WEBVTT - Richard Koo and Zichen Wang on What Just Happened in China 0:00:02.600 --> 0:00:13.920 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.560 --> 0:00:21.880 Hello and welcome to another episode up the All Thoughts Podcast. 0:00:21.960 --> 0:00:23.320 I'm Tracy Alloway. 0:00:23.079 --> 0:00:24.200 And I'm Joe Whysenthal. 0:00:24.520 --> 0:00:27.479 Joe, what is going on in China? We haven't asked 0:00:27.480 --> 0:00:29.360 that question for a while, I mean, how. 0:00:29.200 --> 0:00:30.920 Long is it ever? How long do we ever go 0:00:30.960 --> 0:00:34.960 without a China episode? But since the last time we 0:00:35.040 --> 0:00:37.120 ever talked about China, which was probably like a month 0:00:37.159 --> 0:00:40.680 ago or something, we have seen an absolute flurry of 0:00:40.760 --> 0:00:43.919 policy announcements. Look, we know that the big picture is 0:00:43.960 --> 0:00:47.440 that there's been slow growth. The real estate market is dismal, 0:00:47.880 --> 0:00:51.080 consumption is slow, the stock market, which I don't think 0:00:51.159 --> 0:00:55.360 is particularly important to Chinese policymakers, has been terrible. And 0:00:55.400 --> 0:00:57.560 then over the last few weeks, we've had this flurry 0:00:57.560 --> 0:00:58.120 of announcement. 0:00:58.440 --> 0:01:03.040 Right, so, there was something of a policy pivot in September, 0:01:03.080 --> 0:01:05.680 which in itself is kind of unusual, and we'll get 0:01:05.680 --> 0:01:08.880 into that. But we've basically seen you know, new polep 0:01:08.920 --> 0:01:14.240 Bureau guidance. We've seen monetary easing, we've seen property support, 0:01:14.480 --> 0:01:19.480 we've seen some signs of maybe more fiscal stimulus. And 0:01:19.560 --> 0:01:21.679 that to me is kind of the big question because 0:01:21.720 --> 0:01:24.440 so far, and you're going to hear me ask this 0:01:24.560 --> 0:01:27.080 question a couple of times, I imagine, But so far, 0:01:27.120 --> 0:01:30.600 the responses to what's been announced are kind of along 0:01:30.640 --> 0:01:34.280 this range of some people thinking it's kind of nothing burger, 0:01:34.520 --> 0:01:37.120 it's just more monetary easing. We've seen this kind of 0:01:37.160 --> 0:01:40.000 thing before. But then there are people out there who think, no, 0:01:40.200 --> 0:01:42.600 this is actually a big deal, and China is sort 0:01:42.640 --> 0:01:46.000 of signaling a big shift in its mindset in how 0:01:46.080 --> 0:01:49.400 it approaches things like fiscal stimulus and also social safety 0:01:49.440 --> 0:01:50.200 nets totally. 0:01:50.240 --> 0:01:53.800 So we know that there was the mega Chinese fiscal 0:01:53.920 --> 0:01:56.360 stimulus that happened in two thousand and eight and two 0:01:56.360 --> 0:01:59.120 thousand and nine after the global financial crisis, and is 0:01:59.160 --> 0:02:02.400 sort of historic how much got built then. But you know, 0:02:02.640 --> 0:02:04.720 unlike much of the rest of the world, in the 0:02:04.760 --> 0:02:07.200 wake of COVID, there has really been very little and 0:02:07.240 --> 0:02:10.320 there's been this sort of drum beat that that's sort 0:02:10.360 --> 0:02:13.640 of the way we think of countercyclical fiscal policy in 0:02:13.639 --> 0:02:16.840 Western economies is not the preferred approach. That there's this 0:02:16.960 --> 0:02:22.440 preference for domestic investment, the investment tech, exports, et cetera. 0:02:23.040 --> 0:02:26.320 And so something happened though in this year in the 0:02:26.440 --> 0:02:29.359 last several months that has prompted at least some sort 0:02:29.360 --> 0:02:32.480 of pivot, and we need to understand why now and 0:02:32.520 --> 0:02:33.760 what the goals are. Yeah. 0:02:33.800 --> 0:02:36.760 Well, you also mentioned some of the economic data that's 0:02:36.760 --> 0:02:39.000 been coming out of China recently. One of the big 0:02:39.000 --> 0:02:42.760 things that happened was I think the first contraction in 0:02:42.919 --> 0:02:46.760 bank lending in nearly two decades. And so if we're 0:02:46.800 --> 0:02:51.160 talking about contracting bank lending, then it feels like there's 0:02:51.200 --> 0:02:54.560 one person we definitely need to talk to, and that 0:02:54.680 --> 0:02:59.440 is Richard Ku of balance sheet recession fame. So listeners 0:02:59.520 --> 0:03:02.480 might remember that we spoke to him last year when 0:03:02.680 --> 0:03:05.640 his idea of a balance sheet recession in China was 0:03:05.680 --> 0:03:08.160 really starting to take off. And again, if you look 0:03:08.160 --> 0:03:11.639 at that bank lending contraction, it seems like that's kind 0:03:11.639 --> 0:03:13.840 of been born out in the data. And then the 0:03:13.919 --> 0:03:17.880 other perfect guest we have for this episode is someone 0:03:17.880 --> 0:03:20.800 who's going to speak to the question of how economic 0:03:20.840 --> 0:03:25.440 policy is actually implemented in China, because I think everyone 0:03:25.480 --> 0:03:29.399 has this view of China as a very centralized command economy, 0:03:29.960 --> 0:03:32.680 but you have all these local governments who actually have, 0:03:33.000 --> 0:03:35.240 you know, some degree of autonomy when it comes to 0:03:35.320 --> 0:03:41.920 deciding individual spending decisions, or how particular macro policy or 0:03:41.960 --> 0:03:48.240 how particular macro policy should be implemented at the individual 0:03:48.480 --> 0:03:51.040 micro level. It reminds me, do you remember that old 0:03:51.120 --> 0:03:53.640 proverb of I think it's a heaven is high and 0:03:53.680 --> 0:03:57.120 the emperor is far away? You know you heard that one? 0:03:57.280 --> 0:03:58.080 Anyway? Yes? 0:03:58.160 --> 0:04:00.640 Actually, yes, Wait are you listening to me? 0:04:00.800 --> 0:04:01.240 You no? 0:04:01.240 --> 0:04:03.680 No, I actually do remember that. I've come across that. 0:04:04.000 --> 0:04:07.160 So China is big and Shishin Ping is in Beijing 0:04:07.480 --> 0:04:10.120 putting out like generalist mandates, but a lot of that 0:04:10.160 --> 0:04:12.640 is going to get executed at a more local level. 0:04:12.920 --> 0:04:13.080 Right. 0:04:13.160 --> 0:04:16.200 So, after our conversation with Richard Kou, which will be 0:04:16.240 --> 0:04:18.200 the first half of this, we're going to be speaking 0:04:18.240 --> 0:04:21.200 with the Zishan Wong. He is a mid career master 0:04:21.320 --> 0:04:24.919 student at Princeton University. He's on leave from the Center 0:04:25.000 --> 0:04:28.240 for China and Globalization, and he is the author of 0:04:28.279 --> 0:04:32.080 the excellent Pecnology subs deck. Listeners might remember we did 0:04:32.080 --> 0:04:34.760 a recent episode with Adam Two's and he gave a 0:04:34.800 --> 0:04:38.240 shout out to the Pecnology substack. So it's like, okay, 0:04:38.240 --> 0:04:40.400 we got to get him on because if two gives 0:04:40.560 --> 0:04:42.480 him a shout out, then obviously we needed to talk 0:04:42.520 --> 0:04:45.320 to him, and then all of this flurry of China news. 0:04:45.360 --> 0:04:47.360 This is the perfect hook. So you'll hear from Richard 0:04:47.680 --> 0:04:49.039 and then you'll hear from Azishan. 0:04:49.240 --> 0:04:51.680 All right, let's start with Richard at the sort of 0:04:51.760 --> 0:04:54.679 macro level. Richard Ku, thank you so much for coming 0:04:54.720 --> 0:04:55.919 back on all thoughts. 0:04:56.240 --> 0:04:58.120 Oh, quite welcome. It's a great honor for me. 0:04:59.000 --> 0:05:00.000 Thank you, thank you. 0:05:00.279 --> 0:05:02.760 So I'll just jump in with the first question. There 0:05:02.800 --> 0:05:07.279 seems to be a spectrum of responses to what China 0:05:07.320 --> 0:05:09.479 has announced so far. And on the one end you 0:05:09.560 --> 0:05:13.039 have people like George Magnus who are saying this is crazy. 0:05:13.279 --> 0:05:15.760 It's the definition of doing the same thing over and 0:05:15.800 --> 0:05:18.599 over again and expecting a different result. And then on 0:05:18.640 --> 0:05:20.599 the other hand you have people who say this is 0:05:20.640 --> 0:05:24.200 actually a really big policy shift. It's just that the 0:05:24.240 --> 0:05:27.840 party is rolling stuff out incrementally, and so it may 0:05:27.920 --> 0:05:30.240 still be the case that we get a big fiscal 0:05:30.279 --> 0:05:33.280 response at some point. Where do you lie on that 0:05:33.320 --> 0:05:36.960 sort of spectrum of opinions about what's been announced so far. 0:05:37.640 --> 0:05:40.840 Well, I am slightly closer to the people who think 0:05:41.040 --> 0:05:43.520 this might be the beginning of a new move instead 0:05:43.560 --> 0:05:46.920 of just doing the same thing over and over in 0:05:47.040 --> 0:05:50.160 that the size of the package that came out, mostly 0:05:50.200 --> 0:05:55.680 from People's Bank of China is quite significant, very large 0:05:55.720 --> 0:05:58.800 there is, and that shows that for the first time 0:05:58.920 --> 0:06:03.680 the Chinese women is indicating their awareness that this is 0:06:03.720 --> 0:06:08.120 a serious business. And I think that's the indication that 0:06:08.360 --> 0:06:12.560 we haven't seen until now. And so yes, I am 0:06:12.800 --> 0:06:16.880 slightly positive because they actually indicated that they're very serious 0:06:16.920 --> 0:06:21.040 about the problem we face. Now this is the same 0:06:21.080 --> 0:06:25.720 thing over again. Well, central bank responses are the easiest 0:06:25.800 --> 0:06:28.400 one to put in on the table compared to our 0:06:28.480 --> 0:06:30.800 physical stimulus, where you have to decide you know, where 0:06:30.839 --> 0:06:33.039 the money should be spent, and how should be spent, 0:06:33.240 --> 0:06:36.160 and who gets the money and who doesn't in all 0:06:36.200 --> 0:06:37.919 of those things will have to be worked out on 0:06:37.960 --> 0:06:40.719 the fiscal side, but on the monetary side, you know, 0:06:40.760 --> 0:06:43.520 only central bank have to make a decision how much 0:06:43.600 --> 0:06:47.000 money to put in. So you would expect central bank 0:06:47.040 --> 0:06:52.320 to move fast and first if they realize that they 0:06:52.360 --> 0:06:55.520 have to do something. And so I'm not surprised that 0:06:56.040 --> 0:07:01.039 central bank actions came first before the fiscal response. But 0:07:01.279 --> 0:07:05.039 in a sense, we in Japan years ago did the 0:07:05.080 --> 0:07:08.960 same thing. Thirty years ago, we had a word called PKO. 0:07:09.279 --> 0:07:13.320 In a PKO usually means peacekeeping operation by the United Nations, 0:07:13.600 --> 0:07:16.400 but those of us in the market. Thirty years ago, 0:07:16.760 --> 0:07:20.560 the word PKO meant price keeping operations by the Ministry 0:07:20.560 --> 0:07:23.720 of Finance trying to keep Japanese share prices from falling. 0:07:24.320 --> 0:07:27.440 And so there's a little bit of similarities with what 0:07:28.000 --> 0:07:31.080 Japanese did thirty years ago with what China is doing 0:07:31.120 --> 0:07:32.720 with its share prices. 0:07:33.160 --> 0:07:36.040 If I can just jump in here when you say 0:07:36.160 --> 0:07:38.680 this might be the beginning of something real, what is 0:07:38.720 --> 0:07:40.320 it specifically that looks good to you? 0:07:41.000 --> 0:07:43.800 Well, first of all, I'm no great fan of using 0:07:43.920 --> 0:07:48.360 monetary policy, meaning policies from the central bank to fight 0:07:48.600 --> 0:07:51.320 what I call balanced you recession, and I think China 0:07:51.440 --> 0:07:56.160 is facing balance recession. And balance recession happens when a 0:07:56.400 --> 0:08:00.240 dead finance bubble burst. As the prices collapsed lie these 0:08:00.320 --> 0:08:03.360 remain people realize that they are balance sheets underwater or 0:08:04.120 --> 0:08:07.400 nearly so, and they all try to repair their balance 0:08:07.400 --> 0:08:10.360 sheets all at the same time. And repairing balance sheets, 0:08:10.400 --> 0:08:12.880 of course, is the right thing to do, but when 0:08:12.920 --> 0:08:15.200 everybody does it all at the same time, we enter 0:08:15.320 --> 0:08:19.920 the problem of fallacy or composition that even though everybody 0:08:20.000 --> 0:08:22.880 is doing the right things, collectively, we get the wrong results. 0:08:23.160 --> 0:08:26.600 And we get that problem in this case because in 0:08:26.640 --> 0:08:30.320 the national economy, if someone is repairing balance sheets, meaning 0:08:30.360 --> 0:08:34.000 pain down debt or increasing savings, someone has to borrow 0:08:34.080 --> 0:08:37.480 those funds to keep the economy going. But and usual economies, 0:08:37.600 --> 0:08:40.360 you know, you bring interust rates down, there'll be people 0:08:40.400 --> 0:08:43.160 out there willing to borrow the money and spend it, 0:08:43.200 --> 0:08:45.840 and that's how you keep the economy going. But in 0:08:45.880 --> 0:08:48.280 the balance sheet recession, you bring interest rates down to 0:08:48.440 --> 0:08:51.480 very low levels, and Chinese interest rates already pretty low, 0:08:51.760 --> 0:08:54.280 but even if you bring it down to zero, people 0:08:54.280 --> 0:08:57.320 would be still repairing balance sheets. Because if you're in 0:08:57.880 --> 0:09:00.720 negative equity territory, you have to come out of that 0:09:00.800 --> 0:09:04.079 as quickly as possible. And so when you're in that situation, 0:09:04.640 --> 0:09:08.040 you cannot expect private sector to respond to lowering of 0:09:08.080 --> 0:09:11.439 interest rates or quantitative easying, forward guidance and all of 0:09:11.480 --> 0:09:15.000 those monetary policy to get this private sector to borrow 0:09:15.040 --> 0:09:17.559 money again. And because they are all doing the right 0:09:17.600 --> 0:09:20.599 things paying down debt. So when you're in that situation, 0:09:21.080 --> 0:09:24.360 economy to go. We can vary very quickly because all 0:09:24.440 --> 0:09:27.920 the safety funds that are returned to the banking system 0:09:28.120 --> 0:09:31.280 cannot come out again, and that's how you end up 0:09:31.400 --> 0:09:34.680 with economy drinking very, very rapid. And the only way 0:09:34.720 --> 0:09:38.000 to stop this is for the government, which is outside 0:09:38.000 --> 0:09:40.840 of the fallacy of composition, to borrow money. And that's 0:09:40.840 --> 0:09:44.760 the fiscal policy, of course, but that hasn't come out yet. 0:09:45.360 --> 0:09:48.600 And so yes, they did the quick and easy part 0:09:48.800 --> 0:09:52.000 with big numbers on the monetary side. But if you 0:09:52.000 --> 0:09:55.240 are in balanced your recession monetary policy, I'm afraid it's 0:09:55.280 --> 0:09:57.400 not going to be very effective. You really need a 0:09:57.400 --> 0:10:00.840 fiscal policy to get the economy moving, and that hasn't 0:10:00.960 --> 0:10:01.800 arrived yet. 0:10:02.120 --> 0:10:04.200 Well, then what's good? I mean you say, Okay, the 0:10:04.240 --> 0:10:06.960 PBOC moved first. You think this could be the start 0:10:06.960 --> 0:10:09.760 of something different. But if all they've really done, in 0:10:09.800 --> 0:10:11.920 your view is announce the sort of substance on the 0:10:11.960 --> 0:10:14.960 central bank side, I'm still trying to understand what you 0:10:15.120 --> 0:10:17.880 see as maybe some reason for optimism. 0:10:18.600 --> 0:10:21.240 Well, optimism in the sense that the amounts involved are 0:10:21.240 --> 0:10:24.520 pretty large. Okay, you know, Center kept on saying, if 0:10:24.520 --> 0:10:26.360 this is not enough, we're going to do more and 0:10:26.400 --> 0:10:30.240 more and more. Well, as someone mentioned, this is just 0:10:30.320 --> 0:10:33.840 like Mario Doraghi is saying that you see people do 0:10:33.960 --> 0:10:37.240 whatever it takes to keep the Euro going. That kind 0:10:37.240 --> 0:10:41.199 of sounds like that, and in that sense at least 0:10:41.280 --> 0:10:45.160 Central Bank is indicating that situation is quite serious, okay, 0:10:45.160 --> 0:10:47.200 which is a good thing because we haven't heard that 0:10:47.280 --> 0:10:51.160 yet from those guys before. But what the real policy 0:10:51.160 --> 0:10:53.440 that is needed is not from the monastery side. It 0:10:53.440 --> 0:10:55.120 has to come from the fiscal side. 0:10:55.520 --> 0:10:57.520 What could they do on the fiscal side? And this 0:10:57.640 --> 0:10:59.760 is the thing I don't really understand, because I think 0:10:59.800 --> 0:11:03.160 I've agrees that part of the problem here is the 0:11:03.280 --> 0:11:08.480 lack of consumption, So why not just go directly? I 0:11:08.520 --> 0:11:12.439 know monetary policy is faster and to some extent easier 0:11:12.480 --> 0:11:15.400 to roll out, but why not move sooner on the 0:11:15.400 --> 0:11:18.040 fiscal side and just stimulate consumption directly. 0:11:19.040 --> 0:11:23.400 Well, if people are all concerned about repairing their balance sheets, 0:11:23.920 --> 0:11:27.720 you give them money to spend, and too often they 0:11:27.840 --> 0:11:30.800 just use it to pay down debt. And so even 0:11:30.880 --> 0:11:33.960 within physical stimulus, you have to be very careful here 0:11:34.400 --> 0:11:38.760 because tax cuts, I'm afraid, are not very effective during 0:11:38.800 --> 0:11:42.120 balance sheet recessions, because people use that money to repair 0:11:42.160 --> 0:11:45.040 their balance sheets, and repairing balances is of course the 0:11:45.120 --> 0:11:47.760 right thing to do, but it will not add to 0:11:47.800 --> 0:11:51.200 GDP when they're using that tax cuts to pay down 0:11:51.240 --> 0:11:54.800 debt or rebuild their savings, so that will not add 0:11:54.840 --> 0:11:59.160 to consumption as much as you would expect under ordinary circumstances. 0:11:59.520 --> 0:12:02.480 And so I would really like to see government just 0:12:02.559 --> 0:12:05.360 borrow and spend the money, because that would be the 0:12:05.360 --> 0:12:08.280 most effective way to stop the deflationary spiral. 0:12:09.280 --> 0:12:13.160 A source of funds in an economy that's experiencing balance 0:12:13.160 --> 0:12:16.719 sheet recession that's sort of outside the fallacy of composition 0:12:16.840 --> 0:12:20.120 or the composition effects is exports. And so you could 0:12:20.200 --> 0:12:23.360 imagine that if the world is filled with people buying 0:12:23.480 --> 0:12:28.360 bid vehicles and humanoid robots and batteries from cattle and 0:12:28.400 --> 0:12:31.040 so forth, that that can bring in the cash and 0:12:31.080 --> 0:12:33.679 that could be another source. Does the math add up 0:12:33.800 --> 0:12:37.000 in your view? Can China export its way out of 0:12:37.600 --> 0:12:40.000 the what you assess as a balance sheet recession? 0:12:40.640 --> 0:12:44.160 Yes, Export is definitely one of the best ways if 0:12:44.160 --> 0:12:46.800 you can use it to come out of balancing recession. 0:12:47.800 --> 0:12:52.000 But China, just like Japan thirty years ago, is the 0:12:52.200 --> 0:12:56.320 largest trade subplus country in the world, and if the 0:12:56.320 --> 0:12:59.920 world's largest trade subplus country in the world tries to 0:13:00.240 --> 0:13:05.040 export its way out. Very many trading partners will complain 0:13:05.480 --> 0:13:09.199 that you're already such a large destabilizing factor on the 0:13:09.240 --> 0:13:12.360 world trade. Now you're going to destabilize it even more. 0:13:13.160 --> 0:13:15.959 And so I remember thirty years ago that United States, 0:13:16.040 --> 0:13:19.720 Europe and others were very much against Japan trying to 0:13:19.760 --> 0:13:24.760 expore its way out, and because of their displeasure, particularly 0:13:24.840 --> 0:13:29.640 the US displeasure, Japanese en which thought that at one 0:13:29.720 --> 0:13:33.240 hundred and sixty when the bubble burst in nineteen ninety 0:13:33.920 --> 0:13:37.320 ended up eighty hundred of dollars five years later nineteen 0:13:37.400 --> 0:13:40.640 ninety five. And what that indicated to me was that 0:13:41.080 --> 0:13:45.000 if you're running trade deficit, you can probably expose your 0:13:45.000 --> 0:13:47.440 way out and no one can really complain because you're 0:13:47.480 --> 0:13:50.160 a deficit country to begin with. But if you're the 0:13:50.280 --> 0:13:53.320 surplus country, and that if you're the largest straight subplus 0:13:53.360 --> 0:13:57.080 country in the world, there will be huge pushback against 0:13:57.120 --> 0:13:59.600 that kind of move by the Chinese. And we already 0:13:59.679 --> 0:14:04.400 seen that in very many countries complaining that China should 0:14:04.440 --> 0:14:08.000 not export its problems. 0:14:21.840 --> 0:14:23.920 Yeah, this is something that I wanted to ask you, 0:14:24.040 --> 0:14:26.680 which is it seems like part of the problem here 0:14:26.960 --> 0:14:30.840 is that China is in need of a new type 0:14:30.880 --> 0:14:34.520 of growth model, so one that maybe is less reliant 0:14:34.640 --> 0:14:39.440 on things like exports and being a major beneficiary of globalization. 0:14:39.600 --> 0:14:42.320 Given the restrictions that you just laid out, what could 0:14:42.400 --> 0:14:44.200 that new model actually look like. 0:14:44.880 --> 0:14:47.520 You know, there are no balancing problems in the Chinese 0:14:47.720 --> 0:14:51.360 economy today. We don't need a new model, right because 0:14:51.400 --> 0:14:54.000 then there thinks will be still moving forward as before. 0:14:54.800 --> 0:15:00.080 But suddenly Chinese domestic demand shrunk because of the balancing problems, 0:15:00.160 --> 0:15:04.640 and then Chinese manufacturers or even the government is forced 0:15:04.680 --> 0:15:08.200 to export its way out. I think what we need 0:15:08.240 --> 0:15:10.960 to do is really fix the balance sheet problems first, 0:15:11.680 --> 0:15:14.360 instead of talking about the new model of economic growth. 0:15:14.880 --> 0:15:16.960 We can talk about these things a long time, but 0:15:17.320 --> 0:15:19.960 I don't think that will solve the problem of balance recession. 0:15:20.040 --> 0:15:22.880 And balance recession, by the way, can kill the economy 0:15:22.920 --> 0:15:25.880 pretty quickly. So if I may give you an America example, 0:15:26.280 --> 0:15:28.160 Suppose I have of thousand dollars of income and I 0:15:28.160 --> 0:15:31.000 spend nine hundred myself. The nine hundred is already someone 0:15:31.040 --> 0:15:33.680 else's income, so that's not a problem. But one hundred 0:15:33.720 --> 0:15:36.160 dollars that I say to go through people like us, 0:15:36.360 --> 0:15:39.720 our financial institutions, and we'll be lent to someone who 0:15:39.800 --> 0:15:42.240 can use it. That person borrows and spends it, then 0:15:42.400 --> 0:15:45.600 economy will be total expenditure in economy would be nine 0:15:45.640 --> 0:15:47.840 hundred that I spent plus hundred dollars that this guy 0:15:47.960 --> 0:15:51.960 spent together thousand dollars against original income of thousand dollars. 0:15:52.000 --> 0:15:54.640 And that's how economy moves forward, right, And if there 0:15:54.640 --> 0:15:57.200 are too many borrowers and economies doing well, center BANKU 0:15:57.280 --> 0:16:00.120 race race to a few central BANKU lower race, make 0:16:00.160 --> 0:16:02.800 sure that the cycle is maintained. That's the usual economy. 0:16:03.240 --> 0:16:06.160 But what happens in the BALANCEE recession is that when 0:16:06.160 --> 0:16:07.800 I have a thousand dollars to income and I spend 0:16:07.880 --> 0:16:11.120 nine hundred myself, that nine hundred is not a problem, 0:16:11.120 --> 0:16:13.480 but one hundred dollars, I decided to say, ends up 0:16:13.600 --> 0:16:16.160 stuck in the financial system because no one's borrowing money, 0:16:16.840 --> 0:16:19.760 and China so many people are refusing to borrow money 0:16:19.840 --> 0:16:23.640 these days because of that issue. Then economy shrinks from 0:16:23.840 --> 0:16:27.240 one thousand to nine hundred, so ten percent decline and 0:16:27.320 --> 0:16:29.920 the next round, the nine hundred is someone else's income. 0:16:30.000 --> 0:16:33.280 When that person decides to save ten percent, spends eight 0:16:33.360 --> 0:16:35.600 hundred ten and decides to say ninety dollars. That ninety 0:16:35.600 --> 0:16:38.600 dollars gets stuck in the financial system again because repairing 0:16:38.680 --> 0:16:42.240 financial balance sheets could take a very long time. I mean, 0:16:42.320 --> 0:16:45.960 Japanese took nearly twenty years to repair their balance sheets. 0:16:46.240 --> 0:16:48.720 But in the meantime, economy can go from one thousand, 0:16:48.800 --> 0:16:51.280 nine hundred, eight hundred ten, seven hundred and thirty very 0:16:51.360 --> 0:16:54.480 very quickly. And that actually happened in the United States 0:16:54.560 --> 0:16:57.120 during a great depression. You know, from nineteen twenty nineteen 0:16:57.160 --> 0:17:00.360 nineteen thirty three, the United States lost forty six percent 0:17:00.360 --> 0:17:04.080 of its nominal GDP. And something quite similar actually happened 0:17:04.080 --> 0:17:07.360 in Spain after two thousand and eight, when unemployment rates 0:17:07.359 --> 0:17:10.440 skyrocketed to twenty six percent in just three and a 0:17:10.480 --> 0:17:13.720 half years or so. That's the kind of danger we 0:17:13.800 --> 0:17:17.280 faced in the balancing recession and talking about the new 0:17:17.359 --> 0:17:22.000 economic models among all these academics, you know, trying to say, okay, 0:17:22.000 --> 0:17:24.399 what is the right model? Well, I don't think we 0:17:24.480 --> 0:17:27.240 have that much time. In Chinese government does not have 0:17:27.320 --> 0:17:30.600 that much time to think about the new economic model 0:17:30.760 --> 0:17:33.760 when the economy is already in that kind of visual cycle. 0:17:34.240 --> 0:17:36.880 So I would recommend that instead of talking about new 0:17:36.880 --> 0:17:39.880 economic model when we have the time to do so 0:17:40.480 --> 0:17:43.880 at the moment, I would very much like to see 0:17:43.960 --> 0:17:47.240 Chinese governments borrow and spend one hundred dollars to keep 0:17:47.280 --> 0:17:48.600 the economy from collapsing. 0:17:49.640 --> 0:17:53.240 So, speaking of a pressing time constraint, I remember the 0:17:53.320 --> 0:17:55.879 last time we spoke to you a little over a 0:17:55.960 --> 0:17:59.520 year ago. It was again about this balance sheet recession 0:17:59.640 --> 0:18:03.399 in China idea, and at the time you mentioned that 0:18:03.400 --> 0:18:06.480 there were a lot of Chinese officials who had been 0:18:06.760 --> 0:18:11.120 reading your work and lots of domestic policy papers being 0:18:11.160 --> 0:18:15.359 published that referenced your work. What's the discourse been like 0:18:15.520 --> 0:18:17.560 for you over the past year or so. Do you 0:18:17.600 --> 0:18:20.920 get a sense that you know the urgency is even 0:18:21.000 --> 0:18:24.080 more salient now? Are lots of people reaching out to 0:18:24.119 --> 0:18:24.879 you from China. 0:18:27.000 --> 0:18:32.000 Well, that is actually quite true, speaking engagements one after another. 0:18:33.160 --> 0:18:36.560 But the country is not exactly the safest place on 0:18:36.640 --> 0:18:41.240 earth to go, and so I'm trying to meet all 0:18:41.280 --> 0:18:46.800 these speech requests by doing things online or meeting them 0:18:46.840 --> 0:18:50.399 in Tokyo or some safer places instead of traveling to China. 0:18:51.359 --> 0:18:54.000 But yes, huge number of requests that are coming my 0:18:54.119 --> 0:18:58.600 way from people all walks of life. They wanted to 0:18:58.640 --> 0:19:00.760 hear more about what happened to you depends thirty years 0:19:00.800 --> 0:19:04.840 ago and how similar is the situation they faced today. 0:19:05.720 --> 0:19:09.960 So we're recording this October fourteenth. Over the weekend October twelfth, 0:19:10.000 --> 0:19:12.919 the Ministry of Finance did hold a press conference, and 0:19:12.960 --> 0:19:14.800 I think the view is kind of to your point. 0:19:14.840 --> 0:19:17.440 There were not a lot of details on we are 0:19:17.480 --> 0:19:20.520 going to spend money now, which is what you prescribe, 0:19:20.840 --> 0:19:22.720 but there were some comments and there are going to 0:19:22.760 --> 0:19:25.320 be some more things expected to roll out. One of 0:19:25.320 --> 0:19:29.119 my understandings about Chinese fiscal policy is it's very decentralized 0:19:29.280 --> 0:19:31.639 and that the local governments control a lot of the 0:19:31.720 --> 0:19:35.159 levers of spending. And that model, to some extent is 0:19:35.160 --> 0:19:38.080 broken because a lot relied on land sales. And at 0:19:38.119 --> 0:19:40.880 the same time, the central government has tried to prick 0:19:40.960 --> 0:19:43.080 the bubble of real estate, and there's all kinds of 0:19:43.119 --> 0:19:46.800 stress on that model. One of the things that seems 0:19:46.800 --> 0:19:49.000 to have come up in the mof press conference is 0:19:49.080 --> 0:19:52.520 this idea of allowing local governments to issue more debt. 0:19:52.960 --> 0:19:56.080 Maybe the central government could take more direct role in 0:19:56.200 --> 0:20:00.400 repairing the balance sheets of local government. Can you talk 0:20:00.400 --> 0:20:02.959 about that, setting aside like the question of like how 0:20:03.040 --> 0:20:06.159 much to be spent right now, is there much juice 0:20:06.200 --> 0:20:10.280 to be had essentially out of changing the fiscal structure 0:20:10.480 --> 0:20:13.840 of local governments and changing how local governments collect and 0:20:13.840 --> 0:20:14.560 spend revenue. 0:20:14.800 --> 0:20:19.119 Well, there are multiple issues. What you what you just said? Okay, Now, 0:20:19.160 --> 0:20:21.880 if you look at local governments in the United States 0:20:21.960 --> 0:20:25.159 or Japan, most places, you know they are supposed to 0:20:25.160 --> 0:20:29.160 around large deficits. Right There's a rule in almost all 0:20:29.240 --> 0:20:34.720 countries that local governments should not run large deficits. And 0:20:35.000 --> 0:20:37.600 that is because if local governments go bad at the 0:20:37.720 --> 0:20:39.680 end of the day, central bank might have to look 0:20:39.720 --> 0:20:45.000 after those those problems, and local governments cannot print money 0:20:45.040 --> 0:20:49.040 like the central government can. Right But in China, even 0:20:49.080 --> 0:20:54.160 though same rules should have applied, local governments were able 0:20:54.200 --> 0:20:56.560 to sell lots of land, make a lot of money 0:20:56.600 --> 0:20:58.919 in the process, and then they were able to do 0:20:59.040 --> 0:21:02.400 quite a bit of fiscal sticks, which also of course 0:21:02.400 --> 0:21:06.359 added to their GDP. That model will have to be 0:21:07.200 --> 0:21:11.760 completely revised now because no one wants to buy land anymore, 0:21:12.720 --> 0:21:15.920 and so the big source of revenue of local governments 0:21:15.920 --> 0:21:19.040 are gone, and as a result, many of them are 0:21:19.680 --> 0:21:24.639 very close to bankrupt and under the circumstances I'm afraid 0:21:24.760 --> 0:21:27.439 central government will have to take over a lot of 0:21:27.440 --> 0:21:30.960 these problems from the local government. So this myth that 0:21:32.000 --> 0:21:35.199 Chinese central government the budget DeFore said is not a 0:21:35.359 --> 0:21:38.439 very big part of GDP. That myth will have to 0:21:38.480 --> 0:21:43.200 be thrown out and central government will have to take 0:21:43.240 --> 0:21:45.919 on not all of it, perhaps, but some of the 0:21:45.960 --> 0:21:49.480 liabilities are the local governments, so that local governments can 0:21:49.520 --> 0:21:54.080 move forward. Now, in terms of actual financing fiscal stimulus, 0:21:54.960 --> 0:21:57.879 the balancing recession is caused by excess savings in the 0:21:57.880 --> 0:22:02.480 private sector. Talking about one hundred dollars dimension to you earlier. 0:22:02.720 --> 0:22:06.920 So the money is there. So even though budget deficit 0:22:07.000 --> 0:22:10.080 of China might be very large, the money is there 0:22:10.440 --> 0:22:13.960 for government to borrow. If the money is not there 0:22:14.000 --> 0:22:18.000 for the government to borrow, Chinese government bondills should have 0:22:18.080 --> 0:22:20.560 gone up higher and higher, but as you know, Chinese 0:22:20.560 --> 0:22:23.840 government venue government bondills almost down to two point zero, 0:22:24.200 --> 0:22:28.800 zero one or two percent when that low because there 0:22:28.800 --> 0:22:32.439