1 00:00:05,880 --> 00:00:08,760 Speaker 1: Welcome to Kobe Time, a podcast series on Markets and 2 00:00:08,770 --> 00:00:11,898 Speaker 1: Economies from D BS Group Research. I'm Tare, chief economist. 3 00:00:11,909 --> 00:00:17,100 Speaker 1: Welcoming you to our 118th episode. We're recording this podcast 4 00:00:17,110 --> 00:00:19,500 Speaker 1: on the fifth of March, the week of China's National 5 00:00:19,510 --> 00:00:23,479 Speaker 1: People's Congress or NBC. This is a critical year for 6 00:00:23,489 --> 00:00:27,290 Speaker 1: China's leadership. It's the 75th anniversary of the People's Republic 7 00:00:27,299 --> 00:00:31,270 Speaker 1: and the nation is of course facing multiple geopolitical demographic 8 00:00:31,280 --> 00:00:32,500 Speaker 1: and economic challenges, 9 00:00:32,900 --> 00:00:38,110 Speaker 1: real estate crisis, deflationary pressure, flagging investor confidence, it's all there. 10 00:00:38,610 --> 00:00:42,619 Speaker 1: And additionally, China's exporters are facing numerous existing and forthcoming 11 00:00:42,630 --> 00:00:46,059 Speaker 1: restrictions to trade from the US and the eu. So 12 00:00:46,069 --> 00:00:47,810 Speaker 1: what to make of the N PC in the middle 13 00:00:47,819 --> 00:00:51,150 Speaker 1: of all these headwinds? What lies ahead, Bert Hoffman, a 14 00:00:51,159 --> 00:00:54,279 Speaker 1: young professor at the East East Asian Institute at National 15 00:00:54,290 --> 00:00:57,119 Speaker 1: University of Singapore is here to talk about all this 16 00:00:57,430 --> 00:01:00,590 Speaker 1: and more. Bet is also a senior fellow at the 17 00:01:00,770 --> 00:01:04,239 Speaker 1: Society Policy Institute. He has spent most of his care 18 00:01:04,250 --> 00:01:06,589 Speaker 1: at the World Bank including a long stint as the 19 00:01:06,599 --> 00:01:10,179 Speaker 1: country director for China. This is Burt's fourth period on 20 00:01:10,190 --> 00:01:13,069 Speaker 1: our podcast and that's the first for any guest, Bet Hoffman. 21 00:01:13,080 --> 00:01:15,739 Speaker 1: Welcome back to K time. Great to be back 22 00:01:16,309 --> 00:01:19,500 Speaker 1: and a busy day for you. I'm sure you must 23 00:01:19,510 --> 00:01:22,930 Speaker 1: have been following the speeches and, and giving your views 24 00:01:22,940 --> 00:01:26,199 Speaker 1: to your followers in the Twitter verse. But now we 25 00:01:26,209 --> 00:01:29,410 Speaker 1: have you bet um the two sessions of this week 26 00:01:29,419 --> 00:01:32,330 Speaker 1: at the Great Hall of the People, big formal affair, 27 00:01:32,339 --> 00:01:34,589 Speaker 1: but also very consequential for the rest of the year. 28 00:01:34,949 --> 00:01:37,239 Speaker 1: You've seen the projections and policy announcements, bets what do 29 00:01:37,250 --> 00:01:37,809 Speaker 1: you make of them? 30 00:01:38,930 --> 00:01:42,800 Speaker 2: Well, look, the, the 5% or around 5% growth rate 31 00:01:42,809 --> 00:01:46,989 Speaker 2: is that's probably the, the headline um that is 32 00:01:48,779 --> 00:01:52,830 Speaker 2: a bit higher than most of the market would see it. 33 00:01:52,839 --> 00:01:55,199 Speaker 2: I'm not saying I expect but the way they projected 34 00:01:55,519 --> 00:02:01,480 Speaker 2: the IMF projected 4.6% for the coming year, uh five 35 00:02:01,489 --> 00:02:04,319 Speaker 2: around five is a bit higher and it means that 36 00:02:04,330 --> 00:02:06,080 Speaker 2: the government would probably have to 37 00:02:06,529 --> 00:02:11,269 Speaker 2: provide some stimulus to the economy. That's not altogether clear yet. 38 00:02:11,279 --> 00:02:15,000 Speaker 2: From the numbers, the headline fiscal deficit was the same 39 00:02:15,008 --> 00:02:18,888 Speaker 2: as last year, but the headline fiscal deficit of 3% 40 00:02:19,110 --> 00:02:24,550 Speaker 2: doesn't really say that much. Unfortunately, the presentation of the budget, 41 00:02:24,559 --> 00:02:27,339 Speaker 2: the way China does, it means that you really have 42 00:02:27,350 --> 00:02:29,448 Speaker 2: to read in between the lines to see whether there 43 00:02:29,460 --> 00:02:33,029 Speaker 2: is a fiscal stimulus or not. Uh it's not 44 00:02:33,570 --> 00:02:36,789 Speaker 2: trivial to stage a fiscal stimulus because 45 00:02:38,130 --> 00:02:42,220 Speaker 2: in the past government always used local governments to deliver 46 00:02:42,229 --> 00:02:46,449 Speaker 2: that stimulus this year. They've announced that the local governments 47 00:02:46,460 --> 00:02:52,198 Speaker 2: are allowed to borrow 3.9 trillion RMB, which is 0.1 48 00:02:52,210 --> 00:02:54,668 Speaker 2: trillion higher than last year. So that's sort of a 49 00:02:54,679 --> 00:02:55,929 Speaker 2: positive sign. 50 00:02:56,258 --> 00:02:58,309 Speaker 2: But at the same time, a lot of local governments 51 00:02:58,320 --> 00:03:00,508 Speaker 2: are not inclined to borrow because they actually have a 52 00:03:00,520 --> 00:03:03,168 Speaker 2: debt problem. So it really remains to be seen whether 53 00:03:03,179 --> 00:03:06,779 Speaker 2: that is really the, the tool with which the government 54 00:03:06,788 --> 00:03:11,039 Speaker 2: can deliver that stimulus. You mentioned deflation. Well, uh the 55 00:03:11,050 --> 00:03:16,740 Speaker 2: CP I number that Lee Chang presented this morning was 0.2% 56 00:03:16,750 --> 00:03:21,179 Speaker 2: over last year, the projected level is 3% now that 57 00:03:21,190 --> 00:03:23,839 Speaker 2: is really quite ambitious. Um 58 00:03:24,449 --> 00:03:27,970 Speaker 2: So it would actually imply that a lot more uh 59 00:03:27,979 --> 00:03:32,109 Speaker 2: stimulus would have to, would have to take place. Uh 60 00:03:32,130 --> 00:03:34,388 Speaker 2: The key reason for that is that the government, 61 00:03:34,779 --> 00:03:37,600 Speaker 2: I mean, the government is pivoting towards what they call 62 00:03:37,610 --> 00:03:41,440 Speaker 2: quality high quality growth. And with that, they try to 63 00:03:41,449 --> 00:03:46,910 Speaker 2: move away from this more credit based stimulus based real 64 00:03:46,919 --> 00:03:50,490 Speaker 2: estate based growth of the past of the past 10 years. 65 00:03:50,500 --> 00:03:54,399 Speaker 2: If you want ever since the global financial crisis, towards 66 00:03:54,619 --> 00:03:58,839 Speaker 2: more innovation driven, more productivity driven growth, that's all good 67 00:03:58,850 --> 00:04:00,759 Speaker 2: and well. And as in fact, 68 00:04:01,460 --> 00:04:03,860 Speaker 2: they're actually doing it quite well. If you look at 69 00:04:03,869 --> 00:04:08,869 Speaker 2: sort of the resource reallocation, the credit reallocation towards manufacturing 70 00:04:08,880 --> 00:04:10,880 Speaker 2: is going very much in the right direction. 71 00:04:11,839 --> 00:04:12,979 Speaker 2: The problem is that 72 00:04:13,820 --> 00:04:18,859 Speaker 2: a lot more supply comes on stream from those that manufacturing, 73 00:04:18,869 --> 00:04:21,079 Speaker 2: whereas demand is still lackluster 74 00:04:21,440 --> 00:04:24,789 Speaker 2: uh yes, consumption demand didn't do so badly last year. 75 00:04:24,799 --> 00:04:27,160 Speaker 2: As a matter fact, it was leading growth, but that 76 00:04:27,170 --> 00:04:30,299 Speaker 2: was more the rebound of the COVID lockdowns that we 77 00:04:30,309 --> 00:04:35,019 Speaker 2: saw in 22. So that looks pretty ok. But overall 78 00:04:35,029 --> 00:04:38,220 Speaker 2: the underlying trend in consumption is not yet strong enough, 79 00:04:38,230 --> 00:04:43,488 Speaker 2: which means that external surpluses overall, but especially in manufacturing 80 00:04:43,500 --> 00:04:48,820 Speaker 2: are quite large and that by itself complicate China's external 81 00:04:49,529 --> 00:04:55,130 Speaker 2: uh situation. Iee the Europeans and the US now are 82 00:04:55,140 --> 00:04:59,469 Speaker 2: bar barking against this, this sort of big supply coming 83 00:04:59,480 --> 00:05:03,450 Speaker 2: from China, particularly in areas such as uh uh electric 84 00:05:03,459 --> 00:05:04,670 Speaker 2: vehicles and 85 00:05:04,774 --> 00:05:09,484 Speaker 2: um other renewables where China is a big supplier for 86 00:05:09,494 --> 00:05:12,104 Speaker 2: the whole of the world. So that will cause some 87 00:05:12,113 --> 00:05:14,825 Speaker 2: tensions down the road. So in other words, the five 88 00:05:14,834 --> 00:05:17,674 Speaker 2: even the 5% is going to be a bit of 89 00:05:17,684 --> 00:05:19,915 Speaker 2: a challenge to uh to get there. 90 00:05:21,420 --> 00:05:26,320 Speaker 1: And what's your sense of, you know, the sectoral approaches? 91 00:05:26,329 --> 00:05:29,089 Speaker 1: So if you just mentioned EVs, so there was quite 92 00:05:29,100 --> 00:05:33,109 Speaker 1: a bit of language around productivity, innovation and research and 93 00:05:33,119 --> 00:05:37,529 Speaker 1: development and so on. Uh this is good quality growth. 94 00:05:37,540 --> 00:05:39,730 Speaker 1: Of course, we all want good quality growth. And I'm 95 00:05:39,738 --> 00:05:42,470 Speaker 1: sure bet in your career as a World Bank Country director, 96 00:05:42,480 --> 00:05:45,369 Speaker 1: you talked a lot about uh moving away from, 97 00:05:45,660 --> 00:05:49,469 Speaker 1: you know, investment driven to consumption driven growth model. And 98 00:05:49,480 --> 00:05:53,320 Speaker 1: your colleagues across 19 street and the IMF did the same. Now, 99 00:05:53,359 --> 00:05:56,589 Speaker 1: I I want to sort of touch upon one conundrum, 100 00:05:56,600 --> 00:05:58,630 Speaker 1: which is, you know, we're talking about a country that 101 00:05:58,640 --> 00:06:02,238 Speaker 1: has grown very fast and in the past has delivered 102 00:06:02,250 --> 00:06:03,000 Speaker 1: excellent 103 00:06:03,279 --> 00:06:06,469 Speaker 1: returns to investors today that accounts for 18% of the 104 00:06:06,480 --> 00:06:09,679 Speaker 1: global economy. A third of global growth still comes from China. 105 00:06:09,690 --> 00:06:13,279 Speaker 1: But the financial markets keep selling off uh while you're 106 00:06:13,290 --> 00:06:15,940 Speaker 1: seeing in the US, you know, financial markets are hitting 107 00:06:15,950 --> 00:06:21,000 Speaker 1: record after record. So what should we make about this divergence? Bert, 108 00:06:21,850 --> 00:06:23,859 Speaker 2: well, look, first, uh 109 00:06:24,559 --> 00:06:27,260 Speaker 2: the world outside has changed and there's been a major 110 00:06:27,269 --> 00:06:30,839 Speaker 2: adjustment of monetary policies in Europe and the United States. 111 00:06:31,100 --> 00:06:34,839 Speaker 2: So suddenly the the 4 to 5% that you could, 112 00:06:34,850 --> 00:06:38,109 Speaker 2: that you can make in China is no longer good enough. 113 00:06:38,119 --> 00:06:39,459 Speaker 2: It used to be really good 114 00:06:40,029 --> 00:06:43,809 Speaker 2: when interest rates were zero. Basically in the United States 115 00:06:43,820 --> 00:06:47,118 Speaker 2: and Europe now you can get a risk free 4.5% 116 00:06:47,130 --> 00:06:50,359 Speaker 2: in the US similar in Europe, uh you know, on 117 00:06:50,369 --> 00:06:54,880 Speaker 2: treasuries or, or uh European government bonds. And, and so 118 00:06:54,890 --> 00:06:59,159 Speaker 2: that's different. That's explains a lot of the portfolio outflow 119 00:06:59,399 --> 00:07:00,679 Speaker 2: that came from China. 120 00:07:01,950 --> 00:07:07,220 Speaker 2: Second, uh foreign direct investment into China didn't do so well. 121 00:07:07,339 --> 00:07:10,480 Speaker 2: That's in part because of the complications of COVID uh 122 00:07:10,489 --> 00:07:14,250 Speaker 2: hard to assess the geopolitics in all of this. So 123 00:07:14,260 --> 00:07:16,809 Speaker 2: I think a lot of foreign investors say, well, if 124 00:07:16,820 --> 00:07:19,700 Speaker 2: I'm there, I'm reinvesting my profits. But if I'm not there, 125 00:07:19,709 --> 00:07:20,519 Speaker 2: I don't know whether I 126 00:07:20,635 --> 00:07:24,165 Speaker 2: want to be there. And some that are there, they say, well, 127 00:07:24,174 --> 00:07:27,484 Speaker 2: maybe we should look at the China plus one strategy 128 00:07:27,494 --> 00:07:29,924 Speaker 2: and that is starting to emerge. So that's the 2nd, 129 00:07:30,204 --> 00:07:34,845 Speaker 2: 2nd area. The third, that's really China domestic regulatory and 130 00:07:34,855 --> 00:07:39,015 Speaker 2: and moving towards quality growth is fine as you say. 131 00:07:39,595 --> 00:07:42,295 Speaker 2: But investors would say, am I still going to make 132 00:07:42,304 --> 00:07:43,375 Speaker 2: money out of that? 133 00:07:44,010 --> 00:07:47,109 Speaker 2: And that's less clear and, and mind you, the the 134 00:07:47,119 --> 00:07:50,579 Speaker 2: objective of high quality growth of higher quality growth has 135 00:07:50,589 --> 00:07:52,429 Speaker 2: been around for a very long time. But I think 136 00:07:52,440 --> 00:07:55,910 Speaker 2: it's fair to say that the way China wants to 137 00:07:55,920 --> 00:08:00,230 Speaker 2: achieve it has changed. Whereas before and I'm talking 138 00:08:01,559 --> 00:08:02,850 Speaker 2: 2013, 139 00:08:03,720 --> 00:08:08,899 Speaker 2: where China published a major, a major decision document from 140 00:08:08,910 --> 00:08:12,579 Speaker 2: the third plenum of the 18th Party Congress. Forgive me, my, 141 00:08:12,929 --> 00:08:15,820 Speaker 2: my uh my long title. Uh 142 00:08:16,579 --> 00:08:18,619 Speaker 2: and that basically said we need to move to high 143 00:08:18,640 --> 00:08:23,220 Speaker 2: quality growth, more innovation driven growth, more uh uh uh 144 00:08:23,230 --> 00:08:29,089 Speaker 2: um productivity driven growth by means of the market and 145 00:08:29,100 --> 00:08:34,090 Speaker 2: making the market the decisive force in allocating resources. That 146 00:08:34,099 --> 00:08:37,080 Speaker 2: was the third plan of the 18 party Congress. Since then, 147 00:08:38,979 --> 00:08:42,628 Speaker 2: the government under the leadership of Xi Jinping has taken 148 00:08:42,638 --> 00:08:44,748 Speaker 2: a different direction. And now they're basically saying yes, we 149 00:08:44,758 --> 00:08:48,718 Speaker 2: should deliver that high quality growth with the state in 150 00:08:48,729 --> 00:08:52,129 Speaker 2: the lead. I'm not saying we're neglecting the market as 151 00:08:52,138 --> 00:08:56,609 Speaker 2: a tool but as a tool to deliver on the 152 00:08:56,619 --> 00:08:59,999 Speaker 2: state's objectives. And that's quite a different approach. And I 153 00:09:00,008 --> 00:09:01,679 Speaker 2: think a lot of investors say, well, 154 00:09:02,780 --> 00:09:05,280 Speaker 2: am I gonna make money out of that? And that's 155 00:09:05,289 --> 00:09:08,919 Speaker 2: in the end, what drives investors? I think uh for some, 156 00:09:08,929 --> 00:09:12,080 Speaker 2: the answer is, well, maybe not. And that 157 00:09:12,789 --> 00:09:16,599 Speaker 2: in part, explain sort of the, the down downward pressure 158 00:09:16,609 --> 00:09:19,819 Speaker 2: on the, on the stock market stock market in China, 159 00:09:19,830 --> 00:09:22,699 Speaker 2: I think has never been a good, a good indicator. 160 00:09:23,010 --> 00:09:26,020 Speaker 2: Uh I mean, I, I joined the World Bank's China 161 00:09:26,030 --> 00:09:29,330 Speaker 2: team two years after the first stock market was opened and, 162 00:09:29,690 --> 00:09:31,919 Speaker 2: and I just couldn't understand it and I'm still not 163 00:09:31,929 --> 00:09:32,010 Speaker 2: sure 164 00:09:32,070 --> 00:09:36,169 Speaker 2: or whatever, I understand the dynamics that drives, that drives 165 00:09:36,179 --> 00:09:39,530 Speaker 2: the uh the the Chinese stock market. There's an addition 166 00:09:39,539 --> 00:09:43,979 Speaker 2: on the retail side of investment there. Uh It has 167 00:09:43,989 --> 00:09:48,900 Speaker 2: never been as important. I mean, two thirds of Chinese 168 00:09:48,909 --> 00:09:51,250 Speaker 2: household wealth is in their housing, 169 00:09:52,940 --> 00:09:56,880 Speaker 2: but they also see this volatility in, in, in the market. 170 00:09:56,890 --> 00:09:59,520 Speaker 2: And it's one thing that they don't like now that 171 00:10:00,039 --> 00:10:03,118 Speaker 2: they've come, they've gotten the message from the real estate 172 00:10:03,130 --> 00:10:05,280 Speaker 2: sector that actually 173 00:10:05,760 --> 00:10:08,900 Speaker 2: their apartments is not necessarily going to deliver on their 174 00:10:08,909 --> 00:10:13,030 Speaker 2: pension uh uh down the road and, and they become 175 00:10:13,039 --> 00:10:17,140 Speaker 2: more conservative, I think in investing, you see uh deposits, 176 00:10:17,150 --> 00:10:20,539 Speaker 2: household deposits going up quite strongly. And I think that's 177 00:10:20,549 --> 00:10:23,539 Speaker 2: a reallocation from on the one side, real estate, from 178 00:10:23,549 --> 00:10:27,619 Speaker 2: the other side from stock market investment. So, so um 179 00:10:27,630 --> 00:10:31,210 Speaker 2: whether that will turn around depends a lot on whether 180 00:10:32,059 --> 00:10:37,199 Speaker 2: households and domestic investors are regaining their confidence in in 181 00:10:37,210 --> 00:10:38,520 Speaker 2: the growth of the economy. 182 00:10:39,770 --> 00:10:42,150 Speaker 1: So where if you can't make any money in the 183 00:10:42,159 --> 00:10:44,780 Speaker 1: stock market and you can make money in the property 184 00:10:44,789 --> 00:10:49,150 Speaker 1: sector uh and interest rates are going down where the 185 00:10:49,159 --> 00:10:51,250 Speaker 1: rest of the world is going up. We should be 186 00:10:51,260 --> 00:10:53,750 Speaker 1: seeing a massive, you know, 187 00:10:54,820 --> 00:10:57,869 Speaker 1: like to, you know, away from R and B denominated 188 00:10:57,880 --> 00:11:01,770 Speaker 1: assets are the Chinese capital controls that effective, that the 189 00:11:01,780 --> 00:11:04,919 Speaker 1: Chinese have no way to take the money out or 190 00:11:04,929 --> 00:11:08,689 Speaker 1: are there some materially different, you know, dynamics at play 191 00:11:08,700 --> 00:11:10,949 Speaker 1: now than they were a decade ago? Because we did 192 00:11:10,960 --> 00:11:13,419 Speaker 1: see big outflow pressure on the R and B during 193 00:11:13,429 --> 00:11:16,570 Speaker 1: the table 10 a decade ago and PB OC lost 194 00:11:16,580 --> 00:11:18,559 Speaker 1: a lot of reserve strength to intervene. How come we're 195 00:11:18,570 --> 00:11:19,650 Speaker 1: not seeing that this time? 196 00:11:20,510 --> 00:11:22,349 Speaker 2: Well, I think you see some of it in the 197 00:11:22,359 --> 00:11:24,909 Speaker 2: balance of payment and if you look at the numbers, 198 00:11:24,919 --> 00:11:27,709 Speaker 2: if you look at the increases in the net errors 199 00:11:27,719 --> 00:11:29,760 Speaker 2: and emissions, you might see some of it if you 200 00:11:29,770 --> 00:11:33,579 Speaker 2: look at some of the trade data don't quite quite 201 00:11:33,590 --> 00:11:36,609 Speaker 2: match with what you sort of see on the counterpart side. 202 00:11:36,619 --> 00:11:41,650 Speaker 2: So there's probably some some capital flight ongoing. But 203 00:11:42,210 --> 00:11:47,140 Speaker 2: from the 2015, 2016 events, I think China has learned 204 00:11:47,150 --> 00:11:51,468 Speaker 2: and they've tightened up the already existing regulations quite a bit. 205 00:11:51,609 --> 00:11:54,030 Speaker 2: So yes, it is in a way harder to get 206 00:11:54,039 --> 00:11:57,299 Speaker 2: money out of out of China beyond the legal limit 207 00:11:57,309 --> 00:11:59,949 Speaker 2: and the legal limit is not that high. It's, it's 208 00:12:00,320 --> 00:12:03,728 Speaker 2: uh I forgot what it was exactly. I think it's 50,000, 209 00:12:04,250 --> 00:12:09,549 Speaker 2: $50,000 not small money but $50,000 per person that you 210 00:12:09,559 --> 00:12:13,320 Speaker 2: can take that you can out that process to get 211 00:12:13,330 --> 00:12:17,010 Speaker 2: it out. Uh Here has also become quite cumbersome. So, 212 00:12:17,150 --> 00:12:19,400 Speaker 2: so it, it, to some extent, it is a managed 213 00:12:19,409 --> 00:12:24,270 Speaker 2: capital account for sure those foreign investors 214 00:12:24,669 --> 00:12:28,439 Speaker 2: that came in through the legal channels to qualify for 215 00:12:28,450 --> 00:12:31,520 Speaker 2: an investor channel, they have no problems taking it out. 216 00:12:31,530 --> 00:12:33,929 Speaker 2: And that's also what you what you see actually in 217 00:12:33,940 --> 00:12:36,609 Speaker 2: the last year, year and a half, the outflow of 218 00:12:36,619 --> 00:12:39,250 Speaker 2: portfolio investment in China into China, 219 00:12:39,909 --> 00:12:43,130 Speaker 1: right? Uh But at the same time, the government will 220 00:12:43,140 --> 00:12:45,299 Speaker 1: issue quite a bit of bonds. In addition to the 221 00:12:45,309 --> 00:12:47,340 Speaker 1: local government issues that you talked about, we saw some 222 00:12:47,349 --> 00:12:52,229 Speaker 1: announcement about ultra long terror bond issuances. Surely it wouldn't 223 00:12:52,239 --> 00:12:55,210 Speaker 1: be a problem for the government to finance its deficit, right? 224 00:12:57,340 --> 00:12:59,710 Speaker 2: It will, there's enough savings around and the way that 225 00:12:59,719 --> 00:13:05,090 Speaker 2: finances the banks with their increased deposits, they can very 226 00:13:05,099 --> 00:13:09,289 Speaker 2: easily buy government bonds uh on the uh on on 227 00:13:09,299 --> 00:13:12,770 Speaker 2: the market. And that's the main mechanism for uh for China. 228 00:13:12,780 --> 00:13:13,010 Speaker 2: So 229 00:13:13,890 --> 00:13:16,829 Speaker 1: yeah, that's what I sort of surmise as well. Um 230 00:13:16,840 --> 00:13:19,130 Speaker 1: But I want to talk a little bit of the 231 00:13:19,140 --> 00:13:22,179 Speaker 1: confidence issue. You just mentioned that the local domestic uh 232 00:13:22,190 --> 00:13:25,580 Speaker 1: confidence is poor. You talked about this in an article 233 00:13:25,590 --> 00:13:29,080 Speaker 1: you wrote last year for Asia Society, you stated China's 234 00:13:29,090 --> 00:13:32,830 Speaker 1: economic plight can better be described as an expectations, recession, 235 00:13:33,080 --> 00:13:36,119 Speaker 1: lasting growth would require deeper reforms to change expectations held 236 00:13:36,130 --> 00:13:38,369 Speaker 1: by households and private sector. So let's talk about that. 237 00:13:38,380 --> 00:13:42,179 Speaker 1: How would the government change the expectations, which is pretty 238 00:13:42,190 --> 00:13:43,348 Speaker 1: much at its floor right now? 239 00:13:44,469 --> 00:13:48,049 Speaker 2: Well, look, I I think the government has done most 240 00:13:48,059 --> 00:13:50,929 Speaker 2: of what it can do in terms of talking. 241 00:13:51,830 --> 00:13:53,439 Speaker 2: Uh there was a bit of a shock and there 242 00:13:53,450 --> 00:13:56,020 Speaker 2: was a realization that confidence is a real factor as 243 00:13:56,419 --> 00:14:00,109 Speaker 2: it shows up. The government documents has showed up again today, 244 00:14:00,719 --> 00:14:04,770 Speaker 2: the government work report and I I think the government 245 00:14:04,780 --> 00:14:07,569 Speaker 2: has done a lot of of, of um 246 00:14:08,070 --> 00:14:10,960 Speaker 2: communication they met with the private sector. They continue to 247 00:14:10,969 --> 00:14:14,090 Speaker 2: emphasize the private sector is very important. Uh I think 248 00:14:14,099 --> 00:14:15,959 Speaker 2: now the proof of the padding is so what what's 249 00:14:15,969 --> 00:14:19,659 Speaker 2: actually going to happen, what in concrete measures is happening 250 00:14:19,979 --> 00:14:21,869 Speaker 2: that we can see there is there is there is 251 00:14:21,880 --> 00:14:24,909 Speaker 2: room for the private sector and that has to do with, 252 00:14:24,919 --> 00:14:25,500 Speaker 2: you know, individual 253 00:14:25,559 --> 00:14:29,510 Speaker 2: your licensing uh uh uh decisions to see whether a 254 00:14:29,530 --> 00:14:32,760 Speaker 2: private sector actually can have access to all these funds 255 00:14:32,770 --> 00:14:36,119 Speaker 2: that are supposed to stimulate research and development and innovation 256 00:14:36,130 --> 00:14:40,500 Speaker 2: and otherwise. And whether whether there is again an opening 257 00:14:40,510 --> 00:14:45,539 Speaker 2: for private entrepreneurs uh to make, to make use of, 258 00:14:45,549 --> 00:14:49,409 Speaker 2: there's still quite quite, you know, substantial growth that we're 259 00:14:49,419 --> 00:14:52,440 Speaker 2: going to see from China, the 4 to 5% is not, 260 00:14:52,450 --> 00:14:54,599 Speaker 2: is not small growth, you can make money there. 261 00:14:55,080 --> 00:14:56,940 Speaker 2: So, so I think it is really the proof of 262 00:14:56,950 --> 00:15:00,320 Speaker 2: the panic now and and that will gradually then rebuild, 263 00:15:00,700 --> 00:15:03,780 Speaker 2: rebuild some of the some of the confidence, the other 264 00:15:03,789 --> 00:15:06,260 Speaker 2: factor though. And I think that is important and that 265 00:15:06,270 --> 00:15:08,460 Speaker 2: is still yet to be seen 266 00:15:10,400 --> 00:15:13,419 Speaker 2: is how much is this high quality growth? And and 267 00:15:13,429 --> 00:15:16,450 Speaker 2: that drives expectations quite a bit. I mean, China is 268 00:15:16,460 --> 00:15:20,500 Speaker 2: used to a tradition of the government saying, ok, well, 269 00:15:20,820 --> 00:15:22,450 Speaker 2: this is going to be the growth and then we're 270 00:15:22,460 --> 00:15:24,020 Speaker 2: gonna make it no matter what. 271 00:15:25,200 --> 00:15:29,760 Speaker 2: Now nowadays with quality high quality growth, that emphasis is 272 00:15:29,770 --> 00:15:33,419 Speaker 2: a bit gone. And if you're used to targeting your 273 00:15:33,429 --> 00:15:37,429 Speaker 2: investments and your spending decisions based on what the government 274 00:15:37,440 --> 00:15:39,820 Speaker 2: more or less says is going to be the growth rate, 275 00:15:40,099 --> 00:15:43,669 Speaker 2: then suddenly you, you're you're thrown into uncertainty if that's 276 00:15:43,679 --> 00:15:47,260 Speaker 2: no longer the binding constraint, if it's no longer the 277 00:15:47,270 --> 00:15:52,239 Speaker 2: the critical key performance indicator for government. So I think 278 00:15:52,250 --> 00:15:52,489 Speaker 2: they 279 00:15:53,239 --> 00:15:56,159 Speaker 2: at at some point, it should be clarified sort of, well, 280 00:15:56,169 --> 00:15:58,840 Speaker 2: what can we expect of this high quality growth and 281 00:15:58,849 --> 00:16:01,630 Speaker 2: what does it actually mean? Because high quality growth is great. 282 00:16:01,809 --> 00:16:05,380 Speaker 2: I think that the supply side is pretty much defined 283 00:16:06,580 --> 00:16:11,440 Speaker 2: but to go with, with that uh the the distribution 284 00:16:11,450 --> 00:16:15,030 Speaker 2: of the distribution of that high quality growth is unclear. 285 00:16:15,039 --> 00:16:18,979 Speaker 2: It's a, it's an objective but it's unclear the environmental 286 00:16:18,989 --> 00:16:22,520 Speaker 2: measures that go along with it uh important but quite 287 00:16:22,530 --> 00:16:25,520 Speaker 2: unclear how that is going to hit the various industries. 288 00:16:25,530 --> 00:16:28,760 Speaker 2: So the go the change in goal itself has brought 289 00:16:28,770 --> 00:16:32,429 Speaker 2: about a number of uncertainties that would need to be removed, 290 00:16:32,440 --> 00:16:34,580 Speaker 2: that would need to be removed over time. I think 291 00:16:34,590 --> 00:16:35,359 Speaker 2: that's important 292 00:16:35,770 --> 00:16:40,630 Speaker 2: for households frankly. The key is, is the real estate market. 293 00:16:41,960 --> 00:16:45,359 Speaker 2: Uh There is this fear, it's not yet reality, but 294 00:16:45,369 --> 00:16:50,109 Speaker 2: this fear that that oil prices might decline very, very sharply. 295 00:16:50,409 --> 00:16:53,539 Speaker 2: And what would then happen to me as a household? 296 00:16:54,010 --> 00:16:56,130 Speaker 2: That is a uh uh 297 00:16:56,989 --> 00:16:59,609 Speaker 2: a task for the government. In this case, there's no, 298 00:16:59,619 --> 00:17:03,000 Speaker 2: there's no other actor to ensure that indeed the measures 299 00:17:03,010 --> 00:17:05,650 Speaker 2: are taken to stabilize the real estate market. It's not 300 00:17:05,660 --> 00:17:08,489 Speaker 2: gonna not gonna be like before and, and frankly, that's 301 00:17:08,500 --> 00:17:11,810 Speaker 2: not desirable, but the government has put in place a 302 00:17:11,819 --> 00:17:15,510 Speaker 2: number of plans that I find reasonable, especially in social 303 00:17:15,520 --> 00:17:18,050 Speaker 2: housing in rental housing 304 00:17:18,310 --> 00:17:22,689 Speaker 2: that can still maintain a relatively uh uh well a 305 00:17:22,699 --> 00:17:29,159 Speaker 2: downsized but but robust, robust uh housing sector and construction 306 00:17:29,339 --> 00:17:33,640 Speaker 2: that would then lead to, to um um a stabilization 307 00:17:33,650 --> 00:17:36,760 Speaker 2: of prices same and that would give comfort to the 308 00:17:36,770 --> 00:17:40,979 Speaker 2: household sector the second part. And, and that's still a conundrum. 309 00:17:40,989 --> 00:17:43,869 Speaker 2: And I'm not quite clear where the government's going yet 310 00:17:45,189 --> 00:17:48,130 Speaker 2: with the high quality growth. With the move to the, 311 00:17:48,140 --> 00:17:50,729 Speaker 2: the renewed emphasis on manufacturing 312 00:17:52,160 --> 00:17:54,540 Speaker 2: for the households. The question is, so where is the 313 00:17:54,550 --> 00:17:55,859 Speaker 2: jobs are gonna come from? 314 00:17:56,680 --> 00:17:59,540 Speaker 2: And I I was just looking at some statistics and, 315 00:17:59,550 --> 00:17:59,859 Speaker 2: and 316 00:18:00,680 --> 00:18:06,819 Speaker 2: government statistics on employment, the automobile sector is booming. It's 317 00:18:06,829 --> 00:18:11,339 Speaker 2: doing great. It's got 4.5 million people unemployed in that sector. 318 00:18:12,319 --> 00:18:16,660 Speaker 2: That's the same number as in 2015 in otherwise. And, 319 00:18:16,670 --> 00:18:20,040 Speaker 2: and if you look at a modern, a modern car factory, 320 00:18:20,050 --> 00:18:22,969 Speaker 2: all you see is robots. So the automation and the 321 00:18:22,979 --> 00:18:27,689 Speaker 2: capital intensity of those sectors that are currently being promoted 322 00:18:27,699 --> 00:18:28,540 Speaker 2: by the government 323 00:18:28,869 --> 00:18:32,438 Speaker 2: that does not result into sufficient jobs for those people 324 00:18:32,449 --> 00:18:35,930 Speaker 2: that just come from university. There's another 12 million coming 325 00:18:35,939 --> 00:18:40,188 Speaker 2: from university this year. They just said, and, and they've 326 00:18:40,199 --> 00:18:44,150 Speaker 2: been trained in all kinds of things including past generations in, 327 00:18:44,160 --> 00:18:44,520 Speaker 2: in 328 00:18:45,790 --> 00:18:48,510 Speaker 2: skills that may no longer be that much desire, but 329 00:18:48,520 --> 00:18:51,109 Speaker 2: nobody will go into a factory of, of the people 330 00:18:51,119 --> 00:18:54,209 Speaker 2: that have done computer science or something that they thought 331 00:18:54,219 --> 00:18:56,770 Speaker 2: they thought they were going to be coders for, for 332 00:18:56,780 --> 00:19:01,609 Speaker 2: Weixing for wechat. And suddenly they need to find different 333 00:19:01,619 --> 00:19:05,449 Speaker 2: kinds of jobs. So that is adjustment and, and the issue, 334 00:19:05,800 --> 00:19:09,459 Speaker 2: the related issue of youth unemployment, I think also weighs 335 00:19:09,469 --> 00:19:14,089 Speaker 2: quite heavily on, on households and households expectations. It's not, 336 00:19:14,729 --> 00:19:18,229 Speaker 2: I mean, people find jobs but everybody knows somebody who 337 00:19:18,239 --> 00:19:21,020 Speaker 2: didn't find a job. And so it's sort of this, this, 338 00:19:21,030 --> 00:19:25,030 Speaker 2: this uh uh almost sort of sort of this, this 339 00:19:25,040 --> 00:19:28,270 Speaker 2: um through social media, sort of the people get this 340 00:19:28,280 --> 00:19:30,589 Speaker 2: impression that actually the job market is not doing well 341 00:19:30,599 --> 00:19:30,949 Speaker 2: and that, 342 00:19:31,780 --> 00:19:36,760 Speaker 2: that lingers on, on expectations. So one of the 343 00:19:38,270 --> 00:19:41,329 Speaker 2: I I think the government uh uh will come to 344 00:19:41,339 --> 00:19:44,250 Speaker 2: the realization that look the big job creator, whether you 345 00:19:44,260 --> 00:19:47,750 Speaker 2: like it or not is actually services, the services sector. 346 00:19:47,760 --> 00:19:50,130 Speaker 2: And it's been, it's been for the past 15 years 347 00:19:50,140 --> 00:19:50,729 Speaker 2: like that, 348 00:19:51,420 --> 00:19:55,160 Speaker 2: For any country that goes above China's per capita income, 349 00:19:55,380 --> 00:19:58,560 Speaker 2: you'll find the services sector being the big job, job 350 00:19:58,569 --> 00:20:03,640 Speaker 2: generator and so creating sufficient space for that, not overly 351 00:20:03,650 --> 00:20:06,680 Speaker 2: being too heavy handed with regulation of that sector so 352 00:20:06,689 --> 00:20:10,400 Speaker 2: that the sector can thrive, I think will be the 353 00:20:10,410 --> 00:20:12,439 Speaker 2: key for creating more employment. 354 00:20:13,400 --> 00:20:15,520 Speaker 1: But that is absolutely key. I mean, if you had 355 00:20:15,530 --> 00:20:16,930 Speaker 1: not mentioned that I was gonna jump on it at 356 00:20:16,939 --> 00:20:20,180 Speaker 1: that point. Exactly. So are we talking about a flaw 357 00:20:20,189 --> 00:20:22,280 Speaker 1: in the existing growth model which is in the name 358 00:20:22,290 --> 00:20:26,020 Speaker 1: of good quality growth? Uh we may be actually looking 359 00:20:26,030 --> 00:20:28,439 Speaker 1: at sort of, you know, making the service sector a 360 00:20:28,449 --> 00:20:31,339 Speaker 1: bit subservient to the manufacturing sector, but from a job 361 00:20:31,349 --> 00:20:34,930 Speaker 1: creation perspective, that's not a good thing. Is there recognition 362 00:20:34,939 --> 00:20:36,859 Speaker 1: in the Chinese policy circle about that issue, 363 00:20:37,739 --> 00:20:40,750 Speaker 2: uh not that I know of, but it doesn't nowadays 364 00:20:40,760 --> 00:20:43,760 Speaker 2: that that is that, that doesn't mean that much anymore 365 00:20:43,770 --> 00:20:46,208 Speaker 2: because it's, you know, a lot of the policy discussions 366 00:20:46,219 --> 00:20:49,989 Speaker 2: is now behind closed doors. It's hard to see what 367 00:20:50,000 --> 00:20:52,930 Speaker 2: is going on. That by itself is not a great signal, 368 00:20:52,939 --> 00:20:55,209 Speaker 2: it would be great if there were, if there were 369 00:20:55,219 --> 00:20:57,760 Speaker 2: a debate in the open on, you know, whether the 370 00:20:57,770 --> 00:21:01,250 Speaker 2: the new growth model meets all the goals of, of, 371 00:21:01,260 --> 00:21:04,599 Speaker 2: of Chinese society, that would that by itself would be helpful. 372 00:21:04,880 --> 00:21:06,989 Speaker 2: I believe that economics basically has said 373 00:21:07,094 --> 00:21:09,314 Speaker 2: in the end, the government will come to the conclusion 374 00:21:09,625 --> 00:21:13,165 Speaker 2: that they need to be uh more active in promoting 375 00:21:13,175 --> 00:21:17,795 Speaker 2: the service sector, at least, uh not just saying things 376 00:21:17,805 --> 00:21:22,813 Speaker 2: about the manufacturing sector because that's important for entrepreneurs to say, oh, actually, 377 00:21:22,824 --> 00:21:24,954 Speaker 2: I can find my way into the service sector. It 378 00:21:24,964 --> 00:21:27,795 Speaker 2: may not be the focus of the government, but I 379 00:21:27,805 --> 00:21:30,765 Speaker 2: can make my, my, my business there. I can make 380 00:21:30,775 --> 00:21:34,395 Speaker 2: my profits there. But that and again, it's this big 381 00:21:34,405 --> 00:21:36,364 Speaker 2: shift that has been going on from a 382 00:21:37,439 --> 00:21:41,420 Speaker 2: a development model which was not sustainable and everybody agreed 383 00:21:41,430 --> 00:21:45,020 Speaker 2: on that to something new that still needs, that still 384 00:21:45,030 --> 00:21:47,290 Speaker 2: needs to fill out some of the blacks, 385 00:21:47,839 --> 00:21:51,180 Speaker 1: right? So bet when you wrote that uh Asia Society 386 00:21:51,189 --> 00:21:55,489 Speaker 1: article and talked about his expectations of recession, you were 387 00:21:55,500 --> 00:21:57,939 Speaker 1: sort of countering some of the things that Richard Ku 388 00:21:57,949 --> 00:22:01,040 Speaker 1: has written in terms of balance sheet recession. So those 389 00:22:01,050 --> 00:22:02,260 Speaker 1: who don't know, you know, Richard Ku 390 00:22:02,719 --> 00:22:05,609 Speaker 1: in the past have written a lot on Japan's uh 391 00:22:05,619 --> 00:22:10,510 Speaker 1: economic plight and had a rather compelling look at Japan's 392 00:22:10,520 --> 00:22:14,119 Speaker 1: problems through the balance sheet approach. Uh You don't think 393 00:22:14,130 --> 00:22:17,260 Speaker 1: that you can necessarily look at the same Japanese lens 394 00:22:17,300 --> 00:22:18,959 Speaker 1: and project that onto China, 395 00:22:19,819 --> 00:22:24,079 Speaker 2: correct? I mean, III I appreciate Richard's uh analysis of 396 00:22:24,089 --> 00:22:27,139 Speaker 2: Japan brilliant analysis and, and the one that really brought 397 00:22:27,150 --> 00:22:30,500 Speaker 2: it down to uh to, to something that that indeed 398 00:22:30,510 --> 00:22:35,550 Speaker 2: makes sense. Uh China is still quite different. Uh first, 399 00:22:35,560 --> 00:22:39,478 Speaker 2: the the the magnitudes of decline are not in the 400 00:22:39,489 --> 00:22:40,079 Speaker 2: order 401 00:22:41,160 --> 00:22:45,050 Speaker 2: of magnitude that that Japan saw. And II I, in 402 00:22:45,060 --> 00:22:48,718 Speaker 2: that piece, I quote a former governor of uh Japan's 403 00:22:48,729 --> 00:22:52,339 Speaker 2: Central Bank and the numbers were stunning that the decline 404 00:22:52,349 --> 00:22:54,859 Speaker 2: in wealth balance sheet wealth 405 00:22:55,760 --> 00:22:56,660 Speaker 2: between 406 00:22:57,339 --> 00:23:01,839 Speaker 2: 1990 1998 was 245% of GDP. 407 00:23:02,699 --> 00:23:05,859 Speaker 2: China is nowhere near that. Uh Yes, there is price 408 00:23:05,869 --> 00:23:09,109 Speaker 2: decline and, and the real price decline on on real 409 00:23:09,130 --> 00:23:12,829 Speaker 2: is probably higher than what is monitored, monitored through the 410 00:23:12,839 --> 00:23:15,689 Speaker 2: official channels. But nevertheless, it is not in that order 411 00:23:15,699 --> 00:23:19,149 Speaker 2: of magnitude. Second, the big problem 412 00:23:20,599 --> 00:23:24,640 Speaker 2: in Japan was that it was not just uh uh 413 00:23:24,689 --> 00:23:28,188 Speaker 2: uh if you want those engaged in the real estate bubble, 414 00:23:28,199 --> 00:23:31,419 Speaker 2: et cetera, but it was everybody because everybody was engaged. 415 00:23:31,430 --> 00:23:34,199 Speaker 2: So it was the households and it was the businesses 416 00:23:34,250 --> 00:23:38,859 Speaker 2: that were engaged heavily into basically beefing up their balance 417 00:23:38,869 --> 00:23:39,379 Speaker 2: sheet 418 00:23:40,280 --> 00:23:47,119 Speaker 2: with inflated uh with bubbled style asset prices. And so when, 419 00:23:47,130 --> 00:23:47,540 Speaker 2: when 420 00:23:48,810 --> 00:23:50,569 Speaker 2: the deflation hit, 421 00:23:51,189 --> 00:23:54,030 Speaker 2: it hit everybody and the only one that could step 422 00:23:54,040 --> 00:23:57,650 Speaker 2: in was the government in China. The balance sheet problem 423 00:23:57,660 --> 00:24:00,410 Speaker 2: is really quite restricted still 424 00:24:01,790 --> 00:24:02,680 Speaker 2: to the real estate side. 425 00:24:03,780 --> 00:24:08,119 Speaker 2: And yes, the ever grounds of the world that are in, 426 00:24:08,130 --> 00:24:11,469 Speaker 2: in real trouble and some have been told to close 427 00:24:11,479 --> 00:24:15,099 Speaker 2: down by Hong Kong courts. So that's those are real issues. 428 00:24:15,109 --> 00:24:18,599 Speaker 2: No question about it. But beyond that, it doesn't, it's 429 00:24:18,609 --> 00:24:20,599 Speaker 2: not big enough yet 430 00:24:21,420 --> 00:24:22,760 Speaker 2: to affect the backs. 431 00:24:23,560 --> 00:24:25,920 Speaker 2: It is not big and it is not that much 432 00:24:25,930 --> 00:24:28,439 Speaker 2: spill over to the rest of the economy, the rest 433 00:24:28,449 --> 00:24:32,780 Speaker 2: of the businesses and households, et cetera. Unless there's a 434 00:24:32,790 --> 00:24:33,929 Speaker 2: major downturn 435 00:24:34,949 --> 00:24:36,819 Speaker 2: in real estate prices are still 436 00:24:38,040 --> 00:24:41,319 Speaker 2: not that much affected. There is a lot of uncertainty 437 00:24:41,329 --> 00:24:44,000 Speaker 2: as we discussed, but it's not that you can say yes, 438 00:24:44,010 --> 00:24:46,489 Speaker 2: we take the balance sheet and oh, there's a very 439 00:24:46,500 --> 00:24:49,119 Speaker 2: big hole that needs to be filled. So I, I 440 00:24:49,130 --> 00:24:53,420 Speaker 2: would hesitate to call a balance sheet position. Now. It 441 00:24:53,430 --> 00:24:54,260 Speaker 2: doesn't mean 442 00:24:55,589 --> 00:24:59,560 Speaker 2: that over time it wouldn't be able, wouldn't turn into 443 00:24:59,569 --> 00:25:02,050 Speaker 2: one if nothing were to happen. But I, 444 00:25:02,790 --> 00:25:06,160 Speaker 2: I I don't project that frankly, there's some other more 445 00:25:06,170 --> 00:25:09,159 Speaker 2: detailed issues on demographics, but we can maybe discuss that 446 00:25:09,170 --> 00:25:10,688 Speaker 2: sometimes there's some other time, 447 00:25:11,060 --> 00:25:14,780 Speaker 1: right? Um One big thing in the case of Japan, 448 00:25:14,790 --> 00:25:17,000 Speaker 1: that sort of became a source of paralysis was the 449 00:25:17,010 --> 00:25:22,369 Speaker 1: cross shareholding of Japanese financial sector, the banks owned property companies, 450 00:25:22,380 --> 00:25:24,369 Speaker 1: they own shares in other banks. And as a result, 451 00:25:24,380 --> 00:25:25,319 Speaker 1: everybody became 452 00:25:25,550 --> 00:25:29,030 Speaker 1: so reluctant to recognize losses on debt because that would 453 00:25:29,040 --> 00:25:31,129 Speaker 1: have had an impact on their equity value and so on. 454 00:25:31,650 --> 00:25:34,650 Speaker 1: I have tried to analyze this issue in the context 455 00:25:34,660 --> 00:25:37,369 Speaker 1: of China and I've looked at a couple of GFSR 456 00:25:37,380 --> 00:25:39,540 Speaker 1: reports from the IMF where they've tried to take a 457 00:25:39,550 --> 00:25:42,609 Speaker 1: dive into this. I think the first impression is that 458 00:25:42,619 --> 00:25:45,729 Speaker 1: we don't have very good data, but even in the 459 00:25:45,739 --> 00:25:49,250 Speaker 1: presence of some not good data, it doesn't seem like 460 00:25:49,260 --> 00:25:52,369 Speaker 1: it's that prevalent in China. Uh the the cross shareholding issue. 461 00:25:52,380 --> 00:25:53,329 Speaker 1: What's your impression? 462 00:25:53,989 --> 00:25:56,609 Speaker 2: So I would agree with that. I haven't seen the analysis. 463 00:25:56,619 --> 00:25:58,890 Speaker 2: I love to see it, but I would, I would 464 00:25:58,900 --> 00:26:01,839 Speaker 2: agree with that. And even so the, the, 465 00:26:04,000 --> 00:26:08,459 Speaker 2: the trust in the banking system remains quite high and 466 00:26:08,469 --> 00:26:11,688 Speaker 2: therefore they may have issues in non-performing loans. And if 467 00:26:11,699 --> 00:26:15,050 Speaker 2: you really look at the banking system, the non-performing loans 468 00:26:15,060 --> 00:26:18,579 Speaker 2: are quite a bit higher than the items just tagged 469 00:26:18,589 --> 00:26:21,310 Speaker 2: as non-performing loans because there's a lot of investments on 470 00:26:21,319 --> 00:26:21,890 Speaker 2: the banking 471 00:26:22,489 --> 00:26:26,430 Speaker 2: balance sheet that are really loans that are not performing, 472 00:26:26,439 --> 00:26:29,449 Speaker 2: but that might at some point perform again or debt 473 00:26:29,459 --> 00:26:33,109 Speaker 2: equity swaps, et cetera. So those become investments if the 474 00:26:33,119 --> 00:26:36,188 Speaker 2: intention is to hold it until maturity. 475 00:26:36,880 --> 00:26:41,819 Speaker 2: But, but even with the banks, given the basically ironclad 476 00:26:41,829 --> 00:26:44,859 Speaker 2: guarantee from the government on the banking system. 477 00:26:45,650 --> 00:26:49,109 Speaker 2: And in addition, the difficulty of taking out your money 478 00:26:49,119 --> 00:26:49,829 Speaker 2: anywhere else, 479 00:26:50,619 --> 00:26:53,109 Speaker 2: frankly, it's very hard to sort of see a an 480 00:26:53,119 --> 00:26:57,709 Speaker 2: implosion of balance sheet happening in Chi in China as 481 00:26:57,719 --> 00:26:58,229 Speaker 2: it did 482 00:26:58,819 --> 00:26:59,430 Speaker 2: inch back, 483 00:27:00,520 --> 00:27:03,900 Speaker 1: right? Um I want to talk a little later about 484 00:27:03,910 --> 00:27:07,780 Speaker 1: the impact of debt and deflation. Uh But before that 485 00:27:07,790 --> 00:27:10,708 Speaker 1: one area which is um I'm kind of was hoping 486 00:27:10,719 --> 00:27:12,659 Speaker 1: that there will be more discussed in the two sessions. 487 00:27:12,670 --> 00:27:15,280 Speaker 1: Uh Maybe it's just a given our reality in China 488 00:27:15,290 --> 00:27:18,260 Speaker 1: that you don't have to measure separately, which is green investment. 489 00:27:18,589 --> 00:27:21,930 Speaker 1: So I read this fascinating analysis by the Center for 490 00:27:21,939 --> 00:27:25,290 Speaker 1: research on energy and clean air. And they had this 491 00:27:25,300 --> 00:27:30,810 Speaker 1: report where they estimated $1.6 trillion worth of contribution from 492 00:27:30,819 --> 00:27:34,810 Speaker 1: clean energy on China's economy last year, which they estimated 493 00:27:34,819 --> 00:27:38,630 Speaker 1: accounted for all the growth investment and a larger share 494 00:27:38,640 --> 00:27:41,030 Speaker 1: of growth than any other sector in China. And the 495 00:27:41,040 --> 00:27:44,929 Speaker 1: report also said something like China invested $890 billion in 496 00:27:44,939 --> 00:27:48,159 Speaker 1: clean energy investment, a 40% year on year increase 497 00:27:48,435 --> 00:27:52,004 Speaker 1: as almost as large in total global investment in fossil fuels. 498 00:27:52,224 --> 00:27:54,614 Speaker 1: Um So, Bert, I think I told you a couple 499 00:27:54,625 --> 00:27:56,625 Speaker 1: of years ago that in a podcast I did with 500 00:27:56,765 --> 00:28:00,104 Speaker 1: our friend Jun Ma, he had said that China should 501 00:28:00,114 --> 00:28:02,754 Speaker 1: spend or would spend 4 to 5, even 6% of 502 00:28:02,765 --> 00:28:07,104 Speaker 1: GDP a year on green to get its goal of, 503 00:28:07,114 --> 00:28:09,534 Speaker 1: you know, 2015 at zero done. It seems like they're 504 00:28:09,545 --> 00:28:12,214 Speaker 1: beginning to deliver uh what, what are your views? 505 00:28:12,454 --> 00:28:15,984 Speaker 2: Well, they, they delivering of source so well short of 506 00:28:15,994 --> 00:28:17,785 Speaker 2: what they could do. And that is, 507 00:28:18,150 --> 00:28:23,189 Speaker 2: that is the one option that I see uh for China. 508 00:28:23,199 --> 00:28:25,579 Speaker 2: And this conundrum of, we don't want to have this 509 00:28:25,670 --> 00:28:29,250 Speaker 2: infrastructure real estate driven growth, but we, we want to 510 00:28:29,260 --> 00:28:33,089 Speaker 2: move to manufacturing which provides insufficient demand, 511 00:28:34,219 --> 00:28:37,680 Speaker 2: the total, the total and it's, it's an estimate, but the, 512 00:28:37,689 --> 00:28:43,160 Speaker 2: the total investment needed to meet Xi Jinping's net zero 513 00:28:43,170 --> 00:28:51,170 Speaker 2: by 2060 is about 100% of 2020 GDP. So that's 2.5% 514 00:28:51,180 --> 00:28:54,229 Speaker 2: point every year. They're sort of at that level in 515 00:28:54,239 --> 00:28:54,880 Speaker 2: terms of 516 00:28:56,079 --> 00:28:57,979 Speaker 2: green investment. 517 00:28:58,939 --> 00:29:02,030 Speaker 2: But you could also say, well, in the first decade, 518 00:29:02,040 --> 00:29:03,670 Speaker 2: we double that or we triple that 519 00:29:04,469 --> 00:29:08,310 Speaker 2: because right now we need the mat. So I find 520 00:29:08,319 --> 00:29:11,339 Speaker 2: that an yeah, uh uh an opportunity that can be 521 00:29:11,349 --> 00:29:15,219 Speaker 2: used to sort of substitute a, a good stimulus if 522 00:29:15,229 --> 00:29:18,719 Speaker 2: you want a good stimulus lies at the green stimulus 523 00:29:18,750 --> 00:29:21,969 Speaker 2: is there for the taking that's buying, not everything will 524 00:29:21,979 --> 00:29:24,880 Speaker 2: go right? But it's by and large good investment that 525 00:29:24,890 --> 00:29:29,479 Speaker 2: are gonna be productive in a greener cleaner, less carbon 526 00:29:29,510 --> 00:29:30,609 Speaker 2: intensive world. 527 00:29:31,109 --> 00:29:33,729 Speaker 2: And the government could say, ok, we're gonna accelerate that 528 00:29:33,739 --> 00:29:34,849 Speaker 2: and that would be 529 00:29:36,670 --> 00:29:39,390 Speaker 2: a very good investment. It would be a good stimulus 530 00:29:39,400 --> 00:29:43,619 Speaker 2: and it's pretty similar. The type of input that you 531 00:29:43,630 --> 00:29:46,369 Speaker 2: need in the green investments are not that dissimilar to 532 00:29:46,760 --> 00:29:49,839 Speaker 2: the inputs that you need into normal infrastructure or in, 533 00:29:49,969 --> 00:29:52,739 Speaker 2: in in housing. So it would also from an employment 534 00:29:52,750 --> 00:29:55,530 Speaker 2: point of view, from a construction sector point of view, 535 00:29:55,719 --> 00:29:58,619 Speaker 2: it would actually add up. And I believe that, uh 536 00:29:58,630 --> 00:30:02,410 Speaker 2: that's something that uh the government can definitely explore. 537 00:30:03,339 --> 00:30:06,739 Speaker 1: Right. And, you know, they import so much fossil fuel. 538 00:30:06,890 --> 00:30:08,800 Speaker 1: I mean, you would think that even from uh the 539 00:30:08,810 --> 00:30:12,020 Speaker 1: new found, you know, global zeitgeist of security, you know, 540 00:30:12,030 --> 00:30:14,859 Speaker 1: energy security and food security and so on, it also 541 00:30:14,869 --> 00:30:16,719 Speaker 1: makes sense from a strategic perspective. 542 00:30:17,140 --> 00:30:21,010 Speaker 1: Um but I am going to read you a longish 543 00:30:21,020 --> 00:30:23,560 Speaker 1: section from a Wall Street journal article which may have 544 00:30:23,569 --> 00:30:25,189 Speaker 1: an agenda. So I I want you to sort of 545 00:30:25,199 --> 00:30:27,020 Speaker 1: tell me if you are seeing an agenda in what 546 00:30:27,030 --> 00:30:29,099 Speaker 1: I'm about to read or just in general, you know, 547 00:30:29,109 --> 00:30:32,089 Speaker 1: your your view on this issue. So here I go, 548 00:30:32,109 --> 00:30:35,619 Speaker 1: China's factories are churning out more cars, machinery and consumer 549 00:30:35,630 --> 00:30:37,900 Speaker 1: electronics than its domestic economy can absorb 550 00:30:38,270 --> 00:30:40,839 Speaker 1: propped up by cheap state directed loans. Chinese companies are 551 00:30:40,849 --> 00:30:43,420 Speaker 1: flooding foreign markets with products they can sell at home. 552 00:30:43,430 --> 00:30:46,660 Speaker 1: Some economies see this China shock, pushing inflation down even 553 00:30:46,670 --> 00:30:49,579 Speaker 1: more than the first inflation shock. They're talking about 20 554 00:30:49,589 --> 00:30:52,349 Speaker 1: years ago, China's economy is now slowing. Whereas in the 555 00:30:52,359 --> 00:30:54,359 Speaker 1: previous area, it was booming as a result of this 556 00:30:54,369 --> 00:30:58,770 Speaker 1: inflationary effect of cheap Chinese manufactured goods cannot be offset 557 00:30:58,780 --> 00:31:01,660 Speaker 1: by Chinese demand for iron ore, coal and other commodities. 558 00:31:01,859 --> 00:31:04,310 Speaker 1: So I suppose the basic point in this article is 559 00:31:04,319 --> 00:31:07,130 Speaker 1: that we're in for a second deflationary shock from China. 560 00:31:07,170 --> 00:31:08,000 Speaker 1: What do you think? 561 00:31:09,650 --> 00:31:13,510 Speaker 2: But first, I think you can substitute China with Germany 562 00:31:14,000 --> 00:31:17,819 Speaker 2: um in China is bigger. But uh 563 00:31:18,790 --> 00:31:21,890 Speaker 2: uh I I don't disagree with 564 00:31:22,630 --> 00:31:26,160 Speaker 2: the data underlying this analysis. I don't think the tone 565 00:31:26,170 --> 00:31:27,209 Speaker 2: is very fair. 566 00:31:28,089 --> 00:31:31,920 Speaker 2: Um Because if, if, if Germany has 6 7% of 567 00:31:31,930 --> 00:31:34,180 Speaker 2: GDP surplus on the current account, say, oh, Germany is 568 00:31:34,189 --> 00:31:37,709 Speaker 2: very competitive if China has to say, oh, it's terrible 569 00:31:37,719 --> 00:31:39,069 Speaker 2: lack of domestic demand. 570 00:31:39,750 --> 00:31:43,069 Speaker 2: So, so uh I think this is this is sort 571 00:31:43,079 --> 00:31:44,810 Speaker 2: of an asymmetric treatment of that. 572 00:31:45,520 --> 00:31:49,199 Speaker 2: Second. Uh what I said before is indeed the the 573 00:31:50,560 --> 00:31:53,839 Speaker 2: the lack of domestic demand will mean that uh uh 574 00:31:53,849 --> 00:31:55,979 Speaker 2: prices domestically 575 00:31:57,329 --> 00:32:02,390 Speaker 2: are actually falling. And GDP deflator over the past year 576 00:32:02,400 --> 00:32:06,430 Speaker 2: was 0.6%. Uh the last quarter, it was 1.6%. 577 00:32:07,449 --> 00:32:12,180 Speaker 2: The the the producer price index is also much um 578 00:32:12,189 --> 00:32:14,099 Speaker 2: much negative. So 579 00:32:15,780 --> 00:32:18,780 Speaker 2: Chinese companies have a hard time domestically and prices go 580 00:32:18,790 --> 00:32:19,130 Speaker 2: down 581 00:32:20,040 --> 00:32:21,479 Speaker 2: in part that is also 582 00:32:22,189 --> 00:32:24,250 Speaker 2: on the international market, 583 00:32:25,569 --> 00:32:28,050 Speaker 2: not just by Chinese companies, by the way, I mean 584 00:32:28,060 --> 00:32:31,709 Speaker 2: you also see you see uh the most of the 585 00:32:31,719 --> 00:32:33,630 Speaker 2: car export of China which is 586 00:32:34,400 --> 00:32:38,300 Speaker 2: attractive headlines around the world. Uh They are still with 587 00:32:38,310 --> 00:32:42,319 Speaker 2: internal combustion engines and that's Chinese companies but it's also 588 00:32:42,329 --> 00:32:46,540 Speaker 2: other companies. Part of the electric vehicle exports is Tesla, 589 00:32:46,719 --> 00:32:50,959 Speaker 2: not Byd. Yes, it's Byd but it's also Tesla. So, 590 00:32:51,020 --> 00:32:53,670 Speaker 2: so I think it's, it, you, you need, you need 591 00:32:53,680 --> 00:32:56,479 Speaker 2: to disentangle that a little bit. But the, the, the 592 00:32:56,790 --> 00:32:59,260 Speaker 2: punch line for me is that well, 593 00:32:59,650 --> 00:33:03,229 Speaker 2: weren't we fighting inflation everywhere else around the world? So, 594 00:33:03,239 --> 00:33:05,300 Speaker 2: wouldn't it be helpful 595 00:33:05,900 --> 00:33:10,079 Speaker 2: if China were to offer consumer goods that people want 596 00:33:10,479 --> 00:33:14,339 Speaker 2: at a lower price? Isn't that a good thing? But I'm, 597 00:33:14,349 --> 00:33:17,119 Speaker 2: I'm a little bit with the implicate. I, I don't 598 00:33:17,130 --> 00:33:20,430 Speaker 2: disagree with the analysis and I've done the analysis myself 599 00:33:20,439 --> 00:33:22,839 Speaker 2: as in fact, what I, what, what I tell my 600 00:33:22,849 --> 00:33:26,160 Speaker 2: Chinese colleagues is, is, is something related but different 601 00:33:26,829 --> 00:33:29,390 Speaker 2: and others have made this analysis as well. But if 602 00:33:29,400 --> 00:33:33,449 Speaker 2: you look at China's surpluses in manufacturing 603 00:33:35,410 --> 00:33:38,689 Speaker 2: that's growing and it's nothing out of the ordinary. If 604 00:33:38,699 --> 00:33:39,790 Speaker 2: you look at it in terms of 605 00:33:40,619 --> 00:33:41,989 Speaker 2: China's GDP, 606 00:33:43,150 --> 00:33:45,650 Speaker 2: but if you look at the surpluses in terms of 607 00:33:45,660 --> 00:33:47,369 Speaker 2: world GDP, 608 00:33:48,300 --> 00:33:51,439 Speaker 2: it's twice the level that it was before the global 609 00:33:51,449 --> 00:33:54,280 Speaker 2: financial crisis and everybody was complaining then. 610 00:33:54,900 --> 00:33:58,959 Speaker 2: So what I see coming is a lot of uh 611 00:33:59,500 --> 00:34:03,290 Speaker 2: uh resentment there. And you hear the noise from the 612 00:34:03,300 --> 00:34:07,719 Speaker 2: Europeans already that, that oh, actually this is China 613 00:34:09,100 --> 00:34:13,370 Speaker 2: through inappropriate policies. They can export so much. Uh the 614 00:34:13,379 --> 00:34:17,830 Speaker 2: key argument always being over, they have all these companies 615 00:34:17,840 --> 00:34:19,610 Speaker 2: have access to cheap loans. Well, 616 00:34:20,469 --> 00:34:24,290 Speaker 2: yeah, the US and Europe just had a decade of 617 00:34:24,300 --> 00:34:26,669 Speaker 2: zero interest rate. So I don't quite know where that 618 00:34:26,679 --> 00:34:30,050 Speaker 2: complaint is coming from. But, but there's some concerns also 619 00:34:30,060 --> 00:34:34,889 Speaker 2: with subsidies and others uh that, that could have been, 620 00:34:35,860 --> 00:34:39,020 Speaker 2: that could have been subject to a 621 00:34:40,148 --> 00:34:42,849 Speaker 2: WTO process. Unfortunately, 622 00:34:44,199 --> 00:34:47,870 Speaker 2: that's no longer possible. Yes, Europe is doing its investigation 623 00:34:47,879 --> 00:34:49,580 Speaker 2: into subsidies but it will in the end be a 624 00:34:49,590 --> 00:34:52,659 Speaker 2: one sided action by Europe because 625 00:34:53,658 --> 00:34:56,808 Speaker 2: there's no more appellate body in the WTO. So therefore, 626 00:34:56,819 --> 00:35:01,138 Speaker 2: there's no final determination of who is right and who 627 00:35:01,148 --> 00:35:03,799 Speaker 2: is wrong in this. But more broadly, I think, I 628 00:35:03,809 --> 00:35:09,708 Speaker 2: think this is risky territory for China. Its model of 629 00:35:09,718 --> 00:35:10,998 Speaker 2: for the future 630 00:35:11,919 --> 00:35:15,139 Speaker 2: may not work if there is a a very strong 631 00:35:15,149 --> 00:35:18,299 Speaker 2: reliance on external demand in those new sectors. 632 00:35:19,560 --> 00:35:23,060 Speaker 2: So ergo the conclusion is they must work on that 633 00:35:23,070 --> 00:35:24,129 Speaker 2: domestic demand. 634 00:35:25,570 --> 00:35:27,709 Speaker 1: But at the same time, but you could say that, ok, 635 00:35:27,989 --> 00:35:31,110 Speaker 1: America with this rich customers and Europe with the rich 636 00:35:31,120 --> 00:35:36,649 Speaker 1: customers may pursue tariffs and whatever to keep Chinese exports out. 637 00:35:36,659 --> 00:35:40,968 Speaker 1: But I think that Latin Americans, Africans, most of South Asia, 638 00:35:40,979 --> 00:35:43,250 Speaker 1: Middle East, Southeast Asia, I don't think there'll be averse 639 00:35:43,260 --> 00:35:47,419 Speaker 1: to the reasonably priced or cheaply priced Chinese products. 640 00:35:47,959 --> 00:35:50,469 Speaker 2: But you, you hear the same noise 641 00:35:51,310 --> 00:35:54,669 Speaker 2: from uh Brazil from uh South Africa so that we're getting, 642 00:35:54,679 --> 00:35:58,770 Speaker 2: we're getting flooded by Chinese goods. And so there is, 643 00:35:58,780 --> 00:36:01,729 Speaker 2: it's broader than just Europe and it's broader than just a, 644 00:36:01,739 --> 00:36:06,679 Speaker 2: a rich country, a rich country fed. And um and 645 00:36:06,689 --> 00:36:09,739 Speaker 2: I think it is to some extent, uh you know, it, 646 00:36:09,750 --> 00:36:12,000 Speaker 2: it is a bit China issue even if, even if 647 00:36:12,010 --> 00:36:13,770 Speaker 2: the allegation may not be correct. 648 00:36:14,239 --> 00:36:18,159 Speaker 2: But the lack of domestic demand is, is is an 649 00:36:18,169 --> 00:36:21,540 Speaker 2: issue from China's point of view and from an employment 650 00:36:21,550 --> 00:36:23,929 Speaker 2: point of view, from a growth point of view, but 651 00:36:23,939 --> 00:36:25,419 Speaker 2: it's also an international issue, 652 00:36:26,070 --> 00:36:29,529 Speaker 1: right? Um I want to talk to you about China 653 00:36:29,540 --> 00:36:32,540 Speaker 1: and Trump if there is going to be a Trump 654 00:36:32,550 --> 00:36:34,979 Speaker 1: two point. Oh, but before that independent of, you know, 655 00:36:34,989 --> 00:36:37,030 Speaker 1: who was the president of the United States in early 656 00:36:37,040 --> 00:36:44,000 Speaker 1: 2025 the movement toward tech related restrictions over China uh 657 00:36:44,010 --> 00:36:46,179 Speaker 1: for the longest time, it was that, you know, there 658 00:36:46,189 --> 00:36:49,290 Speaker 1: has to be a gap between manufacturing capabilities in China 659 00:36:49,300 --> 00:36:50,049 Speaker 1: versus the West. 660 00:36:50,290 --> 00:36:53,040 Speaker 1: But it seems like we're going much further than that. 661 00:36:53,050 --> 00:36:54,659 Speaker 1: And one is that the gap is to be widened. 662 00:36:54,669 --> 00:36:57,800 Speaker 1: Nobody really knows how much wider should China be three 663 00:36:57,810 --> 00:37:00,089 Speaker 1: generations behind or four? I think the Americans haven't made 664 00:37:00,100 --> 00:37:02,070 Speaker 1: up their mind on that, but it seems to be 665 00:37:02,080 --> 00:37:04,350 Speaker 1: even deeper than that, which is that we will not 666 00:37:04,360 --> 00:37:07,729 Speaker 1: actually let the Chinese procure even the products. So not 667 00:37:07,739 --> 00:37:09,850 Speaker 1: that they can make, they cannot even procure them. So 668 00:37:09,860 --> 00:37:13,350 Speaker 1: I'm seeing uh various companies that are trying to get 669 00:37:13,360 --> 00:37:16,800 Speaker 1: licenses to export somewhat lower power A I chips. They're 670 00:37:16,810 --> 00:37:19,340 Speaker 1: not feeling finding themselves under review by 671 00:37:19,590 --> 00:37:22,699 Speaker 1: uh us authorities that they can't even export that. So 672 00:37:22,709 --> 00:37:26,250 Speaker 1: where do you think this this tech war is going 673 00:37:27,550 --> 00:37:30,649 Speaker 2: well? Uh a couple of years back, I wrote an 674 00:37:30,659 --> 00:37:34,290 Speaker 2: article which was called Trade Tech and Trust. 675 00:37:35,850 --> 00:37:39,219 Speaker 2: And I think a lot of the more extreme views because, 676 00:37:39,229 --> 00:37:41,060 Speaker 2: you know, the United States is a complex place. There's 677 00:37:41,070 --> 00:37:44,439 Speaker 2: lots of views, there is the Trump thing, but, but 678 00:37:44,449 --> 00:37:47,919 Speaker 2: there is even within the administration, lots of views. You, you, 679 00:37:48,179 --> 00:37:51,020 Speaker 2: you now represented more if you want to. Jake Sullivan 680 00:37:51,030 --> 00:37:56,859 Speaker 2: kind of the national security based view. And Sullivan has 681 00:37:56,870 --> 00:38:00,010 Speaker 2: been very clear, he came out with a speech, uh 682 00:38:00,020 --> 00:38:02,138 Speaker 2: it's now more than a year back, but where he said, 683 00:38:02,149 --> 00:38:05,669 Speaker 2: we need to keep China behind ie 684 00:38:06,419 --> 00:38:12,159 Speaker 2: not relatively but absolutely, that was later softer by Yellen. 685 00:38:13,459 --> 00:38:16,040 Speaker 2: And it became much more sort of the European approach. 686 00:38:16,050 --> 00:38:19,729 Speaker 2: And as in fact, the G7 agreed on the de 687 00:38:19,820 --> 00:38:25,009 Speaker 2: risking approach. So a narrow national security, the small yards 688 00:38:25,020 --> 00:38:29,839 Speaker 2: with high fences type of approach. Uh the problem with 689 00:38:29,850 --> 00:38:32,040 Speaker 2: that is that that me and even 690 00:38:32,709 --> 00:38:35,479 Speaker 2: assuming that that is feasible. The problem with that is 691 00:38:35,489 --> 00:38:37,120 Speaker 2: that on the Chinese side, 692 00:38:38,459 --> 00:38:41,040 Speaker 2: they would say, well, yeah, so today is 693 00:38:41,840 --> 00:38:44,580 Speaker 2: the below 10 nanometer chips, but what is it going 694 00:38:44,590 --> 00:38:49,219 Speaker 2: to be tomorrow? So as soon as you invoke national 695 00:38:49,229 --> 00:38:53,020 Speaker 2: security in some of these tech measures, you don't know 696 00:38:53,030 --> 00:38:55,219 Speaker 2: where this is going down, is it from the Chinese side? 697 00:38:55,229 --> 00:38:57,899 Speaker 2: So from a Chinese point of view, from a national 698 00:38:57,909 --> 00:39:00,479 Speaker 2: security point of view, you say, ok, so we have 699 00:39:00,489 --> 00:39:04,399 Speaker 2: to rely on our indigenous innovation and then once you 700 00:39:04,409 --> 00:39:07,580 Speaker 2: start thinking about national security, then suddenly 701 00:39:08,379 --> 00:39:12,629 Speaker 2: as Mr Biden thinks suddenly an electric car is also 702 00:39:12,639 --> 00:39:15,149 Speaker 2: a national security. But so, so 703 00:39:16,169 --> 00:39:19,679 Speaker 2: that conversation is not very productive. And uh but at 704 00:39:19,689 --> 00:39:20,270 Speaker 2: the same time, 705 00:39:22,320 --> 00:39:25,810 Speaker 2: it's a topic where a, a WTO can 706 00:39:26,659 --> 00:39:30,919 Speaker 2: discuss things, but also there's other mechanisms, uh believe it 707 00:39:30,929 --> 00:39:33,850 Speaker 2: or not. Well, I'm old enough to know the uh 708 00:39:34,010 --> 00:39:37,750 Speaker 2: in the old Cold War, there was the Cocom list 709 00:39:37,780 --> 00:39:40,629 Speaker 2: and all the stuff that you couldn't sell to Russia. 710 00:39:40,639 --> 00:39:46,280 Speaker 2: And that was pretty elaborate list and pretty effective as well. 711 00:39:46,290 --> 00:39:48,759 Speaker 2: Only the East Germans was sort of 712 00:39:49,429 --> 00:39:52,320 Speaker 2: take apart the West German, the West German high tech 713 00:39:52,330 --> 00:39:54,209 Speaker 2: and then send some of it to, to Russia. 714 00:39:54,870 --> 00:39:58,610 Speaker 2: Uh the successor to that was the WASSE our list. Now, 715 00:39:58,620 --> 00:40:04,089 Speaker 2: interestingly enough, this Russian Federation was a member of the 716 00:40:04,100 --> 00:40:07,540 Speaker 2: WASSE our group to determine the list. It was a, 717 00:40:07,550 --> 00:40:10,689 Speaker 2: it was a platform for discussion. And I think that's, 718 00:40:10,699 --> 00:40:13,969 Speaker 2: it's very important at this point in time to create 719 00:40:13,979 --> 00:40:16,469 Speaker 2: that platform is that the WTO could play a role, 720 00:40:16,479 --> 00:40:17,409 Speaker 2: but it could also be 721 00:40:17,969 --> 00:40:20,850 Speaker 2: elsewhere and it doesn't have to be everybody at the table. But, 722 00:40:21,110 --> 00:40:23,500 Speaker 2: but to sort of start that conversation, what is, what 723 00:40:23,510 --> 00:40:27,669 Speaker 2: is a reasonable, what is a reasonable assessment of security 724 00:40:27,679 --> 00:40:29,290 Speaker 2: risk and how can we stop that? 725 00:40:30,590 --> 00:40:34,110 Speaker 2: I think some, some in, in the US and even 726 00:40:34,120 --> 00:40:37,810 Speaker 2: in Europe, they say, look, look, national security goes beyond 727 00:40:37,820 --> 00:40:41,229 Speaker 2: particular technologies. It is simply we need a strong economy, 728 00:40:41,239 --> 00:40:44,090 Speaker 2: we need, we need steel, we need boats, we need. 729 00:40:44,469 --> 00:40:44,889 Speaker 2: So 730 00:40:45,600 --> 00:40:50,419 Speaker 2: the whole of the industry is affected by national security 731 00:40:50,719 --> 00:40:53,939 Speaker 2: that is hard to deal with because that would lead 732 00:40:53,949 --> 00:40:58,929 Speaker 2: to a fairly far reaching decoupling which as, as, as 733 00:40:58,939 --> 00:41:02,500 Speaker 2: you know, would also lead to large efficiency losses and 734 00:41:02,510 --> 00:41:08,699 Speaker 2: frankly a AAA much less prosperous future for the whole 735 00:41:08,709 --> 00:41:11,138 Speaker 2: of the world than it could be. 736 00:41:12,169 --> 00:41:15,229 Speaker 2: Uh if this issue of national security is managed. Well, 737 00:41:16,439 --> 00:41:16,810 Speaker 1: yeah, 738 00:41:17,580 --> 00:41:21,819 Speaker 1: not, not particularly uh you know, hopeful in those areas, 739 00:41:22,000 --> 00:41:25,279 Speaker 1: but talking about things that are not particularly hopeful. Uh 740 00:41:25,320 --> 00:41:27,899 Speaker 1: you know, then polls in the US are suggesting a 741 00:41:27,909 --> 00:41:30,330 Speaker 1: pretty decent chance that we'll have Donald Trump come back 742 00:41:30,340 --> 00:41:33,979 Speaker 1: to power. Uh And uh you know, when people ask me, 743 00:41:34,020 --> 00:41:36,290 Speaker 1: you know, what will the world look like under Trump? 744 00:41:36,300 --> 00:41:38,159 Speaker 1: I said, you know, there's very little surprise there. We 745 00:41:38,169 --> 00:41:39,810 Speaker 1: know exactly what he'll do because he said it 746 00:41:40,120 --> 00:41:43,159 Speaker 1: the, the significant ramping up of tariffs against China, perhaps 747 00:41:43,169 --> 00:41:46,759 Speaker 1: even a generalized tariff against all imports and a whole 748 00:41:46,770 --> 00:41:49,759 Speaker 1: bunch of things that will happen on the geopolitical side 749 00:41:49,770 --> 00:41:51,709 Speaker 1: that we don't need to talk about here. But from 750 00:41:51,719 --> 00:41:55,729 Speaker 1: China's perspective, should a Trump 2.0 would be a rather 751 00:41:55,739 --> 00:41:56,540 Speaker 1: disastrous one. 752 00:42:00,760 --> 00:42:04,699 Speaker 2: So, um but first, I think, you know, his age, 753 00:42:04,709 --> 00:42:07,620 Speaker 2: Trump's age is a real problem. So I think we shouldn't. No, 754 00:42:07,629 --> 00:42:11,549 Speaker 2: that's a joke. Um I think from, from the Chinese 755 00:42:11,560 --> 00:42:16,129 Speaker 2: point of view there is they actually fear Biden more 756 00:42:16,139 --> 00:42:17,659 Speaker 2: I believe than Trump. 757 00:42:18,439 --> 00:42:22,500 Speaker 2: Part of the reason is that Trump was as detrimental 758 00:42:22,510 --> 00:42:26,620 Speaker 2: to the allies and partners of the United States 759 00:42:27,659 --> 00:42:30,020 Speaker 2: as he was to China, the first terrorist that he 760 00:42:30,030 --> 00:42:34,610 Speaker 2: announced was on aluminum from Canada, its closest partner. It's 761 00:42:34,620 --> 00:42:39,199 Speaker 2: absolute closest partner. So, so Trump seems to be much 762 00:42:39,209 --> 00:42:42,489 Speaker 2: more like an America first rather than anything else that 763 00:42:42,500 --> 00:42:43,000 Speaker 2: is 764 00:42:43,739 --> 00:42:46,000 Speaker 2: great for undermining 765 00:42:47,010 --> 00:42:51,399 Speaker 2: the strongest asset that the US has, namely partners and 766 00:42:51,409 --> 00:42:52,810 Speaker 2: allies all around the world. 767 00:42:53,629 --> 00:42:54,750 Speaker 2: If you look at China, 768 00:42:55,479 --> 00:42:57,570 Speaker 2: China has lots of good relationships, 769 00:42:58,649 --> 00:42:59,388 Speaker 2: but they have 770 00:43:00,229 --> 00:43:03,750 Speaker 2: one treaty ally and maybe one close partner in uh in, 771 00:43:03,760 --> 00:43:06,729 Speaker 2: in Russia. So, so the this one of the key 772 00:43:06,739 --> 00:43:11,569 Speaker 2: strengths of the United States that would be undermined by Trump. 773 00:43:11,610 --> 00:43:13,840 Speaker 2: And it would mean that there would a lot more 774 00:43:13,850 --> 00:43:14,689 Speaker 2: countries would 775 00:43:15,280 --> 00:43:18,620 Speaker 2: start leaning towards China economically, 776 00:43:19,489 --> 00:43:21,709 Speaker 2: but even from a security point of view, because the 777 00:43:21,719 --> 00:43:22,229 Speaker 2: second 778 00:43:23,649 --> 00:43:26,909 Speaker 2: part where Trump has been very explicit, he no longer 779 00:43:26,919 --> 00:43:30,819 Speaker 2: wants to pay for the defense of other countries. Um No, 780 00:43:30,879 --> 00:43:31,840 Speaker 2: that that is a, 781 00:43:32,590 --> 00:43:35,590 Speaker 2: a misguided thought in terms of in terms of what 782 00:43:35,600 --> 00:43:37,540 Speaker 2: is actually happening and what are actually 783 00:43:38,419 --> 00:43:43,000 Speaker 2: mechanisms like NATO doing. But, but irrespective uh that's the 784 00:43:43,010 --> 00:43:48,679 Speaker 2: way uh candidate Trump thinks and it may mean that the, 785 00:43:48,689 --> 00:43:51,100 Speaker 2: the Europeans would have to rely a lot more on 786 00:43:51,110 --> 00:43:52,959 Speaker 2: their own defenses that, 787 00:43:53,360 --> 00:43:57,850 Speaker 2: that dynamics can again, be very detrimental because if you 788 00:43:57,860 --> 00:43:59,739 Speaker 2: have to rely on your own offenses, you have to 789 00:43:59,750 --> 00:44:02,139 Speaker 2: rely on your own defense industry because you can no 790 00:44:02,149 --> 00:44:05,830 Speaker 2: longer rely on potentially getting all your, all your weaponry 791 00:44:05,840 --> 00:44:09,479 Speaker 2: that you need from the US, even aside from, even 792 00:44:09,489 --> 00:44:13,139 Speaker 2: aside from not having the might of the US behind you. 793 00:44:13,149 --> 00:44:17,399 Speaker 2: So that, that dynamics uh is, is, is really, uh 794 00:44:17,409 --> 00:44:18,500 Speaker 2: a bit depressing 795 00:44:19,300 --> 00:44:23,610 Speaker 2: and I'm not sure whether thinking through all the consequences, 796 00:44:23,620 --> 00:44:28,669 Speaker 2: whether everybody in the US administration and future administration would agree. 797 00:44:28,939 --> 00:44:31,319 Speaker 2: So I think, I think for China, 798 00:44:31,949 --> 00:44:34,850 Speaker 2: it's, it's a plus the M I mean, they, they're already, 799 00:44:34,860 --> 00:44:37,560 Speaker 2: they've been building down the exposure to us 800 00:44:38,260 --> 00:44:41,949 Speaker 2: in terms of exports al already quite dramatically. They found 801 00:44:41,959 --> 00:44:49,439 Speaker 2: channels around the Trump version, one tariffs through Mexico, through Vietnam, 802 00:44:49,449 --> 00:44:51,560 Speaker 2: through India, even um 803 00:44:52,310 --> 00:44:55,879 Speaker 2: where China is increasing the export uh uh semi finished 804 00:44:55,889 --> 00:45:00,050 Speaker 2: goods to those countries and then they become other countries, goods. 805 00:45:00,389 --> 00:45:01,040 Speaker 2: Um 806 00:45:02,159 --> 00:45:04,850 Speaker 2: I'm not saying that that is sustainable but it, it, 807 00:45:05,020 --> 00:45:10,969 Speaker 2: it's something more manageable for, for, for China. I think 808 00:45:10,979 --> 00:45:16,370 Speaker 2: one of the key misconceptions in, in the thinking of, of, 809 00:45:16,379 --> 00:45:19,669 Speaker 2: of Trump is that China is still a very export 810 00:45:19,699 --> 00:45:23,739 Speaker 2: dependent country and yes, they're still doing well with exports and, 811 00:45:23,750 --> 00:45:27,360 Speaker 2: and they need exports for, for demand. But there's other 812 00:45:27,370 --> 00:45:28,850 Speaker 2: sources of demand and 813 00:45:29,570 --> 00:45:32,449 Speaker 2: the biggest growth in exports is of course not the 814 00:45:32,459 --> 00:45:35,669 Speaker 2: United States which has been now quite negative to Europe, 815 00:45:35,679 --> 00:45:38,830 Speaker 2: it's more or less flat but it is ASEAN. It 816 00:45:38,840 --> 00:45:41,850 Speaker 2: is all the Belt and Road countries where you see 817 00:45:41,860 --> 00:45:46,689 Speaker 2: their share in China's exports is skyrocketing and the share 818 00:45:46,699 --> 00:45:49,669 Speaker 2: if you want of the old powers, the G7 in Europe, 819 00:45:49,729 --> 00:45:52,929 Speaker 2: it's declining. But now it's below 40%. It used to 820 00:45:52,939 --> 00:45:56,949 Speaker 2: be almost 60%. So that is really turning around and, 821 00:45:56,959 --> 00:45:58,810 Speaker 2: and I don't think so. In other words, 822 00:45:59,469 --> 00:46:02,290 Speaker 2: for China, it's a little bit pluses and minuses. But, 823 00:46:02,300 --> 00:46:07,209 Speaker 2: but what, what Biden has done I believe is, is 824 00:46:07,219 --> 00:46:13,120 Speaker 2: quite effectively mobilizing its partners and allies in the Asia 825 00:46:13,129 --> 00:46:18,290 Speaker 2: Pacific region region for any eventuality that might happen. Even 826 00:46:18,300 --> 00:46:22,330 Speaker 2: the Philippines came back into the fold if you want, offered, 827 00:46:22,409 --> 00:46:28,409 Speaker 2: offered the United States uh uh space for, for base and, and, and, 828 00:46:28,419 --> 00:46:29,169 Speaker 2: and that's, 829 00:46:30,310 --> 00:46:31,610 Speaker 2: that's good diplomacy 830 00:46:32,689 --> 00:46:36,399 Speaker 2: and the Chinese don't like it because they think that 831 00:46:36,409 --> 00:46:39,510 Speaker 2: this is a containment policy. But so therefore, maybe they, 832 00:46:40,429 --> 00:46:42,989 Speaker 2: they in the end think they can benefit more from the, 833 00:46:43,189 --> 00:46:46,600 Speaker 2: the roughness of a Trump because Trump would destroy a 834 00:46:46,610 --> 00:46:48,529 Speaker 2: lot of alliances of the United States. 835 00:46:50,399 --> 00:46:53,669 Speaker 1: Um II, I hear your point. Uh when I look 836 00:46:53,679 --> 00:46:57,659 Speaker 1: at China's trade surplus vis A vis in Vietnam or Mexico, 837 00:46:58,020 --> 00:47:00,610 Speaker 1: uh they've gone up a lot, meaning that there are 838 00:47:00,620 --> 00:47:03,469 Speaker 1: a lot of companies in there with Chinese capital or 839 00:47:03,479 --> 00:47:07,280 Speaker 1: taking Chinese inputs which are exporting into the UFS circumventing 840 00:47:07,290 --> 00:47:10,659 Speaker 1: all these tariff walls. I do worry about the generalized 10% 841 00:47:10,669 --> 00:47:12,250 Speaker 1: tariff because I think that would be a bit of 842 00:47:12,260 --> 00:47:14,669 Speaker 1: a trade shock for the whole world. And at a 843 00:47:14,679 --> 00:47:16,939 Speaker 1: time when we still have some inflation worries 844 00:47:17,290 --> 00:47:19,449 Speaker 1: earlier, I talked about deflation. I think then we'd have 845 00:47:19,459 --> 00:47:21,580 Speaker 1: to worry about inflation shocks if we are going to 846 00:47:21,590 --> 00:47:25,399 Speaker 1: have some generalized tariffs. Um But uh before I let 847 00:47:25,409 --> 00:47:29,600 Speaker 1: you go, final talk on industrial policy, which is, you know, 848 00:47:29,610 --> 00:47:32,580 Speaker 1: very much in vogue in Europe and the US now, 849 00:47:32,590 --> 00:47:35,469 Speaker 1: particularly in the US and the Inflation Reduction Act. Um 850 00:47:35,479 --> 00:47:39,189 Speaker 1: Do you think China is doing good industrial policy these days? 851 00:47:39,199 --> 00:47:41,489 Speaker 1: I mean, would you say that the whole ev outcome 852 00:47:41,500 --> 00:47:45,870 Speaker 1: is a successful uh you know, manifestation of industrial policy? 853 00:47:47,000 --> 00:47:50,299 Speaker 2: Uh I think China is doing it better than before 854 00:47:51,550 --> 00:47:53,689 Speaker 2: and they are used to it. 855 00:47:54,489 --> 00:47:58,310 Speaker 2: Whereas if I look at the industrial policies as announced 856 00:47:58,679 --> 00:48:02,110 Speaker 2: by Europe and the United States, it may not be, 857 00:48:03,040 --> 00:48:06,159 Speaker 2: it may not be what it takes. China has a 858 00:48:06,169 --> 00:48:07,370 Speaker 2: problem that they do too much 859 00:48:09,100 --> 00:48:12,429 Speaker 2: and I had this one. I I need to paraphrase 860 00:48:12,439 --> 00:48:14,540 Speaker 2: the quote and I also make it a bit more Chinese. 861 00:48:14,550 --> 00:48:18,120 Speaker 2: But um somebody said, look, 862 00:48:18,860 --> 00:48:22,500 Speaker 2: China's industrial policy is like throwing a big bowl of 863 00:48:22,510 --> 00:48:24,520 Speaker 2: noodles at the wall 864 00:48:25,179 --> 00:48:29,439 Speaker 2: and then invest in those areas where the noodles stick. 865 00:48:30,699 --> 00:48:33,600 Speaker 2: The problem with that is that China has an awful 866 00:48:33,610 --> 00:48:34,679 Speaker 2: lot of noodles. 867 00:48:35,959 --> 00:48:39,330 Speaker 2: Now, I like I I it was actually with spaghetti 868 00:48:39,340 --> 00:48:42,840 Speaker 2: but I make noodles because it is China I now, 869 00:48:43,229 --> 00:48:46,270 Speaker 2: now that I think is China's problem. And if you 870 00:48:46,280 --> 00:48:48,620 Speaker 2: look at the, the the new setup, 871 00:48:49,419 --> 00:48:55,310 Speaker 2: China is really making AAA whole of society effort into 872 00:48:55,320 --> 00:48:59,840 Speaker 2: many areas of industrial policy. And that is, 873 00:49:01,120 --> 00:49:03,759 Speaker 2: I don't think that's very productive for China. And they 874 00:49:03,770 --> 00:49:06,540 Speaker 2: have better, better coordinations now than say five or 10 875 00:49:06,550 --> 00:49:09,389 Speaker 2: years ago. And it, and it was all over the place. But, 876 00:49:09,399 --> 00:49:14,739 Speaker 2: but it, it increases the defenses from other countries because 877 00:49:14,750 --> 00:49:18,179 Speaker 2: they say, well, you see, we're telling that China never 878 00:49:18,189 --> 00:49:21,219 Speaker 2: obeyed by WTO rules and look, it's becoming less and 879 00:49:21,229 --> 00:49:24,300 Speaker 2: less of a market economy. I'm not saying that's, that's 880 00:49:24,310 --> 00:49:27,209 Speaker 2: a fair argument, but that's the argument that's going to 881 00:49:27,219 --> 00:49:29,659 Speaker 2: be made more industrial policy China has 882 00:49:29,979 --> 00:49:32,330 Speaker 2: and the more effective they will be, the more you 883 00:49:32,340 --> 00:49:34,790 Speaker 2: will hear that argument. So I think China should do 884 00:49:34,800 --> 00:49:38,009 Speaker 2: a little less Europe and the United States should think 885 00:49:38,020 --> 00:49:40,638 Speaker 2: about it a bit more on how would they exactly 886 00:49:40,649 --> 00:49:43,158 Speaker 2: do this? Europe? Europe is very clear, Europe. 887 00:49:43,959 --> 00:49:46,100 Speaker 2: Well, the best thing that they can do is break 888 00:49:46,110 --> 00:49:50,919 Speaker 2: down the remaining barriers between eu countries. It's the biggest obstacle. 889 00:49:51,169 --> 00:49:54,439 Speaker 2: The second biggest obstacle is the financing, but it's related. 890 00:49:54,770 --> 00:49:57,060 Speaker 2: Like if you, if you invent something great in the 891 00:49:57,070 --> 00:50:00,520 Speaker 2: United States, you have the United States. If you invent 892 00:50:00,530 --> 00:50:04,679 Speaker 2: something great in the Netherlands, you have the Netherlands. So, 893 00:50:04,750 --> 00:50:07,379 Speaker 2: so you, and, and then you have to struggle through 894 00:50:07,389 --> 00:50:08,100 Speaker 2: the regulatory ma 895 00:50:08,274 --> 00:50:10,674 Speaker 2: as you know, to finally make it a European. So 896 00:50:10,685 --> 00:50:14,004 Speaker 2: there's still a lot of barriers, formal and informal that, 897 00:50:14,014 --> 00:50:18,425 Speaker 2: that prevent Europe from being a very big player in 898 00:50:18,435 --> 00:50:22,354 Speaker 2: new industries, simply because they, they can't scale up rapidly 899 00:50:22,364 --> 00:50:27,074 Speaker 2: enough compared to the United States. And China's is increasingly there. 900 00:50:27,084 --> 00:50:30,445 Speaker 2: They're not there yet. There's lots of divisions between provinces, 901 00:50:30,455 --> 00:50:32,415 Speaker 2: between municipalities, there's lots of 902 00:50:33,489 --> 00:50:37,350 Speaker 2: subnation industrial policies that distort the market quite a bit 903 00:50:37,360 --> 00:50:40,310 Speaker 2: very much recognized by the government as an issue. But 904 00:50:40,320 --> 00:50:43,549 Speaker 2: to unify that market would would, in my view be 905 00:50:43,560 --> 00:50:47,070 Speaker 2: the most powerful industrial policy tool that China can do 906 00:50:47,080 --> 00:50:48,860 Speaker 2: for itself just like Europe. 907 00:50:49,879 --> 00:50:53,739 Speaker 1: Yeah. Uh that that subject remains a light one. So 908 00:50:53,750 --> 00:50:55,719 Speaker 1: maybe when you come back for the fifth time, we'll 909 00:50:55,729 --> 00:50:57,590 Speaker 1: devote more time to that issue at 910 00:50:57,979 --> 00:51:00,939 Speaker 2: the end of the year. Uh at EA I, the 911 00:51:00,949 --> 00:51:05,389 Speaker 2: new director Alfred Sh, he has announced that uh that 912 00:51:05,399 --> 00:51:10,070 Speaker 2: we would do a conference on industrial policy with participation 913 00:51:10,080 --> 00:51:12,799 Speaker 2: from Asia, from the United States and from China. So 914 00:51:12,810 --> 00:51:14,020 Speaker 2: that will be very interesting. 915 00:51:14,439 --> 00:51:18,219 Speaker 1: That sounds fantastic. Definitely be there to attend that. Uh Bert. 916 00:51:18,229 --> 00:51:20,699 Speaker 1: Thank you so much for your time and insights. 917 00:51:21,729 --> 00:51:23,709 Speaker 2: It's been a pleasure. Thank you for having me. 918 00:51:24,110 --> 00:51:26,840 Speaker 1: A pleasure. Is all mine. Copy time was produced by 919 00:51:26,850 --> 00:51:30,049 Speaker 1: Ken Delbridge at Sply Studios. Violet Lee and Daisy Sherman 920 00:51:30,120 --> 00:51:34,139 Speaker 1: provided additional assistance. All 100 episodes of the podcast are 921 00:51:34,149 --> 00:51:37,810 Speaker 1: available on youtube and on all major podcast platforms including 922 00:51:37,820 --> 00:51:41,529 Speaker 1: Apple Google and Spotify. As for our research publications, webinars, 923 00:51:41,540 --> 00:51:43,540 Speaker 1: and live streamers, you can find them all by Googling 924 00:51:43,550 --> 00:51:46,790 Speaker 1: D BS research library. Have a great day.