Speaker 1: Welcome to Kobe Time, a podcast series on Markets and
Speaker 1: Economies from DBS Group Research. I'm Time Ruby, chief economist,
Speaker 1: welcoming you to our 93rd episode which will be devoted
Speaker 1: to China.
Speaker 1: China had a torrent 2022 struggling to manage the pandemic,
Speaker 1: dealing with distress in the property and tech sectors, facing
Speaker 1: pushback from the U S and its allies on technology
Speaker 1: and market access, etcetera. 2023 is off to a promising start.
Speaker 1: But could this be a false done? Well, let's get
Speaker 1: some expert views. Today's guest is a long standing supporter
Speaker 1: of Kobe Time, Bert Hoffman. Bert
Speaker 1: is the Director of the East Asian Studies Institute at
Speaker 1: National University of Singapore and professor in practice at the
Speaker 1: Lee Kuan Yew School. Before joining us, he worked at
Speaker 1: the World Bank for 27 years, 22 of which were
Speaker 1: in Asia and a dozen of those were in China
Speaker 1: where he was country director for the World Bank from
Speaker 1: 2014 to 2019, Bert Hoffman. Warm welcome back to Capitan.
Speaker 1: You're our first three peat guest.
Speaker 2: Great to be back. Time War.
Speaker 1: It's great to have you a lot to talk about
Speaker 1: but start with perhaps the pandemic bird. Let's begin by
Speaker 1: taking stock of this remarkable turnaround that we have seen
Speaker 1: in the last few months.
Speaker 2: Yeah. Well, the, we're almost done with the turnaround. It
Speaker 2: almost looks as if the numbers are showing that the
Speaker 2: rural areas are a bit different than the less monitored
Speaker 2: than the urban areas. But there's been this tremendous wave
Speaker 2: starting sort of mid December
Speaker 2: by early January, it was already starting to peter out.
Speaker 2: And now over the Chinese New Year, we see a
Speaker 2: further decline in at least the infections as far as
Speaker 2: we know what the data are far less strong than
Speaker 2: before because there's practically no more testing, but the government
Speaker 2: has incidentally reported on the infection rate and that now
Speaker 2: seems to come down quite dramatically. So, um
Speaker 2: I mean, just three months ago, we were thinking this
Speaker 2: was impossible and now we're almost through with the omicron wave.
Speaker 2: Of course, there's been lots of suffering. There's been many
Speaker 2: people that because they were not vaccinated enough or simply
Speaker 2: because they were old that died because of Macron. But
Speaker 2: it seems to be that from now on, at least
Speaker 2: the economic recovery can really take, take hold.
Speaker 1: But, but what does it say about pandemic management? I mean,
Speaker 1: now we're the third year of this pandemic and in
Speaker 1: the rest of the world, the M RNA vaccines played
Speaker 1: a very large role in that pandemic management process in
Speaker 1: the case. Of China. That wasn't the case. Does it
Speaker 1: mean that whether you have the right vaccine or the
Speaker 1: wrong vaccine or rather the more effective vaccine and not
Speaker 1: so effective vaccine, you sort of go through the same narrative.
Speaker 2: Well, I think what happened in China would have in part,
Speaker 2: be avoidable first, I don't think that the local vaccines
Speaker 2: are that much less effective. It just takes three shots
Speaker 2: of them. Uh China did a lot of vaccination in 2021,
Speaker 2: but then it sort of petered out in part because
Speaker 2: they were so successful and they made a tactical mistake
Speaker 2: in the beginning
Speaker 2: to say what the vaccines are ready for the working
Speaker 2: people because they go out and about and they need
Speaker 2: to be protected. The elderly therefore, had the impression that
Speaker 2: maybe this was not such a great idea for them.
Speaker 2: And of course, elderly are also more vulnerable to any
Speaker 2: side effects of vaccination. But the vaccine themselves are pretty effective,
Speaker 2: not as effective as the M R N A s but,
Speaker 2: but pretty high effectiveness after three vaccines. The problem is
Speaker 2: that a lot of people got their third vaccine
Speaker 2: the third shot already quite a while ago. So maybe
Speaker 2: they were not under, under the most recent wave. At
Speaker 2: the same time, Macron is far lighter. Uh the impact
Speaker 2: of O Macron, even if you're not vaccinated is far
Speaker 2: milder than say the delta, the delta variant, which caused
Speaker 2: a lot of deaths in the United States and in Europe.
Speaker 2: So
Speaker 2: um in that sense, it did, it did pay for
Speaker 2: China to wait. But of course, it came at considerable cost.
Speaker 2: And I think that in the end was a big
Speaker 2: factor for China to move out of COVID, 0 to
Speaker 2: 0 COVID policy relatively quickly. I mean, I would say
Speaker 2: too quickly
Speaker 2: uh in, in November, December last year and the other
Speaker 2: part of, of uh of the exit was of course
Speaker 2: the demonstrations that took place. I mean, the people were
Speaker 2: basically fed up. That was in early November, that was
Speaker 2: after the Party Congress. There was an announcement, ok. We're
Speaker 2: going to do the 20 point program and that basically
Speaker 2: was a gradual exit from zero co of it.
Speaker 2: But the effect was that infections showed up and local
Speaker 2: governments still clamped down by means of lockdowns and that
Speaker 2: triggered then the protests, I think by then already the
Speaker 2: infections rates were so high that frankly, it was almost unstoppable. Again.
Speaker 2: I think a more phased exit would have been desirable.
Speaker 2: But as uh the great Donald Rumsfeld said it is
Speaker 2: what it is. And now we are looking at a
Speaker 2: recovery to uh to this, to this uh three years
Speaker 2: really off COVID management that did have some that have results.
Speaker 2: There's no question about it,
Speaker 2: but China is now behind everybody else in, in the,
Speaker 2: in the recovery phase. Mind you none of the countries
Speaker 2: except maybe where I live, Singapore did it very well.
Speaker 2: That exit Singapore went very carefully, very sort of two
Speaker 2: steps forward, one step back in the exit took in
Speaker 2: total about nine months to exit, to exit the zero
Speaker 2: COVID or not the zero COVID, but a very strict
Speaker 2: COVID management that, that Singapore had.
Speaker 2: And I think that was a very good way to
Speaker 2: go about. But nevertheless, they also experienced a wave. They
Speaker 2: also experienced more, more death in the in the exit
Speaker 2: of the, of the COVID management. So it was almost unavoidable.
Speaker 2: I'm not even speaking about other countries in Europe or
Speaker 2: the United States, the United States never exited because they
Speaker 2: never really entered a COVID serious COVID management effort except
Speaker 2: for the vaccines.
Speaker 2: I
Speaker 1: want to talk about the vaccine for just one more moment.
Speaker 1: But if I may, I saw a recent article by
Speaker 1: Joe Stiglitz where he basically accused Western Pharma companies of
Speaker 1: hoarding the formula behind the M R N A vaccine.
Speaker 1: And his point was this should be a global public good.
Speaker 1: And if a company in China just wants to copy
Speaker 1: it and sell it,
Speaker 1: uh so be it because it is an issue of
Speaker 1: global public health. Um would an approach like that, let's
Speaker 1: say a year ago, would it have made a difference?
Speaker 1: Because it seems to me a year ago, the narrative
Speaker 1: out of China was M RNA is a Western vaccine
Speaker 1: and that I think was very unfortunate. It should have
Speaker 1: been something seen as a global good.
Speaker 2: Yeah, look, frankly, I, I don't think the price was
Speaker 2: an impediment for China. They could have afforded it. Um,
Speaker 2: they chose not to and they chose to pursue their
Speaker 2: own research in a local
Speaker 2: M RNA. I mean, the irony is that they were
Speaker 2: ready to produce it in, in, in China, the fighter,
Speaker 2: the fighter biontech M RNA, they were ready to actually
Speaker 2: produce it in on a major scale but that they
Speaker 2: backed away from that. So I don't think price was
Speaker 2: an issue. It was in some, in some developing countries,
Speaker 2: it was an issue.
Speaker 2: And I think that whole system of incentives for innovation
Speaker 2: would for global public goods can be reconsidered. And if
Speaker 2: you want indeed go back 20 years. Uh it was
Speaker 2: governments around the world that invested in the research that
Speaker 2: made the M RNA vaccine possible, but it was also
Speaker 2: companies that invested for 10 years, say to commercialize
Speaker 2: the platform that made it in the end possible to,
Speaker 2: to produce, to produce the vaccine itself and to respond
Speaker 2: very quickly to the COVID 19, to the COVID 19 epidemic.
Speaker 2: So I think 11
Speaker 2: you know, it's amidst a pandemic, you always say, well,
Speaker 2: they should give it away. But then the question is
Speaker 2: also what's the impact on the next pandemic and the
Speaker 2: incentives to, to do R N A? If it isn't
Speaker 2: it purely government financed R and D that leads to
Speaker 2: uh an outcome one can consider to say, okay, maybe
Speaker 2: one should give it away.
Speaker 1: Right. Um I think uh there are, you know, in,
Speaker 1: in the middle of a big global crisis, I think
Speaker 1: there's always a tendency to, you know, forget about long
Speaker 1: term incentives, just get it done, get us out of
Speaker 1: the crisis and then we'll see. But you're right.
Speaker 1: Uh companies like Biontech and Moderna spent a decade or
Speaker 1: more uh investing in the whole M RNA technology infrastructure
Speaker 1: before you know, the timing came to be, you know,
Speaker 1: sort of, you know, right for them to be very,
Speaker 1: very effective around the world. I'm pretty sure that the
Speaker 1: Chinese foreign companies will also get certain strategic investments from
Speaker 1: the government of China preparation for the next rainy day.
Speaker 1: Um but Macro China,
Speaker 1: particularly the economic environment, so we in the last say,
Speaker 1: 23 months have begun to pick up a pro growth
Speaker 1: shift in economic policy. Uh Would you like to sort of,
Speaker 1: you know, express your take on what's been going on
Speaker 1: on the economic front?
Speaker 2: Well, so the numbers may not show that much yet,
Speaker 2: but if you want the tone has clearly changed and
Speaker 2: that is, I think the watershed was the the 20th
Speaker 2: Party Congress which took place in October and after that,
Speaker 2: some major speeches, but then particularly the central economic work
Speaker 2: conference reflects a far more,
Speaker 2: not just pro growth stance, but also far more friendlier
Speaker 2: stance towards the private sector are friendlier stance even towards
Speaker 2: the previously maligned platform companies. So I think there has
Speaker 2: been some realization that some of the previous policy directions
Speaker 2: Would not bring China where it wants to be. I
Speaker 2: continue to grow were relatively high with I mean the
Speaker 2: informal target for the next 15 years is
Speaker 2: this 4.75% that rolls out if you take Xi Jinping's
Speaker 2: doubling of 2020 G D P by 2035. If you
Speaker 2: take that series, you would need a growth rate of
Speaker 2: 4.75 and you would probably need a higher growth within
Speaker 2: the early years given that there are factors such as demographics,
Speaker 2: such as other other factors that would sort of bring
Speaker 2: in the later years, bring a lower growth rate. So
Speaker 2: Um and and the previous policy stands with big emphasis
Speaker 2: on controlling capital, I mean the in the 2021. So
Speaker 2: not the latest, but the 2021 Central Economic Work Conference
Speaker 2: that was controlling of the wild expansion of capital by
Speaker 2: means of a traffic light system. So that all sounded quite,
Speaker 2: quite scary. Now, the tone is different
Speaker 2: and some of the actions are quietly frankly different. Uh
Speaker 2: policymakers have said look, the rectification of the platform companies
Speaker 2: is now over doesn't mean it's not gonna be any regulation,
Speaker 2: but it's going to be a normal in a more
Speaker 2: normal regulatory process. So it's not catching up on previously
Speaker 2: lacking regulation. D D do Jin was allowed to
Speaker 2: take on new users on their platform for two more
Speaker 2: than two years, they couldn't do that. So there's some,
Speaker 2: some positive signals there that, that, that promised a bit
Speaker 2: more in the, in the, in the, in the coming
Speaker 2: in the coming years.
Speaker 2: Uh You know, I'm careful there because tone does not
Speaker 2: yet mean real policies. And I think it will take
Speaker 2: some time to see what is true, whether there is
Speaker 2: truly a new direction under the new team that Xi
Speaker 2: Jinping pass put in place and the transition will be
Speaker 2: completed by March. And then we will probably see some
Speaker 2: some more evidence of a change in direction
Speaker 2: at say the third planet which is traditionally about economic policy.
Speaker 2: So that would be somewhere in the fall. Um So
Speaker 2: I'm a bit careful. I think a lot of investors
Speaker 2: are still a bit careful and, and that of course,
Speaker 2: brings you to this year's growth picture where
Speaker 2: a lot of people expect this the big rebound in consumption,
Speaker 2: the revenge consumption coming after COVID, I'd be I'd be
Speaker 2: a little bit modest in my expectations. Yes, there will
Speaker 2: be a bump in, in, in consumption, but there's still
Speaker 2: lots of uncertainties out there. So the savings rate of
Speaker 2: household may remain quite big. Second, uh The part of
Speaker 2: the reason why the household saves so much is indeed
Speaker 2: as you mentioned, the property sector.
Speaker 2: So they couldn't invest in their traditional and favorite investment
Speaker 2: I E apartments.
Speaker 2: Uh that by itself was not a great idea anymore,
Speaker 2: but there's very few alternative investment vehicles for, for China,
Speaker 2: maybe stocks will get a bit more of a booster.
Speaker 2: And yes, they will allocate a bit more in if
Speaker 2: you want durable, durable goods such as cars and otherwise.
Speaker 2: But whether that is going to be a major driver
Speaker 2: of draws, after all,
Speaker 2: Household consumption is only 38% of GDP by now. It's going,
Speaker 2: it has come down again from almost 40 a couple
Speaker 2: of years back. And, and so you still need that
Speaker 2: investment component
Speaker 2: to drive growth externally. It doesn't look very good. I
Speaker 2: may not be as pessimistic as as some including the
Speaker 2: I M F. Some see that some say that you know,
Speaker 2: the Europe and the U S for sure are going
Speaker 2: to be in a recession. I frankly,
Speaker 2: I'm not so sure if I look at the numbers,
Speaker 2: but I'm not the expert there, irrespective external demand is
Speaker 2: not going to drive China's growth. I think we can
Speaker 2: agree on that. So that investment growth is still very,
Speaker 2: very important. Overall investment is still more than 40% of GDP.
Speaker 2: Another question is okay. So, so, so part of that
Speaker 2: of course, is is government investment, especially government investment in infrastructure.
Speaker 2: Well, uh the ones that need to do that is
Speaker 2: local governments and then by now pretty tight, they don't
Speaker 2: have enough revenues and they have loaded up quite a
Speaker 2: bit of formal debt on the books and informal debt
Speaker 2: through the local government financing vehicles that are enjoying a
Speaker 2: second leash of life. They were supposed to have been
Speaker 2: phased out after 2015, but they're sort of back and
Speaker 2: thriving and
Speaker 2: yes, it's not formal government debt, but nevertheless, local governments
Speaker 2: are probably going to be held responsible for it. So
Speaker 2: maybe not as much as before, maybe not as much
Speaker 2: impetus will come from infrastructure property. We've talked about maybe
Speaker 2: not as much impetus from property simply because the mass
Speaker 2: in the property sector still needs to be sorted out.
Speaker 2: And if I had
Speaker 2: A couple of $100,000 in China, I'm not sure whether
Speaker 2: this year would be the moment to buy an apartment
Speaker 2: that would be delivered to three years from now with
Speaker 2: a company that I'm not sure whether it will be
Speaker 2: around 23 years from now. So I think there's still
Speaker 2: a lot of uncertainty there. It will probably stabilize at
Speaker 2: a much lower level
Speaker 2: but it won't be a major driver at all. So
Speaker 2: that then
Speaker 2: The remaining part is business investment, both public and private.
Speaker 2: It's a surprisingly low share of GDP by now. Government
Speaker 2: has stopped publishing the numbers unfortunately. So we can't really
Speaker 2: determine it. But some of the estimates that we have
Speaker 2: uh shows that it's only 12-14% of GDP is business investment.
Speaker 2: So it's less than a third of total investment,
Speaker 2: but they're somewhat more optimism coming from the more positive
Speaker 2: tone that the central economic work conference and other major
Speaker 2: policy actions provide for
Speaker 2: Investors in, in public and private businesses that might give
Speaker 2: a bit of a boost. But overall, the picture is
Speaker 2: not that this is going to be a massive rebound
Speaker 2: and we're gonna be in, up in the, in, in,
Speaker 2: in the 7, 8% rate. It sounds we don't do
Speaker 2: any formal projections, but 5-6, it's probably a good sort
Speaker 2: of a good number to focus the mind on.
Speaker 1: Right. I think bird even 5-6 would be pretty good
Speaker 1: for the world even if one doesn't entertain outright recession
Speaker 1: in Europe and the us, it is a slower outlook
Speaker 1: and a rebound from China. You know, I'll take that
Speaker 1: balancing outcome at least for 2023. You were describing the
Speaker 1: property market and you talk about a big mess. So
Speaker 1: I want to
Speaker 1: get a little deeper into the big mess of the
Speaker 1: property sector in terms of reform. So we have the
Speaker 1: three red lines a couple of years ago. It seems
Speaker 1: like right now there's a bit of a step back
Speaker 1: from the three red lines direction of reforms because it
Speaker 1: is a big mess and it has to be sorted out.
Speaker 1: Otherwise it'll just become a big albatross around the neck
Speaker 1: of the economy.
Speaker 2: So it's it's it's a very complicated, I mean, that's
Speaker 2: the property sector proper, sorry for the double proper. But
Speaker 2: then there is the broader setting in which that property
Speaker 2: sector has, has become such an important part of the economy.
Speaker 2: And I think that is important as well. And that's
Speaker 2: really linked to local government, to revenues of local government,
Speaker 2: to
Speaker 2: The intergovernmental fiscal system that really now needs reforms. I mean,
Speaker 2: it's been almost 30 years that there was a serious
Speaker 2: reform of of that fiscal sector. I think China is
Speaker 2: ready for another wave of reforms there
Speaker 2: on the property sector. So
Speaker 2: yes, the government basically saved the number of companies that
Speaker 2: got into trouble by very the three red line policy,
Speaker 2: the very tight policy on leverage in property sector and
Speaker 2: on indebtedness. But it caused part of the problem because
Speaker 2: because
Speaker 2: the property sector developing company developer companies were not able
Speaker 2: to borrow as much as before they rely even more
Speaker 2: on pre sales.
Speaker 2: So pre sales became the vehicle by which they financed
Speaker 2: the construction of companies of of of property.
Speaker 2: Technically there is some sort of a guarantee on that,
Speaker 2: but in reality, it doesn't really work. So you had
Speaker 2: this no moment where property companies started to basically
Speaker 2: default on their payments and they simply didn't have money
Speaker 2: to finish their existing existing projects. That part, I think
Speaker 2: the government has more or less fixed,
Speaker 2: But it has not yet fixed is to think about. Well,
Speaker 2: what kind of property sector do we want? And how
Speaker 2: should that look? Like there's been some policy pronouncements on
Speaker 2: that and I think they're going in the right direction.
Speaker 2: I think everybody sort of agrees that it shouldn't go
Speaker 2: back to the old days and the property sector shouldn't
Speaker 2: be 18% of GDP, something even more, but we calculated
Speaker 2: something in the order of 18% of GDP
Speaker 2: it should probably be less and it should also be
Speaker 2: a very different kinds of sector. So it shouldn't be
Speaker 2: all the high end apartments that would be good for
Speaker 2: the wealthier part of Chinese population.
Speaker 2: But there should be a lot of the next wave.
Speaker 2: If you want a big demand will be for rental housing,
Speaker 2: it will be for low income housing. It will be
Speaker 2: for the migrants who want to move out of their
Speaker 2: dorms and want to start building their existence for their
Speaker 2: families without having such high incomes as uh some of
Speaker 2: these apartments are built for.
Speaker 2: So that that is still a decent property sector and
Speaker 2: demand is not is not gone. Also increasingly coming on,
Speaker 2: the market is sort of replacement demand of a lot
Speaker 2: of the apartments built in the 80s and the 90s.
Speaker 2: And the
Speaker 2: Even the 2000, you say, well, maybe people want to
Speaker 2: live a little bigger but also the quality of the
Speaker 2: buildings in those days was not that good. So that's
Speaker 2: quite a bit of replacement demand coming, coming on stream
Speaker 2: as well. But in terms of new demands, I believe
Speaker 2: it's the migrants and the migrant workers that are in
Speaker 2: the cities and that should, they don't have, but that
Speaker 2: should be able to
Speaker 2: Seattle have urban who co have access to financing for
Speaker 2: their apartments. That would be the next wave of demand.
Speaker 2: There will be a different kind of demand and it
Speaker 2: will require different kinds of buildings. It would even require
Speaker 2: different kinds of longer term finance.
Speaker 2: Probably the banks may not even be the greatest vehicle
Speaker 2: for that kind of find, especially not in social housing,
Speaker 2: but there's other sources of finance including the National Social
Speaker 2: Security Fund. It doesn't need massive returns, it doesn't need
Speaker 2: to return and the positive one. But but in other countries,
Speaker 2: that is often a source for social housing finance. So
Speaker 2: so a lot of piece of the puzzle need to
Speaker 2: come together then
Speaker 2: if you no longer built, only for these high end
Speaker 2: expensive apartments, local governments will get less for their land,
Speaker 2: they probably shouldn't sell as much land as they did anyway.
Speaker 2: But they do have a lot of burdens of social
Speaker 2: services and and that burden will only increase as the
Speaker 2: population ages and as new migrants come in. So they
Speaker 2: need new sources of revenues and and again, so going
Speaker 2: back to this property developer game promoted by local governments
Speaker 2: that need the revenues to build the infrastructure and provide
Speaker 2: the services. That would be, that would not be the
Speaker 2: direction that that China should go.
Speaker 1: Okay. So there is a lot of revenue need, there
Speaker 1: is need for dealing with an aging population, dealing with
Speaker 1: urban renewal, climate change and so on. Uh Burt where
Speaker 1: will all this money come from?
Speaker 2: Well, I have one simple solution that will probably not happen.
Speaker 2: But the simple solution is that China is also the
Speaker 2: largest carbon gas or greenhouse gas emitter in the world.
Speaker 2: And they, there's about 12 gigatons, 14 Yucatan equivalent that
Speaker 2: China miss every year. If you were to tax that,
Speaker 2: if you were to tax it with an economically efficient
Speaker 2: rates, which is about 75 to $80 a ton,
Speaker 2: You'd raise 7% of GDP.
Speaker 2: I don't expect that to happen. I don't expect that
Speaker 2: to happen anytime soon, but China already has a carbon
Speaker 2: tax and one that is pretty close to that 75,
Speaker 2: they raise about 60-65 dollars on fuel.
Speaker 2: So uh transport fuel. So cars when you go to,
Speaker 2: when you go and fill up, you actually pay about
Speaker 2: $60 a ton, implicitly a ton of uh CO2 emissions
Speaker 2: through that tax on it. Well, that can be expanded
Speaker 2: to industrial applications that can even be expanded to
Speaker 2: uh energy uh and power production. Given that the current
Speaker 2: system that has been introduced on an experimental basis. I
Speaker 2: E the cap and trade frankly brings about such a
Speaker 2: low price for carbon that is hardly worth, it's about
Speaker 2: 6 to $7 on the on the market right now.
Speaker 2: And it's very little trade. Um It seems that that
Speaker 2: China is making the mistakes that Europe made 25 years ago.
Speaker 2: So I don't see much of an incentive coming from
Speaker 2: that
Speaker 2: cap and trade market. Therefore, there is a lot of
Speaker 2: scope for carbon pricing. The other one look, China, China
Speaker 2: has said they want to do more common prosperity and
Speaker 2: I also rich people would give more, give back more
Speaker 2: to society. China for now seems to think that that
Speaker 2: will be sort of donation based the tertiary distribution as
Speaker 2: China calls it
Speaker 2: met a more logical step is to simply tax richer
Speaker 2: people more currently, that hardly happens. And there's a reason
Speaker 2: because capital gains are not taxed in China, except on housing.
Speaker 2: Interestingly enough, the various sources of income are taxed differently.
Speaker 2: So it's a, it's a schedule er income tax and
Speaker 2: then also the exemption of the income tax is very high.
Speaker 2: So in China, you're exempt up to the level of
Speaker 2: four times the average wage. Whereas if you look at
Speaker 2: the O E C D countries, they, they give you
Speaker 2: an exemption until about a quarter to half of the
Speaker 2: average wage. So if you were to gradually put more
Speaker 2: people into the personal income tax, by simply not by
Speaker 2: simply not increasing that personal exemption,
Speaker 2: you would gradually get more from the personal income tax.
Speaker 2: Right now. China gets 1% of GDP out of the
Speaker 2: personal income tax. The average O E C D country
Speaker 2: gets 8% of GDP
Speaker 2: out of the Breslin income tax. True. Xi Jinping says
Speaker 2: we don't want to have a,
Speaker 2: well, for a stage, we don't have a text and spent.
Speaker 2: But if you look at Korea or Japan, that are
Speaker 2: not necessarily
Speaker 2: Nordic welfare states, there's still tax to about 4-5% of
Speaker 2: GDP and personal income tax. It's simply a good tax.
Speaker 2: China has a good tax and that's the value added tax,
Speaker 2: very productive, very efficient. Unfortunately, it's also regressive because poorer people,
Speaker 2: they spend more of their income on consumption than richer
Speaker 2: people do. And therefore the tax burden coming from V
Speaker 2: A T is simply higher on low income strata. So
Speaker 2: China should keep the V A T but then compensate
Speaker 2: for the distributional effects through the personal income tax.
Speaker 1: The sort of, you know, messaging that we get from
Speaker 1: the authorities with respect to fiscal reform, the things that
Speaker 1: you just talked about. Okay, let's put the side, the
Speaker 1: Idealized version of $75 a ton carbon tax on every
Speaker 1: single source of emission. Clearly that's not gonna happen. But
Speaker 1: in terms of corporate sector tax reform, personal tax reform
Speaker 1: and sort of this view about the current taxation system
Speaker 1: being somewhat regressive. What is your reading? I mean, is
Speaker 1: there a alignment by the within the government that they
Speaker 1: need to go in the right direction on these things?
Speaker 2: Well, unfortunately, no, not yet. Um
Speaker 2: I think there is a gradually a deeper understanding that
Speaker 2: um
Speaker 2: the current trajectory of the fiscal is not sustainable.
Speaker 2: Um
Speaker 2: That includes the recent measures taken during COVID. There's been
Speaker 2: a lot of tax exemption, a lot of V A
Speaker 2: T exemption of small and medium enterprises, a lot of
Speaker 2: exemption of social security premium for medium smaller media enterprises.
Speaker 2: That sounds good. But it also means that you basically
Speaker 2: empty the coffers of the National Social Security Fund that
Speaker 2: we're already not enough
Speaker 2: to sustain the current pension system in the medium term.
Speaker 2: So a lot, a lot needs to happen and I
Speaker 2: think the sustainability issue will then drive it.
Speaker 2: But once you, once you want to address the sustainability issue,
Speaker 2: you need to bring in a lot of elements that
Speaker 2: common prosperity theme that is very dear. It wasn't in
Speaker 2: the central economic work conference document, but it clearly hasn't
Speaker 2: gone away. And frankly, it, it makes sense for China
Speaker 2: to now aim for something which is a more shared
Speaker 2: phase of still growth but more shared growth and, and
Speaker 2: that can be done without,
Speaker 2: without chasing away the entrepreneurs, without without controlling capital. It
Speaker 2: can be done by fairly sensible policies that would improve
Speaker 2: the sustainability of uh of fiscal policies. Over time, it's
Speaker 2: not yet being debated that much as in fact, the
Speaker 2: East Asian Institute, we just had a conference on
Speaker 2: fiscal policy for the new era and we were well,
Speaker 2: we were honored by the presence of former Finance Minister
Speaker 2: Lo G Way. He's one of the key thinkers on
Speaker 2: fiscal policies over the past 2025 years. And
Speaker 2: um he was also, I mean, he did express a
Speaker 2: lot of areas where he said reforms would be possible
Speaker 2: but was also less confident in
Speaker 2: stating that indeed, those reforms are already on the books.
Speaker 2: I think there's time for this and you know, this
Speaker 2: requires a good academic debates. Then the policy makers in
Speaker 2: the ministries need to put the pen to paper and
Speaker 2: see what they can, what what can be done politically.
Speaker 2: Uh and, and technically, and then you know, the overtime
Speaker 2: that needs to, that needs to happen. It doesn't need
Speaker 2: to happen overnight. It doesn't need to happen this year.
Speaker 2: But the fiscal sustainability issue expressing the commitment by the
Speaker 2: government to say, yes, we want in the medium we
Speaker 2: want that fiscal sustainability achieve and we want fiscal instruments
Speaker 2: to play a role in common prosperity. And I would
Speaker 2: let me add a third. I would also say I
Speaker 2: want fiscal policies on budget fiscal policies to play a
Speaker 2: role in macroeconomic stabilization. So the classic factors,
Speaker 2: The classic goals, objectives of fiscal policy, then then that
Speaker 2: would give a lot of confidence that indeed those issues
Speaker 2: will be solved in the next 5 to 10 years.
Speaker 1: Um Burt earlier when you were talking about revenues, um
Speaker 1: you started talking about the revenue coming from taxing emissions
Speaker 1: and so on. And you talked about how the cap
Speaker 1: and trade system or what is known as the emission
Speaker 1: trading system in China is probably subject to the same
Speaker 1: sort of
Speaker 1: errors that the European GTs made two decades ago. Elaborate
Speaker 1: on that a little bit about. You know, why do
Speaker 1: you think that there are these flaws in that system
Speaker 1: or that approved?
Speaker 2: So, so I mean, the there's a couple of problems
Speaker 2: and that the, the, the Europeans made exactly the same
Speaker 2: mistakes first.
Speaker 2: Um China issued a lot of permits to emit okay.
Speaker 2: And they didn't auction them off, they gave them to
Speaker 2: existing polluters that is very convenient, very comforting for the
Speaker 2: existing polluters. So they won't be in the way. As
Speaker 2: a matter of fact, they will make money out of it,
Speaker 2: they will make money out of it
Speaker 2: and the state will not.
Speaker 2: So your hand out and in this case a lot,
Speaker 2: normally you would say, well, you hand out as many
Speaker 2: as you think is sustainable is necessary and that would
Speaker 2: mean a reduction of emissions compared to before starting a
Speaker 2: cap and trade. But basically the caps were put at
Speaker 2: existing emissions. One reason that's one reason why that price
Speaker 2: is very low.
Speaker 2: There's a second effect of that cap and trade that
Speaker 2: economists haven't really thought about yet. But it also actually
Speaker 2: makes entry much more difficult, entry into any sector, much
Speaker 2: more difficult because then you have to go out and
Speaker 2: buy those emissions. So your competitors got a handout from
Speaker 2: government
Speaker 2: on the permits, but you have to go and buy that.
Speaker 2: So it distorts competition to some extent. A text would
Speaker 2: not do that. A text would not do that. The
Speaker 2: taxes other downsides. But the upside of a cap and
Speaker 2: trade are theoretically are theoretically that there would be smart
Speaker 2: people that
Speaker 2: invent new things to reduce emissions and then sell it
Speaker 2: or sell permits on the basis of that invention. That's
Speaker 2: the theory.
Speaker 2: I think if you look back on the experience over
Speaker 2: the past 25 years, that actually it takes different instruments
Speaker 2: to get that done. Take solar
Speaker 2: solar was not suddenly profitable because there was a cap
Speaker 2: and trade in Europe. Solar was suddenly profitable because it
Speaker 2: was a feed in tariff, a feed in tariff on
Speaker 2: electricity production. And that worked wonderfully well. Similarly now with
Speaker 2: electric vehicles, um they become
Speaker 2: profitable because there's still heavy subsidies, it's getting less, but
Speaker 2: it's still heavy subsidies on adopting an electric vehicle. And
Speaker 2: that then brings the production to scale and that drives
Speaker 2: down costs. So I think that, that we know that
Speaker 2: that is a very efficient way of doing it.
Speaker 2: You know, the next the next area is that that
Speaker 2: kind of policy can work is one carbon capture. And again,
Speaker 2: China can play a big role and two would be
Speaker 2: hydrogen and hydrogen is, I mean, it's nothing new and
Speaker 2: we know how to produce it, we know how to
Speaker 2: produce it in a clean way, the green hydrogen,
Speaker 2: but we don't really have a market yet and it
Speaker 2: costs too much at the moment. So putting up a
Speaker 2: feed in tariff would be a very good idea and
Speaker 2: it would really make renewable energy tradable right now. One
Speaker 2: of the big downsides of renewables is that you can
Speaker 2: have your windmill in your backyard,
Speaker 2: but transporting it over fast,
Speaker 2: vast lengths of space is very expensive because you lose
Speaker 2: a lot in the process. China has done a lot
Speaker 2: with high voltage transmission. So within the country, they're pretty efficient.
Speaker 2: The losses are pretty limited.
Speaker 2: But you really want, you know, you really want to
Speaker 2: make use of the sun in, in Saudi Arabia, in
Speaker 2: Australia and in Algeria. And that's probably all you need
Speaker 2: to get all the energy in the world, but they
Speaker 2: need to get it out there. Hydrogen is a fantastic
Speaker 2: way
Speaker 2: to get from A to B actually where you first
Speaker 2: make ammonia. But that's, that's a technical detail because hydrogen
Speaker 2: is a bit explosive. So you don't want to have
Speaker 2: ships exploding. So you turn it into ammonia and then
Speaker 2: you turn it back into hydrogen on the point of destination.
Speaker 2: All those processes are known. There's nothing that needs to
Speaker 2: be invented. You just need to bring it to a
Speaker 2: scale
Speaker 2: where the costs are less than the alternatives that was
Speaker 2: done miraculously well with solar pretty well with wind, not
Speaker 2: yet with other alternatives. So, so so and cap and
Speaker 2: trade frankly, is almost completely disconnected from that. The the
Speaker 2: only mechanism that was in place was the clean development
Speaker 2: mechanism I E and the World Bank where I used
Speaker 2: to work,
Speaker 2: they played a role in that I E they,
Speaker 2: they basically
Speaker 2: transferred money from the Eu to China and other countries
Speaker 2: to reduce their carbon emission, sort of a means of.
Speaker 2: And that was then based on the trading in the policies,
Speaker 2: the Kyoto Protocol policies that were implemented in Europe.
Speaker 2: I think those days may simply be gone simply because
Speaker 2: it requires a level of international cooperation that may no
Speaker 2: longer be available, giving subsidies to China to become less
Speaker 2: polluting may not be the most popular political proposition at
Speaker 2: this point in time, even though it might economically be
Speaker 2: the right thing to do.
Speaker 1: Okay. So you just made the perfect segue to my
Speaker 1: next question which is on climate change. I hear from
Speaker 1: Western experts on security side as well as on climate change,
Speaker 1: said that the US has more or less given up
Speaker 1: on China, they'll do their thing and the U S
Speaker 1: will find allies in Europe and elsewhere to make progress
Speaker 1: on climate change. So this challenge is going to go
Speaker 1: at it alone or do you see there being some
Speaker 1: scope for international cooperation on
Speaker 1: taxonomy and the E T S best practice and so on.
Speaker 2: Look on T S I don't know, but on a
Speaker 2: number of technologies, there is actually
Speaker 2: a perfect some competition is fine,
Speaker 2: Some competition is absolutely fine and looking for the next
Speaker 2: IP that, that that would help create, you know, the
Speaker 2: miracles that we buy now need in order to stay
Speaker 2: below 1.5° of temperature increase.
Speaker 2: But there is actually a very good complementarity between China
Speaker 2: and the rest of the world because China has two advantages. One,
Speaker 2: they have
Speaker 2: a very big scale
Speaker 2: two, they have enormous manufacturing capacity
Speaker 2: and and go back to the story of solar. It
Speaker 2: was not Chinese I P, it was Australian I P
Speaker 2: and European I P and China took that used the
Speaker 2: German policy tool. German invented policy to feed in tariff.
Speaker 2: I made that a success. They were a little bit
Speaker 2: naughty because they didn't allow others to come in and
Speaker 2: there was real issues. So so frankly, there was distortion
Speaker 2: in trade. Their same now is happening with batteries for instance,
Speaker 2: where China is conducting an industrial policy that impedes trade
Speaker 2: and it would be it would be a case that
Speaker 2: you could bring to the W T O
Speaker 2: Western countries never brought China to the W T O
Speaker 2: on except for the solar panel issue. But that was
Speaker 2: a fairly targeted issue. So there's issues with China's policy.
Speaker 2: But at the same time, if you suppose you time
Speaker 2: or in the rest of the afternoon, you would invent
Speaker 2: the miracle, the miracle to do carbon capture in the
Speaker 2: most efficient way.
Speaker 2: Well, where would you go? You wouldn't do it in Singapore.
Speaker 2: You wouldn't probably not even in Europe because Europe is yes,
Speaker 2: it's united, but it's not really because there's still lots
Speaker 2: of countries China and bring it to scale.
Speaker 2: So that scale and the manufacturing capability to bring things
Speaker 2: to scale is enormously important.
Speaker 2: And if you were to sort of do your own thing,
Speaker 2: you would lose that complementarity. I don't think it will
Speaker 2: be a total loss because I think some of the
Speaker 2: competition is good,
Speaker 2: some of the competition, it will also be good for
Speaker 2: other countries, for third countries that might benefit from competition
Speaker 2: between
Speaker 2: say a Western solution and a Chinese solution. But, but
Speaker 2: there would be losses as well,
Speaker 1: right? I remember having a conversation with David Victor who
Speaker 1: wrote that book making Climate policy work. And he made
Speaker 1: one point that, you know, we as economists, you know,
Speaker 1: had all sorts of market based solutions in mind for
Speaker 1: dealing with climate change. But over the last 23 decades,
Speaker 1: to your point about Europe's experience on E T S
Speaker 1: is that we've come to the solution, you need a
Speaker 1: lot of
Speaker 1: top down nudges whether setting price of carbon or even
Speaker 1: the quantity that could be traded within the exchange. All
Speaker 1: of that has to come from the regulator or the
Speaker 1: government or whatever. And from that perspective, China, I suppose
Speaker 1: is even if it goes on its own and it's
Speaker 1: just being a source of competition as opposed to complementarity might,
Speaker 1: you know, work out. Um But moving from the green agenda,
Speaker 1: I want to talk a bit about tech,
Speaker 1: the tech sector regulation, of course, was a huge team
Speaker 1: for China in the last couple of years. Uh In fact,
Speaker 1: it's not just a China thing. I mean, the rest
Speaker 1: of the world as well, their regulators and governments grappling
Speaker 1: with data privacy and oligopoly or monopoly nature of large
Speaker 1: tech firms. So what do you make of the seismic
Speaker 1: actions of the last few years? And now that we're
Speaker 1: seeing some
Speaker 1: easing of those actions? I mean, what did the employee
Speaker 1: imply for China's tech entrepreneurs and also the future of
Speaker 1: innovation in China?
Speaker 2: Right. Well, I mean, looking back over the past 23
Speaker 2: years on the regulatory crackdown and, and the effects of it,
Speaker 2: I think there's some, there's some upsides and some downsides
Speaker 2: to that. I think the downside was really the way
Speaker 2: it was done, the suddenness with which the regulatory atmosphere
Speaker 2: changed and it will make, you know, investors intact a bit,
Speaker 2: a little bit
Speaker 2: queasy for a long time to come because who knows
Speaker 2: who's next that I think is the long term damage.
Speaker 2: If you look at some of the upsides,
Speaker 2: China,
Speaker 2: some of the concerns that have been debated for by
Speaker 2: now decades
Speaker 2: in the United States in Europe, Europe is a bit
Speaker 2: different because they never managed to basically bring about sort
Speaker 2: of a tech company at scale at the level of
Speaker 2: Google or, or Facebook or, or otherwise China has in
Speaker 2: part by keeping them out by keeping the Googles and
Speaker 2: uh Facebooks and the Amazons out.
Speaker 2: That part was a distortion of competition or quite a
Speaker 2: question about it, but it did, it did deliver them
Speaker 2: a viable alternative. So they have, they've done well in
Speaker 2: that sense in the first two decades, when they started
Speaker 2: to result into monopolistic behavior of those platforms, China intervened,
Speaker 2: China has the political
Speaker 2: system to behave, that is a lot more complex in
Speaker 2: the West. I recognize that, but I actually did it
Speaker 2: and they did it also with the purpose of, of
Speaker 2: indeed rectifying some of the monopolistic behaviors of uh of
Speaker 2: the Alibaba's and the J D the 10 cents of
Speaker 2: the world. So that, that seems very reasonable. Then beyond
Speaker 2: that there is something that is much more political control
Speaker 2: oriented um um like
Speaker 2: censorship games um and, and others. And then there is
Speaker 2: the common prosperity, reducing the burden on, on the, on
Speaker 2: the middle, the middle income households by banning online tutoring.
Speaker 2: I don't know how that helps, but that was at
Speaker 2: least the stated motivation. No, because the tutoring
Speaker 2: it's not gonna go away. It's not gonna be online,
Speaker 2: it's going to be in person and then only the
Speaker 2: rich can afford the in person. So it frankly, I
Speaker 2: think that was wrong headed but but it was, that
Speaker 2: was the stated motivation. So, so one can understand that
Speaker 2: that was a policy action. I think it was the
Speaker 2: wrong policy action but leaving that aside. So, so, so
Speaker 2: so China is now
Speaker 2: as per statement in the Central Economic Work conference. Uh
Speaker 2: you also said a number of things in Davos. And so,
Speaker 2: so they're in common water in the regulation, the regulation
Speaker 2: is not going to go away.
Speaker 2: It will be, it will be the market will be,
Speaker 2: you know, regulated by the government so that the optimal
Speaker 2: outcome for society results not the optimal outcome for the
Speaker 2: owners of the company. And, and you know, that is,
Speaker 2: that sounds
Speaker 2: for some, that sounds for Americans, maybe that sounds scary. But,
Speaker 2: but frankly, it is the way most Europeans would think
Speaker 2: about the company. So you regulate the market and such
Speaker 2: as you get the optimal outcome. And in fact, it's
Speaker 2: Adam Smith's first book was all about that. People would
Speaker 2: like to read people like to read the wealth of nations,
Speaker 2: but the first book was all about the moral sentiments
Speaker 2: and the,
Speaker 2: yeah, the moral cultural setting in which the market takes place.
Speaker 2: So nothing new under the sun in that sense and
Speaker 2: that will look different in China, then it will look
Speaker 2: in Europe that which is different from how it looks
Speaker 2: in the United States or how it looks in Japan.
Speaker 2: That market is not one thing, it is, it's a
Speaker 2: social construct if you want. I think as a result
Speaker 2: and I'm sure I'm not going to make your investors happy.
Speaker 2: But
Speaker 2: as a result, the, you know, the valuation of those
Speaker 2: companies will be less, will be less than previous expectations.
Speaker 2: Okay. Previous expectation was like, oh my goodness, the sky's
Speaker 2: the limit because even if you count Alibaba and JD
Speaker 2: and others, if you add them all up, they still
Speaker 2: only have whatever 30% of the retail market and could
Speaker 2: go to 60 or 90%. So, so I think some
Speaker 2: of that, that sort of infinite possibilities has gone
Speaker 2: second and that there are of two minds, but I
Speaker 2: think we'll find we'll find it relatively soon. And that
Speaker 2: is on the financial side because the one thing that
Speaker 2: where I think that the government in a way,
Speaker 2: got the wrong motivation was with the fintech. Now, the
Speaker 2: fintech has built on the back of
Speaker 2: the e commerce transactions by, by Alibaba buy tents and
Speaker 2: by others was actually a very efficient way of getting
Speaker 2: money
Speaker 2: to small companies
Speaker 2: and it was a big competition of course for the
Speaker 2: banks and the banks, I think were the big beneficiaries
Speaker 2: of the crackdown on the, on the and finance and others.
Speaker 2: I think that also had real economic cost. So right
Speaker 2: now we have back return to these, promoting the policies
Speaker 2: for credit to small and medium enterprises. Well, it wasn't
Speaker 2: an issue
Speaker 2: when and finance could provide the credits on the basis
Speaker 2: of the payment behavior of companies. They could approve your
Speaker 2: credit
Speaker 2: in, uh what was it? It was in three seconds.
Speaker 2: I think they said that they claimed that they could
Speaker 2: do so, I think, I think they're, the government should
Speaker 2: reconsider what did they want to keep their and, and,
Speaker 2: and indeed,
Speaker 2: you know, the proof of the pudding is will and
Speaker 2: finance be able to go back to I P O.
Speaker 2: It will probably, again, we had an evaluation much less
Speaker 2: Than before before. I think the plans were to issue
Speaker 2: something that would lead to evaluation almost $300 billion. I
Speaker 2: think that's history. But still, there's still lots of value
Speaker 2: in the evening, the regulated and finance model. So the
Speaker 2: government should go ahead.
Speaker 2: They're going to go ahead and allow that competition for
Speaker 2: the traditional banks who haven't been doing, who haven't been
Speaker 2: doing that job. It's also competition two ways yesterday may
Speaker 2: have been anticompetitive behavior in the, in the online sphere.
Speaker 2: There's also anticompetitive behavior in the traditional and the traditional
Speaker 2: industries in China. So they should address that as well.
Speaker 1: I wanted to sort of go back to the very
Speaker 1: first point you made in answer to my question, which
Speaker 1: is that maybe it will have a negative impact on
Speaker 1: the overall entrepreneurial Zeal. Um you probably will not have
Speaker 1: a lot of upside to your point, you know, and
Speaker 1: will not be 300 billion. So a budding entrepreneur growing
Speaker 1: up in China, would they want to go down the
Speaker 1: rather challenging route of being an entrepreneur and deal with
Speaker 1: all the pain and risk of failure when the upside
Speaker 1: is going to be fundamentally lower.
Speaker 2: Well, so look, I think there's still frankly knowing China
Speaker 2: and knowing
Speaker 2: the people from China, there will be tons of entrepreneurs
Speaker 2: and and one of the incredibly striking statistics is the
Speaker 2: number of new companies registered ever since.
Speaker 2: Uh Li Keqiang made mass entrepreneurship his policy. A lot
Speaker 2: of these companies went under during COVID and even before.
Speaker 2: But you know, startups, they go under unfortunately. But so
Speaker 2: I think there's still a lot of uh entrepreneurial zeal.
Speaker 2: What what is a risk?
Speaker 2: And that is in the short term may be an
Speaker 2: opportunity for places such as Singapore. But but there's a
Speaker 2: risk where that people opt out earlier. So I think
Speaker 2: uncertainty on that regulatory environment, it I don't think it
Speaker 2: will stop entrepreneurial activity but it would change your entrepreneurial activity.
Speaker 2: I e you want to make money and then set
Speaker 2: up your family office in Singapore and live off the
Speaker 2: live off the proceeds from that. That's a very different
Speaker 2: kind of entrepreneurship
Speaker 2: that brings about the very big innovation that brings that
Speaker 2: brings about the M RNA is where you need a
Speaker 2: 10 year, 15 year horizon. So with regulatory uncertainty, you
Speaker 2: shorten the horizon for entrepreneurs and they do different things.
Speaker 2: I don't think that is healthy for China
Speaker 2: and I think China would do well in really very
Speaker 2: deliberately
Speaker 2: restoring some of that regulatory certainty and regulatory certainty doesn't need.
Speaker 2: It's almost irrespective of the political system. I mean, you
Speaker 2: know that it's this predictability in in the process is
Speaker 2: it's the fair hearings. It's the
Speaker 2: uh yeah, floating first ideas and white papers on regulations
Speaker 2: in particular areas, giving people an opportunity to talk about that.
Speaker 2: That's not all too radical and not too dissimilar from
Speaker 2: what China is already doing had been doing. So I
Speaker 2: think some of that we need to come back to
Speaker 2: restore some of the confidence.
Speaker 1: Okay. Um Switching gears again, I read obituaries of Belt
Speaker 1: and Road these days uh in various journals that it's
Speaker 1: been a spectacular failure and waste of China's capital and
Speaker 1: diplomatic overtures and it will just end up creating a
Speaker 1: bunch of white elephants or at its worst, you know,
Speaker 1: highly indebted countries which will end up defaulting. What's your sense?
Speaker 2: Well, that's not my sense. I think there is, I mean,
Speaker 2: if you look at the numbers and there's been some
Speaker 2: recent papers on on new data basis because the numbers
Speaker 2: are not that great. You get a lot of announcements
Speaker 2: from China, the realization the numbers are a little bit
Speaker 2: difficult to get. So if you take the new data basis,
Speaker 2: then that disbursement on
Speaker 2: overseas investment from China almost came to a halt during COVID.
Speaker 2: And I think that's almost by necessity. So there was
Speaker 2: a lot needed at home. A lot of fiscal resources
Speaker 2: were needed at home. So uh some of the overseas
Speaker 2: investment simply fell by the wayside. Second. Yes, there have
Speaker 2: been issues
Speaker 2: and some countries I won't name them accuse China of
Speaker 2: pursuing a debt trap. Diplomacy. Frankly, that is that is
Speaker 2: not in China's interest in China doesn't do that. What
Speaker 2: China does do is take more risk.
Speaker 2: And that is not always, that doesn't always pan out.
Speaker 2: But the counterfactual of that is that they have actually
Speaker 2: been
Speaker 2: a lot more flexible in rescheduling debt. If you look
Speaker 2: at China's record on rescheduling debt, they've been really quite
Speaker 2: good at it and bringing solutions such as a debt
Speaker 2: equity swap which is maligned in international
Speaker 2: circles. But what happened with the famous humbling Total Total
Speaker 2: report was that China took an equity stake and there
Speaker 2: simply to wipe out the debt, it shouldn't have been
Speaker 2: debt financed, so probably shouldn't have been financed.
Speaker 2: But the president of the damn president of Sri Lanka
Speaker 2: really wanted to have that report, then it should have
Speaker 2: been financed with so much debt.
Speaker 2: So the debt equity swap was actually a solution and,
Speaker 2: and the contract that Chinese contractor did to run it
Speaker 2: for 100 years was a solution for the project. People
Speaker 2: failed to see that. But there was a lot of,
Speaker 2: there was a lot of engineering, a lot of financial
Speaker 2: engineering to make the best of it still never going
Speaker 2: to be great or not for a long time. But
Speaker 2: at least now there's a fighting chance
Speaker 2: China has done a number of other investment, just like others.
Speaker 2: You know, the World Bank had a success rate
Speaker 2: of its investments of about 70%,,
Speaker 2: 70% not 100% 70%. So it's pretty good bank. I
Speaker 2: think they've been around for a long time. So it's
Speaker 2: not that every development finance becomes a success. The World
Speaker 2: Bank maybe does more difficult stuff like building health systems
Speaker 2: and you know, conditional cash transfers, maybe that's more difficult
Speaker 2: than infrastructure but not every, not every project became a success.
Speaker 2: Same if China, not every project becomes a success,
Speaker 2: some of the incentives in the system as it is
Speaker 2: I e quite a decentralized mobilization of projects, it's probably
Speaker 2: less desirable if you want to make a good initiative
Speaker 2: of global connectivity, which by itself is a good idea.
Speaker 2: So long story short, I think there's a bit of
Speaker 2: a pause. China needs some of those more resources at
Speaker 2: home but it's not gone. It is key initiative of
Speaker 2: Xi Jinping,
Speaker 2: it won't go away. Um uh It's morphing a little
Speaker 2: bit into something broader even as a global development initiative.
Speaker 2: And part of it, if you want the Belt and
Speaker 2: Road is part of the global development initiative. But as
Speaker 2: you say, it's also not just about infrastructure, it's about diplomacy,
Speaker 2: it's about policy coordination,
Speaker 2: it's about financial integration i alternatives to the dollar based system.
Speaker 2: So it's a lot more than just a bit of
Speaker 2: infrastructure around the world. So it's not gone, it will
Speaker 2: be back and actually a lot, a big part of
Speaker 2: the investments are quite, quite okay,
Speaker 1: right? And if it was such an unmitigated disaster, we
Speaker 1: will not be seeing now the U S, for example,
Speaker 1: redouble its effort to its own sort of
Speaker 2: smaller, smaller, right?
Speaker 1: Um But us China rivalry, it seems like, you know,
Speaker 1: there's no end to it. Not a week goes by
Speaker 1: when I don't read one more action by the Americans
Speaker 1: to widen the tech gap between the US and the Chinese.
Speaker 1: And we see increasing efforts to widen that uh sort of,
Speaker 1: you know, coalition if you will, the Dutch are joining in,
Speaker 1: in terms of S M L s, uh you know,
Speaker 1: ability to sell technology to China.
Speaker 1: Um and uh the idea that, you know, TSMC produces
Speaker 1: right next door to China, but its frontier products will
Speaker 1: not be accessible to China seems to me rather dangerous.
Speaker 1: Uh As far as the, you know, China's sense of
Speaker 1: security is concerned. Um where do you see this, this
Speaker 1: whole rivalry going?
Speaker 2: Well, I I hope it will end somewhere on the
Speaker 2: table where some sensible solutions are being discussed but failing that.
Speaker 2: And there's now been some this talk, not yet an
Speaker 2: official reaction from China but talk about possible countermeasures. The
Speaker 2: one that was prominently discussed in Beijing was on solar
Speaker 2: panels and solar technology where China is now in the lead.
Speaker 2: And they said, well, our national security may require us
Speaker 2: to limit the experts of of that technology. I don't
Speaker 2: know how serious that is but clearly China might be
Speaker 2: looking for some retaliation. And of course, you want to,
Speaker 2: you want to hit those sectors that are very high
Speaker 2: priority to the country that is trying to restrict you.
Speaker 2: There's other areas where China has an uncomfortable hold over
Speaker 2: over the U S. The U S may not may
Speaker 2: not yet be aware but more more on the more
Speaker 2: positive side of positive side on on a different take,
Speaker 2: China will of course now double down on on developing
Speaker 2: its own technology and it's hard and they have failed
Speaker 2: in the past, but in the past,
Speaker 2: they could fail because there was always an alternative right now,
Speaker 2: there is no alternative. And so it will bring a
Speaker 2: very different kind of dynamic
Speaker 2: to the next phase of semiconductor development. And and take,
Speaker 2: take the A S M L the, you know, the
Speaker 2: extreme ultraviolet lithography that's incredibly hard to pull together
Speaker 2: with, you know, thousands of components coming from hundreds of companies.
Speaker 2: But but in the end, if you, if you take
Speaker 2: your time, you would probably be able to do it.
Speaker 2: I mean, SML didn't start with that machine. It took
Speaker 2: them 20 years to build that machine and importing lots
Speaker 2: of technologies. So, so building a supply chain that can
Speaker 2: make an ultra field at lithography, extreme lithography
Speaker 2: that may take some time, but it's now absolutely necessary
Speaker 2: for China. So that, that's the irony. So you, you
Speaker 2: gave a very strong incentive where China failed before now
Speaker 2: you get the strongest incentive to China to succeed. So
Speaker 2: there probably would have been alternative pathways where you say, well,
Speaker 2: you know, we're going to continue to deliver you chips
Speaker 2: for a whole range of things. So just not for
Speaker 2: areas that are linked directly to military.
Speaker 2: Uh So I think this the measures happened too broad,
Speaker 2: brushed and um
Speaker 2: second and, and that is probably more fundamental. I mean, it's,
Speaker 2: it's it's very hard to go back
Speaker 2: if the U S would not say oh no, no,
Speaker 2: but you know, we didn't mean it and you know,
Speaker 2: we're gonna be okay,
Speaker 2: the trust is gone.
Speaker 2: So China would basically continue that that course of action,
Speaker 2: I think to, to develop alternatives and then over time
Speaker 2: it will be of a different of you need a
Speaker 2: different different ecosystem that could potentially still be narrow, say
Speaker 2: too limited to things such as semiconductors. But it could
Speaker 2: also be much border. I mean, in, in the National
Speaker 2: Security Adviser speech that announced the preview the measures that
Speaker 2: were put in place a month later by commerce.
Speaker 2: Uh there were a number of other sectors mentioned and
Speaker 2: so China things, well, you know what sector is going
Speaker 2: to be next. So they will take a very different
Speaker 2: take on technology development. They would want to now put
Speaker 2: it to very serious use to reduce the reliance. It
Speaker 2: will be it will be difficult and it will be costly,
Speaker 2: costly for China in the short run,
Speaker 2: but it will also be costly for others because China
Speaker 2: will probably also not share some of the new technology
Speaker 2: that they develop with other countries. The I M F
Speaker 2: has made some guesstimates because it's very hard to make
Speaker 2: estimates on what is actually cost. They said a sort
Speaker 2: of a total decoupling and technology sphere would cost about
Speaker 2: half a percent 0.6% of growth to China, but it
Speaker 2: was also cost the West quite a bit of growth. So,
Speaker 2: so it's uh
Speaker 2: it's very unfortunate that that we are where we are. Look,
Speaker 2: it's way beyond economics, it's national security, it is politics,
Speaker 2: it is
Speaker 2: uh perceptions on what the other side wants in this world.
Speaker 2: So that's a very big conversation that we can't have on,
Speaker 2: on podcast but so complex, not going in the right
Speaker 2: direction at this, at this point. And it will have
Speaker 2: been like, like SML uh being a Dutch person. I
Speaker 2: know that that a lot of my friends are quite
Speaker 2: unhappy because it simply caused SML market
Speaker 2: and they are the best in the world and they're
Speaker 2: proud of it. And now they can't sell to all
Speaker 2: the clients that they want to and it happens to
Speaker 2: be a very big client, China.
Speaker 1: No, it's not just A S M L I mean
Speaker 1: and video is another company where the second these restrictions
Speaker 1: went into place, we see it impact very negatively on
Speaker 1: the share price because they made a huge amount of
Speaker 1: money selling these high end chips to Chinese gaming companies
Speaker 1: and Chinese uh internet companies and so on. So so
Speaker 1: I I hear you that it's a lose, lose proposition
Speaker 1: but I also hear you that is probably here to
Speaker 1: stay final question. Birth
Speaker 1: companies will not stand on the sidelines on all these
Speaker 1: China plus one discussion and so on. You're seeing Korean
Speaker 1: Japanese companies, you know, trying to create multiple supply chains
Speaker 1: and so on. But what about Chinese companies themselves? With
Speaker 1: Chinese capital become very strategic around the China plus one.
Speaker 1: And by that, I mean, would we see Chinese companies
Speaker 1: trying to do M and A or acquisitions in Vietnam
Speaker 1: and Malaysia, etcetera so that they can use Vietnam Stamp.
Speaker 2: So I think we've already seen a little bit of
Speaker 2: that in reaction to the Trump to the Trump tariffs.
Speaker 2: And uh some more of that might, might happen in
Speaker 2: the future. And you know, it, it sits a little
Speaker 2: bit uneasy with China's other strand and that is its
Speaker 2: dual circulation where they want to on shore as much
Speaker 2: of critical supply chains, but maybe the less critical supply chains,
Speaker 2: they might be more comfortable and
Speaker 2: moving abroad. And part of that will be indeed done
Speaker 2: by Chinese companies. I cannot imagine that they would,
Speaker 2: you know, put a lot of tech, tech money into,
Speaker 2: into Vietnam or Singapore and otherwise that, that they want
Speaker 2: to have on shore, that's part of their objectives. Of course,
Speaker 2: a lot of the money that will move and still,
Speaker 2: I think we're still largely talking about moving rather than
Speaker 2: actually moving
Speaker 2: the only, you know, the very concrete case. And everybody
Speaker 2: knows that the Foxconn case where you know, they open
Speaker 2: up facilities in India that might potentially be down the road,
Speaker 2: be be uh an alternative. There's some carmakers looking at Indonesia,
Speaker 2: more beefing up of Thailand. But a lot of it
Speaker 2: is still a lot of talk because also
Speaker 2: people still like the Chinese market for European companies far
Speaker 2: more than for us companies. Frankly, they're more deeply embedded into, into,
Speaker 2: into the Chinese economy. I mean, yes, all the apples
Speaker 2: are made in, in China, but none of them are
Speaker 2: actually made by an American company made by Taiwanese company.
Speaker 2: So the
Speaker 2: it's a very different kind of embedding than say, having
Speaker 2: a wholly owned subsidiary like B S F S that
Speaker 2: opens a $10 billion facility in Guangdong, that's bricks and
Speaker 2: mortar right there with all the risks that you can,
Speaker 2: that you can, that you can imagine. So, so there's
Speaker 2: a lot of talk and if you look at the
Speaker 2: service of foreign investors, a lot of talk that they
Speaker 2: are now seriously looking at the way I sort of
Speaker 2: said it, look at it went from the,
Speaker 2: from the white board of the strategy department to the boardroom.
Speaker 2: So nowadays, boardroom stuff and and big investments, additional investments
Speaker 2: in China. Now before they were almost sort of automatically approved,
Speaker 2: now they're being screened on supply chain risk, but especially
Speaker 2: vulnerability to geopolitical risk because that's the most difficult one
Speaker 2: to handle for any company because you know, you get these,
Speaker 2: these unpleasant surprises like Russia's invasion of the Ukraine who would,
Speaker 2: who had expected that and suddenly we're there. So, so
Speaker 2: that's I think very difficult risk risk to manage and
Speaker 2: that will influence investment flows around the world, some of
Speaker 2: them from China. But China has different reasons for investing
Speaker 2: abroad in part because they become too expensive.
Speaker 1: That's right. Uh Bert what a sweeping, you know, discourse
Speaker 1: on China. I'm very grateful for your terrific insights and
Speaker 1: very nuanced analysis. Thank you, Bert.
Speaker 2: My pleasure. Good to be back and maybe we'll make
Speaker 2: it 1/4 time.
Speaker 1: It will be the three figures of Kobe time by
Speaker 1: then for sure. But yeah, you will be the first
Speaker 1: one to make that. I can guarantee you that.
Speaker 1: Uh So thank you, Bert and thanks to our listeners,
Speaker 1: Kobe Time was produced by Ken Del Bridge from Spice Studios,
Speaker 1: Daisy Sharma and violently provided additional assistance. This podcast is
Speaker 1: for information only and does not offer any investment advice.
Speaker 1: All 93 episodes of Coffee time are available on youtube
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Speaker 1: As for our research publications and webinar recordings, you can
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Speaker 1: great day.