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Speaker 1: The U S And China are on the verge of

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Speaker 1: a trade war now that the Trump administration has moved

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Speaker 1: forward with tariffs. China has vowed to retaliate, and President

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Speaker 1: Trump threatened to retaliate an even bigger fashion. He says

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Speaker 1: that trade wars are easy to win. But how will

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Speaker 1: this really impact China's economy? Is it really growing at

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Speaker 1: an incredible seven percent rate? Or is it about to

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Speaker 1: collapse from a mountain of debt and an aging population.

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Speaker 1: Which are the myths and which are the facts? Welcome

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Speaker 1: to Benchmark. I'm Scott Landman, an economics editor with Bloomberg

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Speaker 1: News in Washington. Joining me today is my Bloomberg colleague,

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Speaker 1: Jeff Kerns, also here in d C. Jeff, welcome back

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Speaker 1: to Benchmark. Thanks Scott. It's great to be back, So Jeff.

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Speaker 1: The last time we had you on Benchmark, you were

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Speaker 1: in Beijing, and now you've just returned from almost three

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Speaker 1: years there as China economy editor. How does it feel

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Speaker 1: to be back? Indeed, it was two years, ten months

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Speaker 1: and ten days, and it's a little bitter sweet to

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Speaker 1: leave China. But it's great to be back here in Washington,

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Speaker 1: and we're happy to have you back here. Uh so, Now,

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Speaker 1: since I actually held the same position as you did

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Speaker 1: in Beijing as economy editor for three years before you

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Speaker 1: were there, we thought it would be a good idea

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Speaker 1: to talk about China what we saw on the ground

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Speaker 1: there and address some common perceptions or misperceptions about the

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Speaker 1: world's second largest economy. We'll call it myth or fact.

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Speaker 1: Are you ready, chef? I'm ready? All right, So let's

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Speaker 1: talk about trade first. China's economy is so dependent on

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Speaker 1: trade that Trump says he can win a trade war

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Speaker 1: with China easily, and China does actually export about four

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Speaker 1: times as many goods to the United States as it imports.

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Speaker 1: Is this a myth or a fact? That China is

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Speaker 1: so dependent on trade and Trump can win this trade

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Speaker 1: were easily. What was the thinking over in China when

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Speaker 1: you were there. One of the clear themes that the

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Speaker 1: government said is that they're prepared to suffer the consequences,

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Speaker 1: that they're not going to be pushed around into making

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Speaker 1: concessions that they're not prepared to make or that they

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Speaker 1: don't believe they should, and that they're ready to take

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Speaker 1: the pain for a little while. And the system there

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Speaker 1: is a unique one that positions them to be able

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Speaker 1: to do that without worries about political blowback or anything

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Speaker 1: like that. And so that's been a really clear theme

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Speaker 1: from the government that they are ready to take on

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Speaker 1: this battle and that they didn't want it and didn't

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Speaker 1: ask for it. So let's talk about the perception then

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Speaker 1: that China is really dependent on exports. I mean, you

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Speaker 1: said they're willing to take some pain, so obviously tariffs

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Speaker 1: would cause some pain for the economy. But you know,

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Speaker 1: for for decades China was really dependent on exports on

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Speaker 1: its manufacturing sector. How has its economy evolved in recent

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Speaker 1: years as it still has depended on manufacturing or have

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Speaker 1: other kinds of industries sprung up to to take up

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Speaker 1: some of that economic growth. Well, that's a really good point.

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Speaker 1: The economy is definitely evolving. The big theme is the

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Speaker 1: rebalancing and the economy away from the old smoke stack

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Speaker 1: industries and the traditional focus of the last three or

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Speaker 1: four decades on exports and toward the consumer and towards services.

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Speaker 1: Services since two thousand and fifteen have accounted for more

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Speaker 1: than of output, so that was a big milestone. And

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Speaker 1: the consumer is getting stronger and stronger as a as

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Speaker 1: a domestic prop for growth. So you're right, there's a

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Speaker 1: real shift that continues to slowly push shuring it away

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Speaker 1: from that old dependence on making, uh, you know, exporting

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Speaker 1: things and making cheap things to celebroad it's a it's

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Speaker 1: a really different world than it was maybe five or

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Speaker 1: ten years ago. Yeah, yeah, I can remember about even

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Speaker 1: six or seven years ago. I forget exactly when, but

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Speaker 1: services did pass uh manufacturing part of the economy to

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Speaker 1: become the largest sector. And uh, there is still a

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Speaker 1: lot of manufacturing in China that is still a very

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Speaker 1: important part of the economy, but there has been this

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Speaker 1: steady shift toward the consumer towards the services that you know,

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Speaker 1: that show that the economy is just not this massive

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Speaker 1: made in China thing that it was for a long time.

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Speaker 1: And that's why I think the government is pushing this

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Speaker 1: made in China, which is sort of this evolution of

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Speaker 1: what it means to to make things in China and

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Speaker 1: focus more on high technology and that sort of thing.

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Speaker 1: Is that right, Yeah? I mean in China is probably

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Speaker 1: one of the more underappreciated goals of the government, and

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Speaker 1: it is really an ambitious target to really dominate a

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Speaker 1: number of the you know, high tech sectors. One of

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Speaker 1: the one the really interesting things that is a minor

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Speaker 1: thing that came in the last year was the the

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Speaker 1: new high speed rail line. The new high speed rail

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Speaker 1: trains that rolled out the Fu Shing which means rejuvenation,

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Speaker 1: were domestic technology and this was rolled out with a

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Speaker 1: big fan fair last fall around the time of the

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Speaker 1: Party Congress, UH to show that this doesn't depend on

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Speaker 1: German or Japanese imports to run these high speed rail trains,

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Speaker 1: which are really the kind of the pride of the

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Speaker 1: industrial economy there. It's definitely something that's UH an under

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Speaker 1: appreciated point at this time that we're talking a lot

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Speaker 1: about trade. Now you mentioned this point about state developed

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Speaker 1: technology or technology developed in China, it's maybe a good

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Speaker 1: time to segue to another myth or fact. Does the

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Speaker 1: state control the economy or does the state let the

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Speaker 1: private sector really do what it wants to do just

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Speaker 1: without having full free reign to um, you know, to

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Speaker 1: do whatever business it wants. Well, I think the answer

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Speaker 1: might be both. It might be that the there is

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Speaker 1: a definite Communist party control that's been tightening over not

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Speaker 1: just over state owned enterprises but also over other countries,

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Speaker 1: but there's also a real high level focus on putting

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Speaker 1: more support into startups and innovative companies that will rise

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Speaker 1: to become the next Ali, Babo or Tencent and really

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Speaker 1: push the economy forward. And so there's two two different

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Speaker 1: things going on there. There's been more state control over

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Speaker 1: the state owned enterprises, but also trying to make them

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Speaker 1: leaner and more nimble to kind of get away from

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Speaker 1: the old, bloated and debt ridden enterprises that they used

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Speaker 1: to be in the past. So both of these things

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Speaker 1: are happening concurrently. One of the things that's really interesting

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Speaker 1: though with debt is that this is one of the

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Speaker 1: main risks and that total control can kind of be

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Speaker 1: exerted on companies that don't look like they're acting carefully

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Speaker 1: and they can be forced to reduce borrowing or sell assets.

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Speaker 1: And so there is both an encouragement of the government

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Speaker 1: to uh to have more party control over companies to

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Speaker 1: make sure that they're serving the government that way, but

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Speaker 1: also to also to support the new engines that it

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Speaker 1: sees it self needing in the future. Right right, there's

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Speaker 1: really this combination of hands on in some ways and

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Speaker 1: hands off in other ways, but it's never really going

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Speaker 1: to get to a fully hands off um kind of approach,

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Speaker 1: because you do have this need for the Communist Party

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Speaker 1: to maintain state control or you know, maintain control of

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Speaker 1: the government of the country. And you mentioned what you

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Speaker 1: mentioned debt, and that brings us to another point that

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Speaker 1: we need to address and something that really you know

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Speaker 1: that that I remember I um edit a lot of

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Speaker 1: stories about when I was over there. It's kind of

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Speaker 1: this growing theme. UM, let's ask this question, is it

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Speaker 1: a myth or a fact that China's debt is so

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Speaker 1: out of hand that a crisis could be coming any

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Speaker 1: day now? Well, we've heard a lot of that. There's

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Speaker 1: probably been more of a focus on debt during the

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Speaker 1: three years I was there from two thousand fifteen to

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Speaker 1: to this year than was during the I guess the

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Speaker 1: three prior years when you were there, when there was

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Speaker 1: probably more of a boom in adding to debt. And

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Speaker 1: in the last couple of years there's been really focused

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Speaker 1: on maybe not reducing it, but flattening the pace of growth.

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Speaker 1: And so the with debt, there was a real focus

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Speaker 1: on these these kind of large conglomerates. That was really interesting.

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Speaker 1: It was a way to show that the government was

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Speaker 1: addressing problems and risks, but also by taking on some

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Speaker 1: of the biggest names. And one of the best examples

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Speaker 1: of that was the on Bud Insurance Group, which was

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Speaker 1: um around the world. It was buying large, expensive assets UH,

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Speaker 1: most notably the Wall Offer story in Manhattan and UH

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Speaker 1: building what looked like an increasingly unsustainable portfolio with a

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Speaker 1: lot of debts. So the government has seized the company

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Speaker 1: and its prosecuting the the founder for fraud and now

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Speaker 1: is overseeing the stabilization of this this big company. And

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Speaker 1: there's similar things happening with other large conglomerates like Dali

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Speaker 1: and Wanda Group and also h n A, which are

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Speaker 1: in similar positions with the government has come in to say,

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Speaker 1: you're gonna need to peel back a little bit of

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Speaker 1: that debt and be careful. Yeah, it seems like you

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Speaker 1: made the point. When when I was there, there was

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Speaker 1: just this acknowledgement that there was an issue with debt,

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Speaker 1: or at least you know, a growing number of economists

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Speaker 1: were pointing it out, and it was starting to kind

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Speaker 1: of seep into the um you know, the public statements

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Speaker 1: of official or at least the thinking of what we

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Speaker 1: could suss out of us another journalists were able to

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Speaker 1: figure out. And at the same time, you know, a

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Speaker 1: lot of people are started making dire predictions this is

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Speaker 1: going to be the beginning of a big financial crisis

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Speaker 1: in China, and of course, you know that has not

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Speaker 1: come to pass. The government has taken these kinds of

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Speaker 1: steps that you mentioned to deal with you know what,

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Speaker 1: we're some of the biggest offenders on this issue, and

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Speaker 1: you know, has has tried a variety of solutions, different

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Speaker 1: programs to to kind of, um address the debt issue

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Speaker 1: and make sure it doesn't balloon out of hand. And

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Speaker 1: yet at the same time, um, you know, they do

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Speaker 1: still use debt to support growth and it doesn't seem

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Speaker 1: like that's about to end any time as soon as

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Speaker 1: that is that fair to say? That sounds about right

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Speaker 1: all right? Well, speaking of GDP growth, that brings us

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Speaker 1: to another key issue with China's economy that a lot

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Speaker 1: of people like to talk about, and that's the uh.

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Speaker 1: Those are the numbers that the Chinese government puts out

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Speaker 1: on the economy every quarter, and I think it's close

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Speaker 1: to four years now, somewhere in that range, we have

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Speaker 1: had a GDP number every quarter that's been somewhere between

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Speaker 1: six point five and seven percent. Uh, you know, it

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Speaker 1: seems pretty unrealistic from the outside. So but let's ask

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Speaker 1: the question, is China's GDP really growing at this kind

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Speaker 1: of seven percent? Right? Well, what I can't tell you

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Speaker 1: is that our own uh Bloomberg Growth Tracker for China,

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Speaker 1: which is developed by our economists in in Beijing and

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Speaker 1: Hong Kong, is showing that it's about six point just

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Speaker 1: under seven percent at six and uh the three and

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Speaker 1: twelve month averages are right around the same seven percent

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Speaker 1: level there. So that's something that's kind of an affirmation.

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Speaker 1: And and they've also done examinations looking at kind of

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Speaker 1: what other data sources like big data say about this,

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Speaker 1: and they've they've shown some affirmation that the economy isn't

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Speaker 1: really actually growing at three percent. But the question about

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Speaker 1: growth is an interesting one because China, one of the

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Speaker 1: important things remember is that there's a growth target that's

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Speaker 1: set by the government, and so there's a a reason

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Speaker 1: that you would kind of want to see that that

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Speaker 1: you might expect growth to be steered towards a certain

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Speaker 1: level or really said to be at a certain level.

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Speaker 1: And this year that's at six point five percent, and

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Speaker 1: so coincidentally, that's what economists are projecting for this year's expansion.

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Speaker 1: And that's an interesting, uh interesting coincidence with the growth figures.

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Speaker 1: Are You're right, they're very stable. They haven't moved for

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Speaker 1: the last three years, uh, quarter and quarter by more

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Speaker 1: than zero point one percentage point. Uh. And so there's

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Speaker 1: there's a real uncanny stability that really doesn't compare to

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Speaker 1: any other major economy out there. Yeah, especially here in

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Speaker 1: the US, where the GDP numbers swinging from quarter to quarter.

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Speaker 1: We went from two point two percent annualized pace in

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Speaker 1: the first quarter, you know, now the forecasts are for

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Speaker 1: around four percent in the second quarter. That's a little

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Speaker 1: bit different way of looking at it. That's quarter on

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Speaker 1: quarter annualized. Uh. China uses year over year. But even

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Speaker 1: with that, we've seen stronger variations in the US and

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Speaker 1: just about you know, every other major developed economy. Uh.

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Speaker 1: So to wrap up, I wanted to turn to one

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Speaker 1: last major issue hanging over China's economy, and that's the demographics.

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Speaker 1: You know, one theme that was also coming up while

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Speaker 1: I was over there is that the workforce was starting

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Speaker 1: to shrink, meeting the working age population was actually starting

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Speaker 1: to get smaller. Uh, you know, people were getting older,

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Speaker 1: not enough babies were being born. This is partly the

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Speaker 1: result of government policies. You have the one child policy

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Speaker 1: for a long time. It's now a two child policy.

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Speaker 1: But even then, I'm not sure if birth rates are

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Speaker 1: really taking off. But that brings us to the question

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Speaker 1: of how this is going to affect the economy. And

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Speaker 1: the question is is it a myth or a fact

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Speaker 1: that the shrinking workforce, the aging workforce is going to

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Speaker 1: post a big risk to China's growth in coming decades. Well,

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Speaker 1: let's say it's a fact that it's a big worry

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Speaker 1: for policymakers, and they've they've talked about this concern. The

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Speaker 1: one of the big milestones was that repealing of that

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Speaker 1: one child rule. And now our own reportings is that

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Speaker 1: that's uh, the new limit of two children is due

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Speaker 1: to be scrapped all together, so there's no limit. Uh.

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Speaker 1: When that one child rule was first uh eliminated, there

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Speaker 1: was a little bit of a pop in the birth rates,

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Speaker 1: but then the following year that kind of settled right

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Speaker 1: back down to seventeen million a year, so it didn't

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Speaker 1: really sustain for more than one year, which might have

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Speaker 1: been a little unsettling and might have been the reason

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Speaker 1: that there's uh consideration of just dropping that that rule together.

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Speaker 1: But there is the long term trends are not are

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Speaker 1: not encouraging, and by there the projections showed there's going

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Speaker 1: to be more people who are sixty or older than

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Speaker 1: those who are fourteen and younger. So that's a big

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Speaker 1: potential headache for for policy makers to address, and it

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Speaker 1: doesn't argue well for the long term growth trends. And

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Speaker 1: coming back to our original theme of how trade tensions

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Speaker 1: will affect China's economy or whether you know, Trump can

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Speaker 1: win a trade war with China, it's actually one area

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Speaker 1: where in the long term, the US may actually hold

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Speaker 1: a structural advantage if the US population can grow uh

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Speaker 1: faster than than China or or not shrink actually, but

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Speaker 1: you know, like like we've also reported here that depends

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Speaker 1: on immigration, and if immigration is subject to restrictions, then

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Speaker 1: you know that actually will result in a labor force

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Speaker 1: in the United States that's stable or shrinking. So uh,

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Speaker 1: you know, I think it is pretty interesting to compare

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Speaker 1: the long term demographic trends that aren't really all that

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Speaker 1: different in both countries in in a really big picture.

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Speaker 1: Would you agree with that, Jeff, I I would. I

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Speaker 1: think that's a really compelling point. So, Jeff, thinking about

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Speaker 1: all these things that we've been talking about, ken Trump

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Speaker 1: easily win a trade war with China, Well, I guess

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Speaker 1: that depends on what the definition of victory is. But

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Speaker 1: right now it's UH. It looks like a pretty chaotic outlook.

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Speaker 1: So I'm not really sure how to judge that, But

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Speaker 1: I think that the UH for China, the country is

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Speaker 1: confident that they can sustain anything thrown at them. And

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Speaker 1: the other thing for China that I think is the

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Speaker 1: one thing I'm gonta learned is that don't bet against China.

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Speaker 1: It's full of surprises. I'll never forget. We arrived on Monday,

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Speaker 1: August ten, two fifty and the next day was the

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Speaker 1: yuand evaluation, which was a major crisis for the whole world.

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Speaker 1: Uh and markets fell around the world, and there were

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Speaker 1: all kinds of predictions ab out the downfall of the

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Speaker 1: the unsustainable debt and uh inflated stock markets, and here

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Speaker 1: we are that the economy is looking pretty darn rob Us. Now, Jeff,

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Speaker 1: I remember that day well too, And what you say

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Speaker 1: is correct about the predictions that were made at that

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Speaker 1: time and how we should all have a little humility

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Speaker 1: in what we judged to be the outlook for China

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Speaker 1: and this budding trade war as it takes off. Jeff Kerns,

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Speaker 1: thanks for joining us on Benchmark. Thanks great to talk

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Speaker 1: to you. Benchmark will be back next week. Until then,

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Speaker 1: you can find us on the Bloomberg terminal, Bloomberg dot com,

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Speaker 1: our Bloomberg app, and podcast destinations such as Apple Podcasts, Spotify,

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Speaker 1: or wherever you listen. We love it if you took

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Speaker 1: the time to rate and review the show so more

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Speaker 1: listeners can find us. You can also check us out

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Speaker 1: on Twitter, follow me at Scott Landman, and our guest

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Speaker 1: Jeff Kerns, is at Jeff Kerrens j E F F

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Speaker 1: k E A r n S. Benchmark is produced by

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Speaker 1: Toe for Foreheads and Magnus Henrikson. The head of Bloomberg

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Speaker 1: Podcast is Francesco Levie. Thanks for listening. See you next time.