WEBVTT - Richard Koo on China's Risk of 'Japanification' 0:00:10.240 --> 0:00:13.640 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.760 --> 0:00:15.080 I'm Tracy Alloway. 0:00:14.840 --> 0:00:16.759 And I'm Joe Wysn't thal Joe. 0:00:16.720 --> 0:00:19.439 Do you remember at the beginning of the year there 0:00:19.600 --> 0:00:22.320 was so much excitement about China reopening. 0:00:23.160 --> 0:00:24.239 Yes. Absolutely. 0:00:24.280 --> 0:00:24.479 You know. 0:00:24.560 --> 0:00:27.040 It is interesting because I think if you go back 0:00:27.080 --> 0:00:30.280 to last fall, there was all this talking's like, why 0:00:30.400 --> 0:00:32.839 is it China giving up on COVID zero? When is 0:00:32.920 --> 0:00:35.599 China going to give up on COVID zero? And then 0:00:35.680 --> 0:00:37.560 and they're like, oh, it's not going to happen anytime soon. 0:00:37.640 --> 0:00:40.120 And then one day it just happened, and everyone's like, Okay, 0:00:40.360 --> 0:00:42.800 here comes China, Here comes all the demand from China. 0:00:42.840 --> 0:00:43.839 It's on, that's right. 0:00:43.920 --> 0:00:47.080 And so a big plank or portion of the Boll 0:00:47.159 --> 0:00:51.080 thesis for twenty twenty three was that because China was 0:00:51.159 --> 0:00:54.920 reopening its economy after basically being shut for three years, 0:00:55.120 --> 0:00:58.640 you were going to get all this additional economic activity. 0:00:58.960 --> 0:01:03.000 And while we have seen markets rally, it is not 0:01:03.880 --> 0:01:06.960 it is definitely not because of China. In fact, China 0:01:07.040 --> 0:01:09.520 really seems to be struggling here. So we have you know, 0:01:10.000 --> 0:01:14.200 Chinese manufacturing is still at or nearer contraction. I think 0:01:14.240 --> 0:01:18.960 exports are flagging. Inflation is basically around zero, which might 0:01:19.000 --> 0:01:21.200 sound great to a number of other countries right now, 0:01:21.240 --> 0:01:25.000 but of course it means that in China growth is subpar. 0:01:25.800 --> 0:01:27.319 Yeah, I mean, I think it also. 0:01:27.959 --> 0:01:32.039 The big story for the world too has been oil demand, 0:01:32.360 --> 0:01:35.440 and there's a lot of expectation that's like, Okay, commodity 0:01:35.480 --> 0:01:38.640 prices are kind of soft, but China's going to reopen. 0:01:38.720 --> 0:01:41.320 Oil demand is going to surge, and that was expected 0:01:41.360 --> 0:01:46.400 to contribute to like further inflationary pressures throughout the world oil, copper, 0:01:46.680 --> 0:01:50.720 et cetera. And so yeah, that's that totally caught that 0:01:50.800 --> 0:01:53.200 market by surprise and changed a lot of the sort 0:01:53.240 --> 0:01:55.800 of macro dynamics globally that people were expecting. 0:01:55.960 --> 0:01:56.160 Yep. 0:01:56.400 --> 0:01:59.360 So now is the perfect time to dig into what 0:01:59.520 --> 0:02:02.280 is going on with the Chinese economy, and you know, 0:02:02.560 --> 0:02:05.800 to some degree, the weakness this year sort of highlights 0:02:05.880 --> 0:02:10.040 these longer term concerns around China. How is it actually 0:02:10.280 --> 0:02:13.960 transitioning or developing its economy. Is it going to be 0:02:14.000 --> 0:02:17.400 able to achieve the ultra high levels of growth that 0:02:17.440 --> 0:02:19.880 we've seen in the past, or is it going to 0:02:19.919 --> 0:02:23.200 fall into something like a middle income trap what's going 0:02:23.200 --> 0:02:25.840 on with Chinese local government debt that's been in the 0:02:25.840 --> 0:02:28.639 headlines quite a bit recently, and all of that put 0:02:28.680 --> 0:02:33.320 together has given rise to this idea of Japanification risk 0:02:33.560 --> 0:02:36.519 for China. So the notion that you might have ultra 0:02:36.600 --> 0:02:39.799 high levels of debt that weigh on future growth because 0:02:39.840 --> 0:02:42.680 everyone has to spend their money basically paying down their 0:02:42.720 --> 0:02:46.000 debt rather than investing in new and exciting things. 0:02:46.520 --> 0:02:50.000 Yeah, it's weird because I feel like there's like, now, 0:02:50.080 --> 0:02:52.919 there's two conflicting themes that I think about with China. 0:02:53.000 --> 0:02:55.400 So one is exactly as you said that there is 0:02:55.480 --> 0:03:00.519 this sort of sluggish growth, over capacity, debt, indebted cities 0:03:00.680 --> 0:03:03.680 and so forth, lack of domestic consumption. And then the 0:03:03.720 --> 0:03:06.239 other one is this sort of awe that the world 0:03:06.360 --> 0:03:10.799 has that like the booming electric vehicle exports, that they 0:03:10.840 --> 0:03:14.239 finally got the first flight of their domestic wide body 0:03:14.280 --> 0:03:18.040 aviation that first planned the COMAC that we talked about 0:03:18.040 --> 0:03:21.560 with Brad Setser, and of course all the anxiety about 0:03:21.600 --> 0:03:24.400 the chip progress that the country has made, which is 0:03:24.400 --> 0:03:28.000 why the Biden administration has cut off access to various 0:03:28.080 --> 0:03:31.680 high tech, cutting edge semiconductor equipment. So there's these two things. 0:03:31.680 --> 0:03:34.600 There's this like sort of like shokunawe at the success 0:03:34.639 --> 0:03:37.120 they're having in batteries, cars and so forth. At the 0:03:37.120 --> 0:03:39.520 same time, like the macro numbers do not look good. 0:03:40.040 --> 0:03:43.480 It's true China is always like a giant waiting in 0:03:43.520 --> 0:03:47.880 the wings to take over everyone else's economy. And also simultaneously, 0:03:48.280 --> 0:03:52.520 this bundle of vulnerabilities that people are worried is going 0:03:52.560 --> 0:03:55.760 to tip into a massive financial crisis. That's always the case. 0:03:56.120 --> 0:03:58.960 But okay, I have to say, we really do have 0:03:59.040 --> 0:04:01.360 the perfect guest to discuss all of this. We're going 0:04:01.400 --> 0:04:04.280 to be speaking with Richard Ku, chief economist at the 0:04:04.360 --> 0:04:08.320 Nomora Research Institute, which is the research arm of Japan's 0:04:08.320 --> 0:04:11.520 biggest brokerage to Moora. And of course he is also 0:04:11.600 --> 0:04:15.040 the man who basically wrote the book on balance sheet recession. 0:04:15.200 --> 0:04:17.760 So Richard, thank you so much for coming back on 0:04:17.800 --> 0:04:18.279 all thoughts. 0:04:18.360 --> 0:04:19.480 Well, thank you for having me. 0:04:19.839 --> 0:04:23.120 Yeah, really appreciate it. Maybe just to begin with, I 0:04:23.160 --> 0:04:26.479 know you've been talking and writing about this theme of 0:04:26.520 --> 0:04:29.800 a potential balance sheet recession in China. You also have 0:04:29.880 --> 0:04:31.880 a book that came out I think it was just 0:04:32.000 --> 0:04:35.760 last year called Pursued Economy, where you talk quite a 0:04:35.760 --> 0:04:39.480 lot about the trajectory of China's economy, but talk to 0:04:39.600 --> 0:04:42.000 us about what you're seeing now that suggests there may 0:04:42.040 --> 0:04:46.920 be signs of a Japan style balance sheet recession in China. 0:04:47.640 --> 0:04:51.159 Well, a lot of Chinese journalists economists are being contacted 0:04:51.279 --> 0:04:54.320 me on this issue also, that are we going to 0:04:54.320 --> 0:04:58.120 be Japan soon or are we already on that path? 0:04:58.760 --> 0:05:01.960 And my answer to that is that. 0:05:02.320 --> 0:05:05.599 A lot of similarities between what happened to Japan thirty 0:05:05.680 --> 0:05:09.080 years ago and what's happening to China today, but they 0:05:09.080 --> 0:05:15.120 are also important differences. And what the Chinese economists worried 0:05:15.160 --> 0:05:19.760 about is that China may be following fall into what 0:05:19.800 --> 0:05:23.880 I call balance recession. And balance recession is triggered by 0:05:24.320 --> 0:05:28.160 this whole notion that people feel uncomfortable with their balance sheets, 0:05:28.440 --> 0:05:31.279 suppose that the debt is too large relative to their assets, 0:05:31.600 --> 0:05:34.200 and that typically happens after the bursting of a bubble. 0:05:34.360 --> 0:05:37.400 If the bubble is financed with debt, and as the 0:05:37.480 --> 0:05:40.800 prices collapse but the liabilities remain, people realize that their 0:05:40.839 --> 0:05:44.039 balance is underwater. And if the balance is underwater, you 0:05:44.080 --> 0:05:45.760 have to fix it, or how do you fix it? 0:05:46.040 --> 0:05:49.159 You pay down debt. Well, that's the right thing to 0:05:49.200 --> 0:05:51.600 do at the individual level, but when everybody does this 0:05:51.640 --> 0:05:54.080 all at the same time, we got into a fallacy 0:05:54.080 --> 0:05:57.479 of composition problems in that in the national economy, if 0:05:57.480 --> 0:05:59.920 someone is saving money or paying down debt, you need 0:06:00.040 --> 0:06:02.440 someone else to borrow and spend those money to keep 0:06:02.480 --> 0:06:05.560 the economy going. And in the usual economy, you bring 0:06:05.839 --> 0:06:08.560 you give too few borrowers, you bring interest rates down. 0:06:08.640 --> 0:06:12.240 Too many borrowers, you push interest rates higher, and then 0:06:12.240 --> 0:06:15.880 that's how you keep the economy is going. But when 0:06:15.920 --> 0:06:20.680 the big bubble burst and as the prices collapse, everyone 0:06:20.720 --> 0:06:22.799 will be paying down there no one will be borrowing 0:06:22.839 --> 0:06:25.679 money even at zero interest rates, because if your balance 0:06:25.760 --> 0:06:28.160 is underwater, you're not going to borrow money even if 0:06:28.560 --> 0:06:32.480 interust rates come down to zero. And that's the prospect 0:06:32.560 --> 0:06:36.600 that Chinese are worried about. And China got this huge bubble, 0:06:37.560 --> 0:06:42.680 especially in the residential real estate, and the amount of 0:06:43.000 --> 0:06:48.640 price increase that China observed on the residential real estate 0:06:48.720 --> 0:06:52.479 is almost same as what happened to Japan thirty years 0:06:52.480 --> 0:06:57.240 ago in Tokyo and Osaka. And so when the real 0:06:57.320 --> 0:07:01.080 estate bubbles start collapsing last year, all these Chinese economists 0:07:01.120 --> 0:07:04.760 begin to worry about japan like situation where so many 0:07:04.800 --> 0:07:06.960 people are paying down there all at the same time, 0:07:07.920 --> 0:07:12.600 and economy could then fall into a deflationary spiral. I 0:07:12.640 --> 0:07:15.760 think that is actually already happening in China. A lot 0:07:15.840 --> 0:07:19.440 of people are saying very few people borrowing, so many 0:07:19.440 --> 0:07:23.520 people are paying down debt even with these low interest rates, 0:07:25.000 --> 0:07:30.480 and that's a very bad sign macroeconomically. Individually they might 0:07:30.520 --> 0:07:33.480 be doing the right things, but collectively they may be 0:07:33.680 --> 0:07:37.960 killing the economy. But there's also a big difference between 0:07:38.000 --> 0:07:40.520 the Chinese situation and the Japanese one, and that is 0:07:40.560 --> 0:07:45.720 that Chinese are already very much aware of this risk 0:07:45.840 --> 0:07:50.960 called balance recession. And thirty some years ago, when this 0:07:51.320 --> 0:07:55.000 thing was happening in Japan, no one in Japan, including myself, 0:07:55.520 --> 0:07:58.640 had any idea about this balance recession because it was 0:07:58.720 --> 0:08:02.040 not taught in economic books. I mean certainly not when 0:08:02.080 --> 0:08:06.000 I was going through. And so when the economy began 0:08:06.080 --> 0:08:10.960 to lose forward momentums and Bank of Japan brought rays 0:08:11.000 --> 0:08:17.239 down to very low levels, nothing happens. Structural reform, nothing happens. 0:08:18.000 --> 0:08:22.640 Fiscal stimulus, well, fiscal stimulus always worked, but that was 0:08:22.720 --> 0:08:25.440 cut short because they thought every time the economy showed 0:08:25.480 --> 0:08:28.680 even the slightest sign of growth, they say, ah, we 0:08:28.720 --> 0:08:32.080 don't need physical stimulus anymore. Economy is improving. And then 0:08:32.080 --> 0:08:35.240 the economy tanked a game, and it tanked a game 0:08:35.360 --> 0:08:39.160 because people were still repairing balance sheets and when a 0:08:39.280 --> 0:08:47.240 large bubble burst, and as the prices collapsed badly, it's 0:08:47.280 --> 0:08:50.240 going to take five ten years easily to repair those 0:08:50.240 --> 0:08:54.400 balance sheets. And in the Japanese case, it was bubble 0:08:54.480 --> 0:08:56.560 was led by the commercial real estate. The commercial real 0:08:56.640 --> 0:09:01.199 estate prices fell eighty seven percent nationwide, not just in 0:09:01.240 --> 0:09:04.960 the little corner of Tokyo, but the entire country. And 0:09:05.000 --> 0:09:08.600 so the balance sheet challenge that Japanese companies face was 0:09:08.720 --> 0:09:11.960 absolutely massive. They all start paying down that all at 0:09:12.000 --> 0:09:14.400 the same time, and that's how we got into this 0:09:15.280 --> 0:09:18.520 very slow growth. But the government did not know how 0:09:18.520 --> 0:09:23.440 to handle this type of recessions because in economics we 0:09:23.520 --> 0:09:26.720 will never talk to look at balance sheets, and so 0:09:26.920 --> 0:09:32.920 Japanese responses were very inconsistent, I should say, whereas in 0:09:32.960 --> 0:09:36.800 the Chinese case, they are fully aware of this recession 0:09:36.840 --> 0:09:39.920 called balance recession. That's why they have been calling me 0:09:40.360 --> 0:09:44.080 very frequently these days. I was told I don't know, 0:09:44.480 --> 0:09:47.400 I have no way to prove this, but one Chinese 0:09:47.400 --> 0:09:52.199 professor told me that about half of the PhD dissertations 0:09:52.280 --> 0:09:57.840 written on economics in China today based on my work 0:09:57.840 --> 0:10:01.960 on balance sheet recession. Now I don't know whether it 0:10:02.080 --> 0:10:05.440 was just making that number up, but what that suggests 0:10:05.480 --> 0:10:08.760 to me is that now the Chinese government know that 0:10:08.840 --> 0:10:13.080 there is this disease called balance recession, and they should 0:10:13.080 --> 0:10:16.320 know how to handle it. Also because once you know 0:10:16.400 --> 0:10:20.360 that this is a recession which is produced by lack 0:10:20.480 --> 0:10:25.720 of borrowers, and the borrowers are not coming into borrow 0:10:25.720 --> 0:10:28.320 money because they have balanceing problems, So the private sector 0:10:28.360 --> 0:10:31.440 themselves cannot change their behavior. After they are doing the 0:10:31.480 --> 0:10:34.960 right things trying to repair their balance sheets, then the 0:10:35.000 --> 0:10:37.600 government has to come in and borrow and put that 0:10:37.679 --> 0:10:41.720 money back into the income stream, which means fiscal stimulus 0:10:41.960 --> 0:10:46.760 is absolutely essential once you're in balance recession. And so 0:10:46.840 --> 0:10:50.600 my guess is that Chinese government will put in the 0:10:50.640 --> 0:10:55.040 fiscal stimulus, which they are actually quite good at, and 0:10:55.160 --> 0:10:59.199 that will keep the recession from turning into a depression 0:10:59.280 --> 0:11:03.480 or something. So that's the key difference between the Japanese situation. 0:11:03.600 --> 0:11:06.840 Thirty years ago, and what the Chinese resent, what the 0:11:06.920 --> 0:11:10.120 Chinese may be faced with today, that they already know 0:11:10.200 --> 0:11:14.760 what disease they are dealing with, and they are probably 0:11:14.760 --> 0:11:17.400 they are not going to waste any money, waste any 0:11:17.440 --> 0:11:22.520 time trying monetary easy or structural reform policies. My guess 0:11:22.640 --> 0:11:25.360 is that they'll go straight into the fiscal stimulus to 0:11:25.720 --> 0:11:27.959 keep the economy from losing its power. 0:11:45.280 --> 0:11:49.640 So you mentioned that one advantage perhaps that China has 0:11:49.920 --> 0:11:54.720 is having seen the experience of Japan. Incidentally, the US 0:11:54.840 --> 0:11:57.520 also had that advantage when we had the two thousand 0:11:57.520 --> 0:12:00.720 and eight two thousand and nine financial crisis. You wrote 0:12:00.720 --> 0:12:03.320 a whole book on it, the Holy Grail of Macroeconomics. 0:12:03.679 --> 0:12:07.640 Of course, US policymakers didn't exactly listen or heed the 0:12:07.640 --> 0:12:10.000 warnings of that book, and we had this pretty awful 0:12:10.440 --> 0:12:12.360 decade for growth. 0:12:13.080 --> 0:12:13.880 You know, I'm. 0:12:13.720 --> 0:12:17.240 Curious though, just in terms of balance sheets diving in, like, 0:12:17.360 --> 0:12:21.320 how do you see the distribution of debt in China? 0:12:21.400 --> 0:12:23.640 So the federal government doesn't have much debt, we know 0:12:23.720 --> 0:12:27.520 that is it? How much is it corporates versus real 0:12:27.640 --> 0:12:32.640 estate developers, versus households versus local cities and municipalities, like 0:12:32.760 --> 0:12:35.160 what does the distribution of debt in China look like? 0:12:35.920 --> 0:12:36.160 Well? 0:12:36.480 --> 0:12:43.400 Can I first comment on your first comment about the US. Sure, Well, 0:12:44.360 --> 0:12:47.160 when I was trying to explain to my formal colleagues 0:12:47.160 --> 0:12:50.079 at the Federal Reserve that we were suffering from balance 0:12:50.120 --> 0:12:53.160 saing session in Japan and therefore we need fiscal stimulus, 0:12:53.240 --> 0:12:58.840 not structural reform. And as a formal recipient of doctoral 0:12:58.840 --> 0:13:01.760 fellowship from the Board of Goldness, I have been, you know, 0:13:02.360 --> 0:13:05.160 going back to the FED to give seminars on this 0:13:05.240 --> 0:13:10.360 issue throughout the nineties, and as you mentioned just now, 0:13:11.679 --> 0:13:14.880 they did not take any of my warnings. I was 0:13:14.960 --> 0:13:19.240 bashed every step of the way, with the FED economist saying, 0:13:19.559 --> 0:13:21.719 come on, just Bank of Japan printing the money and 0:13:21.720 --> 0:13:24.640 then everything be fine. But I would try to explain 0:13:24.679 --> 0:13:28.440 that that doesn't work when they are now borrowers. Well, 0:13:28.800 --> 0:13:33.720 once two thousand and eight Lehman crisis happened, someone I 0:13:33.760 --> 0:13:37.760 don't know who brought my book to the attention of 0:13:38.120 --> 0:13:43.559 Jimmer Benenki and he read it the Holy Gramach Economics, 0:13:43.760 --> 0:13:47.920 the book you mentioned, and he told so many other 0:13:47.960 --> 0:13:49.960 people in the Federal Reserve to read it as well. 0:13:51.360 --> 0:13:55.400 And if you notice that at the beginning he was 0:13:55.520 --> 0:14:00.640 arguing that yes, monetary policy can handle it, as he 0:14:00.800 --> 0:14:05.280 was a disciple of Milton Freeman, who argue that if 0:14:05.320 --> 0:14:08.839 the Fed acted more responsible during a great depression, things 0:14:08.840 --> 0:14:12.760 wouldn't have gone so bad. But after reading my book, 0:14:13.440 --> 0:14:17.160 he started talking about fiscal cliff, which is the opposite 0:14:17.240 --> 0:14:20.080 of what treatment was saying. And I thought that was 0:14:20.120 --> 0:14:24.120 a very important change in the US policy when Germin 0:14:24.160 --> 0:14:29.360 Minanke at various events kept on saying we cannot afford 0:14:29.360 --> 0:14:32.359 the fall off the fiscal cliff. The government has to 0:14:32.400 --> 0:14:36.800 continue borrowing and spending money, meaning that fiscal policy is 0:14:36.800 --> 0:14:41.120 absolutely essential. And I think that is the key difference 0:14:41.200 --> 0:14:46.040 between the United States and Europe, because Europe really did 0:14:46.080 --> 0:14:50.000 not heed any of my advice, especially at the top level, 0:14:50.840 --> 0:14:54.840 and so they fell into a really serious balance recession 0:14:55.200 --> 0:14:58.680 and that recession lasted for almost ten years, whereas in 0:14:58.680 --> 0:15:03.040 the United States, the epicenter of this global financial crisis, 0:15:03.400 --> 0:15:06.360 because of the efforts made by Jimmerman and get the 0:15:06.480 --> 0:15:10.160 Fed and Larry Summers also, who actually endorsed my book 0:15:10.200 --> 0:15:14.200 The Holy grailm Microeconomics. He talked about the importance of 0:15:14.240 --> 0:15:17.960 fiscal stimulus. It has to be speedy, substantial, and sustained. 0:15:18.760 --> 0:15:21.680 So Obama administration was trying to put in fiscal stimulus. 0:15:22.320 --> 0:15:26.360 They made a lot of resistance from them from the Republicans, 0:15:26.920 --> 0:15:29.320 but at least US was trying to do all the 0:15:29.400 --> 0:15:31.920 right things, and I think that's why US came out 0:15:31.920 --> 0:15:36.760 of balance sheet recession much faster than the Europeans. So 0:15:37.080 --> 0:15:40.400 I would say that my book actually did have an 0:15:40.440 --> 0:15:45.840 impact on the US policy. If it had impact earlier, 0:15:45.960 --> 0:15:49.640 it would have probably helped the US economy even sooner. 0:15:50.320 --> 0:15:52.080 So that's one comment I want to make, and that 0:15:52.240 --> 0:15:56.160 is that US policy makers realize that they're facing balance 0:15:56.160 --> 0:16:00.800 sheet recession like EO too into the recession and made 0:16:00.880 --> 0:16:05.600 all the appropriate changes to fight it. Now, going back 0:16:05.600 --> 0:16:10.040 to the Chinese issue of where the debt might be, 0:16:11.440 --> 0:16:13.000 you know a lot of people like to talk about 0:16:13.040 --> 0:16:16.239 the size of the debt, but what is really important 0:16:16.760 --> 0:16:19.560 is the difference between the size of the debt and 0:16:19.600 --> 0:16:24.080 the size of the savings. And the fact that the 0:16:24.200 --> 0:16:29.280 Chinese interest rates, for example, ten year Chinese government bounds 0:16:29.320 --> 0:16:33.240 today is offering what two point six percent suggests that 0:16:33.560 --> 0:16:37.360 savings are far bigger than the debt because if the 0:16:37.360 --> 0:16:40.080 debt or the borrowing is probabiger than the savings. Interest 0:16:40.120 --> 0:16:43.080 rates should be higher, not lower, and the fact that 0:16:43.280 --> 0:16:45.440 ten year government bounce is down to two point six 0:16:45.480 --> 0:16:50.240 percent suggest to me that overall China's biggest problem is 0:16:50.240 --> 0:16:53.520 that there are too much savings relative to borrowings. So, 0:16:53.640 --> 0:16:57.880 having said that, who has the capacity to borrow and 0:16:57.920 --> 0:17:04.040 spend this money? Well, as you correctly mentioned, the federal 0:17:04.080 --> 0:17:08.159 government of the central government probably has plenty of rooms 0:17:08.240 --> 0:17:13.520 left to borrow and spend. But the regional governments I understand, 0:17:13.600 --> 0:17:18.119 are in very sad shape because they can't sell the 0:17:18.200 --> 0:17:23.200 land as easily or as expensively as before, and they 0:17:23.200 --> 0:17:26.080 have used up quite a bit of their resources in 0:17:26.119 --> 0:17:30.399 the previous years trying to support the economy, and also 0:17:30.520 --> 0:17:35.320 during the COVID nineteen and so the feeling I get 0:17:35.400 --> 0:17:42.160 is that regional governments are really overburdened already, and probably 0:17:42.200 --> 0:17:44.280 they will require quite a bit of help from the 0:17:44.320 --> 0:17:47.359 central government going forward if they are going to be 0:17:47.520 --> 0:17:51.760 the one who will be actually implementing fiscal stimulus, which 0:17:51.800 --> 0:17:53.640 is needed during the balancey recession. 0:17:54.520 --> 0:17:58.640 So, just on the idea of physical stimulus, historically, it 0:17:58.720 --> 0:18:02.359 does feel like a lot of China's stimulus has come 0:18:02.480 --> 0:18:06.760 in the shape of support measures to companies or these 0:18:06.840 --> 0:18:11.560 huge construction projects, big infrastructure and development projects of one 0:18:11.600 --> 0:18:14.919 sort or another. What would be the ideal form of 0:18:15.000 --> 0:18:19.159 stimulus this time around, because, of course, China is trying 0:18:19.200 --> 0:18:22.960 to balance various needs and goals here. It's talked a 0:18:22.960 --> 0:18:27.120 lot about retooling its economy away from manufacturing and real 0:18:27.240 --> 0:18:33.000 estate and more towards consumption. And yet historically we haven't 0:18:33.080 --> 0:18:37.800 seen a lot of fiscal support for households and individuals. 0:18:37.800 --> 0:18:40.280 It just hasn't been a very big thing in China. 0:18:40.920 --> 0:18:44.280 In terms of I mean, fiscal stimulus can come in 0:18:44.320 --> 0:18:47.760 various forms, right, You can have tax cuts of all 0:18:47.800 --> 0:18:51.560 of fiscal policy, or government actually borrowing and spending money, 0:18:51.600 --> 0:18:55.800 and the spending can go to in very many different places. 0:18:56.760 --> 0:19:01.080 First of all, tax cuts during balance research is not 0:19:01.240 --> 0:19:04.200 going to be very effective, and the reason is quite simple. 0:19:04.240 --> 0:19:05.960 Those people who get a tax cut who use the 0:19:06.040 --> 0:19:08.440 money to pay down debt, and that's good for that 0:19:08.440 --> 0:19:11.880 at the individual level perhaps, but collectively that won't help 0:19:11.920 --> 0:19:16.639 the GDP from collapsing. And so during balanceing recession, tax 0:19:16.680 --> 0:19:21.879 cuts should not be the main force of supporting the economy. 0:19:22.040 --> 0:19:24.919 So the government has to borrow and spend money, so 0:19:25.160 --> 0:19:28.560 within that what will be most effective. And I would 0:19:28.680 --> 0:19:37.240 argue that all those residential housing projects that were started 0:19:37.920 --> 0:19:40.960 but are now put on hold because the construction companies 0:19:41.280 --> 0:19:45.240 either have gone bankrupt or having so much financial problems 0:19:45.280 --> 0:19:49.240 they cannot move forward. I would recommend Chinese government to 0:19:50.680 --> 0:19:55.120 go in there and help those construction companies so that 0:19:55.480 --> 0:20:01.320 all the promised construction will be actually complete. I think 0:20:01.359 --> 0:20:04.600 that would be the most effective way to spend fiscal 0:20:04.600 --> 0:20:09.960 stimulus fiscal money, because that way, those people who were 0:20:10.040 --> 0:20:13.600 feeling very insecure, I mean they paid for the apartment 0:20:13.600 --> 0:20:17.040 house already or put the down payment. Now they're wondering 0:20:17.080 --> 0:20:20.440 whether they will get anything from all the investments they made, 0:20:20.680 --> 0:20:25.280 will at least get that apartments built and they can 0:20:25.800 --> 0:20:29.320 look forward to perhaps some larger apartments as a result. 0:20:30.880 --> 0:20:34.800 And the same part would be helping the construction industries. 0:20:35.080 --> 0:20:38.000 And one key difference between the Japanese and the Chinese 0:20:38.040 --> 0:20:41.119 situation is that construction is such a large part of 0:20:41.240 --> 0:20:45.040 Chinese GDP. Construction accounts was something like twenty six percent 0:20:45.080 --> 0:20:49.199 of Chinese GDP, whereas during the bubble days in Japan 0:20:49.280 --> 0:20:53.080 it was only around twenty percent, and it wasn't a 0:20:53.119 --> 0:20:55.800 big part of the picture, whereas in the Chinese bubble 0:20:56.320 --> 0:20:59.840 it came with a huge construction boom. And so when 0:21:00.320 --> 0:21:05.840 acid prices collapse but construction boom also go bust, then 0:21:05.880 --> 0:21:08.360 you are hit from both the real side as well 0:21:08.400 --> 0:21:11.880 as from the balance EAT side and BALANCEA side. There's 0:21:11.920 --> 0:21:14.960 not much one can do. But on the construction side, 0:21:15.200 --> 0:21:20.119 if government comes in and help finish those projects that 0:21:20.280 --> 0:21:24.400 was started, I think that kind of money will probably 0:21:24.640 --> 0:21:27.960 go a long way in helping the Chinese economy. 0:21:28.520 --> 0:21:31.120 Can I ask what about the role of the foreign 0:21:31.400 --> 0:21:34.959 sector when we sort of break down the Chinese economy 0:21:35.000 --> 0:21:37.280 and a sort of sectoral model. So it's like, Okay, 0:21:37.320 --> 0:21:41.240 we know that domestic households have a high level of savings. 0:21:41.240 --> 0:21:44.560 We know the federal government has not borrowed a lot. 0:21:44.680 --> 0:21:49.360 But on the other hand, the trade surpluses are massive. 0:21:49.680 --> 0:21:51.920 And again I sort of mentioned in the intro that 0:21:51.960 --> 0:21:56.000 one of the themes right now is that Chinese advanced exports, 0:21:56.000 --> 0:21:59.080 particularly in areas like batteries and evs and other cutting 0:21:59.200 --> 0:22:01.120 edge stuff, is kind of booming. 0:22:01.680 --> 0:22:04.960 If it continues to boom, can. 0:22:04.840 --> 0:22:08.359 That go some ways in sort of mitigating the need 0:22:08.760 --> 0:22:12.080 for federal government borrowing absolutely. 0:22:12.240 --> 0:22:14.600 I mean, if Chinese companies keeps on coming up with 0:22:14.760 --> 0:22:20.040 new fantastic products, and both Chinese and non Chinese are 0:22:20.080 --> 0:22:22.600 willing to borrow money to buy those products, then that 0:22:22.680 --> 0:22:26.639 will be helping the Chinese economy in massive, massive fashion. 0:22:27.840 --> 0:22:31.160 And I realized, as you mentioned already, that there are 0:22:31.280 --> 0:22:34.720 many Chinese companies that are highly innovative, coming up with 0:22:34.760 --> 0:22:38.280 a lot of interesting products, and they should find plenty 0:22:38.320 --> 0:22:42.119 of export markets for those products, So that part is 0:22:42.160 --> 0:22:46.480 definitely there. My concern, however, is the same concern that 0:22:46.600 --> 0:22:50.040 Japan had back in those days. At that time thirty 0:22:50.119 --> 0:22:52.960 years ago, Japan was running the largest trade of pluses 0:22:52.960 --> 0:22:56.240 in the world. So many people wanted to buy Japanese cameras, 0:22:56.320 --> 0:23:01.719 Japanese cars, Japanese appliances, and it was running such a 0:23:01.800 --> 0:23:04.679 large trade surplus. 0:23:04.359 --> 0:23:06.639 It could not push it even more. 0:23:08.160 --> 0:23:10.920 In that if Japan wanted to export even more by, 0:23:10.960 --> 0:23:13.400 for example, bringing the Japanese end down a little bit, 0:23:14.080 --> 0:23:18.080 Americans would be very upset. The USTR will be knocking 0:23:18.080 --> 0:23:20.800 on the Japanese and said, no, you ben opened your 0:23:20.840 --> 0:23:25.800 market not sending these additional products to US. And I 0:23:26.080 --> 0:23:29.760 was actually involved in the US Japan trade friction back 0:23:29.960 --> 0:23:34.560 thirty years ago. At that time, the US Ambassador to 0:23:34.640 --> 0:23:39.240 Japan was mister Walter Mondale, a former Vice president, who 0:23:39.320 --> 0:23:44.080 asked away. Recently he found out that this guy Richard Ko, 0:23:44.280 --> 0:23:48.560 who is frequently appearing in Japanese television programs, actually carries 0:23:48.600 --> 0:23:51.240 an American passport. So he asked me to come over, 0:23:52.040 --> 0:23:55.919 and he basically asked me to represent the United States 0:23:55.960 --> 0:23:59.520 in all these Japanese TV programs on US Japan trade friction. 0:24:00.240 --> 0:24:05.639 And at that time, usgvent trade friction was really really bad, serious, ugly, 0:24:06.119 --> 0:24:09.440 you name it. It was really terrible. So I tried 0:24:09.480 --> 0:24:12.040 to ill go to the US embassy to get a 0:24:12.080 --> 0:24:15.000 food briefing from staff first there and then go to 0:24:15.040 --> 0:24:18.639 the television's studios to try to explain the American position 0:24:18.720 --> 0:24:22.960 to the Japanese audience, even though I was actually employed 0:24:22.960 --> 0:24:26.560 by the Japanese Research Institute, and all these other Japanese 0:24:26.600 --> 0:24:29.359 on the program waiting with their guns to shoot me down. 0:24:29.560 --> 0:24:32.199 You know, that was that kind of situation. So I 0:24:32.320 --> 0:24:35.080 learned a lot about trade friction back in those days, 0:24:36.080 --> 0:24:41.040 and Japan really could not rely on additional exports because 0:24:41.080 --> 0:24:45.200 it was already running such a large trade surplus. So 0:24:45.320 --> 0:24:49.320 if Japan could have used exports by bringing the Japanese 0:24:49.359 --> 0:24:51.520 hand down a little bit and export its way out, 0:24:52.119 --> 0:24:57.280 that would have shortened the balanceing recession by some considerable years. 0:24:57.920 --> 0:25:00.639 But that option really was not available to Japan at 0:25:00.680 --> 0:25:04.560 that time because it was such a large trade cirplust country. 0:25:05.440 --> 0:25:08.320 And I think that applies to China today as well 0:25:09.000 --> 0:25:09.359 as you know. 0:25:09.480 --> 0:25:09.760 China. 0:25:09.760 --> 0:25:12.200 As you mentioned, China is the largest trade circlust country 0:25:12.240 --> 0:25:15.600