1 00:00:10,680 --> 00:00:14,200 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:14,320 --> 00:00:18,880 Speaker 1: I'm Tracy Allaway and I'm Joe. Wasn't so Joe. It 3 00:00:18,960 --> 00:00:22,400 Speaker 1: has to be said that there are many irony's to 4 00:00:22,480 --> 00:00:25,279 Speaker 1: come out of the coronavirus crisis, but one of the 5 00:00:25,320 --> 00:00:28,479 Speaker 1: big ones has to do with the fact that the 6 00:00:28,560 --> 00:00:34,479 Speaker 1: outbreak started in China in early and yet China have 7 00:00:34,560 --> 00:00:38,839 Speaker 1: the best performing economy that year. Yeah. I think it 8 00:00:38,960 --> 00:00:45,040 Speaker 1: was the only major economy that actually um grew overall 9 00:00:45,240 --> 00:00:49,120 Speaker 1: in which is pretty extraordinary. And I don't really know 10 00:00:49,159 --> 00:00:51,479 Speaker 1: if it's if it's true or if it will be 11 00:00:51,560 --> 00:00:54,360 Speaker 1: durably true, but I do think there's this sort of 12 00:00:54,480 --> 00:00:58,800 Speaker 1: meme out there that like China one in some way 13 00:00:58,840 --> 00:01:00,920 Speaker 1: that it came out ahead. I don't actually, I'm not. 14 00:01:01,120 --> 00:01:03,720 Speaker 1: I have a getting necessarily been convinced of it. But 15 00:01:03,840 --> 00:01:06,800 Speaker 1: because of China's growth and the quick rebound and it's 16 00:01:06,840 --> 00:01:09,720 Speaker 1: successful suppression of the virus, that is like a thing 17 00:01:09,800 --> 00:01:13,640 Speaker 1: people say. Yeah, so China's GDP grew I think it 18 00:01:13,720 --> 00:01:17,720 Speaker 1: was two point three percent last year, which means it 19 00:01:17,800 --> 00:01:21,280 Speaker 1: was the only major economy as as you mentioned, to 20 00:01:21,680 --> 00:01:25,200 Speaker 1: escape contraction, which is pretty amazing. And then of course 21 00:01:25,800 --> 00:01:30,000 Speaker 1: people have been pitching China's experience in as sort of 22 00:01:30,080 --> 00:01:33,760 Speaker 1: like proof of the benefits of a command economy. When 23 00:01:33,800 --> 00:01:37,360 Speaker 1: you have something like an outbreak in a country with 24 00:01:37,520 --> 00:01:41,920 Speaker 1: a very strong government, you can control the population, you 25 00:01:41,959 --> 00:01:45,280 Speaker 1: can put in place restrictions and things that are ultimately 26 00:01:45,280 --> 00:01:48,320 Speaker 1: going to make it easier to to fight the virus, 27 00:01:48,400 --> 00:01:50,440 Speaker 1: and of course you can pull a bunch of lovers 28 00:01:50,920 --> 00:01:55,000 Speaker 1: to boost economic activity as well. So most people have 29 00:01:55,040 --> 00:01:58,200 Speaker 1: been talking about what an exceptional year it was for 30 00:01:58,320 --> 00:02:01,480 Speaker 1: China's sort of proofs of their economic model might be 31 00:02:01,520 --> 00:02:05,800 Speaker 1: more resilient than some people think. But there are people 32 00:02:05,840 --> 00:02:10,040 Speaker 1: out there who think that actually wasn't as good a 33 00:02:10,080 --> 00:02:13,200 Speaker 1: year for China as it's been portrayed, and that if anything, 34 00:02:13,760 --> 00:02:18,400 Speaker 1: China is coming out of in a more vulnerable position. Yeah, 35 00:02:18,440 --> 00:02:21,120 Speaker 1: I don't think there's you know, it seems too early 36 00:02:21,200 --> 00:02:24,839 Speaker 1: to know, right, So yes, it grew. Um, I'm I'm 37 00:02:24,840 --> 00:02:27,120 Speaker 1: thinking back to our episode with Dan Wong from a 38 00:02:27,160 --> 00:02:30,000 Speaker 1: few weeks ago where he said like his lessons from 39 00:02:30,760 --> 00:02:33,880 Speaker 1: were a that on some level the government is more 40 00:02:34,480 --> 00:02:37,360 Speaker 1: tough and brutal than he appreciated, but also in his 41 00:02:37,480 --> 00:02:41,640 Speaker 1: view that the there's a can do spirit to Chinese 42 00:02:41,639 --> 00:02:44,520 Speaker 1: business and the economy that he thinks is unmaged elsewhere. 43 00:02:45,080 --> 00:02:47,800 Speaker 1: But I still think that, you know, regardless of what 44 00:02:47,880 --> 00:02:51,880 Speaker 1: the situation is right now, we it's very much a 45 00:02:52,040 --> 00:02:55,040 Speaker 1: jump ball open question of what the long term economic 46 00:02:55,240 --> 00:03:00,360 Speaker 1: ramifications are going to be from this extraordinary past once 47 00:03:00,400 --> 00:03:04,519 Speaker 1: basically right. Of course, time will ultimately tell, but given 48 00:03:04,560 --> 00:03:07,680 Speaker 1: that we are coming up to the one year anniversary 49 00:03:08,000 --> 00:03:10,280 Speaker 1: of Earth, by the time we release this episode will 50 00:03:10,280 --> 00:03:12,400 Speaker 1: probably be in the midst of the one year anniversary 51 00:03:12,800 --> 00:03:16,600 Speaker 1: of the big market sell off and the virus really 52 00:03:16,760 --> 00:03:19,560 Speaker 1: um sort of expanding in the rest of the world. 53 00:03:19,760 --> 00:03:24,280 Speaker 1: I think the China experience is worth discussing um, and 54 00:03:24,320 --> 00:03:27,000 Speaker 1: of course we can talk about whether or not the 55 00:03:27,040 --> 00:03:30,680 Speaker 1: strength that we saw a exists and be will continue 56 00:03:30,680 --> 00:03:34,320 Speaker 1: into one. So I'm happy to say we have the 57 00:03:34,360 --> 00:03:38,080 Speaker 1: perfect person on to talk about this, someone who has 58 00:03:38,120 --> 00:03:42,560 Speaker 1: been on all thoughts before. It's Michael Pettis, finance professor 59 00:03:42,720 --> 00:03:45,720 Speaker 1: over at Paking University and a senior fellow at the 60 00:03:45,800 --> 00:03:50,160 Speaker 1: Carnegie Chinghwa Center. Everyone enjoys his thoughts on China. He's 61 00:03:50,200 --> 00:03:52,520 Speaker 1: probably one of the best China commentators out there, so 62 00:03:52,600 --> 00:03:55,600 Speaker 1: we're really grateful to have them on the program again, Michael, 63 00:03:55,800 --> 00:03:59,280 Speaker 1: thanks for coming on. Thank you so great to be back. 64 00:03:59,640 --> 00:04:02,200 Speaker 1: So did we get that right? China had two point 65 00:04:02,200 --> 00:04:07,320 Speaker 1: three GDP growth in Lots of commentators described that as 66 00:04:07,960 --> 00:04:12,880 Speaker 1: proof of Chinese exceptionalism, proof of the economic model. But 67 00:04:13,560 --> 00:04:17,400 Speaker 1: you've written that you saw it slightly differently. What was 68 00:04:17,520 --> 00:04:22,480 Speaker 1: China's year like for you? How strong was the economy? Actually? Well, 69 00:04:22,520 --> 00:04:25,640 Speaker 1: the first point that I make pretty often and probably 70 00:04:25,920 --> 00:04:29,960 Speaker 1: the last time we spoke, is that GDP in China 71 00:04:30,040 --> 00:04:32,760 Speaker 1: means something very different than it means in other countries. 72 00:04:32,839 --> 00:04:37,000 Speaker 1: GDP and China is an input and in other countries 73 00:04:37,040 --> 00:04:41,120 Speaker 1: it's a measure of output, and that makes it non comparable. 74 00:04:41,240 --> 00:04:44,920 Speaker 1: What what happened last year in China is that there 75 00:04:44,920 --> 00:04:49,320 Speaker 1: are basically two types of growth that Beijing focuses on. 76 00:04:49,520 --> 00:04:53,760 Speaker 1: There is what you know, what we call high quality growth, 77 00:04:53,800 --> 00:04:57,400 Speaker 1: which is really the growth in consumption, the growth in 78 00:04:57,600 --> 00:05:00,680 Speaker 1: business investment, which is closely tie to the growth and 79 00:05:00,720 --> 00:05:05,640 Speaker 1: consumption and growth in exports. And then there is the 80 00:05:05,720 --> 00:05:10,200 Speaker 1: growth that everyone recognizes is low quality growth, which Beijing 81 00:05:10,279 --> 00:05:14,320 Speaker 1: has has pledged to reduce, and that's the growth that 82 00:05:14,400 --> 00:05:20,600 Speaker 1: arises from increases in public sector infrastructure spending, much of 83 00:05:20,640 --> 00:05:25,359 Speaker 1: which is really nonproductive and in real estate development. And 84 00:05:25,400 --> 00:05:28,600 Speaker 1: it's not a big secret that China has one of 85 00:05:28,640 --> 00:05:32,800 Speaker 1: the fastest growing debt ratio's debt burdens in the world, 86 00:05:33,320 --> 00:05:37,719 Speaker 1: mostly generated by this investment in in in public sector 87 00:05:37,760 --> 00:05:42,960 Speaker 1: infrastructure and real estate development. So um, what matters is 88 00:05:43,080 --> 00:05:47,920 Speaker 1: how growth developed last year, and and it's no big surprise, 89 00:05:48,040 --> 00:05:51,799 Speaker 1: is no big secret that you know, the quality growth, 90 00:05:52,000 --> 00:05:56,880 Speaker 1: that is, consumption and business investment were down quite substantially. 91 00:05:57,480 --> 00:06:01,600 Speaker 1: Exports were up, but collectively they were net down. And 92 00:06:01,640 --> 00:06:05,760 Speaker 1: the only reason China had two point three percent real 93 00:06:05,839 --> 00:06:10,000 Speaker 1: GDP growth is because of a seven percent surge in 94 00:06:10,080 --> 00:06:13,159 Speaker 1: real estate development. And uh, I forget the number, but 95 00:06:13,320 --> 00:06:16,200 Speaker 1: more than more than three or four percent growth in 96 00:06:16,279 --> 00:06:19,839 Speaker 1: public sector infrastructure spending. And you can see that in 97 00:06:20,080 --> 00:06:26,600 Speaker 1: you know, the soaring steel prices, copper prices, sales of machinery, etcetera, etcetera. Now, 98 00:06:26,760 --> 00:06:29,520 Speaker 1: if this stuff was good growth, there wouldn't be a 99 00:06:29,520 --> 00:06:32,440 Speaker 1: big debate about trying to restrain it. You know, if 100 00:06:32,240 --> 00:06:35,000 Speaker 1: if you spend a hundred dollars to build the bridge 101 00:06:35,000 --> 00:06:37,279 Speaker 1: and it makes you a hundred and fifty dollars richer, 102 00:06:37,760 --> 00:06:40,440 Speaker 1: there shouldn't be any debate about whether or not you 103 00:06:40,440 --> 00:06:42,560 Speaker 1: should build the bridge. The fact that there is such 104 00:06:42,560 --> 00:06:44,920 Speaker 1: a bridge as a recognition that it's really not worth 105 00:06:44,960 --> 00:06:48,160 Speaker 1: a hundred dollars. It's worth less than that. And that's 106 00:06:48,240 --> 00:06:51,719 Speaker 1: the growth that was generated. That's what took China from 107 00:06:51,720 --> 00:06:54,920 Speaker 1: a negative growth rate to a positive growth rate. And 108 00:06:54,960 --> 00:06:59,279 Speaker 1: the coral corollary of that, of course, is that China's 109 00:06:59,400 --> 00:07:04,760 Speaker 1: debt to GDP ratio went up twenty five percentage points 110 00:07:04,960 --> 00:07:07,520 Speaker 1: last year. The year before that was pretty bad, it 111 00:07:07,600 --> 00:07:10,920 Speaker 1: went up six percentage points. So that really gives you 112 00:07:10,960 --> 00:07:15,400 Speaker 1: an idea of how China generated growth this year. You 113 00:07:15,400 --> 00:07:18,600 Speaker 1: could argue that that was a great accomplishment, but you 114 00:07:18,640 --> 00:07:21,480 Speaker 1: could also argue that it left the economy warsaw not 115 00:07:21,640 --> 00:07:26,280 Speaker 1: better off. You know, on this question of um disaggregating 116 00:07:26,360 --> 00:07:29,920 Speaker 1: high quality growth and low quality growth. I mean, one 117 00:07:29,960 --> 00:07:32,360 Speaker 1: of the things that you know, since I've been following 118 00:07:32,600 --> 00:07:36,360 Speaker 1: markets and economics for a little over a decade now professionally, 119 00:07:36,400 --> 00:07:40,000 Speaker 1: I remember like two thousand nine, two thousand ten, and 120 00:07:40,040 --> 00:07:42,960 Speaker 1: they posted those videos on YouTube of the so called 121 00:07:44,120 --> 00:07:48,360 Speaker 1: ghost cities or you know, all these apartment towers that 122 00:07:48,400 --> 00:07:51,120 Speaker 1: were completely unoccupied, like oh, look at all this wasteful spending, 123 00:07:51,240 --> 00:07:53,480 Speaker 1: or there would be like a train station but no 124 00:07:53,600 --> 00:07:56,560 Speaker 1: city around it, and then it seems like years later 125 00:07:57,440 --> 00:08:00,200 Speaker 1: those cities did actually end up becoming occupied and those 126 00:08:00,240 --> 00:08:02,120 Speaker 1: train stations that seem like they were in the middle 127 00:08:02,120 --> 00:08:05,960 Speaker 1: of nowhere looked like, uh, actually people are using them. 128 00:08:06,040 --> 00:08:08,880 Speaker 1: So a is that true that a lot of what 129 00:08:09,000 --> 00:08:14,880 Speaker 1: was characterized as malinvestment did become productive investment and be 130 00:08:15,120 --> 00:08:19,320 Speaker 1: how can one identify in real time that what you 131 00:08:19,440 --> 00:08:24,280 Speaker 1: characterize as bad growth or mediocre growth um low quality 132 00:08:24,320 --> 00:08:28,800 Speaker 1: growth is in fact going to be um unproductive public investment. 133 00:08:29,560 --> 00:08:32,480 Speaker 1: The the answer to your first question is that China 134 00:08:32,559 --> 00:08:35,280 Speaker 1: is a huge country. It's really really I don't like 135 00:08:35,360 --> 00:08:38,800 Speaker 1: to use specific examples because you can prove anything you want. 136 00:08:39,280 --> 00:08:43,240 Speaker 1: There's certainly are areas that were considered to be overbuilt 137 00:08:43,280 --> 00:08:46,680 Speaker 1: that filled up. There are even more areas that have 138 00:08:46,800 --> 00:08:49,559 Speaker 1: never really filled up. If you go to ken Jin, 139 00:08:49,760 --> 00:08:53,640 Speaker 1: for example, Uh, they decided that they wanted to become 140 00:08:54,080 --> 00:08:57,240 Speaker 1: one of the leading financial centers of China. There's about 141 00:08:57,280 --> 00:08:59,960 Speaker 1: ten cities that want to do that. And the way 142 00:09:00,200 --> 00:09:03,920 Speaker 1: you become a leading financial center, according to Changin, is 143 00:09:03,960 --> 00:09:08,600 Speaker 1: you build an entire Manhattan worth of office buildings on 144 00:09:08,640 --> 00:09:12,040 Speaker 1: the outskirts of the city, and they did that. That 145 00:09:12,200 --> 00:09:14,840 Speaker 1: area is quite visited, but it is visited by tourists. 146 00:09:14,880 --> 00:09:18,640 Speaker 1: Nobody actually lives there, and it's really spectaculor. You've got 147 00:09:18,640 --> 00:09:22,800 Speaker 1: all these beautiful buildings, just thousands of them. They're all empty, 148 00:09:22,880 --> 00:09:25,200 Speaker 1: so you can you know, it's easy for you to 149 00:09:25,240 --> 00:09:28,880 Speaker 1: find examples or counter examples. That's why I look at 150 00:09:28,920 --> 00:09:33,839 Speaker 1: the aggregate numbers, and China has had the highest investment 151 00:09:33,880 --> 00:09:38,080 Speaker 1: growth rate in history for forty years and the highest 152 00:09:38,200 --> 00:09:42,520 Speaker 1: investment share of GDP of any country in history, ten 153 00:09:42,600 --> 00:09:47,400 Speaker 1: percentage points higher than number two, which was South Korea 154 00:09:47,520 --> 00:09:49,560 Speaker 1: for a brief period, but China has had it for 155 00:09:49,600 --> 00:09:52,800 Speaker 1: thirty or forty years, and that alan should worry you. 156 00:09:52,880 --> 00:09:57,600 Speaker 1: But more importantly is the debt trajectory, because when you 157 00:09:57,720 --> 00:10:02,360 Speaker 1: borrow money to fund invest stament, if the investment is productive, 158 00:10:02,800 --> 00:10:06,480 Speaker 1: by definition, your debt to GDP ratio can't go up, 159 00:10:06,520 --> 00:10:09,520 Speaker 1: because while your debt goes up, your GDP should be 160 00:10:09,559 --> 00:10:13,520 Speaker 1: going up at least as quickly. Chinese debt rose very 161 00:10:13,600 --> 00:10:17,240 Speaker 1: quickly in the nine nineties, but nobody noticed it because 162 00:10:17,360 --> 00:10:20,840 Speaker 1: g d P rose even more quickly it was only 163 00:10:21,320 --> 00:10:26,439 Speaker 1: during some period around the first decade of the century 164 00:10:26,520 --> 00:10:30,280 Speaker 1: where suddenly the growth in debt picked up and accelerated 165 00:10:30,360 --> 00:10:35,080 Speaker 1: were while the growth and GDP slowed down. Because most 166 00:10:35,120 --> 00:10:38,400 Speaker 1: of the debt goes to fund investment that cannot possibly 167 00:10:38,480 --> 00:10:42,440 Speaker 1: happen if the if the investment is productive. You know, 168 00:10:42,559 --> 00:10:46,320 Speaker 1: in theory, if you invest in in kindergartens, you don't 169 00:10:46,320 --> 00:10:48,960 Speaker 1: get the results for another twenty or thirty years. But 170 00:10:49,080 --> 00:10:52,080 Speaker 1: that's a tiny part of the investment. Most of it 171 00:10:52,120 --> 00:10:55,360 Speaker 1: is bridges and subways and things like that, and we 172 00:10:55,440 --> 00:10:58,440 Speaker 1: haven't seen the benefits yet. So in my mind, there's 173 00:10:58,480 --> 00:11:02,320 Speaker 1: no question that much of this investment is misallocated. But 174 00:11:02,840 --> 00:11:06,960 Speaker 1: what I think doesn't matter. Clearly Beijing is very worried 175 00:11:06,960 --> 00:11:09,600 Speaker 1: about this. This is why they're having this huge debate 176 00:11:10,080 --> 00:11:14,000 Speaker 1: about how much growth they need. If the growth was good, 177 00:11:14,120 --> 00:11:16,240 Speaker 1: you shouldn't debate it. If you can get eight percent, 178 00:11:16,280 --> 00:11:18,400 Speaker 1: get eight percent. If you can get ten percent, get 179 00:11:18,440 --> 00:11:22,360 Speaker 1: ten percent. But they're not trying to get eight percent 180 00:11:22,440 --> 00:11:24,560 Speaker 1: or ten percent, which they easily could they have the 181 00:11:24,559 --> 00:11:28,880 Speaker 1: debt capacity, because clearly they don't believe in that growth, 182 00:11:28,920 --> 00:11:30,959 Speaker 1: and that's why you have all of this talk about 183 00:11:31,000 --> 00:11:35,679 Speaker 1: rebalancing and dual circulation. This is a clear recognition that 184 00:11:35,720 --> 00:11:38,280 Speaker 1: there is a serious problem with the quality of growth. 185 00:11:39,559 --> 00:11:41,920 Speaker 1: Could you dive into that a little bit more so? 186 00:11:42,559 --> 00:11:46,520 Speaker 1: Beijing is obviously looking at a trade off between economic 187 00:11:46,559 --> 00:11:51,080 Speaker 1: growth and more debt accumulation. How are they thinking about 188 00:11:51,080 --> 00:11:54,680 Speaker 1: that and what are the political calculations that you see 189 00:11:54,679 --> 00:11:56,720 Speaker 1: them making at the moment. Well, in a couple of 190 00:11:56,760 --> 00:12:02,240 Speaker 1: weeks will start the famous two Sessions. Typically that's when 191 00:12:02,240 --> 00:12:05,120 Speaker 1: they set out the plans for the year and for 192 00:12:05,120 --> 00:12:08,440 Speaker 1: for people like you and me. The most important part 193 00:12:08,440 --> 00:12:11,640 Speaker 1: of the two sessions is that they announced the GDP 194 00:12:11,800 --> 00:12:14,960 Speaker 1: growth target for the year most or as we know 195 00:12:15,160 --> 00:12:17,920 Speaker 1: by December, what the GDP growth target is. Last year 196 00:12:18,320 --> 00:12:22,200 Speaker 1: there wasn't one, and this year there probably won't be 197 00:12:22,240 --> 00:12:25,440 Speaker 1: a GDP growth target. But it's clear that there is 198 00:12:25,480 --> 00:12:29,200 Speaker 1: a ferocious debate about growth versus debt. So you have 199 00:12:29,360 --> 00:12:32,240 Speaker 1: one group of people saying it is really important to 200 00:12:32,320 --> 00:12:35,079 Speaker 1: keep the growth rate as as high as possible, by 201 00:12:35,080 --> 00:12:37,400 Speaker 1: which you know a lot of people are saying GDP 202 00:12:37,520 --> 00:12:40,720 Speaker 1: growth this year in China will be eight to I 203 00:12:40,760 --> 00:12:43,320 Speaker 1: don't think that's the case. I think they're more likely 204 00:12:43,360 --> 00:12:47,160 Speaker 1: to go either between six and seven percent of the 205 00:12:47,200 --> 00:12:50,719 Speaker 1: debt guys have the upper hand, or seven and eight 206 00:12:50,760 --> 00:12:53,400 Speaker 1: percent of the growth guys have the upper hand. But 207 00:12:53,480 --> 00:12:57,880 Speaker 1: either way, that's the nature of the debate that we're hearing. 208 00:12:58,520 --> 00:13:02,120 Speaker 1: On the one hand, you have the politicos, the provincial leaders, 209 00:13:02,200 --> 00:13:05,320 Speaker 1: and you know, some of the military and foreign affairs 210 00:13:05,320 --> 00:13:07,640 Speaker 1: guys saying we need to keep growth rates as high 211 00:13:07,720 --> 00:13:12,640 Speaker 1: as possible. On the other hand, there's almost unanimity among academics, 212 00:13:13,000 --> 00:13:16,160 Speaker 1: m the Central Bank, people in the Ministry of Finance 213 00:13:16,240 --> 00:13:21,280 Speaker 1: and the banking regulators, almost unanimity not complete, saying that no, 214 00:13:21,520 --> 00:13:24,760 Speaker 1: we absolutely have to get debt under control. And so 215 00:13:24,840 --> 00:13:27,920 Speaker 1: that's really what the discussion is going to be. Uh. 216 00:13:28,240 --> 00:13:30,680 Speaker 1: But it's very hard to do. You cannot get debt 217 00:13:30,720 --> 00:13:33,960 Speaker 1: under control, in my opinion, unless you're willing to accept 218 00:13:34,040 --> 00:13:37,319 Speaker 1: growth rates of two to three percent or maybe even lower. 219 00:13:37,800 --> 00:13:41,640 Speaker 1: And I don't think even the hardest core debt warriors 220 00:13:42,200 --> 00:13:45,680 Speaker 1: are willing to UH to see growth drop that quickly. So, 221 00:13:45,920 --> 00:13:49,720 Speaker 1: you know, thinking back pre virus, and I think I 222 00:13:49,720 --> 00:13:52,240 Speaker 1: don't remember when we had you on before, but it's 223 00:13:52,240 --> 00:13:54,439 Speaker 1: been a consistent theme of your work, and we should, 224 00:13:54,440 --> 00:13:57,680 Speaker 1: of course mentioned the book that you published this last 225 00:13:57,760 --> 00:14:01,720 Speaker 1: year with Matt Klein Trade war are class wars, which 226 00:14:01,880 --> 00:14:06,439 Speaker 1: seemed very timely. But this idea that Chinese growth has 227 00:14:06,440 --> 00:14:09,559 Speaker 1: sort of come expense, come at the expense of household 228 00:14:09,559 --> 00:14:14,320 Speaker 1: buying power, that it's so heavily focused on investment, not 229 00:14:14,440 --> 00:14:19,320 Speaker 1: much consumption. Chinese households are forced to or the facto, 230 00:14:19,520 --> 00:14:21,760 Speaker 1: forced to save a lot. You know, when when the 231 00:14:21,800 --> 00:14:23,960 Speaker 1: when the crisis hit, it made me wonder, It's like, well, 232 00:14:24,080 --> 00:14:26,280 Speaker 1: is this going to change? Is there going to be 233 00:14:26,360 --> 00:14:28,920 Speaker 1: an increase in the social safety net so that households 234 00:14:28,920 --> 00:14:31,400 Speaker 1: don't have to spend more, Will there be more public 235 00:14:31,440 --> 00:14:35,080 Speaker 1: health spending? And will that infrastructure get built out also 236 00:14:35,200 --> 00:14:38,800 Speaker 1: sort of allowing consumers to spend more. It seemed like 237 00:14:39,280 --> 00:14:42,880 Speaker 1: that could be a catalyst for some meaningful change along 238 00:14:42,880 --> 00:14:46,920 Speaker 1: that dimension. And I'm curious, you know, in the short term, yes, okay, 239 00:14:47,280 --> 00:14:50,360 Speaker 1: lots of the growth has been um, you know, government 240 00:14:50,680 --> 00:14:54,800 Speaker 1: spending on infrastructure. But is there any shift afoot in 241 00:14:54,840 --> 00:14:57,560 Speaker 1: this sort of rebalancing of the economy that you've been 242 00:14:57,560 --> 00:15:01,520 Speaker 1: talking about for years. There's certainly a lot more a 243 00:15:02,400 --> 00:15:05,960 Speaker 1: focus on it, and it's become very fashionable now for 244 00:15:06,320 --> 00:15:10,240 Speaker 1: local government officials to make one announcement after another that 245 00:15:10,280 --> 00:15:14,720 Speaker 1: they're boosting consumption or upgrading consumption was the was the 246 00:15:14,760 --> 00:15:19,960 Speaker 1: fashionable phrase. But the problem is that we we know 247 00:15:20,120 --> 00:15:23,680 Speaker 1: why the consumption share of g d P in China 248 00:15:23,960 --> 00:15:28,920 Speaker 1: is so low. It's it's just arithmetic. Households, ordinary households. 249 00:15:29,480 --> 00:15:34,000 Speaker 1: They retain the lowest share of GDP of any country 250 00:15:34,040 --> 00:15:38,359 Speaker 1: probably in history. And as a result, since most consumption 251 00:15:38,480 --> 00:15:42,760 Speaker 1: is household consumption, if you have a low household consumption share, 252 00:15:42,920 --> 00:15:46,480 Speaker 1: that low household income share, then you're gonna have a 253 00:15:46,520 --> 00:15:51,240 Speaker 1: low household consumption share. So how do you resolve that problem? Well, 254 00:15:51,480 --> 00:15:54,160 Speaker 1: there's really only two weeks, and again this is just arithmetic. 255 00:15:54,240 --> 00:15:56,520 Speaker 1: You can you can keep shops open later at night, 256 00:15:56,560 --> 00:15:59,520 Speaker 1: which they're proposing to do. You can, you know, make 257 00:15:59,560 --> 00:16:05,440 Speaker 1: shopping malls more more beautiful, and you can improve online delivery, etcetera, etcetera. 258 00:16:05,760 --> 00:16:08,760 Speaker 1: But none of that has an impact on on on 259 00:16:08,880 --> 00:16:13,040 Speaker 1: consumption because basically the way you consume is you have 260 00:16:13,360 --> 00:16:17,040 Speaker 1: a an income, and out of that income, you serve 261 00:16:17,080 --> 00:16:20,240 Speaker 1: a certain you save a certain amount, and then you know, 262 00:16:20,320 --> 00:16:23,200 Speaker 1: the rest is your consumption budget. If you spend more 263 00:16:23,240 --> 00:16:25,320 Speaker 1: money late at night, you're going to spend less money 264 00:16:25,320 --> 00:16:28,440 Speaker 1: in the day. There's only two ways to get you 265 00:16:28,520 --> 00:16:31,960 Speaker 1: to consume a bigger share of GDP. One way is 266 00:16:32,000 --> 00:16:35,280 Speaker 1: to encourage lots of consumer debt, and that happened in 267 00:16:35,320 --> 00:16:38,320 Speaker 1: the last five or six years, a household debt surge 268 00:16:39,320 --> 00:16:41,720 Speaker 1: to buy some measures higher than it is in the 269 00:16:41,840 --> 00:16:45,280 Speaker 1: US UM And then the other way is to increase 270 00:16:45,320 --> 00:16:47,880 Speaker 1: the household income share, and that's what you're talking about, 271 00:16:48,000 --> 00:16:52,440 Speaker 1: by strengthening, strengthening the social safety net, raising wages, you know, 272 00:16:52,480 --> 00:16:57,120 Speaker 1: all of these various measures. But the problem is that 273 00:16:57,240 --> 00:17:01,000 Speaker 1: if I increase your share of GDP, by definition, I 274 00:17:01,040 --> 00:17:04,040 Speaker 1: have to reduce somebody else's share. And that's the part 275 00:17:04,119 --> 00:17:08,800 Speaker 1: that's never discussed um but we know basically, again it's 276 00:17:08,840 --> 00:17:14,680 Speaker 1: just arithmetic. You have to reduce the share retained by 277 00:17:14,760 --> 00:17:18,359 Speaker 1: um UH, local governments and the local elites in order 278 00:17:18,400 --> 00:17:22,800 Speaker 1: to increase the share retained by ordinary households. You can 279 00:17:22,840 --> 00:17:25,240 Speaker 1: also do it by screwing the business sector, but they 280 00:17:25,240 --> 00:17:27,280 Speaker 1: don't want to do that because the business sector is 281 00:17:27,320 --> 00:17:30,359 Speaker 1: the best part of the economy. But this is politically 282 00:17:30,400 --> 00:17:33,440 Speaker 1: really tough to do. And again it's something new. We've 283 00:17:33,480 --> 00:17:37,320 Speaker 1: known this for a while. It's just politically extremely difficult 284 00:17:37,640 --> 00:17:41,320 Speaker 1: to manage these transfers, and that's what they have to resolve. 285 00:17:57,280 --> 00:18:00,760 Speaker 1: So in a year like where we saw the government 286 00:18:00,880 --> 00:18:05,119 Speaker 1: ramp up spending in nonproductive parts of the economy, and 287 00:18:05,160 --> 00:18:09,600 Speaker 1: we also saw Chinese manufacturing really come roaring back, partly 288 00:18:09,640 --> 00:18:13,040 Speaker 1: because or mostly because the US and the rest of 289 00:18:13,080 --> 00:18:15,959 Speaker 1: the world we're buying lots of things like face masks 290 00:18:15,960 --> 00:18:21,880 Speaker 1: and computers. How much of that rebalancing that China has 291 00:18:21,920 --> 00:18:24,560 Speaker 1: been trying to do for so long now, you know, 292 00:18:24,800 --> 00:18:28,080 Speaker 1: moving more of its economy towards consumption, how much of 293 00:18:28,080 --> 00:18:33,400 Speaker 1: that actually got undone in and how difficult is it 294 00:18:33,440 --> 00:18:40,880 Speaker 1: going to be to kind of um reverse that dynamic. Well, first, Tracy, 295 00:18:40,960 --> 00:18:43,240 Speaker 1: let me tell you I'm a little bit skeptical about 296 00:18:43,400 --> 00:18:47,120 Speaker 1: the traditional argument for the surge in China's trade surplus. 297 00:18:47,160 --> 00:18:50,239 Speaker 1: I don't think it was because people bought lots of 298 00:18:50,320 --> 00:18:54,080 Speaker 1: masks and and things like that, because had that been 299 00:18:54,119 --> 00:19:00,320 Speaker 1: the story, the increase in Chinese export earnings would really 300 00:19:00,320 --> 00:19:04,040 Speaker 1: have led to an increase in Chinese imports, and it didn't. 301 00:19:04,080 --> 00:19:08,560 Speaker 1: Imports were actually down. So my view is a little 302 00:19:08,560 --> 00:19:12,080 Speaker 1: bit different. If you look at how China responded to 303 00:19:12,160 --> 00:19:14,720 Speaker 1: COVID nineteen, not just China, there were a few other 304 00:19:14,760 --> 00:19:17,560 Speaker 1: countries in Asia that did the same thing. It was 305 00:19:17,680 --> 00:19:20,800 Speaker 1: very different from the way the US and Europe responded. 306 00:19:20,840 --> 00:19:24,360 Speaker 1: In the US and Europe, this was treated mainly as 307 00:19:24,400 --> 00:19:28,160 Speaker 1: a demand side problem, and most of the policy responses 308 00:19:28,160 --> 00:19:33,200 Speaker 1: were aimed at boosting demand and basically by distributing income 309 00:19:33,240 --> 00:19:36,119 Speaker 1: to households. So what you see in Europe and in 310 00:19:36,160 --> 00:19:41,520 Speaker 1: the US is that the proxy for consumption recovered quite strongly. 311 00:19:42,160 --> 00:19:46,400 Speaker 1: The proxy for industrial production was still negative for the year. 312 00:19:47,440 --> 00:19:50,280 Speaker 1: But in China the response was very different. There was 313 00:19:50,520 --> 00:19:54,320 Speaker 1: very little demand side boost, basically nothing. It was all 314 00:19:54,400 --> 00:20:01,639 Speaker 1: supply side boost, cutting taxes on corporates, improving logistics, subsidizing manufacturing, etcetera. 315 00:20:02,240 --> 00:20:07,679 Speaker 1: So last year industrial production recovered very strongly. It was positive. 316 00:20:08,560 --> 00:20:11,960 Speaker 1: The proxy for consumption was negative. I think don't quote 317 00:20:11,960 --> 00:20:13,359 Speaker 1: me on this, but I think it was five or 318 00:20:13,400 --> 00:20:17,440 Speaker 1: six percent negative. So there's only you know, there's only 319 00:20:17,520 --> 00:20:19,280 Speaker 1: one way, or there's only a couple of ways you 320 00:20:19,320 --> 00:20:24,480 Speaker 1: can resolve it. If your industrial production recovers much more 321 00:20:24,600 --> 00:20:29,680 Speaker 1: strongly than your consumption, then the only ways to resolve 322 00:20:29,720 --> 00:20:33,480 Speaker 1: it is either with a significant increase in investment, which 323 00:20:33,520 --> 00:20:37,400 Speaker 1: we saw or if the rest of the world has 324 00:20:37,480 --> 00:20:40,600 Speaker 1: the opposite reaction, you can also resolve it with a 325 00:20:40,680 --> 00:20:45,399 Speaker 1: significant increase in your trade surplus. And that's what happened 326 00:20:45,400 --> 00:20:51,320 Speaker 1: in China. Exports surged, imports actually dropped last year, which 327 00:20:51,320 --> 00:20:55,479 Speaker 1: shouldn't happen when exports surge, but the result was China 328 00:20:55,640 --> 00:20:58,960 Speaker 1: is now running some of the biggest monthly trade surplus 329 00:20:59,080 --> 00:21:01,800 Speaker 1: is that it has in its history. Now this is 330 00:21:01,800 --> 00:21:06,320 Speaker 1: a problem because the reason the US and Europe boosted 331 00:21:06,359 --> 00:21:09,080 Speaker 1: the demand side is of course they want that increase 332 00:21:09,119 --> 00:21:12,639 Speaker 1: in demand to feed into a boost in supply side 333 00:21:12,640 --> 00:21:15,639 Speaker 1: and employment at home, and part of it did, but 334 00:21:15,760 --> 00:21:18,240 Speaker 1: part of it leaked abroad to Asia, and I know 335 00:21:18,880 --> 00:21:21,560 Speaker 1: some of our friends at Treasury are looking at this 336 00:21:21,800 --> 00:21:25,359 Speaker 1: very very closely. Now. I don't know how how long 337 00:21:25,440 --> 00:21:28,359 Speaker 1: it can go on that China can run these huge 338 00:21:28,480 --> 00:21:32,000 Speaker 1: trade surpluses, but I would guess that this is going 339 00:21:32,040 --> 00:21:36,560 Speaker 1: to create increasing tensions during the year, which means that 340 00:21:36,680 --> 00:21:39,239 Speaker 1: China has to find a different way of resolving this, 341 00:21:39,440 --> 00:21:43,040 Speaker 1: either more investment, which it doesn't want to do, or 342 00:21:43,440 --> 00:21:46,920 Speaker 1: much more pressure on rebalancing income, which, as I said, 343 00:21:47,040 --> 00:21:50,439 Speaker 1: is is easy to explain but politically really hard to 344 00:21:50,480 --> 00:21:55,280 Speaker 1: pull off. I'm glad you brought in the international tension 345 00:21:55,320 --> 00:21:58,480 Speaker 1: because I was, you know, curious your take. It seems 346 00:21:58,560 --> 00:22:01,600 Speaker 1: like the US is really in the middle of a 347 00:22:01,680 --> 00:22:07,240 Speaker 1: pretty serious ideological policy pivot in terms of its appreciation 348 00:22:07,320 --> 00:22:10,159 Speaker 1: of the power of fiscal stimulus. And of course, we 349 00:22:10,200 --> 00:22:12,840 Speaker 1: saw one of the biggest fiscal packages of all time 350 00:22:13,520 --> 00:22:17,480 Speaker 1: with the Cares Act basically a year ago. We saw 351 00:22:17,520 --> 00:22:20,080 Speaker 1: another round of checks go out. At the end of 352 00:22:21,320 --> 00:22:23,879 Speaker 1: it looks like we're going to get yet another pretty 353 00:22:23,880 --> 00:22:28,640 Speaker 1: substantial stimulus, perhaps almost as much as two trillion, again, 354 00:22:28,680 --> 00:22:31,840 Speaker 1: lots of checks, and we might get another spending plan 355 00:22:32,080 --> 00:22:37,359 Speaker 1: even after that later in if Biden can push forward 356 00:22:37,400 --> 00:22:40,120 Speaker 1: the Build Back Better plan, which would presumably be more 357 00:22:40,480 --> 00:22:44,159 Speaker 1: long term and um infrastructure based. But you know, you 358 00:22:44,480 --> 00:22:48,320 Speaker 1: mentioned this idea of the fiscal stimulus leaking and ultimately 359 00:22:48,400 --> 00:22:54,080 Speaker 1: turning into incomfort for China, and I'm curious, a how 360 00:22:54,160 --> 00:22:56,919 Speaker 1: you see that emerging as we get further rounds of stimulus, 361 00:22:56,960 --> 00:23:00,440 Speaker 1: and be just in your view, how US policy makers 362 00:23:00,720 --> 00:23:04,480 Speaker 1: should be thinking about using fiscal firepower in the most 363 00:23:04,480 --> 00:23:07,760 Speaker 1: effective way such that it actually has uh, it's uh, 364 00:23:07,880 --> 00:23:12,480 Speaker 1: it's desired goal of making the U s economy more Robot, Well, 365 00:23:12,520 --> 00:23:15,119 Speaker 1: I think you're You're right, Joe. In the seventies we 366 00:23:15,240 --> 00:23:18,679 Speaker 1: decided that fiscal policy doesn't work. It's all monetary. And 367 00:23:18,720 --> 00:23:21,640 Speaker 1: I think now we're you know, we're reversing. We're figuring 368 00:23:21,720 --> 00:23:24,440 Speaker 1: that the monetary policy no longer works, it's got to 369 00:23:24,480 --> 00:23:27,560 Speaker 1: be fiscal and I think that makes a lot of sense. 370 00:23:28,040 --> 00:23:29,800 Speaker 1: It seems to me that there are a couple of 371 00:23:29,840 --> 00:23:32,720 Speaker 1: things that the US can do um that are that 372 00:23:32,720 --> 00:23:35,600 Speaker 1: that that would be quite positive for US growth. First 373 00:23:35,600 --> 00:23:37,399 Speaker 1: of all, if you believe that there is a demand 374 00:23:37,480 --> 00:23:41,439 Speaker 1: side problem and that the reason businesses aren't investing is 375 00:23:41,440 --> 00:23:43,399 Speaker 1: not because the cost of capital is too high, but 376 00:23:43,440 --> 00:23:46,600 Speaker 1: because there's no demand, then it seems to me that 377 00:23:46,640 --> 00:23:50,520 Speaker 1: if you can create demand, for example, by increasing the 378 00:23:50,560 --> 00:23:55,520 Speaker 1: income of ordinary households, then businesses will begin to invest 379 00:23:56,040 --> 00:23:59,520 Speaker 1: and the cost of of of those transfers to the 380 00:23:59,520 --> 00:24:04,399 Speaker 1: households sector becomes self liquidating because while we increase, either 381 00:24:04,440 --> 00:24:09,159 Speaker 1: through debt or monetary creation, the income of the household sector, 382 00:24:09,240 --> 00:24:13,359 Speaker 1: there's no inflationary or debt impact because the supply side 383 00:24:13,400 --> 00:24:17,560 Speaker 1: will automatically adjust. Americans will produce more stuff, or they'll 384 00:24:17,560 --> 00:24:20,400 Speaker 1: produce the same amount of stuff with less household debt 385 00:24:21,040 --> 00:24:24,040 Speaker 1: um so there will be no net cost to the US. 386 00:24:24,080 --> 00:24:28,360 Speaker 1: It's a self liquidating process the other self liquidating process 387 00:24:28,359 --> 00:24:31,040 Speaker 1: in my opinion, and I know there's some controversy about this. 388 00:24:31,800 --> 00:24:34,639 Speaker 1: I'm surprised that there is. But the US has really 389 00:24:34,680 --> 00:24:39,560 Speaker 1: bad infrastructure. It has enormous opportunities to upgrade the infrastructure, 390 00:24:39,600 --> 00:24:42,280 Speaker 1: in which case, again, if you fund it by debt 391 00:24:42,400 --> 00:24:44,600 Speaker 1: or if you fund it by money creation, it doesn't 392 00:24:44,600 --> 00:24:49,040 Speaker 1: really matter because whatever increase on the demand side, the 393 00:24:49,119 --> 00:24:52,840 Speaker 1: increase on the supply side is even greater. Obviously, if 394 00:24:52,880 --> 00:24:56,680 Speaker 1: you repair the roads in New York City, the savings 395 00:24:56,800 --> 00:24:59,440 Speaker 1: to American car owners is much greater than the cost 396 00:24:59,480 --> 00:25:02,200 Speaker 1: of repair the roads, and and on and on and on. 397 00:25:02,560 --> 00:25:05,399 Speaker 1: So the the US can do both of these things, 398 00:25:05,400 --> 00:25:07,159 Speaker 1: and I think they're the right things to do. In 399 00:25:07,240 --> 00:25:10,280 Speaker 1: the long term, infrastructure is probably more important, but in 400 00:25:10,320 --> 00:25:13,080 Speaker 1: the short term, boosting household income for the poorest is 401 00:25:13,160 --> 00:25:16,320 Speaker 1: extremely important. And the point is that in either case 402 00:25:16,359 --> 00:25:18,320 Speaker 1: it's not going to create a burden for the US, 403 00:25:18,400 --> 00:25:21,560 Speaker 1: because in either case it will boost the supply side 404 00:25:21,560 --> 00:25:24,240 Speaker 1: at least as much as it boosts the demand side. 405 00:25:24,960 --> 00:25:29,080 Speaker 1: The problem is that the US is also acting. And 406 00:25:29,080 --> 00:25:30,800 Speaker 1: it's not a problem for the world. That's a problem 407 00:25:30,800 --> 00:25:34,639 Speaker 1: for the US is also acting as again the consumer 408 00:25:34,720 --> 00:25:39,520 Speaker 1: of last resort, that is, that is supplying demand for 409 00:25:39,920 --> 00:25:43,479 Speaker 1: many other economies. And I think if the US were 410 00:25:43,520 --> 00:25:46,080 Speaker 1: able to address that problem, either in some sort of 411 00:25:46,240 --> 00:25:50,879 Speaker 1: multilateral convention or unilaterally if necessary, it would get a 412 00:25:50,960 --> 00:25:54,600 Speaker 1: much greater bang for its domestic buck. So I have 413 00:25:54,760 --> 00:25:59,040 Speaker 1: what might be a stupid question, but Joe described this 414 00:25:59,200 --> 00:26:03,320 Speaker 1: ideological shift underway in the US and how people and 415 00:26:03,400 --> 00:26:08,919 Speaker 1: certainly politicians think about fiscal stimulus. And we've been talking 416 00:26:08,960 --> 00:26:13,920 Speaker 1: about some of the weaknesses of China's own stimulus measures 417 00:26:13,960 --> 00:26:16,760 Speaker 1: in and this idea that a lot of them went 418 00:26:16,800 --> 00:26:21,480 Speaker 1: into unproductive corners of the economy rather than directly into 419 00:26:21,560 --> 00:26:26,240 Speaker 1: workers pockets so as to boost consumption. Why doesn't China 420 00:26:27,080 --> 00:26:30,919 Speaker 1: just do stimulus through direct payments or you know, a 421 00:26:31,000 --> 00:26:35,040 Speaker 1: system similar to the checks being written in the US. 422 00:26:35,119 --> 00:26:37,200 Speaker 1: Like in many ways you would think that that would 423 00:26:37,240 --> 00:26:43,800 Speaker 1: fit into China's professed um ideology of communism, like you know, 424 00:26:43,840 --> 00:26:45,880 Speaker 1: the idea that they're helping workers, and why don't they 425 00:26:45,880 --> 00:26:49,840 Speaker 1: just give people money? It's an interesting question. I mean, 426 00:26:49,920 --> 00:26:52,760 Speaker 1: some people argue that China has really never developed an 427 00:26:52,760 --> 00:26:56,960 Speaker 1: institutional framework for doing that. For forty years, the only 428 00:26:57,000 --> 00:26:59,280 Speaker 1: thing that's really known how to do is to boost 429 00:26:59,359 --> 00:27:04,840 Speaker 1: the supplies side. When they try to boost a household incomes. Again, 430 00:27:04,920 --> 00:27:08,320 Speaker 1: they didn't do it by by transferring income to the 431 00:27:08,359 --> 00:27:13,520 Speaker 1: household sector. They did it by subsidizing employment costs, which, 432 00:27:13,640 --> 00:27:18,520 Speaker 1: if they work, work by increasing supply more than demand. Um. 433 00:27:18,560 --> 00:27:22,160 Speaker 1: The other argument is that there are huge political implications 434 00:27:22,240 --> 00:27:24,560 Speaker 1: to these types of transfers. To to give you an 435 00:27:24,600 --> 00:27:28,200 Speaker 1: idea that I often use, household income in China is 436 00:27:28,359 --> 00:27:31,959 Speaker 1: roughly fifty percent of GDP, So one way you can 437 00:27:32,000 --> 00:27:34,280 Speaker 1: think about it is that there is a parity between 438 00:27:34,320 --> 00:27:38,000 Speaker 1: the household sector and the non household sector, non household 439 00:27:38,000 --> 00:27:43,159 Speaker 1: being businesses and government. For most countries, household income is 440 00:27:43,240 --> 00:27:47,119 Speaker 1: seventy to eight percent of GDP. So even for China 441 00:27:47,200 --> 00:27:50,679 Speaker 1: to get halfway to normal in terms of the distribution 442 00:27:50,760 --> 00:27:54,080 Speaker 1: of income, we have to shift from an economy in 443 00:27:54,160 --> 00:27:59,199 Speaker 1: which households are roughly the same size as non households 444 00:27:59,400 --> 00:28:01,320 Speaker 1: to in a what I me in which households are 445 00:28:01,359 --> 00:28:05,000 Speaker 1: two to three times the size of non households. And 446 00:28:05,040 --> 00:28:07,560 Speaker 1: if you don't want that shift to be paid for 447 00:28:08,200 --> 00:28:11,560 Speaker 1: by businesses, then by definition it's got to be paid 448 00:28:11,600 --> 00:28:14,639 Speaker 1: for by governments. And I would submit to you that 449 00:28:14,640 --> 00:28:21,080 Speaker 1: that huge shift in relative income must have a political implication, 450 00:28:21,160 --> 00:28:25,520 Speaker 1: a pretty significant political implication, which I think is very 451 00:28:25,640 --> 00:28:29,119 Speaker 1: very hard for China to deal with. I have another, 452 00:28:29,600 --> 00:28:33,239 Speaker 1: perhaps stupid question, but it's something that you brought up, uh, 453 00:28:33,400 --> 00:28:35,680 Speaker 1: that you brought up, And also I think you brought 454 00:28:35,720 --> 00:28:38,440 Speaker 1: up the last episode and I meant to ask it, 455 00:28:38,480 --> 00:28:39,640 Speaker 1: and I felt dumb at the time. So I'm just 456 00:28:39,680 --> 00:28:42,520 Speaker 1: gonna ask you now, when you talk about the the 457 00:28:42,640 --> 00:28:48,200 Speaker 1: income that's gained by local governments, why is that such 458 00:28:48,280 --> 00:28:52,800 Speaker 1: a difficult source of income to touch? And who is 459 00:28:52,800 --> 00:28:56,400 Speaker 1: actually benefiting from that? Other local politicians that in some 460 00:28:56,480 --> 00:28:59,640 Speaker 1: way or another end up pocketing it, is other projects 461 00:28:59,680 --> 00:29:02,400 Speaker 1: that extend their power. Like talk to us about why that, 462 00:29:02,720 --> 00:29:04,960 Speaker 1: because that's not so much of a thing here, Like 463 00:29:05,360 --> 00:29:11,040 Speaker 1: why is that such a politically difficult thing to fight? Well, um, 464 00:29:11,280 --> 00:29:14,080 Speaker 1: that's a little politically sensitive. But I'll talk about a 465 00:29:14,080 --> 00:29:16,680 Speaker 1: case that happened a few years ago under under both 466 00:29:16,760 --> 00:29:18,960 Speaker 1: Chili because you know, he's a bad guy, so we're 467 00:29:18,960 --> 00:29:22,840 Speaker 1: allowed to say this. But one of my former students 468 00:29:22,880 --> 00:29:26,040 Speaker 1: worked in a private equity fund in in his city. 469 00:29:26,280 --> 00:29:28,080 Speaker 1: I think when he was the mayor, it wasn't of 470 00:29:28,120 --> 00:29:30,040 Speaker 1: hard being before he became the mayor of chun Ching 471 00:29:31,000 --> 00:29:36,760 Speaker 1: and invested in a company that makes locks, and the 472 00:29:36,840 --> 00:29:40,080 Speaker 1: principle of this company was very close to some senior 473 00:29:40,120 --> 00:29:44,320 Speaker 1: people in the government. Three months after they invested in 474 00:29:44,360 --> 00:29:48,040 Speaker 1: the company that makes locks and keys, the city announced 475 00:29:48,680 --> 00:29:54,040 Speaker 1: that for security reasons, all locks and keys in government 476 00:29:54,040 --> 00:29:57,280 Speaker 1: buildings were going to be changed. And I don't need 477 00:29:57,320 --> 00:29:59,240 Speaker 1: to tell you who got the mandate to do that. 478 00:29:59,800 --> 00:30:03,640 Speaker 1: I think there's a very strong connection between local elites 479 00:30:03,680 --> 00:30:07,720 Speaker 1: and local governments, and even in China that's been discussed. 480 00:30:07,760 --> 00:30:10,880 Speaker 1: Remember in two thousand and seven, when when Jiabao gave 481 00:30:10,920 --> 00:30:15,600 Speaker 1: his famous speech about how we need to rebalance the economy. 482 00:30:15,720 --> 00:30:18,320 Speaker 1: Within a few months of that speech, you started to 483 00:30:18,360 --> 00:30:22,320 Speaker 1: see in the Chinese press the phrase vested interest. These 484 00:30:22,320 --> 00:30:26,960 Speaker 1: were the terrible groups that were opposing UH measures that 485 00:30:27,080 --> 00:30:30,920 Speaker 1: Beijing was trying to make to re balance income. And 486 00:30:30,960 --> 00:30:34,440 Speaker 1: then UH didn't work until two thousand and twelve when 487 00:30:34,880 --> 00:30:38,479 Speaker 1: when Shijing Ping became secretary, and that's when you started 488 00:30:38,480 --> 00:30:42,000 Speaker 1: to see this very strong anti corruption campaign which many 489 00:30:42,080 --> 00:30:45,760 Speaker 1: people argued was as much about politics as it was 490 00:30:45,800 --> 00:30:47,920 Speaker 1: about corruption. And again I don't want to, you know, 491 00:30:47,920 --> 00:30:50,520 Speaker 1: speak too openly about it because these are sensitive topics. 492 00:30:51,080 --> 00:30:53,640 Speaker 1: But I think there is a perception in China, a 493 00:30:53,800 --> 00:30:58,600 Speaker 1: very clear perception that the ability of local governments to 494 00:30:58,680 --> 00:31:03,880 Speaker 1: control enormous amounts of assets is closely allied to the 495 00:31:03,920 --> 00:31:08,200 Speaker 1: wealth of local elites. Got it. So it is sort 496 00:31:08,200 --> 00:31:11,320 Speaker 1: of like it's still it's kind of business income, even 497 00:31:11,320 --> 00:31:14,640 Speaker 1: though we we talk, sorry, just to clarify, So when 498 00:31:14,640 --> 00:31:17,120 Speaker 1: you're talking about like, Okay, there's local government income and 499 00:31:17,160 --> 00:31:19,040 Speaker 1: there's business income, and we you know, we're going to 500 00:31:19,160 --> 00:31:21,240 Speaker 1: increase buying power of the household sector, one of those 501 00:31:21,280 --> 00:31:24,560 Speaker 1: has to get touched. It's kind of also business income. 502 00:31:24,600 --> 00:31:29,000 Speaker 1: It's just perhaps a little bit more politically connected business income. Sure, 503 00:31:29,080 --> 00:31:32,479 Speaker 1: today there was an announcement by by several large cities 504 00:31:32,480 --> 00:31:36,840 Speaker 1: in which they're changing the land auctions system. And I 505 00:31:36,880 --> 00:31:38,880 Speaker 1: don't pretend to be an expert on it, but several 506 00:31:38,920 --> 00:31:41,920 Speaker 1: of my friends have told me that this new system 507 00:31:41,960 --> 00:31:45,720 Speaker 1: will benefit the largest real estate developers at the expense 508 00:31:45,760 --> 00:31:48,880 Speaker 1: of the smaller ones. You know, it's really useful to 509 00:31:48,960 --> 00:31:53,040 Speaker 1: have some control over these kinds of policies. Again I'm 510 00:31:53,080 --> 00:31:55,560 Speaker 1: speaking sort of euphemistically, but but you know, you know, 511 00:31:55,600 --> 00:31:57,960 Speaker 1: you know what I mean. Some of that also, I 512 00:31:58,000 --> 00:32:02,360 Speaker 1: think is just the problem of execution in a country 513 00:32:02,560 --> 00:32:05,200 Speaker 1: as big as China, and this idea that you get 514 00:32:05,240 --> 00:32:08,040 Speaker 1: an edict that might be handed down from Beijing, but 515 00:32:08,320 --> 00:32:11,400 Speaker 1: local governments will carry it out in different ways, not 516 00:32:11,440 --> 00:32:15,520 Speaker 1: necessarily always because of corruption, but maybe because of incompetence 517 00:32:15,720 --> 00:32:19,640 Speaker 1: or something like that. Like there's a wide well, there's 518 00:32:19,680 --> 00:32:23,280 Speaker 1: a huge room for interpretation on a lot of these. 519 00:32:24,080 --> 00:32:28,760 Speaker 1: Also just institutional rigidities. Any mayor can very quickly build 520 00:32:28,760 --> 00:32:31,680 Speaker 1: a new bridge, but he won't necessarily know how to 521 00:32:31,760 --> 00:32:35,600 Speaker 1: distribute income to the household sector. Yeah, this is the 522 00:32:36,240 --> 00:32:39,040 Speaker 1: I think this is an underappreciated thing because people think, oh, 523 00:32:39,120 --> 00:32:42,200 Speaker 1: China has this command economy. If Beijing says, you know, 524 00:32:42,280 --> 00:32:46,680 Speaker 1: flip a switch and start lending, like more lending from banks, 525 00:32:46,720 --> 00:32:51,600 Speaker 1: for instance, people think that's really easy to do. But actually, um, 526 00:32:51,760 --> 00:32:53,920 Speaker 1: we find that often like the banks have to think 527 00:32:53,960 --> 00:32:57,200 Speaker 1: through this stuff. Sometimes the mandate isn't exactly clear, and 528 00:32:57,240 --> 00:33:01,000 Speaker 1: so it's not as easy as it seems. But anyway, 529 00:33:01,400 --> 00:33:04,360 Speaker 1: since um, since Joe and I seem to be an 530 00:33:04,360 --> 00:33:07,240 Speaker 1: asking stupid question, mode, I have another one for you, 531 00:33:07,320 --> 00:33:11,600 Speaker 1: which is we've been talking about how the policy response 532 00:33:11,840 --> 00:33:17,040 Speaker 1: in has probably led to a further accumulation in debt. 533 00:33:17,640 --> 00:33:19,880 Speaker 1: We've seen lots of investment in things like the real 534 00:33:20,000 --> 00:33:24,320 Speaker 1: estate sector you just mentioned another land reform effort. We 535 00:33:24,360 --> 00:33:26,520 Speaker 1: have seen Beijing take a lot of steps to prop 536 00:33:26,760 --> 00:33:32,160 Speaker 1: up the property sector recently. What's the downside of China 537 00:33:32,280 --> 00:33:36,600 Speaker 1: accumulating more debt because at the moment, in other parts 538 00:33:36,600 --> 00:33:39,640 Speaker 1: of the world, like the US, for instance, people seem 539 00:33:39,680 --> 00:33:42,080 Speaker 1: to be growing more comfortable with the idea of the 540 00:33:42,120 --> 00:33:45,920 Speaker 1: government taking on debt in order to fund stimulus. Why 541 00:33:46,080 --> 00:33:50,000 Speaker 1: is it a bad thing for China? Well, the simple 542 00:33:50,080 --> 00:33:52,480 Speaker 1: answer is that if it weren't, it would be very 543 00:33:52,520 --> 00:33:55,480 Speaker 1: easy to put together a policy that made everyone a 544 00:33:55,520 --> 00:34:00,000 Speaker 1: real millionaire overnight. And clearly that makes no sense. Um, 545 00:34:00,120 --> 00:34:03,400 Speaker 1: but we don't really know where are the limits of debt. 546 00:34:03,440 --> 00:34:05,680 Speaker 1: But we know a couple of things. First Off, when 547 00:34:05,760 --> 00:34:10,880 Speaker 1: debt levels rise quickly enough that there is real uncertainty 548 00:34:10,920 --> 00:34:14,319 Speaker 1: about how debt payment debt servicing costs are going to 549 00:34:14,360 --> 00:34:17,000 Speaker 1: be allocated. You know, basically there's two types of debt. 550 00:34:17,120 --> 00:34:19,960 Speaker 1: You can borrow money that's self liquidating. In other words, 551 00:34:20,000 --> 00:34:23,400 Speaker 1: you use the money to create the value that pays 552 00:34:23,480 --> 00:34:26,439 Speaker 1: off the debt and and then you can borrow money 553 00:34:26,440 --> 00:34:29,280 Speaker 1: for projects and are not self liquidating. And in that case, 554 00:34:29,360 --> 00:34:31,399 Speaker 1: the only way you can repay the debt is through 555 00:34:31,440 --> 00:34:35,240 Speaker 1: implicit or explicit transfers. You can you can tax the 556 00:34:35,239 --> 00:34:38,880 Speaker 1: the people, you can lower wages, you can expropriate wealth, 557 00:34:39,200 --> 00:34:41,200 Speaker 1: you can default. You know, there's all these different ways 558 00:34:41,200 --> 00:34:43,680 Speaker 1: you can inflate it away, and those are just ways 559 00:34:43,680 --> 00:34:47,560 Speaker 1: of assigning the cost of of servicing the debt. Uh. 560 00:34:47,600 --> 00:34:49,640 Speaker 1: The problem with that is that we all know that, 561 00:34:49,760 --> 00:34:52,759 Speaker 1: and once the uncertainty levels are high enough. We've seen 562 00:34:52,800 --> 00:34:57,200 Speaker 1: this in country after country, economic agents change their behaviors 563 00:34:57,200 --> 00:35:01,440 Speaker 1: in ways designed to protect themselves. For example, flight capital, 564 00:35:01,520 --> 00:35:05,640 Speaker 1: which we've seen in China, private sector businesses disinvest which 565 00:35:05,680 --> 00:35:09,239 Speaker 1: again we're seeing in China. Maybe you see workers organized, 566 00:35:09,280 --> 00:35:11,200 Speaker 1: maybe you see the middle class pictom money out of 567 00:35:11,200 --> 00:35:14,360 Speaker 1: the banking system. We're not seeing that yet. But once 568 00:35:14,440 --> 00:35:18,120 Speaker 1: you reach that point, it becomes self reinforcing, and you 569 00:35:18,160 --> 00:35:22,160 Speaker 1: want to avoid that point. That's true for any country, 570 00:35:22,760 --> 00:35:25,320 Speaker 1: and I would say that in China, with debt growing 571 00:35:25,440 --> 00:35:29,480 Speaker 1: so much faster than GDP and real real skepticism, with 572 00:35:29,560 --> 00:35:33,320 Speaker 1: real skepticism about the true value of that GDP, that's 573 00:35:33,360 --> 00:35:35,640 Speaker 1: a real risk. You don't want to find out where 574 00:35:35,640 --> 00:35:37,560 Speaker 1: the limit is, but there has to be a limit. 575 00:35:38,120 --> 00:35:40,879 Speaker 1: The second thing, and this is where China is very 576 00:35:40,960 --> 00:35:45,960 Speaker 1: different from other countries, is that um when you borrow 577 00:35:46,080 --> 00:35:50,520 Speaker 1: money and spend it on something that doesn't create value, 578 00:35:51,160 --> 00:35:53,879 Speaker 1: from an accounting point of view, you should expense it. 579 00:35:54,400 --> 00:35:59,000 Speaker 1: But in China it isn't expense it's capitalized. So if 580 00:35:59,040 --> 00:36:02,000 Speaker 1: I borrow a hundred dollars and spend it on something 581 00:36:02,080 --> 00:36:05,799 Speaker 1: that's worth twenty, I should take an eighty dollar right now, 582 00:36:06,000 --> 00:36:08,400 Speaker 1: but I don't. I carry the whole thing out a 583 00:36:08,440 --> 00:36:12,560 Speaker 1: hundred dollars. That means that there is eighty dollars of 584 00:36:12,719 --> 00:36:17,640 Speaker 1: recorded wealth that isn't real wealth. Right The total wealth 585 00:36:17,680 --> 00:36:22,000 Speaker 1: of the country is overstated on paper relative to the 586 00:36:22,040 --> 00:36:25,760 Speaker 1: real wealth of the country, and that has to be amortized. 587 00:36:25,760 --> 00:36:29,520 Speaker 1: That is automatically amortized over time, but you don't see 588 00:36:29,520 --> 00:36:34,160 Speaker 1: the amortization as long as debt continues to grow more 589 00:36:34,280 --> 00:36:37,680 Speaker 1: quickly than the amount that is implicitly amortized. But that 590 00:36:37,760 --> 00:36:40,960 Speaker 1: requires an acceleration in the growth rate of debt, and 591 00:36:41,040 --> 00:36:44,160 Speaker 1: at some point when you can no longer accelerate the 592 00:36:44,160 --> 00:36:48,279 Speaker 1: growth rate in debt, you start implicitly amortizing all of 593 00:36:48,280 --> 00:36:51,400 Speaker 1: these costs, which means basically you start to take losses 594 00:36:51,840 --> 00:36:55,040 Speaker 1: and they subtract from the GDP growth number as well 595 00:36:55,040 --> 00:36:58,520 Speaker 1: as setting off what we call financial distress costs. I 596 00:36:59,280 --> 00:37:03,520 Speaker 1: apologize if it's a little bit pedantic, but basically, we 597 00:37:03,719 --> 00:37:08,200 Speaker 1: know that you don't have infinite debt capacity, but we 598 00:37:08,360 --> 00:37:11,799 Speaker 1: don't know when you reach your limit. We also don't 599 00:37:11,840 --> 00:37:14,520 Speaker 1: want to find out, and I think that's the problem 600 00:37:14,520 --> 00:37:18,040 Speaker 1: with the rise in debt in China. So I do 601 00:37:18,160 --> 00:37:20,839 Speaker 1: think it's your to this to your last answer, that 602 00:37:20,920 --> 00:37:24,479 Speaker 1: one of the strengths of your approach, and I would 603 00:37:24,480 --> 00:37:26,040 Speaker 1: say the approach of a lot of sort of more 604 00:37:26,080 --> 00:37:30,280 Speaker 1: heterodox economists, is the sort of deep understanding of accounting, 605 00:37:31,040 --> 00:37:33,600 Speaker 1: and not that accounting is everything, but that if you 606 00:37:33,640 --> 00:37:36,320 Speaker 1: don't understand accounting, you you miss a lot of this stuff. 607 00:37:36,600 --> 00:37:39,520 Speaker 1: But that being said, there is more than accounting. And 608 00:37:40,239 --> 00:37:42,719 Speaker 1: we have you know, we we mentioned we we had 609 00:37:42,760 --> 00:37:47,239 Speaker 1: a recent episode on the rise of Chinese semiconductor industry 610 00:37:47,239 --> 00:37:50,200 Speaker 1: and some other domestic industries. Things that actually, you know, 611 00:37:50,320 --> 00:37:55,320 Speaker 1: technological improvements, increases in productive capacity as the country gets 612 00:37:55,719 --> 00:37:58,560 Speaker 1: richer and has more know how, how do you see 613 00:37:58,640 --> 00:38:02,880 Speaker 1: that developing? Just you know, accounting aside this sort of 614 00:38:02,920 --> 00:38:06,560 Speaker 1: the boom in uh sort of world class or it's 615 00:38:06,719 --> 00:38:10,319 Speaker 1: the attempt to achieve sort of world class corporations that 616 00:38:10,360 --> 00:38:14,000 Speaker 1: whether on a tech basis or sort of cultural export basis. 617 00:38:14,040 --> 00:38:16,319 Speaker 1: I mean we see it with TikTok are really white 618 00:38:16,400 --> 00:38:19,400 Speaker 1: dad's are really emerging in China? And how much is 619 00:38:19,440 --> 00:38:22,360 Speaker 1: that sort of changing the equation so to speak, Well, 620 00:38:22,480 --> 00:38:25,320 Speaker 1: you're right about accounting. Accounting doesn't tell you the truth, 621 00:38:25,440 --> 00:38:28,000 Speaker 1: but it tells you things that are clearly not true, 622 00:38:28,040 --> 00:38:30,200 Speaker 1: and it allows you to dismiss a lot of stuff 623 00:38:30,760 --> 00:38:33,759 Speaker 1: on on on the issue of investment in high tech 624 00:38:34,160 --> 00:38:36,880 Speaker 1: that gets a huge amount of attention is very sexy. 625 00:38:36,920 --> 00:38:40,080 Speaker 1: Everybody loves it. But we have to you know, we 626 00:38:40,120 --> 00:38:42,839 Speaker 1: have to make two points here. First of all, it's very, 627 00:38:43,000 --> 00:38:46,000 Speaker 1: very small, and when you compare it to total investment 628 00:38:46,080 --> 00:38:49,719 Speaker 1: in China, it's tiny if you want. You know, for 629 00:38:49,920 --> 00:38:52,319 Speaker 1: years and years China has said, don't worry about the 630 00:38:52,360 --> 00:38:56,240 Speaker 1: investment problem. All we have to do is shift out 631 00:38:56,280 --> 00:39:01,080 Speaker 1: of bad investment into productive, good investment, for example, high 632 00:39:01,080 --> 00:39:04,279 Speaker 1: tech and that, and that's that problem solved. Well, they've 633 00:39:04,280 --> 00:39:06,279 Speaker 1: been talking about this for ten fifteen years and it 634 00:39:06,320 --> 00:39:10,000 Speaker 1: hasn't really happened. And I liken that a little bit too. 635 00:39:10,040 --> 00:39:14,239 Speaker 1: You know, don't worry about your child getting an education. 636 00:39:14,800 --> 00:39:16,960 Speaker 1: All she has to do is win the lottery ticket 637 00:39:17,000 --> 00:39:20,640 Speaker 1: and she won't need an education. Yeah, it's true, but 638 00:39:20,719 --> 00:39:23,319 Speaker 1: winning the lottery ticket is quite hard, and so far 639 00:39:23,520 --> 00:39:25,879 Speaker 1: very few countries have been able to pull this off. 640 00:39:26,400 --> 00:39:30,640 Speaker 1: It's a huge amount of new investment that has to 641 00:39:30,680 --> 00:39:34,840 Speaker 1: replace this old, less valuable investment. But the other problem 642 00:39:34,880 --> 00:39:37,160 Speaker 1: is that we don't really know how to cost a 643 00:39:37,160 --> 00:39:42,200 Speaker 1: lot of this. I think Chinese online retail is a miracle. 644 00:39:42,360 --> 00:39:45,200 Speaker 1: I think it was also created when nobody was watching, 645 00:39:45,760 --> 00:39:49,719 Speaker 1: because basically, all these very smart kids leap frog a 646 00:39:50,040 --> 00:39:55,560 Speaker 1: terribly creepy retail distribution system. But I'm not sure all 647 00:39:55,600 --> 00:39:59,879 Speaker 1: these other areas, you know, the super fast computers, the satellites, 648 00:40:00,000 --> 00:40:04,040 Speaker 1: a high speed rail network, I'm not sure how economically 649 00:40:04,160 --> 00:40:09,640 Speaker 1: successful they are. They are great programs, right, there's spectacular technology, 650 00:40:10,400 --> 00:40:15,239 Speaker 1: but it's only sustainable if the economic value added of 651 00:40:15,280 --> 00:40:18,759 Speaker 1: that technology is greater than the cost, and it's very 652 00:40:18,800 --> 00:40:21,759 Speaker 1: easy to come up with cases in history where a 653 00:40:21,760 --> 00:40:25,359 Speaker 1: lot of trophy investment in technology in the long run 654 00:40:25,480 --> 00:40:29,239 Speaker 1: turned out not to be sustainable. So we just don't know. 655 00:40:29,360 --> 00:40:31,560 Speaker 1: But for me, the key problem is that you know, 656 00:40:31,640 --> 00:40:33,959 Speaker 1: this is great stuff, but it's just not big enough 657 00:40:34,440 --> 00:40:38,040 Speaker 1: to replace all the railroads and bridges and empty buildings. 658 00:40:52,239 --> 00:40:59,399 Speaker 1: So given the investment in unproductive or less productive industries, 659 00:40:59,520 --> 00:41:03,439 Speaker 1: given the debt accumulation, and given I know you took 660 00:41:03,480 --> 00:41:06,520 Speaker 1: some issue with this idea, but given the idea that 661 00:41:07,239 --> 00:41:13,880 Speaker 1: strong manufacturing probably helped China offset some weaknesses in and 662 00:41:13,960 --> 00:41:18,440 Speaker 1: we can debate by how much, but how vulnerable do 663 00:41:18,600 --> 00:41:23,200 Speaker 1: you see the economy the Chinese economy in this year 664 00:41:23,440 --> 00:41:28,200 Speaker 1: as things presumably start to normalize, um maybe as the 665 00:41:28,239 --> 00:41:32,040 Speaker 1: spending boom in the US starts to die down a 666 00:41:32,080 --> 00:41:38,200 Speaker 1: little bit, what's going to happen to China? Well, I 667 00:41:38,200 --> 00:41:41,919 Speaker 1: think one is going to be a very good year 668 00:41:42,000 --> 00:41:44,759 Speaker 1: for China, in which it looks like it will have 669 00:41:44,800 --> 00:41:47,719 Speaker 1: achieved many of its subjectives, but it will only be 670 00:41:47,760 --> 00:41:51,480 Speaker 1: really by it will start to change again. And the 671 00:41:51,560 --> 00:41:54,640 Speaker 1: reason is because in China, like in most other countries, 672 00:41:55,040 --> 00:41:58,040 Speaker 1: we saw a huge increase in the household savings rate 673 00:41:58,160 --> 00:42:01,320 Speaker 1: last year. You know, we can debate about the reasons. 674 00:42:01,800 --> 00:42:03,880 Speaker 1: Part of it had to do when you're locked in 675 00:42:03,920 --> 00:42:06,840 Speaker 1: and locked up in home, you can't go out and shop. 676 00:42:06,920 --> 00:42:10,600 Speaker 1: It's much harder to shop. Obviously, you're not going to restaurants, etcetera, etcetera. 677 00:42:10,840 --> 00:42:14,919 Speaker 1: So a lot of that increase in savings was simply 678 00:42:14,960 --> 00:42:18,200 Speaker 1: because I wanted to spend money but I couldn't. Part 679 00:42:18,239 --> 00:42:21,200 Speaker 1: of that increase in savings was probably again not just 680 00:42:21,320 --> 00:42:24,680 Speaker 1: in China, but in the whole world. COVID nineteen scared 681 00:42:24,760 --> 00:42:27,640 Speaker 1: us all, and I think all of us decided that 682 00:42:27,680 --> 00:42:30,680 Speaker 1: we're going to be better prepared for the next crisis 683 00:42:30,760 --> 00:42:33,839 Speaker 1: and probably will save a little bit more money than 684 00:42:33,880 --> 00:42:37,040 Speaker 1: we normally do. Now we don't know the breakdown, but 685 00:42:37,120 --> 00:42:40,600 Speaker 1: at least some of the increase in savings last year 686 00:42:40,760 --> 00:42:43,920 Speaker 1: is going to be reversed this year in China. And 687 00:42:43,960 --> 00:42:49,160 Speaker 1: my guess is that between the increase in consumption, which 688 00:42:49,160 --> 00:42:51,399 Speaker 1: could be eight or nine percent this year, maybe even 689 00:42:51,400 --> 00:42:56,840 Speaker 1: a little more, and the increase in business investment aimed 690 00:42:56,880 --> 00:43:00,680 Speaker 1: at consumption. Let's ignore what happens to the exports sector, 691 00:43:00,719 --> 00:43:03,520 Speaker 1: because I could go either way, but those two things 692 00:43:03,560 --> 00:43:07,840 Speaker 1: should generate in my opinion, between six to seven percentage 693 00:43:07,880 --> 00:43:11,440 Speaker 1: points of growth this year. This is all healthy growth. Now. 694 00:43:11,760 --> 00:43:15,160 Speaker 1: If China is satisfied with six to seven percent growth, 695 00:43:15,480 --> 00:43:18,680 Speaker 1: then that means we won't need significant growth and real 696 00:43:18,800 --> 00:43:23,080 Speaker 1: estate development or in public sector infrastructure spending um in 697 00:43:23,160 --> 00:43:26,360 Speaker 1: order to achieve that implicit growth target. There will probably 698 00:43:26,440 --> 00:43:30,239 Speaker 1: be some, but I would argue that this year the 699 00:43:30,400 --> 00:43:34,080 Speaker 1: debt to GDP ratio will probably only increase by one 700 00:43:34,200 --> 00:43:38,480 Speaker 1: or two percentage points, and a hundred percent or nearly 701 00:43:38,520 --> 00:43:41,280 Speaker 1: a hundred percent of the growth will be generated by 702 00:43:41,320 --> 00:43:44,239 Speaker 1: the good stuff. But it's important to remember that this 703 00:43:44,320 --> 00:43:47,799 Speaker 1: is mostly a reversal of last year. Last year the 704 00:43:47,800 --> 00:43:51,000 Speaker 1: debt to GDP ratio went up by twenty five percentage points. 705 00:43:51,000 --> 00:43:53,680 Speaker 1: If it goes up by only one or two that's 706 00:43:53,680 --> 00:43:58,680 Speaker 1: still roughlycent a year for two years, which has doubled 707 00:43:58,719 --> 00:44:03,120 Speaker 1: the rate of previous years. So this year will look 708 00:44:03,200 --> 00:44:07,760 Speaker 1: quite good, but it's mainly a reversal of how bad 709 00:44:07,880 --> 00:44:11,480 Speaker 1: last year looked. And then once that reversal and consumption 710 00:44:11,600 --> 00:44:14,319 Speaker 1: has worked its way through, then you know, then we're 711 00:44:14,360 --> 00:44:18,400 Speaker 1: back to the same old problem, which is that consumption 712 00:44:18,520 --> 00:44:21,799 Speaker 1: is too low a share of GDP for China to 713 00:44:21,840 --> 00:44:26,400 Speaker 1: give up on on on nonproductive investment to generate growth 714 00:44:26,480 --> 00:44:29,359 Speaker 1: rates much above two or three percent. So I want 715 00:44:29,400 --> 00:44:31,400 Speaker 1: to just go back to the sort of very question 716 00:44:31,600 --> 00:44:34,479 Speaker 1: that we set up at the beginning. And I don't 717 00:44:34,480 --> 00:44:36,680 Speaker 1: even really like the question or something like, but it's 718 00:44:36,680 --> 00:44:38,880 Speaker 1: like this idea. It's like, Okay, did like did China 719 00:44:38,960 --> 00:44:42,000 Speaker 1: win like it was this year? Like a did it 720 00:44:42,080 --> 00:44:46,279 Speaker 1: improve China's trajectory and standing in the world? And I 721 00:44:46,320 --> 00:44:49,480 Speaker 1: guess part of the question is, and again it goes 722 00:44:49,520 --> 00:44:52,160 Speaker 1: to your book, is obviously some of it. The question 723 00:44:52,239 --> 00:44:54,279 Speaker 1: has to do with China's own domestic policy, its own 724 00:44:54,280 --> 00:44:57,880 Speaker 1: success at fighting COVID, but also in the changing policy 725 00:44:57,960 --> 00:45:00,799 Speaker 1: stance of other countries. And it goes back to the 726 00:45:00,880 --> 00:45:03,840 Speaker 1: US and whether the US will continue to be the 727 00:45:03,960 --> 00:45:08,960 Speaker 1: consumer of last resort. Also, we had yesterday were recording 728 00:45:09,200 --> 00:45:13,000 Speaker 1: recording this February, but yesterday we had Biden, Biden coming 729 00:45:13,000 --> 00:45:17,640 Speaker 1: out and talking about focusing on rebuilding the US semiconductor 730 00:45:17,640 --> 00:45:22,640 Speaker 1: industry and not being dependent on China for complex supply 731 00:45:22,760 --> 00:45:25,880 Speaker 1: chain needs, which raises the question of whether maybe there 732 00:45:25,880 --> 00:45:29,080 Speaker 1: will be a meaningful change. So, looking down the road, 733 00:45:29,960 --> 00:45:31,960 Speaker 1: is it possible that things that in the end that 734 00:45:32,000 --> 00:45:37,600 Speaker 1: were catalyzed by COVID by end up really not playing 735 00:45:37,640 --> 00:45:41,120 Speaker 1: to China's favor of the way people are imagining right now. Well, 736 00:45:41,160 --> 00:45:44,400 Speaker 1: you know, I think I think China's response to COVID 737 00:45:44,480 --> 00:45:47,440 Speaker 1: nineteen was incredibly impressive. You know, a month ago when 738 00:45:47,440 --> 00:45:51,200 Speaker 1: there was that new outbreak, they moved really really quickly. 739 00:45:51,200 --> 00:45:54,400 Speaker 1: I got tested several times. They really they you know, 740 00:45:54,440 --> 00:45:57,640 Speaker 1: they reset up all of the barriers into my neighborhood, 741 00:45:57,640 --> 00:46:00,839 Speaker 1: into every neighborhood. You had to you have to check 742 00:46:00,840 --> 00:46:04,160 Speaker 1: your state is constantly, etcetera. It's very inconvenient, but it's 743 00:46:04,239 --> 00:46:07,920 Speaker 1: incredibly effective. Now, I think for institutional reasons, it's very 744 00:46:07,960 --> 00:46:10,600 Speaker 1: difficult for countries in the US and Europe to replicate that. 745 00:46:11,000 --> 00:46:14,680 Speaker 1: But still, the Chinese responded really well to COVID nineteen. 746 00:46:15,160 --> 00:46:17,560 Speaker 1: But the way I think about COVID nineteen is a 747 00:46:17,560 --> 00:46:20,560 Speaker 1: little bit differently. I don't think it changed everything. I 748 00:46:20,600 --> 00:46:23,680 Speaker 1: think what it did is it accelerated everything. All of 749 00:46:23,719 --> 00:46:29,120 Speaker 1: the underlying problems in the global economy, income inequality, trade imbalances, 750 00:46:29,320 --> 00:46:34,920 Speaker 1: rising debt, etcetera. Were seriously exacerbated by COVID nineteen. So 751 00:46:35,080 --> 00:46:37,760 Speaker 1: for me, the the answer to the long term question 752 00:46:38,480 --> 00:46:43,360 Speaker 1: is that COVID nineteen made adjustment all the more urgent 753 00:46:43,520 --> 00:46:47,640 Speaker 1: for China, for the US, for Europe, for Brazil, for everybody. 754 00:46:47,719 --> 00:46:50,920 Speaker 1: So the questions is which types of systems are better 755 00:46:51,040 --> 00:46:53,680 Speaker 1: at adjusting. And this may just be the American in 756 00:46:53,760 --> 00:46:56,839 Speaker 1: me speaking, but you know, I also think the historical 757 00:46:56,920 --> 00:47:01,760 Speaker 1: precedents are pretty clear. For all of their faults, democracies 758 00:47:01,840 --> 00:47:06,080 Speaker 1: are pretty good at adjusting, and when they adjust, it's 759 00:47:06,080 --> 00:47:09,799 Speaker 1: always such a messy, ugly process that that's precisely when 760 00:47:09,800 --> 00:47:13,279 Speaker 1: democracies lose their prestige, like in the nineteen seventies or 761 00:47:13,320 --> 00:47:17,720 Speaker 1: in the nineteen thirties. The irony is that they lose 762 00:47:17,800 --> 00:47:21,120 Speaker 1: their prestige exactly when they're doing what they do best. 763 00:47:21,600 --> 00:47:25,239 Speaker 1: Autocracies have much more difficulty adjusting, and you can see 764 00:47:25,280 --> 00:47:30,120 Speaker 1: in China China responded to OVID by COVID nineteen by 765 00:47:30,360 --> 00:47:36,840 Speaker 1: exaggerating its previous supply side responses. It's very difficult for 766 00:47:36,880 --> 00:47:40,360 Speaker 1: autocracies to make that adjustment. Now, it's not impossible in 767 00:47:40,480 --> 00:47:43,880 Speaker 1: history isn't a perfect map of the future. But I 768 00:47:43,920 --> 00:47:47,520 Speaker 1: would say the answer to your question, Joe, we're only 769 00:47:47,560 --> 00:47:50,360 Speaker 1: really going to know over the next three to four years, 770 00:47:51,000 --> 00:47:54,239 Speaker 1: and and the answer will be those systems that did 771 00:47:54,239 --> 00:47:59,000 Speaker 1: a better job of adjusting to the acceleration COVID nineteen 772 00:47:59,040 --> 00:48:03,600 Speaker 1: created ultimately will be the quote unquote winners, and those 773 00:48:03,640 --> 00:48:06,799 Speaker 1: systems that had trouble adjusting are are going to be 774 00:48:06,840 --> 00:48:12,919 Speaker 1: worse off because of of COVID nineteen. Does that make sense? Yeah? 775 00:48:13,480 --> 00:48:18,000 Speaker 1: That was great. Alright, Michael Pettis on all thoughts yet again, 776 00:48:18,120 --> 00:48:21,319 Speaker 1: Thank you so much. Really appreciate it, my pleasure. Thank you. Yeah, 777 00:48:21,360 --> 00:48:23,759 Speaker 1: that was great, Michael, thank you so much for coming back. Sorry, 778 00:48:23,800 --> 00:48:25,759 Speaker 1: Can I just ask one question? What's the mood like 779 00:48:26,000 --> 00:48:28,879 Speaker 1: in Beijing at the moment? And I'm curious, like are 780 00:48:28,920 --> 00:48:31,759 Speaker 1: people going out? I know you, um you had some 781 00:48:31,800 --> 00:48:34,960 Speaker 1: interest in nightclubs, Like are people going out to clubs 782 00:48:35,000 --> 00:48:39,120 Speaker 1: at the moment? Are they allowed to? Well? Things completely 783 00:48:39,160 --> 00:48:42,120 Speaker 1: opened up around September, a lot of my bands were 784 00:48:42,160 --> 00:48:45,360 Speaker 1: touring around China. It was amazing, sold out shows everywhere 785 00:48:45,400 --> 00:48:48,680 Speaker 1: they went, etcetera, etcetera. And then about a month ago, 786 00:48:48,760 --> 00:48:52,359 Speaker 1: because of the new outbreak in Hebei Province, which surrounds us, 787 00:48:53,280 --> 00:48:56,080 Speaker 1: all the shows in Beijing were canceled and they haven't 788 00:48:56,120 --> 00:48:59,759 Speaker 1: been reopened, but we're expecting them to reopen fairly soon. 789 00:49:01,000 --> 00:49:04,000 Speaker 1: So you know, you go outside and everything is packed. 790 00:49:04,719 --> 00:49:07,080 Speaker 1: What's your favorite band right now that we should check out? 791 00:49:07,640 --> 00:49:10,240 Speaker 1: Oh god, it's like asking, you know, he's your favorite 792 00:49:10,239 --> 00:49:13,920 Speaker 1: son or daughter. It's not there. There there's a lot 793 00:49:14,040 --> 00:49:18,560 Speaker 1: of them. Uh, you know, it's well, what's interesting is 794 00:49:18,600 --> 00:49:21,319 Speaker 1: that there was this new TV show that came out, 795 00:49:21,920 --> 00:49:24,160 Speaker 1: you know, in all of our indie bands were indie bands, 796 00:49:24,239 --> 00:49:27,640 Speaker 1: you know, the most famous one Carsit Cars could play 797 00:49:27,680 --> 00:49:31,280 Speaker 1: and you know, could draw an audience of two hundred. Now, 798 00:49:31,880 --> 00:49:36,800 Speaker 1: when they announced a tour in three months, within a minute, 799 00:49:36,960 --> 00:49:39,360 Speaker 1: half of the tour is sold out, and within the 800 00:49:39,440 --> 00:49:42,000 Speaker 1: day the entire tour is sold out. And these are 801 00:49:42,080 --> 00:49:45,600 Speaker 1: venues of two thousand, three thousand people. So we're really 802 00:49:45,640 --> 00:49:50,040 Speaker 1: starting to see a sea change in the you know, 803 00:49:50,239 --> 00:49:53,720 Speaker 1: the attitude towards what was a very indie underground music scene. 804 00:49:53,880 --> 00:49:55,840 Speaker 1: So that's pretty exciting. I'm gonna have to listen to 805 00:49:55,880 --> 00:50:00,880 Speaker 1: some Car Sit Cars. I see the on Spotify, so 806 00:50:01,040 --> 00:50:07,400 Speaker 1: t K fourteen ourselves besides me Lonely Leery dream Can 807 00:50:07,760 --> 00:50:11,400 Speaker 1: there's so many jokes. Great, we know I'll have to 808 00:50:11,600 --> 00:50:14,240 Speaker 1: I'll have to start adding them to my morning rotation. 809 00:50:14,520 --> 00:50:17,280 Speaker 1: Thank you there you go, and at some point maybe 810 00:50:17,320 --> 00:50:19,520 Speaker 1: we'll have to have you back and some for just 811 00:50:19,600 --> 00:50:23,879 Speaker 1: a discussion on Chinese Indian punk bands and just talk 812 00:50:23,920 --> 00:50:26,640 Speaker 1: about I'd love to do it. That would be great. 813 00:50:26,680 --> 00:50:44,959 Speaker 1: We'll do that as well. Thanks Michael, Thank you so Joe. 814 00:50:45,040 --> 00:50:47,719 Speaker 1: There's obviously a lot to go through from that conversation, 815 00:50:47,920 --> 00:50:51,600 Speaker 1: but one of the things that definitely struck me was 816 00:50:51,840 --> 00:50:57,880 Speaker 1: Michael repeating this idea that COVID basically exacerbated existing trends. 817 00:50:58,080 --> 00:51:02,480 Speaker 1: So if we saw China having some difficulty rebalancing its 818 00:51:02,480 --> 00:51:07,000 Speaker 1: economy before, difficulty with them inequality and things like that 819 00:51:08,040 --> 00:51:12,000 Speaker 1: really hardened that trend. Yeah, I mean, it's sort of 820 00:51:12,040 --> 00:51:16,040 Speaker 1: like this big macro thing that's beyond China. And of 821 00:51:16,080 --> 00:51:17,960 Speaker 1: course I would say, like in the middle of neck 822 00:51:18,080 --> 00:51:21,279 Speaker 1: in the middle of last summer, there was probably more 823 00:51:21,320 --> 00:51:24,439 Speaker 1: of COVID is going to change everything, and some things 824 00:51:24,440 --> 00:51:26,560 Speaker 1: that probably will change, but I also think a lot 825 00:51:26,600 --> 00:51:29,880 Speaker 1: of things um are are going to get even more 826 00:51:29,960 --> 00:51:32,160 Speaker 1: are clearly getting more extreme, and this sort of like 827 00:51:32,280 --> 00:51:37,160 Speaker 1: Chinese macro imbalances, uh, certainly looks like it's it's one 828 00:51:37,200 --> 00:51:39,680 Speaker 1: of them. Yeah. And the other thing that I thought 829 00:51:39,719 --> 00:51:44,680 Speaker 1: was interesting was his description of adjustment periods in democracy 830 00:51:44,719 --> 00:51:48,960 Speaker 1: and how when democracies are going through a period of 831 00:51:49,040 --> 00:51:54,160 Speaker 1: volatility or uncertainty, everyone starts writing articles about how, you know, 832 00:51:54,320 --> 00:51:58,920 Speaker 1: the Chinese is winning and command economies have benefits and 833 00:51:58,960 --> 00:52:03,200 Speaker 1: that sort of thing. But actually what's happening is that 834 00:52:03,280 --> 00:52:08,360 Speaker 1: the Chinese economy just isn't adjusting very well while democracies 835 00:52:08,480 --> 00:52:12,120 Speaker 1: are in the process of doing that adjustment. I'm not sorry, 836 00:52:12,120 --> 00:52:16,200 Speaker 1: I'm not nearly as no Lucid as Michael was on this, 837 00:52:16,280 --> 00:52:17,959 Speaker 1: but you know what I mean, Yeah, No, I thought 838 00:52:18,000 --> 00:52:20,680 Speaker 1: that was really interesting. Also, like his point about tech, like, 839 00:52:20,719 --> 00:52:25,080 Speaker 1: obviously it is really impressive in many cases what some 840 00:52:25,160 --> 00:52:28,279 Speaker 1: big these Czech tech giants have done. But on the 841 00:52:28,280 --> 00:52:32,080 Speaker 1: other hand, like in the in a country and economy 842 00:52:32,160 --> 00:52:35,640 Speaker 1: as large as China's, do they how much do they 843 00:52:35,680 --> 00:52:38,399 Speaker 1: really move the needle yet in terms of like sort 844 00:52:38,400 --> 00:52:42,000 Speaker 1: of macro discussions, And you know, it's even like here, 845 00:52:42,680 --> 00:52:44,600 Speaker 1: you know, even in the US, like, of course we 846 00:52:44,680 --> 00:52:49,040 Speaker 1: have a handful of these incredibly successful startups and tech giants, 847 00:52:49,040 --> 00:52:52,799 Speaker 1: but for the vast majority of Americans it's not like 848 00:52:53,400 --> 00:52:55,479 Speaker 1: they're working for them, or it's not like they've seen 849 00:52:55,560 --> 00:52:59,080 Speaker 1: like some huge economic benefit from them other than perhaps 850 00:52:59,080 --> 00:53:02,920 Speaker 1: as consume yours, and so you know, you can imagine 851 00:53:02,920 --> 00:53:05,759 Speaker 1: how in China it's even uh, that phenomenon is even 852 00:53:05,800 --> 00:53:08,200 Speaker 1: more extreme. Words. It's interesting a lot of people making 853 00:53:08,239 --> 00:53:11,360 Speaker 1: money world class tech in some cases, but whether they 854 00:53:11,400 --> 00:53:15,000 Speaker 1: actually move to the macro dial is sort of another question, right. Well, 855 00:53:15,120 --> 00:53:18,239 Speaker 1: that was another thing in Michael's conversation that struck me, 856 00:53:18,320 --> 00:53:21,799 Speaker 1: this idea of attention between consumers and businesses, and that 857 00:53:22,200 --> 00:53:26,240 Speaker 1: you can't necessarily re balance towards consumers without taking something 858 00:53:26,280 --> 00:53:30,480 Speaker 1: away from business. Um, and I guess it seems kind 859 00:53:30,480 --> 00:53:33,480 Speaker 1: of obvious in retrospect, but you can see how that 860 00:53:33,600 --> 00:53:37,759 Speaker 1: would be really politically sensitive for the Communist Party. Yes, 861 00:53:37,880 --> 00:53:43,080 Speaker 1: and I was I'm glad he clarified what he's talking 862 00:53:43,080 --> 00:53:47,279 Speaker 1: about when we when people talk about income that goes 863 00:53:47,360 --> 00:53:50,399 Speaker 1: through local governments, because of course, for the most part, 864 00:53:50,480 --> 00:53:53,920 Speaker 1: like local government in you know, of course, any regional 865 00:53:53,960 --> 00:53:56,839 Speaker 1: government in US wants more tax revenue, etcetera. But that's 866 00:53:56,880 --> 00:54:00,600 Speaker 1: not it's clearly a different dimension. And his ex planation 867 00:54:01,120 --> 00:54:03,800 Speaker 1: of why that would be a very sort of politically 868 00:54:03,840 --> 00:54:07,200 Speaker 1: sensitive thing to rebalance and come from local government to 869 00:54:07,360 --> 00:54:11,959 Speaker 1: the everyday household sector that was extremely helpful. I didn't 870 00:54:11,960 --> 00:54:16,280 Speaker 1: really get that before. All right, well, we'll have Michael 871 00:54:16,280 --> 00:54:19,160 Speaker 1: on on again to talk I guess the economics of 872 00:54:19,280 --> 00:54:22,000 Speaker 1: Chinese indie rock bands. Does that work? Or maybe we 873 00:54:22,000 --> 00:54:23,680 Speaker 1: don't even have to talk echo. Why don't we just 874 00:54:23,719 --> 00:54:26,040 Speaker 1: like have him play some of his favorite songs and 875 00:54:26,040 --> 00:54:28,279 Speaker 1: then chat about like we could do like we could 876 00:54:28,320 --> 00:54:31,600 Speaker 1: just like a real music episode, you know, just let's 877 00:54:31,600 --> 00:54:34,640 Speaker 1: listen to bands together. Oh well, we maybe we should 878 00:54:34,640 --> 00:54:37,600 Speaker 1: save him for like the Variety show or something like that, 879 00:54:37,880 --> 00:54:41,200 Speaker 1: or have it Variety show. That'd be good. That's actually 880 00:54:41,200 --> 00:54:43,960 Speaker 1: a really good idea. Maybe we could Oh that's a 881 00:54:44,000 --> 00:54:47,200 Speaker 1: good idea we should for or maybe our next live show, 882 00:54:47,600 --> 00:54:51,520 Speaker 1: whether maybe online. What if we like talked to Michael 883 00:54:51,719 --> 00:54:53,960 Speaker 1: we did a little like eco chat and then we 884 00:54:54,000 --> 00:54:55,920 Speaker 1: had him introduced one of his bands that they could 885 00:54:55,960 --> 00:54:58,680 Speaker 1: play a few songs. I think that'd be fun, be 886 00:54:59,280 --> 00:55:04,360 Speaker 1: like thoughts the China Club experience. Yeah, this is a 887 00:55:04,360 --> 00:55:06,319 Speaker 1: good idea. All right, this is definitely what this is 888 00:55:06,360 --> 00:55:09,080 Speaker 1: what this is what we have to do. Okay, Um, 889 00:55:09,080 --> 00:55:11,640 Speaker 1: well we recorded all of that, so all thoughts listeners, 890 00:55:11,680 --> 00:55:14,480 Speaker 1: you just had an insight into our our work process 891 00:55:14,560 --> 00:55:18,120 Speaker 1: for planning Um, shall we leave it there? Yeah? All right, 892 00:55:18,640 --> 00:55:21,319 Speaker 1: let's leave it there. This has been another episode of 893 00:55:21,360 --> 00:55:24,200 Speaker 1: the All Thoughts Podcast. I'm Tracy Alloway. You can follow 894 00:55:24,239 --> 00:55:27,200 Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Why 895 00:55:27,239 --> 00:55:30,040 Speaker 1: Isn't All? You can follow me on Twitter at the Stalwart. 896 00:55:30,440 --> 00:55:33,840 Speaker 1: Follow our guest Michael Pettis on Twitter. He's at Michael 897 00:55:34,200 --> 00:55:38,640 Speaker 1: X Pettis. Follow Laura Carlson, our producer. She's at Laura M. Carlson. 898 00:55:38,960 --> 00:55:42,920 Speaker 1: Followed the Bloomberg head of podcast, Francesco Leavi at Francesca Today, 899 00:55:43,320 --> 00:55:46,200 Speaker 1: and check out all of our podcast at Bloomberg under 900 00:55:46,200 --> 00:56:05,360 Speaker 1: the handle at podcasts. Thanks for listening to