July 29, 2010 —The following article has been translated into English and appeared on July 29, 2010 in International Finance News, one of China's leading business newspapers. (http://paper.people.com.cn/gjjrb/html/2010-07/29/content_581593.htm?div=-1

Harold McGraw III took over The McGraw-Hill Companies from his father in 1998. Under his supervision, the revenue of the company increased from USD 3.713 billion in 1998 to USD 5.95 billion in 2009. The company's leading brands, such as Standard & Poor's, J.D. Power and Associates, Aviation Week, and Platts (the leading global authority for energy and commodities information that publishes more than 8,500 price assessments daily), are all well-known to the Chinese people. Today, McGraw-Hill is making a significant change in the education market in China.

Recently International Finance News had the honor to talk with Mr. McGraw during his visit to Shanghai. He shared with us his unique insights toward the global economy and the Chinese economy.

The world economy: Risk of double dip recession is increasing

International Finance News (IFN): Standard & Poor's represents one of the core businesses of The McGraw-Hill Companies. It has always been following the latest trends and developments in the world economy. Could you please share with us your observations on the development trend in the world economy?

Harold McGraw III (Terry McGraw): The world economy is estimated to grow by 4.6% this year. This is mainly due to the rapid growth in China and India. As for the major developed economies, the U.S. is expected to grow by 3% this year, with somewhat lower growth expected for next year, and Europe will grow by 1.2% this year and probably by 1.5% next year.

Overall, I think the world economy is mixed -- the developed countries are recovering from a very deep recession while the developing economies have seen some fairly strong recovery.

IFN: Are you optimistic about the global economic recovery? According to some media, we may probably see a double dip recession in the second half of this year or next year. What's your opinion?

Terry McGraw: I think those concerns are valid. Many people in the U.S. now are worried about the vigor of the economic recovery. Ben Bernanke, the U.S. Federal Reserve Chairman, said recently, "What we are seeing now is a limited recovery." Seventy percent of the U.S. economy is driven by consumption, but consumers are not participating fully in the economic activities. So growth has to come from the other 30%, i.e. from business investment. However, I don't think we have created a favorable environment for business investment. In the face of higher interest rates, higher taxes, extremely stringent supervision and many ongoing lawsuits, companies are reluctant to take the risk of investing, and without investment there are no jobs. So I think at the policy level, the developed countries need to consider how to encourage investment from the business community. I think there is a greater possibility now for a double dip recession.

The Chinese economy: Growth will continue

IFN: What are your observations on the Chinese economy? Do you think China can maintain its growth momentum? If not, what should China do about it?

Terry McGraw: China represents one of the most amazing growth opportunities in the world. Infrastructure has been developing very rapidly and an increasing number of people are now enjoying the benefits of prosperity. What we need to pay attention to is whether or not China can develop a sound social foundation and effective social security and education systems in order to ensure continued growth in the future.

To sustain growth, one of the key issues is access to get capital and how to ensure sufficient capital for future growth. China should not rely on government investment alone. We need a sound capital market for investors.

So, in order to sustain growth and maintain sustainability, we need some push from the market.

Capital markets are very important -- they have to be built on a sound structure. There is a need for a corporate bond market as part of the overall capital market. We also need to see the internationalization of the RMB, more cross-border transactions and more financial products. These are all very important.

IFN: We are facing some very complicated issues here. You just mentioned internationalization of RMB. The latest statistics shows that local debts in China are also a worrying issue. Do you foresee any changes in the economic development of China?

Terry McGraw: I think this is very hard to predict. China is not an isolated economy. It is not free from outside influences. In general, China will continue to see high growth rates, but at the same time the Chinese leadership knows that China needs to be more open and liberalized, particularly in terms of a more liberalized capital market, and that they need to regulate smartly, in a way that regulation neither leads to an overheated economy nor imposes undue restrictions on growth. Regulation must not become a constraint for development. We need to find out the most suitable level of regulation that can best help us control the risks and the most suitable level of regulation that would encourage entrepreneurship and creativity and enable entrepreneurs to access the capital needed for development. We need the right balance.

Another key issue is to increase consumption. So far China has been relying on export for its development. Now that the export market is sluggish, there is a need for the government to encourage domestic consumption by creating more opportunities through more open and liberalized mechanisms so that all kinds of people can start up businesses while bearing the risks.

I am sure the central leadership is fully aware of this. As to the transformation of economic structure and the consumption structure, it takes time. Of course there is every reason to believe that enough time and effort will be made to address the issue effectively. There is a need for consistency and continuity in the policies so that fundamental changes can be achieved. These policies must be deeply rooted in the entire system.

By whatever account, China's achievement is amazing. Every time I come to Shanghai, I see a new city and a lot of new things. This is very exciting, and China has a very promising future.

Financial reform in the U.S.: The key is to get the right balance

IFN: I have been following closely reports on the financial reform that is currently underway in the U.S. Do you think the U.S. is on the right track in this regard?

Terry McGraw: We are moving in the right direction, but the key is to get the right balance. On the one hand, we cannot afford to do without control or rules; on the other hand, the regulatory system must not be too stringent as to discourage innovation. Therefore, we need to regulate smartly. It would be better if the financial reform bill could be further modified, but generally speaking it will help rebuild confidence and trust in the market.

IFN: Which part of the bill do you think would need modification most?

Terry McGraw: I think clarity is most important. Currently there are certain ambiguities in the bill that might have some legal consequences in the future. For instance, what is the meaning of "reasonable investigation"? We need to have a clear definition otherwise we might need to go to court to get it clarified. In terms of "the accountability of the firms", I think the Senate and the House bills when combined together do solve some issues and as a result accountability has been made clearer.