Speaker 1: She Jinping, the President of China has been in office
Speaker 1: for five years, and it looks like he will be
Speaker 1: around a lot longer. While he's at it. Here are
Speaker 1: some more names you might want to become familiar with,
Speaker 1: Leo Chu, E Gong, Leo Kun. These three men will
Speaker 1: be the brains behind China's economic and financial policy, probably
Speaker 1: for at least the next five years, and that means
Speaker 1: they could also help direct or deflect a possible trade
Speaker 1: war between the US and China. All in all, they
Speaker 1: will shape the world's second largest economy and in turn
Speaker 1: have a major impact on the rest of the world.
Speaker 1: Welcome to Benchmark. I'm Scott landman and economics editor at
Speaker 1: The Bloomberg News in Washington, And I'm Daniel Moss, economics
Speaker 1: writer and editor at Bloomberg View in New York. So,
Speaker 1: Dan she Jinping seems pretty firmly in control of China
Speaker 1: these days. Why should we care about some of his underlings.
Speaker 1: She may be firmly in control, but he can't be
Speaker 1: everywhere doing everything at all times. He also knows that
Speaker 1: the party's success depends on economic stability. That means no
Speaker 1: economic blow ups. The more range of opinions you can
Speaker 1: listen to the safer you'll be all right. Well, let's
Speaker 1: find out some more about this range of opinions with
Speaker 1: our guest, Nicholas Lardie is one of the foremost scholars
Speaker 1: on China's economy, having studied it for decades. He's been
Speaker 1: a senior fellow at the Peterson Institute for International Economics
Speaker 1: in Washington for fifteen years, and his most recent book
Speaker 1: is Markets Over Mao, The Rise of Private Business in China. Nick,
Speaker 1: welcome to Benchmark. Thank you. First of all, Nick, who
Speaker 1: is Leocha? Well, Leocha is a sort of economic technocrat
Speaker 1: who has served in a couple of administrations over the
Speaker 1: past decade at fairly high positions. He hasn't been extremely visible,
Speaker 1: but he's been vice chairman of one of the most
Speaker 1: important committees that deals with the economies of National Economic
Speaker 1: Development and Reform Commission. He's also been head of a
Speaker 1: small leading group on sin Anton economics, which is a
Speaker 1: very important behind the scenes advisor. And now he's going
Speaker 1: to be a Vice Premier with a pretty broad economic portfolio.
Speaker 1: How did he get so close to sheet and ping
Speaker 1: over the years to eventually get into this kind of position. Well,
Speaker 1: you're right, he has developed a good relationship with Seejing Ping,
Speaker 1: and all indications are that he will continue to be
Speaker 1: a fairly influential voice. I would caution, however, that a
Speaker 1: little bit hard to know exactly where Leucha stands on
Speaker 1: some issues. He seems to be able to serve masters
Speaker 1: that have disparate views on economic issues, so I don't
Speaker 1: necessarily think he's going to be in the driver's seat,
Speaker 1: but he will be a very strong implementer of the
Speaker 1: policies that he wants to support. Taking a broader look
Speaker 1: at the Chinese economy, Nick, you've written that China is
Speaker 1: much more of a private sector economy than popular discourse
Speaker 1: would seem to recognize. There's a lot of talk about
Speaker 1: how President she has semantic control of the political system,
Speaker 1: what's happening on the ground with the economy, how much
Speaker 1: day to date control does he have. Over the last
Speaker 1: few years, he has exerted a great deal more control
Speaker 1: over the economy. There has been what I think is
Speaker 1: fairly described as a bit of a resurgence of the state.
Speaker 1: About three quarters of China's GDP is being generated by
Speaker 1: private firms, but under She, we've seen proliferation of industrial policies.
Speaker 1: State banks have been lending more money to state companies,
Speaker 1: and she aspires that the state will play a much
Speaker 1: bigger in the economy. How successful that will be ultimately,
Speaker 1: I think remains to be seen. But when we talk
Speaker 1: about private companies in China, don't a lot of them
Speaker 1: have Communist Party cells or leaders that are installed to
Speaker 1: help direct the company business in line with objectives that
Speaker 1: the party has set. Ultimately by President she Well, China
Speaker 1: for more than two decades has required Party committees in
Speaker 1: all enterprises, whether they're state owned or privately owned. So
Speaker 1: this is not a new development, at least in a
Speaker 1: technical sense. Now, what really remains to be seen is
Speaker 1: are these committees going to take a much stronger role
Speaker 1: than they have had in the past. Certainly, there's not
Speaker 1: much evidence that party committees in private enterprises have persuaded
Speaker 1: these companies to do things that they think are against
Speaker 1: their interests. On the other hand, if you're a big
Speaker 1: company like Ali Baba and your Jack Ma the billionaire CEO,
Speaker 1: you certainly want to be perceived as carrying out policies
Speaker 1: that are consistent with those of the party. Talk to
Speaker 1: us about Ye Gung, the new Central Bank governor. Last
Speaker 1: month in Hong Kong, there was some chat that Leo
Speaker 1: would get both jobs vice Premier and governor of the
Speaker 1: People's Bank of China. What does it say that the
Speaker 1: deputy governor has been elevated. Well, I think it's a
Speaker 1: very important move. I think it would have been unrealistic
Speaker 1: for Leucha to be a Vice Premier and of the
Speaker 1: Central Bank governor simultaneously. This is something Drew m g
Speaker 1: did back in the late nineties. But I think the
Speaker 1: Central Bank governor's job has become much more important, much
Speaker 1: more time consuming, and requires a lot more international travel
Speaker 1: than Liuhu could undertake. I think the fact that he
Speaker 1: Gang has been elevated implies that we will have a
Speaker 1: substantial continuity on monetary policy, exchange rate policy, and all
Speaker 1: the things at the Central Bank has an influence on
Speaker 1: He is Western educated, he went back to China in
Speaker 1: He's worked his way up in the Central Bank over
Speaker 1: a period of several decades, and he has been the
Speaker 1: lead brains behind some of the most important reforms in
Speaker 1: the financial sector over the last twenty years, and most
Speaker 1: notably he was the architect for the liberalization of interest rates,
Speaker 1: which started in the late nineties and was not really
Speaker 1: completed until about the middle of twenty thirteen. So it
Speaker 1: was a very long, gradual process in which they moved
Speaker 1: from a system in which all interest rates on both
Speaker 1: deposits and loans were fixed and immovable to one in
Speaker 1: which these rates are now being determined largely by market forces. Nick.
Speaker 1: As long as we're talking about China Central Bank, can
Speaker 1: we talk about how much power central bank actually has
Speaker 1: the People's Bank of China. The independence of China Central
Speaker 1: Bank is differ from that of say, the Federal Reserve
Speaker 1: or European Central Bank. Right, yes, the Chinese Central Bank
Speaker 1: is not independent in the traditional sense of that word.
Speaker 1: It needs to get approval for any major changes in
Speaker 1: the interest rates that it tries to influence, or things
Speaker 1: like the discount rates and so forth. Changes in exchange
Speaker 1: rate policy that it manages have to be approved at
Speaker 1: much higher level. On the other hand, the Central Bank
Speaker 1: in China, at least under the previous governor, has had
Speaker 1: an enormous influence on the economy and they have hit
Speaker 1: The bank has weighed in on a range of economic policies,
Speaker 1: fiscal policy, tax policy. So yes, it's not independent, it's
Speaker 1: not completely free to carry out the usual kinds of
Speaker 1: monetary operations without approval. But you would not find the
Speaker 1: head of the Federal Reserve in the United States offering
Speaker 1: opinions about tax policy fiscal policy in the same way
Speaker 1: that we've seen in China. So the Central Bank governor
Speaker 1: has been a key economic policy maker weighing in on
Speaker 1: a very broad range of economic issues. In the West,
Speaker 1: nick Way used to the finance minister or the treasury
Speaker 1: secretary of a given nation being the big economic cheese.
Speaker 1: Is that the case in China, Well, it certainly hasn't
Speaker 1: been in recent years. The Ministry of Finance in China
Speaker 1: seems to focus primarily on the tax side, the collection
Speaker 1: of taxes, changes in the tax laws, enforcement of tax laws,
Speaker 1: and so forth, and they have not been a big
Speaker 1: shaper of broad macro economical policy in the same way
Speaker 1: that we would be familiar with in the United States.
Speaker 1: So I think the Central Bank has actually been more
Speaker 1: important in that domain than most other agencies in China.
Speaker 1: So the name that we have as the new Finance
Speaker 1: Minister as someone named Leo Kuhn, and I can as
Speaker 1: even as somebody who who spent a few years in
Speaker 1: China covering China's economy. I was not familiar with him.
Speaker 1: What do we know about him and what does his
Speaker 1: appointment say about any kind of direction of policy? Well,
Speaker 1: I think very little. The previous Ministry of Finance was
Speaker 1: a man who came out of the tax Bureau of
Speaker 1: the Ministry and was promoted to be minister. I'm not
Speaker 1: even aware, as you aren't, about the background of Leo Clinton,
Speaker 1: but I would not expect him to be a main
Speaker 1: shaper of policy. I would expect the person that we
Speaker 1: haven't talked about who would be much more important is
Speaker 1: Gauasu Ching, who has now been named to head, who
Speaker 1: has been head of the Central Bank, the Bank Regulatory Commission,
Speaker 1: and is now going to take charge of the merged
Speaker 1: Bank and Insurance Regulator. He's a very strong reformer. He's
Speaker 1: a much stronger personality, and I think he'll work very
Speaker 1: well together with people like Leo and e Gun. Let's
Speaker 1: switch to look at the broader economic dynamic, particularly between
Speaker 1: the world's two largest economies, China and the United States.
Speaker 1: We hear a lot about the Trump administration's desire to
Speaker 1: reduce America's trade deficit with China. We also hear a
Speaker 1: lot about tariffs and other measures that may be imposed.
Speaker 1: Can you break this down a bit for us? In particular,
Speaker 1: I'm wondering, given the extent of global supply chains, how
Speaker 1: much of the stuff the US imports from China actually
Speaker 1: originates somewhere else from an American company. Well, a very
Speaker 1: large share of what China sells to US is actually
Speaker 1: produced by what we would call for an affiliates, that is,
Speaker 1: multinational companies based in China. Many of them, of course,
Speaker 1: are US multinationals, but there's some European and other multinationals
Speaker 1: operating in China. It and these companies typically supply final
Speaker 1: products that are based on long production chains. As your
Speaker 1: questions suggests, they're buying inputs from all over the world,
Speaker 1: producing products in China, and then selling them back into
Speaker 1: the United States. So the Chinese content of these products
Speaker 1: is typically very low. Obviously, the best examples are the
Speaker 1: Apple products iPhones, iPads, which are made almost exclusively in China,
Speaker 1: and the foreign content is of the value of the product. Now,
Speaker 1: what this means is if tariffs are put on those
Speaker 1: kinds of products consumer electronics in particular, we will impose
Speaker 1: some pain on China, but a great deal of the
Speaker 1: pain will be transferred to the countries and the companies
Speaker 1: that are supplying all the inputs that go in to
Speaker 1: these consumer electronic products. So this will have an adverse
Speaker 1: effect on companies in Korea, Japan, Taiwan, Singapore, Malaysia and others.
Speaker 1: So this is where I think Mr Trump makes a
Speaker 1: mistake when he says it's easy to win a trade war.
Speaker 1: Both countries will lose if there's a trade war, and
Speaker 1: we will not just impose costs on China, but a
Speaker 1: lot of these costs will be transmitted to other countries,
Speaker 1: particularly those in East Asia. Your example of the iPhone
Speaker 1: is an interesting one. Apple an iconic American company headquartered
Speaker 1: in California. But if I hear you correctly, Nick iPhones
Speaker 1: might be subject to tariffs, well, they could be that.
Speaker 1: The rumor is consumer electronics will be on the list.
Speaker 1: And interestingly, Apple doesn't make any of these products. The
Speaker 1: products are actually made by a time when he's company
Speaker 1: that operates in China, it's actually one of China's biggest employers,
Speaker 1: a company that is technically hun High or it sometimes
Speaker 1: goes by its trade name of Fox Con. So it
Speaker 1: just shows the complexity you have an iconic American designed
Speaker 1: product by an American firm, Apple sold in the United States,
Speaker 1: but it's being produced in China by a Taiwanese company
Speaker 1: that is drawing parts and components from the global supply chain.
Speaker 1: Now as we record this, some of the details are
Speaker 1: still in flux, but it does seem like there will
Speaker 1: be a trade conflict between the US and China that
Speaker 1: could go on for some time. Nick, how do you
Speaker 1: see this playing out? And also when we talk about
Speaker 1: again people like Leocha and e Gong, when they're making
Speaker 1: decisions that affect China's economy or how China approaches these issues,
Speaker 1: what objectives are they going for and what are they
Speaker 1: trying to protect as far as China's economy goes well,
Speaker 1: I think they're doing everything possible to avoid a trade
Speaker 1: conflict with the United States. Leoha made a trip to
Speaker 1: Washington several weeks ago to try to enter into serious
Speaker 1: discussions with the US administration. Quite frankly, he was basically rebuffed.
Speaker 1: Posture of the administration seems to be, we don't want
Speaker 1: to negotiate anymore. That hasn't been sufficiently effective in the past.
Speaker 1: We want to see some results, so they're going to
Speaker 1: this more unilateral approach. I think the other person to
Speaker 1: figure in this discussion should be Wang Chi Shan. Wang
Speaker 1: Chi Shan has been named Vice president of China. He
Speaker 1: is well known to many Americans in the financial sector,
Speaker 1: in the business sector, and I think he will play
Speaker 1: a similarly large role in trying to manage the economic
Speaker 1: relationship with the United States. So, Nick, when we see
Speaker 1: large headline numbers fifty billion, sixty billion associated with US
Speaker 1: actions against China, is that really just a negotiation? How
Speaker 1: should we be looking at this? Well, I think that
Speaker 1: remained to be seen. The administration is probably going to
Speaker 1: announce a target of a very big number thirty six.
Speaker 1: We don't know exactly, but we will take some time
Speaker 1: to identify the exact products that they're going to impose
Speaker 1: these tariffs on. So this currently certainly could set up
Speaker 1: a window in which negotiations ensued, and it might not
Speaker 1: just be with the Chinese. If consumer electronic products are
Speaker 1: on the list to be subject to high tariffs, then
Speaker 1: you would probably have companies like Apple and other US
Speaker 1: consumer products companies lobbying the administration to exempt their products
Speaker 1: from such tariffs. And quite frankly, I think one of
Speaker 1: the reasons has taken a long time for this to
Speaker 1: play out is it's very difficult to identify products that
Speaker 1: we could impose tariffs on that would not have adverse
Speaker 1: effects on our own companies for other countries in Asia
Speaker 1: that supply inputs to the products that are being exported
Speaker 1: from China. So thinking about how this might play out,
Speaker 1: does China have more to lose from a trade war,
Speaker 1: does the US have more to lose from a trade war?
Speaker 1: Or are they both likely to lose in a trade war? Well,
Speaker 1: I think in a trade war, if it comes to that,
Speaker 1: both countries would lose quite substantially. US consumers are going
Speaker 1: to pay more. We're not going to create any new
Speaker 1: jobs if pariffs are put on consumer electronic products. You know,
Speaker 1: Apple is not going to start producing iPhones in Silicon
Speaker 1: Valley tomorrow. That we simply don't have the capability to
Speaker 1: produce many of the products that we import from from China.
Speaker 1: So what would happen is some of these electronic manufacturing
Speaker 1: services companies like con also have production facilities elsewhere in Asia,
Speaker 1: so they will simply switch the production of these products
Speaker 1: from China to Vietnam or India or other places where
Speaker 1: they have facilities already in place. They couldn't do a
Speaker 1: complete substitution in the short run because their capacity is
Speaker 1: very heavily concentrated in China, but some of the production
Speaker 1: would move. So this is a long way of saying
Speaker 1: not likely to have any positive effect on employment in
Speaker 1: the United States. Likely to have very large negative impact
Speaker 1: on consumers because prices will go up. Nick, how much
Speaker 1: is the US to blame for its large trade deficit
Speaker 1: with China. It's pursuing a policy of fiscal expansion at
Speaker 1: a time when China is pursuing a policy of fiscal consolidation.
Speaker 1: What's going on here? Well, I think what's going on
Speaker 1: is that the level of saving in the United States
Speaker 1: is very low, and the expansion of the fiscal deficit,
Speaker 1: which is occurring and will continue for quite a few
Speaker 1: more years, means that are saving short spot from a
Speaker 1: national perspective, will be getting bigger and bigger, which means
Speaker 1: we need to borrow money from the rest of the world.
Speaker 1: And the only way the rest of the world will
Speaker 1: have the money to lend to us is if they
Speaker 1: sell us more products than we buy from them. So ultimately,
Speaker 1: the trade imbalances are largely a function of these macroeconomic
Speaker 1: variables much more than they are a function of tariffs
Speaker 1: or trade restrictions or protectionism. And I think you can
Speaker 1: see that very clearly. In the case of China, their
Speaker 1: current account surplus, which is a broad measure of goods
Speaker 1: and services and a couple of other things, is only
Speaker 1: one point two percent of their GDP. It's extremely small
Speaker 1: by international standards. So globally they did not have a
Speaker 1: big surplus, but they have a big surplus with the
Speaker 1: United States. The United States has a big deficit with China,
Speaker 1: and I think it's a function of problems that originates
Speaker 1: in the US economy. In other words, the administration portrays
Speaker 1: China is being highly protectionists, and it certainly his protection
Speaker 1: is in some domains, but it is not I have
Speaker 1: a big global trader plus. It's global trade surplus is
Speaker 1: very small relative to the size of its economy. It's
Speaker 1: much much less than the surplus of Germany, for example. Well, Nick,
Speaker 1: this story is obviously far from over, and we'll all
Speaker 1: be listening to what you have to say in the
Speaker 1: coming months on whatever happens between the US and China
Speaker 1: on trade. Thank you so much for coming on our podcast.
Speaker 1: Thank you. Benchmark will be back next week. Until then,
Speaker 1: you can find us on the Bloomberg terminal, the Bloomberg
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Speaker 1: you can also find us on Twitter. You can follow
Speaker 1: me at at scott Landman Dan, You're at moss under
Speaker 1: School Echo, and Nick's employer at the Peterson Institute is
Speaker 1: at at p I I E. Benchmark is produced by
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Speaker 1: Thanks for listening, See you next time.