Consolidating Xi’s Position and China’s Direction: A Readout of China’s Annual Legislative Session

welcome to CSIS I'm Scott Kennedy I almost said good night because I just arrived back from Beijing late yesterday and my jetlag tells me it's the evening and one of the most surprising things I found as a traveler to China this past few weeks and being in Beijing is is how the air got worse over the past 10 days not better because you think she jumping supposed to set this up just right to have their start bad and get better better better better over the time of the NPC but APEC members get blue skies in Beijing but NPC deputies don't I guess I think that's the rule so today is the start of March Madness as you know and so if you're on your phone's doing your picks at the end just to be careful about that China has a different kind of annual March Madness the two sessions the meetings of the Chinese China People's Political Consultative Conference and the National People's Congress this is the first session of the 13th NPC and by all indications as we're going to hear from our guests this has been an historic two weeks there's another important first that we did not predict the NPC is not ending today it's ending on the 20th which is five days longer than usual because because usually by now we'd have seen the work reports the new pieces of legislation the personnel appointments but there's still a few days left and in fact today if you were in Beijing it's a day of rest for the NPC deputies in fact they're out there playing tourists today in Beijing while the leadership takes into account all of the suggestions they made for potential edits to the supervision law which is going to be passed soon so and we would have held this event on the 20th but we were we are already hosting another event on that day Chun Zhu the mayor of Gauss young will be giving a speech here at CSAs that afternoon starting at 4 o'clock so we have a full calendar as well as the folks in Beijing but we've got a lot to talk about today and luckily we have two great experts on Chinese politics and economy to help us understand what's been going on in China lately first to my left my colleague Chris Johnson who's senior advisor and Freeman chair in China studies here at CSIS spent 20 years in the US government as leading expert on Chinese elite politics and foreign policy and he's continued to do that since he's been here at CSIS the last few years and a joy to work with Chris every day and I'm looking forward to his insights as much as all of you Danny McMann is with former reporter with The Wall Street Journal was in China for six years I believe 10:10 my gosh and and then he is now currently a fellow at the Paulson Institute in Chicago and he's author of a great new book China's Great Wall of debt which if you want to learn about what China is doing with its financial system and where it's going you should pick this up and you won't get a great wall of debt buying it I think I'm pretty sure so and he after he left the journal he was in Washington at the Wilson Center which is when he spent most of the time writing the book and and now he's in Chicago but here for today's event and also talking about his book in other parts of the city so thank you both for being here today I think the way we're going to proceed is how we work as usual at CSS I'm just going to start off with a few questions - Chris and Denny and then after we whet your appetite and you all have built up some more questions I'll throw things over to all of you and then we'll take it from there okay super all right well let me first start with with Chris because I think we'd agree at least on everything that we've been seeing and everything that my Chinese friends told me when I was in Beijing that this is the historic most historic NPC and quite a long time and that a certain certainly a big part of that is the announcement about ending the two-term limit for the President and vice-president the NPC voted last Sunday to approve this constitutional amendment by a vote of two thousand nine hundred and fifty eight in favor two against in three abstentions so so three interrelated questions because I never can ask just one why did she Jinping push for this amendment when his power comes mainly from the party and being a head of the military how did he overcome opposition from others to push this through and what are the implications for lead politics and governance in China if I could sorry to throw so much at you I think that's its own session okay yeah let me try to answer that briefly you know I I do think it is it I think it's both the most significant development and frankly all of the commentary is a bit overwrought you know my own my own view is that if we've watched Xi Jinping since he arrived it's been abundantly clear that he was on a pathway toward consolidation of power and toward ruling for a significant period of time I have to admit my own public track record on this is clear and that is my view had been that he would step aside at least from formal positions in 2022 probably not because of institutionalization or any sort of foolish notions like that but rather because he would adopt this sort of standard practice of a more traditional Chinese leader which is to have no official titles but still be calling all the shots in the mold of you know dung shopping or or Mao Zedong so in terms of why and to your question about the state presidency it is interesting you know typically the office really hasn't mattered that much other than for its protocol purposes I think it is quite revealing about what it tells us about the role of the state presidency in modern China and in reflection of modern China's global ambitions in that the state presidency is indeed the access point to being able to play a global role you know time has changed Mohammad no longer goes to the mountain you don't go and visit done shopping in his courtyard home down the alleyway you know you have to be out on the world stage if you want to be sort of creating this global role for China so I think that's part of the puzzle here the official ex nation gives us some justification for that as well which is to say in effect these positions are now considered a Holy Trinity that can not be broken apart and have any threat you know of being broken apart I also think very pragmatically this is very consistent with Xi Jinping's penchant for putting shall we say exclamation points on some of the decisions he makes so for example since the Party Congress when I traveled to Beijing talking to contents there's been a lot of mumbling about well we didn't deal with the succession issue at the Party Congress so I believe this is probably she saying okay well I just dealt with it there's not going to be what anytime soon so that I think that's very significant and I think also it probably gives us some hints structurally about what she's altima intentions might be you'll recall in the run-up to the party Congress there was a lot of speculation with regard to the idea of perhaps going back to a chairmanship system or maybe even a Russia style presidency model so-called two plus one there's been a lot of discussion about this this and the retention of Wang Shi Shan and the vice presidency actually tell me that that's probably long range where Xi Jinping is going and you know as a good dialectical thinker who certainly believes in contradictions and so on one thing he will know from having push this thing through is the target on his forehead back wherever you want to put it is even larger you know and that tells me that in fact he will be highly incentivized to continue to both frequently and radically shake up the system to keep his opponents off balance so from a volatility point of view I think that's what should concern us you know sort of the second question about opposition I'm not fully convinced there was significant opposition to this to this move there was a lot of murmuring about it and mumbling I think but most elites in China I think have well accepted for some time that she is going to be playing this this sort of super role you know there was an interesting WeChat video that circulated of Jung's I mean with playing with calligraphy and writing you know I'm very sad that all of my friends have become ghosts you know and so on so that's certainly subtle protests right and again I think this leads to Xi's penchant for exclamation points but from what I can tell wasn't a bunch of significant opposition and she played this as I suspected he would just like he played the issue of the core which was to internally sort of say no no I couldn't possibly and then have his associates and the provinces and so on start clamoring right and roll the process for it I mean what's quite striking from the official explanation is that this happened in a matter of months you know whereas last time we had significant revisions to the state constitution which were much more minor in terms of their content it took almost a year the year-and-a-half actually to get it done so that's interesting in terms of what it means for lis politics I think it's an open question you know really the question is is the idea that he will stay on for a considerable period of time going to lead us toward classic authoritarian and sclerosis or is this centralization of power actually useful in terms of helping them break through on several of these tough challenges that they've been facing controlling vested interests and so on and I think a lot of that will depend on how he chooses to empower these several people who are very interesting to us I know we'll talk more about them today wang shichong the aloha to actually take on some of these tough challenges okay terrific overview as always and a lot to buy into we'll come back to some of these specific issues in just a minute one of the other signs of protest was the photographs of a reporter who was rolling her eyes and and so Danny I don't know if you ever rolled your eyes at a president but let me ask you about the npc's treatment of the economy Lika Chan's work report and at the beginning of the two sessions contained some gaudy and impressive numbers for economic growth and the restructuring of the economy towards services the rapid rise of high tech and the reports made on the fiscal situation and finances both seemed reassuring though clearly they believe there's a little bit more work to do on the financial system and stabilizing it yet the book that you just written is seems to be a little bit gloomier points out to significant dangers in the economy so how do we square circle with do we does she and his team deserve credit for managing this balance between growth and limiting financial risks and and how do you see that playing out in the NB C that's ongoing right now yeah of course well I mean certainly she and his current administration have made some progress towards reforming the economy I think perhaps the most significant headway they they've made is actually reining in industrial over capacity which is something which has been on the agenda for a very long time but no one's ever really been able to make headway on and the reason that's significant is that helped last year at least create the sort of perfect storm that allowed them to balance economic growth fast economic growth while slowing the pace of debt community at accumulation so rainy and industrial overcapacity allowed the price of commodities to go up which allowed corporate earnings to rise at the same time the global economy improved and so Chinese exports went up which also helped companies deal with their their debt burden however the problem is these sorts of conditions aren't necessarily going to be sustainable so you take a commodity price inflation I mean that's always already on the way down you take something like exports I mean stronger exports helping the Chinese economy isn't a function of reform that's something that China has to kind of rely on the global conditions to kind of benefit from and it's certainly not something that you can rely on in the long term particularly given the trade tensions that are building between the US and China and the other aspect of this equation as well as the financial system so certainly we saw a corporate borrowing stall last year which was fantastic we still saw overall debt levels increase because households can borrowed more the government borrowed more but having said all that the PBOC real the central bank really did make some genuine headway in dealing with financial risk by focusing on interbank lending so this has been a big concern for the last few years because you know banks and financial institutions have been lending more and more to each other and so it's kind of raised the spectrum specter of financial contagion if there's some sort of shock to the financial system something that may have other otherwise being a sort of a a isolated cry and isolated problem will now potentially sort of flow through the entire financial system and this we'll bank and finally managed to start D you know sort of pulling apart some of those interbank networks that have built up over the last few years I think we saw interbank wealth management products declined by three point five trillion renminbi last year which is which is not insignificant but what's interesting about this and the C but the China Banking Regulatory Commission made this point in January is that what allowed them to continue to grow the economy whilst running in financial risk last year is that this what they managed to squeeze out of the financial system was what they called idle cash which was kind of code for sort of leveraged speculation now if they continue on this sort of route and kind of try and suppress risk in the financial system continue to try and D leverage at some point there there is going to come a moment where that affects the ability of the economy to grow and that and then sort of we're going to get to see just sort of how committed the government is to deleveraging reining in financial risks and whatnot so as Scott pointed out my book does take a fairly gloomy perspective on the Chinese economy and oh and the reason for that is over my course of ten years as a journalist in China I'd say that the the dominant economic trend that I saw wasn't that the Chinese government is an amazing reformer but it was quite the opposite that every effort at top-down economic reform was either stonewalled or got the run around by lower levels of government and state-owned firms and when I say got the runaround what typically that meant is that lower levels of government would implement the letter of whatever rule they were being required to implement and then the the actual spirit would be flattered and I think we see that very clearly with local government debt for example so this has been an issue since 2009 governments have central government's have repeatedly tried to deal with the issue this isn't just a huge in tailwind job our problem I mean the biggest effort are trying to rein in local government debt was by Xi Jinping in 2015 when we had what what was perhaps the most expensive effort at reform at of the time and generally speaking I mean certainly we in the media thought okay this this issue is done you know the government has managed to rein in the risk we can move on and then two years later she Jinping himself is saying in speeches last year that local government debt has is one of the two greatest threats to financial stability and so taking all that into account that's kind of why I'm gloomy about the Chinese economy but it's also why I think sort of bringing it back to the what's happening with the MPC is that the single greatest economic reform that's being pushed by Beijing at the moment isn't actually explicitly economic its political because this is about the to the extent that Xi Jinping can shift power from the government apparatus to the party for him to be able to improve the discipline over the party and for him to be able to concentrate that control over the party in his own hands will potentially give him the mechanism whereby he can break down that sort of behavior whereby other aspects of the government have felt free to be able to work against top-down economic reform super super insightful and both big picture and what what we seem right now which is an excellent segue to asking some questions about the specific policies at the NPC is been debating over and I think you've been very helpful because in in highlighting that in China there is no policy area which is purely economic and one that is just purely political that they're all interconnected and so this is really I think a question for both of you starting with with Chris going you know in terms of the big issues that they're talking about the supervision law and what that means and the government restructuring that they just announced with with the new chart and reorganization and obviously there's a question about corruption and you know limiting it but obviously that is directly relevant to this question of being able to implement the type of financial reforms that Danny mentioned are so important that they've kept kicking the can down the road on are we seeing that we're at the that they are not going to try and kick the can down the road anymore with these type of things and and that actually they're now going to open the can and really address it more proper really sorry for the bad metaphor well yeah you know that remains to be seen but I think that's certainly what the government is touting with with the changes and I think we cannot separate and should not separate because they're a unified whole the move toward the national supervision Commission and the steady movement although halting toward really a super regulator for the financial system you know my own view is that they still for whatever reason can't seem to quite go all the way there but they're getting there in bits and pieces and my senses they will eventually get there and this is why lyoha for example is acquiring so many titles and and so on but on the supervision Commission side yes I mean I think you know there was a fundamental shift and I think a lot of people missed it perhaps including myself in terms of its significance I would argue your plus ago where Wang Chi Shan then still in his hat as discipline chief for the party began to make speeches that made clear they were shifting the focus of the CDI cease activity away from how many mistresses and cash you had stuffed in your couch and so on you know corruption issue to this idea of discipline which means following central instructions and the theme that came out of the party congress of the centralized unified leadership under Xi Jinping as the core this is a it's a it's a sort of trite phrase but it's also very important I think in terms of its meaning and the supervision Commission is clearly designed to then take that process that won't reach on started and put it on steroids in the following manner as the central discipline inspection Commission of course it's read only extends to members of the party and party institutions and so on the supervision commission will combine the CDI cease functions with the former state entities that oversaw prosecutorial functions and judicial functions and this will allow them to reach anybody basically and that's very very important they're also adding bits and pieces whereby for example in the past the recipient of bribes would be the one that you know the discipline inspection people would focus on not necessarily the giver the giver of the bribes will also be you know subject to the rid of this thing which changes that dynamic that we often see between and then actually you can't Wong wrote very helpfully about yesterday in terms of corruption you know theoretically can be good for the economy in terms of transferring assets from the state to the private sector so you know the infrastructure is there that's what I'm trying to say and and how they'll do it is interesting I take deniz point about how the centralization of power has that potential energy one thing I worry a little bit about I think we've already seen a few examples of this though is that if the problem before were that if local officials simply floated these at least the spirit of a jinks and tensions you know the idea of the mountains are high and the emperor is far now they almost seem to be stumbling over themselves to implement central instructions even when the conditions on the ground very clearly indicate that this is a bad idea you know all the transfer from coal to natural gas heating tai chi's program against migrants and beijing you know these these sort of things and you know my view is these are at the end of the day largely sort of PR gaps at worst for the further party but they signal some potential for much more serious overcorrecting problems sure certainly certainly but anyone ask you to weigh in on this on the same issues from your perspective what are the big things that we've heard so far maybe related to government restructuring or some of the policy issues and we know that when I was in China watching the NPC the there was a lot of conversation about the property tax law which some people think is as important to the discipline finding a financial source to being able to give discipline not just the parties discipline but what are the what are the big takeaways that you see from the NPC in addressing some of these problems either policy wiser or in terms of institutions yeah I mean the policy their property tax is a great example because it's this thing has been in the works for for years and years I mean there are a lot of good reasons for implementing it but it's a sort of thing that it's you know until it's actually imposed it kind of just feels like as I've written about how the implementation of the property taxes is just around the corner at least two or three times and then so it's kind of difficult to get enthusiastic about but having said that I mean it's a good example because talking about the government restructuring another issue which was exactly like that was the the combining of the financial regulators like I've done exactly the same thing I've written multiple stories about how now is the time to combine the banking insurance and the securities regulator and there have been times in the past where we've really seemed to be on the threshold of that happening um for all intents and purposes this should have happened a long time ago I mean the regime was set up for a very specific purpose because at the time those three types of financial institutions were very comfortably siloed in their own operations the banks almost exclusively did deposit-taking business securities companies were exclusively responsible for four listed firms and insurance companies self-explanatory but certainly starting from about 2009 with the expansion what was really the start of the shadow banking system so the the borders between all three have been increasingly increasingly blurred so there's been an argument for quite some time that all three institutions or three regulators should have should have blurred and so the thing about this reform is that it's certainly an advance it certainly you are well well well needed but it doesn't go all the way you know dude you're perhaps doesn't go to the extent that we'd kind of hoped or expected so the reform is just the merging of the banking regulator with the insurance regulator the securities regulator still sort of remains out out there on their own as as an independent force the other thing to keep in mind as well and Josie l-tron wrote about this I think in November and what was kind of regarded as almost he's kind of like farewell essay is that the problem with the regulation of the financial system these days isn't just that things are falling in between the gaps of those three regulatory agencies it's just it's also that there is a fourth financial regulator and that is a lot of aspects of the financial system are regulated by local governments and that the financial the way that the financial system has evolved over the last few years is that banks and shadow banks and trust they are always looking for opportunities at regulatory arbitrage and so as regulation has tightened on those sort of core businesses things have migrated business a financial experimentation and innovation has REO migrated to sort of things like financial asset exchanges which regulated a local level and don't get a government oversight and so there's new places for the concentration of risk so certainly this reform is is fantastic in the sense that it's it's long overdue but at the same time it doesn't necessarily deal with all the problems that need to be addressed in terms of financial regulation I can just add two quick points because Danny's comment about writing the same story over and over again reminded me of something you know I when I was in government I can remember early writing several things about how the People's Liberation Army was about to undergo fundamental force restructuring and it didn't happen and now it has and so I think we need to be sort of very cautious in terms of just assuming well once again it's not going to happen you know this time an in fact Xi Jinping has shown a determination to do things that his predecessors tried and failed to do in those spaces and you know the way he's prioritized it which is the politics and you know institutions like the military first and that economic stuff later tells you quite a bit about how he thinks and then just one other point I think the thing that's most interesting that's outside of these structural changes but really really matters is I'll be a believer when they actually do the fiscal rebalancing which they're talking a lot about now frankly I think both the most interesting they're probably the hardest job that's going to be had here in the coming years is finance minister because the next finance minister is supposed to come up with a fiscal rebalancing plan implement the property tax and to you know several other things that Logie way clearly was unable to do sure during during his time there and so you know as to Denny's point we squeeze down the of the places for them to recycle this cash and the LG Fe pressure you know is especially important now at the local level there's gonna have to be transferred payments to the center because the localities are screaming for resources and that will be interesting to see how it goes sure sure i'ma wonder just to rip a little bit off of what you both said I mean I wonder if this speaks to a common rule of financial reform in countries writ large which is when there's a financial crisis there is a lot of political momentum to do shuffling of the bureaucracy and make changes and adopt laws and if you don't have the that pressure on you right then then you go halfway where you take your foot off the gas I think the US Congress part of it just voted to take their gas off a little bit on the dodd-frank reforms so it's not something that's but necessarily just Chinese may apply more broadly although I think Xi Jinping's argument would be actually the big reform here is about strengthening the role to party and controlling you more directly so while we're looking at the government shake changes the party's role as important as you all mentioned all right let's now get to the fun fun part which is a speculation part which is about about where for which we have no responsibility to bear on personnel because all of those a very few of those decisions have been made yet but there's you know several people who are being bantered around in the press and certainly and when we get to the 19th on Monday they'll make these announcements and these probably matter a little bit for addressing some of these real policy challenges so we've got you know Wang Chi Shan Leo who got the central bank governor position open we have lika Chang who you know the head of the state I call him the section chief of the State Council now and E Gong Wu Shu Qing others what are the big personnel appointments that we ought to be looking for maybe didn't you start with you what are the ones on the financial economic governance side who you think are gonna matter most that and and if you care to make a few predictions but clearly the single most important vacancy that's coming up is the the central bank governor and if you like we can talk about Jo a little bit later but in terms of who replaces him I mean there's been a lot of speculation as to what the it's not necessarily that he will be replaced it's that the government may actually restructure the way that it manages the financial regulators and oversees the economy so there is a sense that perhaps Lille her will assume that role and then you know somebody will be appointed under him to kind of you know be in charge of sort of the daily management of the of the of the CBSE in terms of the two names that get bandied around most of a central bank governor it would eat gong and grocery Ching I don't have a lot of insight into into e Gong you know I spent a lot more time sort of reporting on on GWACs reaching on my time in my time I think this certainly the foreign press I think has a real soft spot for for GWACs reaching because I mean he is when it comes down to it I mean he's been a real hard charging financial reformer I mean he's only been at the China Banking Regulatory Commission for the last 18 months but he's done more in terms of financial reform than anyone in that role pretty much since the own income you know a lot of what he's doing is is sort of going under the under the radar but it's a lot of sort of micro economic reform that is trying to you know aggressively pull the banks in line I mean in the last year in particular I mean the banks have really started a new state's aggressive is is a bit of an exaggeration but the banks have finally started disposing or been writing off non-performing loans and increasingly large volumes he the the banking regular banking regulator is handing out fines left right and center to all sorts of infractions on on rules and regulations and so you know if we were kind of looking for a real hard-charging reformer then I mean I think he'd be a good fit for the for the role but that's kind of like the extent of my insights into into those sort of you know into sort of the you know the criminal Kremlinology of jong-un High and then the other big question is is really you know what can we expect of Lille her going forward I mean what sort of you know clearly the expectation is he is going to be in charge of of the general direction of the economy and the financial system but maybe we can get that get into that a little bit later everyone okay sure hey Chris let me turn to you and see where you think the people are going to end and what the meaning of that is yeah well I think most of it is fairly clear I mean you know Leo clearly is going to be the supreme up for the economy writ large I think frankly his position in the financial area is a little strange right he's not someone who has a strong background in this space and I think to some degree this is a knock if you will on him is that well he's a great theoretician and academic and sort of policy adviser but he doesn't have the governance chops frankly he doesn't have the political night-fighting chops that you need to be a vice-premier in a pullet Bureau member this is something you often often hear and we're about to see what he does have is a very clear backing from Xi Jinping and maybe that's all that matters in this context you know and we hear and read and see a lot about his reform credentials quote-unquote and so on but it's important to remember he comes out of his sort of state planning background I think he thinks that way supply-side is his invention you know this is not someone who wants to see a market-based fire sale of state-owned assets he fully supports Xi Jinping's desire to grow the you know and empower the state sector produce global champions you know other so I think we just need to have our sort of expectations correct and then it will be interesting to see so what will be the emerging scenes if you will between his authority and other people's ability to maneuver and this is where I think of course your chains role if he isn't in the bank is gonna be particularly interesting this is why I think actually he will not get it is because there are many people who despite his many technical credentials feel that he has a strong penchant to be too political I think since he's been at CB RC there's been a worry at the central bank that he would overcorrect and they were constantly battling that by injecting you know liquidity and so on into the system he missed once and was sent off to Shandong usually usually in the system you don't get to miss twice so my guess is he probably won't get it Egon I don't know he certainly has the technical credentials I think there's a case to be made that he was largely blamed for the mini devaluation debacle in 2015 he followed up by giving a very poor speech at the g20 meeting you know that was hosted which should have really been a softball so we'll see I think it leaves the field somewhat open and then you know how much will even lyoha being empowered as he is have the ability to push upstream against whatever Xi Jinping's ambitions might be I mean I find it quite interesting they seem to be on a very heavy course towards significant deleveraging this year and then I think it's fair to say that at the central economic work conference in December they started to backpedal a little bit was that because of conditions was that because they saw the wind direction from on high you know these are interesting questions and then finally I think they're the bigger question is does even Leo home really matter when Wang Qishan is going to be around with this significant and yet blurry massive portfolio right which remains to be defined I think that's very important and then of course if you're leakage hyung I think you're sort of wondering why you go to work every day but that's that's my own gift well you get to leave at five at least perhaps so all right let me ask one last question before I turn it over to the audience and about foreign policy and defense at least in Beijing it seemed that these weren't high priorities at the NAC but some NPCs it actually has been pretty significant and as people may have heard there may be a us-china trade war or something like that and so there's lots of anxieties and so this you would think maybe it'd be something even if there's not a piece of legislation where deputies would want to be you know showing off their nationalist chops and we'd also see other types of conversation coming out of this event what do we make of you know what are the foreign policy takeaways defense policy takeaways that we've heard from this week or why is it such a non-issue if you don't think it's very important I actually think it is important and it's been sort of the quiet story I think to some degree one of to me the most and potentially exciting and challenging at the same time elements of the the proposed government restructuring plan is the creation of this new international aid and dhoni donor body right which I believe is an effort to finally create a one-stop-shop focal point for the belt and Road initiative we know that Xi Jinping is very frustrated with the fact that despite the policy having been around now for several years if you try to identify one project that can be uniquely branded as belton Road that wasn't in the tool shed for the previous decade that was rebranded as as belt and Road it's hard to find and it seems that the the initiative has sort of lost some steam there been some recent press reporting about how in energy related investments for example tied to Bri they're running out of money or at least financing has sort of been a problem so this seems to be an effort to sort of reenergize that we've had the very interesting story in the press some weeks ago about how Chinese ambassadors abroad we're going to be increasingly empowered right to sort of run an aggressive sort of you know foreign representational opportunity and frankly we now have the most senior foreign affairs guys in senior positions that we've ever had we're going to have young jet sure as a pullet Bureau member and potential vice premier it looks like Wang he has dual headed as foreign minister and state councilor and then some tau is going to play some kind of role somewhere around there so they're putting a lot of energy now into this and it comes out with a party congress right well he Jinping in his speech says we're standing firm and tall in the East and you know increasingly we had we're moving to the center of global affairs they're putting money and institutional strength where their mouth is on that on defense I mean I think obviously the big issue is the headline number was an 8% growth which is below the double digit growth they've been having you know for a long time in the past I think the commentary which was not by accident you know the official commentary around that number is significant which says a this is the new normal so the defense establishment has to get used to that lower figure and B we're going to put it all into advanced weapons systems so it doesn't suggest to me that they're slowing you know the pace of their military modernization at all rather they're going to intensify a taking each of the structural changes that she's done doing this man super super honey these we're good okay terrific you cup you covered a lot all right so let's turn things over to you I think we've got a microphones that will come to you after I call on you please identify yourself your institution and if you could keep your questions short that would be super helpful let's start here in the front on the right a Chrismukkah a simple question but in two parts do you think that the wall of debt is actually bigger in China vanities in Europe or America but actually I'm more interested in whether we're wasting youths livelihoods on sort of sustainability futures so if that's different from debt the way you define things which country which of the three regions is worse than that in those terms I the issue in China isn't so much the absolute amount of debt so if you're kind of taking the size of debt relative to the size of China's economy it's broadly in line with that of the United States although it depends on how you measure it and China shadow banking system kind of makes it a little bit difficult to know for sure the issue at hand is the pace at which the audacity emulated so you look at the the size of Chinese debt say let's say in 2008 around the China time of the of the global financial crisis and the pace at which it's accumulated today well you look at other countries that have experienced a similar expansion in debt and they're places like the United States prior to the subprime crisis Thailand prior to the Asian financial crisis Japan immediately prior to the lost decade Spain prior to the eurozone crisis so you can kind of get the the the the issue then your issue is that the faster debt accumulates the harder it is to actually find productive places to put that money and so it ends up in a whole lot of waste in a whole lot of speculation now the thing is China's financial system works a little bit differently from elsewhere because no one in China is under any illusions that the government completely backs the system in fact everybody from the biggest bank to the lowest you know ordinary person who buys some product from a an online lender assumes that at some point if something goes wrong the government is its backing things up and so there is sort of a degree of stability to that system because there is this this this faith in the this ever-present safety net but it's also its it it aggravates the risk levels because people feel they can keep adding adding more and more debt so that's kind of the problem when it comes to sort of the the future of you know whether it's sort of eating into the the future of the next generation I mean the question is really how China disposes of the debt now in a perfect world it can avoid a crisis and then slowly deal with the debt pay it off gradually over a period of time and I think that's what they're trying to do at the moment well as I said we've seen an increase in bank loan disposals in 2017 if they can sort of maintain that pace of slowly cleaning up the you know that the system over five six seven year period then it probably won't have a massive impact on sort of the next generation however the government's under no illusions that the system can't continue the way it is I think it was a year ago or two years ago Xi Jinping wrote I think it was a I think it was a speech he gave to the party which was which he effectively said that we have a very small window to change the way the economy works because effectively with this debt driven growth we are eating into our future and so it has to change so and there might be the best best place to leave it go all the way in the back thank you see our reporter from Voice America I'd like to shift our that focus from the Chinese domestic issues to the issues between US and China you mentioned you guys just mentioned that in China won't want you Shang Yang Jiechi Wang Yi might be in charge of foreign policy and but who they're going to talk to when they come to the United States the reason why I'm asking because the South China Morning Post just run an article two days ago said with the departure of Tillerson it's harder for China to find somebody to talk to in president Trump's White House thank you okay all right from Chinese politics to American politics what are you guys I'll take a stab at it you know I think it's fair to say that despite you know some of these exciting changes in China increasingly they look like the stable predictable one and we look like the opposite of that which is challenging this issue of how to handle the relationship actually I think now goes back into the previous administration as well where there was really no Tsar if you will for the China relationship appointed in the Obama administration and I think they had sort of the idea in the first term there were several people I think who Connor we're filling the role certainly Secretary Clinton was keenly involved secretary Gates was from his point of view and obviously secretary Geithner was very involved in the economic side of the relationship second term had just kind of stumbled around nobody was really managing the relationship and I think it was largely because the administration made the case with some justification in many ways now the relationship is too big for a single person to really be the the focal point there are too many issues one of the interesting things about the evolution and how we manage things under the Trump administration so far has been we really have returned to an era of president to president management of the relationship they're the only two that make any decisions it seems that pretty much the only time anything gets done in the relationship is when they meet and you know things like the former snad now CED the four dialogues they're just not happening and that's mainly you know from the US side China I think both with Young jitters visit and then again with Leo husba sit and probably murmurings from the sidelines for long to Sean's office they've been asking for the administration to appointment someone as this there's a big person and they're wondering who that can be one of the challenges we might face I think is that if long Qi Jian is indeed overseeing the bilateral relationship China will be quick I think to get hung up on protocol issues and say well whose equivalent in terms of stature to to meet with Wang Qi Jean they do seem to have done some analysis of the former Gore chair and Amir didn't process and they of course can see that vice president pence that relationship with taro also in Japan so perhaps they're thinking about something similar to that but it's a it's a real problem and be the energy or if you will this sort of ball is in the court of the US administration to figure out what it wants to do but with reshuffling the cabinet on a daily basis it's kind of difficult to but now and and also the trend line seems to be toward people who take a dimmer view of China that presumably will be true of secretary Pompeo if john bolton comes in his national security adviser that would certainly be the case so let's wait and see I would just just to finger on that that I the Chinese desire to have an interlock a single interlocutor to some extent may assume based on in addition to what you just said that that person has a stake in a stable relationship with China you're correct and it may be no matter who they talk to whether it's a single person or a group of people they won't define that person and so they may end up being unhappy with the substance even if they get this the format that they want I'm gonna come to the third row here to Marcus thank you for for the event and for great remarks I am from the IMF but I will not represent IMF use here so two views I've heard on this political change in China and I'm just wondering what your perspective isn't that one is that you know reforms really only have really got going in the last year seriously and we're already in the second term of XI XI XI Xi's presidency so if there were a serious term limit you would expect the second term very soon to become kind of a lame duck and this diminishing reform power so in a sense that's you know continuity really is the only way forward for serious reforms second our own experience really has been and in many of these reform areas it's actually as you said in it it's the middle level bureaucracy and the vested interests down there which hold it back and you know let me go on anything on let's say Bri for example you know when we want to make critical remarks we get a lot of resistance from the mid-level bureaucracy when we go to the seniors we hear you should say it it is you know so I really see this reform as a top-down reform agenda combine the two and then you look at the economy lots of these reforms really are very long-term projects Janee you have mentioned this or delays and the fiscal reforms that this will happen but if you look at it seriously does you know there's there's three legs of this which is the budget process medium-term budgeting more transparent it's cleaning up the financing which is opening up the front door closing the back door shutting off local governments from financing etc etc and it's the vertical imbalance local governments don't have the money to spend what they need to spend so this is a ten-year project and it started but of course a lot of there has to has to continue so a lot of things are going on and my sense is is going in the right direction much more intensely in the last year the one critical thing that's still out there and the question is what happens if growth really falters as a result of these reforms will they be able to go on now my view is that they will not allow growth to fall too seriously nor should they because it would seriously risk stability in China and globally so that leaves us with the question can China reform with growth and this in my view requires long-term steady top-down effort so from that perspective two questions really are what does it mean now you know obvious of course we risk a trophy and we do already see that this entrenchment of power from the top creates signs of atrophy that the critical views don't filter up but my sense is there is not really a lot to filter up from the bottom up anyway so I just leave you with these two thoughts that you know I think put a bit more of a balanced view into just criticizing what's going on there so thoughts on the this big meta debate about the two ending to term limits political stability as a alternative as a way to get at these hard reforms or atrophy volatility that you mentioned in the your initial remarks where do you think the opportunity or big problem I think really this is reflective of the debate we've been having since Xi Jinping showed up you know at a peak it started to become clear that he was gonna move in in this direction which for me was the day he entered office but yeah I think for a lot of other analysts took until the party Congress you know and basically it is at core is what he's doing a reflection is it a means in and of itself is it a reflection of him being a power-mad megalomaniacs like now or is he more of a pragmatist who's doing what he thinks needs to be done for the system I think if you look at the track record on balance it looks much more like the latter to me there are worrying cult of personality ask elements to to she's time in office but I think your core observation which is that it takes a lot of time to manage these things these challenges grew up over 40 years can't be resolved within one and I think we have to take into account which people seem to miss regularly Xi Jinping has different priorities than say leo huh does you know his priority was I control the political system first and that takes time he had to break the back of the various you know factions inside the system he had to control the military you know who Jintao's great mistake was in it wasn't his own fault he knew what he needed jus he was just neighbor and able to do it because he had insufficient power you have to control the key levers of power in order to be able to initiate these type of reforms what is that it's the military as the security services the party bureaucracy and propaganda right and it's taken Xi Jinping five years to get control of those and as a sort of political guy V's were his instincts I agree with you I think but in the last year we see him now turning to some of the unfinished business of the rest of that agenda there are risks of atrophy there are risks of overcorrection and so on I will differ with you slightly and then I think perhaps they might have enough steel in the belly to to risk growth in order to do it they want to do although I think you're correct in saying that they seem to be trying to have their cake and eat it too you know the message from the central economic work conference clearly to me as controlling risk is enough to help us you know do what we need to do and not sacrifice grouse in the process so why should we bother I think where they'll run into the wall on that as Denny pointed out is let's say roughly this summer when the tailwind from last year runs out of steam and they have to make decisions about whether to stimulate or not I want to just touch on the the question I mean you know China has to keep growing at a certain pace yeah so how do they do it and there is I mean you read leaker Chung's work report and it's been a theme for the last few years but I mean he says that time and time again in his speech it's like we need to develop new drivers of growth so the question is what is the new economic model and what I find interesting is is certainly outside of China but it's also sort of an idea perpetuated in China is that we don't need to worry about the big problems in China because once the government recognizes the problems they'll always be able to fix it and certainly Beijing Xi Jinping has the plan it supply-side structural reform but what's interesting is that took a long time to actually get to that plan and a couple of very important false starts now in my book I actually spent a lot of time writing about urbanization because when I left the journal in mid 2015 we were still in an area era an era when Beijing was talking about what specifically leaker Chun was talking about how urbanization was going to be the driver of growth it's like the old model hat wasn't working urbanization was going to drive it as recently as there was the end of 2015 beginning of 2016 when Logie Wei was turfed out as the Minister of Finance he was still giving speeches about how China has to affect it that he was still advocating liberalisation that the growth drivers had to be liberalizing the economy injecting not not liberalization for its own sake but injecting competition to be able to make the economy more efficient he was talking about things like land reform breaking down the monopolies and so you kind of had there was never this clear vision coming out of Beijing as to what the future of Chinese economic growth was going to look at so in the end they sort of settled on this idea of supply-side structural reform which I think more than anything is born out of this fear of the middle income trap that you know China has to make the leap from low end low cost manufacturers and heavy industry to more technologically advanced industries the way we're going to do that is not by liberalisation it is not by clearly by urbanization it's going to be a forced march into the industries that we think are going to be strategically important now there's no it might be it might be a raving success I mean lord knows that strategy work for steel and shipbuilding and solar panels and cement and aluminium until you ended up with rapid over capacity but it could be a successful strategy but there's no reason to suggest that it necessarily is particularly given that this was really only one of a number of ideas that were being debated back and forth for a very long time and just to put a sharper point on that I mean I think the process we've watched is from sort of the giddiness surrounding the third plenum to a more realistic settling in the middle that is more frankly in line with what their political setup dictates they do yeah I would just add on to that just to sharpen the point even further that you could get plenty of growth with reform liberalizing reform but you would create a loser and they don't want that be state-owned enterprises and they don't want a so easy to lose so therefore you limit the type of choices that you can potentially make if there's certain folks that you don't that you want to be on the winning side which means that you have to do it you have to do that find that Goldilocks space right so in the front right here I can remain seated just like the other two guys right I've always viewed Oh David whoa I've always viewed reporters as barometers of elite opinions just as bus drivers or taxi drivers at barometers of the opinions of common people I had two very interesting experiences with Chinese reporters one two or three years ago with a reporter who had just come from China who is a real party loyalist but he mentioned this potential removal of term limits and he seemed to look at it with some concern and this week I was interviewed by a Chinese reporter and it was supposed to be about this Congress and he wanted to it seemed like he was avoiding to some extent this larger issue of the removal of term limits and he wanted to more to talk about these other issues such as elevation of the environment to a ministerial level and when we did talk about the removal of term limits I was somewhat elliptical and moved the issue to how great countries seem to take a longer period of time to consider these kinds of changes and also in 2004 it took China 15 months I expected big pushback and there wasn't and my view is when there's not pushback from someone like him there's general agreement how do you didn't say well you said earlier that there didn't seem to be much concern among Chinese elites is there some undertone of concern about this and a wait-and-see to see how much how well turnout yeah my point was not to suggest there wasn't concern among elites I think there is significant concern among elites especially the liberal intellectual elite but what's important to remember is a the party has spent most of its history persecuting the liberal intellectual elite in China and B I don't think she Jinping in particular really cares about their opinions so you have to sort of put that to one side for me it comes back to the practicality of it which is that the system itself doesn't change in terms of the you know it's sort of core fundamentals you know the this sort of fantasy that it was moving towards institutionalization you know over the last ten years or so the system has to remain what it is or will cease to exist that's just sort of its operating philosophy and that's what Xi Jinping I think is is implementing so you know there is resistance I think the key issue is now it's about de shi Jinping stumble in some way because you know the challenge with opposition and systems like China's or any other authoritarian system is that you often can't see it until it's already activated right because it goes to ground in periods where you know we have a forceful player like XI and to my point earlier I think this will incentivize him to continue to sort of keep everyone else in the system off balance that's been a consistent pattern of his behavior since he arrived and I don't expect that's change so there is concern there is opposition you know it's not coincidental that you know internet searches for immigration shot through the roof when you know the when the initiative was announced and you can see to your point the government's handled it a bit haphazardly right so the announcement was released in English that person was subsequently punished you know there's been a lot of back-and-forth and the official explanations have a certain undertone of protest too much in terms of trying to explain why this is a good idea and they don't want to talk about it they're busy highlighting all the other constitutional changes and so on so that does tell us that you know there's a general mood of wariness and I think to some degree it confirms the worst fears among some in the elite about what they thought maybe she Jinping had in mind and that's significant we've only got a few more minutes left so why don't we take a series of questions together and we'll start with the in the fourth row that the the neighbors who both have their hand up and then we'll come here and and so we'll just take a series of collection of questions and let Chris and Denny answer Kimani and ambien she found from Judge Tom University I'm curious about local government Deb programs and actually before Xi Jinping like the local governments have huge responsibility but the accountability did not match that authority and there is huge hidden depth problems and I'm thinking like I'm wondering whether the central government has a really clear picture of the hidden problems and is it controllable Sarika Steve BG student and part-time lecturer Edgar's University in New Jersey could they be a disagreement I mean among Chinese officials about how to respond or term decision on types thanks [Music] Lutron Corral South China Morning Post whoever Wang XI Shan would meet his counterparts in the USA I wonder what kind of approach the China could take dealing with with now the tensions between US and China would the so-called old friend diplomacy still working and with these requests or demands put by the Trump administration is negotiable in an in a short period of time Thanks all right we have one more on this side folks who want us I mean are we got are we good all right so we've got three questions out there you guys let's split them up however you'd like to do okay I'll leave with local government debt I think one of the reasons why local government that is so difficult to control is that so much has actually asked of China's local governments so to bring this back to the MPC again what was quite interesting about the Ministry of Finance's work report is that and we combined with leeko Chung's is though for 2018 we still have a growth target of 6.5 percent right at the same time the central government is going to run a lower budget deficit this year that it did last year at the same time the central government is winding back significantly on a lot of taxes so which is great I mean this is less tax berg burden for industry but it also means less money is going into the government coffers at the same time Xi Jinping's priorities for 2018 are poverty alleviation and cleaning up pollution on top of all the other expectations that local governments currently have which is spending more on things like education and health care so at the end of the day you've got this situation where the central government really wants to have its cake in and either - it's telling local governments that we need to grow just as quickly there's less money available and by the way you've got to do all these other things as well and so how do they do that I mean the way they've been doing it for the last decade is that okay we maximize our tax revenue by growing as quickly as possible and the fastest way to grow as quickly as possible on short notice is to borrow money and build something so this is kind of it's almost the Lord make me chase but not just yet it's this desire to keep main you know maintain fast economic growth but not necessarily willing to make the sacrifices to to ensure that it happens and so this is the problem really for the local governments because the burden falls on them I think the first one was about sort of differences in the Chinese government about a response to the us-china trade war who knows you know it's an opaque system III think I think there are perhaps two streams of thought on this one which probably is the majority view and represents that of the top leadership and one that maybe as a sort of minority view the first view being we should try to avoid this at all costs you know to Denny's point earlier to the degree they made any success and their efforts to deleverage the financial system last year a huge part of that was the global updraft that they had and exports you know so the last thing they need is a trade war with the United States if they want to continue the deleveraging agenda this year and I think they do and I don't think we would have seen two envoys young gesture and liova and rapid succession followed by an unprompted phone call from Xi Jinping to discuss the issue unless the Chinese were sort of came to avoid it so I think that's a lens toward the idea of let's see if we can solve this there is also though I think a lot of head-scratching about this hundred billion you know a dollar issue how do we achieve it you know there was a good article this morning sort of saying you can't buy as many Boeing's and soybeans and so on as you do typically the things you would do that you used to do and the other ways are more challenging and I think to some degree there's a constituency in the Chinese government who says Trump is a paper tiger he talks a lot about these issues let's say that he goes there with the 3301 investigation in a fairly full-throated way it will be difficult but we will survive the United States will be shown to be the paper tiger they are and know by the way we'll go around and sweep up all the pieces from them having shot their allies in the face with things like three two and and so on and I think also when they look at the rollout of something like the aluminum and steel tariffs they see a lot of noise but then they see carve-outs straight away and they say well maybe the bite isn't quite as bad as the bark so probably what's happening inside the government is they're trying to balance their approach in terms of carrot-and-stick retaliation and things they might do to try to solve the problem and my sense is they're gonna withhold judgment on how to handle that until they see what we actually do and then on the does the old Valpo yell game work you know and so on that's a significant question and to scott's earlier point you know it's really is anyone on the administration side listening right you know if you look at leo has agenda when he came here he basically had three priorities one was to sort of get the dialogues reestablished know answer to was to present sort of a long laundry list of things interestingly china wanted which probably showed some disconnect for where we are and n3 was to sort of see if they couldn't appoint a point person you know to to sort of manage the relationship that also didn't happen so you know how we manage that i think going forward one of the challenges I think we face with the potential trade issue is that certainly I think on the Chinese side maybe someone on our side there's a view that okay the US will do something China will respond then we'll put our guns on the table and sit down and talk both parties have to agree that's the strategy before we can have it when we run into a problem so I think that's really where the challenge lies well I think what we've heard today about China's National People's Congress in the two sessions is a sign in contrast right between what's going on in Beijing and here it was interesting the president I guess it was about 10 days ago tweeted after this initial news about Xi Jinping's that he thought that was neat and he's like he thought well maybe that could happen here too so well I think if we did a survey we might find a little bit different type of polling results as a result but in any case I think what we really appreciate helping us clarify everything that China seems to be juggling in terms of the bureaucracy the leadership the personnel and we've got in a few days we will get the final answers on some of those questions for others we're gonna need to wait some time but you guys have given us a good roadmap to look ahead for at least the next year or more on what the big issues are and what we might be able to expect in China and with the bilateral relationship as well so please everybody join me in thanking Chris Andy [Music]

Channel: Center for Strategic & International Studies

Views: 7,065

Rating: 4.4366198 out of 5

Keywords: csis, international, politics, diplomacy, washington

Id: Z2zO5JPmz2s

Length: 68min 6sec (4086 seconds)

Published: Thu Mar 15 2018