Kevin Rudd on China's New Economic Approach

well good morning good day good evening everyone we really welcome you and we're pleased you could join us for a special vip session today with kevin rudd president of the asia society and president of the asia society policy institute kevin is one of the world's leading if not the leading china expert will offer his perspectives on xi jinping's pivot to the state the impact of ideology demography and decoupling on xi's new economic policy framework now we've all been watching in recent days and weeks a whirlwind of activity surrounding china's treatment of the private sector it started almost a year ago last october with the suspension of and groups ipo and it was followed by a number of other actions including anti-trust fines on alibaba at unprecedented levels but it's picked up enormous intensity and speed in early july with what i would call a ton of bricks falling on dd after it issued an ipo in the new york stock exchange and this set off a series of targeted actions new policies new regulations and laws reigning in chinese private sector and promoting the concepts of common prosperity and dual circulation it's hit many sectors it hasn't been limited to the tech sector it's a transportation education finance and now entertainment and the flurry of activity seems to be far from over we looked at kevin this morning to help us unpack these developments and help us frame them in a broader strategic context specifically he will help us better understand what's driving these policy shifts what do they mean for the chinese economy what are the risks what are the challenges why are they priorities for xi jinping and what does this mean for u.s china relations going forward and for u.s firms doing business with china now before i turn to kevin just a few housekeeping details after kevin speaks i will join him for a short discussion and that part this part will be recorded following that we will have i will turn to folks in the audience and i urge you to either use your raised hand function or let me know through the chat room that you'd like to ask a question but that part of the program will not be recorded so with that over to you kevin well thank you very much wendy and greetings to everybody um wendy's right most of us have been bewildered by what's been happening in terms of this series of policy statements announcements by the chinese authorities directed in large part of the chinese private sector over nearly 12 months now but gathering in intensity over the summer so what i've tried to do uh in the last period of time is make sense of this and to ask what actually is happening why is it happening and what does it mean in terms of future directions for growth in the chinese economy the reason this is important is that china's economic performance is the biggest factor affecting chinese domestic political stability biggest factor affecting frankly the future of u.s china relations and it's a huge factor affecting global economic growth given the fact that chinese growth is represented on average for the last decade about half the global growth factor so what china does here really matters for all of us at multiple levels my second point really is this so what's the nature of the change that we're looking at how are we best able to summarize it what i say uh in my prepared remarks which i've had distributed to everyone joining us so that if you like afterwards work your way through it or throw it in the bin whichever is easiest for you is to characterize these changes as a deliberate policy by xi jinping to move the economic dial the center of gravity of chinese economic policy towards the left and what do i mean by left i don't mean it in a pejorative sense i just mean it in an analytical and descriptive sense if the barometer of economic policy has state and party control at one end of the axis and the market determining the allocation of resources and economy at the other end of the axis what we've seen with this series of measures now from xi jinping is moving that dial more in the direction of the party in the state and further away from the market and this is important for us to take stock of furthermore how do we make that judgment and how is it seen in terms of concrete instruments of policy well i identify four or five of them one of them is the rehabilitation of what we would call industry policy or industrial policy in the west that is the state taking the direct lead in particular sectors of the economy where they weren't necessarily taking as strong a lead in the past for example we're all familiar with what they're doing in technology policy with the china 2025 strategy but that's now been doubled down on and there's now a new as it were special investment fund of some 1 trillion us dedicated to china achieving enormous breakthroughs in high technology particularly in semiconductors in order to set china up robustly and independently to the future second area that we see this movement to the left on is student enterprise policy more generally under previous chinese administrations soes as we call them were almost an endangered species that is they were told the reform to down size their staff to do rationalization of their assets and to frankly do something about their accumulated debt now while those disciplines haven't been removed altogether we see a whole new phase of state on enterprise reform where reform actually has been redefined itself so that the saturn enterprise sector now is given a whole new set of state investment funds not only just to expand their own operations but to invest in private firms and to some in some cases merge with them as well third area is what i describe as the selective application of chinese monopoly law against big chinese tech firms of course we're familiar with a number of them jd alibaba and others but the anti-monopoly laws in china don't seem to be applied to the traditional monopolies in the state-owned sector but to the new areas uh where we see large chinese firms emerging in the tech sector and tech platforms which brings us to the fourth area of change and i would say movement to the left which is the new set of chinese data security laws and new compliance regimes brought in under xi jinping over the last two years and again in the last couple of months which make the compliance obligations now for any uh data based firm through its apps or through its platforms much more compliant to the requirements of the chinese state and the ability of the state to intervene particularly that data is being shared with corporations let alone foreign corporations little and foreign corporations based in foreign countries and the final of my list of five if you like in terms of this movement to the left is what i describe as the new xi jinping concept of common prosperity in chinese for it is what does that mean you might say well china's a socialist country of course they believe in common prosperity well yes and no because chinese state or party activism so far has not been prominent in any large-scale redistribution of wealth away from the chinese private sector and profits to wages and salaries for their staff however that too is changing and what we see with the new promulgations under this concept of common prosperity is statements about the importance of improving wage and salary levels statements about the importance of improving working conditions for example what's often called in the chinese gig economy which is working from nine until nine six days a week jul 9 0 9 liu 6 six meaning saturday and therefore um the oppressive nature of those working conditions for workers particularly those who in the past have been accustomed to working in the state sector and of course now the requirement for the largest and most successful with chinese private sector firms to set up very large philanthropic funds for wider investment back into communities society and into workers and when i say large funds i'm talking about 10 billion plus u.s funds which have been established by a number of these firms literally in the last month or so so there are four or five barometers of change which i think is significant the question i'd like to pose in my remarks today uh is well how big is the change against where we've been in the past my answer to that is pretty big if the age of deng xiaoping which in chinese economic policy terms went under the rubric of reform and opening ran from the 12th party congress back in 1982 to the 19th party congress in 2017 it essentially governed um the overall direction of an incremental move over the years and over the decades of the chinese economy in a pro-market direction both at home and china's engagement with markets abroad i leave to one side all the classical accusations about chinese state manipulation of markets at home and abroad but that was the overall policy direction within chinese ideological terms we often talk about it as being the band of meaning and under the rubric of don xiaoping and geigle which means reform and opening it was moving in that overall direction the big set of changes however have occurred at the 19th party congress in 2017 under xi jinping and if you like that brought to a close the formal era of reform and opening chinese authorities would dispute that but we now have a new period under xi jinping starting in 2017 which we now have a new term for it's called the new development concept and this new development concept becomes the umbrella term under which a whole series of other new shall we say economic policy directions are now being set but whose organizing principle is a greater role for the party and the state over the independent powers of the market and private firms within that market and what are those other terms you'll start to hear uh the uh terms such as the real economy you'll start to hear terms such as the dual circulation economy you'll start to hear terms such as national self-reliance to the function i've already spoken about the role of state on enterprise reform being redefined but also you'll start to hear more of terms like common prosperity the best way i can describe all these terms which each means something slightly different is that it's like a series of venn diagrams and some of them are intersecting sets some of them are overlapping sets and some of them actually sit next to each other as non-intersecting sets but still within an overall framework and the framework is we the party are now intervening more uh in the market in the name of the overall well-being of the state and the overall well-being of individual workers and employees within the state next question i wanted to address is as follows why have these changes occurred and how do we how can we understand why the shift has been brought into being and here i'd like to edify two or three major sources for these change changes of course you're not going to have the chinese political system come out and saying we're doing all this for x because it's more complex than that we have to dig beneath the surface but as we dig beneath the surface i think we find three sets of drivers for why this shift to the left is occurring in the policy instruments that i referred to before and these three sets of motivating forces ideology demography and china's interpretation of decoupling decoupling from the united states and each of those three has its own impact on chinese policy decision making each of those and also overlaps with the other let me talk briefly about our ideology first ideology as i said before is often best defined as a band of meaning within china's highest level policy and political discourse i said before the band of meaning around dung scalping's term of reform and opening basically underneath it then was able to unleash a whole series of individual reformist initiatives across the entire economy from which grew out the entire explosion of the chinese private sector frankly over time at a higher ideological level again how did don xiaoping do that well it's complex but in the history of the communist party xi jinping describes it now as belonging to three eras the mao era the dung era and now the xi jinping era now in the mao era they described the central mission of the party really through until about 1956 and then really through until about 1976 as class struggle that's why frankly there wasn't much economic growth in that period it was primarily a political agenda the second period that dunn brought in in 1978 was called an era which pushed class struggle to one side and where the central mission of the party was ideologically defined as economic development further defined as unleashing the productive forces in the economy in order to lift people out of poverty and pushing to one side any class consequences or of unequal relations which might have arisen from that period marx has described this as unleashing the forces of production but relegating the relations of production that's code language for class and that essentially is what dung did ideologically back in 1982 in the resolution of the 12th party congress way back then but guess what that formal resolution which he undertook at that congress remained in force until 2017. it was only at the 19th party congress in 2017 that xi jinping formally changed that central definition of the party's mission in the economy or to use max's terms the principal contradiction which china was seeking to address the chinese is and what did that mean this new formulation of the party's mission and i've written on this in the past over the last two or three years it was expressed in these terms we are now identifying the party's principal mission as rectifying the imbalances and the inadequacies of the previous development model that is the previous 35 years and if you like dealing with though they don't use this term the capitalist excesses of that period we see this of course in the statements which are coming out now about common prosperity and income redistribution we've seen it for some time in terms of a heightened environmental policy intervention by the chinese government the party and state which we all welcome but we also see it in terms of the party in the state resuming some of the traditional commanding heights functions in the chinese economy which don xiaoping had let go during that previous 35 year period so when i say that ideology matters what happened in 2017 at the 19th party congress really did matter just like it really did matter what dung did back in 1982 because what flows from as it were the ideological headquarters of those decisions is creating the political space then for those within the system to innovate around a more interventionist pro party pro-state more skeptical of the market series of policy interventions of the type that we've seen now with growing intensity in the last 12 months a second cause of these changes is what i described as china's date of demographic destiny this is not much in the public debate but frankly china's political leaders i think have become quite stunned by the recent demographic data now if you look at the birth rate in the year 2020 the number of new births in china was down 18 in 2020 compared with 2019. now there are covert factors at work in that but it doesn't explain such a big adjustment and in fact it follows a trend line which now has the chinese fertility rate standing at 1.3 very low for a developing country when in japan a fully developed economy is at 1.4 united states a fully developed economy is at 1.7 and so therefore this has caused a degree of concern on the part of chinese policy makers why because part of xi jinping's dream for china is for china to become not just a fully advanced economy but on top of that to become a global great power and the deep fear of chinese political and policy leaders is that china becomes old before it becomes rich and powerful and therefore why is that relevant to our discussion about moving economic policy towards the left it's because xi jinping has concluded that in order to make it more possible for young chinese families to have more kids given that they formally abolish the one child policy now and there is virtually an unlimited opportunity to have kids now is because it's impossible economically for families to do that given the huge costs which are now associated with raising a kid raising a kid from p to 12 in china for a working class family and lower middle class families estimated over that period of time was costing something like 115 000 u.s that's a lot of money if the income you're on is still relatively low therefore what xi jinping is doing across a range of policy instruments is to try and increase uh individual disposable incomes so if you ask yourself why is he interviewed intervened so brutally with the private tutorial sector in china part of the reason there part of it not all of it is because families were spending sometimes 10 to 20 percent of their income on paying for private tutors and as a consequence the ability for families to as it were consider the possibility of having additional kids was being completely undermined third factor and the final one is this economic decoupling i've talked about ideology i've talked about demography the third driving force is the chinese leadership's conclusion about which way joe biden's america is going to go in terms of the continuation of decoupling trends between the two economy on trade foreign direct investment on technology also in terms of new restrictions in capital markets and also of course on other aspects including the competition between the two countries currencies as well xi jinping's conclusion is that the united states is likely to continue in this path because of the bipartisan consensus in the congress about china's strategy because of that xi jinping does not want to face a series of vulnerabilities like he did over the last several years on the question of semiconductors huawei 5g and china's vulnerability to u.s dominated or controlled global supply chains hence the resuscitation of industrial policy hence the resuscitation of soe policy hence the new priority attached to data security policy and the rest in other words he's sending a message to his own people and to the united states the decoupling will not be just a discretionary vision that china may seek to preempt and get there on sandstone um i've got about 45 seconds left in my allocated time of 20 minutes so i'm going to go to the very last point i wanted to touch on which is what will all this mean in terms of the impact of the real chinese economy well these are the biggest set of measures impacting the chinese private sector in a constraining way that we have really seen over the last 35 to 40 years so therefore the critical question here is does xi jinping run the risk of killing the goose that laid the golden egg given the central role of the chinese private sector in generating growth employment productivity as well as the vast bulk of chinese innovation as well and a very large slice of chinese overall taxation revenues these are big questions um and we don't have a huge amount of qualitative data yet about the impact on private sector business settlement but you don't have to be a road scholar to deduce that there is a high level of anxiety across the chinese private sector particularly on the part of large established entrepreneurial firms which have been successful over the last 20 to 30 years not just the alibaba's not just the 10 cents not just the jd's not just the deities not just the mate ones but others as well the key barometer here will be what happens of course with um private fixed capital investment numbers and what we are seeking to analyze is how that data will unfold over the next 12 months when all these measures begin to bite but i know amongst chinese policymakers there is a high level of concern about the impact of this and when you see statements most recently for example by vice premier liu um seeking to reassure the chinese private sector but they still have a cherished place in the economy it indicates that the chinese system at its center is concerned about the real impact on growth numbers the core to china's ability to move out of the middle income trap to become a fully developed economy and to grow over time depends on population workforce participation and productivity or is my american friends say productivity but when it comes to productivity um having an economy where the state-owned enterprise sector is coming back and the private sector is under pressure is a step in the wrong direction total factor productivity growth in china is only stood at about 1.1 annually after the last five to 10 years that's not sufficient to break through the middle income trap china needs to lift that but by providing greater market share for public firms a more constrained operating environment for private firms it's difficult for me to see how robust productivity growth is returned to and resumed in the future so there are my comments there are my remarks over to you wendy and then let's open up the discussion well thanks kevin you sure put a lot on the table so let me start with a few questions first um i guess my basic question would be why now i mean you've pointed already to five years ago or four years ago 2017 the 19th party congress and in your in your written remarks you um reveal a lot of signals that were there that things were changing that there was a pivot in place but why have we seen such a flurry of activity um over the past two months do you expect this a kind of robust pace to keep up particularly to the 20th party congress and do you think it's the 20th party congress where xi jinping is seeking his third term as kind of the driving force here or is it something more complicated than that i think wendy i mean it's a critical question because it goes to whether these driving factors will continue to operate beyond the 20th party congress as well in pushing chinese economic policy further to the left again why now i think xi jinping has always been a left-leaning ideologist you see that in what he's done with the party in pure politics moving as it were again the center of gravity to the left there if the barometer is the power of local parliaments the power of the national people's congress the power independently of the chinese legal system as opposed to the power of the party and his power within it he's engineered in his first term in office a significant shift of politics to the left before we go to the economic policy domains we've just been discussing his second term i think has been the gradual unfolding of a parallel though i thought originally not as intense agenda in pushing the economy to the left but it has gained pace why do i think it's gained pace i think his preferred approach would have been much more gradual but what's caused him to gain pace are a series of external events the u.s china trade war of 1819 which came in hard on the heels of the 2017 party congress then you had the coronavirus crisis of 2020 and into 2021 in part which again caused him to conclude we need a strong party and a trump strong state to navigate our way through this and then his final piece of evidence if you like was all the signals and indications out of the white house that uh whereas trump had gone china's strategy had basically remained and was being sustained and in some cases doubled down on in a more systematic way by the bard administration i think if you pull those things together they've kind of turbo charged a pre-existing ideological predilection to move partially to the left of these economic poll on these economic policy instruments for reasons of underlying socialism that i referred to before the turbocharged by these other as it were statist factors will it continue beyond the 20th party congress i think wendy you're right to actually raise the point that i think part of xi jinping's campaign effort for november 2022 is to say to the chinese country and people at large i'm on your side i want some of their obscene levels of wealth this is his campaign which if you like uh to be redistributed to you i want to have more socialism back into dungeon ping's notion of socialism with chinese characteristics and as a consequence what he's doing is building a plank for his reappointment and i believe his aspiration is to become leader for life and on on top of his as it were existing control and leverage within the internal machinery of the communist party itself so i suspect that once his re-elect is under his belt at the end of next year there'll be some reappraisal particularly by his ex senior economic advisers whether this has gone too far and i wouldn't be surprised if there's a re-evaluation to try and find a better golden mean after the event but that's a speculation on my part between now and the um end of next year i think we need to fasten our seat belts for more of the same so following up on that kevin and you did mention recent comments by she's senior political adviser leho this week where he's almost reassuring not in my view not only um chinese the chinese private sector but also global investors um that china continues to support the private sector and that is support for the private sector he said won't change um how do you interpret those comments is this an indication that there may be kind of internal debate within china or maybe china's just gone too far um in his pronouncements over the past couple of months or are these just kind of words that are spoken by a kind of an overconfident regime feeling that it's headed in the right policy um direction uh leo the vice premier who i know well and many americans know well he's american trained he's an economist and he's the xi jinping's right-hand man on the economy so we should we'll ask ourselves this question how could this come about in terms of my description of the overall shift in the center of economic policy gravity to the left over the last several years but the last 12 months in particular i think there's a reason for that and that is uh in this realm of the central leadership you've got those who are responsible for china's macroeconomic management made up of the uh and frankly the people's bank of china uh run by egang and before him joshua and between them they understand frankly as well as any other central bank or any other finance minister in the world and like the u.s secretary of the treasury how the global economy really works and what you need to do in order to generate sustained high levels of growth within the chinese economy as well that's the centrality of markets there's another group in the xi jinping leadership team who are from let's call it the politics ideology and security and intelligence team and and that team frankly don't know the first thing about how an economy ticks they don't understand how markets work they are very much driven by an organizing principle called security um and when the security team i come up against shall we say the economic team in a normal environment where there is no big perceived internal or external threat then frankly the economic team will normally do okay but when there is a perceived external threat as there is at the moment in terms of u.s china decoupling and a range of other challenges to china around the world and a fear about domestic political security lead up to the 20th party congress frankly that team started to win all the debates and i believe that's what's been occurring then what happens a bit like diplomats they get sent out to clean up the wreckage afterwards i'm sure as a former american trade diplomat you've had to do a bit of that in the past wendy as well not that the united states government would ever make a mistake that needed to be cleaned up afterwards as an australian right as an australian foreign as australian foreign minister and prime minister let me tell you we'd regularly have officials up there cleaning up after various shall we say policy miscues so i think this is not um and his team with a different as it were substantive policy message they are trying to massage markets fully aware of the fact that these deep policy shifts have occurred and i believe further doing this wendy in their using their engagements with foreigners to then feed back into the chinese system and the political and security apparatus that they may well have overreached and to use as it were their basis for information what foreigners are saying and doing as opposed to what individual policy advisors may be independently recommending within the chinese system okay i'm going to ask my final question and then i will turn it over to the audience so can i um urge out folks that want to ask questions to use the raise hand function or just send me a note in the chat and that is kevin what does all this mean for u.s china relations going forward i mean it's hard to be encouraged by your comments when you talk about not only decoupling but now decoupling that's become a policy direction for china as well i mean we used to think of trade or the economy as being the balance the good part of the relationship and if this part is really going to be increasingly strained how do you see u.s china relations going forward well um i think it's going to be really rough through until the 20th party congress and then i think we reappraise once he's got his reelect or reappointment under his belt secondly you're absolutely right wendy the economic relationship for 35 years certainly through until the beginning of the trade war was the central piece of ballast in the u.s china relationship so whatever happened whether it was tiananmen whether it was some spy plane incidents whether it was taiwan policy whether it was human rights controversies the central ballast which would ultimately stabilize the relationship was this vast network of people engaged in the economy through trade foreign direct investment increasingly capital markets and across the whole spectrum and migration flows as well people to people the problem is uh if it starts to unravel then the ballast becomes much thinner and becomes much uh lighter and ceases to actually hold the ship steady and that's where i fear we're headed right now um and of course when we think about the cold war between uh the united states and the soviet union one of the reasons why it was so easy to slide into a cold war with the soviets was there was no economic engagement between uh the soviet union united states after the end of the second world war a little bit of reconstruction aid but that was about it um whereas with china there's vast enmeshment um across all those domains of economic policy i just referred to held the show together but they're now cracking and the big news is that it and i think american policy makers need to be deeply aware of this it's not just a discretionary decision by the united states now as to whether they decouple and if so when and how and under what terms the chinese are now signaling themselves signaling themselves we know that's the direction you're heading in and we intend to get ahead of the curve my concern is if you then pull the economic ballast out of this then are you left with something as uh brutal as what the soviet union relationship looked like in the past that does begin to look like a cold war not there yet but the trend line is bad okay i see a number of hands up so that i can talk

Channel: Asia Society

Views: 86,818

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Keywords: asia society policy institute, kevin rudd, wendy cutler, xi jinping, economics, asia society new york, program, policy

Id: cpLECUjTZwQ

Length: 39min 12sec (2352 seconds)

Published: Wed Sep 08 2021

Reddit Comments

[u/Baronnolanvonstraya]

K Rudd’s really got a fire in him recently!

^{Take notes Malcolm Turnbull}