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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Weisenthal and I'm Tracy Halliway, Tracy, there's been

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Speaker 1: some interesting data out of China lately regarding the recovery

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Speaker 1: from the coronavirus crisis. You're gonna have to narrow that down,

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Speaker 1: but are you. Are you talking about some of the

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Speaker 1: data that sort of supports the notion that they're seeing

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Speaker 1: something of a recovery, although it's mostly driven on the

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Speaker 1: supply side rather than the demand side. Is that what

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Speaker 1: you're talking about? Yeah, sorry, I was very super cryptic,

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Speaker 1: but yes, this idea that we have seen this sort

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Speaker 1: of what some people might characterize as kind of a

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Speaker 1: V shaped recovery on the industrial side, sort of an

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Speaker 1: impressively fast and resilient restart of the factories and so forth,

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Speaker 1: by not so much on the demand side yet, at

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Speaker 1: least from the data. And maybe you have a better

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Speaker 1: sense of this from the Hong Kong perspective, but it

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Speaker 1: still seems like consumption shopping and going out to eat

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Speaker 1: still still kind of tame. Yeah, I think that's exactly right.

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Speaker 1: Although I have to say in Hong Kong we are

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Speaker 1: starting to see a little bit of a pickup, mostly

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Speaker 1: because everyone is stuck in the city. They can't actually leave.

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Speaker 1: Um when they have to come back, they have to

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Speaker 1: go into two weeks quarantine. So everyone is taking staycations

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Speaker 1: and going out quite a bit lately. But with that

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Speaker 1: exception made, yes, we are seeing a stronger supply driven

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Speaker 1: recovery than we are on the demand side. And one

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Speaker 1: thing that I find interesting about that is that it

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Speaker 1: sort of speaks to the very nature of China's economic model.

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Speaker 1: I guess one of the benefits of having a command

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Speaker 1: economy is that when times are bad, you can kind

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Speaker 1: of command everyone to go back to work, and you

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Speaker 1: can tell companies to maintain jobs and start making products again.

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Speaker 1: But of course, you know, the downside of a command

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Speaker 1: economy is that you might not necessarily get as strong

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Speaker 1: a consumer as you want. Right So, the the industrial side,

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Speaker 1: the corporate side, is very much an extension of policy,

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Speaker 1: much more so than consumption. And so this this this

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Speaker 1: sort of dual speed recovery that we're seeing in China.

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Speaker 1: It may be a cue right now, but it speaks

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Speaker 1: to something much broader. And I'm thinking also, we had

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Speaker 1: a recent discussion with Matt Klein just this sort of

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Speaker 1: general idea that the Chinese economy has never really been

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Speaker 1: as sort of consumption focused, household focused as it is

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Speaker 1: uh investment and production focused. Yeah, that's exactly right. And

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Speaker 1: of course the other big theme that's cropping up at

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Speaker 1: the moment is what China is doing to support its

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Speaker 1: financial system. So we know that the authorities are trying

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Speaker 1: to walk this fine line between cropping up the banks

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Speaker 1: but also you know, avoiding moral hazard and trying not

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Speaker 1: to accumulate even more debt. So that's something else that's

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Speaker 1: going on at the moment. So all these things are

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Speaker 1: like kind of like microcosms or cute versions of stories

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Speaker 1: that I mean, you and I haven't covered, um talked

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Speaker 1: about the world economy for years now, literally since I

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Speaker 1: think the first day that I, you know, been covering

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Speaker 1: the news. You just hear forever about the China bubble,

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Speaker 1: and it's the most obvious bubble, and there was all

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Speaker 1: this debt supposedly and all this bad debt, and it's

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Speaker 1: sort of taken for granted that it must come to

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Speaker 1: an end, that there must be a reckoning. And we

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Speaker 1: know people shorting China forever and talking about how how

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Speaker 1: dysfunctional the system is. But you know, it's been years

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Speaker 1: and years since we've been talking about this and the

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Speaker 1: great sort of Chinese I don't know, reset bubble popping.

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Speaker 1: It never quite seems to happen. Yeah, China is forever

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Speaker 1: a debt crisis sort of on the brink, and yep,

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Speaker 1: it never seems to happen. There's always these fall starts,

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Speaker 1: like you'll see something it's like, oh, some apartment developer

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Speaker 1: couldn't sell their units, and everyone like, this is it.

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Speaker 1: This is the moment we've all been waiting for. The

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Speaker 1: Chinese real estate bubble is popping. And then six months

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Speaker 1: later it's like apartment prices hit new all time highs

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Speaker 1: and that goes away. Yeah. I mean, I would say

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Speaker 1: in recent years you've had some bigger ones. So you

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Speaker 1: had Bao Schang Bank, which actually um failed, which was

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Speaker 1: very unusual. And now it's really interesting is you're starting

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Speaker 1: to get some losses on wealth management products that a

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Speaker 1: lot of banks sold to retail investors. That's another thing

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Speaker 1: that lots of people thought was going to tip over

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Speaker 1: the financial system into some sort of crisis because people

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Speaker 1: weren't going to buy the products anymore and they would

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Speaker 1: pull funding for the banks essentially, So yeah, you have

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Speaker 1: a lot of things that could go wrong, but the

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Speaker 1: consequences never seem as dire as people originally predicted, exactly right.

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Speaker 1: So anyway, I think that you know, raises an interesting

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Speaker 1: question of well, why is this, Why does this, Why

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Speaker 1: does the doomsday bubble crash collapse scenario that so many

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Speaker 1: people just assume is inevitable? Why has it not happened?

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Speaker 1: Is it going to happen? We're gonna be talking about

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Speaker 1: that today with our own colleague, a special episode with

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Speaker 1: one of our Bloomberg colleagues. They were going to be

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Speaker 1: speaking to Tom Orlick. He is the chief economist here

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Speaker 1: at Bloomberg, and he has a new book out on

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Speaker 1: exactly this topic called China The Bubble That Never Popps.

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Speaker 1: So Tom, thank you very much for joining us. Thanks Joe,

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Speaker 1: and I especially enjoyed your manly attempts to frame the

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Speaker 1: subject without accidentally using the title of my book before

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Speaker 1: you introduced it right, kind of guided it right there

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Speaker 1: without quite using it. But it really has been a thing,

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Speaker 1: and even before I was aware that you had this

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Speaker 1: book in the work, so that you're coming out, congratulations,

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Speaker 1: By the way. This has been like a sort of

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Speaker 1: like weird head scratcher, because for as long as I've

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Speaker 1: been following this stuff, it just seemed inevitable that China

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Speaker 1: must be the most obvious bubble ever, and then it

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Speaker 1: was only a matter of time before it's crashing down.

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Speaker 1: The only debate seemed to be when and not if

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Speaker 1: it was going to happen. Yeah, that's completely right. So

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Speaker 1: so I lived in China from two thousand and seven

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Speaker 1: to two thousand and eighteen, mainly focused on improving my

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Speaker 1: table tennis game, but I did a little bit of

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Speaker 1: economics as well, and that was the persistent narrative right

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Speaker 1: from the Great Financial Crisis and that famous four trillion

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Speaker 1: nuan stimulus which Premier Wen Jiaobao launched, all the way through.

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Speaker 1: Now there's been this massive rise in debt, and the

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Speaker 1: question everybody has had has been, well, how long can

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Speaker 1: this continue? And what's it gonna look like when it

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Speaker 1: melts down? So give us a summary of the weaknesses

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Speaker 1: in China's economy or the financial system that people have

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Speaker 1: seen for this long. What is it that they are seeing,

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Speaker 1: what is it that they're concerned about? So I break

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Speaker 1: it down in three ways Tracy. So the first is

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Speaker 1: the size of the debt bubble um. So if you

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Speaker 1: go back to two thousand and eight, China's debt to

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Speaker 1: GDP looking at the whole economy was around a hundred

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Speaker 1: and if you fast forward to two thousand and sixteen,

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Speaker 1: two thousand and seventeen, it's gone all the way up

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Speaker 1: to two D two hundred and six. So that's an

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Speaker 1: astronomical increase in debt in a really short period of time.

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Speaker 1: The International Monetary Fund scanned the world. They went back

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Speaker 1: in history too, I think World War two. They couldn't

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Speaker 1: find another country which had taken on so much debt

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Speaker 1: so quickly, but they did find a bunch of countries

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Speaker 1: that have taken up that had taken on less debt

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Speaker 1: and still had a financial crisis. So that's the first thing,

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Speaker 1: just a huge amount of debt taken on very quickly.

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Speaker 1: And then the second thing, if we look at the

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Speaker 1: borrower side of the Chinese economy, who's borrowing the money, Well,

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Speaker 1: it's state owned enterprises investing in excess capacity building steel

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Speaker 1: mills when no one wants any more steel, cement kilns,

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Speaker 1: when they wone wants any more cement. It's real estate

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Speaker 1: developers building those ghost towns in the desert or those

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Speaker 1: empty apartment blocks, and its local governments building the roads

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Speaker 1: to nowhere. So on the borrower side, we've got a

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Speaker 1: bunch of people making investments in things which have got

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Speaker 1: low returns, so how are they're going to pay the

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Speaker 1: money back? And then on the lender side, you've got

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Speaker 1: state owned banks. State owned banks operating more on policy

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Speaker 1: directives than commercial incentives, they're probably making some bad lending decisions,

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Speaker 1: and you have the explosive growth of a shadow banking sector.

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Speaker 1: Shadow banks don't have the capital to absorb losses, are

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Speaker 1: lending to really low quality borrow is the risks they're

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Speaker 1: going to be high. So this I have a million

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Speaker 1: questions already just based on that, but I'll start with one.

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Speaker 1: And you know, one of the things that's really been

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Speaker 1: popular conversation in the last couple of years, and partly

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Speaker 1: popularized by their eyes of say modern monetary theory, is

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Speaker 1: that there is a distinct difference between private sector debt

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Speaker 1: and public sector debt, and that public sector debt just

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Speaker 1: doesn't have shouldn't be thought of with the same kind

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Speaker 1: of credit risk. And I'm curious whether to some extent,

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Speaker 1: we can start getting our heads around the Chinese debt

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Speaker 1: bubble by the fact that you know, you mentioned state

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Speaker 1: owned enterprise, state banks, local governments, which presumably are implicitly

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Speaker 1: at some level backed by the federal government. The sort

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Speaker 1: of difficulty that outside analysts have in distinguishing what's truly

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Speaker 1: private sector credit versus public sector credit, and how much

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Speaker 1: does that lay to the misconceptions about the and sustainabuilding. Yes,

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Speaker 1: so that's a really important point, Joe. And one thing

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Speaker 1: which really distinguishes China from the rest of the world,

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Speaker 1: or at least the liberal capitalist rest of the world,

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Speaker 1: the US, Europe and so on, is state participation in

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Speaker 1: the economy and in many sense, in many instances just

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Speaker 1: state ownership of the key players. So let's say we

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Speaker 1: have a bad loan in the US system, Well, how

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Speaker 1: is that going to be resolved? Well, maybe there's some

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Speaker 1: initial negotiations between the borrow and the bank, and then

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Speaker 1: maybe there's some legal recourse for the bank if the

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Speaker 1: borrower can't repay it, they try and reclaim their collateral.

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Speaker 1: How does that look in the Chinese context, Well, probably

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Speaker 1: the local government owns the bank, and they own the

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Speaker 1: corporate and they have some tax revenue or other sources

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Speaker 1: of income they can put into play. And so that

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Speaker 1: entire conversation, that entire negotiation is taking place within the

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Speaker 1: state family. And as long as China continues to grow,

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Speaker 1: and remember China continues to clock not in this COVID

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Speaker 1: nineteen year, of course, but in general China continues to

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Speaker 1: grow around five six, then the government just has a

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Speaker 1: lot of resources that they can continue to shuffle around

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Speaker 1: the system, and that allows them to resolve a lot

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Speaker 1: of problems behind closed doors without a blow up taking place.

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Speaker 1: Just on that note of sort of shuffling things around

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Speaker 1: the system and also having this closed circuit of state

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Speaker 1: owned enterprises and banks that all sort of have relationships

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Speaker 1: with each other. How much does the fact that we're

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Speaker 1: essentially talking about a closed economy factor into China's resilience here,

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Speaker 1: because of course, you know, there has been some degree

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Speaker 1: of opening up, but you still have hefty capital control.

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Speaker 1: So how much does that actually insulate China from problems? Yeah,

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Speaker 1: that's a that's a really important point, Tracy. You often

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Speaker 1: hear people saying that that China learned the lesson of

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Speaker 1: the Asian financial crisis, right, they learned the lesson of

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Speaker 1: the Asian financial crisis, and that's why they've been stable.

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Speaker 1: What was the lesson of the Asian financial crisis that

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Speaker 1: they learned? Essentially, it was don't let Wall Street in,

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Speaker 1: don't let foreign capital in. In China, they actually have

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Speaker 1: a have a phrase for sort of foreign speculative investors.

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Speaker 1: They call them. I'm probably gonna get this wrong, but

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Speaker 1: it's like that inn wrong, are you, which means big

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Speaker 1: financial crocodiles. So the big financial crocodiles came, and they

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Speaker 1: came and gobbled up soul, they gobbled up career, they

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Speaker 1: destroyed much of the Asian great story. And China saw

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Speaker 1: that and said, you know what, We're going to finance

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Speaker 1: our own development. We don't need these foreign funds coming in,

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Speaker 1: which are great when they're coming in and everyone's really happy,

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Speaker 1: but when they leave, the system crashes down. And so

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Speaker 1: because China's growth story has really been domestically finance, that

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Speaker 1: gives China an important basis for stability that you just

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Speaker 1: don't see in other emerging markets. This is like a

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Speaker 1: really key point, just this idea of local denomination of debt. Basically,

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Speaker 1: I mean, as long as debt is in a UM,

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Speaker 1: it's an a currency that you can print that makes

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Speaker 1: it more sustainable. Because of Chinese incredible growth, it hasn't

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Speaker 1: needed to use foreign money to finance itself. Joe, I

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Speaker 1: knew you'd find a way to work modern monetary theory

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Speaker 1: into this conversation. I knew it, you know, just trying,

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Speaker 1: just trying to see if, like you know that we're

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Speaker 1: all speaking the same we're all speaking the same language. Yeah,

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Speaker 1: And actually I'm I'm not as familiar with the with

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Speaker 1: the precepts of m m T as as Joe as

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Speaker 1: Joe is. But from what I from what little I

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Speaker 1: do understand understand about it, I think China has actually

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Speaker 1: been pursuing a kind of quasi m MT type polar

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Speaker 1: see for the last twenty years without cooling an MMT.

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Speaker 1: So there's there's kind of you know, I'm thinking back

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Speaker 1: to like the over the last decade, and I feel

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Speaker 1: like the China debt bubble story is actually sort of

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Speaker 1: two prongeduniority alluded to both of them. One was on

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Speaker 1: the pure financing side, but the other one was just

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Speaker 1: about this sort of misallocation of capital. And it doesn't

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Speaker 1: matter really what currency investments are made in. If they're

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Speaker 1: bad investments, they're bad investments. And I remember, like all

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Speaker 1: those videos that used to be on YouTube that I forget.

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Speaker 1: The hedge fund manager used to go to those cities

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Speaker 1: out in the middle of nowhere and nobody was in

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Speaker 1: the in the cities. Did those ever get filled up?

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Speaker 1: Like what happened to those ghost cities we were talking about,

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Speaker 1: like eleven? Did people eventually move into those apartments? Oh,

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Speaker 1: Hugh Hendry, that was the That was the fund manager

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Speaker 1: that went made all those YouTube videos showing all these

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Speaker 1: like empty series. I remember the name. I remember the name.

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Speaker 1: It's a shame there were no drones in those days.

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Speaker 1: He could have saved a lot of himself a lot

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Speaker 1: of time. So that's a really interesting story, and and

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Speaker 1: it speaks to another one of the themes in my book,

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Speaker 1: which is had China's policymakers have policy instruments available to

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Speaker 1: them which enabled them to move the dial on the

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Speaker 1: macro economy in ways which other other countries just wouldn't

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Speaker 1: be able to do. So let me tell you a

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Speaker 1: story about a trip I made to Guayyang, the capital

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Speaker 1: of Guajo Province, back in two thousand and seventeen. And

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Speaker 1: Guayang had a serious ghost time problem. They've built a

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Speaker 1: bunch of shiny new tower blocks, but no one wanted

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Speaker 1: to live in them. Um, so what did the local

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Speaker 1: government do. They got out the bulldozers and they went

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Speaker 1: and knocked over everyone's house. And then they said, okay, sorry,

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Speaker 1: we're not saying of your house. And by the way,

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Speaker 1: we're going to have the l and your house was

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Speaker 1: on but don't worry. Here's some money. Go and move

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Speaker 1: into the shining new apartment block. That's one way to

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Speaker 1: do it. The real estate developers who built the shining

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Speaker 1: new apartment blocks were happy because someone had come and

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Speaker 1: brought them. The local government now had some land. The

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Speaker 1: real estate developers, who and I flushed with cash, brought

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Speaker 1: the land off the local government. So the financial circle

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Speaker 1: was complete and the real estate, the empty real estate

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Speaker 1: have been used up. And that wasn't just a gay

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Speaker 1: Yang story. That was a national story that happened to

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Speaker 1: millions of people every year for the last decade in China,

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Speaker 1: there was a national program that the government sort of

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Speaker 1: euphemistically called its slum clearance. Millions of people every year

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Speaker 1: for the best part of a decade getting their old

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Speaker 1: home knocked ober and getting some money to move into

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Speaker 1: a new home. And when you can do that kind

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Speaker 1: of thing, which China can and I don't think any

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Speaker 1: other country in the world can, then problems like massive

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Speaker 1: real estate o stay suddenly become a little bit easier

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Speaker 1: to deal with. Can we talk about the downsides of

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Speaker 1: having this sort of closed circular command economy system, because

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Speaker 1: you know, you're we're talking about the misallocation of capital.

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Speaker 1: And one thing that you do tend to see in

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Speaker 1: the Chinese market a lot is there is a lot

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Speaker 1: of excess cash and it sort of just rolls into

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Speaker 1: one thing after another. So you know, it'll go into property,

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Speaker 1: and then it will go into stocks, and then it

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Speaker 1: will go into something else, and people do lose money

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Speaker 1: on those investments, and every once in a while you

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Speaker 1: do hear stories of outrage at someone who's from someone

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Speaker 1: who's lost their entire savings on you know, appear to

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Speaker 1: peer loan scheme or something like that. What are the

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Speaker 1: downsides of having that kind of circularity in a closed system?

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Speaker 1: So I think the first thing to say is that

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Speaker 1: there are some very serious social damage sites. Right just

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Speaker 1: think about that slum clearance example. Did those millions of

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Speaker 1: people want to have their homes builders so that the

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Speaker 1: government could solved the problem of real estate over capacity.

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Speaker 1: I think there's a reason democratic countries wouldn't be able

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Speaker 1: to do that, basically because people don't like it. So

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Speaker 1: there's some very serious social downsides to it. There's also

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Speaker 1: economic downsides as well. If you have very large scale

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Speaker 1: misallocation of capital, then you have very low return on assets,

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Speaker 1: very low productivity growth. And ultimately, when China has used

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Speaker 1: up all the space, it has to catch up with

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Speaker 1: the US, to catch up with Germany, to catch up

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Speaker 1: with Japan in terms of its use of modern technology,

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Speaker 1: it's use of modern management techniques. Then that's going to

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Speaker 1: come back to bite really hard, and China's great is

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Speaker 1: going to be very weak, and we are going to

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Speaker 1: see a day of reckoning in the economy and in

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Speaker 1: the financial system. That day just as much further away

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Speaker 1: than most people realize. I'm member. There's that one street

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Speaker 1: in Beijing where a lot of the really big state

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Speaker 1: owned enterprises have their sort of headquarters offices, and a

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Speaker 1: friend of mine used to refer to it as the

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Speaker 1: street where capital goes to die. We need, we need

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Speaker 1: photos of that the street work to die. But Tom,

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Speaker 1: I want to press you on that last point, because

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Speaker 1: you referred to a day of reckoning. Will it be

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Speaker 1: a day? I mean? And I mean that kind of

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Speaker 1: literally in the sense that when we think about, say,

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Speaker 1: the US housing bubble haven't collapsed. Okay, it took place

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Speaker 1: over a period of time, but you know there's like

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Speaker 1: a few days that really stand out. The Lehman Brothers

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Speaker 1: collapsed and so forth. In the China context, Is there

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Speaker 1: gonna be a day when it collapses? Or will it

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Speaker 1: just be that at some point you expect we'll look

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Speaker 1: back and say, years and years of misallocation and other

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Speaker 1: bad decisions lead to a degradation of growth and productivity

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Speaker 1: that clearly set it back. Is it gonna be a

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Speaker 1: crash or just sort of like a bad period? Yeah,

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Speaker 1: I think it's a It's kind of the is it

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Speaker 1: Lehman or is it Tokyo? Right, being the kind of

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Speaker 1: the moment where everything went wrong, and and Tokyo being

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Speaker 1: the kind of the example of an economy which just

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Speaker 1: kind of lost its moxi moxire, is it mojo? But

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Speaker 1: maybe both over an extended period of time. And I

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Speaker 1: think the point I come back to is that what

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Speaker 1: China's government needs in order to successfully backstop the system

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Speaker 1: is continued growth in its resources. Right, if the government

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Speaker 1: has continued growth in profits from state firms, continued growth

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Speaker 1: in profits from state banks, continued brace in tax revenue,

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Speaker 1: continued land sales revenue, then it's got money that it

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Speaker 1: can carry on shuffling around the system to make everybody

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Speaker 1: whole right, to paper over over over the cracks, and

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Speaker 1: to have those things. What it needs is growth. For me,

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Speaker 1: the point when the bubble pops, whether it is the

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Speaker 1: kind of the beginning of a long stagnation or a

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Speaker 1: kind of a crisis, point is the moment when the

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Speaker 1: growth stops. So the question is when's that going to be?

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Speaker 1: And one powerful way of thinking about that is, well,

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Speaker 1: where is China relative to the technology frontier? Where is

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Speaker 1: China relative to the level of productivity that we see

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Speaker 1: in the United States and Japan and elsewhere. And the

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Speaker 1: answer is actually still a really long way. G d

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Speaker 1: P per capital in China is a third of the

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Speaker 1: level that it is in the United States. Japan fell over,

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Speaker 1: Japan's GDP per capital was already at US levels. Based

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Speaker 1: on that way of thinking about things, China still has

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Speaker 1: quite a long way to run, So I'd be curious

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Speaker 1: to get your take on what you think China see

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Speaker 1: as its role in the global financial system, Like what

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Speaker 1: is China actually trying to achieve with some of its

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Speaker 1: capital markets opening up. You mentioned this idea that it

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Speaker 1: wanted to keep a lot of the Western speculators out

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Speaker 1: earlier um And is there a moment at which China's

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Speaker 1: global financial ambitions may be become constricted by that closed

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Speaker 1: economy that we've been describing. There's a real cost to autarchy, Tracy,

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Speaker 1: some of those points that you were mentioning so much

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Speaker 1: money slashing around in the system, chasing returns on P

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Speaker 1: to P schemes today and equity tomorrow and real estate

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Speaker 1: on Thursday, and so China's policymakers recognized that there are

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Speaker 1: some benefits in terms of efficiency to having a more

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Speaker 1: open system, to allowing money to go on to come

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Speaker 1: in and out of the country. At the same time,

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Speaker 1: there's still a real fear about what might happen if

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Speaker 1: they open up too quickly. I spent to one senior

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Speaker 1: executive in a Chinese who said, opening up all of

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Speaker 1: the weaknesses we have in our banking system would be

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Speaker 1: like it would be like seeking death. So they want

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Speaker 1: the efficiency gains, but they want to do it gradually

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Speaker 1: so they can try and minimize the costs. M I

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Speaker 1: want to ask you a question that sort of um

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Speaker 1: not necessarily the focus of your book, which had obviously

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Speaker 1: been in the works for a while, but it's sort

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Speaker 1: of of acute important importance. You mentioned post the last crisis,

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Speaker 1: the four trillion dollar stimulus got a lot of attention.

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Speaker 1: There was this big sort of commodities boom associated with it,

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Speaker 1: sort of between two thousand nine two thousand and eleven.

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Speaker 1: It was a huge amount of enthusiasm towards emerging markets,

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Speaker 1: which they faded over the subsequent decade, but at least

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Speaker 1: initially coming out of the crisis, all kinds of sort

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Speaker 1: of after effects from that sort of massive move on

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Speaker 1: the demand side. We haven't seen that this time around.

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Speaker 1: It feels like the measures have been more limited in

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Speaker 1: that we just started this conversation talking about sort of

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Speaker 1: dual speed nature of the recovery. Could you see China

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Speaker 1: doing something like that again, particularly if global demand for

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Speaker 1: their goods remains soft, just to do the sort of

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Speaker 1: slow reopening of the West and elsewhere. I think there's

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Speaker 1: there's two big differences between two thousand and eight when

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Speaker 1: they did that massive shock and or stimulus and today.

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Speaker 1: So the first is they just don't have as much

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Speaker 1: policy space as they did. There is a cost to

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Speaker 1: running a massive credit stimulus for a long period of time,

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Speaker 1: and the cost is you can't do it again. And

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Speaker 1: then the second thing is actually that stimulus didn't work

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Speaker 1: out so great for that. It was a stimulus which

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Speaker 1: was very popular with the rest of the world, but

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Speaker 1: that's because it created massive positive spillovers for the rest

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Speaker 1: of the world. The benefits, yeah, there were benefits for China,

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Speaker 1: but because a lot of the money went to importing

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Speaker 1: iron ore, for example, a lot of the benefits spilled

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Speaker 1: over to Australia and Brazil in the form of more

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Speaker 1: volumes and higher prices for their commodity sales. So China

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Speaker 1: this time they're running a pretty big stimulus. We think

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Speaker 1: the fiscal deficits going to go up to eleven of

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Speaker 1: GDP this year. That's not nothing, but it's certainly smaller

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Speaker 1: than it was in two thousand and eight, and it's

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Speaker 1: kind of it's meaner, right, it's more smartly focused to

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Speaker 1: the benefits are much more going to stay inside China.

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Speaker 1: We're not going to see those those big positive spillovers

432
00:25:44,640 --> 00:25:48,240
Speaker 1: to the rest of the world. I think we'd be

433
00:25:48,400 --> 00:25:51,000
Speaker 1: remiss if we didn't ask you a little bit about

434
00:25:51,080 --> 00:25:53,760
Speaker 1: the ongoing trade attentions with the US and what those

435
00:25:53,800 --> 00:25:57,639
Speaker 1: mean for the Chinese economy. But how much damage do

436
00:25:57,720 --> 00:26:01,160
Speaker 1: they actually inflict on China, Because there's an argument, at

437
00:26:01,200 --> 00:26:06,239
Speaker 1: least domestically in China that in some ways, by you know,

438
00:26:06,440 --> 00:26:09,000
Speaker 1: closing off the country from the rest of the global market,

439
00:26:09,040 --> 00:26:12,480
Speaker 1: you're sort of encouraging it to double down on its

440
00:26:12,520 --> 00:26:15,679
Speaker 1: domestic focus and maybe even speed up the development of

441
00:26:15,720 --> 00:26:19,400
Speaker 1: its own domestic market even faster. I think there's there's

442
00:26:19,440 --> 00:26:22,320
Speaker 1: a couple of things. So trade war is definitely a

443
00:26:22,320 --> 00:26:24,359
Speaker 1: trade war is definitely not good for China, and a

444
00:26:24,359 --> 00:26:27,840
Speaker 1: trade war at the same time as they are managing

445
00:26:27,840 --> 00:26:31,480
Speaker 1: this painful deliveraging process trying to manage down some of

446
00:26:31,520 --> 00:26:34,600
Speaker 1: that debt they took on after the Great Financial Crisis,

447
00:26:35,080 --> 00:26:37,159
Speaker 1: and at the same time as they have the COVID

448
00:26:37,240 --> 00:26:41,320
Speaker 1: nineteen crisis is definitely painful. So they certainly don't want

449
00:26:41,359 --> 00:26:43,640
Speaker 1: tariffs to go back up. I'm sure they'd like them

450
00:26:43,640 --> 00:26:46,320
Speaker 1: to come down. But then the second question is is

451
00:26:46,359 --> 00:26:50,760
Speaker 1: a trade war going to fundamentally derail China's development process?

452
00:26:51,000 --> 00:26:53,359
Speaker 1: And I think the answer to that is no, and

453
00:26:53,440 --> 00:26:56,960
Speaker 1: it's for the reasons that you suggested, Tracy. So firstly,

454
00:26:57,400 --> 00:27:01,439
Speaker 1: China's domestic innovation engine. I mean, China does not have

455
00:27:01,680 --> 00:27:05,760
Speaker 1: a Stanford or a Harvard, but China's domestic innovation engine

456
00:27:05,800 --> 00:27:09,320
Speaker 1: is pretty powerful. No one spend No one apart from America,

457
00:27:09,440 --> 00:27:12,159
Speaker 1: spends more on R and D than China. If you

458
00:27:12,200 --> 00:27:16,080
Speaker 1: look at the innovation rankings, China is punching way above

459
00:27:16,119 --> 00:27:20,040
Speaker 1: its weight relative to its level of development. It's important

460
00:27:20,080 --> 00:27:23,320
Speaker 1: to remember that it's actually really hard for other countries,

461
00:27:23,359 --> 00:27:27,040
Speaker 1: other countries to decouple from China. Right The US has

462
00:27:27,119 --> 00:27:30,280
Speaker 1: really moved aggressively in that direction, but they can't move

463
00:27:30,280 --> 00:27:33,520
Speaker 1: completely in that direction because the apples and the call

464
00:27:33,640 --> 00:27:37,840
Speaker 1: coms of the world are deeply invested in the China relationship.

465
00:27:38,359 --> 00:27:40,520
Speaker 1: And that is also true of the big multinationals in

466
00:27:40,560 --> 00:27:43,800
Speaker 1: Europe and the big multinationals in Japan. So trade war

467
00:27:43,880 --> 00:27:46,159
Speaker 1: is definitely bad. Trump in a sense is kind of

468
00:27:46,200 --> 00:27:49,680
Speaker 1: like the anti Nixon. Nixon opens China up. Trump it

469
00:27:49,760 --> 00:27:52,439
Speaker 1: seems to be doing his best to close it down. Um,

470
00:27:52,760 --> 00:27:55,760
Speaker 1: I don't think he's going to succeed ultimately. I don't

471
00:27:55,800 --> 00:27:58,040
Speaker 1: think this is going to be anything more than a

472
00:27:58,080 --> 00:28:03,040
Speaker 1: little bump on China's development traject. What about um? And

473
00:28:03,160 --> 00:28:05,320
Speaker 1: no one seems to talk about this as much anymore,

474
00:28:05,480 --> 00:28:07,639
Speaker 1: or only when you hear about it seems to be

475
00:28:07,720 --> 00:28:13,439
Speaker 1: about failures or disappointment. But the endeavors of the Belton

476
00:28:13,600 --> 00:28:17,439
Speaker 1: Road initiative or just creating all of these, you know,

477
00:28:17,520 --> 00:28:23,000
Speaker 1: financing investments in other countries which might theoretically one day

478
00:28:23,040 --> 00:28:28,560
Speaker 1: be sources of demand for China and further opportunities for growth.

479
00:28:29,040 --> 00:28:32,800
Speaker 1: What's is that stalled out? Is that not going as planned?

480
00:28:32,920 --> 00:28:35,720
Speaker 1: What's happening with that? So She Jimping came into power,

481
00:28:36,000 --> 00:28:38,800
Speaker 1: and he basically had a different conception of China's role

482
00:28:38,840 --> 00:28:42,400
Speaker 1: in the world. Right, the dumb shaping famously said, we

483
00:28:42,440 --> 00:28:45,680
Speaker 1: should bide our time and hide our strength. Right, we

484
00:28:45,680 --> 00:28:50,080
Speaker 1: should just stay quiet, benefit from favorable global conditions and develop.

485
00:28:50,360 --> 00:28:52,360
Speaker 1: And She Jimping came in and said, you know what,

486
00:28:52,400 --> 00:28:55,040
Speaker 1: we've arrived. We want all the medals of the Olympics.

487
00:28:55,080 --> 00:28:57,840
Speaker 1: We've got the biggest part exchange reserves with the biggest

488
00:28:57,840 --> 00:29:00,600
Speaker 1: exposture in the world. We're here, and we're we're not going,

489
00:29:00,680 --> 00:29:02,320
Speaker 1: We're not gonna, We're not going to hide it anymore.

490
00:29:02,920 --> 00:29:05,360
Speaker 1: So you had a bunch of initiatives from Shi Jimping.

491
00:29:05,720 --> 00:29:07,800
Speaker 1: We had the Belt and Raid scheme, which was basically

492
00:29:07,840 --> 00:29:11,760
Speaker 1: announcing their arrival as a kind of a geopolitical power.

493
00:29:12,320 --> 00:29:16,480
Speaker 1: You had China where they announced their ambition to kind

494
00:29:16,520 --> 00:29:20,280
Speaker 1: of own the future of technology. Both of those things

495
00:29:20,280 --> 00:29:24,720
Speaker 1: were frankly pr disasters for China. Right the entire rest

496
00:29:24,720 --> 00:29:27,680
Speaker 1: of the world said, what you're going to be taking

497
00:29:27,720 --> 00:29:33,160
Speaker 1: over Africa and owning AI and robots. That's not acceptable.

498
00:29:33,440 --> 00:29:37,000
Speaker 1: So it's not a coincidence that the announcement of the

499
00:29:37,000 --> 00:29:41,000
Speaker 1: Belt and Raid scheme and the announcement of China came

500
00:29:41,040 --> 00:29:44,840
Speaker 1: immediately before the shift in the global perception of China

501
00:29:45,160 --> 00:29:49,640
Speaker 1: towards are basically a more sort of cautious, hostile view

502
00:29:49,720 --> 00:29:52,160
Speaker 1: of what China's rise men. And it's also not a

503
00:29:52,200 --> 00:29:55,960
Speaker 1: coincidence that China has stopped talking about both of these things. Right,

504
00:29:56,240 --> 00:30:00,400
Speaker 1: China doesn't really talk about China anymore. They do really

505
00:30:00,440 --> 00:30:03,480
Speaker 1: talk so much about the Belton Road anymore. And that's

506
00:30:03,520 --> 00:30:05,920
Speaker 1: not that's not because they're not doing them still. It's

507
00:30:05,960 --> 00:30:09,680
Speaker 1: because they've realized that it doesn't actually strategically make sense

508
00:30:10,040 --> 00:30:12,880
Speaker 1: to make these bold claims. I have like a semi

509
00:30:12,960 --> 00:30:18,160
Speaker 1: interesting analogy about table tennis and the Chinese economy. Oh yeah, yeah, yeah,

510
00:30:18,240 --> 00:30:20,360
Speaker 1: tell us that you You hit a great thread on

511
00:30:20,400 --> 00:30:23,000
Speaker 1: Twitter about this, and I want our listeners to hear it.

512
00:30:23,080 --> 00:30:26,080
Speaker 1: So before we go, tell us how table tennis explained

513
00:30:26,200 --> 00:30:30,000
Speaker 1: the resilience of the Chinese economy. Um so so. I

514
00:30:30,040 --> 00:30:33,440
Speaker 1: spent a lot of time in China playing table tennis.

515
00:30:33,640 --> 00:30:36,600
Speaker 1: I actually moved to China partly because I wanted to

516
00:30:36,680 --> 00:30:39,400
Speaker 1: be a China economist, but mainly because I wanted to

517
00:30:39,440 --> 00:30:42,080
Speaker 1: be a better table tennis player. Wait for real, I

518
00:30:42,160 --> 00:30:44,560
Speaker 1: was young and foolish. I played in I played in

519
00:30:44,560 --> 00:30:47,719
Speaker 1: sweaty basement clubs. I played in the headquarters of some

520
00:30:47,800 --> 00:30:51,720
Speaker 1: of China's biggest stay owned banks. I played with the

521
00:30:51,720 --> 00:30:54,280
Speaker 1: Shanghai University Ping pong team, who are really good at

522
00:30:54,320 --> 00:31:00,520
Speaker 1: table tennis. There are YouTube videos. YouTube videos come from

523
00:31:00,760 --> 00:31:05,640
Speaker 1: table tennis match in Shanghai. Yeah, I just look these up. Oh, Tom,

524
00:31:05,680 --> 00:31:07,920
Speaker 1: that was a mistake telling us Laura, can we get

525
00:31:07,960 --> 00:31:10,360
Speaker 1: some sound in here, just some like pinkness. I love

526
00:31:10,440 --> 00:31:20,360
Speaker 1: that sound of the So China's table tennis has some

527
00:31:20,480 --> 00:31:24,959
Speaker 1: really serious problems. The men's team went on strike a

528
00:31:24,960 --> 00:31:28,120
Speaker 1: few years ago because they weren't happy because there was

529
00:31:28,200 --> 00:31:31,560
Speaker 1: some backroom political deal which got rid of the coach

530
00:31:31,600 --> 00:31:34,920
Speaker 1: they really liked. If you speak to professional players in China,

531
00:31:35,280 --> 00:31:39,280
Speaker 1: they all have stories about bribes and corruption and payments

532
00:31:39,280 --> 00:31:41,520
Speaker 1: they did their parents needed to make to get them

533
00:31:41,520 --> 00:31:45,520
Speaker 1: into the best training programs. The best players in China,

534
00:31:46,280 --> 00:31:49,160
Speaker 1: they had to start training when they were eight or nine,

535
00:31:49,760 --> 00:31:52,440
Speaker 1: drop out of school to have any chance of making it.

536
00:31:52,800 --> 00:31:57,360
Speaker 1: So you've got you've got corruption, you've got nepotism, you've

537
00:31:57,400 --> 00:32:01,400
Speaker 1: got a kind of mechanical, almost in human approach to training.

538
00:32:01,640 --> 00:32:05,240
Speaker 1: And yet China's table tennis team are indisputably the best

539
00:32:05,280 --> 00:32:08,160
Speaker 1: in the world. Go and check the International Table Tennis

540
00:32:08,160 --> 00:32:10,440
Speaker 1: Federation rankings. Look at the top ten for men, the

541
00:32:10,480 --> 00:32:13,000
Speaker 1: top ten for women. There's a lot of Chinese people

542
00:32:13,400 --> 00:32:16,600
Speaker 1: on that list. So why is that? Well, there's a

543
00:32:16,640 --> 00:32:19,960
Speaker 1: few reasons. The first is there's one point three billion

544
00:32:20,000 --> 00:32:23,600
Speaker 1: people in China and they all try table tennis, so

545
00:32:23,680 --> 00:32:27,720
Speaker 1: there's a massive talent pool to pick from and huge

546
00:32:27,720 --> 00:32:31,400
Speaker 1: economies of scale. The second reason is they have a

547
00:32:31,480 --> 00:32:34,600
Speaker 1: really well planned approach to ensuring that they're going to

548
00:32:34,600 --> 00:32:37,600
Speaker 1: be the best. If a foreign player develops a good

549
00:32:37,640 --> 00:32:39,760
Speaker 1: serve or a good shot and wins a few games

550
00:32:39,760 --> 00:32:43,200
Speaker 1: against the Chinese team, they'll get a video camera, they'll

551
00:32:43,200 --> 00:32:46,720
Speaker 1: record the foreign player, they'll take the video home, they'll

552
00:32:46,760 --> 00:32:49,520
Speaker 1: break it down, they'll analyze it, they'll make sure they've

553
00:32:49,560 --> 00:32:53,040
Speaker 1: mastered that technique. So the technique might work once against

554
00:32:53,080 --> 00:32:55,479
Speaker 1: the Chinese team, but it's not going to work twice

555
00:32:56,160 --> 00:32:59,640
Speaker 1: and written large those benefits of the Chinese table tennis

556
00:32:59,680 --> 00:33:04,800
Speaker 1: system has also the benefits the Chinese economy has. China

557
00:33:05,040 --> 00:33:08,800
Speaker 1: is the most populous country in the world, which means

558
00:33:08,800 --> 00:33:13,960
Speaker 1: they have absolutely enormous economies of scale. China's trade with

559
00:33:14,000 --> 00:33:16,200
Speaker 1: the rest of the world means that they can learn

560
00:33:16,280 --> 00:33:20,400
Speaker 1: foreign technologies and foreign techniques. And when you put together

561
00:33:20,640 --> 00:33:24,800
Speaker 1: the foreign technologies and the foreign techniques with China's massive scale,

562
00:33:25,240 --> 00:33:28,160
Speaker 1: what you end up with in table tennis and in

563
00:33:28,200 --> 00:33:32,400
Speaker 1: the economy is the potential for for a world beating system.

564
00:33:32,440 --> 00:33:34,840
Speaker 1: I love it. I'm so glad, we I'm so glad

565
00:33:35,000 --> 00:33:37,560
Speaker 1: we got this in but it's perfect and uh, you know,

566
00:33:37,680 --> 00:33:40,440
Speaker 1: just the idea you can you can mismanage a lot,

567
00:33:40,520 --> 00:33:43,240
Speaker 1: but when you have that much raw resources, you can

568
00:33:43,280 --> 00:33:47,280
Speaker 1: still be the best. That's exactly right by my book,

569
00:33:47,440 --> 00:33:50,400
Speaker 1: China the Bubble that Never Problems, by the book People. Well,

570
00:33:50,400 --> 00:33:52,400
Speaker 1: thank you so much, Tom. Now I want to do

571
00:33:52,480 --> 00:33:55,360
Speaker 1: one on Russian chest during the Soviet year. I wonder

572
00:33:55,400 --> 00:33:58,920
Speaker 1: how many analogies there are between Chinese creampo and the

573
00:33:59,000 --> 00:34:02,080
Speaker 1: dominant of rush a chess. But can we can talk

574
00:34:02,080 --> 00:34:05,400
Speaker 1: about that another time? Thanks again, Tom, congratulations, Thanks so

575
00:34:05,480 --> 00:34:21,320
Speaker 1: much so, Joe. I really enjoyed that conversation, not least

576
00:34:21,360 --> 00:34:24,239
Speaker 1: because it has led me down the internet wormhole of

577
00:34:24,520 --> 00:34:29,279
Speaker 1: watching Tom Orleck table tennis videos from years ago. That's fun,

578
00:34:30,080 --> 00:34:32,800
Speaker 1: but also because it is interesting to think of China

579
00:34:32,880 --> 00:34:35,080
Speaker 1: as sort of one of the first examples of a

580
00:34:35,120 --> 00:34:39,799
Speaker 1: real quasi MMT economy with all the benefits and also

581
00:34:39,880 --> 00:34:43,040
Speaker 1: the downsides that that might entail. Yeah, I was thinking,

582
00:34:43,040 --> 00:34:45,279
Speaker 1: you know, back to our you know, and I think

583
00:34:45,280 --> 00:34:48,279
Speaker 1: about this episode a lot, remember a fottel Kaboo, But

584
00:34:48,320 --> 00:34:49,840
Speaker 1: I think that was last year, or maybe it was

585
00:34:49,880 --> 00:34:53,080
Speaker 1: two years ago, and talking about sort of MMT in

586
00:34:53,160 --> 00:34:57,000
Speaker 1: the developed developing market context, and of course most countries

587
00:34:57,040 --> 00:35:01,520
Speaker 1: don't really have the sort of industrial or technical or

588
00:35:01,560 --> 00:35:04,960
Speaker 1: growth capacity the way China has had. But that is

589
00:35:05,040 --> 00:35:07,719
Speaker 1: sort of just like this very different model of not

590
00:35:07,960 --> 00:35:13,160
Speaker 1: relying on external financing to grow and their costs and benefits.

591
00:35:13,160 --> 00:35:16,000
Speaker 1: But one benefit is you don't have those sort of

592
00:35:16,360 --> 00:35:19,200
Speaker 1: financial crises the same way where suddenly you have a

593
00:35:19,280 --> 00:35:23,879
Speaker 1: huge obligation and a foreign currency. Yeah, and I mean

594
00:35:23,960 --> 00:35:26,640
Speaker 1: you have to say that there are some advantages to

595
00:35:26,680 --> 00:35:30,239
Speaker 1: having a command economy in times of crisis, and specifically,

596
00:35:30,800 --> 00:35:35,720
Speaker 1: I guess in times of national pandemics as we've seen.

597
00:35:35,880 --> 00:35:39,399
Speaker 1: You know, the US might struggle or at least take

598
00:35:39,440 --> 00:35:44,240
Speaker 1: some time to institute job safety measures, whereas in China,

599
00:35:44,360 --> 00:35:47,680
Speaker 1: like I think, they're much much more used to telling

600
00:35:47,680 --> 00:35:50,279
Speaker 1: people in companies what to do, and so you see

601
00:35:50,320 --> 00:35:56,160
Speaker 1: that sort of economic machinery start much faster. Yeah. I

602
00:35:56,200 --> 00:35:58,359
Speaker 1: think that's right. And I think the key thing that

603
00:35:58,400 --> 00:36:01,120
Speaker 1: I took away from that is not that there aren't

604
00:36:01,360 --> 00:36:05,640
Speaker 1: massive risks to the Chinese growth model, and there clearly

605
00:36:05,760 --> 00:36:08,320
Speaker 1: are and they are all kinds of problems. And building

606
00:36:08,360 --> 00:36:10,839
Speaker 1: cities if no one wants to live in them is

607
00:36:10,880 --> 00:36:13,719
Speaker 1: going to be an issue. Or building steel plants that

608
00:36:14,239 --> 00:36:16,520
Speaker 1: for steel that goes unused is going to be an issue.

609
00:36:16,719 --> 00:36:19,200
Speaker 1: I think what what the key thing is just sort

610
00:36:19,239 --> 00:36:23,279
Speaker 1: of being clear about identifying what the risks are. And

611
00:36:23,320 --> 00:36:26,160
Speaker 1: if you're looking for the sort of Lehman moment or

612
00:36:26,239 --> 00:36:29,279
Speaker 1: something like that, it's probably not going to be that,

613
00:36:29,480 --> 00:36:33,800
Speaker 1: but more along the lines of like an ongoing degradation

614
00:36:33,920 --> 00:36:36,920
Speaker 1: and productivity. If they, if they, if you build an

615
00:36:36,960 --> 00:36:40,279
Speaker 1: economy of stuff that nobody wants. So I think what

616
00:36:40,440 --> 00:36:43,960
Speaker 1: maybe perhaps analysts got wrong is not about the sustainability

617
00:36:44,000 --> 00:36:48,160
Speaker 1: or unsustainability per se, but about what the aftermath looks

618
00:36:48,200 --> 00:36:50,279
Speaker 1: like if things go bad. And I think that's where

619
00:36:50,520 --> 00:36:55,160
Speaker 1: Tom's perspective is really helpful. Yeah, cities full of streets

620
00:36:55,200 --> 00:36:58,640
Speaker 1: where capital goes to time. And now I'm gonna spend

621
00:36:58,640 --> 00:37:01,879
Speaker 1: the rest of the day watching compund vicas. This has

622
00:37:01,880 --> 00:37:05,480
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway.

623
00:37:05,560 --> 00:37:08,600
Speaker 1: You can follow me on Twitter at Tracy Alloway and

624
00:37:08,640 --> 00:37:11,480
Speaker 1: I'm Joe Wisn't though you could follow me at the Stalwart.

625
00:37:11,920 --> 00:37:15,479
Speaker 1: Be sure to follow our guest on Twitter tom Orlick.

626
00:37:15,640 --> 00:37:18,720
Speaker 1: He's at tom Orlick, and check out his new book, China,

627
00:37:19,120 --> 00:37:21,800
Speaker 1: The Bubble That Never Popps, and be sure to follow

628
00:37:21,840 --> 00:37:26,000
Speaker 1: our producer Laura Carlson. She's at Laura M. Carlston. Followed

629
00:37:26,040 --> 00:37:29,440
Speaker 1: the Bloomberg Head of podcast, Francesco Levi at Francesca Today,

630
00:37:29,880 --> 00:37:32,879
Speaker 1: and check out all of our podcasts at Bloomberg under

631
00:37:32,920 --> 00:38:00,320
Speaker 1: the Twitter handle at podcast. Thanks for listening one