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Speaker 1: I was there in May and the Starbucks in the

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Speaker 1: basement of our office in Beijing was hopping. Welcome back

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Speaker 1: to the Bloomberg Benchmark podcast. I'm your host, Tori Soella

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Speaker 1: Bloomberg News. Thanks for listening to our first episode, and

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Speaker 1: we just couldn't wait to get out another one, so

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Speaker 1: we have a bonus show for you guys today. I

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Speaker 1: am joined by my colleagues and co host Dan Moss,

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Speaker 1: also in d C and Akio in San Francisco. Hey guys,

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Speaker 1: Hey guys, what's the weather like in San Francisco. It's

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Speaker 1: like boiling here, foggy and cold, the way a good

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Speaker 1: San Francisco summer should be like. In case you missed

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Speaker 1: us last week, Benchmark is a podcast about the global economy.

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Speaker 1: It's twists, it's turns, it's upstance, downs, and how it

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Speaker 1: affects you. We break down the most interesting numbers and

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Speaker 1: ideas from around the world, share them with you in

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Speaker 1: a way that hopefully will be understandable and lo and

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Speaker 1: behold fun. So last week we talked about productivity and

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Speaker 1: we were talking about, um, what we could potentially talk

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Speaker 1: about this week. A lot has happened over the past week,

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Speaker 1: but nothing has kept us up at night the way

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Speaker 1: China has um. So this week we're going to be

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Speaker 1: talking about China. Some quick context here. The Shanghai Main

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Speaker 1: Stock Index is down thirty nine percent since it hit

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Speaker 1: its peak in June. And when China sneezes, everyone captured

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Speaker 1: a cold, so um emerging market stock markets have lost

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Speaker 1: two trillion dollars collectively just over the course of August,

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Speaker 1: So you know, this is a pretty big meltdown. Today

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Speaker 1: we're going to be talking about this and what it

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Speaker 1: means for the rest of us, and we're also going

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Speaker 1: to talk a little bit about China's economy. You know, how,

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Speaker 1: how would you guys describe what China's economy is like?

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Speaker 1: Socialism with Chinese characteristics was the way down described it.

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Speaker 1: But I gotta tell you I was there in May

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Speaker 1: and the Starbucks in the basement of our office in

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Speaker 1: Aging Wall was holping, absolutely hoping. And you know what else,

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Speaker 1: Grande plant cost about the same as it cost me

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Speaker 1: across the street this morning. So it seems like there's

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Speaker 1: a decent amount of private enterprise going on there now.

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Speaker 1: But also the government still has a ton of control.

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Speaker 1: To shed some more light on all these things, we've

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Speaker 1: got Kenneth Lieberthal from the Brookings Institution here to help us.

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Speaker 1: Ken thank you so much for joining us. A pleasure

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Speaker 1: to be here. Aki. Those numbers were crazy, and clearly

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Speaker 1: investors are semi panicking. So it's kind of weird because

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Speaker 1: we always think of China, or we've historically thought of

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Speaker 1: China as this place where you know, growth is nuts,

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Speaker 1: it's off the charts, they're stealing us jobs, are doing

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Speaker 1: all this stuff. What's changed and what's happening now? Well,

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Speaker 1: first of all, i'd encourage you not to attach too

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Speaker 1: much important to the fall off in china stock market.

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Speaker 1: That stock market went up by a hundred and fifty

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Speaker 1: percent over the last eighteen months, so the fall off

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Speaker 1: of thirty so it still has most investors way ahead

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Speaker 1: of the game. Number one, but number two, it clearly

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Speaker 1: was a bubble. It had to burst, and it burst,

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Speaker 1: and it still has a ways to go, probably before

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Speaker 1: you hit a real market determined uh, you know, equilibrium

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Speaker 1: rate there. The good news is that the stock market

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Speaker 1: is very little to do with the real economy in China.

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Speaker 1: While the stock market was going up, the real economy

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Speaker 1: was slowing dramatically. You know, the China stock market is

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Speaker 1: not like the US market or the markets in Japan

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Speaker 1: or Europe. The thing to focus on really is what

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Speaker 1: is going on in the management of China's economy. How

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Speaker 1: accurate are the numbers? So what do we know about

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Speaker 1: it and what are the implications of that for US

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Speaker 1: and UH. I think there are now a lot of

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Speaker 1: worries about the quality of management of the economy about UH,

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Speaker 1: the accuracy of the numbers coming out of China, and

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Speaker 1: since as the second largest economy in the world and

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Speaker 1: the largest trading partner of more than half the countries

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Speaker 1: in the world, if not mistaken, what happens in its

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Speaker 1: real economy is a great significance and we be happy

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Speaker 1: to explore that as you know, as you want to

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Speaker 1: get into it. Many people probably aren't used to seeing

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Speaker 1: the words Slowdown and China next to each other. Yet

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Speaker 1: if you look under the hood, it's been a couple

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Speaker 1: of years since they clocked ten, but even so seven

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Speaker 1: that's the official target. So many countries would kill for that.

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Speaker 1: You bet they would. I think we would kill for that.

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Speaker 1: China for years grew at ten percent on average real

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Speaker 1: growth of GDP per year, absolutely astonishing, especially when you

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Speaker 1: consider they're almost one point four billion people there. But

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Speaker 1: a lot of that growth was a combination of smart

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Speaker 1: economic management but also the having rapid growth by bringing

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Speaker 1: people in from the countryside to the cities, getting inserted

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Speaker 1: into the global supply chains so that you take high

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Speaker 1: value added products from Japan, from South Korea, from the

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Speaker 1: US and elsewhere and assemble them in China and then

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Speaker 1: sell them, then export them out of China, and you

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Speaker 1: build infrastructure to make all that quite efficient. So that's

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Speaker 1: not technologically innovative. Growth is not very high quality growth.

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Speaker 1: Catching up story, it's really catching up, and it's following

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Speaker 1: a model that a number of East Asian countries have

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Speaker 1: followed before, and they ran with that model. They ran

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Speaker 1: very effectively with us. They deserve a lot of credit

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Speaker 1: for it, but they've exhausted that model. That model assumed

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Speaker 1: that trying to keep pumping out exports, increasing the exports

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Speaker 1: at a substantial rate every year. But then the global

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Speaker 1: economy has slowed. Uh. Protection is sentiment on a lot

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Speaker 1: of places has increased, and there's no way that trying

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Speaker 1: to can grow by simply pumping out exports in larger

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Speaker 1: and larder large your volumes Secondly, it counted on a

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Speaker 1: huge labor surplus. You look at the age distribution of

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Speaker 1: the Chinese population, and from the time they started this

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Speaker 1: grossburg until two thousand and thirteen, they had more people

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Speaker 1: of working age than they had people either too young

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Speaker 1: or too old to work, than is typical of countries

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Speaker 1: at that stage and development. So they had a lot

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Speaker 1: of cheap labor coming in and they could afford to

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Speaker 1: pay them little, give them very few benefits, work them

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Speaker 1: very hard, and make a lot of money off of it.

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Speaker 1: And that is more or less the model they had

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Speaker 1: since done. Began the opening in seven so it's been

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Speaker 1: going for three decades. Yet I have the impression that's

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Speaker 1: certainly in the minds of most Americans and most Western

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Speaker 1: is that's all they still think China is. Yeah, and

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Speaker 1: it isn't. That's the point. It takes a while for

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Speaker 1: a changing reality to kind of catch up and how

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Speaker 1: people think about things. China actually is now entering a

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Speaker 1: period is working age population is shrinking in absolute terms

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Speaker 1: of shrinking. Does that have anything to do with their

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Speaker 1: one child pause? It's it's a kind of result of

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Speaker 1: their one child policy, which began back in the early nineties.

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Speaker 1: When this big growth spurt began, and they still don't

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Speaker 1: have a lot of kids too young to work. What

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Speaker 1: they're going to get a huge increase of is people

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Speaker 1: too old to work, and those are very expensive people.

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Speaker 1: And they went on a huge infrastructure binge, which made

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Speaker 1: a lot of sense. But they've now basically build out

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Speaker 1: the infrastructure that has high payoff. And so if you

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Speaker 1: want to keep investing in infrastructure, you're going to be

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Speaker 1: investing in things. You know, see proverbial bridge to nowhere,

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Speaker 1: and the bridge is still as expensive as a bridge

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Speaker 1: in the middle of New York, but you aren't making

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Speaker 1: money from it. And so this combination of things has

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Speaker 1: forced them to look at how to transition to a

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Speaker 1: to an innovative economy. During economy that's creating new technology

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Speaker 1: that's competing at the high end of the international economic

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Speaker 1: profiles you see, and have the low end assembly operations

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Speaker 1: and that kind of thing moved to places like Vietnam

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Speaker 1: and Bangladesh and India, Pakistan. It's it's interesting you should

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Speaker 1: say that. I mean, last weekend I did back to

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Speaker 1: school shopping for my son, and I bought him some clothes.

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Speaker 1: I probably shouldn't name the outlets I went to. But

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Speaker 1: it's the sort of thing you can imagine, and just

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Speaker 1: out of curiosity, when I got home, I looked at

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Speaker 1: the tags to see where all these things were made.

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Speaker 1: Not a one of them. And I went to three

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Speaker 1: name brand outlets, not a one of them was made

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Speaker 1: in China. It's Vietnam, Pakistan and Indonesia. Yet I'm sure

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Speaker 1: if I was doing that ten years ago, they all

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Speaker 1: would have been made in China. And how did this happen?

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Speaker 1: Yet somehow not permanent to popular consciousness here. Many of

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Speaker 1: the producers in these other countries now are actually Chinese

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Speaker 1: businesses that had moved their business out of China to

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Speaker 1: lower cost places to produce. So they're doing a shen

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Speaker 1: z and elsewhere exactly everyone not on the scale of Shenjum,

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Speaker 1: but that kind of thing. You know, there's a lot

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Speaker 1: of capital coming out of China, especially initially things like textiles,

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Speaker 1: because you know there's such a small margin in that

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Speaker 1: you and it's so labor intensive. You go where the

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Speaker 1: inexpensive labor and basic infrastructure is and that's for example

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Speaker 1: of Vietnam Um. So China is trying to shift the

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Speaker 1: problem is it's a very hard shift to do without

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Speaker 1: some significant disruptions. So, you know, we have this great

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Speaker 1: team here at Bloomberg and they regularly survey economists around

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Speaker 1: the world, announced them, you know, health asces each country

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Speaker 1: you're going to grow over the next year, over the

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Speaker 1: next two years, three years, And right now the expectation

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Speaker 1: is for China to grow six point nine percent this year.

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Speaker 1: Um So, like we said, this is way slower than

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Speaker 1: a ten percent average over over the past few decades.

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Speaker 1: Is six point nine percent really that bad? And earlier

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Speaker 1: you mentioned that, you know, some people don't really trust

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Speaker 1: the numbers that are coming from the Chinese government anymore.

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Speaker 1: You know, I've read some reports that maybe growth is

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Speaker 1: closer to six percent, Like, what does that really? What

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Speaker 1: does that look like? If you're you know, a normal

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Speaker 1: person in China talking to normal people in China, It

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Speaker 1: is a mixed back. People are worried about the economy.

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Speaker 1: Their unemployment figures are very low quality for a variety

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Speaker 1: of technical reasons, they're not very accurate. I think a

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Speaker 1: key thing here is that the statistical system in China

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Speaker 1: that we all rely on is really quite good at

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Speaker 1: measuring capital investment, at measuring output of industrial firms UH,

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Speaker 1: those kinds of things. The old economy, if you will,

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Speaker 1: UH is quite poor and measuring things like service sector

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Speaker 1: businesses UH and consumption. Those figures are collected less frequently

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Speaker 1: and they're usually subject to large adjustments. The system just

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Speaker 1: was geared to what the Chinese were most concerned about

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Speaker 1: over the last three decades. They're now trying to shrink

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Speaker 1: the relative portions of investment of exports and manufacturing in

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Speaker 1: their economy, and they're trying to grow the service sector

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Speaker 1: and especially household consumption as a demand driver since exports

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Speaker 1: can go longer do The trick part of the problem

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Speaker 1: with that is their own numbers are not high quality. Yeah,

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Speaker 1: I know, I know if people don't really trust the

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Speaker 1: numbers out of China depending on who you talk to.

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Speaker 1: So I'm just kind of curious to why that is.

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Speaker 1: We have always theories about numbers here as well. Of course,

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Speaker 1: it sounds like you're saying it is a little more

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Speaker 1: too of them. I think there is a little more

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Speaker 1: to her. I don't think the government is lying. I

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Speaker 1: think the government's reporting the best it's got. The problem

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Speaker 1: is the growth sectors of the economy are the ones

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Speaker 1: where their numbers aren't as good, and the sectors that

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Speaker 1: are ratcheting down are the ones that their numbers are

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Speaker 1: come out every month and they're actually pretty good, and

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Speaker 1: we know how to do adjustments and that kind of thing.

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Speaker 1: So it's a problem in figuring out what's really going on.

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Speaker 1: It appears that while manufacturing is clearly in the dumps,

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Speaker 1: the reality is it seems that wages actually are continuing

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Speaker 1: to go up. Well, the housing market is way off

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Speaker 1: from where it was. Real estate development, especially of residential

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Speaker 1: real estate, is way off, and that was a huge

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Speaker 1: driver in the Chinese economy. Uh So there's just a

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Speaker 1: lot that is shifting around in China. It's very hard

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Speaker 1: to get your arms around it. So I can I

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Speaker 1: are primarily US focused reporters, you know, I'm curious on

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Speaker 1: your thoughts. We can't really just tune out China, even

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Speaker 1: though we mostly focus on what's going on here in America. Um,

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Speaker 1: it's not only we can just block out China, especially

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Speaker 1: not with markets doing what they're doing. So for someone

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Speaker 1: who doesn't cover economics, why should the average American care

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Speaker 1: about what's going on in China beyond what it's doing

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Speaker 1: to their stock portfolios? We do roughly six billion dollars

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Speaker 1: of trade a year, and with China, so relative prices

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Speaker 1: of goods, relative competitiveness, and that kind of thing matter

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Speaker 1: a lot. Secondly, the Chinese are now very rapidly increasing

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Speaker 1: their direct investment in the United States. They're building factories,

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Speaker 1: they're investing in the energy sector, They're doing a lot

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Speaker 1: of things. Uh. If you live in San Francisco, pay attention,

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Speaker 1: or in New York, the Chinese are driving up your

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Speaker 1: real estate values by a lot, especially at the if you're,

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Speaker 1: for example, in the American automotive sector and you look

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Speaker 1: at let me take GM as an example. GM early

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Speaker 1: on got into China. For I think the better part

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Speaker 1: of a decade, maybe even a little longer than that,

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Speaker 1: China has been the bigest private center in the world

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Speaker 1: for GM. Well, North America has lost money every year.

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Speaker 1: China has been a huge profit center. Now, vehicle sales

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Speaker 1: in China are slowing and in some cases actually the

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Speaker 1: market is actually going down. If you're paying GM retired

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Speaker 1: workers pensions, it's money from China in a real sentence

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Speaker 1: that is making that more affordable. So given all of that,

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Speaker 1: let me just ask you to step back in time

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Speaker 1: and we should mention to our listeners that you were

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Speaker 1: the China guy at the National Security Council during the

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Speaker 1: Clinton administration. China's economy is so much bigger now than

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Speaker 1: it was then. What would happen now? I mean, you're

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Speaker 1: a sleep in bed, you get a call from one

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Speaker 1: of your aids. They've just reset the reference rate for

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Speaker 1: the yuan, or they're doing this with the stock market,

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Speaker 1: and there's been a shift in this and the Premier

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Speaker 1: has just said X. What happens? Do you get the

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Speaker 1: call say, come in brief the president at seven o'clock

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Speaker 1: and he or in the future, maybe she's is ken

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Speaker 1: what the heck is going on? I thought we had

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Speaker 1: this figured out. I thought it was the second biggest

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Speaker 1: economy in the world on the way to be the biggest.

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Speaker 1: I thought they had it all figured out. What goes

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Speaker 1: through the minds of policymakers during a period like this way?

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Speaker 1: The US does have so much at stake. It's a

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Speaker 1: very good question. It's very important when you get that

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Speaker 1: kind of calm, that you have very clearly in your

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Speaker 1: mind what really matters short term and long term to

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Speaker 1: the US and what is just one of these things

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Speaker 1: that's a blip. The stock market in China in terms

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Speaker 1: of its economic impact on the US is frankly a blip.

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Speaker 1: And you want to say that, You want to say,

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Speaker 1: you know, the stock market doesn't tell you much about

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Speaker 1: what's going on in China. And as you all know

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Speaker 1: better than I do, markets act on sentiment very often

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Speaker 1: as much as they act on hard numbers and deep analysis,

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Speaker 1: you know. And what we've seen is a classic example

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Speaker 1: of that. Where people were worried about China. They're worried

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Speaker 1: about emergant markets are over are all don't quite know

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Speaker 1: what's going on, and suddenly it looks like a bubble

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Speaker 1: has burst in China, and Chinese are losing their shirts

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Speaker 1: in the market, and so markets everywhere react dramatically. You

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Speaker 1: won't be able to say to the President and to

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Speaker 1: the National Security Advisor and the National Economic Advisor and

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Speaker 1: so forth, that's not what's going on. You see this sentiment,

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Speaker 1: but the real economic significance of it is small. What

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Speaker 1: what I would be more concerned about is not, for example,

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Speaker 1: the stock market went down, but what the Chinese leadership

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Speaker 1: did when they saw it going down, because they then

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Speaker 1: intervened in almost startling fashion. I would say that the

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Speaker 1: really big problem is here. A lot of people are

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Speaker 1: going to feel that the reforms that Chi ching Ping,

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Speaker 1: the Chinese leaders, has put right up on the wall

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Speaker 1: and said this is where we're headed. It didn't take

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Speaker 1: much to knock them back a good peg and resort

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Speaker 1: to very non market approaches and do it, frankly, at

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Speaker 1: the wrong time, so they were bound to fail. He

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Speaker 1: didn't wait till the market was near as natter and

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Speaker 1: then try to provide confidence and move it up. It

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Speaker 1: was still in the middle of a fall, so they

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Speaker 1: expended something like two hundred billion dollars in addition to

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Speaker 1: all kinds of other interventions. They put out roughly two

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Speaker 1: billion dollars to stabilize that market, and then the market fell,

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Speaker 1: so a key. You know, when Ken was talking earlier

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Speaker 1: about demographics and a shrinking labor market, did that make

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Speaker 1: you wonder about your own homeland? Yeah, I was about

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Speaker 1: to say this sounds a lot like Japan. Well, in

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Speaker 1: a sense resonates with Japan. China's age distribution by I

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Speaker 1: believe two thousand and thirty will be roughly what Japan's

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Speaker 1: is now. And as you know, Japan, it's a very

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Speaker 1: old society, uh, in terms of age distribution, the big

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Speaker 1: differences China doesn't have nearly now or perspectively even by

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Speaker 1: two thousand and thirty, the per capita wealth that Japan

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Speaker 1: has what it has had, and we don't know the

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Speaker 1: future on this, what it has had is very dynamic

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Speaker 1: economic decision making, you know, I used to say, and

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Speaker 1: it was true experience supported this that one of the

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Speaker 1: things you could admire about the Chinese leadership, regardless of

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Speaker 1: what you think about the nature of their system, is

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Speaker 1: they did not duck problems coming up when you talk

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Speaker 1: to them. They talked about the future. And let me

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Speaker 1: tell you, if you pointed out problems that you don't

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Speaker 1: understand how big those problems are. And here are some

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Speaker 1: other things, and let me tell you what we're gonna

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Speaker 1: do about them, you know, and we'll experiment. But fundamentally

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Speaker 1: we've got to move in this direction, and they would

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Speaker 1: do it. You look over the ensume a few years

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Speaker 1: and they do it even more than you thought. Big

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Speaker 1: question and for Japan that has not been the case,

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Speaker 1: you know, sincerely and uh. And the question is whether

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Speaker 1: China is going to get tripped up as it goes forward,

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Speaker 1: And frankly, no one knows the future. It would be

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Speaker 1: nice if we did, but no one does. But these

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Speaker 1: last few weeks have I think raised more doubts and

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Speaker 1: more concerns abroad, and I suspect in China too than

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Speaker 1: we are accustomed to With China. That's not a good thing.

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Speaker 1: So we used to worry about Japan and then Aki

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Speaker 1: when Japan's big growths but finished and we thought it

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Speaker 1: was just a temper everything in the country would get

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Speaker 1: back on its fate and go back to what it

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Speaker 1: was doing in the late nighties and the early nineties.

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Speaker 1: That didn't happen, but that was a cave of the

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Speaker 1: world economy because China came online and its economy began

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Speaker 1: growing and growing and growing. Do we need a new China? Well,

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Speaker 1: what is it? Frankly, is too soon to tell what's

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Speaker 1: going to happen to China. They may pick up where

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Speaker 1: they are going to get to tempercent again, but they

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Speaker 1: can sustain five to seven percent for the that's fifteen

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Speaker 1: years on average, and transition to higher quality growth, less

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Speaker 1: environmental impact and all that. Uh, that will be a

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Speaker 1: be a huge contribution to global economic growth. The next

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Speaker 1: big comer possibly will be India. They're already. No, their

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Speaker 1: per capita GDP is miniscule compared to China's. Their infrastructure

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Speaker 1: is almost non existent compared to China's. So you know,

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Speaker 1: India is not there by a very long shot, and

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Speaker 1: therefore you have this huge growth potential in India. It's

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Speaker 1: really great you could be with us today and we

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Speaker 1: loved your insights. It's great to hear from someone who

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Speaker 1: has studied China both academically and has been involved at

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Speaker 1: the nexus of US policy banking on it. Well, all right,

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Speaker 1: that's it for us today. Thanks again for listening to

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Speaker 1: Bloomberg Benchmark. We will be back next week and until

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Speaker 1: then you can find us on the Bloomberg terminal as

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Speaker 1: well as Bloomberg dot com. We are also on iTunes,

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Speaker 1: more listeners can find us and let us know what

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Speaker 1: you thought of the show. We love feedback here um.

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Speaker 1: You can talk to us and follow us on Twitter

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Speaker 1: L in the middle, and at Dan Moss d C.

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Speaker 1: Thanks again, and toward the goodness I can exploring is