Speaker 1: The IMF World Bank Meetings kicked off this week in Washington,
Speaker 1: and this year it feels very different. The world trade
Speaker 1: system is in chaos, and the US, usually a world
Speaker 1: leader in many ways, is now the cause of this
Speaker 1: chaos with President Donald Trump's tariffs on the world. You're
Speaker 1: listening to Asia Centric from Bloomberg Intelligence. I'm Katy Dmitrieva
Speaker 1: and this week I'm in Washington for the IMF World
Speaker 1: Bank Meetings, where the world's economic leaders have gathered for
Speaker 1: the week, and where the global trade war is hanging
Speaker 1: over the city. Arguably, the US and China is the
Speaker 1: relationship and trade deal to get right, and so far
Speaker 1: there don't seem to be many off ramps. Every few
Speaker 1: days it seems tariffs are escalated, heated words are exchanged,
Speaker 1: and the leaders of the world's two largest economies aren't
Speaker 1: getting any closer to actually talking. This week, we have
Speaker 1: probably the ideal person to talk to about this. We
Speaker 1: have Arthur Kroeber, co founder and head of research at
Speaker 1: gav Kal Dragonomics and author of China's Economy What Everyone
Speaker 1: needs to Know. Arthur, thank you so much for joining us.
Speaker 2: Great to be here.
Speaker 1: So let's kick off just as a scene setter. What's
Speaker 1: going on this week in DC? I noticed this year
Speaker 1: it's a bit more quiet in some ways. You know,
Speaker 1: there's usually kind of posters up or flags, but it's
Speaker 1: a lot more quiet this year. What does it kind
Speaker 1: of feel like?
Speaker 3: Well, I think the difference between this year and all
Speaker 3: past years is that we have the mother of all
Speaker 3: trade wars sitting in the background. Trump, despite having back
Speaker 3: down from his most extreme tariffic proposal, still has ten
Speaker 3: percent tariffs on pretty much everyone in the world, twenty
Speaker 3: five percent tariffs on some products like Steve Will and aluminium,
Speaker 3: and anywhere between one hundred and forty and two hundred
Speaker 3: and fifty percent tariffs on China, depending on exactly how
Speaker 3: you count them. And so I think anyone who's looking
Speaker 3: at the macro economy in any country or in the
Speaker 3: world as a whole, it just has to say, we
Speaker 3: don't really know what's going on until we see what
Speaker 3: the impact of these tariffs are. And remember the economic
Speaker 3: data that we have to work with only goes up
Speaker 3: to the end of last month. Well, we didn't have
Speaker 3: all of these tariffs. So we're in a whole new
Speaker 3: world and no one is quite sure what is in
Speaker 3: that world. So I think that probably accounts for the
Speaker 3: feeling of amusement that you may see around here.
Speaker 4: Yeah.
Speaker 1: I mean, usually the IMF meetings are really more focused
Speaker 1: on macro central banks, and this year it really is
Speaker 1: arguably about not just trade, but specifically US and China
Speaker 1: or that relationship.
Speaker 3: Yeah, and I think what the transformation that we went
Speaker 3: through at the beginning of April was that Trump initially
Speaker 3: announced these very high tariffs on essentially every country in
Speaker 3: the world, and what we were left with was much
Speaker 3: lower tariffs, still significant ones in most countries, and gigantic
Speaker 3: ones on China. And what's interesting to me is that
Speaker 3: of all of the countries that got hit with these
Speaker 3: high terrifs, China was the only country that responded to
Speaker 3: this by direct retaliation. They ratcheted up their own teriff
Speaker 3: rates on US products to very high levels, and so
Speaker 3: you got into this tit for tat war of terrif escalation,
Speaker 3: which has left US in a very unusual spot. So
Speaker 3: two largest economies in the world tariff levels that, if
Speaker 3: they're fully enforced, basically mean that there's a trade embargo
Speaker 3: between the US and China, And we've just never been
Speaker 3: in a place like this.
Speaker 1: Before how bad does it get before there is a
Speaker 1: deal that's to be made.
Speaker 3: Well, if you're talking about the US and China specifically,
Speaker 3: I think the Chinese have actually made their position quite clear.
Speaker 3: They've said, we don't like trade wars. We don't think
Speaker 3: they're good for everyone. They put out a white paper saying, look,
Speaker 3: if you look at the total economic relationship between the
Speaker 3: US and China, Yeah, we have a goods trade surplus,
Speaker 3: but the US has a big services trade surplus with China. Plus,
Speaker 3: US companies make a ton of money in the Chinese
Speaker 3: market from domestic production. By my estimates, the sales of
Speaker 3: US companies in China are about triple the value of
Speaker 3: US exports to China. So when you add all that together,
Speaker 3: according to the Chinese, actually it's a balanced economic relationship.
Speaker 3: So they think this whole thing's unreasonable. So that's their position,
Speaker 3: and they've said they're not going to raise tariffs anymore
Speaker 3: because at this level, tariffs are a joke.
Speaker 4: That is a literal quote from the Chinese Ministry of Commerce.
Speaker 3: And they've said, look, if you're willing to talk about
Speaker 3: real things and be reasonable, we're happy to have a discussion,
Speaker 3: but we're not going to make the first phone call.
Speaker 4: And the US has taken the position.
Speaker 3: That no, China has to make the first call, and
Speaker 3: I don't think that's going to happen. So they're at
Speaker 3: a stalemate now where China has laid out its position,
Speaker 3: has stated that it's open to negotiation but is waiting
Speaker 3: for the US to make the first move.
Speaker 4: In the US is saying we're not going to make
Speaker 4: the first move.
Speaker 1: So where do we go from here? Because you've covered
Speaker 1: China as an academic, as a journalist, analyst, So in
Speaker 1: your view, how does this play out? How does this end?
Speaker 1: You know, is it the case that she might end
Speaker 1: up making that call? You just said, probably not. But
Speaker 1: how does this I mean it has to go somewhere?
Speaker 3: Right, Well, it's a good question, and maybe it doesn't
Speaker 3: have to go anywhere, Maybe it just stays in place.
Speaker 3: But I'll give you a few ideas about how things
Speaker 3: could play out from here. So number one, she is
Speaker 3: absolutely not going to make that first call. The Chinese
Speaker 3: have been very, very explicit and pretty i would say,
Speaker 3: open about what their negotiating agenda is. And I think
Speaker 3: the other thing that's important to add is that they
Speaker 3: tried sending messages to the Trump administration in January February
Speaker 3: several times about specific things that could be discussed on try,
Speaker 3: including many of the things that Trump administration has talked about,
Speaker 3: like ventanyl flows and stuff like that, And each time
Speaker 3: that they sent these ideas through, they got no response,
Speaker 3: and instead they got more tariffs on ventanyl into two tranches.
Speaker 3: So their view is, look, we've tried to negotiate, Trump
Speaker 3: has showed no interest, So we're going to stop and
Speaker 3: we're going to do our thing and we're going to
Speaker 3: protect our economy as best we can. And they have
Speaker 3: a lot of tools that they can use, and then
Speaker 3: if the US wants to negotiate, it is on them
Speaker 3: to come to us and explain what it is that
Speaker 3: they want to talk about.
Speaker 4: Then we're happy to talk. So I don't see that
Speaker 4: they're likely to move at all.
Speaker 3: And there's going to be a lot of pressure in
Speaker 3: the Chinese economy this year, but my sense is that
Speaker 3: the government is confident that they can handle the pressure
Speaker 3: and so there's no reason for them to make a move. Now.
Speaker 3: If you look at the Trump administration, essentially, of two
Speaker 3: things that have been said, one is President Trump has
Speaker 3: said I want Chijen Pain to make the first call.
Speaker 4: That's not going to happen.
Speaker 1: He said that a few times, several times.
Speaker 3: Yeah, and him saying it more times doesn't make it
Speaker 3: any more likely to happen. So I think that's just unrealistic.
Speaker 3: And then you have the Treasury Secretary Scott Bessens, who said, look,
Speaker 3: our negotiation strategy is we're going to cut lots and
Speaker 3: lots of trade deals with other countries first, and then
Speaker 3: we're going to all gang up on China and get
Speaker 3: China to change its ways.
Speaker 4: Or put another.
Speaker 3: Way, what he's saying is we're going to go to
Speaker 3: countries and say, if you want lower tariffs, then the
Speaker 3: price of those lower tariffs is that you have to
Speaker 3: increase your trade and investment restrictions with China. And that
Speaker 3: is his stated open negotiating strategy. I think there is
Speaker 3: almost no chance that that can possibly work.
Speaker 1: You mean other countries, Yeah, other countries.
Speaker 3: Won't do it because the majority of countries in the
Speaker 3: world have China as their number one trading partner. Many
Speaker 3: of them rely quite significantly on flows of technology or
Speaker 3: investment to or from China. These are very deep, complex
Speaker 3: relationships that have been built up over de kids, and
Speaker 3: no leader in his right mind would throw that down
Speaker 3: the drain for some kind of a deal with the
Speaker 3: US administration that has shown that it doesn't really adhere
Speaker 3: to deals for more than three or six months at
Speaker 3: a time.
Speaker 1: Even with the tariff levels where they are, though, I mean,
Speaker 1: it's going to be really painful for economies like Vietnam, Cambodia.
Speaker 4: Yeah.
Speaker 3: So I think there will be a few countries, you know,
Speaker 3: like Vietnam, which depends heavily on essentially being a conduit
Speaker 3: for trade from Chinese component factories through to final demand.
Speaker 4: In the US.
Speaker 3: But even there, you'd think that they have a big
Speaker 3: incentive to deal. But you know, a few days ago,
Speaker 3: Hijin Ping went to Hanoi, he got the red carpet treatment.
Speaker 3: They signed forty five different agreements. You know, probably some
Speaker 3: of them were, you know, not all that meaningful, but
Speaker 3: Vietnam was signaling, look, we think that this is a
Speaker 3: really important relationship. We value the Chinese relationship and the
Speaker 3: US relationship. So I think even a country like Vietnam
Speaker 3: is going to push back pretty hard in some stance
Speaker 3: on being told to cut back trade with China because
Speaker 3: they just can't afford.
Speaker 2: To It's literally impossible for them to do so.
Speaker 3: I think the problem that you have here is that
Speaker 3: the United States has set out some very unrealistic expectations
Speaker 3: for what can happen, and I think basically those expectations
Speaker 3: have to be ground down and then the US has
Speaker 3: to find some other way to negotiate. And we saw
Speaker 3: a glimpse of this a while back when Trump announced
Speaker 3: that electronics imports.
Speaker 2: Would be exempt from tariffs.
Speaker 3: And what was interesting there is that the Chinese government
Speaker 3: the instant that that message came out, they had a
Speaker 3: statement that said, this is a good step, this is
Speaker 3: in the right direction. We'd like to see more, but
Speaker 3: we're looking with interest. So that was a very clear
Speaker 3: signal from China that they were looking at that as
Speaker 3: a possible off ramp. That you exempt a whole bunch
Speaker 3: of specific products from tariffs, you lower the temperature and
Speaker 3: then you can start to have a discuss about things.
Speaker 3: So again, I think that the Chinese have been clear
Speaker 3: that they're looking for a way to negotiate because this
Speaker 3: is not an ideal situation for them, but they're only
Speaker 3: willing to.
Speaker 2: Go so far.
Speaker 3: And then the problem was after that Chinese statement, Trump
Speaker 3: and Secretary of Lucnik came out with statements saying, oh no, no,
Speaker 3: these these exemptions electronic, They're only temporary. So they backed
Speaker 3: write up that off ramp onto their tariff super highway,
Speaker 3: and they're still speeding down the road.
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Speaker 1: The other question that comes with a potential deal or
Speaker 1: what it might look like, is whether China actually needs it.
Speaker 1: You know, we've had a lot of economists in the
Speaker 1: private sector coming out with revised estimates for China's growth
Speaker 1: this year. They're not necessarily going to be able to
Speaker 1: make the five percent target. So what's your view on that.
Speaker 1: Is it possible with these tariffs to meet that target?
Speaker 3: Yeah, it's going to be tough. So before the tariffs,
Speaker 3: China had launched quite a lot of monetary and fiscal support,
Speaker 3: and with all of that support, we thought they might
Speaker 3: just be able to hit the five percent for this year.
Speaker 3: And then the tariffs come on, and you know, most
Speaker 3: economists estimate that they'll knock off at least a point
Speaker 3: and probably two from Chinese GDP growth this year, so
Speaker 3: they'll essentially eat up all of the stimulus that has
Speaker 3: already been announced. So if they want to get close
Speaker 3: to five they're going to have to do a lot more,
Speaker 3: And they've talked a lot about stimulating consumer demand, et cetera.
Speaker 3: But it's going to be tough. So I think that's
Speaker 3: one of the reasons that these their preferred outcome here,
Speaker 3: that there is some kind of negotiation and the tariffs
Speaker 3: come down. They're not trying to prolong this unnecessarily, but
Speaker 3: they also want a deal that kind of makes sense
Speaker 3: and reflects economic fundamentals, and that frankly doesn't make their
Speaker 3: government look too weak. So Xi Jinping really has to
Speaker 3: look strong, and I think this is one of the
Speaker 3: reasons that they decided to retaliate, which no other country did.
Speaker 3: But I think number one they were frustrated that all
Speaker 3: their efforts to negotiate had been rebuffed. And then number two,
Speaker 3: they thought, well, we're going to get high tariffs no
Speaker 3: matter what we do. So politically, what's the best way
Speaker 3: for us to play this. What's the best way for
Speaker 3: us to mobilize public support at home for what we
Speaker 3: know is going to be difficult no matter what we do.
Speaker 3: And I think they came up with the answer that
Speaker 3: we're going to fight back and we're going to prove
Speaker 3: that we're strong and we're standing up to Trump. So
Speaker 3: politically it's pretty important for them to to, you know,
Speaker 3: maintain that posture. But it's going to be tough, and
Speaker 3: you know, if there is no resolution to this within
Speaker 3: the next three or four months. I'm personally pretty skeptical
Speaker 3: of the hit five percent.
Speaker 1: Even with the additional monetary.
Speaker 3: Even with additional stimulus, it's just very, very hard to
Speaker 3: get consumer confidence going. Again, that's not something you can
Speaker 3: turn a switch on. But I think the point is
Speaker 3: they're willing to take that pain. Essentially, what they're saying
Speaker 3: is like, Okay, maybe we don't hit our five percent,
Speaker 3: maybe we get three and a half percent.
Speaker 4: We'll live with that.
Speaker 3: Because we think that we can live with that outcome
Speaker 3: more than the US public can deal with a lot
Speaker 3: lower growth and higher inflation that's going to come down
Speaker 3: the road from tariff. So if we have to, we'll
Speaker 3: just play a waiting game and we'll see who cracks first.
Speaker 3: And we bet that it's the Americans that.
Speaker 2: Will crack first.
Speaker 1: Yeah, So literally a game of chicken.
Speaker 3: It's a game of chicken, or economic attrition or you know,
Speaker 3: whatever you want to call it.
Speaker 4: Yeah.
Speaker 1: Yeah, And you've just said that consumer in China it's
Speaker 1: not just about flipping a switch. You know, it doesn't
Speaker 1: happen overnight. This really doesn't happen in a few years.
Speaker 1: What's your read on the government's moves right now to
Speaker 1: try to stimulate the consumer is that, you know, they
Speaker 1: had this trade in program that seemed very successful, but
Speaker 1: sort of a longer term.
Speaker 3: Well, I want to back up and just give you
Speaker 3: my theory of what ails the Chinese consumer. Please do
Speaker 3: because the reality is, I mean, if you go back
Speaker 3: to twenty nineteen, before the pandemic, Chinese consumer is in
Speaker 3: pretty good shape. It was a vibrant, fast growing consumer market,
Speaker 3: very diverse consumption of both products and services, becoming more sophisticated,
Speaker 3: doing a lot of international travel.
Speaker 4: It was a very positive story.
Speaker 3: And basically what we've seen in the last years is
Speaker 3: that story went off the rails. I think reason number
Speaker 3: one was that you had the pandemic and everything shut
Speaker 3: down for a few months in twenty twenty, and China
Speaker 3: was really the only major economy in the entire world
Speaker 3: that did not help out consumers and households during the pandemic.
Speaker 3: The US mailed stimulus checks, most European countries put in
Speaker 3: employment or wage guarantees. China did nothing, so there was
Speaker 3: a big hit to consumer confidence. Then things came back
Speaker 3: a bit, and then they got the second round of
Speaker 3: the pandemic in twenty twenty two, Shanghai lockdowns.
Speaker 4: It was really bad, and I.
Speaker 3: Think Chinese consumers were just traumatized by that sort of
Speaker 3: double whammy of getting hit and not getting any support
Speaker 3: from the government, so they were very cautious coming out
Speaker 3: of the pandemic. And then, of course, the other thing
Speaker 3: that happened in that period is that the Chinese government
Speaker 3: decided to squash the property market, which is the main
Speaker 3: source of household wealth. They've done a very effective job
Speaker 3: of that, and they've been very determined not to reinflate
Speaker 3: the property bubble. But what that means is that one
Speaker 3: of the key sources of household confidence, which is their
Speaker 3: rising wealth, has been knocked out. So you have kind
Speaker 3: of a bad employment market PTSD from the COVID lockdowns
Speaker 3: and a comatost property sector and you add all that
Speaker 3: stuff up, and Chinese consumers are just they do not
Speaker 3: want to spend an extra nickel if they can avoid it.
Speaker 3: And so how do you reverse that cycle because that
Speaker 3: also feeds into business confidence business as well. Consumers aren't buying,
Speaker 3: so we're not going to hire or invest in new
Speaker 3: acqui And if business is aren't hiring, then households say, wait,
Speaker 3: if I lose my job, I'm not going to get
Speaker 3: a new one because no one's hiring. So you have
Speaker 3: a negative confidence spiral and you have to do a
Speaker 3: bunch of things to turn that around. And I think
Speaker 3: they're going to have to do quite a bit more
Speaker 3: in terms of promoting private sector business confidence, which they've
Speaker 3: started to do with the Internet companies. They probably have
Speaker 3: to do a little bit more to support the property
Speaker 3: market than they're comfortable doing now, and they probably just
Speaker 3: have to pump a lot more government money into the
Speaker 3: system than they have done so far. And I think
Speaker 3: at the end of the day they will be willing
Speaker 3: to do all of those things, but they're doing them
Speaker 3: kind of slowly and step by step, so it's not
Speaker 3: going to be easy for them to turn.
Speaker 2: On a dime and get consumer confidence up again.
Speaker 1: Yeah, and for the consumer specifically, do you see these
Speaker 1: measures as sort of a shorter term, you know, trying
Speaker 1: to address the issues in the short term, or do
Speaker 1: you see this as fundamentally potentially changing the psychology of
Speaker 1: the consumers longer term? In other words, can this actually
Speaker 1: create a consumer led economy?
Speaker 3: Well, so, I think a lot of the stuff that
Speaker 3: they've done up until now has been essentially short term,
Speaker 3: like these trade in programs, and trade in programs did
Speaker 3: work a lot better than I thought they would, frankly.
Speaker 1: And that's the equipment and home applying.
Speaker 3: So if you have an old appliance or an old car,
Speaker 3: you can trade it in, you can get a subsidy
Speaker 3: to buy a new one, and that's you know, been
Speaker 3: reasonably effective. But essentially what that does is says you're
Speaker 3: going to buy something in two or three years anyway,
Speaker 3: Why don't you buy it now, so that's just borrowing
Speaker 3: demand from the future. It's not really creating new sustainable demand,
Speaker 3: so that's more of a short term fix. Similarly, you know,
Speaker 3: JD dot Com has set up a fund to buy
Speaker 3: goods from exporters for resale on the domestic market, so
Speaker 3: that's again that's kind of like a short term gimmick
Speaker 3: that's not going to really get.
Speaker 4: You very far.
Speaker 3: But I think the thing that has changed is that
Speaker 3: since last December, Xijionping has made it very clear that
Speaker 3: promoting consumption is a top political primary and this is
Speaker 3: very different than at any other time in his administration.
Speaker 3: So the political importance of promoting consumption has now become paramount,
Speaker 3: and that makes a big difference. In the Chinese system
Speaker 3: and the Chinese system, a lot happens based on signals
Speaker 3: from the top government officials, and for the last five years,
Speaker 3: the signals were mainly, we have to invest a lot
Speaker 3: in high tech industry to become self sufficient. It was
Speaker 3: all a supply side strategy. Now the signal is very
Speaker 3: clearly we need to work on demand. And so what
Speaker 3: usually happens is that they flail around for while after
Speaker 3: these signals go out and then gradually they figure out
Speaker 3: tools that help them get to.
Speaker 2: The desired political objective.
Speaker 3: So I think that is important, and I think over
Speaker 3: the course of a year or two, what that will
Speaker 3: mean is that you'll probably get stronger consumer activity. I
Speaker 3: don't think you're headed towards a consumer led economy because
Speaker 3: the DNA of huge and pain in the communist parties.
Speaker 4: It's all about growth.
Speaker 3: Comes from investment in technology. That's what they really believe
Speaker 3: at bottom. So even if they've made a pretty big
Speaker 3: pivot right now to support consumption, I think their longer
Speaker 3: term strategy is still very much all about technology investment.
Speaker 1: Interesting because that isn't necessarily I mean quite aside from
Speaker 1: what officials in China have said. I mean, you heard
Speaker 1: Janet Yellen speak about the importance of China pivoting to
Speaker 1: the consumer. You're seeing a lot of other countries who
Speaker 1: are hoping that that happens so they don't get access
Speaker 1: stuff from China.
Speaker 3: Yeah, and I just think that it's going to be
Speaker 3: a long, hard slog to achieve that. You know, other
Speaker 3: central bankers, trade ministers, you name it. They've been talking
Speaker 3: for decades literally about how China needed to invest less
Speaker 3: and consume more, and the Chinese have been, you know,
Speaker 3: not very interested in what these people have to say.
Speaker 3: So I don't think that they're really going to take
Speaker 3: too many cues on their domestic policy from Janet Yellen,
Speaker 3: to be frank shocking, but I think there is a problem,
Speaker 3: which is more and more countries are running bigger and
Speaker 3: bigger trade deficits.
Speaker 2: With China on goods.
Speaker 3: And some countries don't care because they're never really going
Speaker 3: to have manufacturing anyway.
Speaker 4: But a lot of countries do care.
Speaker 3: They want to have their own manufacturing sectors and they
Speaker 3: don't want them to be hollowed out by cheap Chinese goods.
Speaker 3: So I think the way to get around that, and
Speaker 3: you've seen this, I think with some of the negotiations
Speaker 3: between China and the European Union is for countries to say,
Speaker 3: all right, if you want to export your stuff to us,
Speaker 3: there's going to be a terif on it. But if
Speaker 3: you want to build factories in our countries to build
Speaker 3: that stuff with local employment, with local supply chains, with
Speaker 3: technology transfer, fine, so you can serve our markets, but
Speaker 3: you have to do it based on investment in this
Speaker 3: country rather than buy exports. And that is actually what
Speaker 3: the United States said to Japan in the nineteen eighties.
Speaker 3: We're absorbing a lot of imports of Japanese cars, semiconductors,
Speaker 3: other things, and essentially we came up with a modus
Speaker 3: vivendi where the Japanese companies agreed to invest a lot
Speaker 3: more in production in the United States. Japanese companies still
Speaker 3: make a ton of money from the US market, but
Speaker 3: a lot more of it is from domestic production.
Speaker 2: Here rather than through exports.
Speaker 3: And that is a viable way of addressing the problems
Speaker 3: that are created by these mercantilist economies that like China
Speaker 3: or Japan, that really want to stay export driven forever.
Speaker 3: As you say, we're going to take some of those
Speaker 3: exports and we're going to compel them to turn into
Speaker 3: domestic production somewhere else.
Speaker 1: But we're talking so much about trade these days, I
Speaker 1: feel like there might be some other risks we're missing.
Speaker 1: Is there something else investors should be thinking about?
Speaker 3: Well, it's a fair point, because you know, if you
Speaker 3: look at the US economy, for example, imports are only
Speaker 3: about eleven or twelve percent of GDP.
Speaker 2: In China, it's.
Speaker 3: About the same imports around ten or eleven percent of
Speaker 3: GDP exports are you know, the high teens, but you
Speaker 3: still have a very large part of the economy. These
Speaker 3: are both gigantic economies and most of it, frankly, is
Speaker 3: domestically driven. So the multipliers of trade are very high,
Speaker 3: and that's where the change is occurring. So it makes
Speaker 3: sense to to pay attention to it. But you're right,
Speaker 3: China is a big economy, and before the trade war
Speaker 3: rolled along all of us China economists were talking about
Speaker 3: other stuff, mainly deflation. And this gets to the consumer
Speaker 3: stuff that we were talking about a minute ago, that
Speaker 3: China for the last basically three years has had a
Speaker 3: falling price level, which is very unusual. China has had
Speaker 3: some episodes of deflation before in the last thirty years,
Speaker 3: but this is the longest.
Speaker 4: It's the most sustained.
Speaker 3: It's not the deepest, but it's the one that's lasts
Speaker 3: the longest, you know, And it reflects in part this
Speaker 3: lack of business confidence, lack of consumer confidence. People hoarding
Speaker 3: savings and not willing to spend it. So what winds
Speaker 3: up happening is that you have a lot of money
Speaker 3: available to invest in creating new supply, but you don't
Speaker 3: have enough demand to buy the stuff that they're making,
Speaker 3: and so it all winds up heading into exports. And
Speaker 3: so the question that a lot of us were focusing
Speaker 3: on was how is trying to get out of this
Speaker 3: deflationary trap that it seems to be in. And some
Speaker 3: people say, well, this is like Japan in the nineteen
Speaker 3: nineties and they're really heading off the rails. And I
Speaker 3: was never in that camp. I won't bore you with
Speaker 3: a long list of reasons why China is not Japan
Speaker 3: in the nineties, but it really not.
Speaker 4: It has a lot more growth.
Speaker 3: Potential than Japan did at that point. They have made
Speaker 3: some mistakes and macropolicy, but if they correct those mistakes,
Speaker 3: they could certainly get back onto a much more vibrant
Speaker 3: economic growth track, you know, even with some of these
Speaker 3: trade disruptions. But what that means is Number one, I
Speaker 3: think they have to be a little bit more aggressive
Speaker 3: on fiscal policy.
Speaker 4: Interest rates.
Speaker 3: Real interest rates are quite high in China. They can
Speaker 3: come down. They've been reluctant to get close to the
Speaker 3: zero bound, but I think they need to do more
Speaker 3: work there.
Speaker 4: And then the big thing is they have an over.
Speaker 3: Regulated service sector. Because my two liner on China's economy
Speaker 3: is manufacturing is over invested and services are overregulated. So
Speaker 3: they have all this investment in making stuff, which they're
Speaker 3: ver good at, but no one in China wants to buy.
Speaker 3: But a lot of the service sectors have lots of regulation,
Speaker 3: lots of state owned enterprises that participate in them, not
Speaker 3: enough space for entrepreneurial innovation. And so if you deregulated
Speaker 3: service sectors, you might be able to get a lot
Speaker 3: more employment opportunities for people as private entrepreneurs figure out
Speaker 3: how to do things better. In education and healthcare, in
Speaker 3: transport logistics, in tourism and entertainment, all of these things
Speaker 3: are subject to a lot of controls. So my thesis
Speaker 3: on this was that they could do a lot more
Speaker 3: on that, and that would be sort of a key
Speaker 3: to getting more dynamic and essentially consumer oriented growth.
Speaker 4: The problem is a lot of the.
Speaker 3: Service sectors wind up being very close to Communist party
Speaker 3: sort of control red lines, you know, like you can
Speaker 3: think about finance, media and so forth. They don't want
Speaker 3: to deregulate these very much because it would be too
Speaker 3: dangerous politically. So they've got a bit of a problem
Speaker 3: there in terms of how do you get enough dynamism
Speaker 3: back into the economy while not crossing any of these
Speaker 3: political red.
Speaker 1: Lines without losing control.
Speaker 2: Yeah, essentially exactly.
Speaker 1: So deflation, service sector deregulation question work. Yes, trade war.
Speaker 1: Where do you see China in about four years time,
Speaker 1: specifically the economy in about four years time?
Speaker 3: Uh?
Speaker 4: Boy, that is really hard.
Speaker 3: Well, because you know, this trade war thing is so
Speaker 3: large and so unpredictable.
Speaker 4: You really don't know.
Speaker 3: Is the entire global trading system just going to be
Speaker 3: completely reconfigured over the next four years, or are we
Speaker 3: going to have this storm that abates and we go
Speaker 3: back to something like that.
Speaker 4: We had a couple of years ago. Both are possible,
Speaker 4: you know.
Speaker 3: I think basically what China is going to look like
Speaker 3: in four years is if you think that they're sort
Speaker 3: of a technological superpower now, they're going to be much
Speaker 3: more of a technological superpower across more sectors. You look
Speaker 3: at industrial automation robots, they're the biggest consumer, they're not
Speaker 3: the biggest producer.
Speaker 4: They're innovating very quickly.
Speaker 3: They're also doing a lot of innovation in new sources
Speaker 3: of green energy like hydrogen things like that. So I
Speaker 3: think the technological development at China, if anything, is only
Speaker 3: going to accelerate. But this could well happen against the
Speaker 3: backdrop of an economy as a whole that's still pretty sluggish,
Speaker 3: that's growing maybe only three percent a year, still kind
Speaker 3: of deflationary. Both of those things can be true at
Speaker 3: the same time, essentially because China is so gigantic that
Speaker 3: they can have a very vibrant set of tech sectors
Speaker 3: that are globally competitive and leading edge and innovation, and
Speaker 3: an overall economy that's still kind of slow. And I
Speaker 3: think this is one of the things that people in
Speaker 3: the rest of the world have a hard time wrapping
Speaker 3: their minds around. They think, if China slows down that much,
Speaker 3: then the edge is going to come off its technological
Speaker 3: gains also, and I just don't think that's true. So
Speaker 3: I think the main thing we have to think about
Speaker 3: is China as a growing technological force in many more
Speaker 3: fields than we see it today on the one hand,
Speaker 3: but also China potentially being a slower growing economy, and
Speaker 3: those two things can exist simultaneously, I think for many years.
Speaker 1: That's maybe a good note to leave it on. Okay,
Speaker 1: thanks so much for joining us.
Speaker 2: This week.
Speaker 4: It was my pleasure. Thank you.
Speaker 1: You've been listening to Asia Centric from Blueberg Intelligence. I'm
Speaker 1: Katidmitrieva in Washington. You can find our podcasts on Apple Podcasts, Spotify,
Speaker 1: or wherever you listen. This episode was produced by Clara
Speaker 1: Chen and Special help this week was given by Rachel
Speaker 1: Lewis Kriski here in Washington. Thanks so much for listening.