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QUEST MEANS BUSINESS

Spain Cuts $80 Billion; Clashes Over Spanish Cuts; Kofi Annan Addresses United Nations on Syria; UN Security Council to Decide Further Action in Syria; US Fed Minutes Show Cautious But Steady Outlook; Spanish Stocks Outperform Rest of Europe; Economist Says Spanish Cuts Will Create Additional Problems; Euro Still Weak

Aired July 11, 2012 - 14:00:00   ET

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


RICHARD QUEST, HOST: It's a case of "Take that!" Spain's new taxes, new spending cuts, and new protests.

(BEGIN VIDEO CLIP)

JUAN SOMAVIA, DIRECTOR-GENERAL, ILO: Youth are not going to accept that they're put aside, not given an opportunity, because you have to give confidence to the financial markets.

(END VIDEO CLIP)

QUEST: Austerity isn't working. The ILO warns tonight, 4.5 million jobs in Europe are at risk.

And the Brits are known for grumbling about the weather. Now, the Belgians are suing the forecaster.

I'm Richard Quest. I mean business.

Unemployment, unpleasant, and unavoidable. Good evening to you. The sentiments tonight of the Spanish prime minister, Mariano Rajoy, as he goes back on his campaign promises and back to austerity.

For the first -- for the fourth time this year, Spain has a new round of cuts with which to contend, and these may be the most controversial cuts so far. Have a look and see exactly what they have been.

The Spanish prime minister announced that there would be $80 billion- worth of cuts. The object of the exercise is to bring down the deficit over two yeas, and that comes after an extension of the deficit target agreed by the eurozone to 2014, we talked about that last night.

But to pay for it all, the other side of that equation, VAT. Now, it goes up to 21 percent. It was 18 percent. Rajoy had promised not to raise the sales tax, 18 to 21 percent and going back on a promise.

Unemployment benefit is also being cut by Spain, which is even more painful when there's 5.7 million unemployed. Civil service pay is to be cut. And the cuts go specifically against Rajoy's manifesto. He said, "I know these measures are not pleasant, but they are necessary." And he said the rules have changed.

(BEGIN VIDEO CLIP)

MARIANO RAJOY, PRIME MINISTER OF SPAIN (through translator): I said I would decrease tax, but I'm increasing it. I have not changed criteria. I will reduce them when it is possible, but circumstances have changed, and I need to adapt to them.

(APPLAUSE)

(END VIDEO CLIP)

QUEST: Now, thousands of people have been marching on Madrid to protest against these cuts and these spending and these increases in VAT. There have been violence, too, with police using rubber bullets and batons against protesters, and a few dozen injuries. Al Goodman is in the Spanish capital for us this evening. Al, the situation in Madrid tonight?

AL GOODMAN, CNN MADRID BUREAU CHIEF: Richard, tension clearly rising. This coal miners' protest, just a few hundred of them marched over the past couple of weeks hundreds of miles from the northern coal mining regions down to the capital.

Now joined this day by thousands of others right here where I'm standing, right across from the Industry ministry, because the government has cut subsidies for the coal mining industry. And those clashes broke out on a very hot afternoon, 76 people is the latest count that was injured, including 33 police officers. The coal miners clearly willing to fight back, Richard.

QUEST: So, we've got the protests, which perhaps are not new, although this is more violent and more extreme. But Rajoy going back on his VAT promise, how will that be greeted and received by the people, or did they always know it was a promise he couldn't keep?

GOODMAN: No, they didn't always know that. It's only been the last couple of days that one of his ministers gave a clear hint that this was going to happen and should be --

(AUDIO GAP)

GOODMAN: -- with cabinet meetings here Friday. We've talked to people on the street. One many told us, how can you grow the economy when you cut consumption? Which is what increasing the sales tax is going to do.

So, an immediate reaction here, although what's at stake, the Madrid stock market did go up, did close higher on the news of this latest round of austerity cuts and tax hikes, Richard.

QUEST: Al Goodman, who is via broadband for us tonight, and apologies there for the nature of the line.

When we heard this morning about the Spanish austerity, the first thing that came to my mind was -- I beg your pardon. We are going to have to take a moment and now go to Kofi Annan speaking at the United Nations.

KOFI ANNAN, SPECIAL ENVOY TO SYRIA, UNITED NATIONS/ARAB LEAGUE: -- and luckily, US told him he could exchange a few words.

I just came from briefing the Council, and we discussed the crisis, as you can imagine, in Syria, my recent trip to the region and the outcome of the action group meeting here in Geneva. And the Council is now discussing what the next step should be and what action they should take. And so, we should hear something from them in the next few days.

Since it's so late, let's go straight to questions.

UNIDENTIFIED MALE: Do you need a microphone?

UNIDENTIFIED CORRESPONDENT: I'm (inaudible), Egyptian journalist. Mr. Special Envoy, I have two points, if you can clarify for us. First point about what you have said after the meeting with President Bashar al- Assad about the three months time for a complete cease fire step-by-step.

ANNAN: You don't understand?

UNIDENTIFIED CORRESPONDENT: If I understand what? OK. Cease fire step-by-step, if I can say. And other point, I hear today, I listened today to the president of the Syrian National Council, Abdulbaset Sieda, and you didn't discuss with them any proposal for anything before your meeting with President Bashar al-Assad.

And they said we are not -- we don't agree with what the outcome of your meeting with President Bashar al-Assad. If you can clarify the two points. And finally --

UNIDENTIFIED MALE: You can ask quicker questions. Thank you very much.

ANNAN: At the first point, let me say that the -- there was no question of three months. What I have discussed, the operating truth is a six-point plan, which is endorsed by the Security Council in resolutions 2042 and 2043. That frames everything.

Within that framework, the discussion we had was to take action at those locations where one has such horrific violence that you can't get in humanitarian assistance, people who are trapped couldn't get out, and work out the cease-fire arrangement at these localities, with possibility the help of (inaudible).

This does not free anybody from the broader obligation of the cease- fire as indicated in the plan. And so, that is the idea, whether it has been Homs, Hama, or wherever.

The question of consultation before going to see President Assad, this issue and this approach came about -- the discussion on the ground. And in fact, the -- the monitors who are on the ground will discuss also on the ground with the opposition.

And my team, here, in their contacts with the opposition will be doing the same. But I couldn't have discussed the proposal with them before I went to him, because there was no such proposal on the table.

UNIDENTIFIED CORRESPONDENT: Thank you very much.

UNIDENTIFIED MALE: Please go ahead.

UNIDENTIFIED CORRESPONDENT: (inaudible) Mr. Kofi Annan, if I understood well, you got some support in the different countries that you just visited. Could you please elaborate on the kind of support you received, and also, concretely, what are the actions that they're going to take in order to put pressure on Syria? Thank you.

ANNAN: I think first of all, when we met here as an action group, all of the members of the action group undertook to maintain, sustain an effective pressure on the parties to implement the Security Council resolutions and first of all take steps to stop the violence so that we can move on to the political dialogue.

In both Iran and Iraq, the governments committed to supporting the six-point plan. They supported the idea of political transition, which would be Syrian-led and allow the Syrians to decide what their future political dispensation will be.

And obviously, we are going to use the influence in talking to the government and the parties, and move into that direction. Thank you.

UNIDENTIFIED MALE: Yes, sir. Please identify yourselves before you ask your question.

UNIDENTIFIED CORRESPONDENT: (inaudible) My question is about -- it's about the UN mission. What is the future? Because it's been four months, almost, that there has now been activities. And I also would like to ask how do you believe in the Russian proposition, the draft resolution to extend the numbers of the mission? Thank you.

ANNAN: Yes, this is an issue before the Security Council. In fact, we do have a Russian resolution on the table, and the British ambassador indicated that the P3 would also be put in a resolution on the table shortly.

The Secretary-General's report is before them, and he has given options as to what should be done, and the decision is up to the Council.

UNIDENTIFIED MALE: Please go ahead.

UNIDENTIFIED CORRESPONDENT: Yes, thank you very much. Ashin (ph) from China's National Television. From what we understood, the outcome of the action group meeting the Saturday before last was a very rare and highly-valued one.

But last week, we read reports of your interview with "Le Monde," where there was -- you said something like the efforts to mediate for the Syrian conflict can fail. So, we were kind of confused. Exactly what did you say and what did you mean? Was this sentence taken out of context?

ANNAN: Let me repeat or say what I meant, that we have not been successful so far. We have so far not succeeded in ending the violence and moving forward. And it's still the fact today. And was urging all governments to work together, to work together to press the parties and to support the one mediation effort, so that we can succeed in the goal we all share.

And if we reunite, and this issue came up in the Council again today, that if the Council speaks with one voice, that voice is much more powerful than when it's divided.

And in the region, governments have interests. Some of them are common interests. First of all, we all want to protect the Syrian people. We all want to see the end to the conflict. We all want to see an end to violence. We all want to make sure it doesn't get out of -- that the conflict doesn't get out of hand and spread to the region.

So, we have lots of common interests. How do we work together to achieve that common interest, rather than move in different directions in the manner where everyone resists, and the Syrians will become the greatest victims? Thank you very much.

UNIDENTIFIED MALE: One last question.

UNIDENTIFIED CORRESPONDENT: Thank you very much. Gabriela Sotomayo (ph) from Mexican News Agency. Mr. Annan, did you discuss with the --

UNIDENTIFIED MALE: (inaudible)

UNIDENTIFIED CORRESPONDENT: Mexico. Mexican News Agency. Did you discuss with Mr. Assad about the election of an interlocutor to begin the dialogue with the opposition? How is that going?

ANNAN: In our practice, yes. We discussed it. He did offer a name, and -- I indicated I wanted to know a bit more about the individual. And so, we are at that stage. Thank you very much.

QUEST: Former Secretary-General, now the special envoy representing the UN, Kofi Anna, and the -- he's the UN and Arab League's envoy for Syria. He has been updating UN Security Council from Geneva. He visited several regional leaders over the past few days, including Syria's President Bashar al-Assad.

And now, Richard Roth is with me, our UN Correspondent. Richard, as I listened to what Mr. Annan said, it's basically, now, back to the UN Security Council to decide what, if any, further action over the next few days.

RICHARD ROTH, CNN SENIOR UN CORRESPONDENT: That's right. The Council was already bound to have to either re-approve or pull out the UN observer mission that has been ineffectual in Syria, about 300 unarmed observers.

So, all of Kofi Annan's recent regional shuttling, it just times out with this. The bigger issue is ending the violence, but they're going to spend, now, the next few days haggling over the way forward. What's significant is that Annan would probably like to have more diplomatic pressure from his bosses, in effect, the Security Council.

At the Council right now, the Western ambassadors -- you're seeing the -- well, earlier, we saw the German ambassador, who said that inside the Council chamber, there was more support for his proposal, a resolution that would threaten, perhaps, sanctions or put some more teeth into the UN's edict towards President Assad.

Russia and China have vetoed other resolutions, though. So, they're going to probably -- probably agree, somehow, to keep a mission inside Syria, and now have a big war of words in the next few days over whether to -- how tough to be on Assad. Richard?

QUEST: Isn't the core of this, Richard, when Annan says "we have not been successful so far at stopping the violence," and he's urging all to work together -- well, he would say that. But "not been successful so far."

And really, we are at the very extremities of incremental improvement. Assad says Assad has nominated his interlocutor. Annan wants to know more. It's very detailed, now.

ROTH: That's right. And it's been going on for 16 months or so. And we've seen these in other crises. Libya, boom, it was very quick. Different situations, of course.

You don't find Western countries at this moment ready to go in with any type of military intervention or even hint at it at the moment, though a new resolution from the Security Council would diplomatically with the jargon open the door to that.

But we're a long way from that. There's too many unknowns, Western diplomats are saying on the ground. Who are the opponents to President Assad?

So, it's really painful, obviously, for the Syrian people, and there's no interest among these countries to do more, so they can all blame each other, it seems. But maybe at the Security Council, the next resolution may say to Assad, all right, now you're going to face sanctions, maybe. But that isn't going to bring the end to this.

Did anyone think 300 unarmed observers running around the streets to look to who shot at who was going to settle this? Well, those hopes are completely over.

QUEST: Richard Roth, who's at the United Nations for us this evening. Thank you, Richard.

When we come back in a moment, the Fed minutes from their last meeting are out. The minutes run to some 24 pages. Felicia Taylor's had 19 minutes to read them. That's not even a page a minute. When we come back, she'll analyze them for us.

(COMMERCIAL BREAK)

QUEST: It's very long and very detailed, 24 pages of it. The US Federal Reserve released the minutes of the last meeting. Felicia Taylor has been looking at them. Minutes just out. What grabs you from them, Felicia?

FELICIA TAYLOR, CNN INTERNATIONAL CORRESPONDENT: Well, I think this is very much a sort of cautious but steady-as-she-goes response to the minutes. And you can see that in the marketplace, and we'll get to that in a second.

But the point is, there were no surprises in here. There was a lot of discussion beforehand about whether or not there was going to be any kind of verbiage about QE3.

We didn't see that, and frankly, I think that's a good thing. Because honestly, if we had heard them talk about it, they were poised and ready to step into the marketplace at any given point in time, then there would have been the concern that things were much, much, much worse.

On the contrary, what they basically said is, the economic recovery is a little bit more moderate than one had expected. Jobless rate is obviously slowing. Long-term unemployment is also remaining high. These are nothing new for us.

We've seen that they are ready for -- there are actually a few on the Fed that are ready for more easing. There was a kind of a healthy debate on that. And a matter of fact, we heard from Bullard yesterday from the St. Louis Federal Reserve that there was really little room for that right now.

Rates, however, may stay low, not only into 2014, but even a little bit longer into 2015. So, that was a little bit of new news there. But there was no commentary, frankly, on QE3.

Don't forget, they've already extended Operation Twist. The debate remains as to whether or not that is really effective. So, I think this is very much a steady-as-she-goes kind of a report.

You can see in the marketplace. It dropped about 50 points from where we were, which was a loss of about 45 points to down 95. But it's still absolutely holding course at this point in the session. Richard?

QUEST: We thank you. Felicia Taylor, who's in New York tonight. The European markets and how they traded. Spanish investors seem pleased with the austerity measures that we told you about earlier. They, perhaps, solidify the recover. Perhaps or not.

Anyway, look at the numbers. The IBEX was up one percent, just over one and a fifth percent. It was the best gain of the day. Paris was down by half a percent on the day.

As we move elsewhere, the London FTSE finished flat, despite showings -- strong showings from oil companies. They moved higher as the price of oil rebounded.

One stock to mention: Burberry down almost 7.5 percent. The reason, interestingly, slower sales and a slower sales growth forecast, and that of course relates to China.

Now, earlier in the program, we were talking about austerity in Spain. When we heard the news this morning of the new measures being taken by Mariano Rajoy, the first thing that most of us thought was hang on, hadn't the Europeans said enough austerity, it's time for growth policies? Those that were going to help countries grow their way out of recession. And yet, here we have Spain introducing brand-new austerity measures.

Paul Donovan says this has all the hallmarks of German dictat. Paul is the managing director of global economics at UBS. I put it to him: with more cuts coming so soon after the cause for growth, the situation in Spain doesn't make sense.

(BEGIN VIDEOTAPE)

PAUL DONOVAN, MANAGING DIRECTOR, GLOBAL ECONOMICS, UBS: Of course it doesn't make sense. This is the eurozone, Richard. You know the eurozone doesn't make sense.

This is the Teutonic discipline. This is Chancellor Merkel with her cry of, "We must have pain. If it's not painful, it's not working," insisting that in exchange for extending Spain's deficit targets out by an extra year, they must have a VAT tax increase, they must have pension changes, and all the rest of it. We're back to the German plan.

QUEST: What does your analysis say the increase in VAT, what effect will it have on Spain's GP?

DONOVAN: Well, clearly, you are already facing a nasty little recession. Raising taxes, cutting government spending, this is not complex economics. This is going to create additional problems to Spain's GDP.

Now, we're forecasting negative GDP in Spain this year and negative GDP in Spain next year. To be forecasting two years negative growth, and sizable dips, down 1.8 this year, down 1.2 next year, this is not good news for the Spanish economy.

QUEST: So --

DONOVAN: And this basically is confirming our view of a really quite dismal outlook, if you're Spain.

QUEST: So, if you were Rajoy and you'd got this commitment from the eurozone group to push out the date -- and let's face it, it does only by a year. In the scheme of a five-year crisis, it's neither fish nor fowl, to add a year. What should he have done? Just push out a year and not done any more?

DONOVAN: Well, I think the problem is that politically, that wouldn't have been accepted. So, yes, of course, he's got to push out a year. He's not going to meet his deficit target. That's entirely obvious. But then, at the same time, the euro group's coming back and saying, well, you've got to cut spending more, you've got to raise taxes more.

Now, this raises a really odd question. Is he having to raise taxes because he's not going to meet the deficit target when it's been extended by a year if he doesn't raise taxes? That's saying something pretty dire about the Spanish economy, if so.

Or is this just German Chancellor Merkel saying, "I want to hear the crack of the whip against leather Lederhosen. I want the cries of pain to be heard. I want discipline to go to my electorate with." In which case, this is bad politics interfering in economics.

QUEST: Or, let me suggest that actually what he's doing is raising these taxes and making these spending cuts because they are structurally necessary. Not necessarily just for the purposes of meeting a nominal deficit target.

DONOVAN: Well, if that is the case, then I'm not sure that this is, perhaps, the best way to be going around it. Rajoy was elected on a pledge of new taxes. "Read my lips, no new taxes," he said. But in Spanish, obviously.

And then, what does he do in January? He raises the income tax. Well, that's fine. If he's come into office and realized that taxes need to go up, then fine, do it all in one fell swoop.

But two, three weeks ago, the IMF come out and say, we think Spain needs to raise VAT, Rajoy comes out and says no, absolutely not, this is completely ludicrous, we're not raising taxes just because the IMF asked for it. And now, he's raising taxes because the eurogroup asked for it.

If this was a structural thing, I think it should've been done earlier on. This piecemeal approach is hardly boosting confidence in the economic management of the eurozone as a whole.

(END VIDEOTAPE)

QUEST: Blunt words from Paul Donovan, UBS. Now, for tonight's --

(RINGS BELL)

QUEST: -- Currency Conundrum. It's a lovely one. On the Canadian ten dollar bill introduced in 1989, an American flag can be seen flying over the parliament building. Is that true or false? We'll bring you the answer later in the program.

The rates tonight: the dollar is sinking after the release of those Fed reserve minutes. The euro is lifting off its two-year low. The single currency's still weaker against the majors, at a three and a half low against the pound and also against the Aussie dollar. Those are the rates --

(RINGS BELL)

QUEST: -- this is the break.

(COMMERCIAL BREAK)

RICHARD QUEST, CNN HOST: Hello, I'm Richard Quest, more QUEST MEANS BUSINESS in a moment. This is CNN, and on this network, the news always comes first.

As you've just been hearing, the U.N. and Arab League envoy for Syria, Kofi Annan, has said the U.N. Security Council will decide on its next steps within days. Speaking just moments ago, Mr. Annan urged governments to work together to end the 16-month crisis.

The Syrian opposition sources tell CNN that Syria's ambassador to Iraq has defected from the Syrian regime. They say Nawaf al-Fares is currently making his way to a safe area. He'd be the highest ranking diplomat to defect from the Syrian government since the start of the uprising.

In Madrid, as you heard on this program, anti-austerity protesters have been throwing rocks and bottles at police, and they responded with rubber bullets and batons. There have been dozens of people hurt. It's the latest protest; it started with a march by coal miners who've walked 450 kilometers to reach the capital. Even so, the prime minister has announced new austerity (inaudible).

Authorities in London are investigating into the death of a wealthy socialite, Eva Rausing's body was found in a police search of her home after her husband was arrested on suspicion of drug possession. Hans Christian Rausing is the heir to a multibillion-dollar family fortune.

Prosecutors have cross-examined English football stay John Terry on Wednesday and pressed him on allegations that he racially abused another player. Several past and present colleagues made character witness statements saying they do not believe that Terry is a racist.

(MUSIC PLAYING)

QUEST: It is ironic that the ILO, the International Labor Organization, is warning about the dire effects of unemployment and austerity in Europe, just, of course, as Spain announces new austerity measures. Well, the window of opportunity is closing on recovery according to the ILO. It is warning that without an urgent shift in policy, unemployment crisis will take a serious turn for the worse.

This is the report that they are talking about. It says an extra 41/2 million jobs are at risk in the next four years in the Eurozone, and the evidence is all pointing to a prolonged labor market recession. It's threatening the stability of the euro itself.

Now the ILO director Juan Somavia told me jobs need to be at the heart of policies, and the time for talking's over.

(BEGIN VIDEO CLIP)

JUAN SOMAVIA, ILO DIRECTOR-GENERAL: The action needs to be now and the action has to center on some specific things. For example, youth unemployment, in the report we say with 0.5 of the budgets of the Eurozone, you can get going a relatively (inaudible) level of youth employment. 0020

But we have to come down to the basic question that you have to -- you have to be able to produce the productive solution. Now as I say, one thing to do is to have the European Central Bank say when it lends money to banks, look, a part of it has to go to investment.

QUEST: Do you now believe that there is an entire generation that is resigned to being jobless for a prolonged period of time?

SOMAVIA: I think that you make -- that point is very well done. I think that the youth are not resigned, and this is a fundamental element that the political leaders have to take into account. Youth are not going to accept that they're put aside, not given an opportunity, because you have to give confidence to the financial markets. That is not going to happen.

And there's a danger already that the delegitimation (sic) of the way financial markets have operated is going to move towards some aspects of business and certainly into government and into collective decision-making.

Youth are not going to take it standing. Let me tell you that. They're going to -- they are going to react to it. And that is already -- we are already seeing, already feeling it. It's there and it's in the society.

And the disquiet goes much beyond youth. So you know, if you want to have -- if you want to handle this with the sensitivity for people but of a road (ph) with a long-term issue (ph) about the stability of Europe, and for the short-term vision of what your citizens are asking you to do, you certainly have to put jobs at the heart of the recovery.

QUEST: But did you ever think that we would be talking about such levels, 11 percent, 11.1 percent unemployment in the most advanced economies in the world, and no prospect of that number coming down meaningfully in the short term?

SOMAVIA: Well, frankly not. And particularly out of my own experience as a Latin American or the experience of people in Asia, in which we did go through austerity measures imposed by the IMF, but none of the conditions under which it worked with an enormous social cost to the present.

You have to be able to devalue -- not devaluing; you need a global growth in which your devaluation can permit you to export more. You don't have it. You need to have a strong financial system that permits you to open public banks and through regional banks to expand credit. It's not there.

The conditions under which austerity have worked in the past are not present today. This is a technical issue, not even a political one, from a technical point of view, you do not have the conditions under which austerity can work.

QUEST: Are you angry?

SOMAVIA: No, no. I'm -- no, what's the word? I'm feeling sorry for a Europe that has been able to take such momentous decision, you know, when they created the European Union, and to find it so incapable of taking decisions that are 5 percent of the political strength, of the political will, that Europe has had in the past.

(END VIDEO CLIP)

QUEST: Seriously big thoughts from Juan Somavia of the ILO.

China's middle class are socially mobile and forget social media. This means they're willing to travel -- after the break.

(COMMERCIAL BREAK)

QUEST: The "Business Traveller" update, and we are watching Farnborough very closely. For the first time this week, Airbus has outsold Boeing. It's day three at Farnborough, but there is still a serious amount of catching up to do.

As you know, this shows this relative size of the two manufacturers. And on day three, Boeing has sold 25 planes, 737s, to a company called Avalon, which brings Boeing's total at the show so far to 220 planes, massive. Airbus, on the other hand, sold 36 planes to China Aircraft and a few other planes to CIT, the A330s. And that total is 56.

But the battle that we are really watching very closely is the battle of the 320 from Airbus and the Boeing 737. And when you look at this battle -- for this is the small plane that they're both going hell for leather for, so far the sales of the A320 are 41. Meanwhile the 737 is 220. That's the way it's looking at the moment for sales.

A lot of those sales, of course, a lot of those planes are headed to China, where the middle class are now firmly on the move. With household incomes on the rise, those who can are now looking to see the world, and there are plenty of airlines vying to take then there. In Beijing recently, I spoke to several airline chief execs who made it clear: China is priority one.

(BEGIN VIDEO CLIP)

QUEST (voice-over): Flight CZ 303 from Guangzhou has just landed at London's Heathrow. It's the first-ever direct link from China's industrial powerhouse to the British capital.

This is China Southern's new route, a powerful and fitting symbol of the staggering rise of Chinese airline, Chinese cities and Chinese travelers.

(MUSIC PLAYING)

QUEST (voice-over): China's enormous population is getting richer and more mobile, with GDP growing at 8 percent a year. And with the growing middle class comes a new generation of travelers. The number of Chinese traveling outside the country has risen to 65 million a year. The pattern repeats with inbound visitors.

By 2030, the number of travelers to, from and through China will reach 1.5 billion. First in line to reap the rewards are China's big three airlines. Already, they make up 75 percent of the huge local market, and they have big plans for international expansion.

LIU SHAOYONG, CHAIRMAN, CHINA EASTERN AIRLINES (through translator): We won't let go of either market. On the one hand, we want to consolidate our domestic markets. On the other hand, we are avidly developing our international business.

We just last month, we announced the purchase of 20 Boeing 777s, priced at nearly $6 billion. This move clearly shows that in the foreseeable future, we'll pay more attention to the long distance international market.

QUEST (voice-over): When the heads of airlines recently gathered in Beijing, everyone was well aware of the importance and opportunity presented by China's growth.

MARTIN CRAIGS, CEO, PACIFIC ASIA TRAVEL ASSOCIATION: By 2030, China will have more air travelers than America, over a billion. So it's very important for anyone in the travel supply chain to understand it better and react to it.

QUEST (voice-over): The world's largest airline, United, has served China since 1983, operating 77 weekly flights to and from the U.S.

JEFF SMISEK, CEO, UNITED AIRLINES: China's been a nice pile on my desk, because it also generates a nice pile of money. And in my business, nice piles of money tend to draw my attention.

QUEST (voice-over): European airlines with longstanding routes into China's big cities are now discovering there are profits to be made flying further afield to tertiary cities and provincial capitals.

CHRISTOPH FRANZ, CEO, LUFTHANSA: Even a slight and tiny increase of welfare for everybody in these secondary cities means that thousands and thousands, 10 thousands of people, for the first time in their lives, have the ability to buy airline tickets. And that's where also business is developing and bringing business travelers.

QUEST (voice-over): Hong Kong-based Cathay Pacific is ideally placed to connect Chinese passengers. As of 2009, with an equity partnership with Air China.

JOHN SLOSAR, CEO, CATHAY PACIFIC: Obviously we're not going to be as big as some of the huge Chinese carriers. But we think we can play a significant role. And that doesn't mean just Beijing and Shanghai.

You know, heretofore, all the flights have been Beijing and Shanghai. We're talking about secondary and tertiary destinations, Hangzhou, Nanjing, Wenzhou, all these places where we think Hong Kong will be a very convenient connecting point.

QUEST (voice-over): Australia's Qantas has also been forging ties. The airline's strategic partner, in this case, China Eastern.

ALAN JOYCE, CEO, QANTAS: We think by 2020 30 percent of all visitors to Australia will be Chinese. That's massive. And we're working closely with China Eastern Airline and expanding our partnership with them. The future for us is absolutely Asia.

QUEST: Here at IATA, the airlines are joined by the plane manufacturers who have challenges of their own. Take Boeing, for example.

QUEST (voice-over): They recently opened a new parts factory in China after four decades of business here, China will soon be Boeing's biggest customer.

JIM ALBAUGH, OUTGOING PRESIDENT, COMMERCIAL BOEING AIRLINES: I think our strategy, if you want the essence of it, we want to be a partner. We want to be somebody that does more than just come over here and sell an airplane and take the money and leave. We want to be part of China and I think we're viewed that way.

QUEST: Boeing has forecast that China and it's airlines will need 5,000 new planes in the next two decades. So it makes sense politically, economically, geographically to make many of the parts right here.

QUEST (voice-over): The Chinese government may have other plans, launching their own rival manufacturer, Comac, in 2008, and the concern of Boeing is what political pressure there will be for Chinese airlines to buy them.

ALBAUGH: The Chinese airlines have to compete internationally. And if they're going to compete internationally, they have to have the best hardware. They have to have the best airplanes. I don't think the Chinese government is going to disadvantage the Chinese airlines by making them fly inferior products. Now will there be a policy where domestically they have to fly some Comac airplanes? Probably so.

QUEST (voice-over): Amid all the numbers, the hype, the promise and the profits, there is only one fact which remains constant: China is a growing market and everyone has to be part of the game.

(END VIDEO CLIP)

QUEST: That's a special report on the China aviation market.

The weather forecast, Jenny Harrison is at the World Weather Center this evening.

I come to you, Jenny, with trepidation and hope.

(LAUGHTER)

JENNY HARRISON, CNN METEOROLOGIST: And rightly so you should, so you should, should you, too. So, right.

(CROSSTALK)

HARRISON: Yes. There's more rain in your forecast. I know. So you're right to have that trepidation. But as for the hope, well, you do get some brighter spots in between. But there's another system pushing into the northwest.

Meanwhile, across the south of Europe, pretty good conditions, a nice summer there for sure. But look at all these thunderstorms again through the low countries, France into Germany, and again southern regions of the U.K. Meanwhile, across Scotland and northern England, the rain just really hasn't stopped for many hours.

This is why, of course. It's to do with the jet stream. Normally, it's much further north, and then now so this particular summer, it is actually plunged swards. So it's allowing all these systems to take the very, very same route, so that means heading across the northwest.

And this shows you again, so we've got the low pressure to the north. There's the jet stream. The next system comes in and literally follows the same track. So, again, we're going to see more rain across more southern and western regions of the U.K.

Meanwhile, in the southeast of Europe, we've got that very hot air in place, the dividing line as usual some very strong thunderstorms in the forecast. Now the heat is still on, but it is beginning to finally break down.

You can see temperatures, again, well in the 30s Celsius, which is above the average. But as we go into Saturday, they're coming down very, very suddenly. And in fact, Belgrade and then Budapest, you can see here, in fact, getting very close to the average, really, by the end of the week and the start of the weekend.

So more rain in the forecast across the west and those northern regions. And temperatures will be cooler under those wet, cloudy skies, just 15 in Glasgow, 18 in London and Paris, but very nice and sunny in Rome with a high of 33, Richard.

(END VIDEO CLIP)

QUEST: We thank you, Jenny Harrison, at the World Weather Center. We are (inaudible). You could answer my question later or tomorrow.

Now some of Jenny's colleagues in --

HARRISON: (Inaudible).

QUEST: Some of your colleagues in Belgium are in hot water. For their chilly predicament, after the break.

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(BEGIN VIDEO CLIP)

QUEST (voice-over): The "Conundrum" answer, the American flag, is it true or false? It's over the building in Canada's $10 bill. False, of course. The flag is often mistaken for an American flag. It's actually the Canadian Red Ensign flag, which features the Union Jack. The Bank of Canada has had to issue several statements that the flag is Canadian.

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QUEST: Now for some poetry this evening.

There is a Belgian town called Knokke-Heist Where the weather's not always too nice. The weather man said there's a downpour ahead And the tourists have begun to think twice.

Now the mayor's been left feeling blue And he's wondering what he can do. He said it's but sport, and he'll see them in court. So I asked the mayor, "Is he going to sue?"

(BEGIN VIDEO CLIP)

LEOPOLD LIPPENS, MAYOR, KNOKKE-HEIST, BELGIUM: I definitely sue them, because they made a forecast, saying that it would be bad weather until the 14th of August, and then five days good weather. And then again for one month, bad weather. I'd like to see now they're in United States, giving the weather forecast for two months ahead, everybody would lop his head off.

QUEST: Do you believe that you have much hope in getting a legal action underway? Because at the end of the day, one man's opinion on a weather forecast, even if it's wrong, if he genuinely believes it's going to rain till Christmas, there's not much you can do about it.

LIPPENS: No, that's not true, because in Lucado (ph), a year ago, there was a lawsuit against a weather forecast and the city won this. So we've got already a precedent that we're going to use.

And we're -- all the cities on the Belgian coast, those 11 cities, are going to go together with the two (inaudible) against not only the weather forecaster, but the newspapers who printed it, because they printed false news. And you're not allowed to print false news.

QUEST: What if he's right?

LIPPENS: Well, he has absolutely no right to do that, because he has to prove what he's telling. And since he's given this forecast, it hasn't rained for three days. So I mean, this guy's just completely berserk.

QUEST: But what effect has it had or what effect do you fear it's going to have?

LIPPENS: Well, it has an effect on all the Belgian coast. We of course know that we are not California or Le Cote d'Azur. But we know also that we have a climate who is absolutely more -- much more convenient and a very healthy climate. And very nice for the people.

But of course with now all the Internet and information you get when people go and check the weather forecast and see that 14 days ahead, that they give abysmal weather possibility, people begin to pack down.

(END VIDEO CLIP)

QUEST: So, Ms. Harrison, would you like to provide me with the name of your solicitors, please?

(LAUGHTER)

HARRISON: You know, interesting, isn't it, very interesting, indeed. The company's a private company in Belgium, Richard. The government, they don't -- the (inaudible) people, you know, up the government data and to actually (inaudible) any type of long-range outlook. They do in the U.K. They do in the U.S., dozens of other countries around the world do this.

So this company thought that is what they would do. This is what they were saying. Just for July, they were saying it would be slightly above average, the temperature. Of course, it's the rain that people are so concerned about. They predicted 135 percent of normal rainfall, and of those temperatures that are above average, just five days during July would be above 25 degrees Celsius.

So we looked at two towns, cities, Brussels and Oostende. So the average high between the beginning and the 10th of July, 22.6 in Brussels, 21.5 in Oostende. Yes, in both cases, that is actually a little bit above the average. As you can see, there are the normal temperatures in black. As for the rainfall, so far in Brussels, 31.7 millimeters.

The rainfall in Oostende, 46.5. Is it above the average? Yes, it is. And in fact, you can see over double the average has fallen already in Oostende, normally just 19.1 by this point in the month. And then in Brussels, 22.3. So, Richard, what they say is, well, this particular Belgian company has a 65 percent chance of this being correct. They're giving -- (inaudible) your face.

They have to give (inaudible) forecast. People expect a long-range forecast. By doing these long-range forecasts, people are generally able to plan and also the more you do it, the better you're going to get.

QUEST: Thank you, Ms. Harrison, defending your case beautifully, and your profession. We'll talk more about that. Jenny Harrison at the World Weather Center.

When we come back, it's a "Profitable Moment."

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(COMMERCIAL BREAK)

QUEST: Tonight's "Profitable Moment," this is the picture that cost the footballer Ronaldinho nearly $1 million. He was seen swinging from a can of Pepsi during a press conference at his new club, Atletico Mineiro, who are sponsored by the soft drink.

But Ronaldinho is sponsored by Coca-Cola, and they were so angry they canceled his sponsorship deal. Poor man. It might not even been his fault. But it is a telling reminder to us all that you can't be too careful when it comes to product placement.

One must always be guarded against the mistake, the slip and the faux pas, oh, no. The slightest indiscretion can have sponsors and management fuming, and one must always be on the right side. After all, accidents may happen, and the result can be very costly indeed. Just ask Ronaldinho.

And that's QUEST MEANS BUSINESS for tonight. I'm Richard Quest. Whatever you're up to in the hours ahead, I hope it's profitable.

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QUEST: Tonight's headlines: the U.N. and Arab League envoy for Syria, Kofi Annan, says the Security Council will decide on its next steps within days. Speaking in the last hour from Geneva, Annan urged governments to work together to end the crisis and Syrian opposition sources tell CNN that Syria's ambassador to Iraq has defected from the Syrian regime.

In Madrid, Spain, anti-austerity protesters threw rocks and bottles at police, who responded with rubber bullets and batons. Dozens of people were hurt. This latest protest began with a march by coal miners who had walked 450 kilometers to reach the capital. Even so, the prime minister announced new austerity measures.

Authorities in London are investigating the death of a wealthy socialite. Eva Rausing's body was found in a police search of her home. Her husband was arrested on suspicion of drug possession. Hans Christian Rausing is the heir to a multibillion-dollar family fortune.

Prosecutors cross-examined English football star John Terry on Wednesday, pressing him on allegations that he racially abused another player. Several past colleagues made character witness, saying they do not believe he is a racist.

Those are the headlines. Now live from New York, "AMANPOUR."

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