Li Keqiang answers questions at forum

On Monday, Premier Li Keqiang answered questions from Executive Chairman of the World Economic Forum Klaus Schwab after delivering a special address at the opening ceremony of the 2016 Summer Davos Forum in Tianjin. On Tuesday, Li had a dialogue with some business leaders attending the forum. Below is a transcript of the two events.

Klaus Schwab: Premier Li Keqiang, thank you for sharing with us such a comprehensive and integrated vision of China's economy. We should not underestimate the challenge related to leading such a large economy. You have graciously agreed to answer one or two questions. You described China's structural reforms and economic adjustment in your special address. And I think it is remarkable to achieve 6.7% growth. And you also shared with us this growth rate is quite stable, but there are still very substantial downward pressures. Now, my question would be: are there any special measures which the Chinese government will take to secure healthy and sustainable economic development?

Li Keqiang: In the first quarter of this year, China's economy grew at 6.7%. And entering Q2, we have maintained a steady momentum of economic development. I should point out that neither has come easily. Such a growth has been achieved when the size of the Chinese economy has reached 10 trillion US dollars. So, the 6.7% growth has generated more additional output than a double digit growth several years ago. Moreover, we have achieved such growth at a time of sluggish global economic recovery. I can also tell you that since last year, growth of Chinese exports has on the whole been in the negative territory. We have relied on our internal drivers to spur growth and our domestic market to provide the room for development. And we have achieved such growth while tackling the long-standing problems in China's development.

When the size of China's economy has become so big, if we still blindly pursue a high growth speed, it will only put more pressure on our resources and the environment, and such growth is unsustainable. The truth is, a medium-high growth is good enough for us in adding jobs, increasing personal income and improving the environment. Recent years have not seen China resort to massive stimulus measures in boosting growth. We have striven for progress while maintaining stable economic performance. We have adhered to pursuing a proactive fiscal policy and prudent monetary policy. And we have focused on advancing structural reforms and succeeded in sustaining medium-high growth. Growth has remained within its proper range and been consistent with our anticipation. Going forward, we will maintain the stability of our policy direction.

In the meantime, we will not underestimate the "variables" in the global economy, nor the potential risks and challenges in China's economy. We have a good reserve of policy instruments to help us meet various challenges. As I said in the special address, the central government debt ratio is pretty low and there is room for us to do more in implementing the proactive fiscal policy. We have a high savings rate in China. That means there is still more that we can do to pursue financial reform, harness existing funds and enhance the transmission mechanism for the financial sector to better serve the real economy. In a word, we are prepared with a good "toolbox" of macro policy instruments to deal with greater challenges. I wish to emphasize that the market should view those short-term fluctuations in China's economy in a calm way. When viewed in the whole of the year and in the long run, China's economy will stay within the proper range and maintain steady growth, and we will be able to strike a balance between steady growth and structural adjustment and, by pursing structural reforms especially supply-side structural reforms, achieve more sustainable development.

We have confidence in a long-term, positive trend of China's economy. I hope that all the business people present here will be long-term investors in China's market and a force for boosting such a trend. We will use fine-tuning measures to address short-term problems, just as I was fine-tuning my earplug to see if the audio services at the meeting venue have satisfied your need. (Laughter)

Klaus Schwab: Maybe with the industrial revolution, in five to ten years, we will have implanted microphones. Would you allow me another question? Your mentioned the importance of the fourth industrialization for the future of China's economy. Now what policies will the Chinese government introduce to fully leverage the potential of this fourth industrial revolution?

Li Keqiang: As I said in the special address, to crack the hard nut of the sluggish global economic recovery, we must address the issue at its root. Hence the imperative to advance structural reforms. This new round of industrial revolution, however one may call it, is now booming and it is a force that no one can afford to overlook. Yesterday evening, I had a meeting with Professor Schwab and a number of forum delegates. It seems that we share such an impression among us that if you go to a place dominated by traditional companies or industries, you may see a lot of problems and find the situation disheartening, but if you go to a place or a company which has seized the opportunity of the new round of industrial revolution and where new industries are booming, you feel that the new economy and new drivers are bringing not just hope but powerful strength.

Mankind has the wisdom of embracing such new hope, hope of the new round of industrial revolution. The Chinese government has made a strong call for innovation-driven development, including both technological innovation and institutional innovation to create more room for everyone to be an innovator. We are championing mass entrepreneurship and innovation in a bid to bring out as much potential of each individual as possible. We have seen such examples in our real world that even an intellectually challenged person may demonstrate a genius' talent in certain areas. So we must cherish the creativity of each individual. This is the first point I want to make.

Second, we need to implement fiscal and tax incentives to support innovation and development of new industries. The central government has adopted a series of preferential tax measures and provided financial support. Yesterday I was briefed by the Tianjin local officials and learned that the Tianjin municipal government has provided guarantee support and risk compensation for the financing extended to innovation-oriented companies. This way, the financial institutions, venture capital and angel capital can provide stronger support for developing new industries and upgrading traditional industries.

Third, we will implement differentiated industrial policies to support the new round of scientific revolution and industrial transformation. We will upgrade traditional industries, enforce stricter environmental, safety and product quality standards to cut overcapacity and eliminate backward capacity. We will introduce supportive measures to boost the growth of new industries and provide new forms of business reasonable space for growth.

To conclude, I want to emphasize that next time when we meet again, whether you are engaged in transforming a traditional industry or developing a new one, you are all the new champions.

Feike Sijbesma, Chairman and CEO of Royal DSM: Premier Li, in recent years, the Chinese government has made vigorous efforts to pursue structural reform, including reforms of the SOEs and functions in the government, and cut in taxes and fees, etc. Could you share with us the priorities in those structural reforms and the progress China is making?

Li Keqiang: Before answering your question, I want to first express my high appreciation to the World Economic Forum for forging such a close partnership with the Chinese side. I'm also very happy to meet friends here, both old and new.

In recent years, the Chinese government has made hard efforts in advancing all-around reform to create the necessary conditions for structural reforms and use structural reform in return to underpin sustained and steady economic growth. We want to maintain balance between steady growth and structural adjustment. What happened in the past couple of years has shown that the Chinese government has not resorted to massive stimulus measures. Instead, we have focused on structural reforms, especially supply-side structural reforms to bring out the creativity of each and every individual and potential of the market. These efforts have improved China's economic structure and supported a medium-high growth of the economy.

In pursuing structural reforms, especially supply-side structural reforms, we have focused on streamlining administration, delegating government power and lifting the undue restrictions on companies and the market. In particular, we have reformed the corporate registration system and investment review system. As a result, in the last couple of years, as many as 40,000 new market entities get registered on an average daily basis. They have given strong boost to employment. Over 13 million urban jobs are added annually. All efforts for maintaining steady economic growth are aimed at ensuring employment.

The endeavor of streamlining administration and delegating power and encouragement of mass entrepreneurship and innovation have also contributed to the improvement of the economic structure. In this process, micro businesses and SMEs have been the largest contributor of new jobs, and made the service sector the biggest sector in the economy. Consumption has been on the rise, fast yet steady, and it has exceeded investment in terms of contribution to GDP growth. All these have made positive impacts on China's economic structure.

Second, we have introduced significant tax cuts and eliminated the undue administrative fees. This has opened up broad space for companies, especially emerging companies, to grow. The activity rate of newly registered companies this year is higher than last year, standing at above 70%. Our policies have paid off.

Third, we have continued to reform SOEs, including large SOEs, to make them leaner but healthier and to ensure that they focus on main businesses, cut the excessive tiers of management and introduce mixed ownership in order to enhance their core competitiveness. We are creating conditions and the environment for SOEs and private companies to compete as equals on a level playing field. This in itself is an effort of structural reform.

In one word, reform is the fundamental driving force for China's economic development, and we will stay firm on this course.

Matthew Prince, CEO of CloudFlare: Premier Li, thank you for meeting with us today. My company is investing in cloud computing infrastructure across China with our partner Baidu. I appreciate your statement in the special address on the importance of cloud to China. My question is about China's strategy to upgrade its manufacturing industry and boost its internet development, specifically the Made in China 2025 and internet+ initiatives. What will be the impact of these initiatives? What will be the Chinese government's next priorities in these areas?

Li Keqiang: China is the world's largest developing country and a country that is still in the process of industrialization. The manufacturing sector is still of fundamental importance to China's development. The priority now is to transform and upgrade the manufacturing sector from low-medium to medium-high level. Hence we introduced the Made in China 2025 and internet+ action plan, which have much commonality with the theme of this year's forum - the fourth industrial revolution.

First, the Made in China 2025 and internet+ initiatives are inseparable. To upgrade China's manufacturing sector and elevate China's 200+ industrial products, the output of which is the largest in the world, to a new level, we need to rely on the internet, cloud computing, big data and other technologies to make China's manufacturing smarter and more digitized.

Second, in upgrading China's manufacturing sector, we need to use the internet+ to pool intellect and resources globally to offer solutions to various problems. In my special address yesterday, I gave the example of a local Tianjin company of cloud computing which serves the manufacturing sector. I hope that CloudFlare will not just work with big companies like Baidu, but also consider partnering with new growth cloud computing companies in China.

Third, in upgrading the manufacturing sector, we must be highly responsive to the market changes. China is already a middle-income country. The middle-income class has diverse needs, so we must ensure that the manufacturing sector is customized and suited to customers' individual needs. We need to use the internet to get a better feeling of their needs and make our products accordingly. There is also need for interactions with customers, and this will open up a broader market for the manufacturing sector and integrate products with services. We live at a time of fast changing market demands and a time when the potential of each individual can be brought out through mass entrepreneurship and innovation and internet+. This presents a challenge to the manufacturing sector, but more importantly, an opportunity.

Klaus Kleinfeld, Chairman and CEO of ALCOA: Thank you for taking the time. I have a question that goes on the "cloud" to the heavy industry that sometimes produces a lot of clouds. You and your administration have been very clear in addressing the issue of overcapacity. This has also caused a lot of media and international attention. As China is taking massive actions to address the issue, how are you going to deal with the economic and social impact of the changes?

Li Keqiang: Just now we discussed the "cloud" floating in the sky. Now we need to turn our attention to the traditional heavy industries standing on the ground. But the truth is a close link is already taking shape between these two. Cloud computing is playing a greater role in transforming and upgrading traditional industries by collecting and analyzing massive data to find new pathways to renovate and upgrade traditional industries. And traditional industries are one of the basis for the birth and growth of cloud computing.

Heavy industry is a traditional industry. We must not turn our back on heavy industries. Without heavy industries, where do we get the materials for the cellphones and other products? What we are doing now is to cut the excess and backward capacity in heavy industries. Such excess capacity is the result of the sluggish global economic recovery and anemic growth of global trade, so it's a global issue that requires a global solution.

There is excess capacity in some sectors in China. In recent years, we have taken strong steps to phase out overcapacity. We are firm in our determination to carry on with this effort, not only to meet our domestic need, but also to do what we should for the international community as a responsible major country. I want to emphasize that China's heavy industry capacity is mainly oriented toward the domestic market, not for large exports. Exports both last year and in the first five months of this year declined.

We are now working hard to phase out the excess capacity of steel and coal. In the next few years, we plan to eliminate 100-150 million tons of excess steel capacity and 800 million tons of coal-making capacity, involving the employment of some two million people. Yet it is encouraging that with mass entrepreneurship and innovation, new industries and new forms of business have flourished and added more jobs than we expected, so we are able to ensure that the affected workers will not lose their job but will get re-employed. The central government has allocated 100 billion yuan for this purpose, and asked local governments to come up with matching funds for the re-employment and resettlement of affected workers.

In carrying out this task, we need to be firm in the resolve, and follow a market-driven and law-based approach. We will enforce stricter environmental, safety and product quality standards to meet our goal. No doubt, the legal rights and interests of workers will be protected in this process. This is not just the responsibility of the Chinese government. I believe you all have a strong awareness of fulfilling corporate social responsibilities in your business operations.

Marc Benioff, Chairman and CEO of Salesforce: Premier Li, it's nice to see you again. Thank you for the tremendous commitment of time you've made to the conference. China has an incredible economic success and you have depicted China's future economic blueprint on many occasions. I would like to know what are the most urgent challenges or obstacles in China's economy. As CEOs like myself and others being here, is there a way that we can partner with you and how can we help you eliminate these obstacles and challenges?

Li Keqiang: It is hard to describe the biggest challenge China's economy faces in one sentence. We now face, at the minimum, two major challenges. One is the sluggish global economic recovery, which means China's economy, one that is deeply integrated into the world economy, now confronts an uncertain and unstable external environment. The other challenge is the entwining of our own long-standing problems, the historical extensive mode of development and institutional barriers. We will focus on tackling our domestic issues and managing our own affairs well.

China needs to use reform and innovation to achieve economic transformation and sustainable, healthy development. Participation of foreign companies is needed in this process. China's reform and opening-up have been developing side by side. In many cases, opening-up could propel reform. The involvement of foreign companies will introduce new technologies and managerial experience, which can be of help to Chinese companies and industrial upgrading. Meanwhile, to heed and adopt the views of companies will help us improve our institutions and provide them with better services.

During China's economic transformation, the new economy is developing, the service sector is growing and traditional industries are going through upgrading. All these will generate tremendous market demand. We welcome more foreign companies to invest in China and will further ease market access and level the playing field. Whether making investment or working in partnership with local companies, the overwhelming majority of the foreign investors would have had reasonable or even fairly high returns when they tally the total scores. China is still the most promising investment market in the world and should be the world's most attractive investment destination.

John B. Veihmeyer, Chairman of KPMG: Premier Li, thank you for your very open, clear and direct answers to the questions. It means a lot to us. Thank you very much for that. My question relates to the capital markets. As we all know, our capital markets are very interconnected around the world. We've seen a latest example of that this past week in the aftermath of the Brexit vote in the UK, just how dependent and interconnected our capital markets are. So there is tremendous interest outside of China in the strength and continued development of China's capital markets. What can the Chinese government continue to do to strengthen and further develop capital markets and the financial system here in China?

Li Keqiang: It is true that the result of the Brexit vote has sent jitters across global financial markets. As I said in my special address yesterday, now is the time for all of us to work together to strengthen confidence, to prevent the spread of panic and to maintain stability of the global capital markets.

On China's part, it will do its best to maintain the stability of its domestic capital and financial markets. This is how China can contribute to the global financial stability. China will continue to enforce financial reforms to develop its multitiered capital markets, because on the whole capital markets in China are not yet well-developed, some markets are not yet mature, and the capital markets and direct financing each only takes up a small percentage in China's financial system and in total social financing. For companies, direct financing only accounts for about 15% of their access to finance. Hence, we need to develop multitiered capital markets.

The Chinese people have a long-standing propensity to save, and savings in China account for nearly half of the GDP. That is one cause of the high leverage ratio of nonfinancial companies in China. We have taken steps to gradually bring down the high ratio by developing multitiered capital markets, market-based debt restructuring, merging and bankruptcy. I want to emphasize that in the first five months this year, Chinese corporate profits in the industrial sector rose by 6.4%. That means there is the basis and room for us to bring down the leverage ratio of nonfinancial companies and raise their efficiency.

In developing capital markets, we will guard against systemic and regional financial risks and prevent cross infection of different financial markets. We will also reform and improve the regulatory regime. This should be a market-driven and law-based process. Just as China's economy, capital markets in China may also experience short-term fluctuations, which are hardly avoidable. But we will not allow rollercoaster rides of capital markets. We will follow market principles and international practices, and deal with the isolated default cases in accordance with the law. All in all, we will continue to develop the capital markets to make them more mature and better play their role in underpinning economic development.

Klaus Schwab: I would like to acknowledge the presence of such high-level government delegation, the esteemed members of government that have accompanied you. Thank you very much for your presence. Your Excellency Premier Li, when I was teaching business policy, I said a successful future has to be based on a grand vision. You presented to us yesterday your grand concept and vision. But it has also to be operationalized in the details. I think we are all impressed by the picture of China's economy you showed us yesterday and how much it is operationalized. I am personally impressed with the detailed knowledge and facts. So to summarize, I can only say there are very often, in the world, particularly in the media, doubts and questions. But I think you have given great answers to all the questions and I think we will all act as ambassadors for what we have heard here and support the development of China in any way we can. We support China's role as a very responsible actor. I think we all are living in a global community, interdependent. So it is in our interest to carry the message which you shared with us in the last two days. Thank you very much.

Li Keqiang: I want to thank you, Professor Schwab and all present for your tremendous effort in making the Summer Davos Forum this year a success. The relationship between our two sides is indeed an interesting one: you could be said to be the host of the Forum and so could we, as the Forum is held on Chinese soil. I agree with you, Professor Schwab, that we have presented both a grand vision for China's development and concrete details supporting the operationalization of this vision. I hope all the business representatives here may try the reverse way: to use the details in your respective industries to prove that China's vision can become a reality. I believe we will all emerge as winners in this process.