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Quest Means Business

Hu in Washington; Doing Business with China; Q25

Aired January 19, 2011 - 14:41   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

(NOTE: Most of this show was preempted by Obama-Hu press conference.)

RICHARD QUEST, CNN HOST: Good evening.

So today remarks a remarkable moment, as the balance of global economic power shifts and resettles. And the leaders of the U.S. and China met for the first time pretty much as equals. President Obama welcomed President Hu to the White House. He hailed the visit as a chance to lay the foundations for the next 30 years. The U.S. president told Mr. Hu: "We have an enormous stake in each other's success" and said the world would become more prosperous if the two nations worked together.

For his part, President Hu replied that cooperation should be based upon mutual respect.

The press conference has just ended.

(BEGIN VIDEO CLIP)

OBAMA: But the currency issue is a part of the problem. The renminbi is undervalued. The Chinese government has intervened very forcefully in the currency markets. They've spent $200 billion just recently, you know. And -- and that's an indication of the degree to which it's still undervalued. President Hu has indicated he's committed to moving toward a market-based system and there has been movement, but it's not as fast as we want. And...

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

HU JINTAO, PRESIDENT, CHINA (through translator): President Obama and I exchanged views on the international economic situation. We believe the world economy is slowly recovering from a international financial crisis but there are still a fair amount of unstable factors and uncertainties. Both sides agreed to strengthen micro economic policy coordination and actively pursue opportunities for greater cooperation in this process. The two sides support the G20 playing a bigger role in international economic and financial affairs. We agree to push forward reform of the international financial system and improve global economic governance.

We champion free trade and oppose protectionism and we hope the Doha Round of negotiations can make early and substantive improvement.

(END VIDEO CLIP)

QUEST: Now, you can see just how seriously America takes this visit. Mr. Hu is being afforded all the pomp and circumstance America can provide. In a few hours, he will be guest of honor at a White House state dinner.

When we come back in just a second to talk to these two gentlemen, we will get the business perspective and we will get the financial community's perspective on the fundamental question -- who needs who the most?

OK, these are the issues, of course. The U.S., of course, needs China. It has a trillion -- China owns a trillion dollars in U.S. debt. It is the largest single holder of U.S. Treasuries. And, crucially, China has a billion consumers, it's one of the fastest growing countries on earth and a burgeoning middle class.

Those consumers eventually now only will consume their own products, but the U.S. higher value items will eventually become attractive and, also, for companies like General Motors, G.M., which has a huge Chinese subsidy.

But the Chinese also need the U.S. because China is -- of course, the U.S. is China's biggest single market. It's worth $334 billion on the bilateral trade relationship. And, of course, China needs to insure that the U.S. deficit doesn't get too great, because that $1 trillion, of course, it needs to ensure the value of their assets at the moment.

The currencies are tied together. What affects one affects the other.

So, if you put it together, you end up with a relationship of mutual need. The core point here is too big to fail. If one side or the other side pulls the trigger, it might do a lot of damage and it would be shooting itself in the foot.

Let us come back and talk to our guests.

China is using the trip to highlight the value to the U.S. It will spend $45 billion on contracts with U.S. companies, $19 billion buys 200 planes from Boeing. The White House says that could safeguard hundreds of thousands of jobs.

Joining me to put this in perspective, Peter Budd has extensive experience of doing business in China, the global aviation business leader for Arup, the consultancy group.

And Fred Neumann, the head of Asian economics research at HSBC.

I'm going to start with you first, Fred, and just basically say we know the currency issue, but that will eventually unwind itself. We've seen the bilateral trade imbalance.

Who needs who most?

FRED NEUMANN, HEAD OF ASIAN ECONOMICS RESEARCH, HSBC: At this point in time, the U.S. needs China more than the other way around. The Chinese economy is very strong. They're very self-confident. They hold U.S. Treasuries to enormous extent. Yes, they like to sell to the U.S. market, but the U.S. now likes to sell to China, as well.

so I think right now, China has just the upper hand.

QUEST: And, Peter, whenever you've been to do business in China -- and you've been there probably more times than you can -- you care to count -- do you get that feeling of the economy -- the economy in the ascendancy?

PETER BUDD, DIRECTOR, OVE ARUP & PARTNERS: Oh, absolutely. I mean China changes almost by a week. I'm a regular visitor to there. I travel five to 12 times a year. Every time you go, you see a difference. And it's not just in the large cities, it's in the developing cities. And there's a tremendous imbalance between the rich part and this -- and the poorer parts.

QUEST: Well, what about that old line, the Chinese want our know-how, they want our expertise and they want us out of here once they've got it?

BUDD: I don't agree. You could say the same of just about any market in the world. What you have to do is stay at the top of your game. Then you collaborate. You collaborate to mutual benefit.

I was going to say I've seen this -- this move over 30 years working with China, initially working on inward investment projects, then working with the Chinese government, now working with private sector Chinese companies both inside China...

QUEST: But they don't want you.

BUDD: -- and out of China.

QUEST: -- they don't want you.

BUDD: Well, that's not true. Twenty-five percent of our staff are now based in China. We had non 30 years ago.

QUEST: If we take a -- you moved your -- not you personally, your bank moved the office of the chief executive to Hong Kong, which reflected this very shift to -- to Asia. So let's talk about the -- is it insoluble to actually have one -- or solvable to actually sort out this trade imbalance and the currency issue?

NEUMANN: I think it will unwind itself over time. But it is -- currently, we have such a competitive economy in China, that it is very different for Western companies to compete. We have to actually relearn the game of competing. Chinese econ -- companies have risen. They have beaten the Americans...

QUEST: You can't compete...

NEUMANN: -- at their own game.

QUEST: You can't compete when they're paying cents on the per hour and others are paying dollars or tens of dollars per hour.

NEUMANN: It's not just about cost. It's also about learning how to sell to consumers in the emerging market world. For example, the Koreans are out competing Western firms in China, for example. You really need to adjust to the Chinese consumer. That's a lesson -- a lesson that needs to be learned, as well.

BUDD: Yes. I mean Chinese consumers are maturing all the time. You mentioned I'm dealing with airports globally. You know, the highest income per -- per passenger, head of income, that Fiumicino Airport on -- on product is actually from Chinese visitors. They're not wanting to buy the fate of the market. They want the real thing.

QUEST: We're just looking while we're talking about some live pictures. This is Secretary of State Clinton with Vice President Biden and, of course, the -- the president. They're about, apparently, all going to have lunch with each other.

The message, Fred, then is, from -- from a purely financial point of view, as an emerging market, how -- I've seen "The Economist" app and that sort of you can see how quickly China takes over from the U.S. as the largest economy.

When do you think it happens?

And do you now believe it is a relationship of G2 equality?

NEUMANN: At the moment, it is G2. But I think we have to be very careful about long-term projections. You can extrapolate from these trends, but I think history has told us that you need to be a bit careful about that.

QUEST: I spot a bit...

NEUMANN: -- so at moment...

QUEST: -- of fence-sitting here.

NEUMANN: It's not fence-sitting. It's at the moment, China is the market that's -- that needs to be beaten, to be conquered. But in two or three year's time, the U.S. might still be in ascendancy and I wouldn't write the U.S. off just yet.

QUEST: Because, as the president said, it's still three times the size with a fraction of the population.

UNIDENTIFIED MALE: Yes.

QUEST: When are you next going to China?

BUDD: Three weeks' time.

QUEST: Send us a postcard.

BUDD: I will.

QUEST: Many thanks.

And you're going back to Hong Kong?

Many thanks, indeed.

We shall turn our attention to corporate news. It is our biggest day so far for the Q25. The giants of Wall Street and the world of technology are put to the test.

QUEST MEANS BUSINESS.

Good evening.

(COMMERCIAL BREAK)

QUEST: As we've ditched much of the program because of the over- running presidential news conference, something we would not ditch, the Q25. Some of the best known global brands are reporting how much they made in the last three months. We already have a three and a two, three greens and two reds.

Today, we've got Goldman Sachs. We have Wells Fargo. And we need to digest IBM and Apple from overnight. They are all members of Q25 Index, which, of course, we bring you every earnings season.

Maggie Lake is in New York.

We will also be showing you the criteria factors that we need to -- that when we actually deal with how -- there they are, the criteria -- sales growth, profit growth, consecutive profit growth, beats expectations, future of optimism. We'll refer to that if we have to -- Maggie, let's start with where we begin. And we begin with Goldman Sachs.

MAGGIE LAKE, CNN CORRESPONDENT: Yes, Goldman Sachs, this is always a perennial favorite. They're -- they're sort of the pace car, usually, Richard. Disappointing this time around, though, in almost every respect. They reported drops in all of their key businesses.

Listen, we know volumes were low. It's a tough trading environment. But they also had financial advisory services down, underwriting down. Their backlog of transitions are down.

So, you know, is -- is the business model broken?

No, it's not. But it certainly shows that Goldman is not invincible.

QUEST: And...

LAKE: So I think this one gets a red.

QUEST: I think -- the thing I found most interesting, or not, as the Goldman thing, their compensation percentage ratio rose on lower revenues, back now from 36 to 39.3 percent -- Maggie.

LAKE: Yes. They've got to keep that talent. And, you know, the other thing we should point out, though, on the plus side -- and there are some bright spots -- they did well trading their own accounts. Remember, this is the first time they're breaking it out in the new era of transparency at Goldman and they're still -- they're still doing...

QUEST: Right.

LAKE: -- getting the job done there. They don't want to lose those traders so just

-- they're paying them.

QUEST: It was a three and a two. We had a debate, but we were pretty much, ourselves, unanimous.

Which color, Maggie?

LAKE: Red.

QUEST: A red for Goldman Sachs.

If we turn to Wells Fargo, I liked Wellie Fargo. Wellie Fargo interested me because it was able to start putting money back on the balance sheet from reserves. Con -- creditworthiness is improving.

LAKE: Yes. You know, investors don't love that. They're not giving a lot of credit for that. But -- but it's true, the -- the loan, the environment is getting better. And that's a good story for Wells, that had so much exposure to the retail sector.

The other interesting thing, Richard, is that Wells' Management, that retirement business, rose from a year ago. They're getting more fees and commissions. It's a high profit margin. And remember, the baby boomers are retiring now. So that's a -- that's certainly a growth business. It should position them well.

QUEST: All right. We all voted. There's a lot more than just Maggie and myself that vote on this. And we all agreed that it should be a green for Wells Fargo.

OK, briefly now, we now turn to Apple and we now turn to IBM.

We'll start with Apple.

I can quickly do the -- the headline -- sales growth, tick; profit growth, tick; conservative profit growth, tick; consecutive, tick, tick -- Maggie.

(LAUGHTER)

LAKE: Yes, hey, listen, it doesn't get much better than this. Normally, we wouldn't even talk about it, five out of five. But this is what I want to point out to you, Richard. I thought this was really key. Eighty of the world's top 100 companies that call -- Apple says -- are using the iPad. And this is a quote from the CFO: "Enterprise CIOs to chief information officers are adding iPads to their approved device list at, quote, "an amazing rate."

Let's remember, Apple doesn't market the business...

QUEST: But part...

LAKE: -- this is consumer oriented. So if they're getting traction on that enterprise front, watch out.

QUEST: Does -- does the Steve Jobs' health problems affect a -- a green or a red?

I think not.

LAKE: I -- I -- I think it can't right now, because -- because we just don't know. So not for us, it doesn't. But it is affecting the stock. With that kind of report, the stock is down just slightly. So you know that is a cloud hanging over it. It's certainly water cooler talk...

QUEST: All right...

LAKE: -- everyone I talk to is trying to figure out what to do with the stock.

QUEST: It's a green. We are out of time. IBM, server growth, hardware growth. I said a green.

What did you say?

LAKE: Yes, a green. We're all in agreement.

QUEST: All right. It's another green.

So, Maggie, many thanks.

Maggie Lake is in New York.

This is how we stand on a big day on the Q25 -- six greens, three reds.

And when I come back in a moment, it will be a Profitable Moment.

What a day.

(COMMERCIAL BREAK)

QUEST: Tonight's Profitable Moment.

Throughout the program, we've had the press conference of the two presidents and we've heard them talk about the shifting global power, the ascendancy of China. There's no getting away from this fact -- China eventually will overtake the U.S. as the largest economy. Both sides have to live with each other.

As we've said tonight, nowhere can that be seen more clearly than the $1 trillion in U.S. government debt that is owned by the Chinese.

Now, the U.S. needs the Chinese to fund its over spending and the trade imbalance. But the other side of that coin, the Chinese can't afford for the debt to become tainted by reckless U.S. deficits.

So very simply, the two countries are stuck with each other. And that will become ever clearer in the years ahead. They are called the G2 for one reason -- who needs who?

Huh, they need each other.

And that is QUEST MEANS BUSINESS, shortened by sweet, nonetheless.

I'm Richard Quest in London.

Whatever you're up to in the hours ahead, I hope it's profitable.

"PIERS MORGAN TONIGHT" is next.

END