a situation where you just restructure and you don't provide capital, all of that spending will take place. the same people who are doing that restructuring are the same people who did it in 1998. you know the mechanisms to be using. they are pursuing that.
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if you look at the economic restructuring, they are going from one economy. the lendingent of system, that's been done with a lot of balance. it's a risky situation. the free exchange of capital is getting it to companies that would not have that access to capital before. producing volatility and that's quite an a cop. ae passive payments is difficult situation. cap flow is what the cap flow is. in terms of the stock market, there and problems. some of the responses have not done by world standards. there has been a big water imbalance. sell, ityone wants to was that kind of circumstance. when i speak to those withymakers, i find people
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equal levels of competence for the things they are dealing with. if you compare the politics of the government, there are no loose cannons running china. you have to be a competent leader. when you look at the politics and the west, you look at some of the leadership there, that could be quite scary. i think the commitment to market reforms is a very real commitment. think of the power that's going to liberalize that economy. it's been an economy. this will circulate. there is a new china. you can speak to that new china.
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i think we are going through a can't help but go over that adjustment. that last two or three years. it comes at a bad time for the rest of the world are in when you look at its impact on commodity prices. look at the vulnerability of the rest of the world in terms of anna terry policy, that's a bad combination. we'll get past that. a bad year in china is a great year in almost any other country. you question their commitment to structural reform? is there a danger western mark --? christine: we went through a couple of years of intense discussions with the chinese of parties because we were going to review the baskets of currency that define the value.
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this is what central banks around the world use. if you asked me if the chinese of 40's would complete the forms they had to take in order to satisfy the criteria of that currency, i would've said i don't think so. mindthe authorities their strategy,termined for we have seen in that case an determination and ability to deliver what frankly what have thought undeliverable to begin with. if the same determination is applied to the reform of therprises in relation to clarity of messages concerning the transition, clarity of communication concerning the
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framework in which they will do find their policies going forward, even if the growth andht -- rate is not 7% closer to 6%, it will take a little bit of time as we said earlier. we believe. it's a massive undertaking. just read -- reforming the state is going to require a fund for these issues. they have done that in the past already with certain sectors. this is part of the exercise like the supply-side reforms in beijing, it will happen. francine: there is commit it? -- commitment? china must get used to the recovery unless reform is pushed through. what are the dangers of waiting too long?
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if we have reached a point of no return, we have to evolve. it would not only affect billions of population, it would have major impact economy. rate has reached 69%. it may drop to six point percent during from the point of economic growth, we are paying more attention to the polity and not the quantity of economic development.
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we proceed to structural reform. we cannot depend on investment. we have to rely on innovation. is a huge task. chinese authority we think that ratio is not that high. government debt for overcoming the debt, measures of been taken to renew. 40% of such reduced loans. increase the
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transparency as individual debt ratio is also very low or relatively low. this is another engine for future economic growth. what we have to do is the debt ratio of enterprises. it's a very difficult task. we need courage to reduce global capacity. the steel and iron industry were built during the high-growth period. that's why we have overcapacity. suche have to reduce capacity. it will be a painful process. there will be a cost for such a all in all, i
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think china has to undertake it willforms, although and onlyifficult possible by finishing the reforms. >> how concerned are you about an outright financial crisis, given the amount of leverage in china? >> the leverage levels are not intolerably high. the problem is debt is still growing at a rate that is significantly faster than income. that is an unsustainable circumstance. it is also an understandable circumstance because changing aat rate abruptly will have negative effect on the economy. i think the issue of instability is more of a balance of payments /currency issue. that becomes one that i'm more concerned about. that might require more of an
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adjustment in the currency. that adjustment in the currency would have an effect on the rest of the world, which would also transmit deflationary pressures to the rest of the world because those exchange rates would essentially appreciate, and that has and if act at a time when there is a weakness in the rest of the world. we have to look at the impact china has on the rest of the world and the rest of the world has on china and the fact that there is not much effectiveness in monetary policy. a risky bind create situation. >> in relation to exchange rates and under currency, i think you are completely right. i think this illusionary pegging against the dollar has to be dismissed. the remnant make -- the renminbi
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has been quite stable, not just now, before the last few months, and that has been knowledge understood by markets. been complaint that there's depreciation against one currency, but you are doing that against a basket of currency. communication on that one is an important one. >> i just wanted to remind everyone that china builds its because of the last 30 years of reform and it's driven by entrepreneurship and largely driven by the private sector. the government commitment to support the private sector is important. i would like to remind you that of the fourth ward is a stock exchange that would enable small to medium-size
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enterprises to be lifted to get funding without producing profits. a lot of the companies listed on nasdaq are not producing profits, remember, and today, in an amazon -- are you can be as good as amazon, but if you do not produce profit, you are not qualified to be listed. that commitment has to be kept. the government came out -- a lot about talk the fourth quarter is coming out . we would love to see it come out as promised. i'm expecting you to come out with a good year. ♪
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anothert to move onto point because i have news -- the imf opened its selection process for director. you have had the support of france in the u.k. and the u.k. do you want a second term? [laughter] >> you will appreciate that i
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will be waiting a little bit before i answer that. thank you for the question. >> if you do get a second term, how much do you think we will in the nexthina seven years? >> in the next few years, given the growth rate of the country, i think we will be talking about china a lot. it's one of the two largest economies in the world. i think we would be crazy not to talk a lot about china and the transformations that are at play at the moment are going to be both fascinating and will matter a lot over the rest of the world. summer,seen in over the surprise, surprise, but we are going to see it more because there will be spillover effect because there is a china supply chain that we will see across the world. any significant reduction in the growth of the largest economy in
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the world or second largest economy in the world, depending how you calculate it, is othersly going to impact economies. >> the growth rate in china has fallen by 4 percentage points. looking at 2020, what do you think the growth rate will be? -- it iscinating fascinating that people say china's growth has collapsed at 6%. if we look at the output relative to what the output was 6, 7 years ago with 12% or 13% growth rate, we are the same. give us -- sorry, i will stop here. [laughter] >> i understand there is some concern about this current year in china. some people forecast that because of volatility and so forth, somehow 2016 would be a very bad year for china.
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growth rate will slow down dramatically. i do not think that will happen because in china, we cannot afford to let growth rates drop sharply.y -- too what we call appropriately expansionary supportive fiscal and financial policies in this current year to make sure that growth rate is still appropriate. china has the means to do so. obviously, we have the means to do so, particularly on the fiscal side. we can expand white a lot. there is no worry about a sharp decline of china's growth rate. 6.9% isple think perhaps not accurate to begin with. i admit our numbers can always be more perfect, more accurate,
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but let me give you a sort of supportive figure. revenues in china went up by not last year, so that's far away from the 6.9%, which the figure is not far away. also mentioned china's contribution to the rest of the world remains extremely large, which is true. talking to multinational ceo's who have business in china, most of them tell you that their is expandinghina quite well. theymotors, for example -- are not the biggest car seller in china, but they sold 1.0 7 china last year. china remains a huge contributor to the rest of the world, and this is something that the rest
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of the world should appreciate a little bit more. [laughter] out alsore pointing that a lot of observers underestimate, which is a strength of consumer spending and a strength of services. resilient are those when you look at the chinese economy? thehen i look at still dynamic force of the chinese economy is its , andpreneurialism especially the small to theum-sized companies, not gigantic ones, even though they command a lot of power. in that regard, performs still need to be more focused on support, whether it is capital market support, tax support, monetary support --
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those are very important for continuous growth. that will continue to be the growth engine for china. from where i sit, i see incredible innovation coming from the young, internet, mobile companies. exciting part an of our economy that very rarely gets featured into the news. so much about market volatility and so on. ast of these do not even get chance to participate in the volatility. i think it is important to remember that especially the -- it is important to include these sme's. they would reduce your volatility. >> a comment? are ame's that
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great contributor to chinese growth. our stock arc it -- our stock market should have done a lot more to support growth. it is doing quite a lot, by the way. take last year -- people focused so much on the gyrations of the last year, but last year, chinese stock markets raised 1.4 trillion in equity money. that placed the chinese stock market and number one in the .orld in terms of equity rates we can certainly do much better. just one very short sentence about financial risk -- china is different from other developing countries in the sense that our is largely fueled by domestic savings, by domestic capital. that gives us confidence in our ability to deal with whatever volatility, risk is coming out of the financial market. if china was a country relying
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largely on foreign capital for , any financial risk could derail our growth. but china is different. inclusive will china's growth be in the future? >> i would like to speak on two fronts. i think paying attention to the growth of sme is important for china. sme has huge potential and vitality, and it is an important sector for solving unemployment. last year, we underwent adjustments, but the year-end
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result was better than the earlier predictions, paving the reform on this financial sector in china. sme isnker, the loans to a manifestation of inclusiveness in china, in our financial statement, and 1.8 trillion is spent on sme. of course, we can do better. i welcome your suggestions. anothereness includes aspect -- environmental , and green economics on which we have undertaken much work. we are very determined, resolute
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on one point, any industry, any sector that is not in line with environmental protection. we would readily not allow them to be established. i think we would be able to welcome a new and better economy in china. trade stagnant, roles thechina take u.s. has had for years in spurring demand? >> i don't think we will see that for three years or more. we're going to see -- china is going through this adjustment process, and it will be, i
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think, a three-your type of three-yearprocess -- type of adjustment process. or the equivalent. it's going to be a negative world economy, and that passes through to emerging countries, particularly those that depend on exports in china or have commodities, and then that is passing through in turn to a number of countries, so there is a world deflationary pressure and that's why when we think about the fed's policies, there's not a country in the world that should not ease its monetary policies. they be some should stay fat. maybe u.k. should stay fat. -- maybe some should stay fat. maybe u.k. should stay fat. by a large, we have that self enforcing growth because the rest of the world represents
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weakening force in china to the exports for their demand. that is also weakening. i think the question will be -- where is the locomotive? is it, and what does it mean for fed policy? if you look at deflationary pressures, how does janet yellen look at this? >> i think the federal reserve .hinks of the business cycle classic business cycle is that when your demand is increasing faster than your capacity and you are at a fairly high level of capacity, unemployment rates are low, gdp gap is fairly tight, you should tighten monetary policy, and that is the policy, i think, that is overwriting the fed's issue. i think they are paying too much attention to the business cycle and not enough attention to the long-term debt cycle. there is a long-term debt cycle that you cannot squeeze much
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more out of this because of the lower interest rates, and so we are seeing that the world that they are getting feedback about is a deflating world with asset prices coming down, and i hope that they will remain flexible in their thinking of monetary policy. risks --mmetric there's a semester -- there's asymmetric risks. if they are a little bit late and then they tighten monetary policy, i do not think that is a problem, but they are not as effective in easing monetary policy. string is aon the real issue. what they have to do is more waiting for the whites of the eyes of inflation because i do not think it will be easy to be .timulative >> i agree with that.
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one of the , again, going back to this digital world we live in, versus the analog world -- one of the , again, going back to this digital world we live in, versus the analog world, we are relying on analog policy, the same policy we have relied on for generations and generations. the world we live in today is completely digitized, more real-time. we have a global workforce today. we have global free movement of currency. anyone with a handheld digital movee, one of those, can any amount of currency they want around the world, can trade any want around the world. fixating on employment in the united states is interesting, but we have been unable to create wage inflation now for multiple years. the fed has told us multiple times that it will come -- every year, it will come, but in some
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aspects, when you think of globalized workforce today, which i think we have a globalized workforce and china is part of our globalized workforce, if you can go higher the into -- the incremental worker for less money in china than you can in the united states, where does the wage price inflation come from -- if the incremental worker for less money in china than you can in the united states, where does the wage price inflation come from? you take most companies that we our clients, and we talked to them about how they are running their company. they will talk to me or talk to howrepresentative about they are optimizing their workforce, how they are moving jobs to bangalore, how they are moving jobs and opportunities to china, moving jobs or opportunities to warsaw, poland, because these are places where
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they can hire workers at a huge discount. to the extent they would have to pay incrementally more for the next worker, they will export the job, so i agree -- until you see the reality of this inflation in the system, i'm not sure assuming it is coming is a good assumption. >> we are almost running out of time, so i'm going to ask each of you to give your best advice for prescription to try to bridge the divide we were between market perception and what policymakers in china want. >> firstly, we hope there will be a recovery in the world volatilityat this will be reduced in scale, and i
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also hope that china will succeed in its structural reform and adjustment to avoid the middle income trap. >> i would say number one, clarity of communication. number two, clarity of purpose. and i would say number three, implementation of the reforms that have then identified. and for all of us, a bit of patience with the massive undertaking. -- number three, implementation of the reforms that have been identified. >> [indiscernible] >> i'm honored. i'm very grateful, and i'm extremely pleased to hear that, and i thank you. >> ray just said that china is, on the margin, a negative contributor toward growth.
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i was thinking -- who in your mind would be a positive contributor of the margin toward growth? >> to be clear, i'm saying as the rate of growth slows and the complexion of the economy changes and the demands on the margin that's a negative to growth. right now, i don't think that we have a locomotive. i think with the exchange rate rising in the united states and with the negative wealth effect we will have because of the stock record going down, that we are going to even in the united states experience a lower level of growth. my concern is that we do not locomotive. >> that's what i wanted to say as well. in this world, in fact, we have to -- all the major countries and major economies simply have to work together a lot more and
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cooperate a lot more in terms of policies, understand each other in terms of overcoming our systematic difficulties, and realize that the economy is globalized. boat, and on the same we just have to cooperate a lot more closely to overcome this rough patch going forward. >> just to follow through, would that be monetary policy cooperation? would that be fiscal policy cooperation? what form would that cooperation take? it will be a challenge. >> it is. sentence, indd one terms of monetary policy, cooperation, and other issues, we are working very well with our u.s. counterparts. >> a challenge but doable? you are confident this will be
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done? >> i think monetary policy is not going to be as effective. that's a big change in the world because we require monetary policy to be effective. i think on cooperation of monetary policies, because you cannot move interest rates as much, you move currencies more, so we are entering an environment in which there will be more currency volatility as a means of easing policies where they need to be eased. ,hat smacks of currency wars not as much currency cooperation. when i think of fiscal policy, i think fiscal policy is very politically sensitive. you get into a bad economic situation, and someone will say you need to be more fiscally responsible and someone will say you need fiscal stimulus, and --n there's political shifts particularly, let's say, the populism taking place in europe and the united states, those may
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not be easy decisions to make. >> i agree with the chairman. i hope for china's success very much. i agree with madame lagarde. we all want clarity. we are hoping for success and all the policy areas. the one area i would throw my his china seems to be more receptive and your point to trade policies, and getting trade policies done with the united states would be very beneficial for both economies. >> final word, 20 seconds. >> i think china is going through this transition period, and there's going to be a lot of volatility and noise, and it is important that the policymakers -- media are not august focused only on the short-term noise but committed to the long-term reform. thank you. [applause] ♪
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emily: he got his start in west philadelphia. working for the fresh prince himself, and later biggie, and p. diddy. his breakthrough came in 2007, when he met a woman the world would come to know as lady gaga. troy carter helped take gaga from unknown to multiplatinum, then broadened his job title from talent manager to tech investor, betting on spotify and uber. but his own path to hollywood was unexpected, coming from a tough neighborhood, with a father who did time for murder. proof, he says, you write your own future. joining me today on "studio 1.0," founder and ceo of atom factory, troy carter.


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