YouTube Who Killed the Chinese Economy?

 

These group of beasts eat human food to shit dogs' shit. No matter what, China's economy is better than that of the West. At least the people are not unable to survive. Look at Europe, look at the United States, which one is human society now?

Who Killed the Chinese Economy? | A Discussion with Adam S. Posen, Zongyuan Zoe Liu, Michael Pettis

https://www.youtube.com/watch?v=6Z1TxK9JyWI&ab_channel=

Foreign Affairs
Everyone can agree: Chinese economic growth is slowing. After Chinese President Xi Jinping lifted the country’s strict COVID-19 restrictions in December 2022, many expected the Chinese economy to surge, but after a brief post-COVID bounce, it appears to be losing some of its vitality. What are the causes of this stagnation? That is a question of intense debate, and China’s ability to recover and the future of U.S. policy largely depend on how it is answered.  
 
Foreign Affairs Executive Editor Justin Vogt and the Peterson Institute’s Adam S. Posen, along with Zongyuan Zoe Liu and Michael Pettis, discuss the causes of China’s economic stagnation and what it may mean for American strategy.  

This joint event from Foreign Affairs and the Peterson Institute for International Economics originally aired on November 14, 2023. 

转写文稿

Thanks Sam and good morning to everybody uh thanks for joining us this is a a uh
a dual event it's a a foreign affairs event uh launch for our our our November December issue but we're doing this in
partnership with our friends at the Peterson Institute for international economics as well um I like to think
about what we're going to do this morning as uh sort of like a a game of
Clue uh a foreign affairs edition of Clue the board game Clue
with with the mystery that we're trying to solve being who killed the Chinese
economy and we're going to get a couple of different you know guesses at that
you know was it zero coid in the 2020s with the excessive State
interventions maybe it was Chinese leader xiin ping in the
2010s with the Civil military Fusion strategy or maybe it was the CCP in in
the alts with an outmoded growth model we're going to get variations on those
guesses today uh from our terrific panel of guests uh Adam Posen and Zoe Lou and
Michael Pettis you have their bios I'm not going to bore you with those but uh take my word for it when I tell you that
these are three of the very best experts on China and on the Chinese economy um
they're going to share our their perspectives with us on this question we're also going to talk a little bit about
uh the current situation in China us Chinese relations and what's what we can
expect to come so we're not just going to focus on the past but also the present and the future as well um I'm
gonna start with Adam because actually this entire sort of question was brought
to the for by this tremendous piece that Adam wrote for the magazine a couple of months ago called the end of the Chinese
uh the end of China's economic Miracle that's what sort of started this debate and uh the the piece that that is in
this issue of the magazine is what's called a response package where we asked uh some people to uh respond to Adam's
argument and to critique it and then for Adam to respond to them so in some ways this is like a a liveaction version of
that response package um and so what I'm going to do is I'm going to start with
Adam we're GNA hear from Zoe we're going to hear from Michael I'm going to ask them some questions about half an hour
in I'm going to turn it over to our audience we have a lot of people on the call today and I'm sure a lot of you
will have questions for our guests uh it should be a really good conversation what I'm hoping we we get out of this
today is not just a sense of uh the history here the economic and the political history that's relevant to the
current moment but a real understanding of how the way in which you interpret that history can shape the way you
understand policy today and policy going forward that's really what what matters and where the rubber hits the road so
Adam and Zoe and Michael thank you you welcome and uh let's try this out let's
see if we can if we can solve this mystery uh Adam let let me start with you can you explain for me uh and for
all of us what the idea that you you put forward in your original article which
was that what China is struggling with is something that you refer to as economic long coid can you explain what
that is and the sources of it and and the ramifications for the Chinese economy thank you Justin I'll try and
thanks to you for your editing and for Foreign Affairs for giving us the Forum and bringing us all together um so in my
view the stunning fact about China's economic slowdown is how little bounce
China got after reopening in zero Co and most economies including Japan including
other neighbors in Asia but all high income economies saw some degree of big consumer rebound right after they
reopened in China that rebound barely existed and then fizzled out and so when
I look at that what I find more deeply is that you see a huge shift in Chinese household Behavior they stop buying
durable goods Autos expensive things small businesses which are essentially owned by households do the same thing
they start putting more and more money into bank accounts into cash-like liquid substances or forms of assets and in
general savings go up but importantly they're moving towards liquidity and I interpret this as a reaction to the zero
covid policy which made China's Communist party and she's more aggressive interventions in the face of
the average Chinese person for decades there was what I called a no politics no problem compact in China this to me was
a big part of the actual Chinese miracle that from dung until she takes power in
2013 if you weren't a democracy protester if you weren't an oppressed Muslim minority or some other ethnic
minority basically you could go about your commercial life you might have to pay a bribe you might not always get the
contract you wanted but basically you were left alone as long as you did know politics starting with she's
consolidating power in 2015 but especially with their zero coid Crackdown average chines suddenly were
subjected to your company is closed you can't go to your job you've lost your business and it's arbitrary by a given
party member in a given City making up their mind and this resonates in away with the people that putting an Alibaba
executive in jail or putting an anti corruption campaign does not because that's just abstract leaders and so when
we have this this breaks the Compact and it's very hard for an autograt which is what she and the Communist Party are to
reestablish credibility they can say oh GE it's it we did it just because of Co
and look at all the millions of lives we saved that it's still not credible that they're going to go back especially
since there's a laundry list of ways in which she and the party have been more and more intrusive in recent years and
two key points to go with that this Behavior this this zero long long Co
economic long Co meaning the nonresponse of consumers to incentives because they're hoarding liquidity they're
trying not to get expropriated they're basically scared this occurred well before the
breakdown of the real estate market the real estate market is on top of that doesn't help but it occurred and is
independent of that and in fact the behavior of moving into savings and out of durable goods is not necessarily what
the real estate market crash would do and the other point is this goes with a turn against the private sector not just
the big fancy you know platform companies but against the private sector
more generally in China which is marked and is different than the previous 30 years in China so to me we have economic
long Co in China the ability to stimulate the economy is very limited
even though they keep trying and therefore there's pressure for Capital people talent and money to exit and
that's the direction I think policy needs to think about thank you and so the the the sort of metaphor here that
you're that you're making with economic La Co is that it's not the virus itself that that sort of has caused these lingering symptoms but but the the kind
of overactive immune response on the part of the state that has stuck with us right that's sort of thank you for
bringing it out yes that is what I wanted to convey sure good good Zoe you you uh you wrote about this obviously
you took up Adam's uh article and and and you wrote a a really interesting critique of it I wanted to ask you some
of I think some of if I understand your critique correctly some of what Adam has written you you sort of agree with but
the emphasis is slightly different can you explain I'd love to hear your kind of basic take on on his the story that
Adam tells about this and and where your view of it differs yeah thank you very much Justin for for the opportunity to
write to Bas response and you know I I do think Dr poon's um metaphor of long
economic coid is is is is very creative and I do share with him in in the sense
that in terms of the how coid have sh has shifted or put in front of the
Chinese normal Chinese people's face in terms of the intrusiveness of the party as well as president xinping however I I
you know I would like to consider myself as as the student of a lot of these great economists including Adam pson
including Professor Michael Pettis as well as Nicolas lardi and all that therefore you know where I come from
really I understand this situation as you know president xinping he did not assemble China's economic Time Bomb but
I do think he should be blamed for having shortened the fuse and if I can
explain this a little bit more you know this is how I view the Chinese economic problems I view it as having the problem
of four DS uh including debt demographics demand and decoupling I
think Professor ptis can explain this in terms the the structural problems way much better than I do especially in
terms of debt demand demographics and all that what I think Pro president Shin Ping's you know his share of the
responsibility here is that is really with regard to how his policies
accelerated the for the the the trajectory of decoupling and um you know
a lot of these four DS that I talked about you know debt demand demographics decoupling a lot of these problem have
long been evident as Professor Pat is noticed and he he he's written widely about this and president xinping and his
presor they were aware of these problems but they really didn't do enough to
mitigate these long-standing issues so this therefore I think it's unfair to
blame shinp entirely for creating all these problems or for the lack of economic recovery postco and that's why
I I I think he didn't assemble the time bomb however really his responsibility
is in terms of the dec the the last the decoupling so this is where I think I
agree with um Dr poen in terms of you know the the the policy missteps that he
has he did um have been highly consequential but I would differ with Dr
Poston in terms in terms of you know the the role of the decoupling or for that matter the the identifying coid 19 as a
critical juncture I would argue that actually you know the critical juncture happened several years before
um zero Co the coid 19 as well as zero coid because if you remember back in
2013 president Shin already put out his own personal explanation his own
explanation to what does he mean by what what what what he thinks reform and deepening uh re deepening reform and
opening up means and in in writing and in his speech he's specifically talking
about you know the for for him reform and open up really is about the emphasis of the state Spector the RO the
leadership of the party in um you know economics and finance and you know in a way he has been quite honest and then if
we why this matters for decoupling and why this relates to coid I I would say
that you know the net effect of zero coid was actually to make president shining
overconfident that his assertive foreign policy could be persuasive and you know
many of us probably still remember the initial shock of coid uh the Chinese government responsive
response has been was relatively successful in terms of control the virus the spread of the virs compared with the
rest of the world and in a way uh the Chinese government response actually is very much reflective of their you know
the governance philosophy in Chinese you know crisis is the same term like is
like Crisis and opportunity is way and G and way it's very much like sunu kind of
thinking in chaos there is great opportunity and this is also where I think president Shin his Draconian zeroo
policies actually created a dent not just for himself but
exacerbated exacerbated not created the previous you know demographic debt and demand problem therefore you know our
pre our uh ter member meeting uh earlier this year um I described you know the
this whole situation as you know before covid or before 2019 when we think about
the Chinese economy it looks like a Monet it's like an impressionist painting it looks beautiful from afar
but it looks like a jumbo mess up close but after covid the problem still exist
but it's now like a Jackson Pollock in the sense that it looks like a jumbo mess from afar and a jumbo mess up close
so from that perspective I really don't think president shim should be blamed for the lack of recovery or for the
assemble the time bomb but he actually did shorten the fuse like this we've
moved from a sort of medical metaphor to an artistic one just in defense of Jackson poock you know Chase May differ
you know some people like those jumbled messes um that's interesting though because what I I also I'm thinking about
what you said about the overconfidence that it's it's good to remind ourselves that in the early phases of uh the
pandemic you know there was reason for the Chinese government and for the CCP to believe that what they had done was
sort of correct and and they were doing so much better um that's an interesting the thing that I think we' we've tend to
forget in our you know in our presentism um speaking of presentism I think I
think you know Michael your your uh contribution here and and your uh
critique if I understand it again correctly and you can you can explain this more thoroughly um is that you see
the roots of of some of uh the problems that China is now facing far earlier than both Adam and Zoe um and sort of
not only see them there but believe that they were sort of foreseeable and even foreseen um can you explain exactly what
you mean by that and whereas Adams talked about the the turning point being
or or maybe not the turning point but the point of no return being 2020 Zoe has talked a little bit about 2015 and
and and 2013 with uh she's arrival on the scene you put I think you seem to
put this Turning Point closer to around 2006 and I'm curious about what are what
the factors what was happening then that sort of cast the die in your point of view sure well U thanks very much Justin
and thanks Adam and and Zoe um the the the other famous Adam Adam twos uh
refers to me as the as the structuralist and and I think that's accurate I think it's a much more structural uh argument
as to what happened with China basically the Chinese growth model the sort of the high savings High investment model is
not particularly Chinese these many countries have followed it and it always seems to follow a pretty similar path um
you have a period of very rapid Healthy Growth followed by a period of very
rapid unhealthy growth driven by a surge in debt and then a difficult adjustment
and one of my favorite economists Albert hman talked about this way way back in in the 1970s and what he argued is that
this is what happens to a successful development model a successful development model by definition makes it
self obsolete because it resolves the problems it was designed to address and then you need to shift the model and if
you don't shift the model you end up de developing a different set of imbalances and he also noted that almost
no one shifts the model and the reason he argued is because a successful development model creates a series of
Institutions that disproportionately better benefit certain constituencies that become very powerful and it's very
hard to shift the model because of the uh blocking efforts by those constituencies well you know he died
before the whole China story but he could have been talking about China and so what I would argue is that this High
investment model made a lot of sense in the in the 1980s and 1990s when China
was possibly the most underinvested economy in the world um but with the
fastest growth rate of investment they closed the Gap pretty quickly between what they had and what they could
productively absorb now at that point you're supposed to shift to a different model but no one ever does not Brazil in
the 1970s not Japan in the 1980s not the Soviet Union in the 1960s and that's
when you end up with very high investment rates that are no longer
productive so when that happens you start to see grow uh debt grow faster than GDP so this is a pretty old story I
would argue that most people would say the problem began in 200920 I think it
start started earlier than that but but it doesn't matter um at some point we started to see this unsustainable
acceleration of debt in order to maintain high growth rates and here is where another Economist that I cite a
lot Janos corai is very important corai argued that in these types of economies
um you have a shift from the hard budget constraint part of the economy to the
soft budget as long as you want high growth rates because a hard budget can strain a part of the economy for example
the private sector won't systematically engage in nonproductive Behavior if they
do they go bankrupt so if you want to maintain higher growth rates than the real economy can deliver then you have
to increasingly shift activity to the the soft budget constraint which in
China was largely local governments in the property sector and so as a result
the problems in China predate the uh xijin ping in fact back in 20 12
remember when Xi Jinping became party uh party secretary we all agreed this was a
good thing because he was a pragmatist and a market guy and back then I argued that if you looked at the Historical
precedence what was very likely to happen was a recentralization of economic decisionmaking because the
conflict over adjustment would be so difficult that without a recentralization of power they would
probably fail to do it so I would argue that all of this was already baked into the before Co now I agree with Adam and
Zoe that Co mattered um and I think it mattered because it accelerated what was
already a pretty bad process not just in the U not just in China but in the US Europe and and the rest of the world so
we saw the uh debt pick up even more rapidly and more importantly during that
period we saw the household share of GDP drop and what was particularly bad we
saw income inequality increase which put even more downward pressure on consumption so I would argue that that's
the basic problem and you know if I could summarize it in a in a Snappy uh
in a Snappy phrase I would say it's not that the recentralization of the economy
caus The Slowdown I would say it was the Slowdown that caused the recentralization of the
economy that's interesting and you you have the causal arrows reversed in a sense from where Adam does that you you
the two of you sort of see this as as you see the same factors but you see them affecting each other in a different
sequence almost yeah can I add yeah please please jump in yeah and I I I
just want to affirm Dr Lou and Professor Pettis is characterizations these are very different points of view as you
just said Justin causality runs the other way I I would make two points I think first the structural the the heavy
duty structurals version which Michael argues for is too dismissive of the
agency of both the party and the average Chinese household if you look at the period even including the period Michael
talks about there's an enormous growth in private sector employment in Returns on private sector Assets in in private
sector investment as my colleague Nick lardy H documented in markets so for Ma
and then starting in 2015 and accelerating the she turns it around but
then again the households don't react until we have the zero coid in the way
that I identify and so to me while the structuralist problems are there it both
exaggerates the determinism coming out of the structural problems and also frankly their magnitude all economies
slow down all economies accumulate over time there was nothing inevitable that you couldn't have put more money in the
private sector and gotten higher returns than you did the last several years anyway just to say I think Mikel and zo
are being perfectly Fair contrasting views but just that would be my point of difference I I don't think their model
fits the the developments that I saw right let me let me ask you to to to clarify one thing though and then I'll
and I'll ask and that will probably generate a response either from Zoe or Michael you you say this wasn't inevitable and and I guess what I'm
curious then is that it's really sort of a political question and I'm wondering
why if it wasn't an why were the choices made that that you see you know as having led to this point that that where
there was agency you you talked about the the household uh spending patterns what about on the on the policy question
what was the particular policy choice and why do you think that was the choice that the CCP opted for instead of the
other choices that presumably you think might have if not averted the the current situation at least pushed it
further off into into the future I'm not a good enough Chinese expert I'm a macroeconomist to do that
but I would have I think there are two clear contributing factors one is is
that not the pro for personal Isis but in an autocratic system the views of the leader do matter and she's views clearly
from the time he took office but particularly from 2015 forward were that the market had gone too far the party
had gotten soft the people had gotten soft and you had to deal with it a second factor is you can argue how much
instead of what something none of the three of us have mentioned yet the external environment how much although
Zoe makes reference to the the remilitarization needs um to be fair um
so how much this is a reaction to perceive threats or external Ambitions and that pushes you in this direction
but I think it's ultimately mostly about control um and that's why again I tried
to speak of the the long coid it's the immune resem response as you kindly
invoked it's it's not because the Communist party ever was not in control
it was that the communist party self-control broke down that unlike dung
and his successors she what broke this no politics no problem Compact and it
may I don't know if it's inevitable but it's very hard for an autocratic system a party to resist that Temptation for
decades it's amazing to me how long China did right yeah that's one of the things that comes through in your in
your in your piece originally is that it's it's sort of like they were the image that I had in my mind and I I almost put this in in the edit and I
decided it was it it was not it wasn't okay for foreign affairs but I'll do it now though is it it was that image of um you know the old uh Road Runner Cartoons
yeah but you know where where uh Wy coyote kind of goes out over the over the edge of the road and is sort of
running on on on air until suddenly he realizes and drops that's kind of the the image that I got from your uh from
your analysis of of Chinese you know recent Chinese economic history Zoe actually before I I I want to go back to Michael in a second but Zoe Adam
mentioned something that I did want to bring in because one thing that your essay talks about is this question of
she's kind of a broader foreign policy and its effect on some of this the sort
of uh the re-embrace of nationalism what you describe as this civil military fusion and its effect on the Chinese
economy can you pick up where Adam left off there and kind of talk a little bit about that context in which this
happened because that's also on our minds now I think with um with the Apec
uh Summit happening this week and with the meeting between Biden and she and I'm sure that some of our uh attendees
are going to want to hear a little bit about that so it' be interesting to hear your take on that sure justing um I do
think president shining's elevation of the Civil military Fusion strategy to
the level of national strategy can you just explain what that is quickly what what you mean by then so so this did not
this so-called strategy did not start from shining it's the whole the whole
civil military Fusion started in during huin era the idea is to empower OB
business physically mobilized Chinese the a whole whole of a society whole of a Nation um element blurring the Str the
nature of military as well as and and the private sector and the civilian sector in terms of technological
advancement and technological self sufficiency so president Shin really
elevated that into as to the level of national National strategy and combining
that with uh you know the made in made in China 20 20 uh 2050 so a lot of this
really triggered um alerted uh Western politicians and in particular here US
policy makers in Washington DC and in response the United US policy makers uh
accelerated a lot of the pre-existing mechanisms such as export control such
as investment screening and now we are in an era of outbound investment sing so
um you know if shining W if president sh did not put this accelerate a lot of
these policies to such a higher level I I do not think it would trigger such a
response from the United States and as a consequence what used to benefit China's
economic rise on the one hand International International confidence in the Chinese economy as well as policy
predictability and then on the other hand that China's easy access and a cheap at a lower cost to Advanced
Technologies in Market those things are no longer there and I would agree with
Pro with Dr poen in that you know president president shining a lot of his policy misstep did matter but I would
say that it matters before coid and more specifically he removed the
predictability and the lack of political drama that used to benefit the Chinese
economy great thank you um Michael I'm goingon to turn to you and and I have a a sort of clarification question for you
that I I hope will be uh fruitful in the meantime um uh folks who are joining us
uh if you want to start thinking about the questions you want to ask I'm gonna I'm G to go to that next but Michael when when you both you and and Adam sort
of tell this this story that to my kind of lay person's mind it brings to to uh
to mind this expression that at least when I was you know a college student I I I I learned which was the middle inome
trap right that that there was this kind of problem where uh as you put it uh you
know a system was developed to solve a certain set of problems and then once it it solved those problems it became
Obsolete and you had to you had to switch um is that essentially what you're describing is that another name
for what you're describing or is that different uh from from what you're talking about and regardless of whether
what the answer is there um I guess my question for you is if China missed its
opportunity or the opportunity it had some time in the alts to shift growth
models um do you only get one chance as a as a regime uh type or do you is this
a kind of thing that you can you can kind of uh you can try again you can keep adapting what what's your were your
view of that well to address the middle-income Trap it's not a phrase that I really
like because it seems to me that we often Trot it out to mean we don't know so it must be the middle- income trap um
but um it in terms of in in terms of the you know I would call it an investment
trap be because it affected all countries that had very very high
investment growth models uh Japan which is certainly not a middle-income country it's quite a rich country also went
through this trap poorer countries like Brazil in the 1960s and70s and so on there's about a dozen two dozen
countries that went through this growth model and what's really striking is how they all follow the same pattern and you
have uh very rapid Healthy Growth followed by very rapid unhealthy growth followed by a very difficult adjustment
and the adjustment can range uh you know I talk about the American style adjustment which Brazil followed too
which is a rebalancing in the form of a crisis so the United States in the 1930s
you'll remember GDP contracted by 35% household income contracted by half of
that brutally painful but it rebalanced and it was quite quick in Japan what we
saw is that GDP growth went from roughly 4 or 5% to around half a percent
consumption growth dropped by a lot less I don't have the per capita numbers but the per capita numbers look like they
dropped from around 3% to 2% so it wasn't as brutal an adjustment but it
took a very long period of time and what's really striking about this and Daren Asim moglu and James Robinson do a
series of very interesting papers on this what's really striking is how politically dis disruptive it's always
been except for two types of uh of of of political systems they argue highly
competitive political systems which seems to mean robust democracies and then highly non-competitive which
basically seems to mean a highly centralized autocracy by the way an example of the latter was China in the
1980s uh a series of reforms ferociously opposed by the party but with a highly
centralized leadership they were able to implement the uh the reforms anyway so I think that's that's a really important
part of it we always see that and that's why I argued that if you were going to advise she back in 2012 you would have
said you know either become a democracy or recentralize power that's that's part of the process now I I I realize my my
answer is getting getting a little bit long but I wanted to talk a little bit about the rise and fall of the private
sector what really seems to drive the private sector in China has been a combination of domestic consumption and
exports and so from uh uh domestic consumption bottomed out around 2010
2011 with household consumption at a a truly surreal 40 34% of GDP and after
that we started to see a partial recovery of consumption and the private sector benefited from that but that more
or less stopped a couple of years before Co and during Co we saw again the consumption share of GDP go down and
that's much more important than exports and so I would argue that what's really driving the expansion and contraction of
the private sector has really been the distribution of income to the household sector I think that's what's really been
key I'm aware that this is already a long answer so let me stop there okay um
I'm gonna open it up up now and I I'm I'm hoping that uh some of our questions might might get at the at the at the
point I was making earlier about what this how our interpretation of this matter is going forward if not I I'll
jump in and kind of ask you all to weigh in on that but I'd like to to give our our many guests a shot here so Sam I'm
going to turn it over to you for our questions thank you so much ladies and gentlemen as a reminder to ask a
question please click on the rais hand icon on your Zoom window when you are called on please accept the unmute Now
button and proceed with your name affiliation and question you may also type in your question using the Q&A box
on your Zoom window at any time and as a reminder this meeting is on the record
our first question is a written submission from Bert Eli who asks to what extent are China's economic issues
an inevitable consequence of its authoritarian governance viewed more broadly is authoritarianism over the
long-term and economically unsustainable form of government okay I think I think Michael
was sort of gesturing at at some of that in his last uh answer maybe Adam do you
have a kind of very very short answer to that one yeah so as I tried to say a
minut ago I think that there is an autocratic Temptation by the individual or by the party look at Orban look at
Putin look at duar look at Chavez and Maduro and Venezuela look at erdogan
that after at a certain point you want control and so it's very hard to resist the urge to exert that control and so
it's not inevitable but I would say it's very unlikely that you can sustain
having authoritarianism and not having excessive intrusions and importantly
arbitrary intrusions I mean that's the key thing that I would emphasize about the household sector reaction the zero
long zero long covid in China is that it's about the arbitrary nature the
capriciousness of authoritarian policies and that's what causes the immune reaction of people trying to self-insure
so authoritarianism can work for long periods there was the old Sam Huntington argument about political order and
changing soci societies with the example of Korea in the 50s and 60s but Korea has done even better as a democracy it's
hard to be a desperate and it's hard to it's even harder to be an enlightened desperate is what you're sort of saying is that you can't keep it up for that
long let's go to the next question Sam thank you so much our next question
is a Live question from Tara hariharan thank you so much my name is Tara hariharan I I work at NWI a hedge
fund in New York uh we've heard some very incisive diagnosis of the problems
uh with the Chinese economy I'd now invite the panelists to talk a little bit about viable policy prescriptions uh
we've already seen some easing in monetary policy but it hasn't really resulted in a pickup in consumer demand
or in housing demand uh similarly on the fiscal side fiscal easing has not yet
shown growth multipliers and uh separately again based on based on the structure of the economy and the the
government it seems like for moral hazard reasons uh China will not be ready to uh bail out the developers or
the local governments or for that matter even do some kind of consumer handouts uh so so what do the panelists see in
terms of actual um you know viable policies that China can take at this point thank you so much that's a great
question thank you T I'd love actually all three of you to take a crack at that because that that that and if you can if you can if you can connect it to your
you know as as Tara put it your your uh if you can connect your prescription to your diagnosis to the extent that you're
willing to I'd love to hear what you think is the answer to that question why why don't we start with Zoe and then
we'll go to Michael and then Adam yeah sure uh Tara thank you very much for your question um I think there there are
two pieces one is uh domestic one is international because I do think you know I do think the Chinese economy
right now is at the stage where reform and open up reform deepening reform
domestically is is is not necessarily going to be about the pure distribution
of benefit but it also involves the allocation of P because systematic
Financial repression already buil buil around it itself institutions as well as the incentives that people are people
just resist uh additional reform and I think Professor Pettis also uh made a
similar argument as well and uh so in terms of domestic I think perhaps
immediate in the immediate term the government really need to figure out how to distribute to stimulate household
consumption I'm not exactly sure whether this is going to be in the format of direct you know stimulus check or um or
or even household debt ease things like that but direct household household
support is necessary both to solve uh to on the one hand to address the lack of
household confidence issue then on the other hand at least to give people some sense of a shortterm relief right and
then internationally I do think this is It's tremendously important uh for president shining to show that he can he
cares about stabilizing us China relations and because this is this is
the moment I always I always remember what what D shaing said when after he visited the United States and on his
plan back to China he told everybody on the plan saying that you know what you know if you look at if you look around
the world for those who became who who are friends of the United States they all become rich and I think I'm not
exactly sure to what extent this kind of political willingness is still there but at least I think apack moment APAC is is
an opportunity for president sh to restore uh the relationship and in
particular to try to stabilize the relationship that's interesting I wonder whether that perception holds about the
value of Friendship with the United States these days Michael what's your what's your basic sort of uh
prescription or or policy advice for for how to uh deal with this slowdown you
know I think there it's not very surprising in fact there is a a a
consensus it's not Universal but there is a consensus among Economic Policy advisors and economic policy makers
about what China needs to do and very specifically uh they need to boost
domestic demand domestic consumption because if you bring investment down and everyone agrees that China has an
overinvestment problem um but if you bring it down the economy slows workers
workers lose their jobs consumption drops and you get all these terrible things so what you really need to do is
as you bring investment down you've got to bring consumption up so everyone agrees on that so how do you bring
consumption up well there's basically two ways one way is uh you encourage
somehow households to save less quite hard to do because the weak economy is
probably what's encouraging them to save more or you encourage household debt and in fact uh banks have been told to
expand their Consumer loans of course Banks only want to uh to lend to professionals who own their own homes
and it's become sort of a joke here if you're part of that favorite group banks are desperately trying to get you to
borrow at incredibly low rates um but that's not sustainable China already has
the highest household debt as a share of GDP among the highest in the world higher than in the US um so monetary the
problem with monetary stimulus in China doesn't work like in the US monetary stimulus tends to stimulate the supply
side of the economy so every time we've fiscal expansion or monetary expansion in China rather than rebalance the
imbalances have gotten worse so what do we do well again everyone agrees we have
to increase the household share of GDP we have to increase their wages transfers the social safety net etc etc
what hasn't really been discussed yet is the hard part if I increase my share
then by definition I have to reduce your share and we haven't really discussed who you are in this uh in this case
that's not totally true there is a growing recognition that it's going to be the government not the business
sector um but which government Beijing or the local governments and what we're
seeing in China it's been developing over the past year and I suspect is going to be the big story of the next
year or two increasing an in increasingly contentious dispute between
Beijing and the local governments as to who's going to pay for the adjustment cost who is going to liquidate in order
to increase the household share of GDP I could go on on that for an hour it's a very complicated issue but ultimately I
think Beijing knows what they have to do they just don't know how to do it that's fascinating it's a there's a bit of a
zero sum quality to what you're describing and the question is who's going to wind up with this with the short end of the stick Adam is that
Michael said that basically everybody agrees about what has to happen that the disagreements are about how to get there do you share that view and do you have
an thoughts about I know you do from your piece but can you tell us what your your sort of prescription is in terms of
how to get there I think there's disagreements on how much those solutions would help I think so let let
me go directly to Tara's question with socialist is excellent so first off on stimulus one of the key differences
between the structural View and my view is that in the stimulus the issue is for
structuralists you restructure the debt and stimulus will work and that fiscal
stimulus is just as it should be effective even if monetary stimulus is
not whereas in my point of view because the households are beaten down it's not
going to work that way and so the Chinese officials despite the moral hazard have been doing stimulus and in
fact they've just announced a one trillion Yuan bond issue which is going
to be directed to plugging the holes in local and state not state but anyway local and Regional government balance
sheets and I'm EXP expecting that to not have very much effect whereas in the
structural model that should have a decent effect and that's the opposite of Japan by the way which my work and
others Seely confirmed that in Japan they didn't do any of that public investment this is one of the big
differences that gets all lighted over in the structurals view is that in Japan
the debt was in the corporate sector not the household sector and in Japan the public investment was not there whereas
the private investment was and was what went bust so the upshot of all this is
that it's not enough whereas in Japan it was enough to take on a combination of monetary stimulus and debt Cleanup in
China because the effect is through the fear of the household sector this autocratic immune response that these
stimulus policies will not do enough and they will not be very effective what you need is a credible commitment from the
authorities that they were not going to interfere with life and that's very hard to get this is why I I think it's it's
fair to say Michael you you feel in the short term actually Adam's View and
those of others may be a little bit too pessimistic you you think it actually this may some of the things are doing now may work all right in the short term
although in the medium and the long term a little more pessimistic is that fair to say yeah I'm I'm not sure that I
would say the structuralist view is that fiscal stimulus works and monetary stimulus doesn't at least my view I
don't know if there are other people who claimed that that title um what I would argue is that supply side policies are
not sustainable it's demand side policies that China really needs because China doesn't have a supply side
constraint it's Michael that's the whole point because that is stimulus policy if we follow the logic of your argument
putting more money in the hands of households should raise consumption if you follow the logic of my argument
putting money in the hands of households should raise savings so it is a very distinct should raise savings because
people don't want to spend whereas you're saying they're spending constraint so so there is a very clear difference
in our predictions on what would be the result of fiscal St okay yeah definitely a very clear difference in our
views that's good let's let's let's that's good that's very well distilled let's take another
question our next question is a written submission from George aridus who asks
to what extent does the demographics particularly aging population impact the ability to stimulate domestic demand and
provide the safety net within the finds of the growing debt crisis Zoe I'm going to throw that one
to you because you actually you talked about this in your piece you you you you talked about the one child policy and some of its lingering effects can you
can you elaborate on that sure I think the one child the the demographics have both um positive effect and a negative
effect because it's not that demographic trend or the Aging population is is going to Doom the Chinese economy
because age as as population becomes as aging population also create new demand
and such as you know uh older health care or you know like you know adult
diet person it drives new industry right but then the the the downside of that is
what worried me more if you just look at the trajectory by 2040 the uh China is
going to have about 42 million people who are above the age
of 60 which is the current legal retirement age and at that time um you
know the United States population is going to be around the entirety of US population is going to be around 390
million the other word within the next um within the next 20 20 years China is
going to the older like retired Chinese people is going to the population is
going to be higher than that of the United States and that is that is not necess that is not going to not not only
removing China's demographic premium but also going to raise the health care cost
tremendously and the social safety the the social welfare system already has been a burdened a lot during coid and
then um the final P the final part in terms of why demographic trending in the long run bod bod not good for the
Chinese economy is really about the real estate sector real estate sector is about 30% of the economy and as a family
formation rate decline as uh Chinese women not necessarily willing to get
married or Buri children um you know basically that is going to permanently
drag down demand in the housing sector so demographics I I don't think in the long run is going to vode well for the
Chinese economy let's take another question our next question is a Live
question from James
grith yes thanks very much uh and it's a pleasure to listen to you I I wrote a
paper on China for the Council on Foreign Relations around 2001 and some of these issues were already being
raised uh if I experienc there in the 1990s uh people were saying economists
were saying they should raise consumption and lower investment uh there's nothing more dangerous than when
economists reach a consensus you can be sure that that something's about to go wrong in this case it seems to me that
the incomes that the Chinese households have in excess of what they consume are
because of High investment share that's what gives them the incomes over and above what they're spending so you can't
really uh ask them to raise their consumption share out of their savings
the savings is what they're not consuming right now because they don't want to and they don't need to and they
have incomes above above and beyond their needs back in the 1990s when I was
advising the the government of China uh this question was already being raised and I asked them what what are you
talking about here materially are we going to build roads and not or sell cars and not have roads to drive them on
or or or gas stations to fill them up in are you going to uh ask people to buy
televisions and not have apartments for them to live in what is this distinction in material terms and why are Western
economists fixated on it when the Chinese have been doing quite well for the last 40 years uh by essentially not
following uh this advice thank you very much okay I'm I'm going to try to draw a
question out of that that's an interesting comment I I I think I think what what uh Mr Gareth is is getting at
and is how what's the what is the real um
capacity that the state has to alter this decision- making uh whether whether
it's in the amongst companies or or households right that what what can they
how much ability do they really have to to to to change decision-making at at all um I don't know whether Adam or
Michael one of you want to wants to respond to that or whether you heard another question in there that you want to address um so thanks to Professor
gbre for listening and contributing um I I would take the question you put forward Justin and I would say two
things first is again Michael Pettis and I um are are on opposite tracks but have
some parallels so I also read a lot of Albert hman and I invoke in my response exit voice and loyalty and and so when
we ask what's the response I think a lot of it is going to be Chinese households
Chinese businesses exercising more exit uh meaning instead of showing loyalty or
complaining domestically which is not an option really they're going to be trying to move their people their plants their
money out not in a huge number but in a marketly larger number and all the data
of the last several months the movements in the Yuan the stories about China cracking down on outflows of Capital fit
that and then that has the policy question which you may want to get to Justin of my arguing that the US should
instead of be doing sanctions to constrain China should be doing suction to get stuff out of China and put
pressure that way let's go right to that Adam actually because I I do want to ask that question I want to hear what what Michael en zooe have to say about that
as well if if we've talked about what you would sort of advise president shei or the C the CCP the one of the real
questions and I would I would recommend to everyone on the call to look at a piece we ran this week uh by Dan Rosen
Logan Wright on this question of what should American policy makers do in reaction to this slowdown um how how
should they treat it you know uh should they try to exploit it should they they lean into it what's the what's the
proper response from the US point of view to what's happening in China regardless of what the sources of the
problem are so why don't why don't you take a stab at that and then we'll hear from Zoe and Michael and that'll probably bring us to time yeah so I'll
try to be quick as I argued in the original article which you guys posted on in early August
you want to think in terms of suctions not sanction that the way to put pressure on the regime is to make it so
that it's attractive for people to leave and then that creates a dynamic we've seen with other autocrats in the
economic sphere that they try to put up more controls against Capital flight against outward migration against
outward investment and those controls induce more desire to leave and so
you're not going to collapse the Chinese Communist Party regime but this is a much more constructive positive way of
putting pressure on the Chinese Communist Party regime than being confrontational trying to bottle them up
the key and I've made this case to various senior US economic officials with who knows how much influence at
this point um it also depends obviously on domestic politics in the US to take advantage of this but it's a much more
attractive position and frankly a much more sustainable position with allies
and with the world and when Us's own economic interest to be pursuing pressure through this means than
pursuing pressure through trying to push China down the second point to go with that and this will be my last point is
that we we have a world in which for a while the Biden Administration and the Trump administration were saying China
is a huge threat because they're so economically powerful then shortly after my article came out no causality of
course President Biden suddenly says China's in deep economic trouble so they're a big threat because they might
lash out now these are not necessarily contradictory but there is a tension there one's about capacity and one's
about intentions and I think the Biden Administration since the president statements in August has wisely moved
into this Apex Summit more about we're not trying to beat China down as secretary Yellen said a couple days ago
we want a constructive economic relationship with China let them fail on their own terms don't be us saying we're
against the Chinese people we're against the Chinese people making a living we're threat threatened by Chinese students or
Chinese business let us be focused on the Chinese Communist party and their
external intentions but don't beat them while they're down and I'm hopeful that there has been that change in the Biden
Administration approach Michael is that your view as well is that would that be your your advice or would you would you
differ on anything there well you know uh first of all I I don't think China is the economic threat that we make it out
to be I think Americans have a history of paranoia and maybe it's a strength of the US but you know we were terrified of
Japan terrified of the Soviet Union it's a it's a economically I'm not talking about geopolitically um it's a it's a
common it's a common Trend and we tend to get it wrong for the same reasons I would say what really matters to the US
is not whether China slows down but the way in which it slows down you know one of the big problems is that if you look
at China within the global context I had an article that came out in theft last week China uh repres represents roughly
18% of global GDP which is probably overstated um it accounts for 133% of
global consumption which is incredibly low it accounts for 31% of global
investment and 30% of global manufacturing so what really matters to
the US and to Europe and the rest of the world is how those things shift as China
adjust now if China has a Japanese style adjustment where you see consumption
growths sort of stable maybe down a bit and much of the adjustment incurring with a reduction in investment what
you're likely to see is the savings rate in China go down faster than the investment rate so that the current
account deficit as a share of global GDP will contract which is exactly what happened with Japan in the 1990s in
which case China's adjustment adds a bit of global demand to the world it's unevenly distributed if you're a Brazil
an exporter of iron or you're going to get badly hurt if you export agricultural Commodities or consumer
goods or import industrial Commodities you'll benefit more from China's adjustment but that's the key now if if
China adjusts or as it attempts to adjust tries to shift lending away from
the property sector and into the manufacturing sector which we're already seeing right the the decline in property
investment has been more than matched by an increase in industrial investment that creates a real problem for the
world because if you assume that China continues to grow maybe at 4% um in in about a decade China's share
of global manufacturing will rise from 30% to 37% while its share of GDP rises
from 18 to say 21% that means the rest of the world in order to accommodate China has got to
reduce its own manufacturing share and you'll have a better sense of this than
I do but I don't get the feeling that that's what the US wants to to do or Europe or India or any of the large
economies they want to increase their manufacturing share so that creates a real problem but from our point of view
what matters is how China adjusts not whether it adjusts that's interesting that's an interesting challenge I'm
going to give Zoe the last word here before we close Zoe your what's your your basic Baseline advice to to the
Biden Administration to American policy makers in terms of how to react to the the Chinese toown um I would say that we
wouldn't re-evaluate the premise for American the China policy because our
the premise of our China strategy has been that China will surpass the United States economically challenge the United
States ideologically and confront the United States militarily however in our
China strategy it seems that we have been we we haven't paid enough attention to the Chinese people until during coid
we started to say oh actually there are when we think about China there is also the angle of Chinese people and U um as
Dr poon's article showed actually you know the the Chinese people not only have agency but also perhaps there is a
growing incentive mismatch between the party and um and the Chinese people and I think US government should be aware
that this is not necessarily the moment that we want to push China or president or the party to look inward because a
country as big as China the second largest world economy with 4 point 1.4
billion people if an an isolated China with that big of econom and that large
number of population who become angry and in particular angry out of the United States that is going to be very
dangerous well I would I don't envy uh any uh policy makers or officials in the
administration right now trying to puzzle through exactly how to to to do this and what to what to do over the
next couple of days and uh I certainly don't uh Envy whoever is putting together a President Biden's uh briefing
book I do hope that they have read all three of you in far Affairs H I think if
they do they'll they'll they'll be a little bit better prepared for that very difficult job I want to thank all three
of you I want to thank our friends at the Peterson Institute and I want to thank everybody uh who uh attended this
morning best of luck to you and thanks again