Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Weisenthal and I'm Tracy Halliway, Tracy, there's been
Speaker 1: some interesting data out of China lately regarding the recovery
Speaker 1: from the coronavirus crisis. You're gonna have to narrow that down,
Speaker 1: but are you. Are you talking about some of the
Speaker 1: data that sort of supports the notion that they're seeing
Speaker 1: something of a recovery, although it's mostly driven on the
Speaker 1: supply side rather than the demand side. Is that what
Speaker 1: you're talking about? Yeah, sorry, I was very super cryptic,
Speaker 1: but yes, this idea that we have seen this sort
Speaker 1: of what some people might characterize as kind of a
Speaker 1: V shaped recovery on the industrial side, sort of an
Speaker 1: impressively fast and resilient restart of the factories and so forth,
Speaker 1: by not so much on the demand side yet, at
Speaker 1: least from the data. And maybe you have a better
Speaker 1: sense of this from the Hong Kong perspective, but it
Speaker 1: still seems like consumption shopping and going out to eat
Speaker 1: still still kind of tame. Yeah, I think that's exactly right.
Speaker 1: Although I have to say in Hong Kong we are
Speaker 1: starting to see a little bit of a pickup, mostly
Speaker 1: because everyone is stuck in the city. They can't actually leave.
Speaker 1: Um when they have to come back, they have to
Speaker 1: go into two weeks quarantine. So everyone is taking staycations
Speaker 1: and going out quite a bit lately. But with that
Speaker 1: exception made, yes, we are seeing a stronger supply driven
Speaker 1: recovery than we are on the demand side. And one
Speaker 1: thing that I find interesting about that is that it
Speaker 1: sort of speaks to the very nature of China's economic model.
Speaker 1: I guess one of the benefits of having a command
Speaker 1: economy is that when times are bad, you can kind
Speaker 1: of command everyone to go back to work, and you
Speaker 1: can tell companies to maintain jobs and start making products again.
Speaker 1: But of course, you know, the downside of a command
Speaker 1: economy is that you might not necessarily get as strong
Speaker 1: a consumer as you want. Right So, the the industrial side,
Speaker 1: the corporate side, is very much an extension of policy,
Speaker 1: much more so than consumption. And so this this this
Speaker 1: sort of dual speed recovery that we're seeing in China.
Speaker 1: It may be a cue right now, but it speaks
Speaker 1: to something much broader. And I'm thinking also, we had
Speaker 1: a recent discussion with Matt Klein just this sort of
Speaker 1: general idea that the Chinese economy has never really been
Speaker 1: as sort of consumption focused, household focused as it is
Speaker 1: uh investment and production focused. Yeah, that's exactly right. And
Speaker 1: of course the other big theme that's cropping up at
Speaker 1: the moment is what China is doing to support its
Speaker 1: financial system. So we know that the authorities are trying
Speaker 1: to walk this fine line between cropping up the banks
Speaker 1: but also you know, avoiding moral hazard and trying not
Speaker 1: to accumulate even more debt. So that's something else that's
Speaker 1: going on at the moment. So all these things are
Speaker 1: like kind of like microcosms or cute versions of stories
Speaker 1: that I mean, you and I haven't covered, um talked
Speaker 1: about the world economy for years now, literally since I
Speaker 1: think the first day that I, you know, been covering
Speaker 1: the news. You just hear forever about the China bubble,
Speaker 1: and it's the most obvious bubble, and there was all
Speaker 1: this debt supposedly and all this bad debt, and it's
Speaker 1: sort of taken for granted that it must come to
Speaker 1: an end, that there must be a reckoning. And we
Speaker 1: know people shorting China forever and talking about how how
Speaker 1: dysfunctional the system is. But you know, it's been years
Speaker 1: and years since we've been talking about this and the
Speaker 1: great sort of Chinese I don't know, reset bubble popping.
Speaker 1: It never quite seems to happen. Yeah, China is forever
Speaker 1: a debt crisis sort of on the brink, and yep,
Speaker 1: it never seems to happen. There's always these fall starts,
Speaker 1: like you'll see something it's like, oh, some apartment developer
Speaker 1: couldn't sell their units, and everyone like, this is it.
Speaker 1: This is the moment we've all been waiting for. The
Speaker 1: Chinese real estate bubble is popping. And then six months
Speaker 1: later it's like apartment prices hit new all time highs
Speaker 1: and that goes away. Yeah. I mean, I would say
Speaker 1: in recent years you've had some bigger ones. So you
Speaker 1: had Bao Schang Bank, which actually um failed, which was
Speaker 1: very unusual. And now it's really interesting is you're starting
Speaker 1: to get some losses on wealth management products that a
Speaker 1: lot of banks sold to retail investors. That's another thing
Speaker 1: that lots of people thought was going to tip over
Speaker 1: the financial system into some sort of crisis because people
Speaker 1: weren't going to buy the products anymore and they would
Speaker 1: pull funding for the banks essentially, So yeah, you have
Speaker 1: a lot of things that could go wrong, but the
Speaker 1: consequences never seem as dire as people originally predicted, exactly right.
Speaker 1: So anyway, I think that you know, raises an interesting
Speaker 1: question of well, why is this, Why does this, Why
Speaker 1: does the doomsday bubble crash collapse scenario that so many
Speaker 1: people just assume is inevitable? Why has it not happened?
Speaker 1: Is it going to happen? We're gonna be talking about
Speaker 1: that today with our own colleague, a special episode with
Speaker 1: one of our Bloomberg colleagues. They were going to be
Speaker 1: speaking to Tom Orlick. He is the chief economist here
Speaker 1: at Bloomberg, and he has a new book out on
Speaker 1: exactly this topic called China The Bubble That Never Popps.
Speaker 1: So Tom, thank you very much for joining us. Thanks Joe,
Speaker 1: and I especially enjoyed your manly attempts to frame the
Speaker 1: subject without accidentally using the title of my book before
Speaker 1: you introduced it right, kind of guided it right there
Speaker 1: without quite using it. But it really has been a thing,
Speaker 1: and even before I was aware that you had this
Speaker 1: book in the work, so that you're coming out, congratulations,
Speaker 1: By the way. This has been like a sort of
Speaker 1: like weird head scratcher, because for as long as I've
Speaker 1: been following this stuff, it just seemed inevitable that China
Speaker 1: must be the most obvious bubble ever, and then it
Speaker 1: was only a matter of time before it's crashing down.
Speaker 1: The only debate seemed to be when and not if
Speaker 1: it was going to happen. Yeah, that's completely right. So
Speaker 1: so I lived in China from two thousand and seven
Speaker 1: to two thousand and eighteen, mainly focused on improving my
Speaker 1: table tennis game, but I did a little bit of
Speaker 1: economics as well, and that was the persistent narrative right
Speaker 1: from the Great Financial Crisis and that famous four trillion
Speaker 1: nuan stimulus which Premier Wen Jiaobao launched, all the way through.
Speaker 1: Now there's been this massive rise in debt, and the
Speaker 1: question everybody has had has been, well, how long can
Speaker 1: this continue? And what's it gonna look like when it
Speaker 1: melts down? So give us a summary of the weaknesses
Speaker 1: in China's economy or the financial system that people have
Speaker 1: seen for this long. What is it that they are seeing,
Speaker 1: what is it that they're concerned about? So I break
Speaker 1: it down in three ways Tracy. So the first is
Speaker 1: the size of the debt bubble um. So if you
Speaker 1: go back to two thousand and eight, China's debt to
Speaker 1: GDP looking at the whole economy was around a hundred
Speaker 1: and if you fast forward to two thousand and sixteen,
Speaker 1: two thousand and seventeen, it's gone all the way up
Speaker 1: to two D two hundred and six. So that's an
Speaker 1: astronomical increase in debt in a really short period of time.
Speaker 1: The International Monetary Fund scanned the world. They went back
Speaker 1: in history too, I think World War two. They couldn't
Speaker 1: find another country which had taken on so much debt
Speaker 1: so quickly, but they did find a bunch of countries
Speaker 1: that have taken up that had taken on less debt
Speaker 1: and still had a financial crisis. So that's the first thing,
Speaker 1: just a huge amount of debt taken on very quickly.
Speaker 1: And then the second thing, if we look at the
Speaker 1: borrower side of the Chinese economy, who's borrowing the money, Well,
Speaker 1: it's state owned enterprises investing in excess capacity building steel
Speaker 1: mills when no one wants any more steel, cement kilns,
Speaker 1: when they wone wants any more cement. It's real estate
Speaker 1: developers building those ghost towns in the desert or those
Speaker 1: empty apartment blocks, and its local governments building the roads
Speaker 1: to nowhere. So on the borrower side, we've got a
Speaker 1: bunch of people making investments in things which have got
Speaker 1: low returns, so how are they're going to pay the
Speaker 1: money back? And then on the lender side, you've got
Speaker 1: state owned banks. State owned banks operating more on policy
Speaker 1: directives than commercial incentives, they're probably making some bad lending decisions,
Speaker 1: and you have the explosive growth of a shadow banking sector.
Speaker 1: Shadow banks don't have the capital to absorb losses, are
Speaker 1: lending to really low quality borrow is the risks they're
Speaker 1: going to be high. So this I have a million
Speaker 1: questions already just based on that, but I'll start with one.
Speaker 1: And you know, one of the things that's really been
Speaker 1: popular conversation in the last couple of years, and partly
Speaker 1: popularized by their eyes of say modern monetary theory, is
Speaker 1: that there is a distinct difference between private sector debt
Speaker 1: and public sector debt, and that public sector debt just
Speaker 1: doesn't have shouldn't be thought of with the same kind
Speaker 1: of credit risk. And I'm curious whether to some extent,
Speaker 1: we can start getting our heads around the Chinese debt
Speaker 1: bubble by the fact that you know, you mentioned state
Speaker 1: owned enterprise, state banks, local governments, which presumably are implicitly
Speaker 1: at some level backed by the federal government. The sort
Speaker 1: of difficulty that outside analysts have in distinguishing what's truly
Speaker 1: private sector credit versus public sector credit, and how much
Speaker 1: does that lay to the misconceptions about the and sustainabuilding. Yes,
Speaker 1: so that's a really important point, Joe. And one thing
Speaker 1: which really distinguishes China from the rest of the world,
Speaker 1: or at least the liberal capitalist rest of the world,
Speaker 1: the US, Europe and so on, is state participation in
Speaker 1: the economy and in many sense, in many instances just
Speaker 1: state ownership of the key players. So let's say we
Speaker 1: have a bad loan in the US system, Well, how
Speaker 1: is that going to be resolved? Well, maybe there's some
Speaker 1: initial negotiations between the borrow and the bank, and then
Speaker 1: maybe there's some legal recourse for the bank if the
Speaker 1: borrower can't repay it, they try and reclaim their collateral.
Speaker 1: How does that look in the Chinese context, Well, probably
Speaker 1: the local government owns the bank, and they own the
Speaker 1: corporate and they have some tax revenue or other sources
Speaker 1: of income they can put into play. And so that
Speaker 1: entire conversation, that entire negotiation is taking place within the
Speaker 1: state family. And as long as China continues to grow,
Speaker 1: and remember China continues to clock not in this COVID
Speaker 1: nineteen year, of course, but in general China continues to
Speaker 1: grow around five six, then the government just has a
Speaker 1: lot of resources that they can continue to shuffle around
Speaker 1: the system, and that allows them to resolve a lot
Speaker 1: of problems behind closed doors without a blow up taking place.
Speaker 1: Just on that note of sort of shuffling things around
Speaker 1: the system and also having this closed circuit of state
Speaker 1: owned enterprises and banks that all sort of have relationships
Speaker 1: with each other. How much does the fact that we're
Speaker 1: essentially talking about a closed economy factor into China's resilience here,
Speaker 1: because of course, you know, there has been some degree
Speaker 1: of opening up, but you still have hefty capital control.
Speaker 1: So how much does that actually insulate China from problems? Yeah,
Speaker 1: that's a that's a really important point, Tracy. You often
Speaker 1: hear people saying that that China learned the lesson of
Speaker 1: the Asian financial crisis, right, they learned the lesson of
Speaker 1: the Asian financial crisis, and that's why they've been stable.
Speaker 1: What was the lesson of the Asian financial crisis that
Speaker 1: they learned? Essentially, it was don't let Wall Street in,
Speaker 1: don't let foreign capital in. In China, they actually have
Speaker 1: a have a phrase for sort of foreign speculative investors.
Speaker 1: They call them. I'm probably gonna get this wrong, but
Speaker 1: it's like that inn wrong, are you, which means big
Speaker 1: financial crocodiles. So the big financial crocodiles came, and they
Speaker 1: came and gobbled up soul, they gobbled up career, they
Speaker 1: destroyed much of the Asian great story. And China saw
Speaker 1: that and said, you know what, We're going to finance
Speaker 1: our own development. We don't need these foreign funds coming in,
Speaker 1: which are great when they're coming in and everyone's really happy,
Speaker 1: but when they leave, the system crashes down. And so
Speaker 1: because China's growth story has really been domestically finance, that
Speaker 1: gives China an important basis for stability that you just
Speaker 1: don't see in other emerging markets. This is like a
Speaker 1: really key point, just this idea of local denomination of debt. Basically,
Speaker 1: I mean, as long as debt is in a UM,
Speaker 1: it's an a currency that you can print that makes
Speaker 1: it more sustainable. Because of Chinese incredible growth, it hasn't
Speaker 1: needed to use foreign money to finance itself. Joe, I
Speaker 1: knew you'd find a way to work modern monetary theory
Speaker 1: into this conversation. I knew it, you know, just trying,
Speaker 1: just trying to see if, like you know that we're
Speaker 1: all speaking the same we're all speaking the same language. Yeah,
Speaker 1: And actually I'm I'm not as familiar with the with
Speaker 1: the precepts of m m T as as Joe as
Speaker 1: Joe is. But from what I from what little I
Speaker 1: do understand understand about it, I think China has actually
Speaker 1: been pursuing a kind of quasi m MT type polar
Speaker 1: see for the last twenty years without cooling an MMT.
Speaker 1: So there's there's kind of you know, I'm thinking back
Speaker 1: to like the over the last decade, and I feel
Speaker 1: like the China debt bubble story is actually sort of
Speaker 1: two prongeduniority alluded to both of them. One was on
Speaker 1: the pure financing side, but the other one was just
Speaker 1: about this sort of misallocation of capital. And it doesn't
Speaker 1: matter really what currency investments are made in. If they're
Speaker 1: bad investments, they're bad investments. And I remember, like all
Speaker 1: those videos that used to be on YouTube that I forget.
Speaker 1: The hedge fund manager used to go to those cities
Speaker 1: out in the middle of nowhere and nobody was in
Speaker 1: the in the cities. Did those ever get filled up?
Speaker 1: Like what happened to those ghost cities we were talking about,
Speaker 1: like eleven? Did people eventually move into those apartments? Oh,
Speaker 1: Hugh Hendry, that was the That was the fund manager
Speaker 1: that went made all those YouTube videos showing all these
Speaker 1: like empty series. I remember the name. I remember the name.
Speaker 1: It's a shame there were no drones in those days.
Speaker 1: He could have saved a lot of himself a lot
Speaker 1: of time. So that's a really interesting story, and and
Speaker 1: it speaks to another one of the themes in my book,
Speaker 1: which is had China's policymakers have policy instruments available to
Speaker 1: them which enabled them to move the dial on the
Speaker 1: macro economy in ways which other other countries just wouldn't
Speaker 1: be able to do. So let me tell you a
Speaker 1: story about a trip I made to Guayyang, the capital
Speaker 1: of Guajo Province, back in two thousand and seventeen. And
Speaker 1: Guayang had a serious ghost time problem. They've built a
Speaker 1: bunch of shiny new tower blocks, but no one wanted
Speaker 1: to live in them. Um, so what did the local
Speaker 1: government do. They got out the bulldozers and they went
Speaker 1: and knocked over everyone's house. And then they said, okay, sorry,
Speaker 1: we're not saying of your house. And by the way,
Speaker 1: we're going to have the l and your house was
Speaker 1: on but don't worry. Here's some money. Go and move
Speaker 1: into the shining new apartment block. That's one way to
Speaker 1: do it. The real estate developers who built the shining
Speaker 1: new apartment blocks were happy because someone had come and
Speaker 1: brought them. The local government now had some land. The
Speaker 1: real estate developers, who and I flushed with cash, brought
Speaker 1: the land off the local government. So the financial circle
Speaker 1: was complete and the real estate, the empty real estate
Speaker 1: have been used up. And that wasn't just a gay
Speaker 1: Yang story. That was a national story that happened to
Speaker 1: millions of people every year for the last decade in China,
Speaker 1: there was a national program that the government sort of
Speaker 1: euphemistically called its slum clearance. Millions of people every year
Speaker 1: for the best part of a decade getting their old
Speaker 1: home knocked ober and getting some money to move into
Speaker 1: a new home. And when you can do that kind
Speaker 1: of thing, which China can and I don't think any
Speaker 1: other country in the world can, then problems like massive
Speaker 1: real estate o stay suddenly become a little bit easier
Speaker 1: to deal with. Can we talk about the downsides of
Speaker 1: having this sort of closed circular command economy system, because
Speaker 1: you know, you're we're talking about the misallocation of capital.
Speaker 1: And one thing that you do tend to see in
Speaker 1: the Chinese market a lot is there is a lot
Speaker 1: of excess cash and it sort of just rolls into
Speaker 1: one thing after another. So you know, it'll go into property,
Speaker 1: and then it will go into stocks, and then it
Speaker 1: will go into something else, and people do lose money
Speaker 1: on those investments, and every once in a while you
Speaker 1: do hear stories of outrage at someone who's from someone
Speaker 1: who's lost their entire savings on you know, appear to
Speaker 1: peer loan scheme or something like that. What are the
Speaker 1: downsides of having that kind of circularity in a closed system?
Speaker 1: So I think the first thing to say is that
Speaker 1: there are some very serious social damage sites. Right just
Speaker 1: think about that slum clearance example. Did those millions of
Speaker 1: people want to have their homes builders so that the
Speaker 1: government could solved the problem of real estate over capacity.
Speaker 1: I think there's a reason democratic countries wouldn't be able
Speaker 1: to do that, basically because people don't like it. So
Speaker 1: there's some very serious social downsides to it. There's also
Speaker 1: economic downsides as well. If you have very large scale
Speaker 1: misallocation of capital, then you have very low return on assets,
Speaker 1: very low productivity growth. And ultimately, when China has used
Speaker 1: up all the space, it has to catch up with
Speaker 1: the US, to catch up with Germany, to catch up
Speaker 1: with Japan in terms of its use of modern technology,
Speaker 1: it's use of modern management techniques. Then that's going to
Speaker 1: come back to bite really hard, and China's great is
Speaker 1: going to be very weak, and we are going to
Speaker 1: see a day of reckoning in the economy and in
Speaker 1: the financial system. That day just as much further away
Speaker 1: than most people realize. I'm member. There's that one street
Speaker 1: in Beijing where a lot of the really big state
Speaker 1: owned enterprises have their sort of headquarters offices, and a
Speaker 1: friend of mine used to refer to it as the
Speaker 1: street where capital goes to die. We need, we need
Speaker 1: photos of that the street work to die. But Tom,
Speaker 1: I want to press you on that last point, because
Speaker 1: you referred to a day of reckoning. Will it be
Speaker 1: a day? I mean? And I mean that kind of
Speaker 1: literally in the sense that when we think about, say,
Speaker 1: the US housing bubble haven't collapsed. Okay, it took place
Speaker 1: over a period of time, but you know there's like
Speaker 1: a few days that really stand out. The Lehman Brothers
Speaker 1: collapsed and so forth. In the China context, Is there
Speaker 1: gonna be a day when it collapses? Or will it
Speaker 1: just be that at some point you expect we'll look
Speaker 1: back and say, years and years of misallocation and other
Speaker 1: bad decisions lead to a degradation of growth and productivity
Speaker 1: that clearly set it back. Is it gonna be a
Speaker 1: crash or just sort of like a bad period? Yeah,
Speaker 1: I think it's a It's kind of the is it
Speaker 1: Lehman or is it Tokyo? Right, being the kind of
Speaker 1: the moment where everything went wrong, and and Tokyo being
Speaker 1: the kind of the example of an economy which just
Speaker 1: kind of lost its moxi moxire, is it mojo? But
Speaker 1: maybe both over an extended period of time. And I
Speaker 1: think the point I come back to is that what
Speaker 1: China's government needs in order to successfully backstop the system
Speaker 1: is continued growth in its resources. Right, if the government
Speaker 1: has continued growth in profits from state firms, continued growth
Speaker 1: in profits from state banks, continued brace in tax revenue,
Speaker 1: continued land sales revenue, then it's got money that it
Speaker 1: can carry on shuffling around the system to make everybody
Speaker 1: whole right, to paper over over over the cracks, and
Speaker 1: to have those things. What it needs is growth. For me,
Speaker 1: the point when the bubble pops, whether it is the
Speaker 1: kind of the beginning of a long stagnation or a
Speaker 1: kind of a crisis, point is the moment when the
Speaker 1: growth stops. So the question is when's that going to be?
Speaker 1: And one powerful way of thinking about that is, well,
Speaker 1: where is China relative to the technology frontier? Where is
Speaker 1: China relative to the level of productivity that we see
Speaker 1: in the United States and Japan and elsewhere. And the
Speaker 1: answer is actually still a really long way. G d
Speaker 1: P per capital in China is a third of the
Speaker 1: level that it is in the United States. Japan fell over,
Speaker 1: Japan's GDP per capital was already at US levels. Based
Speaker 1: on that way of thinking about things, China still has
Speaker 1: quite a long way to run, So I'd be curious
Speaker 1: to get your take on what you think China see
Speaker 1: as its role in the global financial system, Like what
Speaker 1: is China actually trying to achieve with some of its
Speaker 1: capital markets opening up. You mentioned this idea that it
Speaker 1: wanted to keep a lot of the Western speculators out
Speaker 1: earlier um And is there a moment at which China's
Speaker 1: global financial ambitions may be become constricted by that closed
Speaker 1: economy that we've been describing. There's a real cost to autarchy, Tracy,
Speaker 1: some of those points that you were mentioning so much
Speaker 1: money slashing around in the system, chasing returns on P
Speaker 1: to P schemes today and equity tomorrow and real estate
Speaker 1: on Thursday, and so China's policymakers recognized that there are
Speaker 1: some benefits in terms of efficiency to having a more
Speaker 1: open system, to allowing money to go on to come
Speaker 1: in and out of the country. At the same time,
Speaker 1: there's still a real fear about what might happen if
Speaker 1: they open up too quickly. I spent to one senior
Speaker 1: executive in a Chinese who said, opening up all of
Speaker 1: the weaknesses we have in our banking system would be
Speaker 1: like it would be like seeking death. So they want
Speaker 1: the efficiency gains, but they want to do it gradually
Speaker 1: so they can try and minimize the costs. M I
Speaker 1: want to ask you a question that sort of um
Speaker 1: not necessarily the focus of your book, which had obviously
Speaker 1: been in the works for a while, but it's sort
Speaker 1: of of acute important importance. You mentioned post the last crisis,
Speaker 1: the four trillion dollar stimulus got a lot of attention.
Speaker 1: There was this big sort of commodities boom associated with it,
Speaker 1: sort of between two thousand nine two thousand and eleven.
Speaker 1: It was a huge amount of enthusiasm towards emerging markets,
Speaker 1: which they faded over the subsequent decade, but at least
Speaker 1: initially coming out of the crisis, all kinds of sort
Speaker 1: of after effects from that sort of massive move on
Speaker 1: the demand side. We haven't seen that this time around.
Speaker 1: It feels like the measures have been more limited in
Speaker 1: that we just started this conversation talking about sort of
Speaker 1: dual speed nature of the recovery. Could you see China
Speaker 1: doing something like that again, particularly if global demand for
Speaker 1: their goods remains soft, just to do the sort of
Speaker 1: slow reopening of the West and elsewhere. I think there's
Speaker 1: there's two big differences between two thousand and eight when
Speaker 1: they did that massive shock and or stimulus and today.
Speaker 1: So the first is they just don't have as much
Speaker 1: policy space as they did. There is a cost to
Speaker 1: running a massive credit stimulus for a long period of time,
Speaker 1: and the cost is you can't do it again. And
Speaker 1: then the second thing is actually that stimulus didn't work
Speaker 1: out so great for that. It was a stimulus which
Speaker 1: was very popular with the rest of the world, but
Speaker 1: that's because it created massive positive spillovers for the rest
Speaker 1: of the world. The benefits, yeah, there were benefits for China,
Speaker 1: but because a lot of the money went to importing
Speaker 1: iron ore, for example, a lot of the benefits spilled
Speaker 1: over to Australia and Brazil in the form of more
Speaker 1: volumes and higher prices for their commodity sales. So China
Speaker 1: this time they're running a pretty big stimulus. We think
Speaker 1: the fiscal deficits going to go up to eleven of
Speaker 1: GDP this year. That's not nothing, but it's certainly smaller
Speaker 1: than it was in two thousand and eight, and it's
Speaker 1: kind of it's meaner, right, it's more smartly focused to
Speaker 1: the benefits are much more going to stay inside China.
Speaker 1: We're not going to see those those big positive spillovers
Speaker 1: to the rest of the world. I think we'd be
Speaker 1: remiss if we didn't ask you a little bit about
Speaker 1: the ongoing trade attentions with the US and what those
Speaker 1: mean for the Chinese economy. But how much damage do
Speaker 1: they actually inflict on China, Because there's an argument, at
Speaker 1: least domestically in China that in some ways, by you know,
Speaker 1: closing off the country from the rest of the global market,
Speaker 1: you're sort of encouraging it to double down on its
Speaker 1: domestic focus and maybe even speed up the development of
Speaker 1: its own domestic market even faster. I think there's there's
Speaker 1: a couple of things. So trade war is definitely a
Speaker 1: trade war is definitely not good for China, and a
Speaker 1: trade war at the same time as they are managing
Speaker 1: this painful deliveraging process trying to manage down some of
Speaker 1: that debt they took on after the Great Financial Crisis,
Speaker 1: and at the same time as they have the COVID
Speaker 1: nineteen crisis is definitely painful. So they certainly don't want
Speaker 1: tariffs to go back up. I'm sure they'd like them
Speaker 1: to come down. But then the second question is is
Speaker 1: a trade war going to fundamentally derail China's development process?
Speaker 1: And I think the answer to that is no, and
Speaker 1: it's for the reasons that you suggested, Tracy. So firstly,
Speaker 1: China's domestic innovation engine. I mean, China does not have
Speaker 1: a Stanford or a Harvard, but China's domestic innovation engine
Speaker 1: is pretty powerful. No one spend No one apart from America,
Speaker 1: spends more on R and D than China. If you
Speaker 1: look at the innovation rankings, China is punching way above
Speaker 1: its weight relative to its level of development. It's important
Speaker 1: to remember that it's actually really hard for other countries,
Speaker 1: other countries to decouple from China. Right The US has
Speaker 1: really moved aggressively in that direction, but they can't move
Speaker 1: completely in that direction because the apples and the call
Speaker 1: coms of the world are deeply invested in the China relationship.
Speaker 1: And that is also true of the big multinationals in
Speaker 1: Europe and the big multinationals in Japan. So trade war
Speaker 1: is definitely bad. Trump in a sense is kind of
Speaker 1: like the anti Nixon. Nixon opens China up. Trump it
Speaker 1: seems to be doing his best to close it down. Um,
Speaker 1: I don't think he's going to succeed ultimately. I don't
Speaker 1: think this is going to be anything more than a
Speaker 1: little bump on China's development traject. What about um? And
Speaker 1: no one seems to talk about this as much anymore,
Speaker 1: or only when you hear about it seems to be
Speaker 1: about failures or disappointment. But the endeavors of the Belton
Speaker 1: Road initiative or just creating all of these, you know,
Speaker 1: financing investments in other countries which might theoretically one day
Speaker 1: be sources of demand for China and further opportunities for growth.
Speaker 1: What's is that stalled out? Is that not going as planned?
Speaker 1: What's happening with that? So She Jimping came into power,
Speaker 1: and he basically had a different conception of China's role
Speaker 1: in the world. Right, the dumb shaping famously said, we
Speaker 1: should bide our time and hide our strength. Right, we
Speaker 1: should just stay quiet, benefit from favorable global conditions and develop.
Speaker 1: And She Jimping came in and said, you know what,
Speaker 1: we've arrived. We want all the medals of the Olympics.
Speaker 1: We've got the biggest part exchange reserves with the biggest
Speaker 1: exposture in the world. We're here, and we're we're not going,
Speaker 1: We're not gonna, We're not going to hide it anymore.
Speaker 1: So you had a bunch of initiatives from Shi Jimping.
Speaker 1: We had the Belt and Raid scheme, which was basically
Speaker 1: announcing their arrival as a kind of a geopolitical power.
Speaker 1: You had China where they announced their ambition to kind
Speaker 1: of own the future of technology. Both of those things
Speaker 1: were frankly pr disasters for China. Right the entire rest
Speaker 1: of the world said, what you're going to be taking
Speaker 1: over Africa and owning AI and robots. That's not acceptable.
Speaker 1: So it's not a coincidence that the announcement of the
Speaker 1: Belt and Raid scheme and the announcement of China came
Speaker 1: immediately before the shift in the global perception of China
Speaker 1: towards are basically a more sort of cautious, hostile view
Speaker 1: of what China's rise men. And it's also not a
Speaker 1: coincidence that China has stopped talking about both of these things. Right,
Speaker 1: China doesn't really talk about China anymore. They do really
Speaker 1: talk so much about the Belton Road anymore. And that's
Speaker 1: not that's not because they're not doing them still. It's
Speaker 1: because they've realized that it doesn't actually strategically make sense
Speaker 1: to make these bold claims. I have like a semi
Speaker 1: interesting analogy about table tennis and the Chinese economy. Oh yeah, yeah, yeah,
Speaker 1: tell us that you You hit a great thread on
Speaker 1: Twitter about this, and I want our listeners to hear it.
Speaker 1: So before we go, tell us how table tennis explained
Speaker 1: the resilience of the Chinese economy. Um so so. I
Speaker 1: spent a lot of time in China playing table tennis.
Speaker 1: I actually moved to China partly because I wanted to
Speaker 1: be a China economist, but mainly because I wanted to
Speaker 1: be a better table tennis player. Wait for real, I
Speaker 1: was young and foolish. I played in I played in
Speaker 1: sweaty basement clubs. I played in the headquarters of some
Speaker 1: of China's biggest stay owned banks. I played with the
Speaker 1: Shanghai University Ping pong team, who are really good at
Speaker 1: table tennis. There are YouTube videos. YouTube videos come from
Speaker 1: table tennis match in Shanghai. Yeah, I just look these up. Oh, Tom,
Speaker 1: that was a mistake telling us Laura, can we get
Speaker 1: some sound in here, just some like pinkness. I love
Speaker 1: that sound of the So China's table tennis has some
Speaker 1: really serious problems. The men's team went on strike a
Speaker 1: few years ago because they weren't happy because there was
Speaker 1: some backroom political deal which got rid of the coach
Speaker 1: they really liked. If you speak to professional players in China,
Speaker 1: they all have stories about bribes and corruption and payments
Speaker 1: they did their parents needed to make to get them
Speaker 1: into the best training programs. The best players in China,
Speaker 1: they had to start training when they were eight or nine,
Speaker 1: drop out of school to have any chance of making it.
Speaker 1: So you've got you've got corruption, you've got nepotism, you've
Speaker 1: got a kind of mechanical, almost in human approach to training.
Speaker 1: And yet China's table tennis team are indisputably the best
Speaker 1: in the world. Go and check the International Table Tennis
Speaker 1: Federation rankings. Look at the top ten for men, the
Speaker 1: top ten for women. There's a lot of Chinese people
Speaker 1: on that list. So why is that? Well, there's a
Speaker 1: few reasons. The first is there's one point three billion
Speaker 1: people in China and they all try table tennis, so
Speaker 1: there's a massive talent pool to pick from and huge
Speaker 1: economies of scale. The second reason is they have a
Speaker 1: really well planned approach to ensuring that they're going to
Speaker 1: be the best. If a foreign player develops a good
Speaker 1: serve or a good shot and wins a few games
Speaker 1: against the Chinese team, they'll get a video camera, they'll
Speaker 1: record the foreign player, they'll take the video home, they'll
Speaker 1: break it down, they'll analyze it, they'll make sure they've
Speaker 1: mastered that technique. So the technique might work once against
Speaker 1: the Chinese team, but it's not going to work twice
Speaker 1: and written large those benefits of the Chinese table tennis
Speaker 1: system has also the benefits the Chinese economy has. China
Speaker 1: is the most populous country in the world, which means
Speaker 1: they have absolutely enormous economies of scale. China's trade with
Speaker 1: the rest of the world means that they can learn
Speaker 1: foreign technologies and foreign techniques. And when you put together
Speaker 1: the foreign technologies and the foreign techniques with China's massive scale,
Speaker 1: what you end up with in table tennis and in
Speaker 1: the economy is the potential for for a world beating system.
Speaker 1: I love it. I'm so glad, we I'm so glad
Speaker 1: we got this in but it's perfect and uh, you know,
Speaker 1: just the idea you can you can mismanage a lot,
Speaker 1: but when you have that much raw resources, you can
Speaker 1: still be the best. That's exactly right by my book,
Speaker 1: China the Bubble that Never Problems, by the book People. Well,
Speaker 1: thank you so much, Tom. Now I want to do
Speaker 1: one on Russian chest during the Soviet year. I wonder
Speaker 1: how many analogies there are between Chinese creampo and the
Speaker 1: dominant of rush a chess. But can we can talk
Speaker 1: about that another time? Thanks again, Tom, congratulations, Thanks so
Speaker 1: much so, Joe. I really enjoyed that conversation, not least
Speaker 1: because it has led me down the internet wormhole of
Speaker 1: watching Tom Orleck table tennis videos from years ago. That's fun,
Speaker 1: but also because it is interesting to think of China
Speaker 1: as sort of one of the first examples of a
Speaker 1: real quasi MMT economy with all the benefits and also
Speaker 1: the downsides that that might entail. Yeah, I was thinking,
Speaker 1: you know, back to our you know, and I think
Speaker 1: about this episode a lot, remember a fottel Kaboo, But
Speaker 1: I think that was last year, or maybe it was
Speaker 1: two years ago, and talking about sort of MMT in
Speaker 1: the developed developing market context, and of course most countries
Speaker 1: don't really have the sort of industrial or technical or
Speaker 1: growth capacity the way China has had. But that is
Speaker 1: sort of just like this very different model of not
Speaker 1: relying on external financing to grow and their costs and benefits.
Speaker 1: But one benefit is you don't have those sort of
Speaker 1: financial crises the same way where suddenly you have a
Speaker 1: huge obligation and a foreign currency. Yeah, and I mean
Speaker 1: you have to say that there are some advantages to
Speaker 1: having a command economy in times of crisis, and specifically,
Speaker 1: I guess in times of national pandemics as we've seen.
Speaker 1: You know, the US might struggle or at least take
Speaker 1: some time to institute job safety measures, whereas in China,
Speaker 1: like I think, they're much much more used to telling
Speaker 1: people in companies what to do, and so you see
Speaker 1: that sort of economic machinery start much faster. Yeah. I
Speaker 1: think that's right. And I think the key thing that
Speaker 1: I took away from that is not that there aren't
Speaker 1: massive risks to the Chinese growth model, and there clearly
Speaker 1: are and they are all kinds of problems. And building
Speaker 1: cities if no one wants to live in them is
Speaker 1: going to be an issue. Or building steel plants that
Speaker 1: for steel that goes unused is going to be an issue.
Speaker 1: I think what what the key thing is just sort
Speaker 1: of being clear about identifying what the risks are. And
Speaker 1: if you're looking for the sort of Lehman moment or
Speaker 1: something like that, it's probably not going to be that,
Speaker 1: but more along the lines of like an ongoing degradation
Speaker 1: and productivity. If they, if they, if you build an
Speaker 1: economy of stuff that nobody wants. So I think what
Speaker 1: maybe perhaps analysts got wrong is not about the sustainability
Speaker 1: or unsustainability per se, but about what the aftermath looks
Speaker 1: like if things go bad. And I think that's where
Speaker 1: Tom's perspective is really helpful. Yeah, cities full of streets
Speaker 1: where capital goes to time. And now I'm gonna spend
Speaker 1: the rest of the day watching compund vicas. This has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Wisn't though you could follow me at the Stalwart.
Speaker 1: Be sure to follow our guest on Twitter tom Orlick.
Speaker 1: He's at tom Orlick, and check out his new book, China,
Speaker 1: The Bubble That Never Popps, and be sure to follow
Speaker 1: our producer Laura Carlson. She's at Laura M. Carlston. Followed
Speaker 1: the Bloomberg Head of podcast, Francesco Levi at Francesca Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the Twitter handle at podcast. Thanks for listening one