1 00:00:10,760 --> 00:00:14,680 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,760 --> 00:00:19,599 Speaker 1: I'm Joe Wasn't Thal and I'm Tracy halliway, so, Tracy. 3 00:00:19,880 --> 00:00:24,599 Speaker 1: We've been talking about China a fair amount, obviously on 4 00:00:24,640 --> 00:00:29,120 Speaker 1: the podcast. We did that great episode on Evergrand with 5 00:00:29,200 --> 00:00:32,040 Speaker 1: Travis LUNDI. We've been talking about how some of the 6 00:00:32,280 --> 00:00:36,360 Speaker 1: reforms UM fit in with the broader vision with Isabella Vaber, 7 00:00:37,400 --> 00:00:41,320 Speaker 1: some of the uh tech and other industrial policy changes 8 00:00:42,320 --> 00:00:44,280 Speaker 1: with Dan Long. But it still feels like we haven't 9 00:00:44,360 --> 00:00:46,839 Speaker 1: quite like I guess I would say, put all of 10 00:00:46,840 --> 00:00:50,880 Speaker 1: the macro pieces together. No, I don't think we've connected 11 00:00:51,080 --> 00:00:55,480 Speaker 1: the dots between all of those different developments and UM 12 00:00:55,480 --> 00:00:59,440 Speaker 1: and talked about their actual impact on the economy. And 13 00:00:59,600 --> 00:01:02,400 Speaker 1: I mean, I don't know. To me, the big question 14 00:01:02,440 --> 00:01:04,959 Speaker 1: around all of this UM, you know, what's happening in 15 00:01:05,000 --> 00:01:07,720 Speaker 1: the property market right now with Evergrand, and what's been 16 00:01:07,760 --> 00:01:11,920 Speaker 1: happening with the tech crackdowns and various other crackdowns. To me, 17 00:01:12,120 --> 00:01:15,560 Speaker 1: it's just the timing. You know, why decide to do 18 00:01:15,640 --> 00:01:19,720 Speaker 1: all of this right after a global pandemic when you 19 00:01:19,760 --> 00:01:25,200 Speaker 1: could argue that economic recovery might be relatively fragile. And again, 20 00:01:25,200 --> 00:01:27,200 Speaker 1: like we're sort of seeing the impact in the property 21 00:01:27,240 --> 00:01:31,280 Speaker 1: sector now, right, So China introduce this three red lines 22 00:01:31,400 --> 00:01:35,840 Speaker 1: policy last year in order presumably to strengthen its real 23 00:01:35,959 --> 00:01:39,320 Speaker 1: estate market. Um, and fast forward, you know a year later, 24 00:01:39,440 --> 00:01:43,720 Speaker 1: it seems like that's actually caused quite a lot of tensions. Um. 25 00:01:43,760 --> 00:01:46,440 Speaker 1: So yeah, I don't know. To me, it's it's still 26 00:01:46,520 --> 00:01:50,680 Speaker 1: sort of a mystery. Yeah, And there's some interesting things 27 00:01:50,680 --> 00:01:54,880 Speaker 1: so like even take ever Grand for example, And obviously 28 00:01:55,000 --> 00:01:58,280 Speaker 1: there are the sort of like initial effects like okay, 29 00:01:58,280 --> 00:01:59,920 Speaker 1: who is going to be left holding the bag for 30 00:02:00,040 --> 00:02:03,160 Speaker 1: the losses? And I think that's still TVD right, Like 31 00:02:03,200 --> 00:02:06,320 Speaker 1: we don't really know how these sort of like economic 32 00:02:06,400 --> 00:02:12,840 Speaker 1: losses will be distributed among creditors, among regional finance chiefs, 33 00:02:12,880 --> 00:02:15,000 Speaker 1: among people who may have put down a down payment 34 00:02:15,040 --> 00:02:17,560 Speaker 1: for a home and so forth. And then there's sort 35 00:02:17,560 --> 00:02:20,040 Speaker 1: of like limits of like macro impact. And you read 36 00:02:20,080 --> 00:02:25,240 Speaker 1: these stories about commodities piling up in places where the 37 00:02:25,639 --> 00:02:30,920 Speaker 1: home real estate development is slowing and rebar and other 38 00:02:31,080 --> 00:02:35,000 Speaker 1: assets piling up, and so okay, then there's a commodity spillover, etcetera. 39 00:02:35,480 --> 00:02:38,160 Speaker 1: And you know it's interesting you mentioned like why now 40 00:02:38,360 --> 00:02:40,200 Speaker 1: and of course, coming out of the two thousand and 41 00:02:40,200 --> 00:02:43,840 Speaker 1: eight two thousand nine Great Financial Crisis, China was seen 42 00:02:43,880 --> 00:02:47,040 Speaker 1: as like one of the demand engines of the world 43 00:02:47,120 --> 00:02:50,600 Speaker 1: like these, so much of the demand was coming from China. 44 00:02:51,560 --> 00:02:54,920 Speaker 1: Very different dynamic right now from a sort of global 45 00:02:55,000 --> 00:02:58,640 Speaker 1: spillover standpoint where there is a lot of global demand 46 00:02:58,880 --> 00:03:03,359 Speaker 1: for Chinese goods, but not a huge demand impulse it 47 00:03:03,400 --> 00:03:07,160 Speaker 1: would seem coming from China itself. Yeah, so we kind 48 00:03:07,160 --> 00:03:09,320 Speaker 1: of need to have two conversations. So we need to 49 00:03:09,400 --> 00:03:12,840 Speaker 1: talk about what all these recent developments actually mean for 50 00:03:13,040 --> 00:03:16,120 Speaker 1: China's economy domestically, and then of course we have to 51 00:03:16,120 --> 00:03:21,680 Speaker 1: have even bigger conversation about what those changes actually mean 52 00:03:21,800 --> 00:03:25,959 Speaker 1: for China's role in the global economy. Absolutely, and there's 53 00:03:26,000 --> 00:03:28,200 Speaker 1: one of their twists and all this, which is it's 54 00:03:28,240 --> 00:03:31,000 Speaker 1: there's this global energy crisis right now and natural gas 55 00:03:31,080 --> 00:03:35,120 Speaker 1: prices are surging and China is not escaping that. In 56 00:03:35,200 --> 00:03:38,040 Speaker 1: fact that China energy prices are surging in China and 57 00:03:38,080 --> 00:03:41,120 Speaker 1: the sort of curbs and energy consumption, and that don't 58 00:03:41,160 --> 00:03:43,400 Speaker 1: fully understand how that what's going on, or how that 59 00:03:43,440 --> 00:03:47,200 Speaker 1: plays into it. Anyway, we have the perfect guest, I believe, 60 00:03:48,080 --> 00:03:51,760 Speaker 1: to talk about the domestic impacts than the global ramifications. 61 00:03:52,000 --> 00:03:54,200 Speaker 1: He's been on Odd Lots several times. We had to 62 00:03:54,240 --> 00:03:56,640 Speaker 1: get him back. At this moment, we're going to be speaking, 63 00:03:56,720 --> 00:04:00,920 Speaker 1: of course, to Michael Pettis, finance professor Taking University and 64 00:04:00,960 --> 00:04:03,280 Speaker 1: the scholar at the Carnegie Endowment, and of course the 65 00:04:03,320 --> 00:04:07,040 Speaker 1: co author of the book last year, Trade Wars Are 66 00:04:07,160 --> 00:04:10,000 Speaker 1: Class Wars. Professor Pettis, thank you so much for coming 67 00:04:10,000 --> 00:04:14,320 Speaker 1: back on Odd Lots. My pleasure is old. Well, let's 68 00:04:14,360 --> 00:04:17,520 Speaker 1: just start with I guess this sort of like I guess, 69 00:04:17,520 --> 00:04:20,679 Speaker 1: I would say, the first order effects, and we'll probably 70 00:04:20,680 --> 00:04:23,719 Speaker 1: get into second and third and fourth order effects. But 71 00:04:23,880 --> 00:04:27,120 Speaker 1: you know, the big news obviously, Ever, grand we don't 72 00:04:27,160 --> 00:04:29,719 Speaker 1: really know how that story is going to play out, 73 00:04:30,040 --> 00:04:32,640 Speaker 1: kind of like I said at the beginning, they're going 74 00:04:32,640 --> 00:04:35,159 Speaker 1: to you know, we don't know how the economic losses 75 00:04:36,040 --> 00:04:40,599 Speaker 1: from that implosion will be distributed. But what is your 76 00:04:40,720 --> 00:04:45,640 Speaker 1: view sort of a big picture of what that means 77 00:04:46,200 --> 00:04:49,480 Speaker 1: for the Chinese economy, sort of the most straightforward take 78 00:04:49,560 --> 00:04:53,640 Speaker 1: you have, Well, I'd say two things. The first thing 79 00:04:53,760 --> 00:04:56,359 Speaker 1: is that I think the macro view is the is 80 00:04:56,440 --> 00:04:59,479 Speaker 1: the right way to look at it. Ever, Grand d Ever, 81 00:04:59,560 --> 00:05:03,080 Speaker 1: Grand Da in and of itself is uh, you know, 82 00:05:03,160 --> 00:05:08,599 Speaker 1: pretty important, pretty painful, but it's much more important as 83 00:05:08,640 --> 00:05:11,599 Speaker 1: a as a symptom of what we've been seeing. The 84 00:05:11,720 --> 00:05:15,960 Speaker 1: latest round of defaults in China didn't start with ever Grande. 85 00:05:16,440 --> 00:05:19,320 Speaker 1: You could argue that they started in May two thousand 86 00:05:19,480 --> 00:05:22,880 Speaker 1: nineteen with bao Chang Bank, and since then we've had 87 00:05:22,920 --> 00:05:26,960 Speaker 1: a series of very important defaults that have all been 88 00:05:27,040 --> 00:05:30,680 Speaker 1: resolved by the regulators. Um I wouldn't even say ever 89 00:05:30,760 --> 00:05:33,800 Speaker 1: Grande is the most important. I think Hurong is probably 90 00:05:33,839 --> 00:05:36,880 Speaker 1: the most important, and you could also argue that h 91 00:05:37,000 --> 00:05:40,280 Speaker 1: n A and and perhaps uh ping On in the 92 00:05:40,360 --> 00:05:44,919 Speaker 1: future are also more important in terms of size. But 93 00:05:45,279 --> 00:05:48,640 Speaker 1: what really matters about ever grand is not so much 94 00:05:48,680 --> 00:05:52,200 Speaker 1: ever grand but what the property sector represents for China. 95 00:05:52,680 --> 00:05:55,159 Speaker 1: I'm sure you know all the figures they've been they've 96 00:05:55,200 --> 00:05:59,880 Speaker 1: been much repeated recently, but to go through them, the 97 00:06:00,040 --> 00:06:06,680 Speaker 1: property sector, including upstream, upstream and downstream businesses, comprises between 98 00:06:06,760 --> 00:06:12,240 Speaker 1: twenty five and thirty percent of China's GDP, probably closer 99 00:06:12,320 --> 00:06:15,919 Speaker 1: to thirty than to five, and that's roughly twice what 100 00:06:16,080 --> 00:06:21,479 Speaker 1: you would expect in other countries. Real estate investment is 101 00:06:21,520 --> 00:06:26,880 Speaker 1: about thirteen percent of China's GDP. So that's about one 102 00:06:27,000 --> 00:06:30,760 Speaker 1: third of total investment in China, and as you know, 103 00:06:30,880 --> 00:06:35,520 Speaker 1: investment in China is extraordinarily high. It's roughly of g 104 00:06:35,640 --> 00:06:39,960 Speaker 1: d P. In other countries, real estate investment is a 105 00:06:40,080 --> 00:06:43,000 Speaker 1: much lower share. I think in the US it's roughly 106 00:06:43,120 --> 00:06:46,400 Speaker 1: five So when you look at the direct impact of 107 00:06:46,400 --> 00:06:50,640 Speaker 1: a slowdown in the property sector, the numbers are pretty scary. 108 00:06:50,680 --> 00:06:54,880 Speaker 1: They're they're quite large. They represent a very significant part 109 00:06:54,880 --> 00:06:58,320 Speaker 1: of the Chinese economy, and they represent perhaps thirty to 110 00:06:58,400 --> 00:07:02,680 Speaker 1: forty pcent of growth and years. But there's another thing 111 00:07:02,760 --> 00:07:05,520 Speaker 1: that matters a great deal, which may even matter more 112 00:07:06,000 --> 00:07:10,640 Speaker 1: will see, and that is when you look at household wealth. 113 00:07:11,480 --> 00:07:17,760 Speaker 1: Holmes homeownership represents roughly eighty percent of household wealth in China, 114 00:07:18,640 --> 00:07:20,960 Speaker 1: and I've been trying to look at other numbers. This 115 00:07:21,080 --> 00:07:24,400 Speaker 1: is more than twice what it represents in most other countries. 116 00:07:25,000 --> 00:07:28,520 Speaker 1: But I was looking at Japan during the during the 117 00:07:28,560 --> 00:07:32,480 Speaker 1: bubble of the of the late nineties, and there it 118 00:07:32,600 --> 00:07:37,960 Speaker 1: represented I believe roughly sixty of household wealth, which at 119 00:07:37,960 --> 00:07:41,240 Speaker 1: the time was considered a really high number. In China, 120 00:07:41,320 --> 00:07:44,200 Speaker 1: of course, it's much higher than that. And the reason 121 00:07:44,240 --> 00:07:46,720 Speaker 1: that matters, of course, is that if you start to 122 00:07:46,760 --> 00:07:52,160 Speaker 1: see a decline in the price of homes um that 123 00:07:52,240 --> 00:07:56,960 Speaker 1: will very significantly impact household wealth, which in turn should 124 00:07:57,080 --> 00:08:03,320 Speaker 1: significantly impact household consumption. Is things. Yeah, I remember one 125 00:08:03,360 --> 00:08:07,200 Speaker 1: of our previous guests, Travis Lundie, also mentioned that Japan 126 00:08:07,360 --> 00:08:11,600 Speaker 1: bubble comparison. But okay, so here's my one big question 127 00:08:12,120 --> 00:08:16,520 Speaker 1: about what's going on with China property and with ever grants. 128 00:08:16,560 --> 00:08:19,400 Speaker 1: So a lot of people are talking about some of 129 00:08:19,400 --> 00:08:22,800 Speaker 1: the current stresses being caused by the three Red Lines 130 00:08:22,880 --> 00:08:26,920 Speaker 1: program that China introduced last year, where it was trying 131 00:08:26,920 --> 00:08:30,160 Speaker 1: to encourage a lot of real estate developers to delever 132 00:08:30,280 --> 00:08:34,559 Speaker 1: their balance sheets and not to cross um certain thresholds 133 00:08:34,600 --> 00:08:37,720 Speaker 1: for borrowing. I guess, on the one hand, it makes 134 00:08:37,760 --> 00:08:40,800 Speaker 1: some sense for China to try to shore up and 135 00:08:40,920 --> 00:08:44,800 Speaker 1: de leverage its real estate sector because, as everyone knows, 136 00:08:44,880 --> 00:08:48,400 Speaker 1: it is quite heavily indebted. It is very very financialized. 137 00:08:48,720 --> 00:08:52,520 Speaker 1: But on the other hand, given real estates importance in 138 00:08:52,600 --> 00:08:56,480 Speaker 1: the economy, which you, of course just described, it seems 139 00:08:56,559 --> 00:09:00,960 Speaker 1: like a risky proposition to start ring fencing it at 140 00:09:01,000 --> 00:09:05,040 Speaker 1: an economically sensitive time. So I guess my question is 141 00:09:05,400 --> 00:09:10,200 Speaker 1: why did the authorities decide to do it. And then secondly, 142 00:09:10,960 --> 00:09:14,080 Speaker 1: what impact do you think that program has had on 143 00:09:14,160 --> 00:09:19,400 Speaker 1: the property sector overall. It's difficult to figure out why 144 00:09:19,480 --> 00:09:23,679 Speaker 1: the timing, but but I'm not even sure that that matters. 145 00:09:23,720 --> 00:09:27,720 Speaker 1: What I would argue is that the three red lines 146 00:09:28,240 --> 00:09:33,200 Speaker 1: which were announced last year are sort of the trigger 147 00:09:33,480 --> 00:09:36,680 Speaker 1: for ever Grands problems, but they're not really the cause 148 00:09:36,720 --> 00:09:40,120 Speaker 1: of the problems. You know, We've discussed this many times 149 00:09:40,200 --> 00:09:43,679 Speaker 1: before over the past several years, and and the problem 150 00:09:43,679 --> 00:09:48,439 Speaker 1: in China was that you have two types of growth 151 00:09:48,440 --> 00:09:51,640 Speaker 1: in China. You have what Beijing has been calling high 152 00:09:51,720 --> 00:09:56,920 Speaker 1: quality growth, which is really consumption exports and business investment 153 00:09:57,400 --> 00:10:01,199 Speaker 1: oriented towards consumption and exports. That's what I would call 154 00:10:01,320 --> 00:10:05,640 Speaker 1: the sustainable growth, the real underlying growth in the economy. 155 00:10:05,720 --> 00:10:08,920 Speaker 1: And then you have what I would call residual growth, 156 00:10:08,960 --> 00:10:13,440 Speaker 1: which is really investment in the property sector and local 157 00:10:13,480 --> 00:10:17,920 Speaker 1: government spending on infrastructure. And the purpose of that residual 158 00:10:18,760 --> 00:10:23,520 Speaker 1: is to bridge the gap between the real underlying growth 159 00:10:23,559 --> 00:10:27,160 Speaker 1: in China and whatever the GDP growth target is, which 160 00:10:27,160 --> 00:10:30,200 Speaker 1: has always been much higher, in my opinion, at least 161 00:10:30,280 --> 00:10:33,920 Speaker 1: twice the real underlying growth. And I would say that 162 00:10:34,000 --> 00:10:37,520 Speaker 1: at this point, even Shi Jin Ping, the President is 163 00:10:37,559 --> 00:10:41,200 Speaker 1: starting to think this way. In a very important essay 164 00:10:41,760 --> 00:10:46,040 Speaker 1: that he published in July on the New Development Model, 165 00:10:46,520 --> 00:10:51,960 Speaker 1: he talked about the difference between genuine growth and fictional growth, 166 00:10:52,000 --> 00:10:55,880 Speaker 1: and he said, not surprisingly, we need more genuine growth 167 00:10:55,920 --> 00:10:59,280 Speaker 1: and less fictional growth. So what's the problem with the 168 00:10:59,320 --> 00:11:03,080 Speaker 1: fictional grow? Well, when you're when you're borrowing money to 169 00:11:03,280 --> 00:11:08,679 Speaker 1: invest in nonproductive investment than by definition, your debt servicing 170 00:11:08,880 --> 00:11:12,400 Speaker 1: needs your debt, your debt is going to rise faster 171 00:11:12,520 --> 00:11:15,720 Speaker 1: than your debt servicing capacity. And this has been the 172 00:11:15,760 --> 00:11:18,920 Speaker 1: problem in China for well over a decade. And so 173 00:11:19,040 --> 00:11:22,479 Speaker 1: as debt rose, in fact, the growth in debt accelerated 174 00:11:22,480 --> 00:11:26,600 Speaker 1: in the growth and GDP decelerated, That created more and 175 00:11:26,679 --> 00:11:28,840 Speaker 1: more of a debt problem for China, and it was 176 00:11:28,880 --> 00:11:33,080 Speaker 1: just a question of time before Beijing decided to step in. 177 00:11:33,679 --> 00:11:37,480 Speaker 1: They postponed it for a very, very long time, because 178 00:11:37,559 --> 00:11:40,559 Speaker 1: the costs of not stepping in are in the future, 179 00:11:41,160 --> 00:11:43,600 Speaker 1: and the costs of stepping in are in the presence. 180 00:11:43,640 --> 00:11:46,760 Speaker 1: So it's always been easy to postpone the problem and 181 00:11:46,840 --> 00:11:50,120 Speaker 1: hope that something develops. But of course the longer you 182 00:11:50,240 --> 00:11:53,520 Speaker 1: postpone it, you know the costs of both rise, but 183 00:11:53,679 --> 00:11:56,920 Speaker 1: the costs of not intervening rise faster than the costs 184 00:11:56,960 --> 00:12:01,000 Speaker 1: of intervening, and at some point um they were going 185 00:12:01,040 --> 00:12:03,920 Speaker 1: to step in and try to constrain the growth in UM, 186 00:12:03,960 --> 00:12:07,600 Speaker 1: in in in local government debt, and in the property sector. 187 00:12:08,000 --> 00:12:11,920 Speaker 1: And they focus mostly on the property sector. UM So 188 00:12:11,960 --> 00:12:14,200 Speaker 1: if this didn't happen this year, it would have happened 189 00:12:14,320 --> 00:12:17,240 Speaker 1: next year, or could have happened last year. I think 190 00:12:17,280 --> 00:12:22,240 Speaker 1: the timing is less important then the mechanics that that 191 00:12:22,240 --> 00:12:27,120 Speaker 1: that required that eventually that would happen. It definitely sounds 192 00:12:27,200 --> 00:12:29,520 Speaker 1: like she J and Pag has been reading the Michael 193 00:12:29,520 --> 00:12:33,599 Speaker 1: Petter's blog, because of course you've been talking for years 194 00:12:33,720 --> 00:12:37,440 Speaker 1: about this idea of g d P in China, I guess, 195 00:12:37,800 --> 00:12:41,320 Speaker 1: meaning something different than GDP elsewhere. And so where is 196 00:12:41,559 --> 00:12:45,400 Speaker 1: in say the US or elsewhere GDP is like you 197 00:12:45,440 --> 00:12:49,120 Speaker 1: add up everyone's income. In China, they start with the 198 00:12:49,200 --> 00:12:52,880 Speaker 1: GDP target, it would seem, and then they work towards 199 00:12:52,960 --> 00:12:55,640 Speaker 1: them and they figure out how either through high quality 200 00:12:55,679 --> 00:12:59,520 Speaker 1: growth or sort of like manufactured credit driven growth. There's 201 00:12:59,559 --> 00:13:01,959 Speaker 1: a lot of things to unpeel there, and I want 202 00:13:01,960 --> 00:13:04,240 Speaker 1: to get into the sort of life the prospects for 203 00:13:04,280 --> 00:13:07,400 Speaker 1: the high quality growth. But one thing that came up 204 00:13:07,440 --> 00:13:11,440 Speaker 1: in our episode with Travis Lundy and you mentioned it 205 00:13:11,480 --> 00:13:13,560 Speaker 1: just now, I want to hit on it. Um. You know, 206 00:13:13,679 --> 00:13:19,120 Speaker 1: the importance of real estate sales or the selling of 207 00:13:19,320 --> 00:13:24,840 Speaker 1: land specifically for regional government revenue. And you mentioned regional 208 00:13:24,920 --> 00:13:27,760 Speaker 1: government debt. And so if the property developers have to 209 00:13:27,800 --> 00:13:30,840 Speaker 1: pull back and they start buying less land from the 210 00:13:30,880 --> 00:13:34,240 Speaker 1: regional government, can you talk to us about the knock 211 00:13:34,280 --> 00:13:38,000 Speaker 1: on effects and the structure of regional government finance in 212 00:13:38,120 --> 00:13:41,360 Speaker 1: China and what that means if we do get for them, 213 00:13:41,720 --> 00:13:44,120 Speaker 1: for those regional governments, if we do get this pull back, 214 00:13:44,160 --> 00:13:47,480 Speaker 1: and is there some other structure of regional finance that 215 00:13:47,559 --> 00:13:51,199 Speaker 1: may emerge in its wake. That's a very important and 216 00:13:51,320 --> 00:13:55,960 Speaker 1: very interesting and also very complicated U point. What I 217 00:13:56,000 --> 00:13:59,679 Speaker 1: would argue is that in a way, it was the 218 00:13:59,800 --> 00:14:03,240 Speaker 1: way this thing had to develop. Let me let me 219 00:14:03,320 --> 00:14:05,640 Speaker 1: digress a bit and talk a little bit about common 220 00:14:05,679 --> 00:14:09,160 Speaker 1: prosperity is you know, that's the new buzz phrase, um 221 00:14:09,280 --> 00:14:13,440 Speaker 1: that everybody uses, everybody invokes to explain everything. The way 222 00:14:13,559 --> 00:14:19,400 Speaker 1: common prosperity works is that Beijing has decided that in 223 00:14:19,520 --> 00:14:25,359 Speaker 1: order to resolve the over the over dependence on nonproductive investment. 224 00:14:25,800 --> 00:14:29,200 Speaker 1: They have to increase the consumption share of GDP, and 225 00:14:29,240 --> 00:14:31,600 Speaker 1: we've known this for many years. The first time they 226 00:14:31,640 --> 00:14:34,920 Speaker 1: said this formally in public was way back in two 227 00:14:34,960 --> 00:14:38,200 Speaker 1: thousand seven, but they've never been able to do it 228 00:14:38,720 --> 00:14:42,480 Speaker 1: the way Common Prosperity seems to be working. As they're saying, 229 00:14:43,080 --> 00:14:46,720 Speaker 1: the problem is that there is a very uneven distribution 230 00:14:46,800 --> 00:14:51,280 Speaker 1: of income among Chinese households. The rich have too large 231 00:14:51,320 --> 00:14:55,120 Speaker 1: a share, and the ordinary and poor have too low 232 00:14:55,160 --> 00:14:59,240 Speaker 1: a share, and that's why consumption in China is so weak. 233 00:14:59,720 --> 00:15:02,320 Speaker 1: So here is what we're going to do. We're going 234 00:15:02,360 --> 00:15:08,000 Speaker 1: to implement policies that transfer income or transfer wealth from 235 00:15:08,120 --> 00:15:12,160 Speaker 1: the rich and perhaps from businesses to the extent that 236 00:15:12,240 --> 00:15:17,640 Speaker 1: businesses have quote unquote excess profits back to ordinary Chinese 237 00:15:18,080 --> 00:15:23,120 Speaker 1: and that will boost consumption in China. Now that's technically true, 238 00:15:23,160 --> 00:15:27,200 Speaker 1: but there's two big problems with it. The first problem 239 00:15:27,440 --> 00:15:31,200 Speaker 1: is their concept of this gets a bit technical, but 240 00:15:31,400 --> 00:15:37,280 Speaker 1: tertiary distribution in Chinese jargon, there are three forms of distribution. 241 00:15:37,800 --> 00:15:42,280 Speaker 1: There is primary distribution, which is wages, salaries, income on 242 00:15:42,360 --> 00:15:47,040 Speaker 1: your on your savings, et cetera. Distribution of income to households. 243 00:15:47,080 --> 00:15:53,120 Speaker 1: So primary is wages and salaries. Secondary or redistribution are 244 00:15:53,560 --> 00:15:57,400 Speaker 1: is fiscal transfers. And then they have this third thing 245 00:15:57,480 --> 00:16:00,840 Speaker 1: which most of us would have never considered, which they 246 00:16:00,880 --> 00:16:05,360 Speaker 1: call tertiary distribution, which consists of donations from the rich 247 00:16:05,480 --> 00:16:09,920 Speaker 1: to the poor. So common prosperity relies a little bit 248 00:16:10,000 --> 00:16:14,800 Speaker 1: on secondary distribution on fiscal transfers, but it relies primarily 249 00:16:14,840 --> 00:16:20,280 Speaker 1: on tertiary distribution donations. So why is that well, I 250 00:16:20,320 --> 00:16:23,240 Speaker 1: would argue that this was in a in a sense, 251 00:16:23,320 --> 00:16:28,200 Speaker 1: the problem with the dual Circulation program. The dual Circulation program, 252 00:16:28,280 --> 00:16:32,720 Speaker 1: which was introduced last year, argued that that China would 253 00:16:32,760 --> 00:16:36,160 Speaker 1: use its strength in exports and its strength and consumption 254 00:16:36,840 --> 00:16:40,880 Speaker 1: and growing consumption to reinforce each other and to drive 255 00:16:41,000 --> 00:16:45,320 Speaker 1: manufacturing in China into the future. The problem with dual 256 00:16:45,400 --> 00:16:50,680 Speaker 1: circulation is that China's exports strength and its large current 257 00:16:50,680 --> 00:16:55,480 Speaker 1: account surplus. Large trade surplus is caused mainly, as it 258 00:16:55,520 --> 00:16:59,560 Speaker 1: is in every country with large surpluses Japan, Germany, South Korea, etcetera. 259 00:17:00,080 --> 00:17:05,040 Speaker 1: It's caused mainly by the relatively low wage share UH 260 00:17:06,200 --> 00:17:11,080 Speaker 1: relative to productivity. So you're good in exports because your 261 00:17:11,160 --> 00:17:14,760 Speaker 1: wages are low relative to productivity. But of course, as 262 00:17:14,800 --> 00:17:18,760 Speaker 1: you know, that's exactly why consumption is so low. So 263 00:17:18,880 --> 00:17:22,040 Speaker 1: the idea that you could solve both problems was always 264 00:17:22,080 --> 00:17:25,360 Speaker 1: pretty complicated. If you want to solve if you want 265 00:17:25,359 --> 00:17:28,680 Speaker 1: to increase exports, you have to keep wages low relative 266 00:17:28,720 --> 00:17:32,359 Speaker 1: to productivity. If you want to boost domestic consumption, you 267 00:17:32,400 --> 00:17:36,000 Speaker 1: have to raise wages relative to productivity. So how do 268 00:17:36,080 --> 00:17:39,760 Speaker 1: you do that? Well, in a sense, Common Prosperity is 269 00:17:39,800 --> 00:17:44,359 Speaker 1: an attempt to address that, because rather than way raise wages, 270 00:17:44,560 --> 00:17:49,480 Speaker 1: which would undermine export competitiveness, you do so by forcing 271 00:17:49,520 --> 00:17:52,480 Speaker 1: the rich to redistribute income to the poor in the 272 00:17:52,560 --> 00:17:57,640 Speaker 1: form of donations. Now will that work there? There, As 273 00:17:57,680 --> 00:18:00,600 Speaker 1: I said, two problems with it. The first problem is 274 00:18:00,640 --> 00:18:04,320 Speaker 1: that donations are a tiny part of the economy. My 275 00:18:04,480 --> 00:18:10,719 Speaker 1: calculation was that donations represented about three tenths I'm sorry, 276 00:18:10,760 --> 00:18:14,800 Speaker 1: three hundreds of one percent of GDP. So let's say 277 00:18:14,840 --> 00:18:18,520 Speaker 1: that China is able to multiply donations by ten, which 278 00:18:18,560 --> 00:18:21,680 Speaker 1: I think is going to be quite difficult. That's less 279 00:18:21,720 --> 00:18:24,200 Speaker 1: than one third of one percent of g d P. 280 00:18:24,960 --> 00:18:28,639 Speaker 1: And while that helps at the margin, they need to 281 00:18:28,800 --> 00:18:32,159 Speaker 1: redistribute two to three percentage points of of of g 282 00:18:32,320 --> 00:18:36,600 Speaker 1: d P every year to really resolve that problem. So 283 00:18:36,640 --> 00:18:40,680 Speaker 1: that's the first problem with Common Prosperity. The second problem 284 00:18:40,760 --> 00:18:45,160 Speaker 1: with Common Prosperity is that they're trying to solve the 285 00:18:45,240 --> 00:18:50,360 Speaker 1: American problem in China or the European problem in China. 286 00:18:50,480 --> 00:18:53,240 Speaker 1: And by that I mean, if you think that there 287 00:18:53,359 --> 00:18:57,520 Speaker 1: is a bad distortion in the way income is distributed 288 00:18:57,560 --> 00:19:00,160 Speaker 1: in the US, and I think there is an I'm 289 00:19:00,200 --> 00:19:03,879 Speaker 1: sure you agree, then the place you resolve that is 290 00:19:03,960 --> 00:19:08,840 Speaker 1: within the household income share of GDP, which comprises roughly 291 00:19:09,760 --> 00:19:12,320 Speaker 1: of the U S g d P. So if you 292 00:19:12,359 --> 00:19:16,160 Speaker 1: can redistribute income from rich to poor, then you are 293 00:19:16,440 --> 00:19:20,800 Speaker 1: significantly resolving the income distribution problem in the United States. 294 00:19:21,400 --> 00:19:25,159 Speaker 1: But in China, household income is only fifty of g 295 00:19:25,280 --> 00:19:29,760 Speaker 1: d P. The real distortion is the very high government 296 00:19:29,880 --> 00:19:34,119 Speaker 1: share of g d P, which is perhaps twenty percentage 297 00:19:34,119 --> 00:19:36,959 Speaker 1: points in the US and in Europe as much closer 298 00:19:37,000 --> 00:19:40,560 Speaker 1: to zero, could even be negative. So what I would 299 00:19:40,640 --> 00:19:44,920 Speaker 1: argue is that Common Prosperity solves the wrong problem. There 300 00:19:45,040 --> 00:19:50,040 Speaker 1: is certainly huge income inequality within China, but the real 301 00:19:50,200 --> 00:19:54,439 Speaker 1: distortion and distribution is the very high share government retains 302 00:19:54,960 --> 00:19:57,600 Speaker 1: of g d P. So if you want to solve 303 00:19:57,640 --> 00:20:01,000 Speaker 1: that problem, what you really have to do is transfer 304 00:20:01,160 --> 00:20:06,359 Speaker 1: income from local governments to the household sector. Now, you 305 00:20:06,480 --> 00:20:09,960 Speaker 1: asked about the impact of property on local government revenues, 306 00:20:09,960 --> 00:20:12,879 Speaker 1: and as you know, it's a really important part of 307 00:20:12,920 --> 00:20:17,359 Speaker 1: local government revenues between forty and six for you know, 308 00:20:17,440 --> 00:20:23,560 Speaker 1: depending on which local government. So perhaps by by undermining 309 00:20:23,600 --> 00:20:28,320 Speaker 1: the property sector, this is also part of this process 310 00:20:28,359 --> 00:20:33,800 Speaker 1: of reducing the the income share local governments retain of 311 00:20:33,880 --> 00:20:37,399 Speaker 1: g d P and and presumably passing it onto the 312 00:20:37,440 --> 00:20:41,600 Speaker 1: household sector. So theoretically it makes sense, but you know, 313 00:20:42,119 --> 00:20:46,719 Speaker 1: the obvious the obvious concern is that that's a really 314 00:20:46,760 --> 00:20:50,840 Speaker 1: difficult process to manage and that has huge political implications. 315 00:20:51,240 --> 00:21:12,239 Speaker 1: So we'll see how those political implications evolved. You know. 316 00:21:12,560 --> 00:21:16,159 Speaker 1: The one theme that emerges from this discussion is the 317 00:21:16,200 --> 00:21:18,880 Speaker 1: idea of adjustment or trade off. You know, you try 318 00:21:18,920 --> 00:21:21,840 Speaker 1: to resolve or adjust the economy now in order to 319 00:21:22,200 --> 00:21:26,240 Speaker 1: avoid bigger problems later on. But of course that kind 320 00:21:26,280 --> 00:21:30,400 Speaker 1: of change ends up being um probably painful and at 321 00:21:30,400 --> 00:21:35,600 Speaker 1: the very least uncomfortable. So what can China actually do? 322 00:21:35,880 --> 00:21:39,520 Speaker 1: What can the authorities do to try to ease the 323 00:21:39,600 --> 00:21:44,920 Speaker 1: adjustment process and avoid stirring up you know, a lot 324 00:21:44,920 --> 00:21:48,960 Speaker 1: of public anger. You mentioned how much household wealth is 325 00:21:48,960 --> 00:21:51,240 Speaker 1: actually tied to property, and of course we have seen 326 00:21:51,440 --> 00:21:56,520 Speaker 1: some protests over losses tied to China ever grand from individuals. 327 00:21:56,960 --> 00:22:00,760 Speaker 1: So what can China do to sort of manage process? 328 00:22:02,160 --> 00:22:07,080 Speaker 1: You know, Tracy the Unfortunately, I think there is there 329 00:22:07,160 --> 00:22:10,639 Speaker 1: is no way to manage it. Well. The options are 330 00:22:10,880 --> 00:22:14,480 Speaker 1: between bad and and and worse. You know, this is 331 00:22:14,480 --> 00:22:16,679 Speaker 1: what I've been arguing for many years. The longer you 332 00:22:16,760 --> 00:22:19,679 Speaker 1: postpone it, the more difficulty adjustment is going to be. 333 00:22:20,600 --> 00:22:23,080 Speaker 1: And the way I think about it sort of helps 334 00:22:23,119 --> 00:22:25,640 Speaker 1: me think about it is, you know, you look at 335 00:22:25,640 --> 00:22:29,240 Speaker 1: the existing growth model, and you look at the various 336 00:22:29,280 --> 00:22:32,960 Speaker 1: alternatives you have to resolving this growth model. So right now, 337 00:22:33,000 --> 00:22:35,920 Speaker 1: as you know, China has a growth model in which 338 00:22:35,960 --> 00:22:40,040 Speaker 1: you're able to maintain high GDP growth rates only because 339 00:22:40,080 --> 00:22:43,919 Speaker 1: of this explosive growth in debt. So what can China do? 340 00:22:44,400 --> 00:22:48,680 Speaker 1: There are literally five paths it can take. One path 341 00:22:48,840 --> 00:22:52,040 Speaker 1: is to do nothing and continue with this growth model. 342 00:22:52,520 --> 00:22:56,199 Speaker 1: If you have infinite debt capacity, then that works. But 343 00:22:56,280 --> 00:22:58,639 Speaker 1: I think most of us agree that you don't, and 344 00:22:58,680 --> 00:23:02,720 Speaker 1: in fact, Beijing, uh seems to believe very strongly that 345 00:23:02,800 --> 00:23:05,840 Speaker 1: you don't. So what else can you do? Well, you 346 00:23:05,880 --> 00:23:09,560 Speaker 1: can bring down all of this nonproductive investment. You have 347 00:23:09,720 --> 00:23:13,320 Speaker 1: to if you want to stop the growth in debt. 348 00:23:14,359 --> 00:23:18,960 Speaker 1: So what happens if you bring down nonproductive investment, Well, 349 00:23:19,280 --> 00:23:22,280 Speaker 1: perhaps you can replace it with another source of demands. 350 00:23:22,359 --> 00:23:26,600 Speaker 1: So one source of demand could be productive investment. So 351 00:23:26,760 --> 00:23:29,560 Speaker 1: switch out of you know, don't build bridges to nowhere 352 00:23:29,600 --> 00:23:33,160 Speaker 1: and don't build empty apartment buildings and use that money 353 00:23:33,200 --> 00:23:37,480 Speaker 1: to develop the high tech sector and productive sectors in 354 00:23:37,520 --> 00:23:41,439 Speaker 1: the economy. That's much easier said than then. They've been 355 00:23:41,440 --> 00:23:44,399 Speaker 1: talking about this for years and years, and later on, 356 00:23:44,440 --> 00:23:46,680 Speaker 1: if you like, we can go into why. It's going 357 00:23:46,720 --> 00:23:50,680 Speaker 1: to be very difficult, but at least that's one possible path. 358 00:23:51,200 --> 00:23:55,119 Speaker 1: Another possible path as you bring a nonproductive investment down 359 00:23:55,680 --> 00:24:00,080 Speaker 1: is to increase the trade surplus. But of course, you know, 360 00:24:00,119 --> 00:24:02,720 Speaker 1: if we were talking about Singapore, that would be viable, 361 00:24:03,119 --> 00:24:06,640 Speaker 1: but for a big economy like China, that's not viable. 362 00:24:06,960 --> 00:24:09,199 Speaker 1: The trade surplus would have to grow by two to 363 00:24:09,359 --> 00:24:14,479 Speaker 1: three percentage points of China's GDP every year for that 364 00:24:14,560 --> 00:24:17,000 Speaker 1: to be the way out, and clearly the world can't 365 00:24:17,000 --> 00:24:21,439 Speaker 1: absorb that. A third way is to bring down nonproductive 366 00:24:21,440 --> 00:24:27,320 Speaker 1: investment and to increase consumption, and that requires really significant 367 00:24:27,400 --> 00:24:33,320 Speaker 1: income transfers, primarily from the local government sector. And then finally, 368 00:24:33,720 --> 00:24:37,240 Speaker 1: the only other path China can take is to bring 369 00:24:37,280 --> 00:24:41,120 Speaker 1: down nonproductive investment and not replace it with other sources 370 00:24:41,160 --> 00:24:45,399 Speaker 1: of growth, in which case GDP growth drops substantially. I 371 00:24:45,440 --> 00:24:50,080 Speaker 1: would argue probably to below two to three. But that's 372 00:24:50,280 --> 00:24:53,840 Speaker 1: literally it. There are no other options. And when you 373 00:24:53,880 --> 00:24:56,520 Speaker 1: think about it that way, it's very hard to figure 374 00:24:56,560 --> 00:24:59,840 Speaker 1: out what is a good way, what is a good 375 00:25:00,080 --> 00:25:04,080 Speaker 1: ustment process. They're all going to be quite difficult. That 376 00:25:04,080 --> 00:25:07,359 Speaker 1: that's very well laid out and striking of what you 377 00:25:07,680 --> 00:25:10,679 Speaker 1: characterize the sort of I guess the true rate of 378 00:25:10,720 --> 00:25:14,480 Speaker 1: growth when you stirp about the non nonproductive investment spending. 379 00:25:15,119 --> 00:25:17,920 Speaker 1: You know, obviously, and we've talked about this with Dan 380 00:25:18,040 --> 00:25:22,760 Speaker 1: Wong and some of China's industrial or tech ambitions, and 381 00:25:22,800 --> 00:25:25,000 Speaker 1: we used to talk about it with the brad sets 382 00:25:25,000 --> 00:25:27,560 Speaker 1: Are a lot before he joined the administration, and so 383 00:25:27,640 --> 00:25:31,840 Speaker 1: now we can't talk to him anymore. But obviously, like one, 384 00:25:32,280 --> 00:25:35,720 Speaker 1: you know, one path is just the economy becomes much 385 00:25:35,720 --> 00:25:38,479 Speaker 1: more productive and you get much more high quality growth 386 00:25:38,480 --> 00:25:43,000 Speaker 1: than China becomes a bigger leader in you know, wide 387 00:25:43,000 --> 00:25:47,359 Speaker 1: body airplanes and micro chips and pharmaceuticals and all kinds 388 00:25:47,359 --> 00:25:50,040 Speaker 1: of things like that, and theoretically that helps balance the 389 00:25:50,080 --> 00:25:55,680 Speaker 1: economy towards something more productive. That's a long term project, though, 390 00:25:55,720 --> 00:25:58,560 Speaker 1: So even if that's the type of thing that it's like, Okay, 391 00:25:58,600 --> 00:26:01,919 Speaker 1: that's the path, and obviously that can't happen overnight or 392 00:26:01,920 --> 00:26:04,440 Speaker 1: even next year or maybe even over the next uh 393 00:26:04,480 --> 00:26:08,399 Speaker 1: ten years. How much, though, do you sense or do 394 00:26:08,400 --> 00:26:12,080 Speaker 1: you believe that Beijing is sort of like betting on 395 00:26:12,160 --> 00:26:15,119 Speaker 1: that path that ultimately that it can sort of do 396 00:26:15,240 --> 00:26:18,520 Speaker 1: some sort of substitution from the more speculative growth to 397 00:26:18,600 --> 00:26:22,119 Speaker 1: the more high quality growth in some reasonable time framet. 398 00:26:22,800 --> 00:26:25,520 Speaker 1: It depends on you know, which part of Beijing you're 399 00:26:25,560 --> 00:26:29,879 Speaker 1: talking about. I think the local government politico's, the foreign 400 00:26:29,880 --> 00:26:33,800 Speaker 1: affairs people, the military people, the non the non economists 401 00:26:34,320 --> 00:26:37,840 Speaker 1: think that that's the obvious way out. I think, you know, 402 00:26:37,880 --> 00:26:40,840 Speaker 1: when you speak to people at the Central Bank, or 403 00:26:40,960 --> 00:26:44,639 Speaker 1: or at the various regulators, or many of the economists 404 00:26:44,640 --> 00:26:49,600 Speaker 1: that are a policy making advisors, I think there's much 405 00:26:49,720 --> 00:26:53,080 Speaker 1: less optimism that that that that's the way out. But 406 00:26:53,160 --> 00:26:55,080 Speaker 1: I would say I would say two things, you know. 407 00:26:55,240 --> 00:26:58,600 Speaker 1: The first is that this is a really tough thing 408 00:26:58,600 --> 00:27:02,080 Speaker 1: to do. We don't really know why. It is that 409 00:27:02,200 --> 00:27:05,480 Speaker 1: some countries are very good at, you know, the very 410 00:27:05,600 --> 00:27:11,680 Speaker 1: advanced commercially sustainable advanced technology. But I would argue that 411 00:27:11,800 --> 00:27:15,840 Speaker 1: success in the past doesn't necessarily equate the success in 412 00:27:15,880 --> 00:27:19,840 Speaker 1: the future, because when you have highly centralized governments and 413 00:27:19,920 --> 00:27:24,960 Speaker 1: a very clear target, a very clear goal, the highly 414 00:27:24,960 --> 00:27:30,560 Speaker 1: centralized governments are probably better than decentralized, bottoms up type 415 00:27:30,600 --> 00:27:35,000 Speaker 1: of societies and achieving those goals when you are hugely 416 00:27:35,119 --> 00:27:37,160 Speaker 1: under invested in you know, you need to build lots 417 00:27:37,160 --> 00:27:41,480 Speaker 1: of bridges and subways and and and and trains and airports, etcetera. 418 00:27:42,160 --> 00:27:45,480 Speaker 1: That's fine. A certain type of centralized approach may be 419 00:27:45,680 --> 00:27:49,280 Speaker 1: very efficient, but when you take that next step of 420 00:27:49,480 --> 00:27:55,800 Speaker 1: sustainable commercially sustainable advanced technology, it seems like you need 421 00:27:55,920 --> 00:27:58,800 Speaker 1: much more of a bottoms up approach. So maybe it'll work, 422 00:27:58,840 --> 00:28:01,639 Speaker 1: maybe it will not work. We don't really know. But 423 00:28:01,760 --> 00:28:04,400 Speaker 1: the other issue I would argue that we always forget 424 00:28:05,040 --> 00:28:08,160 Speaker 1: is that there is a cost to following a growth 425 00:28:08,280 --> 00:28:12,560 Speaker 1: model where you have an artificially boosted g d P, 426 00:28:13,480 --> 00:28:17,800 Speaker 1: and I recently used the word that Gal Brave came 427 00:28:17,880 --> 00:28:22,440 Speaker 1: up with with with modifications, the word bezel to represent 428 00:28:22,560 --> 00:28:27,000 Speaker 1: the huge gap between wealth, real wealth and perceived wealth. 429 00:28:27,680 --> 00:28:30,159 Speaker 1: And you know this gap is enormous in China. But 430 00:28:30,280 --> 00:28:33,200 Speaker 1: just think in terms of real estate. The total value 431 00:28:33,240 --> 00:28:36,199 Speaker 1: of real estate in China is worth twice what it 432 00:28:36,240 --> 00:28:38,000 Speaker 1: is in the US, more than twice what it is 433 00:28:38,040 --> 00:28:40,600 Speaker 1: in the US, and more than three times what it 434 00:28:40,680 --> 00:28:44,520 Speaker 1: is in Europe. So that means there is a perception 435 00:28:45,480 --> 00:28:51,320 Speaker 1: of enormous amounts of wealth that that are probably not real. 436 00:28:51,560 --> 00:28:55,480 Speaker 1: The real value if you assume the US is correctly valued, 437 00:28:55,800 --> 00:28:59,400 Speaker 1: which is a pretty heroic assumption, then the real value 438 00:28:59,440 --> 00:29:03,320 Speaker 1: of China his real estate should probably be between two 439 00:29:03,320 --> 00:29:07,640 Speaker 1: thirds and and and one times US real estate. So 440 00:29:07,720 --> 00:29:12,560 Speaker 1: there's this huge amount of perceived wealth that doesn't really exist. 441 00:29:13,000 --> 00:29:15,280 Speaker 1: And what we've seen in the past is that during 442 00:29:15,320 --> 00:29:19,680 Speaker 1: the adjustment period that wealth gets amortized and those losses 443 00:29:19,760 --> 00:29:24,440 Speaker 1: have to be distributed within the economy, and that causes 444 00:29:24,480 --> 00:29:27,360 Speaker 1: a couple of things. First of all, it's slow, it 445 00:29:27,520 --> 00:29:30,959 Speaker 1: it becomes a negative, it becomes a drag on GDP growth. 446 00:29:31,280 --> 00:29:36,280 Speaker 1: Whereas before it boosted GDP growth. And secondly, and perhaps 447 00:29:36,280 --> 00:29:40,400 Speaker 1: more importantly, is that when we're all feeling richer, we 448 00:29:40,520 --> 00:29:45,480 Speaker 1: tend to spend more and animal spirits tend to be brighter, brisker. 449 00:29:45,840 --> 00:29:49,080 Speaker 1: But as we start getting poor, as all of that 450 00:29:49,840 --> 00:29:54,520 Speaker 1: bezel or false wealth gets amortized, that changes the behavior 451 00:29:54,600 --> 00:29:58,400 Speaker 1: of the economy, typically in adverse ways, which is why 452 00:29:58,440 --> 00:30:02,800 Speaker 1: I would argue that every country that's experienced an investment 453 00:30:02,920 --> 00:30:08,680 Speaker 1: driven growth bubble has always had a surprisingly difficult adjustment. 454 00:30:09,320 --> 00:30:11,520 Speaker 1: Now that doesn't mean that has to happen in the 455 00:30:11,560 --> 00:30:14,920 Speaker 1: case of China, but unless we can figure out why 456 00:30:15,000 --> 00:30:17,960 Speaker 1: that won't happen in the case of China, then I 457 00:30:18,000 --> 00:30:21,200 Speaker 1: think the safest assumption is to assume that it will happen. 458 00:30:22,520 --> 00:30:26,840 Speaker 1: So there's another thing that's complicating, Um what you know 459 00:30:26,960 --> 00:30:30,800 Speaker 1: you just described as an already painful adjustment process, But 460 00:30:30,920 --> 00:30:33,920 Speaker 1: that has to be the energy crisis that China is 461 00:30:34,240 --> 00:30:38,880 Speaker 1: currently experiencing. Um you know, there have been electricity shortages, 462 00:30:40,000 --> 00:30:43,960 Speaker 1: restrictions on power consumption, and of course a similar thing 463 00:30:44,000 --> 00:30:48,000 Speaker 1: is going on in Europe. So China isn't necessarily alone 464 00:30:48,080 --> 00:30:51,160 Speaker 1: in facing these pressures. But again, it seems to be 465 00:30:51,200 --> 00:30:55,120 Speaker 1: coming at a pretty inconvenient time when the economy is 466 00:30:55,160 --> 00:30:59,080 Speaker 1: already dealing with things like everground and the slowdown in 467 00:30:59,160 --> 00:31:02,280 Speaker 1: real estate. So I guess my question is, how do 468 00:31:02,320 --> 00:31:07,720 Speaker 1: you see the energy crisis um impacting the adjustment process 469 00:31:07,760 --> 00:31:10,000 Speaker 1: that you described and how big a deal is it 470 00:31:10,160 --> 00:31:15,520 Speaker 1: for China's overall economy. Well, it certainly doesn't help, and 471 00:31:15,560 --> 00:31:18,720 Speaker 1: I think it was probably, you know, in retrospect, we 472 00:31:18,920 --> 00:31:22,600 Speaker 1: probably should have seen it coming, based you know, basically 473 00:31:22,640 --> 00:31:25,840 Speaker 1: on the high school economics. One of the things that 474 00:31:25,960 --> 00:31:30,880 Speaker 1: happened in China is that as the input prices in 475 00:31:30,920 --> 00:31:34,920 Speaker 1: the energy sectors sword coal and oil, et cetera, the 476 00:31:35,040 --> 00:31:40,600 Speaker 1: output prices didn't because they're heavily restricted, heavily constrained by 477 00:31:40,640 --> 00:31:44,440 Speaker 1: local governments. So you're only able to raise electricity prices 478 00:31:44,520 --> 00:31:48,040 Speaker 1: a little bit, often by no more than ten So 479 00:31:48,120 --> 00:31:50,959 Speaker 1: the power companies were in this very difficult position in 480 00:31:51,000 --> 00:31:54,800 Speaker 1: which their inputs, the price of their inputs were soaring 481 00:31:55,400 --> 00:31:59,000 Speaker 1: and the price of their output was pretty stable, and 482 00:31:59,080 --> 00:32:01,880 Speaker 1: so they began to making very very large losses. And 483 00:32:01,960 --> 00:32:04,760 Speaker 1: somehow that has to be that has to be addressed. 484 00:32:04,760 --> 00:32:09,680 Speaker 1: In one way is heavily to subsidize those losses and 485 00:32:09,760 --> 00:32:13,480 Speaker 1: another way is through rationing. You you'll remember from again 486 00:32:13,560 --> 00:32:17,480 Speaker 1: from high school economics, that if you don't allow prices 487 00:32:17,600 --> 00:32:21,920 Speaker 1: to rations supply and demand, then supply and demands gets 488 00:32:22,000 --> 00:32:24,760 Speaker 1: you know, gets matched, either in the form of shortages 489 00:32:25,320 --> 00:32:28,240 Speaker 1: or in the form of excesses. And in this case, 490 00:32:28,440 --> 00:32:32,120 Speaker 1: because there was no adjustment on the demand side, prices 491 00:32:32,160 --> 00:32:35,200 Speaker 1: didn't go up, but a huge adjustment on the supply 492 00:32:35,320 --> 00:32:38,719 Speaker 1: side where prices went up a lot, then inevitably we 493 00:32:38,760 --> 00:32:41,160 Speaker 1: had to deal with it in the form of rations, 494 00:32:41,200 --> 00:32:45,800 Speaker 1: of rationing, of of of a scarcity. So the question 495 00:32:45,840 --> 00:32:49,600 Speaker 1: then becomes what does China do next? And my way 496 00:32:49,640 --> 00:32:52,040 Speaker 1: is I'm not very good at predicting, so what I 497 00:32:52,080 --> 00:32:54,360 Speaker 1: try to figure out is what are the ways it 498 00:32:54,400 --> 00:32:58,120 Speaker 1: can react. One way is to allow electricity prices to 499 00:32:58,240 --> 00:33:03,920 Speaker 1: rise substantially. That will have a significant impact obviously on 500 00:33:03,920 --> 00:33:09,000 Speaker 1: on manufacturing productivity and on consumption to Another way is 501 00:33:09,080 --> 00:33:12,640 Speaker 1: for the government to subsidize the loss is borne by 502 00:33:12,680 --> 00:33:16,400 Speaker 1: the power companies, which of course means debt continues to grow. 503 00:33:16,880 --> 00:33:18,920 Speaker 1: And then the third way is to force the power 504 00:33:18,960 --> 00:33:21,640 Speaker 1: companies to eat the losses, which is really very similar 505 00:33:21,920 --> 00:33:24,800 Speaker 1: to the government doing it. So there's not really a 506 00:33:24,880 --> 00:33:28,560 Speaker 1: good way. If energy prices come down substantially, then that 507 00:33:28,600 --> 00:33:32,600 Speaker 1: problem resolves itself. But if it doesn't, I think the 508 00:33:32,640 --> 00:33:36,240 Speaker 1: most likely thing China will do is to continue effectively 509 00:33:36,280 --> 00:33:40,880 Speaker 1: to subsidize energy prices to the manufacturing sector and to 510 00:33:41,320 --> 00:33:46,840 Speaker 1: two households. But remember that subsidies aren't free. Subsidies are 511 00:33:46,960 --> 00:33:50,400 Speaker 1: just transfers, and the way that typically has worked in 512 00:33:50,440 --> 00:33:54,880 Speaker 1: the past is that these transfers to the manufacturing sector, 513 00:33:54,920 --> 00:33:58,000 Speaker 1: which is what it means when you subsidize electricity prices 514 00:33:58,480 --> 00:34:03,080 Speaker 1: are indirectly born by the household sector. So that hurts 515 00:34:03,160 --> 00:34:08,280 Speaker 1: the rebalancing process, right when you subsidize the manufacturing sector 516 00:34:08,320 --> 00:34:13,080 Speaker 1: at the expense of the household sector, necessarily exports will 517 00:34:13,120 --> 00:34:18,520 Speaker 1: become more competitive, but domestic consumption will be weaker, So 518 00:34:18,920 --> 00:34:22,520 Speaker 1: China once again has to face that trade off. The 519 00:34:22,600 --> 00:34:25,160 Speaker 1: idea that you can do things that are good for 520 00:34:25,280 --> 00:34:29,839 Speaker 1: both exports and domestic consumption is simply wrong. You can 521 00:34:30,360 --> 00:34:33,160 Speaker 1: you have to choose one or the other, and we 522 00:34:33,239 --> 00:34:36,640 Speaker 1: know that they believe they have to choose consumption. But 523 00:34:36,920 --> 00:34:41,400 Speaker 1: it's very hard to hurt the exports sector. So you know, 524 00:34:41,400 --> 00:34:43,879 Speaker 1: obviously energy is a good chance to pivot to sort 525 00:34:43,880 --> 00:34:46,480 Speaker 1: of a more global conversation. But there's one other dynamic 526 00:34:46,520 --> 00:34:48,600 Speaker 1: I'm sort of curious your take on, and actually I 527 00:34:48,680 --> 00:34:50,359 Speaker 1: don't know if you have it take on it even 528 00:34:50,440 --> 00:34:53,480 Speaker 1: but I am curious. So with with a lot of 529 00:34:53,520 --> 00:34:57,920 Speaker 1: these energy and power issues that we've seen, there's an element, 530 00:34:58,080 --> 00:35:03,160 Speaker 1: it seems of this sort of mobal transition to more 531 00:35:03,200 --> 00:35:06,600 Speaker 1: sustainable forms of energy, and maybe certain types of cleaner 532 00:35:06,680 --> 00:35:09,680 Speaker 1: energy haven't come online as fast as other types of 533 00:35:09,719 --> 00:35:13,360 Speaker 1: dirtier energy have come offline, leaving us in a position 534 00:35:13,520 --> 00:35:18,440 Speaker 1: where certain types of transition fuels like natural gas end 535 00:35:18,480 --> 00:35:21,839 Speaker 1: up becoming very scarce. And obviously, you know, we know 536 00:35:21,960 --> 00:35:25,239 Speaker 1: in Europe they seem to take climate issues pretty seriously, 537 00:35:26,040 --> 00:35:30,000 Speaker 1: and sometimes like a Davos, we get the impression that 538 00:35:30,120 --> 00:35:33,239 Speaker 1: China takes climate issues very seriously and wants to come 539 00:35:33,239 --> 00:35:36,480 Speaker 1: off coal as a source. But I you know, as 540 00:35:36,480 --> 00:35:38,960 Speaker 1: an outsider, I never have a great sense of how 541 00:35:39,080 --> 00:35:42,640 Speaker 1: much of that is very serious priority climate in Beijing 542 00:35:42,800 --> 00:35:45,759 Speaker 1: versus how much is it makes for good headlines at 543 00:35:45,840 --> 00:35:50,560 Speaker 1: global events. What is your sense of the degree to 544 00:35:50,680 --> 00:35:57,000 Speaker 1: which leadership in Beijing really takes that issue seriously of 545 00:35:57,080 --> 00:35:59,920 Speaker 1: changing the energy mixed to something that is perceived as 546 00:36:00,040 --> 00:36:06,680 Speaker 1: being cleaner and more sustainable. I think Beijing is very 547 00:36:06,680 --> 00:36:11,600 Speaker 1: serious about sustainable growth and about its impact on the environment. 548 00:36:11,719 --> 00:36:15,040 Speaker 1: But you know, again, I'm I'm fairly pessimistic there in 549 00:36:15,040 --> 00:36:18,240 Speaker 1: the sense that I believe, and not just in China 550 00:36:18,280 --> 00:36:21,360 Speaker 1: and the US and in Europe and everywhere else. It's 551 00:36:21,440 --> 00:36:28,240 Speaker 1: easier to be environmentally conscious when you're satisfied with growth. 552 00:36:28,680 --> 00:36:33,160 Speaker 1: But when growth slows, it's it's it becomes much easier 553 00:36:33,200 --> 00:36:36,719 Speaker 1: to push, you know, green concerns into the background. So 554 00:36:36,760 --> 00:36:39,760 Speaker 1: I would argue that that's really what's going to drive 555 00:36:39,880 --> 00:36:43,360 Speaker 1: environmental concerns in China and in the US and in 556 00:36:43,400 --> 00:36:46,200 Speaker 1: the rest of the world. In a good economy, will 557 00:36:46,239 --> 00:36:48,840 Speaker 1: resolve them, or will attempt to resolve them. In a 558 00:36:48,880 --> 00:36:54,920 Speaker 1: bad economy, will focus more on generating growth. Well, why 559 00:36:54,960 --> 00:36:57,680 Speaker 1: don't we widen the discussion even more now and get 560 00:36:57,800 --> 00:37:00,480 Speaker 1: even more macro and talk a little bit about out 561 00:37:00,680 --> 00:37:05,440 Speaker 1: China's role in the international economy or the global economy. 562 00:37:05,560 --> 00:37:08,560 Speaker 1: So maybe just to begin with, I know you've done 563 00:37:08,600 --> 00:37:11,600 Speaker 1: a ton of research into this topic, and you know, 564 00:37:11,680 --> 00:37:14,120 Speaker 1: have even written an entire book on this, But how 565 00:37:14,160 --> 00:37:19,560 Speaker 1: would you characterize China's role in recent years and where 566 00:37:19,560 --> 00:37:24,000 Speaker 1: do you see it heading given the emphasis on adjustment 567 00:37:24,400 --> 00:37:28,000 Speaker 1: that we've been talking about. Well, the way any country 568 00:37:28,080 --> 00:37:30,200 Speaker 1: interacts with the rest of the world, and this is 569 00:37:30,239 --> 00:37:33,840 Speaker 1: true of China, is obviously, by definition, through the balance 570 00:37:33,840 --> 00:37:37,600 Speaker 1: of payments. UM. So what really matters is the extent 571 00:37:37,680 --> 00:37:42,360 Speaker 1: to which China is able to reduce the gap between 572 00:37:42,640 --> 00:37:46,799 Speaker 1: savings and investment. Right if savings exceed investment, China will 573 00:37:46,840 --> 00:37:49,799 Speaker 1: be a net exporter of capital and will run a 574 00:37:49,920 --> 00:37:53,640 Speaker 1: trade surplus. And you know what, what we've seen in 575 00:37:53,680 --> 00:37:57,360 Speaker 1: the past year or two with with the pandemic is 576 00:37:57,400 --> 00:38:01,720 Speaker 1: that while the pandemic was primarily, in my opinion, demand 577 00:38:01,800 --> 00:38:06,799 Speaker 1: side problem, there were definitely supply side interruptions too, but 578 00:38:06,840 --> 00:38:10,400 Speaker 1: it was mostly a demand side problem, and the US, 579 00:38:10,480 --> 00:38:13,600 Speaker 1: in Europe and a number of other large economies treated 580 00:38:13,600 --> 00:38:17,200 Speaker 1: it as a demand side problem. In China, the response 581 00:38:17,239 --> 00:38:20,600 Speaker 1: to COVID nineteen was mostly in the form of supply 582 00:38:20,719 --> 00:38:26,960 Speaker 1: side policies, so additional subsidies for manufacturing, more credit for manufacturing, 583 00:38:27,000 --> 00:38:31,360 Speaker 1: which is a form of subsidy, etcetera, etcetera. Now, when 584 00:38:31,400 --> 00:38:34,680 Speaker 1: that happens, you would expect that there's only two ways 585 00:38:35,239 --> 00:38:39,560 Speaker 1: that the Chinese economy can absorb the resulting imbalance. One 586 00:38:39,600 --> 00:38:44,560 Speaker 1: way is through increased domestic investment, which really meant residual 587 00:38:44,600 --> 00:38:48,880 Speaker 1: investment and therefore nonproductive investment, and the other way is 588 00:38:48,920 --> 00:38:53,000 Speaker 1: through a growing trade surplus. And needless to say, we've 589 00:38:53,040 --> 00:38:56,560 Speaker 1: seen both China's trade surplus in the last year year 590 00:38:56,600 --> 00:38:59,919 Speaker 1: and a half has grown to among the highest month 591 00:39:00,080 --> 00:39:03,640 Speaker 1: lead trade surpluses we've ever seen. And at the same time, 592 00:39:03,719 --> 00:39:09,560 Speaker 1: until very recently, we saw a significant increase in property development, 593 00:39:09,640 --> 00:39:12,560 Speaker 1: which grew i think by seven percent last year while 594 00:39:12,640 --> 00:39:16,480 Speaker 1: GDP only grew by two point three and in public 595 00:39:16,520 --> 00:39:20,360 Speaker 1: sector infrastructure spending. So now the interesting question is what 596 00:39:20,520 --> 00:39:23,400 Speaker 1: is the impact of the of the crisis and the 597 00:39:23,440 --> 00:39:29,680 Speaker 1: property sector. Well, that should drive down property investment. So 598 00:39:30,640 --> 00:39:36,120 Speaker 1: because there is no corresponding reduction in Chinese savings, if 599 00:39:36,160 --> 00:39:39,600 Speaker 1: that's the only thing that happens in China, then almost 600 00:39:39,640 --> 00:39:43,879 Speaker 1: by definition, the Chinese trade surplus should grow, because of course, 601 00:39:43,920 --> 00:39:47,080 Speaker 1: if investment goes down, the gap between savings and investment 602 00:39:47,120 --> 00:39:51,320 Speaker 1: will increase. That I think the Chinese are very worried about, 603 00:39:51,400 --> 00:39:53,840 Speaker 1: and with good reason, because the rest of the world 604 00:39:53,920 --> 00:39:57,960 Speaker 1: is unlikely to be very happy with a significant increase 605 00:39:58,000 --> 00:40:01,360 Speaker 1: in the Chinese trade surplus. So there are only two 606 00:40:01,400 --> 00:40:05,399 Speaker 1: other ways that that that adjustment can take place. One 607 00:40:05,560 --> 00:40:09,600 Speaker 1: is through an increase in unemployment, which reduces the savings rate, 608 00:40:10,200 --> 00:40:13,319 Speaker 1: but of course Beijing doesn't want to see that, So 609 00:40:13,440 --> 00:40:17,759 Speaker 1: the only other resolution to that problem would be an 610 00:40:17,880 --> 00:40:21,200 Speaker 1: increase in quote unquote other investment. And the only other 611 00:40:21,320 --> 00:40:26,800 Speaker 1: investment Beijing could really push is public sector local government 612 00:40:26,880 --> 00:40:30,480 Speaker 1: investment in infrastructure, and already there have been a series 613 00:40:30,520 --> 00:40:33,640 Speaker 1: of announcements saying that that's exactly what they're going to do. 614 00:40:34,200 --> 00:40:37,439 Speaker 1: So that's really the way I think about it. If 615 00:40:37,520 --> 00:40:42,840 Speaker 1: China matches the reduction in property investment with an increase 616 00:40:42,840 --> 00:40:47,240 Speaker 1: in infrastructure investment, then you really haven't solved the domestic problem, 617 00:40:47,320 --> 00:40:50,200 Speaker 1: the domestic debt problem in China at all, but at 618 00:40:50,239 --> 00:40:53,759 Speaker 1: least there won't be a significant balance of payments impact 619 00:40:54,600 --> 00:40:57,560 Speaker 1: if they don't, if they try to constrain the growth 620 00:40:57,600 --> 00:41:02,200 Speaker 1: in debt, then we should see either an increase in unemployment, 621 00:41:02,200 --> 00:41:04,800 Speaker 1: which I think Beijing will do everything it can to prevent, 622 00:41:05,440 --> 00:41:08,160 Speaker 1: or an increase in the trade surplus, which I think 623 00:41:08,160 --> 00:41:10,719 Speaker 1: will be difficult for the rest of the world to absorb. 624 00:41:11,760 --> 00:41:13,879 Speaker 1: Does that make sense? I try to set it out 625 00:41:13,960 --> 00:41:17,080 Speaker 1: really schematically. Yeah, well, so this is and you know, 626 00:41:17,400 --> 00:41:19,080 Speaker 1: kind of one of the weird things about right now. 627 00:41:19,080 --> 00:41:21,520 Speaker 1: And I mentioned that we're sorry to talk about the 628 00:41:21,560 --> 00:41:25,239 Speaker 1: outset in the post Great Financial Crisis environment. The sort 629 00:41:25,239 --> 00:41:27,600 Speaker 1: of well not the perception of the reality is that 630 00:41:27,719 --> 00:41:31,600 Speaker 1: China was this huge growth engine for the world and 631 00:41:31,880 --> 00:41:36,240 Speaker 1: was driving a major contributor to the surgic commodity prices. 632 00:41:36,600 --> 00:41:41,240 Speaker 1: I think the Bloomberg Commodity Index. It peaked in anyway, 633 00:41:41,239 --> 00:41:44,000 Speaker 1: it's peaked again, the Bloomberg Commodity Index, and every day 634 00:41:44,040 --> 00:41:47,040 Speaker 1: we're just sort of jaws dropped at the surgeon in 635 00:41:47,120 --> 00:41:51,080 Speaker 1: various commodity prices. And I've been kind of surprised, however, 636 00:41:52,120 --> 00:41:54,680 Speaker 1: that it's you know, obviously this time China is not 637 00:41:54,800 --> 00:41:58,239 Speaker 1: playing the same role it has And I started off 638 00:41:58,280 --> 00:42:01,120 Speaker 1: with that point, and it is a Bloomberg article that 639 00:42:01,160 --> 00:42:04,080 Speaker 1: I read about ever Grand and the sort of the 640 00:42:04,200 --> 00:42:07,719 Speaker 1: various construction materials that were just sort of lying dormant 641 00:42:07,760 --> 00:42:11,760 Speaker 1: because it's falling behind on its production of real estate 642 00:42:12,440 --> 00:42:15,120 Speaker 1: and so where it is. Previously, it seemed as though 643 00:42:15,200 --> 00:42:18,440 Speaker 1: China was this sort of a major contributing positive impulse 644 00:42:18,480 --> 00:42:21,200 Speaker 1: of the price of commodities. It feels like if anything 645 00:42:21,280 --> 00:42:24,160 Speaker 1: this time around, that price of the surging price of 646 00:42:24,200 --> 00:42:29,280 Speaker 1: commodities is a burden. Yeah, I would say what really 647 00:42:29,320 --> 00:42:33,479 Speaker 1: matters is investment in the property sector is going down. 648 00:42:33,520 --> 00:42:35,759 Speaker 1: I think I think we're all pretty much convinced that's 649 00:42:35,880 --> 00:42:38,400 Speaker 1: that's happening and going to continue to happen. So what 650 00:42:38,520 --> 00:42:41,600 Speaker 1: really matters is that whether it's balanced by an increase 651 00:42:41,680 --> 00:42:45,480 Speaker 1: in public sector infrastructure spending. If it is, we'll just 652 00:42:45,520 --> 00:42:48,640 Speaker 1: see a shift in commodity demand from one sector to another, 653 00:42:49,120 --> 00:42:54,440 Speaker 1: and China will continue absorbing whatever forty of the global 654 00:42:54,480 --> 00:42:58,799 Speaker 1: production of of of industrial commodities. If they don't, in 655 00:42:58,840 --> 00:43:01,560 Speaker 1: other words, if they really do try to constrain the 656 00:43:01,600 --> 00:43:06,440 Speaker 1: growth in debt, then we will see demand for industrial 657 00:43:06,480 --> 00:43:10,440 Speaker 1: commodities go down. Eventually. That has to happen, Jo, I mean, 658 00:43:10,480 --> 00:43:15,520 Speaker 1: there's no way China can continue absorbing roughly of everything 659 00:43:15,560 --> 00:43:19,279 Speaker 1: that's produced. But is it going to happen now? I 660 00:43:19,400 --> 00:43:22,560 Speaker 1: don't think so, because I think we're going to see 661 00:43:23,160 --> 00:43:27,640 Speaker 1: uh an increase in the infrastructure spending side that will 662 00:43:27,719 --> 00:43:46,920 Speaker 1: match the reduction in the property investment side. So I 663 00:43:47,000 --> 00:43:50,920 Speaker 1: have one sort of big picture question in my mind. 664 00:43:51,320 --> 00:43:54,560 Speaker 1: It actually maybe goes back to the more original part 665 00:43:54,600 --> 00:43:57,840 Speaker 1: of the discussion, where we're talking about different modes of growth. 666 00:43:58,239 --> 00:44:01,560 Speaker 1: It feels to me that over the course of my career, 667 00:44:01,719 --> 00:44:05,240 Speaker 1: having you know, covered global markets in the economy, certain 668 00:44:05,320 --> 00:44:09,920 Speaker 1: crackdowns on speculation in China happen or not that uncommon, 669 00:44:10,000 --> 00:44:12,319 Speaker 1: and so you'll get, you know, for years it's like 670 00:44:12,320 --> 00:44:16,560 Speaker 1: other China is doing this or that to encourage discourage 671 00:44:16,680 --> 00:44:19,520 Speaker 1: the purchase of a third apartment, or they're doing this 672 00:44:19,560 --> 00:44:23,319 Speaker 1: so that to crack down on online trading, and then 673 00:44:23,360 --> 00:44:26,480 Speaker 1: it doesn't seem to go anywhere, and then somehow it 674 00:44:26,520 --> 00:44:29,600 Speaker 1: emerges again. And I don't know if they're toothless or 675 00:44:29,640 --> 00:44:31,560 Speaker 1: if they're not in force or whatever it is, but 676 00:44:31,640 --> 00:44:34,960 Speaker 1: that is just my sort of outside perception. Is that 677 00:44:35,280 --> 00:44:37,880 Speaker 1: is that accurate that this sort of this that China 678 00:44:38,000 --> 00:44:41,560 Speaker 1: has made attempts in the past to sort of correct 679 00:44:41,600 --> 00:44:44,680 Speaker 1: from the sort of poor growth to quality growth via that, 680 00:44:45,080 --> 00:44:48,560 Speaker 1: And if so, would you say it's different this time 681 00:44:48,640 --> 00:44:52,359 Speaker 1: in terms of the seriousness with which Okay, after all 682 00:44:52,440 --> 00:44:56,480 Speaker 1: these years and these imbalances building up, that they're not 683 00:44:56,640 --> 00:44:59,560 Speaker 1: just going to in sort of six months again be 684 00:44:59,640 --> 00:45:03,759 Speaker 1: taking various measures to sort of stoke the property sector 685 00:45:03,920 --> 00:45:08,480 Speaker 1: once again to ensure that household wealth and incomes remain elevated. 686 00:45:10,400 --> 00:45:12,640 Speaker 1: I think they will um and I think because of 687 00:45:12,640 --> 00:45:16,200 Speaker 1: a fundamental incompatibility. So why do you why do you 688 00:45:16,239 --> 00:45:19,760 Speaker 1: have surgeon debt, why do you have speculative activity, etcetera, etcetera. 689 00:45:20,280 --> 00:45:23,319 Speaker 1: One argument is because you've got bad apples and you've 690 00:45:23,320 --> 00:45:25,640 Speaker 1: got to identify them and throw them out of the 691 00:45:25,640 --> 00:45:29,200 Speaker 1: barrel as quickly as possible. That could be true. But 692 00:45:29,280 --> 00:45:32,120 Speaker 1: the other argument is, and and it's the one obviously 693 00:45:32,160 --> 00:45:34,640 Speaker 1: that I'm I'm much more comfortable with, is that there 694 00:45:34,640 --> 00:45:39,399 Speaker 1: are systemic tendencies within the growth model that require all 695 00:45:39,480 --> 00:45:42,319 Speaker 1: of this speculative activity, all of this bad debt, all 696 00:45:42,360 --> 00:45:45,680 Speaker 1: these things that you don't want, And until you eliminate 697 00:45:45,760 --> 00:45:47,920 Speaker 1: the source of that, then you're never really going to 698 00:45:48,040 --> 00:45:52,319 Speaker 1: eliminate the bad actions by the bad actors. And so 699 00:45:52,400 --> 00:45:56,160 Speaker 1: what I would say is that the fundamental incompatibility is 700 00:45:56,200 --> 00:46:00,080 Speaker 1: that if you allow GDP growth to be equal to 701 00:46:00,160 --> 00:46:04,080 Speaker 1: the real, healthy, underlying growth what what she didn't been 702 00:46:04,160 --> 00:46:07,760 Speaker 1: called genuine growth, what they used to call high quality growth, 703 00:46:08,280 --> 00:46:11,160 Speaker 1: then you don't need all of this stuff to happen. 704 00:46:11,200 --> 00:46:13,600 Speaker 1: You don't need the rapid expansion in debt, the rapid 705 00:46:13,600 --> 00:46:17,200 Speaker 1: expansion and the money supply, etcetera, etcetera. But as long 706 00:46:17,239 --> 00:46:20,120 Speaker 1: as you have a GDP growth target that exceeds the 707 00:46:20,160 --> 00:46:23,560 Speaker 1: real underlying growth in the economy, you have no choice. 708 00:46:24,160 --> 00:46:27,799 Speaker 1: You have to The system has to be supported by 709 00:46:27,840 --> 00:46:31,080 Speaker 1: moral hazard, because who in his right mind is going 710 00:46:31,160 --> 00:46:35,160 Speaker 1: to lend into a project which has no chance of 711 00:46:36,120 --> 00:46:40,560 Speaker 1: generating the debt servicing capacity needed to pay off the debt. 712 00:46:40,920 --> 00:46:43,040 Speaker 1: You would only do so if you believe that you're 713 00:46:43,080 --> 00:46:46,240 Speaker 1: guaranteed by either the local government or the central government. 714 00:46:46,680 --> 00:46:51,040 Speaker 1: So without moral hazard, the GDP growth target doesn't work. 715 00:46:51,760 --> 00:46:54,120 Speaker 1: And so as long as you have a GDP growth 716 00:46:54,120 --> 00:46:57,920 Speaker 1: target that that exceeds the real underlying growth rate, you 717 00:46:57,960 --> 00:47:00,680 Speaker 1: need moral hazard in the system. And as long as 718 00:47:00,680 --> 00:47:04,759 Speaker 1: you have widespread moral hazard in the system, that necessarily 719 00:47:04,800 --> 00:47:08,200 Speaker 1: you're going to get all of the speculative and inefficient behavior. 720 00:47:08,760 --> 00:47:10,920 Speaker 1: So you can put as many people as you like 721 00:47:11,040 --> 00:47:14,680 Speaker 1: in jail. But as long as you require a GDP 722 00:47:14,800 --> 00:47:17,960 Speaker 1: growth rate that exceeds the real underlying growth rate, you 723 00:47:18,000 --> 00:47:21,759 Speaker 1: will never get rid of the problem. I think that's 724 00:47:21,800 --> 00:47:24,759 Speaker 1: a great spot to leave it. Michael, thank you so 725 00:47:24,840 --> 00:47:29,040 Speaker 1: much for coming out an odd lot I really like 726 00:47:29,200 --> 00:47:32,359 Speaker 1: the way with every question we ask, you're like, well, 727 00:47:32,400 --> 00:47:34,279 Speaker 1: this could resolve in three or four ways, and there's 728 00:47:34,320 --> 00:47:37,400 Speaker 1: always have clearly laid out, and I think got tied 729 00:47:37,480 --> 00:47:39,760 Speaker 1: up a lot of the themes that we've been discussing 730 00:47:39,800 --> 00:47:43,000 Speaker 1: in other episodes. I appreciate you coming back on Thanks show. 731 00:47:43,080 --> 00:47:45,240 Speaker 1: It's the only way I can think about these things. 732 00:47:45,800 --> 00:48:01,439 Speaker 1: I take care of Michael. Thanks Michael. It is very 733 00:48:01,520 --> 00:48:04,120 Speaker 1: easy for me to imagine, and again I say this 734 00:48:04,239 --> 00:48:07,600 Speaker 1: is an outsider without really much perspective, it's very easy 735 00:48:07,680 --> 00:48:11,360 Speaker 1: for me to imagine in three months or six months 736 00:48:11,360 --> 00:48:16,040 Speaker 1: per year, we're back to like real estate records, you know, 737 00:48:16,160 --> 00:48:19,000 Speaker 1: real estate prices, hitting records and China and stories about 738 00:48:19,080 --> 00:48:21,960 Speaker 1: real estate mania and all of this stuff about oh 739 00:48:22,080 --> 00:48:24,560 Speaker 1: finally they bite, they bit the bullet and they took 740 00:48:24,600 --> 00:48:30,120 Speaker 1: this big adjustment. Is having been another another head fake? Um, 741 00:48:30,160 --> 00:48:33,760 Speaker 1: it's definitely a possibility. I mean you're sort of asking 742 00:48:33,800 --> 00:48:37,680 Speaker 1: the classic is a different this time question? But I 743 00:48:37,719 --> 00:48:41,399 Speaker 1: mean Michael's long running point, the more you put it off, 744 00:48:41,520 --> 00:48:43,759 Speaker 1: the worse it's going to get. Right, And so I 745 00:48:43,760 --> 00:48:48,640 Speaker 1: guess the question becomes is now a politically expedient time 746 00:48:48,920 --> 00:48:53,680 Speaker 1: for China to be making that adjustment process. And I 747 00:48:53,719 --> 00:48:57,400 Speaker 1: guess like I can kind of argue it both ways, right, So, like, 748 00:48:57,440 --> 00:49:01,719 Speaker 1: on the one hand, China the economy is still recovering 749 00:49:01,840 --> 00:49:04,400 Speaker 1: from the global pandemic. But on the other hand, China 750 00:49:04,520 --> 00:49:09,040 Speaker 1: has come out of it relatively resilient compared to other countries. 751 00:49:09,120 --> 00:49:12,680 Speaker 1: It's also still closed off from much of the world. 752 00:49:13,400 --> 00:49:16,359 Speaker 1: You know, travelers can't really go in and out. There 753 00:49:16,400 --> 00:49:19,440 Speaker 1: are some pretty heavy restrictions. Um it has a huge 754 00:49:19,520 --> 00:49:23,239 Speaker 1: export boom at the moment, and so like maybe that 755 00:49:23,440 --> 00:49:28,520 Speaker 1: isolation and that narrative of China successfully controlling COVID, maybe 756 00:49:28,560 --> 00:49:32,359 Speaker 1: that's what makes it a particularly good time to sort 757 00:49:32,400 --> 00:49:34,880 Speaker 1: of tackle some of these issues. And also, you know, 758 00:49:34,960 --> 00:49:40,280 Speaker 1: tag on some sort of populous endeavors like uh, cutting 759 00:49:40,520 --> 00:49:44,640 Speaker 1: education costs or having kids stopped playing so many video games. 760 00:49:44,680 --> 00:49:47,200 Speaker 1: I mean, some of that makes sense. Yeah, I guess 761 00:49:47,239 --> 00:49:49,480 Speaker 1: I go back and forth that you don't after speaking 762 00:49:49,520 --> 00:49:52,600 Speaker 1: with Dan and Isabella, you know, it's like, oh, this 763 00:49:52,719 --> 00:49:56,000 Speaker 1: is real. And then and then when Michael lays out 764 00:49:56,040 --> 00:49:59,040 Speaker 1: it's like there are no good options, right, Like, there's 765 00:49:59,120 --> 00:50:02,160 Speaker 1: not like some magic bullet that's going to create good 766 00:50:02,200 --> 00:50:05,960 Speaker 1: growth to substitute for low quality, speculative growth, and I 767 00:50:06,080 --> 00:50:08,160 Speaker 1: go back and forth. So I don't know. I'm glad 768 00:50:08,200 --> 00:50:10,719 Speaker 1: it's not my job to have to make calls and 769 00:50:10,760 --> 00:50:13,160 Speaker 1: I just get to talk to people. I just go 770 00:50:13,200 --> 00:50:15,120 Speaker 1: back and forth. Oh, I thought you were gonna say. 771 00:50:15,200 --> 00:50:17,000 Speaker 1: I thought you're gonna say, You're glad you're not a 772 00:50:17,080 --> 00:50:22,520 Speaker 1: Chinese policymaker. But um, I guess for many reasons. Yeah, yeah, 773 00:50:22,520 --> 00:50:24,480 Speaker 1: I'm glad I'm not a Chinese That also seems like 774 00:50:24,520 --> 00:50:27,720 Speaker 1: gonna be stressful. All right, We're happy that we neither 775 00:50:27,800 --> 00:50:30,160 Speaker 1: are we, you know, Chinese policymakers, nor do we have 776 00:50:30,239 --> 00:50:32,840 Speaker 1: to make actual calls on China. But I mean I 777 00:50:33,080 --> 00:50:36,160 Speaker 1: do think we are at an interesting juncture. I mean, 778 00:50:36,160 --> 00:50:39,279 Speaker 1: at the risk of saying, you know, something very cliche like, 779 00:50:39,360 --> 00:50:41,680 Speaker 1: it does seem to be an interesting time for the 780 00:50:41,760 --> 00:50:45,160 Speaker 1: China economy and I am very, very interested to see 781 00:50:45,560 --> 00:50:48,440 Speaker 1: where it actually goes. Well, we're going to be certainly 782 00:50:48,480 --> 00:50:52,080 Speaker 1: doing more episodes, I'm sure. Yeah, shall we leave it there, 783 00:50:52,880 --> 00:50:56,680 Speaker 1: Let's leave it there. Okay, this has been another episode 784 00:50:56,719 --> 00:50:59,359 Speaker 1: of the All Thoughts Podcast. I'm Tracy Alloway. You can 785 00:50:59,400 --> 00:51:02,839 Speaker 1: follow me on Twitter at Tracy Holloway, and I'm Joe 786 00:51:02,840 --> 00:51:05,560 Speaker 1: wi isn't all. You can follow me on Twitter at 787 00:51:05,640 --> 00:51:08,919 Speaker 1: The Stalwart. Follow our guest on Twitter, Michael Pettis. He's 788 00:51:09,000 --> 00:51:13,080 Speaker 1: at Michael X Pettis. Follow our producer Laura Carlson. She's 789 00:51:13,160 --> 00:51:16,520 Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast, 790 00:51:16,560 --> 00:51:20,520 Speaker 1: Francisco Levi at Francesca Today, and check out all of 791 00:51:20,520 --> 00:51:24,880 Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks 792 00:51:24,920 --> 00:51:25,400 Speaker 1: for listening.