WEBVTT - What's Next For Chinese Trade Talks 0:00:10.240 --> 0:00:13.360 Hello, and welcome to another episode of The Odd Lots Podcast. 0:00:13.480 --> 0:00:18.040 I'm Joe, wasn't and I'm Tracy. It's good to have 0:00:18.120 --> 0:00:20.119 you back. I think we haven't been together in the 0:00:20.200 --> 0:00:25.000 last couple of episodes. I missed you quite a bit. 0:00:25.120 --> 0:00:28.040 That that is. I, you know, like I can do 0:00:28.280 --> 0:00:30.720 the podcast, I guess by myself as you can. But 0:00:31.080 --> 0:00:35.199 it's definitely better when you're here. It's better with a 0:00:35.280 --> 0:00:39.600 co host, exactly right. So in the spirit of you know, 0:00:39.720 --> 0:00:42.760 you're in Hong Kong, I'm in the US, you know, 0:00:42.880 --> 0:00:47.360 in the spirit of reuniting, uh, the two sides of 0:00:47.440 --> 0:00:50.640 the Odd Lots Podcast. It makes sense that the topic 0:00:50.640 --> 0:00:53.880 we're going to talk about is the current state of 0:00:54.240 --> 0:00:57.400 US China trade talks, which as of right now, and 0:00:57.520 --> 0:01:02.040 I should specify when we're talking, it is, uh, Tuesday, 0:01:02.320 --> 0:01:06.320 March five. As of right now, people view that there's 0:01:06.520 --> 0:01:09.080 a lot of progress being made on this front. Whether 0:01:09.160 --> 0:01:11.400 that will be the case by the time this comes 0:01:11.440 --> 0:01:15.160 out in a few days, we have no idea. M Well, 0:01:15.200 --> 0:01:19.200 I appreciate your thoughtfulness, Joe, but you're right. The main 0:01:19.280 --> 0:01:21.480 reason to talk about this issue right now is we 0:01:21.520 --> 0:01:23.440 have a lot of breaking news, a lot of fast 0:01:23.520 --> 0:01:27.720 moving news, and the big news over the weekend in 0:01:27.800 --> 0:01:30.640 early March the first week of March was that the 0:01:30.720 --> 0:01:34.520 US and China might be agreeing some sort of trade deal. 0:01:35.040 --> 0:01:38.119 Still a lot of details to be hammered out, of course, 0:01:38.480 --> 0:01:41.560 but all of that happening against the backdrop of one 0:01:41.600 --> 0:01:44.880 of the biggest news events to take place in China, 0:01:45.040 --> 0:01:49.800 and that is the National People's Congress, the big political 0:01:49.920 --> 0:01:53.680 pow wow between the Chinese Communist Party members taking place 0:01:53.760 --> 0:01:56.480 in Beijing. And we're getting all sorts of news on 0:01:56.560 --> 0:01:59.960 not just the China economy but also it's policy outlook. 0:02:00.120 --> 0:02:02.840 So both of these events combining to be a very 0:02:03.000 --> 0:02:06.280 very big week for China in particular, right And obviously 0:02:06.440 --> 0:02:10.560 people in the US, probably those who care uh somewhat 0:02:10.600 --> 0:02:13.560 plugged in and aware of the trade talks going on 0:02:13.720 --> 0:02:17.560 and the status of those. Probably for fewer people are 0:02:17.600 --> 0:02:21.040 aware of the NPC and the implications of that and 0:02:21.080 --> 0:02:25.920 the type of policies and projections to come from it. Yeah, 0:02:26.040 --> 0:02:28.760 so we should definitely be talking about that. The big news, 0:02:28.880 --> 0:02:31.680 by the way, it has to be China ratcheting down 0:02:32.040 --> 0:02:36.000 its growth forecast to a range of six to six 0:02:36.040 --> 0:02:39.639 point five per cent and in particular, the notion that 0:02:39.680 --> 0:02:42.520 they're moving to a range as opposed to just a 0:02:42.639 --> 0:02:47.560 single figure target, which is what they had previously, is well, 0:02:47.600 --> 0:02:50.280 it sounds a little bit wonky. It's probably a detail 0:02:50.360 --> 0:02:53.600 for most people, but it's interesting. It gives policymakers a 0:02:53.639 --> 0:02:57.519 lot more fox flexibility to reach that target, and lots 0:02:57.560 --> 0:02:59.799 of people are talking about it. And of course it's 0:03:00.320 --> 0:03:04.600 directly into the trade discussions. Does China need to eke 0:03:04.639 --> 0:03:07.680 out a trade deal to help prop up its growth 0:03:07.720 --> 0:03:10.840 at a relatively challenging time? All right, well here to 0:03:10.960 --> 0:03:14.160 discuss all of this is a prior guest on the 0:03:14.160 --> 0:03:17.480 Odd Lots podcast, and excited to have him back, we 0:03:17.560 --> 0:03:20.200 have Brad sets Are on today. He's a Senior Fellow 0:03:20.240 --> 0:03:23.440 for International Economics that the Council on Foreign Relations. He 0:03:23.480 --> 0:03:27.520 used to be a Treasury longtime economics blogger, and longtime 0:03:27.600 --> 0:03:32.440 observer of all things trade and China and US trade relations. 0:03:32.440 --> 0:03:35.840 So very timely guest, Brad, thank you very much for 0:03:35.920 --> 0:03:38.720 joining us. It's a pleasure to be here. Uh, Brad, 0:03:38.800 --> 0:03:42.000 let's start. Obviously we don't have a trade deal, but 0:03:42.160 --> 0:03:44.320 from what you've been able to pick up an official 0:03:44.360 --> 0:03:48.760 statements in the media, what's surprised you or hasn't surprised 0:03:48.800 --> 0:03:52.320 you about the progress that's been made between the US 0:03:52.400 --> 0:03:55.200 and China towards the deal. I guess uh. You know, 0:03:55.280 --> 0:03:59.000 I obviously have been falling the negotiations fairly closely, and 0:03:59.040 --> 0:04:02.240 I've been following in the various ideas that China has 0:04:02.280 --> 0:04:06.640 floated UH fairly closely, and so in some sense, the 0:04:06.680 --> 0:04:09.920 surprise to me is that the US more or less 0:04:10.000 --> 0:04:13.920 was willing to accept the broad contours of a deal 0:04:14.400 --> 0:04:17.120 that China has kind of been outlining at least for 0:04:17.120 --> 0:04:19.600 the past six months, if not for a bit longer. 0:04:20.160 --> 0:04:23.720 The center of that deal seems to be UH, a 0:04:24.279 --> 0:04:28.000 Chinese commitment that's sort of slowly being unrolled to buy 0:04:28.040 --> 0:04:32.720 a lot more agricultural products UH and to buy a 0:04:32.760 --> 0:04:36.720 lot a lot more US energy to bring the bilateral 0:04:36.760 --> 0:04:41.280 trade deficit down. And then I would say, there's some 0:04:41.360 --> 0:04:48.000 add ons that sort of address some longstanding commercial disputes 0:04:48.600 --> 0:04:53.480 and that create a process where some of the newer 0:04:54.279 --> 0:04:58.320 UH fights could possibly be resolved or could possibly UH 0:04:58.480 --> 0:05:01.320 not be resolved the easy things that got like or 0:05:01.320 --> 0:05:03.080 that are likely to get fixed, or that some of 0:05:03.120 --> 0:05:06.839 the joint venture caps will be lifted. We have effectively 0:05:06.880 --> 0:05:09.560 already seen that in the auto sector. That's likely to 0:05:09.600 --> 0:05:13.360 occur in the financial services sector. I think you'll see 0:05:13.400 --> 0:05:18.080 some of the retaliatory tariffs that no one remembers were 0:05:18.120 --> 0:05:21.120 put on rolled back. So you know, I think you're 0:05:21.120 --> 0:05:25.800 going to get a mix of small uh settlements of 0:05:25.839 --> 0:05:29.320 past disputes, and then some sort of process to keep 0:05:29.360 --> 0:05:33.640 talking and try to reach a more serious agreement on 0:05:33.880 --> 0:05:38.800 things like subsidies. So I'm curious if if China is 0:05:38.839 --> 0:05:43.440 agreeing basically to import more agricultural goods and energy from 0:05:43.520 --> 0:05:46.960 the US. I mean, they were going to import those 0:05:47.000 --> 0:05:50.159 things from other countries anyway, so just shifting that to 0:05:50.200 --> 0:05:52.960 the U S seems like it might not be that 0:05:53.080 --> 0:05:55.280 big of a deal for them to do. And if 0:05:55.320 --> 0:05:57.799 we're still going to see the US and China talking 0:05:57.839 --> 0:06:03.080 about these bigger structural issue use like technology transfers and subsidies, 0:06:03.160 --> 0:06:06.479 does it mean that China is sort of getting a 0:06:06.520 --> 0:06:10.400 better deal here. China seems to be making the concessions 0:06:10.440 --> 0:06:13.840 that were easiest for China to make. That's not a shock. 0:06:14.520 --> 0:06:18.560 I suspect the Trump administration will say that China is 0:06:18.600 --> 0:06:22.800 going to roll back all of its retaliatory measures immediately. 0:06:23.040 --> 0:06:26.680 You know, the soybean tarrofts were introduced in retaliation for 0:06:26.720 --> 0:06:30.640 the first round of US three oh one uh tariffs, 0:06:30.960 --> 0:06:34.320 where it seems like the US will in the first 0:06:34.360 --> 0:06:37.920 instance only roll back the twollion of tariffs and it 0:06:37.960 --> 0:06:44.880 will keep on the fifty billion, pending more fulsome agreement 0:06:45.080 --> 0:06:49.359 on all the all the details, and pending full implementation. 0:06:49.920 --> 0:06:52.320 One of the things that's been observed is that from 0:06:52.440 --> 0:06:55.400 the US perspective, we know that President Trump has been 0:06:55.480 --> 0:06:58.880 very focused on that bilateral trade deficit. He thinks that 0:06:58.960 --> 0:07:02.160 a trade deficit is a sign that you're losing, whereas 0:07:02.200 --> 0:07:06.320 others in the administration take a probably more complex, nuanced 0:07:06.360 --> 0:07:10.040 view and are less concerned about that and more concerned 0:07:10.120 --> 0:07:15.960 about the subsidies and these deeper structural issues. Is China 0:07:16.160 --> 0:07:18.760 able to get away with and again we don't have 0:07:18.840 --> 0:07:22.120 a signed deal yet, but in the we see the 0:07:22.160 --> 0:07:26.480 direction that it's going. In your view, is China, I 0:07:26.520 --> 0:07:30.240 guess exploiting these internal divisions within the United States to 0:07:30.360 --> 0:07:32.800 get the deal that's best for itself. Well, I mean 0:07:32.840 --> 0:07:37.480 that that puts everything in such a negative like, but 0:07:37.520 --> 0:07:40.480 I just exploiting in a bad sense. Perspective, But in 0:07:40.600 --> 0:07:44.240 just like it's coming to the table and it obviously 0:07:44.240 --> 0:07:48.280 it appears there our divisions in the US perspective, and 0:07:48.480 --> 0:07:53.520 it's getting maximum benefit for itself from these divisions. I 0:07:53.560 --> 0:07:56.560 think that you know, there's there's long been a tension 0:07:57.320 --> 0:08:02.280 inside the US between different objectives. The easy way of 0:08:02.320 --> 0:08:05.640 framing that tension is between the president's focus on reducing 0:08:05.640 --> 0:08:09.720 the bilateral deficit and more structural measures. But even within 0:08:09.760 --> 0:08:13.160 the structural measures, there are tensions. Should the US focus 0:08:13.200 --> 0:08:17.440 on those Chinese barriers that limit US exports or is 0:08:17.520 --> 0:08:21.280 what the US most interested in and the center of 0:08:21.280 --> 0:08:24.560 the negotiations shouldn't be making it easier for US firms 0:08:24.600 --> 0:08:28.240 to invest in China without giving up their technology as 0:08:28.280 --> 0:08:31.320 a price for market entry. They're related, but they're not 0:08:31.440 --> 0:08:37.040 exactly the same thing. I think the Chinese discovered that 0:08:37.120 --> 0:08:41.360 the president was drawn to the their big commitments in 0:08:41.400 --> 0:08:45.720 agriculture and energy UH, and because he was drawn to that, 0:08:45.720 --> 0:08:48.840 that became a bigger part of the deal. The US 0:08:48.920 --> 0:08:52.000 could have taken that off the table and just been 0:08:52.040 --> 0:09:00.360 negotiating over liberalizing China's investment catalog, just been negotiating over 0:09:01.000 --> 0:09:05.000 some of the subsidy issues related to China. You could 0:09:05.000 --> 0:09:07.920 say that's would be a more productive way of going, 0:09:08.280 --> 0:09:10.440 but it also probably would have reduced the space for 0:09:10.480 --> 0:09:14.640 a deal. Well. Joe mentioned the trade deficit there, and 0:09:14.679 --> 0:09:17.280 one of the interesting things we've seen in recent months 0:09:17.280 --> 0:09:21.040 that is that the US trade deficit with China continues 0:09:21.080 --> 0:09:24.440 to widen, even though you know, we ostensibly have all 0:09:24.480 --> 0:09:27.800 these additional tariffs that have been enacted. And I've seen 0:09:28.360 --> 0:09:32.679 a few analysts pinning this on currency moves, and specifically 0:09:32.679 --> 0:09:35.680 that we've had a stronger dollar and a relatively weaker 0:09:36.040 --> 0:09:39.120 when over that period of time, and the FX moves 0:09:39.160 --> 0:09:42.640 have basically mitigated a lot of the impact that you 0:09:42.679 --> 0:09:46.360 would have seen from tariffs. So I'm curious if if 0:09:46.400 --> 0:09:49.280 we do get some sort of trade deal, does that 0:09:49.440 --> 0:09:53.880 leave currencies as the next sort of fighting ground between 0:09:53.880 --> 0:09:57.680 the two sides. Probably not. One component of the deal 0:09:57.800 --> 0:10:01.760 seems to be some kind of n see peace, which 0:10:02.280 --> 0:10:07.120 broadly speaking involves a Chinese commitment, I assume not to 0:10:07.200 --> 0:10:10.200 let the yuan to appreciate further, whether that's not to 0:10:10.200 --> 0:10:13.600 appreciate further against the dollar or not depreciate further against 0:10:13.600 --> 0:10:16.600 the basket. Has been a left a little bit undefined. 0:10:17.120 --> 0:10:20.720 But as long as China is comfortable keeping the yuan 0:10:20.960 --> 0:10:25.440 at roughly as current level, within the the range it 0:10:25.520 --> 0:10:28.040 has been for the last six months, I don't think 0:10:28.040 --> 0:10:30.959 there's going to be a significant issue. On the other hand, 0:10:31.040 --> 0:10:34.520 if China's economy weekends in China really wants a significantly 0:10:34.559 --> 0:10:38.560 weaker currency, I think that would almost certainly upset the 0:10:38.640 --> 0:10:41.680 basic framework for this deal. Something you said was that 0:10:41.800 --> 0:10:45.400 even among the people who care about the deeper structural issues, 0:10:45.960 --> 0:10:50.360 they all have different perspectives. Something we really saw literally 0:10:50.480 --> 0:10:54.880 on display for everyone was the tension between President Trump 0:10:55.280 --> 0:10:58.440 and Robert Ledheiser, where they're literally in the Oval Office 0:10:58.800 --> 0:11:02.360 publicly disagreeing with each other about the significance of what 0:11:02.480 --> 0:11:06.200 a m o U or memorandum of understanding means. Where 0:11:06.240 --> 0:11:10.880 does Lightheiser fit in this camp? So Lightheiser is has 0:11:10.960 --> 0:11:16.559 long been focused on the more structural impediments to fair 0:11:16.600 --> 0:11:19.920 commerce with China. He hasn't been as focused on the 0:11:20.120 --> 0:11:24.920 bilateral deficit, and he's wanted to make sure that any 0:11:24.920 --> 0:11:30.040 any deal is enforceable, and he has prioritized I guess 0:11:30.080 --> 0:11:33.040 as he should. The concerns were at that were at 0:11:33.080 --> 0:11:36.199 the center of the section three oh one complaint so 0:11:36.440 --> 0:11:40.760 concerns about the protection of U. S intellectual property. So 0:11:41.400 --> 0:11:45.360 in your estimation, you know, we've been watching these trade tensions, 0:11:45.480 --> 0:11:48.320 if not a full blown trade war play out on 0:11:48.400 --> 0:11:53.800 either side. Who's suffered the most over this timeframe is 0:11:53.800 --> 0:11:55.680 that the US or is it China? In terms of 0:11:55.720 --> 0:12:01.240 economic fallout? Well, I think there's little doubt that an aggregate, 0:12:01.280 --> 0:12:03.959 the impact has been bigger on China. You know, as 0:12:04.000 --> 0:12:06.679 you noted, the U. S bilateral deficit has gone up. 0:12:07.120 --> 0:12:10.560 US imports from China continue to go up, so it 0:12:10.640 --> 0:12:14.000 doesn't seem like there has been a bigger impact on China. 0:12:14.480 --> 0:12:18.640 But clearly the uncertainty created by the threat of further 0:12:18.840 --> 0:12:23.559 escalation UH played a significant role in the broader slowdown 0:12:23.559 --> 0:12:27.240 of trade that is now playing out in East Asia. 0:12:27.679 --> 0:12:30.800 On the other hand, you know, one of the joys 0:12:30.880 --> 0:12:33.880 of having a heavy state hand in your economy is 0:12:33.920 --> 0:12:36.200 that when you decide not to import something, you don't 0:12:36.200 --> 0:12:40.880 import it. So, in a narrow sense, China cut its 0:12:41.000 --> 0:12:44.960 imports from the US much more than the US cut 0:12:45.000 --> 0:12:49.360 its imports from China. Soybean exports essentially went to zero, 0:12:49.920 --> 0:12:53.640 so did some other agricultural exports. So did energy exports. 0:12:53.679 --> 0:12:57.400 So when when China wanted to show that it could 0:12:57.640 --> 0:13:04.199 influence market outcomes, showed it could influence market outcomes very decisively. Brad, 0:13:04.280 --> 0:13:07.960 you mentioned supply chains there and the uncertainty caused up 0:13:08.000 --> 0:13:12.400 by this entire drama. I suppose if we get that 0:13:12.520 --> 0:13:15.640 trade deal between the US and China, does that mean 0:13:15.679 --> 0:13:20.000 that we are unlikely to return to the previous status quo? 0:13:20.120 --> 0:13:22.320 Doesn't mean that there will always be an element of 0:13:22.400 --> 0:13:26.320 uncertainty hovering over supply chains, that companies will be making 0:13:26.679 --> 0:13:29.719 contingency plans, and that maybe we start to see a 0:13:29.800 --> 0:13:35.200 sort of balkanization of trading regions between Asia and the 0:13:35.240 --> 0:13:39.480 America's well, I think that's an interesting question. In some sense, 0:13:39.520 --> 0:13:44.920 it will go to the basic question of how businesses 0:13:45.200 --> 0:13:48.680 perceive this deal and whether they perceive this deal is 0:13:48.800 --> 0:13:52.920 likely to stick or whether they think that this is 0:13:53.280 --> 0:13:56.080 going to have more the character of a truce, and 0:13:56.120 --> 0:14:01.520 they still have to plan for the possibility that broad 0:14:01.559 --> 0:14:05.920 based tariffs could be introduced into the trading relationship at 0:14:05.960 --> 0:14:09.200 some point in the future, whether by President Trump after 0:14:09.240 --> 0:14:13.000 he feels disappointed by the outcome of his deal, or 0:14:13.000 --> 0:14:17.520 by a future president. My view would be I'm gonna 0:14:17.520 --> 0:14:20.160 have a really boring answer. To be honest, I think 0:14:20.160 --> 0:14:24.360 there will be some companies that start reconsidering their supply 0:14:24.440 --> 0:14:28.000 chain reliance on China and start to make initial moves 0:14:28.080 --> 0:14:33.280 to rejigger operations. But at the current exchange rate, and 0:14:33.360 --> 0:14:36.160 it if we go back to the old tariff rate, 0:14:36.800 --> 0:14:39.360 I think China is still a very competitive location for 0:14:39.440 --> 0:14:44.000 most manufacturers, so that that adjustment will be modest. Let's 0:14:44.360 --> 0:14:46.720 shift gears and talk about the current state of the U. 0:14:46.760 --> 0:14:51.040 S economy and the new domestic economic goals that the 0:14:51.200 --> 0:14:56.040 Chinese government has set. Aside from the trade issue, what 0:14:56.120 --> 0:14:59.440 do you see as the sort of central problem right 0:14:59.440 --> 0:15:03.200 now the Chinese economy? Well, and the the central problem 0:15:03.200 --> 0:15:05.640 of the Chinese economy is that it to exaggerate just 0:15:05.720 --> 0:15:09.760 a bit. Growth stalled in the fourth quarter. I think 0:15:09.880 --> 0:15:14.960 China has been stuck in cycles of leverage and cycles 0:15:14.960 --> 0:15:18.640 of de leveraging. The past few de leveraging cycles have 0:15:19.440 --> 0:15:23.840 ended in significant slowdowns. Why. I think that's because it's 0:15:23.840 --> 0:15:27.640 actually hard to manage an economy that saves for his 0:15:27.760 --> 0:15:33.480 GDP and without the stimulus provided by relatively loose off 0:15:33.480 --> 0:15:38.640 budget fiscal policies and relatively loose credit policies, the internal 0:15:38.680 --> 0:15:42.320 engines of China's economy tend to start to sputter. So 0:15:42.360 --> 0:15:45.040 my interpretation of what happened last year is that China 0:15:45.640 --> 0:15:51.080 started a fairly broad based policy tightening and credit through 0:15:51.120 --> 0:15:55.680 the shadow financial system, so outside of the main banks 0:15:56.360 --> 0:15:59.840 was tightened. And initially early in two thousand and eight, 0:16:00.920 --> 0:16:03.480 there was a sense that wow, China had pulled off 0:16:03.600 --> 0:16:08.520 the magic de leveraging, it had reduced financial risk without 0:16:08.520 --> 0:16:12.080 slowing the economy. But by the end of it was 0:16:12.320 --> 0:16:19.320 fairly clear that the policy tightening had led to a 0:16:19.480 --> 0:16:23.680 very significant slowdown in activity, probably a more significant slowdown 0:16:23.680 --> 0:16:27.920 in activity than was reflected in the Q four GDP data. 0:16:28.360 --> 0:16:31.440 So for now I think the policy challenge for China 0:16:32.200 --> 0:16:36.840 is to get the Chinese the internal growth engines in 0:16:36.920 --> 0:16:53.880 China restarted. So now we have this big policy meeting 0:16:54.040 --> 0:16:58.520 in Beijing, all these policy makers gathering to discuss this 0:16:58.720 --> 0:17:02.440 very issue. Brad, you alluded to this earlier about you know, 0:17:02.480 --> 0:17:04.879 one of the benefits of having a command economy is 0:17:04.920 --> 0:17:07.120 that essentially you have a lot of levers to pull, 0:17:07.200 --> 0:17:10.840 and you're able to pull them reasonably effectively. What's your 0:17:10.880 --> 0:17:14.920 instinct telling you about which lever policymakers reach for now. 0:17:15.200 --> 0:17:19.800 Is it going back to credit creation and sort of releveraging, 0:17:19.920 --> 0:17:23.200 or is it maybe more fiscal stimulus. Well, it's it's 0:17:23.320 --> 0:17:27.640 it's not either or there is going to be more 0:17:27.680 --> 0:17:31.719 fiscal stimulus. There's been a range of tax cuts that 0:17:31.760 --> 0:17:36.119 have been announced. The change in the central government's budget 0:17:36.160 --> 0:17:39.720 balance is actually very modest. China, for some reason which 0:17:39.720 --> 0:17:43.879 I really don't understand, seems to attach some importance to 0:17:43.960 --> 0:17:49.000 the European monstrict three percent of GDP headline fiscal deficit number. 0:17:49.400 --> 0:17:52.360 So it's going to keep the headline deficit at two 0:17:52.400 --> 0:17:55.080 point eight. But you know, there's a credible argument that 0:17:55.160 --> 0:17:58.400 the real central government fiscal deficit is a bit bigger, 0:17:58.520 --> 0:18:00.119 which would be good. I mean, there's no read and 0:18:00.200 --> 0:18:04.160 why the central government shouldn't have a bigger fiscal deficit. 0:18:04.840 --> 0:18:08.919 But there's also been an increase in the quotas for 0:18:09.040 --> 0:18:13.720 prevent for provincial and local borrowing UH an increasing improval 0:18:13.960 --> 0:18:17.679 for a range of investment projects. So you're gonna probably 0:18:17.720 --> 0:18:22.199 see an even bigger move in the broader measure of 0:18:22.280 --> 0:18:28.280 China's fiscal deficit. And there's been an attempt to loosen 0:18:28.400 --> 0:18:32.600 the screws a bit on the credit creation process, UH 0:18:32.640 --> 0:18:37.520 to make credit more available to private firms, but without 0:18:37.800 --> 0:18:40.800 sort of you know, to use the Chinese phrase opening 0:18:40.800 --> 0:18:45.439 the floodgates and letting the water flow freely over the planes. 0:18:45.600 --> 0:18:49.800 So it's UH an attempt to be somewhat calibrated in 0:18:49.880 --> 0:18:54.040 the credit loosening. You could argue that without the trade deal, 0:18:54.280 --> 0:18:58.520 these more calibrated measures might have been too small. So 0:18:58.560 --> 0:19:02.000 I think China now is counting to some degree on 0:19:02.240 --> 0:19:07.160 the lifting of trade uncertainty to combine with its policy 0:19:07.200 --> 0:19:09.840 measures to help it get its growth target. I feel 0:19:09.840 --> 0:19:15.080 like pretty much ever since I've started covering economics and 0:19:15.119 --> 0:19:18.320 finance and all this stuff, there have been people warning 0:19:18.359 --> 0:19:22.159 about the so called or they're coming hard landing in China. 0:19:22.440 --> 0:19:24.639 Is there anything different? I mean, you just sort of 0:19:24.720 --> 0:19:26.600 laid out this idea. It was like, yes, sometimes they 0:19:26.640 --> 0:19:29.560 have deleveraging cycles, sometimes they have easy cycles. We saw 0:19:29.760 --> 0:19:33.120 the leveraging cycle. Is there anything different about this one? 0:19:33.160 --> 0:19:36.480 Because it does feel like there is some anxiety about 0:19:36.680 --> 0:19:39.440 whether stimulus this time, whether it's on the credit channel 0:19:39.520 --> 0:19:43.000 or the fiscal channel, will get traction. There seems to 0:19:43.040 --> 0:19:45.359 be more concerned about whether it will work this time. 0:19:45.920 --> 0:19:48.639 I find the arguments that China is pushing on a 0:19:48.720 --> 0:19:53.439 string a little off. It's it's hard to think that 0:19:53.520 --> 0:19:59.119 fiscal tightening led China's economy to slow significantly over the 0:19:59.119 --> 0:20:02.520 course of twenty teen and then think that fiscal loosening 0:20:02.880 --> 0:20:06.960 in nineteen will have absolutely no impact. So I think 0:20:07.000 --> 0:20:11.160 that you know, on the purely fiscal channels, uh, they 0:20:11.200 --> 0:20:14.159 basically they work, and they still work in China. Uh, 0:20:14.280 --> 0:20:17.960 they're the central government is in no way over indebted. 0:20:18.160 --> 0:20:21.200 It's got a lot of contingent liabilities. But central government 0:20:21.320 --> 0:20:26.760 bonds are like Chinese GDP, there's scope there. I get 0:20:26.840 --> 0:20:28.840 one of the questions, and it was a good Michael 0:20:28.880 --> 0:20:32.480 Pettis piece in January about this, is like, well, sure, 0:20:32.480 --> 0:20:36.320 you can always boost GDP by building a bridge, but 0:20:36.440 --> 0:20:38.800 if it's a bridge to nowhere, it doesn't really do 0:20:38.840 --> 0:20:41.359 anything for the economy. If it's a bridge to somewhere, 0:20:41.400 --> 0:20:45.320 it will actually improve the productive capacity and actually improve things. 0:20:45.560 --> 0:20:48.400 So I guess the question in my mind and in 0:20:48.440 --> 0:20:51.280 your view, is like, Okay, they could boost the economy 0:20:51.320 --> 0:20:55.359 with increased spending. Is their productive stuff in your view 0:20:55.880 --> 0:20:58.000 for them still to be building or will it be 0:20:58.440 --> 0:21:04.240 bridges to Nowhere, well bridges to Taibet. Look, I I 0:21:04.480 --> 0:21:10.280 don't think that the process of coastal urbanization in China 0:21:10.440 --> 0:21:14.800 is fully complete. I think the Woko process has limited, 0:21:15.200 --> 0:21:20.840 for you know, understandable policy reasons, the capacity of residents 0:21:20.880 --> 0:21:25.879 of some of the more inland or the northeastern provinces 0:21:25.920 --> 0:21:29.520 from migrating. So I think that if you loosen some 0:21:29.680 --> 0:21:34.840 of those restrictions on migration, there is still scope for 0:21:34.920 --> 0:21:39.400 some of the bigger, more successful urban areas to expand. 0:21:39.680 --> 0:21:45.639 So in that sense, there's scope to increase investment and 0:21:45.800 --> 0:21:51.320 physical infrastructure. Productively, there is certainly scope to increase investment 0:21:51.720 --> 0:21:55.760 in kind of the soft infrastructure, more public hospitals. So 0:21:55.840 --> 0:21:59.119 I don't I don't think that China has reached the limit, 0:21:59.800 --> 0:22:04.000 uh of where it really can't find incremental projects that 0:22:04.080 --> 0:22:08.760 have some social utility. That said, you know, the fundamental 0:22:08.800 --> 0:22:11.479 reason why China goes through the cycles and why they 0:22:11.520 --> 0:22:16.600 don't become global crises is because China saves so much. 0:22:16.760 --> 0:22:19.439 That's an advantage. It means that China goes through the 0:22:19.520 --> 0:22:23.440 cycles without really borrowing from the world. It levers up internally, 0:22:23.480 --> 0:22:27.880 it de levers internally the external debt, frankly is trivial. 0:22:28.600 --> 0:22:31.080 China still has a very small but still has a 0:22:31.119 --> 0:22:34.520 current account surplus. It has a net for an asset 0:22:34.560 --> 0:22:39.400 position of considerable size, so it just becomes a domestic balance. 0:22:39.880 --> 0:22:43.600 Flip side, though, is that with fort of GDP and savings, 0:22:44.520 --> 0:22:48.280 it's hard to find investments that are great to accommodate 0:22:48.359 --> 0:22:51.440 all of that savings. So I've always had the view 0:22:51.520 --> 0:22:53.920 that the way for China to get out of this 0:22:54.560 --> 0:22:57.800 leveraging and de leveraging cycle in a in a durable 0:22:57.840 --> 0:23:00.480 way would be a set of policy measures that really 0:23:00.520 --> 0:23:04.520 bring down China's very high UH savings rate, So more 0:23:05.080 --> 0:23:10.600 money on public health, a higher basic pension. China really 0:23:11.200 --> 0:23:17.640 under provides basic social services. In China under taxes personal 0:23:17.680 --> 0:23:21.399 income and there's no property tax. It's a system with 0:23:21.600 --> 0:23:26.080 very low tax on capital income. But as a result, 0:23:26.480 --> 0:23:29.679 the state is a little starved for the kinds of 0:23:29.720 --> 0:23:35.560 revenues that help boost consumption. So I mean, I think 0:23:35.560 --> 0:23:38.040 there are there are ways of that China will get 0:23:38.040 --> 0:23:41.440 out of this trap. And each leveraging and releveraging cycle 0:23:42.040 --> 0:23:46.000 ratches up your internal debt to a somewhat higher level, 0:23:46.400 --> 0:23:50.080 so it's not entirely healthy. But I am not convinced 0:23:50.119 --> 0:23:53.919 that China is has hit the limit and can't go 0:23:54.040 --> 0:23:58.800 through one more cycle or even two more cycles. Hm. Well, 0:23:58.840 --> 0:24:01.359 on that note, I mean just going back to the 0:24:01.400 --> 0:24:04.960 trade discussion we were having and the idea of structural reforms, 0:24:05.359 --> 0:24:10.440 Is there any way that changes on things like technology 0:24:10.480 --> 0:24:14.520 transfers or maybe opening up China's financial markets in various 0:24:14.520 --> 0:24:19.040 ways could help alleviate that savings got You know, I 0:24:19.040 --> 0:24:23.080 don't think that letting City Bank open up a branch 0:24:23.480 --> 0:24:29.720 inside China fundamentally changes China's social insurance system. So I 0:24:29.760 --> 0:24:33.160 don't think that there's sort of an easy win by 0:24:33.320 --> 0:24:36.840 letting US financial services firms into China. I think they'll 0:24:36.840 --> 0:24:40.600 be competing at the margin. Maybe they'll set an example 0:24:40.720 --> 0:24:45.280 of more efficient intermediation without some of the crazy risk taking, 0:24:45.720 --> 0:24:53.160 But I don't think that that fundamentally will transform China's 0:24:53.359 --> 0:24:57.959 domestic economic structure. So what if you have big you know, 0:24:58.040 --> 0:25:01.879 tech companies or multinational moles we start entering that market 0:25:02.000 --> 0:25:05.840 because they feel that, you know, the forced technology transfer 0:25:05.960 --> 0:25:08.159 isn't as much of an issue as it once was, 0:25:08.200 --> 0:25:10.560 Assuming that we do get some sort of agreement on 0:25:10.640 --> 0:25:16.399 that issue, well, I don't think big multinationals entering the 0:25:16.520 --> 0:25:23.040 Chinese market suddenly changes the incentives for low wage Chinese 0:25:23.040 --> 0:25:25.960 workers to save. So I don't think you can solve 0:25:26.640 --> 0:25:33.119 the fundamental weaknesses in China's social insurance by liberalizing access 0:25:33.200 --> 0:25:36.560 to China's market. Now, the technology transfer issue is a 0:25:36.600 --> 0:25:41.800 complicated one. China maintains correctly that it doesn't legally require 0:25:42.040 --> 0:25:46.080 as a condition for market entry technology transfer. There's no 0:25:46.160 --> 0:25:49.400 law that says in order to get approval to make 0:25:49.400 --> 0:25:54.680 an investment inside China, you have to transfer technology. There 0:25:54.680 --> 0:25:57.200 are sectors where you have to enter into joint ventures, 0:25:57.880 --> 0:26:01.040 and your joint venture partner may well ask you to 0:26:01.160 --> 0:26:04.919 transfer technology, but China says that's just the result of 0:26:05.080 --> 0:26:10.680 normal commercial negotiations. There are sectors where if you want 0:26:10.760 --> 0:26:14.439 to get a contract from the Chinese government, uh the 0:26:14.560 --> 0:26:16.760 Chinese governments, they say, well, you need to set up 0:26:16.800 --> 0:26:19.679 shop in China and your local joint venture needs to 0:26:19.680 --> 0:26:23.000 have some indigenous Chinese technology. That's just kind of the 0:26:23.040 --> 0:26:27.560 way business is done. But that's technically a commercial negotiation 0:26:27.680 --> 0:26:33.680 as well. China could certainly ratchet back the pressure that 0:26:33.760 --> 0:26:37.520 has been placed on multinationals looking to invest in China 0:26:37.840 --> 0:26:44.280 to also transfer technology. It certainly helps multinationals, it doesn't 0:26:44.359 --> 0:26:49.400