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Market Oracle FREE Newsletter


China Economy Needs Serious Reform; Russia's Heading in a Bad Direction

Economics / Emerging Markets May 10, 2014 - 02:47 PM GMT

By: Bloomberg


On this week's "Political Capital with Al Hunt," airing tonight at 9:00PM/ET, Bloomberg Television anchor and Bloomberg View columnist Al Hunt, interviews United States Department of Treasury Secretary Jack Lew. Sec. Lew said to Hunt, China must avoid postponing long-term economic measures, "they obviously have to worry about their short-term economic situation. What they can't do is treat the long-term reforms as something they can just put off. They need to be serious about it."

Sec. Lew also said to Hunt:

- China must move toward market-determined prices.

- China needs to be serious about economic reform.

- Seen 'very negative movements' in Yuan recently.

- Russia risks more sanctions if behavior doesn't change.

- "Unacceptable for Russia to violate Ukraine's sovereignty."

- Steps U.S. has taken on Russia 'are being effective.'

- U.S. goal is to get Putin 'to change Russia's policy'

- Russia's economy is heading in a bad direction.

"Political Capital with Al Hunt" airs Friday evenings at 9pm/ET and midnight with repeats throughout the weekend, including 9:30am, 1:30pm and 9pm on Saturday and Sunday at 9:30am and 1:30pm/ET.

To find Bloomberg TV in your area, visit

Bloomberg TV live stream:

Full transcript below.

AL HUNT, HOST: We begin the program with the United States Treasury secretary, Jack Lew.

Thank you for being with us, Mr. Secretary.

You're taking off for China on Sunday, an important trip. Chinese growth was 10 percent. It slowed to 7.4 and may slow more

How likely is it the Chinese will introduce new stimulus measures even at the expense of their economic reforms and what advice would you give them?

JACK LEW, TREASURY SECRETARY: Al, good to be with you today.

Um, I think, you know, China and China's economy is obviously of great into to the world, to us, to -- it's profoundly of interest to the Chinese.

Um, I think that they have a lot of tools that they have to -- to continue to -- to grow. But they have to make the right policy decisions.

Um, the challenge they have is the trade-offs between reform and -- and short-term growth. And I'm certainly going to encourage them to stay on a reform agenda. They need to open their markets. They need to have a level playing field so that their markets determine prices and the -- there can be competition between domestic and international goods and services.

Uh, and that...

HUNT: (INAUDIBLE) likely they'll stick with that reform...

LEW: Well...

HUNT: -- rather than a short-term stimulus?

LEW: You know, I -- I think -- I think that it's -- it -- they obviously have to worry about their short-term economic, uh, situation. We all have to balance short- and long-term decisions we make.

What they can't do is treat the long-term reforms as something that they can just put off.

HUNT: Right.

LEW: And they need to be serious about it. They know they need to be serious about it. They know that their economy, if it doesn't move more toward market-determined prices and -- and signals is not going to give them the medium- and long-term growth they need.

HUNT: Some worry...

LEW: So that they...

HUNT: -- that (INAUDIBLE) their property prices are falling. And I see some experts say that there's the prospect that China is in a bubble that's about to burst and that it will affect the global economy.

Is that a real danger now?

LEW: Look, I -- I think that, you know, there are a lot of challenges that China has to deal with. China has a lot of capacity to deal with its challenges internally. So I -- I think that the question is whether they manage some of the things going on in their -- in their economy, whether it's some price fluctuations in housing or whether it's shadow banking or state and local -- their local provincial finance.

They have the capacity to deal with it. They -- they need to -- to deal with it. (INAUDIBLE)...

HUNT: You don't see them in a bubble right now?

LEW: Look, I -- I think that they have challenges that they have to deal with to, you know, they focus on jobs.

They -- are they creating enough jobs?

And I think that if they're staying on a path where they're creating jobs, they have more license to do the reforms that they need to do, which is what is needed for China to grow and for it to be a level playing field so that U.S. companies can compete in China.

HUNT: Mr. Secretary...

LEW: Look, my -- my focus in China, from a U.S. perspective, is very clear. We want there to be a market that U.S. firms, financial firms and manufacturing firms, service firms, can compete in. And we bring that to the table every time we engage with China.

We also look at exchange rates. Exchange rates is an extremely important issue. You know, we have encouraged them (INAUDIBLE)...

HUNT: Are they living up to their currency commitment?

LEW: Well, you know, they have, uh, made some moves that are consistent with a -- with moving toward more market-determined rates. They widened their trading band. But we've seen some very negative movement in the exchange rate in recent months. One of the issues that I'm going to bring to them is if your policy says that the exchange rate can go up and down, you need to have market signals determining whether it's going up or down.

HUNT: That's also going to be a topic (INAUDIBLE)...

LEW: And that's going to -- that's a serious conversation, because it has to do with the competitiveness of U.S. good in China.

HUNT: Mr. Secretary, I suspect another topic, Russia plans to turn to China for money or ask China for money investments to compensate for what they're losing with the sanctions from the U.S. and the EU.

Are you going to pressure, urge your -- your Chinese counterparts not to go along?

LEW: You know, Al, we talk about a wide range of topics with them that -- when we meet. I'm going to bring the topics that are central to the U.S. agenda and they will raise topics of concern to them.

I think that, you know...

HUNT: This would certainly be...

LEW: Yes...

HUNT: -- be central to us, wouldn't it, if they're going to compensate for the loss of -- of -- of money in Russia because of the (INAUDIBLE)...

LEW: We...


LEW: -- we have -- we have been making the case consistently wherever we go that, um, that it is unacceptable for Russia to violate Ukraine's sovereignty and that when we take actions and other countries in the world take action, um, it is important for there not to be back fill.

HUNT: And we would not be happy, then, if the Chinese were to...

LEW: Well, it...


LEW: -- it is an argument I make wherever I go.

HUNT: And you'll make it in Beijing?

LEW: Well, it -- you know, we're -- we're going to talk about a whole range of topics.

HUNT: How about let's talk about Putin and Ukraine. Why not impose tougher sectorial sanctions now rather than wait?

And if so, would they apply to a wide swath of financial and energy initiatives or be more targeted specific to (INAUDIBLE)...

LEW: You know, Al, I think that the steps we've taken with regard to Russia have been very carefully determined and they've been quite effective. We have acted to target people in the Russian government, senior executives, CEOs who run some of the largest manufacturing firms in Russia, who are very close to the government.

And we have sanctioned a bank, making it clear that we are prepared to go farther down this path should we need to.

The president issued an executive order that gives me the authority to designate whole sectors. We have made very clear that our goal is not to go to the maximum degree that one can to hurt the Russian economy. It's to get President Putin to change Russia's policy.

There is a path here where they can avoid doing real damage to the Russian economy. But we've made clear that if they continue on the path they're on, we will take additional steps.

HUNT: If he doesn't...

LEW: We...

HUNT: -- if he continues on that path, one -- and looking at the sanctions on -- against Iran, one of the things that made them really bite was when we passed so-called secondary sanctions, which says, hey, you do business in the U.S. or Iran, but not both.

Now, if Putin continues, is that a weapon that we would consider using against him?

LEW: Al, I think that one of the things we learned in the Iran sanctions is we worked effectively around the world to have maximum pressure put on Iran. And I think that if you look at that effort, it's probably the most successful sanctions...

HUNT: It is.

LEW: -- regime ever designed.

We are working with our allies as we put measures into place against Russia to make sure that there are other countries that move along with us.

One of the things that we've been very clear...

HUNT: Could you see moving to secondary sanctions?

LEW: Well, no, I -- well, the point I was going to make, Al, is that we have been moving step by step and in a very surgical way. The goal here is not to hurt the European economy, the American economy. It's not to hurt the Russian people, it's to create pressure for President Putin to change his policies.

I think he understands that we are prepared to take steps even if there are second order consequences that we would rather avoid. That determination is very serious, but I -- there are -- are some who call for doing anything you can. I think what we're doing is the most effective way to proceed. And I think that the Russian leadership understands it. I think it's affecting their judgment and it's part of their calculus now.

HUNT: What...

LEW: They need to do change their policy.

HUNT: -- what advice would you give U.S. banks, hedge funds and insurers who haven't reduced their exposure and are still trading in rubles?

LEW: Well, look, I think if you look at the market indicators, since Russia moved into Crimea and since sanctions were threatened and then imposed, all of the major indicators show Russia's economy heading in a -- in a bad direction. Their exchange rate is down. The value of the ruble is down. The equity flight is real. The value of the stock exchange is down.

I think that anyone looking at Russia has to -- has to understand...

HUNT: So you wouldn't...

LEW: -- that...

HUNT: -- you would advise...

LEW: -- that...

HUNT: -- them to reduce their exposure?

LEW: No, I just think that it -- the pressure is on President Putin now to change his policy and that's -- we're going to keep that pressure on. And I don't give investment advice, but I can -- I can tell you that the -- the dynamic is what I'm describing.

HUNT: Your predecessor, Timothy Geithner, has a new book coming out. And he has said that -- and I'm quoting him -- "Of course we still have too big to fail. If one of the big banks went under, the taxpayers, in essence, would still have to pick it up, six years after the crisis."

Do you agree?

LEW: Well, I haven't had a chance to read Tim's book yet. It's not out...

HUNT: Yes, but do you agree with his comment that...


HUNT: -- of course we have too big to fail?

LEW: -- I haven't read the book, so I'm not going to comment on the book (INAUDIBLE)...

HUNT: This is what he said before the book.


HUNT: He said be -- before. He said, "Of course too big to fail still exists."

Does it?

LEW: Well, I have spoken many times on the subject. You compare the U.S. financial system today to where it was before the financial crisis, we have done a huge amount to make it safer and sounder. We have capital where there wasn't sufficient capital before. We have resolution mechanisms where there weren't resolution mechanisms.

There are living wills for the largest (INAUDIBLE)...

HUNT: I don't think anyone would quarrel with that...

LEW: So we...

HUNT: -- Mr. Secretary.

LEW: -- we've done a -- a huge amount and we're doing more. And we have to keep asking is there more we need to do?

HUNT: But is -- is too big to fail still present?

LEW: You know, Al, I -- I think that the law very clearly said that too big to fail is over because it took away authorities that were used.

HUNT: And it is over?

LEW: And we are now implementing that law.

HUNT: One final question. Canada, a few weeks ago, sold 50 year bonds.

With rates low, demand high, why don't we do that?

LEW: You know, we -- we have the -- the deepest, most liquid bond market in the world. We try to develop innovative products. We have a floating rate note that just is being issued now.

I think our financial markets have proven to be the envy of the world and we continue to -- to innovate, but also to, you know, kind of make sure that we have products that the market wants and that...

HUNT: No interest in 50 year bonds?

LEW: Well, we -- we look at all kinds of things. But we're not, you know...

HUNT: It doesn't sound imminent.

LEW: I -- I think if you look at the yield curve, it's lengthened over...

HUNT: Yes.

LEW: -- over time. But we've kept all parts of the yield curve healthy and deep. And I don't think there is a bond market like the market for Treasuries anywhere else in the world.

HUNT: Secretary Lew, thank you very much.

And safe travels on your trip to China.

LEW: Thanks.

Good to be with you.

HUNT: And when we return, more on food and the Benghazi panel. The Bloomberg reporters are next.

Courtesy of Bloomberg Television

Copyright © 2014 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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