Speaker 1: I was there in May and the Starbucks in the
Speaker 1: basement of our office in Beijing was hopping. Welcome back
Speaker 1: to the Bloomberg Benchmark podcast. I'm your host, Tori Soella
Speaker 1: Bloomberg News. Thanks for listening to our first episode, and
Speaker 1: we just couldn't wait to get out another one, so
Speaker 1: we have a bonus show for you guys today. I
Speaker 1: am joined by my colleagues and co host Dan Moss,
Speaker 1: also in d C and Akio in San Francisco. Hey guys,
Speaker 1: Hey guys, what's the weather like in San Francisco. It's
Speaker 1: like boiling here, foggy and cold, the way a good
Speaker 1: San Francisco summer should be like. In case you missed
Speaker 1: us last week, Benchmark is a podcast about the global economy.
Speaker 1: It's twists, it's turns, it's upstance, downs, and how it
Speaker 1: affects you. We break down the most interesting numbers and
Speaker 1: ideas from around the world, share them with you in
Speaker 1: a way that hopefully will be understandable and lo and
Speaker 1: behold fun. So last week we talked about productivity and
Speaker 1: we were talking about, um, what we could potentially talk
Speaker 1: about this week. A lot has happened over the past week,
Speaker 1: but nothing has kept us up at night the way
Speaker 1: China has um. So this week we're going to be
Speaker 1: talking about China. Some quick context here. The Shanghai Main
Speaker 1: Stock Index is down thirty nine percent since it hit
Speaker 1: its peak in June. And when China sneezes, everyone captured
Speaker 1: a cold, so um emerging market stock markets have lost
Speaker 1: two trillion dollars collectively just over the course of August,
Speaker 1: So you know, this is a pretty big meltdown. Today
Speaker 1: we're going to be talking about this and what it
Speaker 1: means for the rest of us, and we're also going
Speaker 1: to talk a little bit about China's economy. You know, how,
Speaker 1: how would you guys describe what China's economy is like?
Speaker 1: Socialism with Chinese characteristics was the way down described it.
Speaker 1: But I gotta tell you I was there in May
Speaker 1: and the Starbucks in the basement of our office in
Speaker 1: Aging Wall was holping, absolutely hoping. And you know what else,
Speaker 1: Grande plant cost about the same as it cost me
Speaker 1: across the street this morning. So it seems like there's
Speaker 1: a decent amount of private enterprise going on there now.
Speaker 1: But also the government still has a ton of control.
Speaker 1: To shed some more light on all these things, we've
Speaker 1: got Kenneth Lieberthal from the Brookings Institution here to help us.
Speaker 1: Ken thank you so much for joining us. A pleasure
Speaker 1: to be here. Aki. Those numbers were crazy, and clearly
Speaker 1: investors are semi panicking. So it's kind of weird because
Speaker 1: we always think of China, or we've historically thought of
Speaker 1: China as this place where you know, growth is nuts,
Speaker 1: it's off the charts, they're stealing us jobs, are doing
Speaker 1: all this stuff. What's changed and what's happening now? Well,
Speaker 1: first of all, i'd encourage you not to attach too
Speaker 1: much important to the fall off in china stock market.
Speaker 1: That stock market went up by a hundred and fifty
Speaker 1: percent over the last eighteen months, so the fall off
Speaker 1: of thirty so it still has most investors way ahead
Speaker 1: of the game. Number one, but number two, it clearly
Speaker 1: was a bubble. It had to burst, and it burst,
Speaker 1: and it still has a ways to go, probably before
Speaker 1: you hit a real market determined uh, you know, equilibrium
Speaker 1: rate there. The good news is that the stock market
Speaker 1: is very little to do with the real economy in China.
Speaker 1: While the stock market was going up, the real economy
Speaker 1: was slowing dramatically. You know, the China stock market is
Speaker 1: not like the US market or the markets in Japan
Speaker 1: or Europe. The thing to focus on really is what
Speaker 1: is going on in the management of China's economy. How
Speaker 1: accurate are the numbers? So what do we know about
Speaker 1: it and what are the implications of that for US
Speaker 1: and UH. I think there are now a lot of
Speaker 1: worries about the quality of management of the economy about UH,
Speaker 1: the accuracy of the numbers coming out of China, and
Speaker 1: since as the second largest economy in the world and
Speaker 1: the largest trading partner of more than half the countries
Speaker 1: in the world, if not mistaken, what happens in its
Speaker 1: real economy is a great significance and we be happy
Speaker 1: to explore that as you know, as you want to
Speaker 1: get into it. Many people probably aren't used to seeing
Speaker 1: the words Slowdown and China next to each other. Yet
Speaker 1: if you look under the hood, it's been a couple
Speaker 1: of years since they clocked ten, but even so seven
Speaker 1: that's the official target. So many countries would kill for that.
Speaker 1: You bet they would. I think we would kill for that.
Speaker 1: China for years grew at ten percent on average real
Speaker 1: growth of GDP per year, absolutely astonishing, especially when you
Speaker 1: consider they're almost one point four billion people there. But
Speaker 1: a lot of that growth was a combination of smart
Speaker 1: economic management but also the having rapid growth by bringing
Speaker 1: people in from the countryside to the cities, getting inserted
Speaker 1: into the global supply chains so that you take high
Speaker 1: value added products from Japan, from South Korea, from the
Speaker 1: US and elsewhere and assemble them in China and then
Speaker 1: sell them, then export them out of China, and you
Speaker 1: build infrastructure to make all that quite efficient. So that's
Speaker 1: not technologically innovative. Growth is not very high quality growth.
Speaker 1: Catching up story, it's really catching up, and it's following
Speaker 1: a model that a number of East Asian countries have
Speaker 1: followed before, and they ran with that model. They ran
Speaker 1: very effectively with us. They deserve a lot of credit
Speaker 1: for it, but they've exhausted that model. That model assumed
Speaker 1: that trying to keep pumping out exports, increasing the exports
Speaker 1: at a substantial rate every year. But then the global
Speaker 1: economy has slowed. Uh. Protection is sentiment on a lot
Speaker 1: of places has increased, and there's no way that trying
Speaker 1: to can grow by simply pumping out exports in larger
Speaker 1: and larder large your volumes Secondly, it counted on a
Speaker 1: huge labor surplus. You look at the age distribution of
Speaker 1: the Chinese population, and from the time they started this
Speaker 1: grossburg until two thousand and thirteen, they had more people
Speaker 1: of working age than they had people either too young
Speaker 1: or too old to work, than is typical of countries
Speaker 1: at that stage and development. So they had a lot
Speaker 1: of cheap labor coming in and they could afford to
Speaker 1: pay them little, give them very few benefits, work them
Speaker 1: very hard, and make a lot of money off of it.
Speaker 1: And that is more or less the model they had
Speaker 1: since done. Began the opening in seven so it's been
Speaker 1: going for three decades. Yet I have the impression that's
Speaker 1: certainly in the minds of most Americans and most Western
Speaker 1: is that's all they still think China is. Yeah, and
Speaker 1: it isn't. That's the point. It takes a while for
Speaker 1: a changing reality to kind of catch up and how
Speaker 1: people think about things. China actually is now entering a
Speaker 1: period is working age population is shrinking in absolute terms
Speaker 1: of shrinking. Does that have anything to do with their
Speaker 1: one child pause? It's it's a kind of result of
Speaker 1: their one child policy, which began back in the early nineties.
Speaker 1: When this big growth spurt began, and they still don't
Speaker 1: have a lot of kids too young to work. What
Speaker 1: they're going to get a huge increase of is people
Speaker 1: too old to work, and those are very expensive people.
Speaker 1: And they went on a huge infrastructure binge, which made
Speaker 1: a lot of sense. But they've now basically build out
Speaker 1: the infrastructure that has high payoff. And so if you
Speaker 1: want to keep investing in infrastructure, you're going to be
Speaker 1: investing in things. You know, see proverbial bridge to nowhere,
Speaker 1: and the bridge is still as expensive as a bridge
Speaker 1: in the middle of New York, but you aren't making
Speaker 1: money from it. And so this combination of things has
Speaker 1: forced them to look at how to transition to a
Speaker 1: to an innovative economy. During economy that's creating new technology
Speaker 1: that's competing at the high end of the international economic
Speaker 1: profiles you see, and have the low end assembly operations
Speaker 1: and that kind of thing moved to places like Vietnam
Speaker 1: and Bangladesh and India, Pakistan. It's it's interesting you should
Speaker 1: say that. I mean, last weekend I did back to
Speaker 1: school shopping for my son, and I bought him some clothes.
Speaker 1: I probably shouldn't name the outlets I went to. But
Speaker 1: it's the sort of thing you can imagine, and just
Speaker 1: out of curiosity, when I got home, I looked at
Speaker 1: the tags to see where all these things were made.
Speaker 1: Not a one of them. And I went to three
Speaker 1: name brand outlets, not a one of them was made
Speaker 1: in China. It's Vietnam, Pakistan and Indonesia. Yet I'm sure
Speaker 1: if I was doing that ten years ago, they all
Speaker 1: would have been made in China. And how did this happen?
Speaker 1: Yet somehow not permanent to popular consciousness here. Many of
Speaker 1: the producers in these other countries now are actually Chinese
Speaker 1: businesses that had moved their business out of China to
Speaker 1: lower cost places to produce. So they're doing a shen
Speaker 1: z and elsewhere exactly everyone not on the scale of Shenjum,
Speaker 1: but that kind of thing. You know, there's a lot
Speaker 1: of capital coming out of China, especially initially things like textiles,
Speaker 1: because you know there's such a small margin in that
Speaker 1: you and it's so labor intensive. You go where the
Speaker 1: inexpensive labor and basic infrastructure is and that's for example
Speaker 1: of Vietnam Um. So China is trying to shift the
Speaker 1: problem is it's a very hard shift to do without
Speaker 1: some significant disruptions. So, you know, we have this great
Speaker 1: team here at Bloomberg and they regularly survey economists around
Speaker 1: the world, announced them, you know, health asces each country
Speaker 1: you're going to grow over the next year, over the
Speaker 1: next two years, three years, And right now the expectation
Speaker 1: is for China to grow six point nine percent this year.
Speaker 1: Um So, like we said, this is way slower than
Speaker 1: a ten percent average over over the past few decades.
Speaker 1: Is six point nine percent really that bad? And earlier
Speaker 1: you mentioned that, you know, some people don't really trust
Speaker 1: the numbers that are coming from the Chinese government anymore.
Speaker 1: You know, I've read some reports that maybe growth is
Speaker 1: closer to six percent, Like, what does that really? What
Speaker 1: does that look like? If you're you know, a normal
Speaker 1: person in China talking to normal people in China, It
Speaker 1: is a mixed back. People are worried about the economy.
Speaker 1: Their unemployment figures are very low quality for a variety
Speaker 1: of technical reasons, they're not very accurate. I think a
Speaker 1: key thing here is that the statistical system in China
Speaker 1: that we all rely on is really quite good at
Speaker 1: measuring capital investment, at measuring output of industrial firms UH,
Speaker 1: those kinds of things. The old economy, if you will,
Speaker 1: UH is quite poor and measuring things like service sector
Speaker 1: businesses UH and consumption. Those figures are collected less frequently
Speaker 1: and they're usually subject to large adjustments. The system just
Speaker 1: was geared to what the Chinese were most concerned about
Speaker 1: over the last three decades. They're now trying to shrink
Speaker 1: the relative portions of investment of exports and manufacturing in
Speaker 1: their economy, and they're trying to grow the service sector
Speaker 1: and especially household consumption as a demand driver since exports
Speaker 1: can go longer do The trick part of the problem
Speaker 1: with that is their own numbers are not high quality. Yeah,
Speaker 1: I know, I know if people don't really trust the
Speaker 1: numbers out of China depending on who you talk to.
Speaker 1: So I'm just kind of curious to why that is.
Speaker 1: We have always theories about numbers here as well. Of course,
Speaker 1: it sounds like you're saying it is a little more
Speaker 1: too of them. I think there is a little more
Speaker 1: to her. I don't think the government is lying. I
Speaker 1: think the government's reporting the best it's got. The problem
Speaker 1: is the growth sectors of the economy are the ones
Speaker 1: where their numbers aren't as good, and the sectors that
Speaker 1: are ratcheting down are the ones that their numbers are
Speaker 1: come out every month and they're actually pretty good, and
Speaker 1: we know how to do adjustments and that kind of thing.
Speaker 1: So it's a problem in figuring out what's really going on.
Speaker 1: It appears that while manufacturing is clearly in the dumps,
Speaker 1: the reality is it seems that wages actually are continuing
Speaker 1: to go up. Well, the housing market is way off
Speaker 1: from where it was. Real estate development, especially of residential
Speaker 1: real estate, is way off, and that was a huge
Speaker 1: driver in the Chinese economy. Uh So there's just a
Speaker 1: lot that is shifting around in China. It's very hard
Speaker 1: to get your arms around it. So I can I
Speaker 1: are primarily US focused reporters, you know, I'm curious on
Speaker 1: your thoughts. We can't really just tune out China, even
Speaker 1: though we mostly focus on what's going on here in America. Um,
Speaker 1: it's not only we can just block out China, especially
Speaker 1: not with markets doing what they're doing. So for someone
Speaker 1: who doesn't cover economics, why should the average American care
Speaker 1: about what's going on in China beyond what it's doing
Speaker 1: to their stock portfolios? We do roughly six billion dollars
Speaker 1: of trade a year, and with China, so relative prices
Speaker 1: of goods, relative competitiveness, and that kind of thing matter
Speaker 1: a lot. Secondly, the Chinese are now very rapidly increasing
Speaker 1: their direct investment in the United States. They're building factories,
Speaker 1: they're investing in the energy sector, They're doing a lot
Speaker 1: of things. Uh. If you live in San Francisco, pay attention,
Speaker 1: or in New York, the Chinese are driving up your
Speaker 1: real estate values by a lot, especially at the if you're,
Speaker 1: for example, in the American automotive sector and you look
Speaker 1: at let me take GM as an example. GM early
Speaker 1: on got into China. For I think the better part
Speaker 1: of a decade, maybe even a little longer than that,
Speaker 1: China has been the bigest private center in the world
Speaker 1: for GM. Well, North America has lost money every year.
Speaker 1: China has been a huge profit center. Now, vehicle sales
Speaker 1: in China are slowing and in some cases actually the
Speaker 1: market is actually going down. If you're paying GM retired
Speaker 1: workers pensions, it's money from China in a real sentence
Speaker 1: that is making that more affordable. So given all of that,
Speaker 1: let me just ask you to step back in time
Speaker 1: and we should mention to our listeners that you were
Speaker 1: the China guy at the National Security Council during the
Speaker 1: Clinton administration. China's economy is so much bigger now than
Speaker 1: it was then. What would happen now? I mean, you're
Speaker 1: a sleep in bed, you get a call from one
Speaker 1: of your aids. They've just reset the reference rate for
Speaker 1: the yuan, or they're doing this with the stock market,
Speaker 1: and there's been a shift in this and the Premier
Speaker 1: has just said X. What happens? Do you get the
Speaker 1: call say, come in brief the president at seven o'clock
Speaker 1: and he or in the future, maybe she's is ken
Speaker 1: what the heck is going on? I thought we had
Speaker 1: this figured out. I thought it was the second biggest
Speaker 1: economy in the world on the way to be the biggest.
Speaker 1: I thought they had it all figured out. What goes
Speaker 1: through the minds of policymakers during a period like this way?
Speaker 1: The US does have so much at stake. It's a
Speaker 1: very good question. It's very important when you get that
Speaker 1: kind of calm, that you have very clearly in your
Speaker 1: mind what really matters short term and long term to
Speaker 1: the US and what is just one of these things
Speaker 1: that's a blip. The stock market in China in terms
Speaker 1: of its economic impact on the US is frankly a blip.
Speaker 1: And you want to say that, You want to say,
Speaker 1: you know, the stock market doesn't tell you much about
Speaker 1: what's going on in China. And as you all know
Speaker 1: better than I do, markets act on sentiment very often
Speaker 1: as much as they act on hard numbers and deep analysis,
Speaker 1: you know. And what we've seen is a classic example
Speaker 1: of that. Where people were worried about China. They're worried
Speaker 1: about emergant markets are over are all don't quite know
Speaker 1: what's going on, and suddenly it looks like a bubble
Speaker 1: has burst in China, and Chinese are losing their shirts
Speaker 1: in the market, and so markets everywhere react dramatically. You
Speaker 1: won't be able to say to the President and to
Speaker 1: the National Security Advisor and the National Economic Advisor and
Speaker 1: so forth, that's not what's going on. You see this sentiment,
Speaker 1: but the real economic significance of it is small. What
Speaker 1: what I would be more concerned about is not, for example,
Speaker 1: the stock market went down, but what the Chinese leadership
Speaker 1: did when they saw it going down, because they then
Speaker 1: intervened in almost startling fashion. I would say that the
Speaker 1: really big problem is here. A lot of people are
Speaker 1: going to feel that the reforms that Chi ching Ping,
Speaker 1: the Chinese leaders, has put right up on the wall
Speaker 1: and said this is where we're headed. It didn't take
Speaker 1: much to knock them back a good peg and resort
Speaker 1: to very non market approaches and do it, frankly, at
Speaker 1: the wrong time, so they were bound to fail. He
Speaker 1: didn't wait till the market was near as natter and
Speaker 1: then try to provide confidence and move it up. It
Speaker 1: was still in the middle of a fall, so they
Speaker 1: expended something like two hundred billion dollars in addition to
Speaker 1: all kinds of other interventions. They put out roughly two
Speaker 1: billion dollars to stabilize that market, and then the market fell,
Speaker 1: so a key. You know, when Ken was talking earlier
Speaker 1: about demographics and a shrinking labor market, did that make
Speaker 1: you wonder about your own homeland? Yeah, I was about
Speaker 1: to say this sounds a lot like Japan. Well, in
Speaker 1: a sense resonates with Japan. China's age distribution by I
Speaker 1: believe two thousand and thirty will be roughly what Japan's
Speaker 1: is now. And as you know, Japan, it's a very
Speaker 1: old society, uh, in terms of age distribution, the big
Speaker 1: differences China doesn't have nearly now or perspectively even by
Speaker 1: two thousand and thirty, the per capita wealth that Japan
Speaker 1: has what it has had, and we don't know the
Speaker 1: future on this, what it has had is very dynamic
Speaker 1: economic decision making, you know, I used to say, and
Speaker 1: it was true experience supported this that one of the
Speaker 1: things you could admire about the Chinese leadership, regardless of
Speaker 1: what you think about the nature of their system, is
Speaker 1: they did not duck problems coming up when you talk
Speaker 1: to them. They talked about the future. And let me
Speaker 1: tell you, if you pointed out problems that you don't
Speaker 1: understand how big those problems are. And here are some
Speaker 1: other things, and let me tell you what we're gonna
Speaker 1: do about them, you know, and we'll experiment. But fundamentally
Speaker 1: we've got to move in this direction, and they would
Speaker 1: do it. You look over the ensume a few years
Speaker 1: and they do it even more than you thought. Big
Speaker 1: question and for Japan that has not been the case,
Speaker 1: you know, sincerely and uh. And the question is whether
Speaker 1: China is going to get tripped up as it goes forward,
Speaker 1: And frankly, no one knows the future. It would be
Speaker 1: nice if we did, but no one does. But these
Speaker 1: last few weeks have I think raised more doubts and
Speaker 1: more concerns abroad, and I suspect in China too than
Speaker 1: we are accustomed to With China. That's not a good thing.
Speaker 1: So we used to worry about Japan and then Aki
Speaker 1: when Japan's big growths but finished and we thought it
Speaker 1: was just a temper everything in the country would get
Speaker 1: back on its fate and go back to what it
Speaker 1: was doing in the late nighties and the early nineties.
Speaker 1: That didn't happen, but that was a cave of the
Speaker 1: world economy because China came online and its economy began
Speaker 1: growing and growing and growing. Do we need a new China? Well,
Speaker 1: what is it? Frankly, is too soon to tell what's
Speaker 1: going to happen to China. They may pick up where
Speaker 1: they are going to get to tempercent again, but they
Speaker 1: can sustain five to seven percent for the that's fifteen
Speaker 1: years on average, and transition to higher quality growth, less
Speaker 1: environmental impact and all that. Uh, that will be a
Speaker 1: be a huge contribution to global economic growth. The next
Speaker 1: big comer possibly will be India. They're already. No, their
Speaker 1: per capita GDP is miniscule compared to China's. Their infrastructure
Speaker 1: is almost non existent compared to China's. So you know,
Speaker 1: India is not there by a very long shot, and
Speaker 1: therefore you have this huge growth potential in India. It's
Speaker 1: really great you could be with us today and we
Speaker 1: loved your insights. It's great to hear from someone who
Speaker 1: has studied China both academically and has been involved at
Speaker 1: the nexus of US policy banking on it. Well, all right,
Speaker 1: that's it for us today. Thanks again for listening to
Speaker 1: Bloomberg Benchmark. We will be back next week and until
Speaker 1: then you can find us on the Bloomberg terminal as
Speaker 1: well as Bloomberg dot com. We are also on iTunes,
Speaker 1: where if you visit, please give us a rating so
Speaker 1: more listeners can find us and let us know what
Speaker 1: you thought of the show. We love feedback here um.
Speaker 1: You can talk to us and follow us on Twitter
Speaker 1: at at the Eto seven, at Tori Stowell with one
Speaker 1: L in the middle, and at Dan Moss d C.
Speaker 1: Thanks again, and toward the goodness I can exploring is