Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode up the All Thoughts Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Whysenthal.
Speaker 2: Joe, what is going on in China? We haven't asked
Speaker 2: that question for a while, I mean, how.
Speaker 3: Long is it ever? How long do we ever go
Speaker 3: without a China episode? But since the last time we
Speaker 3: ever talked about China, which was probably like a month
Speaker 3: ago or something, we have seen an absolute flurry of
Speaker 3: policy announcements. Look, we know that the big picture is
Speaker 3: that there's been slow growth. The real estate market is dismal,
Speaker 3: consumption is slow, the stock market, which I don't think
Speaker 3: is particularly important to Chinese policymakers, has been terrible. And
Speaker 3: then over the last few weeks, we've had this flurry
Speaker 3: of announcement.
Speaker 2: Right, so, there was something of a policy pivot in September,
Speaker 2: which in itself is kind of unusual, and we'll get
Speaker 2: into that. But we've basically seen you know, new polep
Speaker 2: Bureau guidance. We've seen monetary easing, we've seen property support,
Speaker 2: we've seen some signs of maybe more fiscal stimulus. And
Speaker 2: that to me is kind of the big question because
Speaker 2: so far, and you're going to hear me ask this
Speaker 2: question a couple of times, I imagine, But so far,
Speaker 2: the responses to what's been announced are kind of along
Speaker 2: this range of some people thinking it's kind of nothing burger,
Speaker 2: it's just more monetary easing. We've seen this kind of
Speaker 2: thing before. But then there are people out there who think, no,
Speaker 2: this is actually a big deal, and China is sort
Speaker 2: of signaling a big shift in its mindset in how
Speaker 2: it approaches things like fiscal stimulus and also social safety
Speaker 2: nets totally.
Speaker 3: So we know that there was the mega Chinese fiscal
Speaker 3: stimulus that happened in two thousand and eight and two
Speaker 3: thousand and nine after the global financial crisis, and is
Speaker 3: sort of historic how much got built then. But you know,
Speaker 3: unlike much of the rest of the world, in the
Speaker 3: wake of COVID, there has really been very little and
Speaker 3: there's been this sort of drum beat that that's sort
Speaker 3: of the way we think of countercyclical fiscal policy in
Speaker 3: Western economies is not the preferred approach. That there's this
Speaker 3: preference for domestic investment, the investment tech, exports, et cetera.
Speaker 3: And so something happened though in this year in the
Speaker 3: last several months that has prompted at least some sort
Speaker 3: of pivot, and we need to understand why now and
Speaker 3: what the goals are. Yeah.
Speaker 2: Well, you also mentioned some of the economic data that's
Speaker 2: been coming out of China recently. One of the big
Speaker 2: things that happened was I think the first contraction in
Speaker 2: bank lending in nearly two decades. And so if we're
Speaker 2: talking about contracting bank lending, then it feels like there's
Speaker 2: one person we definitely need to talk to, and that
Speaker 2: is Richard Ku of balance sheet recession fame. So listeners
Speaker 2: might remember that we spoke to him last year when
Speaker 2: his idea of a balance sheet recession in China was
Speaker 2: really starting to take off. And again, if you look
Speaker 2: at that bank lending contraction, it seems like that's kind
Speaker 2: of been born out in the data. And then the
Speaker 2: other perfect guest we have for this episode is someone
Speaker 2: who's going to speak to the question of how economic
Speaker 2: policy is actually implemented in China, because I think everyone
Speaker 2: has this view of China as a very centralized command economy,
Speaker 2: but you have all these local governments who actually have,
Speaker 2: you know, some degree of autonomy when it comes to
Speaker 2: deciding individual spending decisions, or how particular macro policy or
Speaker 2: how particular macro policy should be implemented at the individual
Speaker 2: micro level. It reminds me, do you remember that old
Speaker 2: proverb of I think it's a heaven is high and
Speaker 2: the emperor is far away? You know you heard that one?
Speaker 4: Anyway? Yes?
Speaker 3: Actually, yes, Wait are you listening to me?
Speaker 4: You no?
Speaker 3: No, I actually do remember that. I've come across that.
Speaker 2: So China is big and Shishin Ping is in Beijing
Speaker 2: putting out like generalist mandates, but a lot of that
Speaker 2: is going to get executed at a more local level.
Speaker 4: Right.
Speaker 3: So, after our conversation with Richard Kou, which will be
Speaker 3: the first half of this, we're going to be speaking
Speaker 3: with the Zishan Wong. He is a mid career master
Speaker 3: student at Princeton University. He's on leave from the Center
Speaker 3: for China and Globalization, and he is the author of
Speaker 3: the excellent Pecnology subs deck. Listeners might remember we did
Speaker 3: a recent episode with Adam Two's and he gave a
Speaker 3: shout out to the Pecnology substack. So it's like, okay,
Speaker 3: we got to get him on because if two gives
Speaker 3: him a shout out, then obviously we needed to talk
Speaker 3: to him, and then all of this flurry of China news.
Speaker 3: This is the perfect hook. So you'll hear from Richard
Speaker 3: and then you'll hear from Azishan.
Speaker 2: All right, let's start with Richard at the sort of
Speaker 2: macro level. Richard Ku, thank you so much for coming
Speaker 2: back on all thoughts.
Speaker 4: Oh, quite welcome. It's a great honor for me.
Speaker 3: Thank you, thank you.
Speaker 2: So I'll just jump in with the first question. There
Speaker 2: seems to be a spectrum of responses to what China
Speaker 2: has announced so far. And on the one end you
Speaker 2: have people like George Magnus who are saying this is crazy.
Speaker 2: It's the definition of doing the same thing over and
Speaker 2: over again and expecting a different result. And then on
Speaker 2: the other hand you have people who say this is
Speaker 2: actually a really big policy shift. It's just that the
Speaker 2: party is rolling stuff out incrementally, and so it may
Speaker 2: still be the case that we get a big fiscal
Speaker 2: response at some point. Where do you lie on that
Speaker 2: sort of spectrum of opinions about what's been announced so far.
Speaker 4: Well, I am slightly closer to the people who think
Speaker 4: this might be the beginning of a new move instead
Speaker 4: of just doing the same thing over and over in
Speaker 4: that the size of the package that came out, mostly
Speaker 4: from People's Bank of China is quite significant, very large
Speaker 4: there is, and that shows that for the first time
Speaker 4: the Chinese women is indicating their awareness that this is
Speaker 4: a serious business. And I think that's the indication that
Speaker 4: we haven't seen until now. And so yes, I am
Speaker 4: slightly positive because they actually indicated that they're very serious
Speaker 4: about the problem we face. Now this is the same
Speaker 4: thing over again. Well, central bank responses are the easiest
Speaker 4: one to put in on the table compared to our
Speaker 4: physical stimulus, where you have to decide you know, where
Speaker 4: the money should be spent, and how should be spent,
Speaker 4: and who gets the money and who doesn't in all
Speaker 4: of those things will have to be worked out on
Speaker 4: the fiscal side, but on the monetary side, you know,
Speaker 4: only central bank have to make a decision how much
Speaker 4: money to put in. So you would expect central bank
Speaker 4: to move fast and first if they realize that they
Speaker 4: have to do something. And so I'm not surprised that
Speaker 4: central bank actions came first before the fiscal response. But
Speaker 4: in a sense, we in Japan years ago did the
Speaker 4: same thing. Thirty years ago, we had a word called PKO.
Speaker 4: In a PKO usually means peacekeeping operation by the United Nations,
Speaker 4: but those of us in the market. Thirty years ago,
Speaker 4: the word PKO meant price keeping operations by the Ministry
Speaker 4: of Finance trying to keep Japanese share prices from falling.
Speaker 4: And so there's a little bit of similarities with what
Speaker 4: Japanese did thirty years ago with what China is doing
Speaker 4: with its share prices.
Speaker 3: If I can just jump in here when you say
Speaker 3: this might be the beginning of something real, what is
Speaker 3: it specifically that looks good to you?
Speaker 4: Well, first of all, I'm no great fan of using
Speaker 4: monetary policy, meaning policies from the central bank to fight
Speaker 4: what I call balanced you recession, and I think China
Speaker 4: is facing balance recession. And balance recession happens when a
Speaker 4: dead finance bubble burst. As the prices collapsed lie these
Speaker 4: remain people realize that they are balance sheets underwater or
Speaker 4: nearly so, and they all try to repair their balance
Speaker 4: sheets all at the same time. And repairing balance sheets,
Speaker 4: of course, is the right thing to do, but when
Speaker 4: everybody does it all at the same time, we enter
Speaker 4: the problem of fallacy or composition that even though everybody
Speaker 4: is doing the right things, collectively, we get the wrong results.
Speaker 4: And we get that problem in this case because in
Speaker 4: the national economy, if someone is repairing balance sheets, meaning
Speaker 4: pain down debt or increasing savings, someone has to borrow
Speaker 4: those funds to keep the economy going. But and usual economies,
Speaker 4: you know, you bring interust rates down, there'll be people
Speaker 4: out there willing to borrow the money and spend it,
Speaker 4: and that's how you keep the economy going. But in
Speaker 4: the balance sheet recession, you bring interest rates down to
Speaker 4: very low levels, and Chinese interest rates already pretty low,
Speaker 4: but even if you bring it down to zero, people
Speaker 4: would be still repairing balance sheets. Because if you're in
Speaker 4: negative equity territory, you have to come out of that
Speaker 4: as quickly as possible. And so when you're in that situation,
Speaker 4: you cannot expect private sector to respond to lowering of
Speaker 4: interest rates or quantitative easying, forward guidance and all of
Speaker 4: those monetary policy to get this private sector to borrow
Speaker 4: money again. And because they are all doing the right
Speaker 4: things paying down debt. So when you're in that situation,
Speaker 4: economy to go. We can vary very quickly because all
Speaker 4: the safety funds that are returned to the banking system
Speaker 4: cannot come out again, and that's how you end up
Speaker 4: with economy drinking very, very rapid. And the only way
Speaker 4: to stop this is for the government, which is outside
Speaker 4: of the fallacy of composition, to borrow money. And that's
Speaker 4: the fiscal policy, of course, but that hasn't come out yet.
Speaker 4: And so yes, they did the quick and easy part
Speaker 4: with big numbers on the monetary side. But if you
Speaker 4: are in balanced your recession monetary policy, I'm afraid it's
Speaker 4: not going to be very effective. You really need a
Speaker 4: fiscal policy to get the economy moving, and that hasn't
Speaker 4: arrived yet.
Speaker 3: Well, then what's good? I mean you say, Okay, the
Speaker 3: PBOC moved first. You think this could be the start
Speaker 3: of something different. But if all they've really done, in
Speaker 3: your view is announce the sort of substance on the
Speaker 3: central bank side, I'm still trying to understand what you
Speaker 3: see as maybe some reason for optimism.
Speaker 4: Well, optimism in the sense that the amounts involved are
Speaker 4: pretty large. Okay, you know, Center kept on saying, if
Speaker 4: this is not enough, we're going to do more and
Speaker 4: more and more. Well, as someone mentioned, this is just
Speaker 4: like Mario Doraghi is saying that you see people do
Speaker 4: whatever it takes to keep the Euro going. That kind
Speaker 4: of sounds like that, and in that sense at least
Speaker 4: Central Bank is indicating that situation is quite serious, okay,
Speaker 4: which is a good thing because we haven't heard that
Speaker 4: yet from those guys before. But what the real policy
Speaker 4: that is needed is not from the monastery side. It
Speaker 4: has to come from the fiscal side.
Speaker 2: What could they do on the fiscal side? And this
Speaker 2: is the thing I don't really understand, because I think
Speaker 2: I've agrees that part of the problem here is the
Speaker 2: lack of consumption, So why not just go directly? I
Speaker 2: know monetary policy is faster and to some extent easier
Speaker 2: to roll out, but why not move sooner on the
Speaker 2: fiscal side and just stimulate consumption directly.
Speaker 4: Well, if people are all concerned about repairing their balance sheets,
Speaker 4: you give them money to spend, and too often they
Speaker 4: just use it to pay down debt. And so even
Speaker 4: within physical stimulus, you have to be very careful here
Speaker 4: because tax cuts, I'm afraid, are not very effective during
Speaker 4: balance sheet recessions, because people use that money to repair
Speaker 4: their balance sheets, and repairing balances is of course the
Speaker 4: right thing to do, but it will not add to
Speaker 4: GDP when they're using that tax cuts to pay down
Speaker 4: debt or rebuild their savings, so that will not add
Speaker 4: to consumption as much as you would expect under ordinary circumstances.
Speaker 4: And so I would really like to see government just
Speaker 4: borrow and spend the money, because that would be the
Speaker 4: most effective way to stop the deflationary spiral.
Speaker 3: A source of funds in an economy that's experiencing balance
Speaker 3: sheet recession that's sort of outside the fallacy of composition
Speaker 3: or the composition effects is exports. And so you could
Speaker 3: imagine that if the world is filled with people buying
Speaker 3: bid vehicles and humanoid robots and batteries from cattle and
Speaker 3: so forth, that that can bring in the cash and
Speaker 3: that could be another source. Does the math add up
Speaker 3: in your view? Can China export its way out of
Speaker 3: the what you assess as a balance sheet recession?
Speaker 4: Yes, Export is definitely one of the best ways if
Speaker 4: you can use it to come out of balancing recession.
Speaker 4: But China, just like Japan thirty years ago, is the
Speaker 4: largest trade subplus country in the world, and if the
Speaker 4: world's largest trade subplus country in the world tries to
Speaker 4: export its way out. Very many trading partners will complain
Speaker 4: that you're already such a large destabilizing factor on the
Speaker 4: world trade. Now you're going to destabilize it even more.
Speaker 4: And so I remember thirty years ago that United States,
Speaker 4: Europe and others were very much against Japan trying to
Speaker 4: expore its way out, and because of their displeasure, particularly
Speaker 4: the US displeasure, Japanese en which thought that at one
Speaker 4: hundred and sixty when the bubble burst in nineteen ninety
Speaker 4: ended up eighty hundred of dollars five years later nineteen
Speaker 4: ninety five. And what that indicated to me was that
Speaker 4: if you're running trade deficit, you can probably expose your
Speaker 4: way out and no one can really complain because you're
Speaker 4: a deficit country to begin with. But if you're the
Speaker 4: surplus country, and that if you're the largest straight subplus
Speaker 4: country in the world, there will be huge pushback against
Speaker 4: that kind of move by the Chinese. And we already
Speaker 4: seen that in very many countries complaining that China should
Speaker 4: not export its problems.
Speaker 2: Yeah, this is something that I wanted to ask you,
Speaker 2: which is it seems like part of the problem here
Speaker 2: is that China is in need of a new type
Speaker 2: of growth model, so one that maybe is less reliant
Speaker 2: on things like exports and being a major beneficiary of globalization.
Speaker 2: Given the restrictions that you just laid out, what could
Speaker 2: that new model actually look like.
Speaker 4: You know, there are no balancing problems in the Chinese
Speaker 4: economy today. We don't need a new model, right because
Speaker 4: then there thinks will be still moving forward as before.
Speaker 4: But suddenly Chinese domestic demand shrunk because of the balancing problems,
Speaker 4: and then Chinese manufacturers or even the government is forced
Speaker 4: to export its way out. I think what we need
Speaker 4: to do is really fix the balance sheet problems first,
Speaker 4: instead of talking about the new model of economic growth.
Speaker 4: We can talk about these things a long time, but
Speaker 4: I don't think that will solve the problem of balance recession.
Speaker 4: And balance recession, by the way, can kill the economy
Speaker 4: pretty quickly. So if I may give you an America example,
Speaker 4: Suppose I have of thousand dollars of income and I
Speaker 4: spend nine hundred myself. The nine hundred is already someone
Speaker 4: else's income, so that's not a problem. But one hundred
Speaker 4: dollars that I say to go through people like us,
Speaker 4: our financial institutions, and we'll be lent to someone who
Speaker 4: can use it. That person borrows and spends it, then
Speaker 4: economy will be total expenditure in economy would be nine
Speaker 4: hundred that I spent plus hundred dollars that this guy
Speaker 4: spent together thousand dollars against original income of thousand dollars.
Speaker 4: And that's how economy moves forward, right, And if there
Speaker 4: are too many borrowers and economies doing well, center BANKU
Speaker 4: race race to a few central BANKU lower race, make
Speaker 4: sure that the cycle is maintained. That's the usual economy.
Speaker 4: But what happens in the BALANCEE recession is that when
Speaker 4: I have a thousand dollars to income and I spend
Speaker 4: nine hundred myself, that nine hundred is not a problem,
Speaker 4: but one hundred dollars, I decided to say, ends up
Speaker 4: stuck in the financial system because no one's borrowing money,
Speaker 4: and China so many people are refusing to borrow money
Speaker 4: these days because of that issue. Then economy shrinks from
Speaker 4: one thousand to nine hundred, so ten percent decline and
Speaker 4: the next round, the nine hundred is someone else's income.
Speaker 4: When that person decides to save ten percent, spends eight
Speaker 4: hundred ten and decides to say ninety dollars. That ninety
Speaker 4: dollars gets stuck in the financial system again because repairing
Speaker 4: financial balance sheets could take a very long time. I mean,
Speaker 4: Japanese took nearly twenty years to repair their balance sheets.
Speaker 4: But in the meantime, economy can go from one thousand,
Speaker 4: nine hundred, eight hundred ten, seven hundred and thirty very
Speaker 4: very quickly. And that actually happened in the United States
Speaker 4: during a great depression. You know, from nineteen twenty nineteen
Speaker 4: nineteen thirty three, the United States lost forty six percent
Speaker 4: of its nominal GDP. And something quite similar actually happened
Speaker 4: in Spain after two thousand and eight, when unemployment rates
Speaker 4: skyrocketed to twenty six percent in just three and a
Speaker 4: half years or so. That's the kind of danger we
Speaker 4: faced in the balancing recession and talking about the new
Speaker 4: economic models among all these academics, you know, trying to say, okay,
Speaker 4: what is the right model? Well, I don't think we
Speaker 4: have that much time. In Chinese government does not have
Speaker 4: that much time to think about the new economic model
Speaker 4: when the economy is already in that kind of visual cycle.
Speaker 4: So I would recommend that instead of talking about new
Speaker 4: economic model when we have the time to do so
Speaker 4: at the moment, I would very much like to see
Speaker 4: Chinese governments borrow and spend one hundred dollars to keep
Speaker 4: the economy from collapsing.
Speaker 2: So, speaking of a pressing time constraint, I remember the
Speaker 2: last time we spoke to you a little over a
Speaker 2: year ago. It was again about this balance sheet recession
Speaker 2: in China idea, and at the time you mentioned that
Speaker 2: there were a lot of Chinese officials who had been
Speaker 2: reading your work and lots of domestic policy papers being
Speaker 2: published that referenced your work. What's the discourse been like
Speaker 2: for you over the past year or so. Do you
Speaker 2: get a sense that you know the urgency is even
Speaker 2: more salient now? Are lots of people reaching out to
Speaker 2: you from China.
Speaker 4: Well, that is actually quite true, speaking engagements one after another.
Speaker 4: But the country is not exactly the safest place on
Speaker 4: earth to go, and so I'm trying to meet all
Speaker 4: these speech requests by doing things online or meeting them
Speaker 4: in Tokyo or some safer places instead of traveling to China.
Speaker 4: But yes, huge number of requests that are coming my
Speaker 4: way from people all walks of life. They wanted to
Speaker 4: hear more about what happened to you depends thirty years
Speaker 4: ago and how similar is the situation they faced today.
Speaker 3: So we're recording this October fourteenth. Over the weekend October twelfth,
Speaker 3: the Ministry of Finance did hold a press conference, and
Speaker 3: I think the view is kind of to your point.
Speaker 3: There were not a lot of details on we are
Speaker 3: going to spend money now, which is what you prescribe,
Speaker 3: but there were some comments and there are going to
Speaker 3: be some more things expected to roll out. One of
Speaker 3: my understandings about Chinese fiscal policy is it's very decentralized
Speaker 3: and that the local governments control a lot of the
Speaker 3: levers of spending. And that model, to some extent is
Speaker 3: broken because a lot relied on land sales. And at
Speaker 3: the same time, the central government has tried to prick
Speaker 3: the bubble of real estate, and there's all kinds of
Speaker 3: stress on that model. One of the things that seems
Speaker 3: to have come up in the mof press conference is
Speaker 3: this idea of allowing local governments to issue more debt.
Speaker 3: Maybe the central government could take more direct role in
Speaker 3: repairing the balance sheets of local government. Can you talk
Speaker 3: about that, setting aside like the question of like how
Speaker 3: much to be spent right now, is there much juice
Speaker 3: to be had essentially out of changing the fiscal structure
Speaker 3: of local governments and changing how local governments collect and
Speaker 3: spend revenue.
Speaker 4: Well, there are multiple issues. What you what you just said? Okay, Now,
Speaker 4: if you look at local governments in the United States
Speaker 4: or Japan, most places, you know they are supposed to
Speaker 4: around large deficits. Right There's a rule in almost all
Speaker 4: countries that local governments should not run large deficits. And
Speaker 4: that is because if local governments go bad at the
Speaker 4: end of the day, central bank might have to look
Speaker 4: after those those problems, and local governments cannot print money
Speaker 4: like the central government can. Right But in China, even
Speaker 4: though same rules should have applied, local governments were able
Speaker 4: to sell lots of land, make a lot of money
Speaker 4: in the process, and then they were able to do
Speaker 4: quite a bit of fiscal sticks, which also of course
Speaker 4: added to their GDP. That model will have to be
Speaker 4: completely revised now because no one wants to buy land anymore,
Speaker 4: and so the big source of revenue of local governments
Speaker 4: are gone, and as a result, many of them are
Speaker 4: very close to bankrupt and under the circumstances I'm afraid
Speaker 4: central government will have to take over a lot of
Speaker 4: these problems from the local government. So this myth that
Speaker 4: Chinese central government the budget DeFore said is not a
Speaker 4: very big part of GDP. That myth will have to
Speaker 4: be thrown out and central government will have to take
Speaker 4: on not all of it, perhaps, but some of the
Speaker 4: liabilities are the local governments, so that local governments can
Speaker 4: move forward. Now, in terms of actual financing fiscal stimulus,
Speaker 4: the balancing recession is caused by excess savings in the
Speaker 4: private sector. Talking about one hundred dollars dimension to you earlier.
Speaker 4: So the money is there. So even though budget deficit
Speaker 4: of China might be very large, the money is there
Speaker 4: for government to borrow. If the money is not there
Speaker 4: for the government to borrow, Chinese government bondills should have
Speaker 4: gone up higher and higher, but as you know, Chinese
Speaker 4: government venue government bondills almost down to two point zero,
Speaker 4: zero one or two percent when that low because there
Speaker 4: are not enough borrowers out there. Financial institutions have to
Speaker 4: place this money somewhere. All these deliveraged funds coming back
Speaker 4: into the financial institutions, newly generated savings, all the money
Speaker 4: that central bank put in, all comes to basically people
Speaker 4: like us in the financial institutions, the fund managers. But
Speaker 4: if the private sector is not borrowing money, the only
Speaker 4: borrow left is the government. And so even if the
Speaker 4: budget required budget deficit might be very large to stabilize
Speaker 4: the economy, the funds are available in the financial market
Speaker 4: only the government just have to borrow that and spend it.
Speaker 4: So financing should not be a big issue for governments.
Speaker 4: In balance recession, you know, Japan was running huge budget deficits,
Speaker 4: and a lot of commission on minded economists who never
Speaker 4: understood the dynamics of balance recession was warning about Japan's
Speaker 4: budget deficit growing sky high and then interest rates going
Speaker 4: sky high. Well, interest rates kept on coming down because
Speaker 4: of the mechanism that I just described to you, that
Speaker 4: all these ones coming into the financial sector cannot go
Speaker 4: to the private sector, ended up going to our government
Speaker 4: bond market. And I see the same pattern developing in
Speaker 4: China today. Right.
Speaker 2: So Joe mentioned the real estate crackdown, and you're talking
Speaker 2: about the reluctance of the private sector to lend, and
Speaker 2: I guess I have to ask to what extent is
Speaker 2: that reluctance to lend, not just a product of the
Speaker 2: debt dynamics that you've already laid out, but also a
Speaker 2: product of the sort of policy whiplash that we've seen
Speaker 2: from the party in recent years, where maybe you fund
Speaker 2: I don't know, an education startup or something like that,
Speaker 2: but then one day officials wake up and decide to
Speaker 2: basically crack down on that entire sector and make it
Speaker 2: very very difficult to operate the business.
Speaker 4: Well, that's another big problem of China today. So in
Speaker 4: aside from balanceing recession, which is a very very serious
Speaker 4: disease to begin with, we have those other factors that
Speaker 4: started hurting the Chinese economy I would say starting as
Speaker 4: early as twenty sixteen. So when you look at the
Speaker 4: flow funds data for the Chinese economy, you notice that
Speaker 4: the Chinese corporate sector started reducing their borrowings starting around
Speaker 4: twenty sixteen. So until twentand sixteen, Chinese companies are borrowing
Speaker 4: or the household sector savings generated, which is of course
Speaker 4: the ideal world household sector saving money, co PRO sector
Speaker 4: borrowing mone But starting around twenty sixteen you see COPRA
Speaker 4: sector borrowing less and less, and around the COVID time,
Speaker 4: cop Pro sector was actually a net safer a net borrower.
Speaker 4: So that trend I think has to do with what
Speaker 4: you just described. That regulatory uncertainties got bigger and bigger
Speaker 4: under the current leadership, and I think people began to
Speaker 4: realize that even after you make these big investments in
Speaker 4: the new projects, they may not be able to expect
Speaker 4: the same revenue stream that they expected earlier because of
Speaker 4: this regulatory uncertainty. And on top of that, of course,
Speaker 4: we have you know, what is known as middle income trap.
Speaker 4: If you reach a certain level of income factories who
Speaker 4: will start moving away from you instead of coming to you.
Speaker 4: So those factors all combine starting around twenty fifteen twenty
Speaker 4: sixteen ended up reducing Chinese corporate borrowings. But if household
Speaker 4: sector is saving money but the corporate sector is not
Speaker 4: borrowing money, you need someone else to fill that gap.
Speaker 4: And actually that gap was filled by Chinese government, mostly
Speaker 4: decentralized local governments. But if that temporary fiscal joto fiscal
Speaker 4: stimulus then turned the economy around, then those local government
Speaker 4: interventions would have been justified. But because this was a
Speaker 4: much more deeply rooted here, I would use structural problems,
Speaker 4: This regulatory uncertainties and middle income trap and so forth.
Speaker 4: Local government just had to keep on borrowing and spending
Speaker 4: money to keep the economy going. And that was happening
Speaker 4: long before the bubble burst. So if you look at
Speaker 4: total or what are called general government spending, not just
Speaker 4: the central government, but the general government, they were financial
Speaker 4: deficits to the tune of almost seven percent of GDP
Speaker 4: by twenty twenty two. This is before the bubble bursting.
Speaker 4: So if you already writing a budget deficit seven percent
Speaker 4: of GDP before the onset of balance recession, then whatever
Speaker 4: you have to do to stop balance recession, we have
Speaker 4: to be on top of this seven percent. Suppose you
Speaker 4: need five percent GDP equivalent to keep the economy going,
Speaker 4: then you're talking about twelve percent of GDP budget deficit.
Speaker 4: And I think that's one of the reasons why Chinese
Speaker 4: policy makers, even though many of them are fully aware
Speaker 4: that in the balance servisssion you need the government to
Speaker 4: come in, they haven't been able to come to a
Speaker 4: full consensus yet because even before the bubble burst, Chinese
Speaker 4: government was writing a large budget deficit.
Speaker 3: I want to go back to exports for a second,
Speaker 3: and you've noted which seems objectively true that here you
Speaker 3: have this huge surplus country, and many countries around the
Speaker 3: world do not want to tolerate a further expansion of
Speaker 3: the surplus. And you see the reticence, not just reticence,
Speaker 3: but pushback in the United States in the form of
Speaker 3: tariffs and promise of more tariffs. You see the anxiety
Speaker 3: in Europe of On the other hand, earlier this year,
Speaker 3: is visiting my mother in Guatemala, and I saw billboards
Speaker 3: for Chinese vehicles for sale there. I have to imagine
Speaker 3: that there's a lot of appeal in the sort of
Speaker 3: the non western parts of the world for cheaper vehicles,
Speaker 3: not being dependent on more expensive European and US cars,
Speaker 3: et cetera. Is there money to be made, an opportunity
Speaker 3: to grow exporting to the rising parts of the world
Speaker 3: that aren't the US or Europe.
Speaker 4: Well, I'm sure, I mean Chinese companies will look at
Speaker 4: what an opportunity that's available out there. But the West
Speaker 4: accounts for something like fifty seven percent of the global GDP,
Speaker 4: and the capital GDP on average is almost sixty thousand dollars.
Speaker 4: The so called non West Malay but India, Africa, South America, Russia,
Speaker 4: they're only about twenty five percent of global GDP and
Speaker 4: put capita GDP on average is like thirteen thousand dollars there.
Speaker 4: China itself is what eighteen percent of global GDP and
Speaker 4: per capita GDP thirteen thousand and also or slightly less
Speaker 4: than thirteen thousand and So if you lose market, which
Speaker 4: is fifty seven percent of global GDP with all the
Speaker 4: rich customers, and you only left with this remaining twenty
Speaker 4: five percent with much poorer customers, of course you have
Speaker 4: to sell to your customers those poorer customers, because you
Speaker 4: have no choice but to upset what you lose in
Speaker 4: a developed world Western world and make up for that
Speaker 4: by sending Morgus to Indian and Russia. I'm sure companies
Speaker 4: will try their best, but I don't think numbers will
Speaker 4: add up.
Speaker 2: If you were a Chinese policy maker and you could
Speaker 2: waive a magic wand and basically make anything happen, what
Speaker 2: would you do in terms of policy? What would be
Speaker 2: the one thing that you would like to see and
Speaker 2: act in Wow?
Speaker 4: If five in China, I will explain to the people
Speaker 4: what kind of disease we contracted. This disease is go
Speaker 4: balance you recession. Everyone is doing the right things, trying
Speaker 4: to repair their balance sheets. But because this will cause
Speaker 4: the fallacy of composition problems, we the government will be
Speaker 4: there to keep the economy going. That is, the government
Speaker 4: will continue to borrow one hundred dollars and spend it.
Speaker 4: So don't worry about this problem. Fix your balance sheats
Speaker 4: and want your balance seats fixed, Come and stop making
Speaker 4: money again.
Speaker 3: Yeah, but just to press further on Tracy's question, because again,
Speaker 3: as you yourself mentioned, fiscal policy isn't as easy as
Speaker 3: a central bank policy because actual decisions have to be made.
Speaker 3: So it's one thing to say we're going to spend,
Speaker 3: but someone is going to get that money, and someone
Speaker 3: is not going to get that money. So just to
Speaker 3: push you on this a little bit further, because as
Speaker 3: you said, fiscal policy is not blanket and generic like
Speaker 3: monetary policy is. How should that spending be channeled in
Speaker 3: a way it's productive and actually gets to the balance
Speaker 3: sheets that need repairing.
Speaker 4: Well, I would use money first to complete all the
Speaker 4: apartments that were started but are not yet complete, because
Speaker 4: in that case, well you might have to take some
Speaker 4: heavy handed actions. But basically the government should take over
Speaker 4: these companies and the projects and start putting money so
Speaker 4: that they will complete the projects. That way, you don't
Speaker 4: have to decide what to make because the things that
Speaker 4: already in the process are being built. All the construction
Speaker 4: drawings are there, workers are there, materials are you know
Speaker 4: where to get the materials, and in many cases potential
Speaker 4: buyers already know. So in that case, you don't waste
Speaker 4: time thinking about what to build, who's to design, and
Speaker 4: who the orders should go to. Remember President Obama when
Speaker 4: he took over two thousand and nine, US was in
Speaker 4: the balance recession after the collapse of the housing bubble. Yeah,
Speaker 4: but he was so careful not to make the Japanese
Speaker 4: mistake of building bridges to nowhere and roads to nowhere.
Speaker 4: He took a long time to decide which projects should
Speaker 4: be funded. But that year and a half or so
Speaker 4: I think U has lost quite a bit of time
Speaker 4: because during that time economy continued to weaken. There was
Speaker 4: no shovel ready projects. But in the Chinese case, I
Speaker 4: would argue that these uncompleted apartments are the shove already projects.
Speaker 4: You already know who wants them, to pay their down
Speaker 4: payments and all of that, So I will spend the
Speaker 4: money first on those projects, complete those projects, and use
Speaker 4: the time while the money is used to complete these apartments.
Speaker 4: I would use the magic wound to get the brightest
Speaker 4: people in China to come into one room and ask
Speaker 4: them to come up with the public works projects with
Speaker 4: a social radia return higher than two point zero percent.
Speaker 4: And the reason is that Chinese government bounded. You know,
Speaker 4: this is about two point zero zero something. These people
Speaker 4: can come up with public works projects with associate RADA
Speaker 4: written higher than let's say two point one percent, then
Speaker 4: those projects will be basically self annancing. It won't be
Speaker 4: a burden of future taxpayers. And then once apartments are
Speaker 4: completed and economy still is struggling from balance she recession,
Speaker 4: then I would like to spend the money on those
Speaker 4: projects that these bright people might come up with.
Speaker 2: All right, Richard, really appreciate you coming back on odd
Speaker 2: lots to give us an update on where we are
Speaker 2: in China's balance sheet recession. Thank you so much. That
Speaker 2: was great.
Speaker 4: Oh, thank you.
Speaker 3: Right, welcome, Thank you, Richard.
Speaker 4: That was great.
Speaker 3: That was our interview with Richard Kue, the chief economist
Speaker 3: of the nomer Or Research Institute in Japan. And now
Speaker 3: we speak with us and one of the pechnology substack.
Speaker 3: So Zishan, thank you so much for coming on odd
Speaker 3: last thrilled to have you here.
Speaker 5: It's so great to be here.
Speaker 3: What did you tell us big picture or small picture?
Speaker 3: Why now we've got this flurry of announcements really over
Speaker 3: the last couple of weeks. We're recording with you. October fifteenth,
Speaker 3: in the recent weekend, there was a Ministry of Finance
Speaker 3: press conference. Prior to the recent Golden week there was
Speaker 3: a flurry of comments from the PBOC et cetera.
Speaker 5: Why now, Well, I think all these developments were called
Speaker 5: the market and all the observers by surprise because nobody
Speaker 5: actually thought this coming. So what started this, you know,
Speaker 5: recent event is a press conference given by China's financial
Speaker 5: regulators led by the Central Bank, which is the People's
Speaker 5: Bank of China, on I think September twenty fourth. So
Speaker 5: after that, two days later there was the Political Bureau
Speaker 5: meeting of the Communist Party of China, and the following
Speaker 5: that there was the State Council exactly meeting, and then
Speaker 5: we had a press conference by the National Development and
Speaker 5: Reform Commission and then the Finance Ministry, which happened on
Speaker 5: Saturday over the weekend. So, as you correctly said, Joe,
Speaker 5: there are a lot of policy announcements, and I think
Speaker 5: right now it's October and kind of just published some
Speaker 5: macroeconomic data. A lot of people are saying that maybe
Speaker 5: one of the reasons for the reasoned economic measures was
Speaker 5: that China is maybe very difficult to reach the five
Speaker 5: percent growth race for the year of twenty twenty four.
Speaker 5: And also the Federal Reserve cut its policy rates, which
Speaker 5: opened the room for you know, the Chinese counterparts.
Speaker 2: So I'm going to ask you basically the same question
Speaker 2: I asked Richard Q, which is the responses to what's
Speaker 2: been announced so far seemed to fall on a sort
Speaker 2: of continuum where you have some people who think this
Speaker 2: is just repeating what China has already done. You know,
Speaker 2: a lot of it so far is monetary easing and
Speaker 2: that sort of thing. It's not that different. But then
Speaker 2: on the other end of the continuum, you have people
Speaker 2: who think this is very significant because the signaling suggests
Speaker 2: that there's something different here, that maybe they're opening the
Speaker 2: door to more fiscal stimulus and things like that. Where
Speaker 2: do you fall along that spectrum of interpreting the significance
Speaker 2: of what we've seen so far, I.
Speaker 5: Do think this is quite significant, and I think we
Speaker 5: can look at this from a number of perspectives. First
Speaker 5: of all, by transition, the political bureau of the Companist
Speaker 5: Party of China just doesn't have a meeting in September
Speaker 5: to focus on the economy. That didn't happen, and so
Speaker 5: this is an exception. And for the governing party of
Speaker 5: China to dedicate out of its past trandition on the
Speaker 5: economy last times of political signal. So you know, that's
Speaker 5: very important from a Chinese political perspective if you are
Speaker 5: like working in the Chinese government. And secondly, some of
Speaker 5: the measures already announced I think did exceed market expectations.
Speaker 5: For example, were started in the September twenty four press
Speaker 5: conference by the People's Bank of China. Pangung Chung, the
Speaker 5: governor of the central bank, announced, you know, the PBOC
Speaker 5: was gonna lower the reserve racial banks that put money
Speaker 5: at the central Bank, that cut the interest rate, lower
Speaker 5: the margage rate that you know Chinese residents pay for
Speaker 5: their housing, and also established a swab facility as well
Speaker 5: as another lending facility to help the stock market. You know,
Speaker 5: to have so many measures put together at a single
Speaker 5: press conference and followed by a very decisive announcement by
Speaker 5: the Finance Ministry that they're working on a physical stimulus,
Speaker 5: but they haven't announced the number because Chinese law, this
Speaker 5: sort of physical spending has to be approved by the legislature,
Speaker 5: which is a National People's Congress Standing Committee, so they
Speaker 5: haven't announced the number. So putting everything together within the
Speaker 5: past two or three weeks out of the expectation, that's
Speaker 5: indeed very significant. And some of these numbers not what
Speaker 5: China got used to for the past two or three
Speaker 5: or four years, especially since COVID, I mean, let's not
Speaker 5: kid ourselves. The market expectation for the Chinese government to
Speaker 5: make some stimulus policies has been high, and there is
Speaker 5: this awareness both inside China as well as and the
Speaker 5: international market that had hoped for some sort of intervention
Speaker 5: for quite a long time, but it didn't come, so
Speaker 5: suddenly it can.
Speaker 3: First of all, this is already very helpful because I
Speaker 3: was not aware, for example, about the sort of tradition
Speaker 3: of where on the calendar such things should be discussed.
Speaker 3: And this is interesting but also gets to another question,
Speaker 3: which is I think the most naive American China observer,
Speaker 3: and I would consider myself in the most naive category.
Speaker 3: It just sort of has this vision in my head
Speaker 3: that Chesin Ping wants something, and then it happens. I mean,
Speaker 3: I know it's not true and there's real, a real
Speaker 3: political system. But then you said, okay, so fiscal stimulus
Speaker 3: technically has to be approved and ratified by the legislature.
Speaker 3: Talk to us about that process, because this is a
Speaker 3: level of sort of political understanding that I truly know
Speaker 3: nothing about. How do the what is the process for Okay,
Speaker 3: some numbers drafted or some allocation of money is drafted,
Speaker 3: how do these decisions actually get made then implemented.
Speaker 5: Well that's a very big question. Yeah, so you take
Speaker 5: it narrow, you are way too humble, And uh yeah,
Speaker 5: I think of all the meetings I've mentioned, the most
Speaker 5: important one is certainly the Political BILLI meeting, which in
Speaker 5: China happens every month. So conditionally there will focused on
Speaker 5: the economy at the end of the year. For example,
Speaker 5: because in every December, which you know just two months away,
Speaker 5: there will be a Central Economic Work Conference which will
Speaker 5: make up economic development plans for the next year. But September,
Speaker 5: this September is political bureau meeting is an exception. So
Speaker 5: I think the typical process is that you know, all
Speaker 5: these Chinese bureaucratic agencies or the ministries, all these committees
Speaker 5: that are part of the Communist Party of China, they
Speaker 5: monitor the situation of the economic data, what are people saying,
Speaker 5: what are Bloomberg reporting, and then they draw up plans
Speaker 5: and they submit to the Chinese leadership. And so when
Speaker 5: there is an instruction, when you know, certain information caught
Speaker 5: the attention of the leadership, they will typically make return
Speaker 5: restructions or give oral instructions which really put things to work.
Speaker 5: And it has to be formalized at a meeting, and
Speaker 5: the most important one is political bureau meeting. And in
Speaker 5: China I also just mentioned a State Council executive meeting.
Speaker 5: The State Council is like the Chinese government cabinet or
Speaker 5: the PBOC, the NDC, the Ministry of Finance or the
Speaker 5: Ministry of Public Security or the Tax Bureau. They are
Speaker 5: all subordinate to the State Council. So the State Council
Speaker 5: their mission is to implement the decisions of the Communist
Speaker 5: Party of China's central committees political bureau. So it's the
Speaker 5: political bureau meeting, the State Council Executive meeting, and then
Speaker 5: translates to specific deployments, rade cards, phacecoalt spending implemented by
Speaker 5: the different ministries, which of course involves their contributions significantly,
Speaker 5: because I wouldn't imagine like China's top leader to have
Speaker 5: such very specific details in you know, whether it should
Speaker 5: be one hundred billion or two hundred billion. These very
Speaker 5: important you know, numbers and plans through are drawn up
Speaker 5: by the technocrats. And also there are a lot of
Speaker 5: you know, think tanks, university research institutions by college professors,
Speaker 5: and they would have their own channels to submit their
Speaker 5: observations or they make their comments publicly and which are
Speaker 5: also monitored by the leadership. You know, there is no
Speaker 5: first amendment in China to be Franks, but so there
Speaker 5: is still a substantial discussion of substantative policies. So all
Speaker 5: of these things contribute to the decision making at to
Speaker 5: the Chinese leadership.
Speaker 2: You mentioned deployment. Just then, how important is it to
Speaker 2: incentivize local officials in this process, because I imagine, okay,
Speaker 2: she Shin Pin can give a general mandate, but to
Speaker 2: your point, it's often the local government officials the technocrats
Speaker 2: there who are actually in charge of implementing and executing
Speaker 2: the policy and in some respects designing it to be
Speaker 2: most effective. How does that process work.
Speaker 5: Well, I think some background should be given because granted,
Speaker 5: China is a unitary state, so it's not a at
Speaker 5: least politically, it's not a federalist system. So people's perception,
Speaker 5: especially Westerners and American perception would be like it's just
Speaker 5: women telling everyone what to do every single matter. So
Speaker 5: that's obviously not true. And for example, probably many people
Speaker 5: are not aware like local government spending in China's overall
Speaker 5: government spending is at i think eighty three or eighty
Speaker 5: five percent, and so the central government spending in China
Speaker 5: as a part of the wall spanning, it's only fifteen percent.
Speaker 5: If you compare that to all the advanced market economy
Speaker 5: in the world, it's among the lowest share in the world.
Speaker 5: So from that perspective, the Chinese, at least in terms
Speaker 5: of physical spending, is very very decentralized. And also if
Speaker 5: you examine the literature on you know, the China Miracle
Speaker 5: for the past three or four decades, one of the
Speaker 5: most prominent theories is that China effect has a sort
Speaker 5: of tournament for local government officials who ever get the
Speaker 5: GDP group fastest or have the best investment projects for
Speaker 5: example the giga factory of Tesla in Shanghai, then they
Speaker 5: get appreciated and probably they will move up the career ladder.
Speaker 5: So indeed it's very important. And also China is a
Speaker 5: huge country. It's, you know the world's second largest economy
Speaker 5: with over thirty provinces one performed billing people. So the
Speaker 5: philosophy is that the central authority gives some mandate, gives
Speaker 5: some direction, but it has to be implemented on a
Speaker 5: region by region basis. For example, China has this housing
Speaker 5: purchase restrictions, but each specific city sets their own criteria.
Speaker 5: For example, if you are Beijing or Shanghai, they have
Speaker 5: by far the most strict housing restrictions. For example, if
Speaker 5: you have a local household RESI restriction, you can only
Speaker 5: buy one apartment, But if you live in a third
Speaker 5: or fours tier city, maybe the restriction over there is
Speaker 5: much more loose. So you know how thing sector is
Speaker 5: an important part of the economic story in China. So
Speaker 5: for example, to revive the real estate industry, the like
Speaker 5: the Ministry of Urban affairs of the Housing ministry. Basically,
Speaker 5: they would, under the mandate given by the central leadership,
Speaker 5: tell everyone, you know, it's time to relax all the
Speaker 5: housing restrictions. But they wouldn't tell, you know, shen jen
Speaker 5: or chanting our hand, you know what to do exactly.
Speaker 5: They would send the signals and the local governments will
Speaker 5: digest the signal and then make their own decisions.
Speaker 3: We talked to Richard Koub about this. One of the
Speaker 3: things that I have some understanding of is this sort
Speaker 3: of very decentralized policy making, very decentralized fiscal infrastructure. One
Speaker 3: of the things I think was sort of hinted at
Speaker 3: at the Finance Ministry press conference was there many people
Speaker 3: who have written about the land sales in various regions
Speaker 3: and the sort of limits to that method of fiscal architecture,
Speaker 3: so to speak. And I think there were some hints
Speaker 3: at the Ministry of Finance about like, eventually perhaps that's
Speaker 3: going to evolve more debt being taken on by the
Speaker 3: central government, et cetera. I take your point about the
Speaker 3: sort of regional competition, but can you talk like, do
Speaker 3: you foresee some sort of evolution post the land sales
Speaker 3: model for regional fiscal spending such that more of it
Speaker 3: somehow comes out of Beijing.
Speaker 5: Well, the background is in China, a lot of local
Speaker 5: government finances used to rely on basically sales fland to
Speaker 5: real estate developers because by China's constitution or the urban
Speaker 5: land are owned by the state, which in fact is
Speaker 5: the city governments where they're in. But because of the
Speaker 5: housing slump we're in right now, this revenue has basically stopped.
Speaker 5: So the plan drawn up in the July meeting of
Speaker 5: the Communist Body of China Central Committee was that there
Speaker 5: will be a sort of tax and the physical reform
Speaker 5: where the local governments will be given new revenue or
Speaker 5: a bigger share of certain tax revenues to replace the
Speaker 5: dwindlin land sales and the housing market is estimated to
Speaker 5: account for I think something between fifteen percent to thirty
Speaker 5: percent of the Chinese GDP. So basically it's in crisis
Speaker 5: and a lot of the biggest real essets developers have
Speaker 5: defaulted on that. That and the Chinese government is very rigid,
Speaker 5: it's very reluctant to help these companies. But at the
Speaker 5: end of the day, I think there has been this reckoning,
Speaker 5: which is you've got to have some sort of real
Speaker 5: esty revival, and because it's just such a large portion
Speaker 5: of the Chinese economy, you know, the overall Chinese strategic
Speaker 5: plan is basically to have more high end value added
Speaker 5: manufacturing and which will take a bigger share of the
Speaker 5: economy at the expense of the dndling housing market share.
Speaker 5: But that transition has to be a gradual process which
Speaker 5: has to be managed as smoothly as possible. So maybe
Speaker 5: just eradicating the real accidence the industry, it's just not possible.
Speaker 5: So right now, I think the Chinese banks have been
Speaker 5: encouraged by the government basically to continue to land to
Speaker 5: the developers. And there is also a political consideration in this.
Speaker 5: It's because in China, most of their apartments are sold
Speaker 5: before they are delivered, so people have already put down
Speaker 5: a down payment and they are paying their mortgage. But
Speaker 5: if they can't get the apartments that they have been
Speaker 5: promised but with they had paid for them, then there
Speaker 5: will be social rests. People will go to the streets
Speaker 5: to protest, so that's a huge issue for potential social instability.
Speaker 5: So from that perspective, the real asset industry is I
Speaker 5: guess too big to fail or certain extent.
Speaker 2: That's a good line. Just going back to the local
Speaker 2: governments for a second, So you mentioned how local governments
Speaker 2: have traditionally been judged, you know, whoever has the highest
Speaker 2: GDP growth, whoever builds the biggest, shiniest new infrastructure project,
Speaker 2: that sort of thing. Do you see any sign that
Speaker 2: maybe the incentive mechanisms for local government actors are starting
Speaker 2: to change or they might be judged by something different.
Speaker 2: I guess this is a very long winded way for
Speaker 2: me to ask you about long range fishing and things
Speaker 2: like that, But are there signs of change in terms
Speaker 2: of how the local governments are being judged?
Speaker 5: I think actually that changed quite a few years back,
Speaker 5: so after seeing him came to power, after China's economy
Speaker 5: transitioned to a mid to high growth numbers and there
Speaker 5: were a lot of collateral damage from the high speed growth,
Speaker 5: for example, environmental degradation. So a few years into his ministration,
Speaker 5: the current Chinese president actually I think that actually started
Speaker 5: even in his predecessor, which highlights what's in the Chinese
Speaker 5: you know, party speak, because scientific development, so it's not
Speaker 5: just an emphasis on you know, whether it's eight percent
Speaker 5: or next year it has to be eight point two percent.
Speaker 5: It was no longer that, and there are more attention
Speaker 5: pay to also security and you know, to resilience. So
Speaker 5: there was not a single emphasis on the growth rate
Speaker 5: for quite some time. What we are seeing in the
Speaker 5: past two or three years, I think is actually a
Speaker 5: comeback to the priority of growth. For example, I think
Speaker 5: in the very important Setro Economic War conference last year,
Speaker 5: it was highlighted that development was still the top priority.
Speaker 5: You know, when I was relatively young, when Chrya started
Speaker 5: the reforment opening up in the late nineteen seventies. That's
Speaker 5: the slogan development is the top priority, which implies that
Speaker 5: economic growth is everything. But then especially you know, after
Speaker 5: the very devastating for your COVID and you know China's
Speaker 5: drastic restrictions to contain the pandemic, the economic growth has
Speaker 5: slowed down significantly. So what we're seeing right now in
Speaker 5: these past two or three years is a re emphasized
Speaker 5: you know, get the economic going and if anything, I
Speaker 5: think local governments there manday now is to you know,
Speaker 5: do everything for the economy.
Speaker 3: This has come up on episodes in the past. But
Speaker 3: how would you describe the process again, you know, in
Speaker 3: the US, we think that feedback between the public and
Speaker 3: the government happens via elections or because you know, we
Speaker 3: have the First Amendment and there's enough scope for people
Speaker 3: to talk about whatever it's frustrating, and then politicians react
Speaker 3: to that. I know there's a political discourse in China
Speaker 3: and social media and there's you know, people talk about
Speaker 3: the garbage time of history and the live flat movement
Speaker 3: and so forth, et cetera. How would you describe, however,
Speaker 3: the feedback process view which the central government recognizes that
Speaker 3: some sort of pivot or temporary pivot has to be
Speaker 3: made to respond to the needs of the public.
Speaker 5: That's a very good question, and I think it's a
Speaker 5: million dollar question. And you know, there are indeed complaints
Speaker 5: and the speculations if there is some sort of eco
Speaker 5: chamber or in the Chinese a more popular term information
Speaker 5: cocoon at the decision making level. And I translated and
Speaker 5: contextualized a speech in my technology newsletter just I think
Speaker 5: a few days ago by a Foremo central economic official,
Speaker 5: which recumentally denies that. I think in this for more
Speaker 5: official and in the Chinese official way, this course, the
Speaker 5: government insists that they are not sitting in some sort
Speaker 5: of information cocoon or echo chamber. They are monitoring the
Speaker 5: situation very closely. They know what the people are talking about,
Speaker 5: they know what you know, Financial Times and Bloomberg are reporting.
Speaker 5: They are aware, you know.
Speaker 4: Yeah.
Speaker 5: I think actually foreign media, international media have a outside
Speaker 5: the role actually within China's discourse and this policy making process.
Speaker 5: So but what I think it's the sort of they
Speaker 5: have this determination which is basically China needs to again,
Speaker 5: you know, advance to a different level of economic development.
Speaker 5: So they are willing to pay for the pains and
Speaker 5: the court in this transition, which is going to be
Speaker 5: a long term process. You know, this is something that
Speaker 5: is eyeing into many Chinese minds. It's basically, you know,
Speaker 5: China make a billion T shirts to pay for one
Speaker 5: Boeing plane from the United States or air busts from Europe. So,
Speaker 5: but China is now trying to make its own C
Speaker 5: nine one nine aeroplane, and it wants to have its
Speaker 5: own very robust semiconductor sector. It is already the largest
Speaker 5: shipbuilding power in the world, followed by South Korea, so
Speaker 5: it wants to pivot to this higher value manufacturing with
Speaker 5: a lot of scientific and technology input into these industries
Speaker 5: and to make this you know, hardware innovation sexy and
Speaker 5: even at the expanse of maybe some consumer internet. So
Speaker 5: in the Chinese policy making view, these hardware based machines tools,
Speaker 5: these are very very important, and I think from the
Speaker 5: very recent even from the press conference given by the
Speaker 5: Ministry of Finance and the NBC, we can have some
Speaker 5: lose to that because you know, a lot of the
Speaker 5: talk amount especially Western China watchers, is that they believe
Speaker 5: the insufficient domestic demound has to be basically countered by
Speaker 5: giving money, giving director subsidies to the Chinese population, or
Speaker 5: basically to have the households have a bigger share of
Speaker 5: the Chinese economy because when compared to other economies, the
Speaker 5: government share of the economy in Chinese significally larger than
Speaker 5: that in the development markets. But if you read the
Speaker 5: NDSC in National Development and Reform Commission, which is typically
Speaker 5: known described as the top economic planner in China, their
Speaker 5: plan to revitalizing domestic demound is categorized into basically two things.
Speaker 5: One is consumption, where it's mentioned for example, China gives
Speaker 5: some subsidies to very poor people before October first, and Secondly,
Speaker 5: the Chinese government gave more scholarship to college students and
Speaker 5: increase the student loans. The range, for example, used to
Speaker 5: be five thousand un but now it's seven thousand un so.
Speaker 5: And on the other hand, the trans government also announced
Speaker 5: that they are still trying to promote the domestic amount.
Speaker 5: From an investment point of view, what they are trying
Speaker 5: to do is, you know, there is this ongoing trade
Speaker 5: in movement. Basically, if you have an old Huawei phone
Speaker 5: or phone, or iPhone or TV screen, you can give
Speaker 5: it back and get a new one where the government
Speaker 5: will give you a relatively big subsidy in the process,
Speaker 5: where they are encouraging the factories to basically to replace
Speaker 5: their old equipments. This put together is known as Leon
Speaker 5: Singh Too New. And also there is also another large
Speaker 5: investment project called you know in Chinese Lean drown two
Speaker 5: key industries, which is two key sectors, one of which
Speaker 5: is known as the major projects of the nation and
Speaker 5: the other is known as the major projects that strengthen
Speaker 5: the critic capabilities of the Chinese nation. So there's two
Speaker 5: key and there is this too New. These are promoted
Speaker 5: by the NDIS in the press conference to everyone that
Speaker 5: this is our way of stimulate domestic demounts. So so
Speaker 5: far as you can see, they're trying to give some
Speaker 5: help to the households and you know, to basically solve
Speaker 5: the needs of the most unfortunate who are suffering the most.
Speaker 5: But on the other hand, I think the direction is
Speaker 5: still very clear. It's like technology build up.
Speaker 3: And yeah, just on.
Speaker 2: The informational cocoon point, do you see any you know,
Speaker 2: you talked about how there is a lot of discourse
Speaker 2: around economic policy and a lot of that takes place
Speaker 2: in public in various ways. Do you see any introspection
Speaker 2: on the part of the party and various officials in
Speaker 2: terms of policies that maybe didn't work out as intended
Speaker 2: in recent years. So I'm thinking of three red lines
Speaker 2: for instance, or some of the policy whiplash that we've
Speaker 2: seen in various crackdowns on you know, consumer tech or
Speaker 2: the education sector and things like that.
Speaker 5: Yeah, I think the three red line is a very
Speaker 5: good example, and there are a lot of scorely pushback
Speaker 5: against three red lines, especially by some professors at the
Speaker 5: National School of Development at Picking University, one of the
Speaker 5: top universities in China. You know, the three red lines
Speaker 5: basically sum it up to make financing for real essay
Speaker 5: company is much more difficult. So the concern is you
Speaker 5: are pushing too horten you say real estate, Yeah, okay,
Speaker 5: I'm sorry. And so the concern was you shouldn't just
Speaker 5: shut down the tap too fast. You should still leave
Speaker 5: some room for the housing sector to to softly phase out,
Speaker 5: to be decreased in the in the importance of the economy.
Speaker 5: So that's that's definitely something because you are seeing now
Speaker 5: the Chinese company is encouraging the banks to land to
Speaker 5: the housing project. There are also other things that I
Speaker 5: think is typically not very well known. For example, believe
Speaker 5: it or not, the Chinese come and place by the
Speaker 5: text book of some sort of Western economic policy making
Speaker 5: very rigidly. There is something called I think mas strict Treaty,
Speaker 5: which is the treaty of the European Union, which basically
Speaker 5: says if a member state wants to join the EU,
Speaker 5: it has to meet some certain thresholds, one of which
Speaker 5: is annual spending. The devastation should not be three percent
Speaker 5: larger than the and also you know, your outstanding national
Speaker 5: debt should not be over forty percent of your GDP.
Speaker 5: Or something like that. Chinda really took it to its heart.
Speaker 5: And you know, during the financial crisis in two thousand
Speaker 5: and eight, the Federal Reserve created a lot of facilities
Speaker 5: and swaps and to help the financial industry. And by
Speaker 5: the way, the PBOC is very recent inventions, is somewhat
Speaker 5: similar to what the FAST created. But the Chinese have
Speaker 5: been playing by these rules for quite some years, which
Speaker 5: in fact creates a very tightening effect. And I think,
Speaker 5: you know, trying to learn to adopt the sort of
Speaker 5: practice and teachings of these experiences and lessons from the
Speaker 5: advanced economy is one thing, and the other thing is.
Speaker 4: It's quite cultural.
Speaker 5: I think there is this emphasis of frugality in the
Speaker 5: Chinese mind is that you got to eat bitterness, you
Speaker 5: got to spend little money and save for the future,
Speaker 5: and that is still in the mindset in the philosophy
Speaker 5: of Chinese decision making.
Speaker 2: So part of the problem here is that China notoriously
Speaker 2: has a extremely savings rate. I think it's like, I
Speaker 2: think China saves like forty percent of GDP, which is
Speaker 2: basically twice the amount that the US saves and four
Speaker 2: times the amount that like the rest of the world saves.
Speaker 2: How can they go about unlocking that savings, because on
Speaker 2: the one hand, it seems very difficult to change the mindset,
Speaker 2: as you just pointed out. But on the other hand,
Speaker 2: you know, they're starting from a relatively low base. There's
Speaker 2: not a big social safety net in the country, so
Speaker 2: there are perhaps things that could be done there. But
Speaker 2: how do you unlock that chunk of savings.
Speaker 5: Well, I think you mentioned the social safety net. That's
Speaker 5: very important, and that's a lot of Chinese experts have
Speaker 5: been opening calling for in the past several years. It's
Speaker 5: basically for the government to spend more money, to devote
Speaker 5: more resources to enhancing, to broadening, to strengthening China's social
Speaker 5: safety net. You know, China's GDP per capitary thirteen thousand
Speaker 5: US dollar, something like the seventy.
Speaker 4: Eighth in the world.
Speaker 5: But it has built up a universal healthcare system and
Speaker 5: so basically, I don't know, ninety eight ninety nine percent
Speaker 5: of the people have some sort of health insurance and
Speaker 5: you know, basically they can they just have to pay
Speaker 5: a portion of their medical costs. But as you correctly mentioned,
Speaker 5: the social safety net, perhaps as a result of the
Speaker 5: overall national economic development it's still not think enough. It's
Speaker 5: just not enough. So and there is a national pension
Speaker 5: system and it's not looking well because part of that
Speaker 5: is demographic changes. You have more you know, old people
Speaker 5: and no longer so many young people, so that's under
Speaker 5: stress as well. So one big part of the current
Speaker 5: ongoing discussion is for the government to spend more money
Speaker 5: into pension, into strengthening the medical care for the system.
Speaker 5: And another very important is institutional reform. So you know,
Speaker 5: paper China's urbanization rate is something like sixty five percent,
Speaker 5: but only if forty eight percent of the people have
Speaker 5: urban household registration, so there is so that means there
Speaker 5: is still many people who actually work and live in cities,
Speaker 5: but they do not have the sort of legal household
Speaker 5: registration in Chinese cities, which means they are not entitled,
Speaker 5: they cannot enjoy the benefits of you know, education, medical care,
Speaker 5: and those cities they're actually living. So if similar reforms
Speaker 5: by you know, making it much easier for them to
Speaker 5: relocate into cities to enjoy the social benefits and so
Speaker 5: that they will no longer be stuck to their rural land,
Speaker 5: that could increase the productivity under unleashed consumption as well.
Speaker 5: And I think this is this is the Hohoka reform.
Speaker 4: Yeah, that's right.
Speaker 5: And also the it is related to the rural land reform.
Speaker 5: And you know, because if you don't have the houk
Speaker 5: household registration in the cities, your children can't go school
Speaker 5: in the city, so your children have to go to
Speaker 5: a rural school. And so that means you can't move
Speaker 5: your family over there, and you can't buy an apartment
Speaker 5: over there, you can't buy the TVs and decorate the house.
Speaker 5: That's a lot of consumption potential over there. So I
Speaker 5: think on the bright side, there is a reason for
Speaker 5: optimism for China's long term growth is simply because there
Speaker 5: is just so much things to do. There is just
Speaker 5: so many things that can be done. And you know,
Speaker 5: in Chinda this very recent talk of low altitude economy,
Speaker 5: so which basically for airspace less than one thousand meters,
Speaker 5: so you can use students to do logistics, and it
Speaker 5: can work on agriculture and a lot of things. But
Speaker 5: in the past it was not possible because there were
Speaker 5: a lot of regulations about airspace, sometimes from a security
Speaker 5: or military perspective. But now I think the Chinese company
Speaker 5: is working on basically reduced They regulate this place, so
Speaker 5: there can be a lot of opportunities. So yeah, there
Speaker 5: are still a lot of things to be done.
Speaker 3: You mentioned the role of foreign media and the importance
Speaker 3: of the sort of outside perspective in the information ecosystem
Speaker 3: that leaders in Beijing use. You work for eleven years
Speaker 3: at the Shinwa News Agency. It's a state news agency.
Speaker 3: What is the role of the state news agency in
Speaker 3: this information eco system and how does it interact in
Speaker 3: terms of what is the role what is the basic
Speaker 3: mission of these agencies?
Speaker 5: Okay, sure, So some personal background. I was born, raised
Speaker 5: in China. I'm totally educated in China. So after college
Speaker 5: in twenty eleven, I joined Singhua News Agency, the state
Speaker 5: news agency. I worked for eleven years there. For the
Speaker 5: first six and a half years I worked in two
Speaker 5: provincial bureaus, so basically a local news reporter, and then
Speaker 5: I worked in Europe and then in Beijing headquarters. So
Speaker 5: there are Singhua News agencies. There is what is now
Speaker 5: known as China Media Group, which is the state broadcaster,
Speaker 5: and then there is China Daily. And there is also
Speaker 5: People Stilly, which is more better known. It's the flagship
Speaker 5: newspaper of the Commutist Party of China, and one of
Speaker 5: his affiliates is very well known. It's called the Global Times.
Speaker 5: And I think in these cases, I think a big
Speaker 5: rule of these Chinese state around news agencies and newspapers
Speaker 5: communicating Beijings, policies and intentions, and of course facilitating a
Speaker 5: domestic discourse that's favorable to the Chinese government because you know,
Speaker 5: the Chinese goverment beliefs this is the best way for
Speaker 5: the country to move forward. And I think there is
Speaker 5: a crucial difference between the Chinese state news system and
Speaker 5: that is practice for example, in the United States. In
Speaker 5: the United States, in the White House, you have a
Speaker 5: press communications team. So whatever President Joe Biden or Vice
Speaker 5: President Kamlin Harris put out is put out by the
Speaker 5: White House and then picked up by the White House
Speaker 5: Press Court, and them are picked up by the news media, which,
Speaker 5: based on their own editorial standards, decide to report it
Speaker 5: or not reported. In the Chinese there is no such
Speaker 5: mechanism of centralized news publication by the central authority. That
Speaker 5: function is delegated to the state media. So at Sinque
Speaker 5: neuwis agency at the China Central television at people stealing newspaper.
Speaker 5: So in the sense, these state media are playing a
Speaker 5: role of the White House communications team. So you know,
Speaker 5: the TV footage of the Chinese President, of the Chinese premier,
Speaker 5: who they meet, and what happened in China these meetings.
Speaker 5: The read outs are directly put out by the Chinese
Speaker 5: state media. So the roles, the setup, and of course
Speaker 5: you know, the political system and also the discretion they
Speaker 5: have are indeed vastly different from that of the United States.
Speaker 5: And you mentioned the role of foreign news media. I
Speaker 5: think very unfortunately, and this is something as a formal correspondent,
Speaker 5: as a former journalist, I really want to highlight is
Speaker 5: China has been unable to send it's journalists to the
Speaker 5: United States. And it's also very difficult for New York Times, Bloomberg,
Speaker 5: Washington Post. What's the journal to have is journalists on
Speaker 5: the ground in China. This doesn't help anybody. And you know,
Speaker 5: as the two countries get their relations right, I sincerely
Speaker 5: hope that you know, the two sides can figure something
Speaker 5: out to have more journalists in each other, which would
Speaker 5: help with you know, understanding China better and understanding the
Speaker 5: United States better.
Speaker 2: Yes, let ten thousand China US journalist correspondence Bloom. I agree.
Speaker 2: I have just one more question. Actually it's two questions,
Speaker 2: but I'm doubling my personal productivity by asking them together
Speaker 2: very quickly. Number one, how much did the US elections
Speaker 2: matter here? Like come November fifth? Is there going to
Speaker 2: be some big rethink of China domestic policy or are
Speaker 2: there certain things that hinge on the outcome of that election?
Speaker 2: And then secondly, what are you watching in terms of
Speaker 2: what's next and what could be significant?
Speaker 5: So you mentioned here you mean in China, right. I
Speaker 5: think Rush DOORSI, the former Deputy Senior Director National Securit
Speaker 5: Coounce of the White House, wrote something either yesterday or
Speaker 5: the day before yesterday on the New York Times, which
Speaker 5: is a very helpful read, and he's clearly trying to
Speaker 5: help Kamla Harris. And I think there is this discussion
Speaker 5: about basically whether China wants a democratic president or Donald
Speaker 5: Trump's second presidency. First of all, I think the Chinese
Speaker 5: official this is domestic affairs of the United States, and
Speaker 5: we don't in the field with the United States domestic elections.
Speaker 5: And I think at least in this round, if you
Speaker 5: examine the responses from the US officials, including those in
Speaker 5: the intelligence community. If I'm not mistaken, they have said
Speaker 5: they did not see any instance of Chinese interference in
Speaker 5: the US elections. I think this is also a discussion
Speaker 5: in China about the because this is like the most
Speaker 5: important election in the world and it's gonna have very
Speaker 5: big impact on China US relations. I think the thinking
Speaker 5: is that if Kamala Harris became the president, she will
Speaker 5: some sort of continue the path that President Joe Biden
Speaker 5: has already laid out. It's gonna be some sort of
Speaker 5: stabilization of the status quo. I mean, make no mistake,
Speaker 5: nobody has any illusions about China US relations these days.
Speaker 5: It will be difficult for both sides, and there will
Speaker 5: be disagreements and even you know, not un conflicts, but
Speaker 5: serious disagreements. But it will be predictable and probably manageable.
Speaker 5: But Donald J. Trump to become the next president, well,
Speaker 5: I'm a Chinese citizen, I really don't want to interfere
Speaker 5: with US elections. But I think the thinking is that
Speaker 5: he's just so unpredictable and nobody knows what. You will
Speaker 5: wake up in the morning five am and it out
Speaker 5: and I'm not sure Beijing is really a big fan
Speaker 5: of that. But as Rassuci pointed out that Donald Trump
Speaker 5: is probably going to mess up the alliance with Europe
Speaker 5: and a lot of US allies, which, if you really
Speaker 5: take a thirty thousand feits view, could be good for
Speaker 5: China because the US messes up its alliance system. But
Speaker 5: am my understanding the courses on predictability. You have to
Speaker 5: face the drama on a weekly basis, So there are
Speaker 5: pros and cons, and I think the Chinese attitude is
Speaker 5: we will stand on our grounds and China will, you know,
Speaker 5: stick to its principles and defend its interests. Whoever gets
Speaker 5: into the White House in power, I'm really not sure
Speaker 5: there is a clear preference for who is going to
Speaker 5: be the president of the United States.
Speaker 2: And in terms of what's next, what we should watch
Speaker 2: out for, Oh, the stimulus measures.
Speaker 5: Well, first of all, watch for the National People's Congress
Speaker 5: Standing Committee meeting of ratifying the size of the fiscal
Speaker 5: stimulars out of the Finance Ministry, because the Finance Minister
Speaker 5: made it very clear that we can't tell you now
Speaker 5: because it has to be ratified, and that's something very important.
Speaker 5: And so what is exactly the size of that stimulus.
Speaker 5: I think very respected Chinese news magazine Tai Sing had
Speaker 5: already put out some numbers, and I believe Bloomberg had also,
Speaker 5: you know, quoted that number and the terminal, and that's
Speaker 5: that's something very important. And also you know, China has
Speaker 5: this five year plannings and so next year China will
Speaker 5: be making up is fifteenth five year plan and so
Speaker 5: that's a mid term to long term prospect and you
Speaker 5: know when can goage if there is any directional change
Speaker 5: in terms of that. And I think I also mentioned
Speaker 5: that every December there will be the Central Economic World Conference.
Speaker 5: It typically happens on the during the Christmas season. But yeah,
Speaker 5: I think that's like the things we're going to closely
Speaker 5: watch for and also sign up for my newsletter.
Speaker 3: Definitely sign up, Hysician Wang. Thank you so much for
Speaker 3: coming on allum.
Speaker 5: Thank you for having things and.
Speaker 3: Like I said, we'll have to do it against the time.
Speaker 3: Thank you, Joe.
Speaker 2: That was so good having Richard and zichen on as well.
Speaker 3: What a treat that was.
Speaker 2: The Macro and the micro.
Speaker 3: No exactly, I thought that was fantastic. As you said,
Speaker 3: the macro and the micro I'm trying to figure like
Speaker 3: where to begin, because there was so much in both
Speaker 3: of those conversations. I appreciate, you know, the big picture,
Speaker 3: the sort of Richard Coo balance sheet recession that you had,
Speaker 3: getting these difficult situations where everyone is saving, everyone is concerned,
Speaker 3: the downward growth feeds on itself. I appreciate this sort
Speaker 3: of idea that like, China hit a moment where okay, yes,
Speaker 3: and physicians point the long term goal is to maintain
Speaker 3: that sort of high tech manufacturing led scientific growth. But
Speaker 3: I think the common thread is with the decline of
Speaker 3: the real estate sector, there was just this moment that
Speaker 3: had to pivot.
Speaker 2: Yeah, well two things there. I mean, it does seem
Speaker 2: fairly clear to me that China has taken that balance
Speaker 2: sheet recession idea on board. Like what they are doing
Speaker 2: now is trying to boost real assets so that people
Speaker 2: want to invest more and they sort of build up
Speaker 2: their confidence and things like that. I guess the big
Speaker 2: question I have is there does seem to be a
Speaker 2: lot of low hanging fruit in terms of reducing the
Speaker 2: savings rate and getting people to spend and invest more.
Speaker 2: But on the other hand, it kind of begs the
Speaker 2: question why hasn't this happened before, you know, stuff like
Speaker 2: Kukau reform and things like that. Why didn't they do
Speaker 2: it before? And I guess my question is is this
Speaker 2: an economic problem or is it one of perhaps political will?
Speaker 3: Yeah, totally, And I guess right like we don't really
Speaker 3: know the answer. From the second part of that conversation
Speaker 3: with a physician. Just now, very interesting this idea that like, okay,
Speaker 3: one signal is simply this fact that like the announcement
Speaker 3: happened now in the calendar year, like right before goldenweg
Speaker 3: I didn't realize that there was like a time of
Speaker 3: year to talk about economic things and so no, I
Speaker 3: didn't so and you know, if there's like a econ
Speaker 3: policy making going on at that time of year, then
Speaker 3: that signal is something different than business as usual. It
Speaker 3: certainly makes a lot of sense to me, you know,
Speaker 3: just this idea that, like even in a sort of
Speaker 3: centralized political system, that these things take time to implement,
Speaker 3: that things have to be approved, that ideas, that there
Speaker 3: is a period of debate for ideas as you know,
Speaker 3: not even in the absence of First Amendment free speech norms,
Speaker 3: there's going to be different views on how things get implemented,
Speaker 3: and I thought that was very interesting.
Speaker 2: Yeah, and also I think Richard brought this up. But
Speaker 2: the idea that, you know, fiscal is a little bit
Speaker 2: more difficult than monetary policy because you're deciding who gets
Speaker 2: the money rather than the sort of generalized easing.
Speaker 3: Right, and that is something that on the specifics of
Speaker 3: how much in whom the money goes to probably not
Speaker 3: something specific that Chijinping would have in his head.
Speaker 2: All right, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the au Thloughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill wysenth Thal. You can follow me at
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