The End of China’s Economic Miracle

you know the last year or two I feel like when I host dinner parties if people aren't in tears at the end the conversation has been incredibly superficial sadly I I don't think there is anyone in the room who can argue that the title of this thing is wrong it is the end of China's economic miracle and I thought that we would start off by by putting the end of the economic miracle in context and I love your phrase about economic long coid and you do a brilliant job and I'm sure all of you have read the article about how consumers have lost faith in their future and you have this sentence that I really liked where you refer to self- Insurance yes people are saving not spending talk to us a little bit about all the symptoms that you started picking up on that said the end of the miracle was coming even before coid right well thank you Henny and thank you all for turning out tonight I'm I'm grateful to the Agia Society for inviting me um I think the important thing is in economic speak we talk about consumers or households uh what that really means is normal people that it's when we talk about that we're talking about the behavior of the broad mass of people who are either wage employees work at home run a very small business not the tycoons that you know we read about when Jack ma or somebody else loses some billion dollars here or there and I started worrying as many people did um around 2015 uh when because the first two years that she was chairman of the party president um he still seemed to be at least carrying through some of the reform aspirations maybe not the political ones but the economic liberalization and there was a very marked shift but what really started to change um was the household behavior and and we saw this starting in 20 middle of 2015 um The People's Bank of China uh with obviously the approval of the poet Bureau um opened up the capital count meaning made it easier for average Chinese to take their money out now I had been warning um a succession of US Treasury secretaries that to stop yelling at China you want a market determined exchange rate because if there really is a market determined exchange rate the first move is going to be down not up because every Chinese household is 95 99% in Chinese assets and so they' naturally want to diversify no matter what but what we saw was it took about 6 months um for the Chinese government uh to and the People's Bank to get a hold of the situation and they imposed not terrible but reasonably strict Capital controls and and that started me thinking about shooting people with phones um no sorry that started me thinking about um I'm kidding sir don't worry um uh that started me thinking about okay is this just the rational households diversifying or is there something more here but I don't want to over suggest I saw it early Henny you were saying you knew people who were seeing by 2018 by the time time of she's second term that there were starting to be changes what for me made it evident was the zero coid policy because to me that's what put in the average person's face that the Chinese Communist Party could and would quite arbitrarily take away your your commercial rights your property rights your ability Liv get to spend a little more time talking about what you saw between 2015 and the first coid wave I I kind of I kind no I'm happy I'm happy to have you talk about that because to be honest I was still formulating I didn't have a strong feeling at that point that that something was seriously wrong um what I would emphasize because some of you have seen there there were various people disagreeing with me which of course is allowed we're not in China um but um that um there were a lot of people who were sort of forecasting this inevitable decline of China and that's a key thing that I don't believe was true there was an inevitability as China grew richer as more of the economy urbanized that the sort of lwh hanging fruit as it said was going away but there was nothing that said you had to have a a sharp slowdown or persistent slowdown and so I guess I'm not trying to duck your question but I guess in a sense the fact that I wasn't very panicked and almost no one else was in 2018 I I think reflects the fact that it it it wasn't structural it was accumulation of decisions and experiences for the Chinese people so in in your article you you focus first on households but you also talk about the corporate yeah landscape and that's important too because all through the beginning years of she and before that you would see the balance between privately own enterpris and state-owned Enterprises sort of going back and forth yeah and then you had a decided tilt toward state-owned Enterprises away from privately owned Enterprises and of course return on assets was much higher in privately owned Enterprises and you had the same sort of back and forth where entrepreneurs would push and then they would be pushed back and then they push again and then all of a sudden they stopped pushing back they had been so you know demoralized and demonized in in China I think I mean putting it a little differently the um so any he knows many of you have read or met my colleague uh Nicholas lardy at the Peterson Institute who had a marvelous book uh called markets over ma and he was one of the first to really document what Henny was just referring to and and sort of the key chart from his book I always refer to is you track the share of credit going to State old Enterprises versus private Enterprises because the vast bulk of financing in China is Bank credit of different forms and basically it's mostly going down on average the share sorry I should do it this way state owned Enterprises um and in 2015 it reaches a bottom and then the share starts going up again and it's going up again ever since and um I think in retrospect and we worried about it at the time um it's clear that that was a policy decision by shei and you can dress it up in various ways and I remember I think my last last or second to last trip to Beijing before Co I had the privilege I guess um to meet with wanan who was in that point she's ideological adviser and he gave us a long lecture which was reported in the Press um about how they had let the the the private sector of capitalism get out of control that they had to rebalance and you know especially given what happened in the US in 2008 uh you know that on the face of it doesn't sound that unreasonable but obviously there's a lot more behind it than just some rebalancing and we'll talk about 20 9 where China was helped the whole world reflate after the financial cont crisis and compare it with now but let let's talk about it's 2020 Y and it's the first quarter of 2020 and China is experiencing the first wave yeah and I had become very interested in biotech and one of my friends owned um McDonald's China and I was calling him every week and by the second or third week of March 80% of McDonald's in China was back to normal really and it just seemed that China was going to have a very very mild coid and I would talk to people in biotech so Eli Lily for example has a big Research Institute in Shanghai and they found that so many of their research scientists left and set up very interesting companies so they set up something called Lily Asian Ventures to invest in the biotech startups or their former scientists and the people there were saying we don't have enough people to test our coid Therapeutics on that's what it was like in the first quarter of 2020 what went wrong a lot of things um I I think it's important to remember and I remember being in a meeting here in New York not far from here um in which there were a number of us in the US and from the US sort of very overconfidently saying well CO's going to be a stress test for regimes you know the us we've got all kinds of hospital beds we've got great Public Health we got the CDC we got the uh the uh oh God whatever anyway um FDA sorry um and it's all going to be great and then we're going to see all these terrible regimes like Iran get into trouble and of course what happened was everybody managed to mess things up I I think what is key about China in 2020 2021 is just when they decided to lock down how Draconian it was how arbitrarily it was applied how long it was held on to and that Rel relates to and he's poting about biotech that the Chinese of course did start to develop their own vaccine and in one of the instances why I get worried about industrial policy subsidy races you know the Chinese insisted that it had to be their vaccine with their technology for their people and that their client states around the world should not buy The American or the European vaccine they should use the Chinese vaccine and the danger with that which sadly plays out is you um you risk not having the best technology and in this case it arguably cost millions of lives um and certainly billions of person hours of disruption and lockdown because China did not have the vaccine we all would have expected and it I think there are experts who might disagree but my understanding is at a very high level of seniority uh including obviously president shei it was decided that mRNA was a foreign technology an American Technology we weren't going to use that and you know it's very funny to think about funny um in a Washington where everybody's paranoid about China reverse engineering stealing technology this that and the other the sense uh it wasn't like we'll figure out what's the best technology and we'll copy it it was we're going to have our own technology and make sure it works and that's frankly stalinist that's a stalinist way of thinking um and so it went very fundamentally wrong and then again I just want to emphasize the arbitrary aspect um so many of you I know know people in China or have lived in China or some of you are Chinese and have been through this but you know you had literally local party officials deciding on no notice everyone to the west of this street is in complete lockdown indefinitely everybody to the east of this street gets to go on with their lives whoops 3 days later we've extended it another 10 blocks um it's really quite extraordinary you know I used to tell people China isn't a monolith but under Xi Jinping it is becoming increasingly a monolith yeah um again there are political scientists and and area studies experts who can speak better than I can on this but I I do think it's important to recognize that we started with a shei regime that was benefiting from what his predecessors not not just in the his role but the accumulated predecessors of the Communist Party leadership since dung had done and that was from 787 9 until 20 through 2012 and when I refer to the end of the Chinese economic Miracle it's in part about the additional slowdown and growth but it's in part that the miracle was that um from dung until until she the party did restrain itself in people's everyday life and Commercial Affairs um if you were a democracy protester in tanman square or in Hong Kong if you were unfortunately a weager Muslim you know the party had no hesitation being quite Barbarian but if you were a normal Han Chinese you know occasionally you'd have to pay a bribe occasionally a a party member's son or daughter would get ahead of you and something but basically you could go about your life as long as you were not political you could just go about your business and um and The Business business of China was business and so a key point about the monolithic um is it's not just that they've successfully created this myth amazingly successfully that you know what had been a China of regions of separate dialects of different ethnicities even within that that you know 98% of Chinese citizens are Han Chinese all speaking mandrin and it's all one country which is an incredible achievement but that you've lost the flexibility and experimentation that XI and Jang xiin and some of the other previous leaders of China allowed it used to be there was and a lot of Scholars have written about this there was competition between the regions in economic terms and social terms you know you would let there be experiments in different parts of China it was in a sense a good version of federalism um again I don't want to overstate it there were always prison camps there were always Secret police but but there was a lot of room and um as long as you didn't challenge the party there was a lot of room and that's gone away you know I want to spend a few more minutes talking about the miracle before we go even more into the reversal of that miracle and you know I think the whole story of Co and the refusal to find the best vaccines is part of that so I grew up in a medical family four generations of the women in my family are doctors and to my horror I sort of started turning into my mother and became very interested in flows into biotech and as recently as 2017 2018 I was in Beijing and I go to meet a doctor who had been here distinguished career as a molecular biologist and had gone back to China a few years before he had unlimited research budgets he could go to any conference in the world and when I met him in Beijing he had two name cards and one was of director general of a research institute in molecular biology and another one was as the co-founder of a company called Beijing which is listed both on NASDAQ and in Hong Kong and I thought China is really beginning to understand what you need for Innovation and the last thing he said to me was you know Henny if you ever need to transcend the internet firewall you just come to my research institute we have no firewall here that's what it was like then and you could feel so hopeful yeah and during when I first came back to New York because I couldn't deal with the quarantines one of the people who was also camping out in New York was the head of fos sun and fing in Mandarin fos Sun had actually licensed bchh and he's hanging out in New York CU he can't deal with the quarantines any more than I can and when my friends would visit him his wife would say please don't ask about why he can't get approval to save lives with btech and it's so sad to see how we all thought China was moving up the value added curve and just one man kind of reversing it and you know all of us here to some extent I think are the beneficiaries of globalization yes and China was one of the first to op out yeah and we will now get closer to where the heart of your argument where you're talking about risks that China is so sensitive about which is capital flight and talent flight right yeah I think um there's a lot of ground between those sentences um the it I what I want to stress is there are these stories of titans of research or business um and understand the press and people living in New York moving the circles heny and some of you do focus on this and we also have a tendency in the US to talk about the Elon musks and the Larry Elliots and the whoever but again what I want to stress is what was the big change in China is what happened to the average people the normal people the people running small businesses the employees that that was the big shift I mean so as long as she was was doing corruption anti-corruption campaigns that so happen to take out political Rivals like boai or Prince Lings of other kinds you know the pop normal people could say well that's great who's for corruption they're arrogant uh as long as he was taking out or disciplining let's say um these individual tycoons um you know again some people in China say oh that's too bad some people in China say oh that's great you know and you could cloak it as this common Prosperity narrative that we're we're we're rebalancing inequality we're rebalancing the state but it it the capital flight the talent flight is is in my view it this is the Insight from Albert hman the very legendary political economy writer that you know you you essentially when you're dealing with a government regime as a normal person you got three choices what he calls exit voice and loyalty loyalty is you stick with it whatever the regime does and that's been the default in China um and default for most of us most of the time um voice is you raise a complaint if you think there's a problem or an injustice or something going wrong in China that obviously has its limitations um and it has been getting more and more limited so then if you believe there's a problem your incentive is to resort to instead to what we call exit now exit can mean literally people leaving the country um we're not going to see millions of people streaming out of the country this is not at least this is not my forecast but I do want to point out a couple things first that what people will at the margin starting mostly with the more sophisticated the more well off but people will at the margin start moving money out starting to hedge their bets as Hy men mentioned summarizing my piece there's there's a desire to self-insure and part of the way you self-insure is you keep things in cash you stay liquid you don't tie things up but part of the way you self-insure is you diversify you get money out you get money into other currencies if you're running a business you get alternative sources of Supply or alternative places to produce if you're running a family you get some of your kids out to study elsewhere or work elsewhere and so the the point I want to build on this is a couple fold first is this is a dynamic we've seen in other autocratic economies and again that's why I want to stress excuse me that the end of the miracle is this change there's been very little pressure for exit almost none in China from 79 till now there were political refugees but was not a mass phenomenon by any means whereas once you start down this road like in Latin America in the past or Venezuela today um you have an active movement of people threatening to move money Talent production but additionally and this is me forecasting it may not be right but I think it will unfortunately um when you have the threat of exit uh the autocrat the ruling regime uh starts putting up more barriers and we're seeing that now we're seeing that you can't publish information that's bad news about companies we're seeing that they're enforcing a bit more some of the exit rules it's harder to get a passport it's harder to get a student visa it's harder to invest abroad um they're making examples of people who uh take their money and use these various gimmicks to get around the uh the restrictions um and and we've in this kind of dynamic once you start down that road it becomes doubly problematic because first the the more people the autocrat the ruling regime puts up barriers the more incentive there is for average people to notice it and say okay I've I I've got to defend myself against this I've got to figure out a way around I got to get some way out and again we've seen this in other we've seen this in Russia we've seen this in Latin America um the SE we see the second point is if as henn's indicating and I think unfortunately is true this ends up being more and more looking like a Mau stalinist kind of regime where it really is one man rule um it's much harder of course for that person to incredibly convince people I'm not going to take away your money I'm not going to take away your rights he can come out and say well I only did that I'm not going to admit it was a mistake it saved millions of lives but I only did what we did because of Co um so don't worry about it you can you can stay put nothing bad's going to happen again unless there's another pandemic but it's not really credible that's that's the difference between having an autocrat versus having at least a norm as was the case after dung that there's some limit on Power and then they get more narrowly economic about going back to something Henny was saying a minute ago um if already in this context um she is favoring the state owned Enterprises which again all the flows of credit all the investment plans seem to do um then any effort to respond to private sector economic problems becomes more fraught so we're seeing that right now um as anybody who's Asia Society member or Patron knows uh there's a bit of a real estate problem in China right now um and um part of my point is that they're not going to deal with it very well or be able to deal with it very well under the current circumstances because what happens is and we've seen this they try to do stimulus policies they try to cut interest rates they try to put money in people's pockets speciic specifically to buy real estate or buy an auto buy durable goods and people don't respond they put the money back into Cash they refuse to spend it basically and that's the logical result again we've seen this before that if you've got a capricious arbitrary regime you don't know what the terms of the deal are going to be you don't want to tie up your money you don't know if they're going to change the policy at any minute and so you just stay liquid and so therefore these stimulus programs don't work very well and then she under and the technocrats under him who want results or not even the technocrats the apparat chicks under him nice distinction well it's changing unfortunately um want results and so they start throwing more money into the state owned Enterprises because there they can command results they can say you know you have to produce this much you cannot lay anybody off you have to do this and that just feeds the cycle so I I I don't want to say there's a point in my article I think where I come close to saying point of no return I know that's a little bit further than I really want to go you used that phrase no return so I'm I'm culpable but um I I I what I re I I don't think it's point of no return but I think it's point of no return as long as she is in charge let's put it that way you know when I read your article and when I listen to you the adjective that I use I don't know whether it's stalinist or whatever but is paranoid and Xi Jinping is paranoid and he's paranoid about himself his hold on power but also he's Paranoid on behalf of China and one of the things you notice when you live in China is a sort of paranoia why because China has no food security and no energy security it's very different than say a Russia Which is far weak but has both energy and food security and the us as well which has both how dangerous is a weak and paranoid China compared to the China that we used to think of as far more powerful when my wife and I went to the China for the first time in 2012 one of the things we found most striking and it was a observation many people made that was very interesting especially since since I'd been worked a lot on Japan uh in the past was the amount of self-confidence with which Chinese people seem to be able to take things whether technology Styles whatever from the west from Japan from elsewhere and not have it interfere with their sense of identity it's you know we'll take what's good we'll do that we're Chinese we're the ancient civilization it's all cool center of the world yeah yeah know but I mean it was really striking and then it S I felt like I really wish Americans were that open to International influence without getting insecure or upset about it so I just want to emphasize I I I share some of your feeling about this um I think when we get into the international sphere there's obviously a lot of things going on that have nothing to do with economics and these you can sing until you're blue in the face which I and some of my colleagues at the Peterson instit to do that if you're worried about food security or you're worried about energy security the important thing is some combination of resilience and diversification and that doesn't necessarily mean that you have to be hostile to the rest of the world it can be that you get the rest of the world into deals with you and in mutual interdependence and you stockpile and you create you know so I don't want to say you know Japan is not at the moment threatening other people and and doing even though it's at least as energy insecure and food insecure as China what I do think is interesting um and which I've said to some people who work for the president our president is we've seen this shift that for the first couple years of the Biden Administration and certainly throughout the Trump Administration there was this repeated concern not unreasonably that oh my God China is eating our lunch in technology China's growing so fast the more economically powerful they get the more of a threat they are to us and then some months ago maybe roughly around the time my article gets published um not to be too cute about it the president our president um came out a couple times in public and said yeah China's econom is in really bad shape and that makes them more dangerous because they're going to be more aggressive now these two are not necessarily in cont contradiction because there are two separate channels one is the Richer they are the bigger they are the more confident the more capacity they have the other is the more desperate they are the more politically pressured they are from economics maybe the more of the Wag the Dog they want they want to distract and social science has evidence on both but it is I know you asked about China but I just want to emphasize that there is this two-way action here that that if the US whatever happens to China their economy is up I'm scared their economy's down I'm scared it does reinforce a dynamic in China and elsewhere as well so before I shift to the other side of the equation and talk about the US I I just wanted to say that I loved when you said don't celebrate ad just expectations but before we shift to the other side of the equation and talk about America policy which by the way Adam describes as confrontational restrictive and punitive I just wanted to see if any of you have questions up until this point on the miracle and the end of the miracle and focusing on China before we move on to the next part of the discussion I don't know if they're moving mics or something but there's a gentleman in back there in a blue shirt thank you do you want to come up and get my mic no I I think we can hear you okay great thank you thanks uh just a question on the excesses caused from the economic Miracle right and how much of the current slowdown is actually addressing some of those side effects of the 203- Year growth and in order to do that you have to slow things down you have to fight the excess corruption you have to address many other issues quality M like to hear your thoughts thanks pollution as well all these environmental so question I'm going to sound probably more wonky Economist for the next minute or so I apologize but um so there is a school of thought and it's one which I was familiar with when working on Japan in the 90s as well and other places that you have too fast lowquality growth you build up fundamental in balances in society and you have to weed those out or else inevitably you'll have problems um and usually this is cited in the context of China real estate boom and succession of real estate booms and busts among other things also the corruption as you mentioned um my view of the matter looking at the last 40 five years um is that that is a second order effect that's treated as mistaken for a first order effect and that it's a highly variable and contingent thing that is treated as a structural in fact it's often referred to as a structural set of problems and so let me take one more minute if I could because it's a very serious question um to try to explain so as I said in a recently published response to some of my Critics on Foreign Affairs um all economies slow down over time as you approach the growth Frontier which is what econ or the productivity Frontier which is how economists refer to it it's harder to maintain a big growth rate the big growth comes when you have a bunch of people in agriculture and an informal economy and you move them into manufacturing and services and you move them into the City and you move them into a market economy and the next big growth comes when you accumulate capital or get foreign investment and you endow those workers with technology that they didn't have and so there's just a natural automatic I mean this is one of the few things in economics that really is true that over time there's what's called convergence that as your income Rises per capita your rate of growth slows um it'll vary over time it'll be setbacks but when you look at the long run average AES that's what happens now and so one way of looking at this is which a number of people have pointed out is if you plot over time what's the basically the the growth rate of China and you stagger it and you do the growth rate of South Korea and you do the growth rate of Japan you know 20 years back 10 years back they fit almost perfectly and so and that's a very robust fact and so to me that's very strong primma evidence that it's this fundamental slowing this this life cycle as it were of an economy as it grows becomes more technologically sophisticated industrializes urbanizes that's the real driver of these long-term growth rates average growth rates it's not all this China specific stuff about quality of growth and all these things that may affect year-to-year fluctuations that may affect the distribution of growth it's not zero but basically China South Korea Japan they all just fall the same path hitting the same benchmarks when they're at this level of of GDP per capita they're at this rate of growth one second sir um and so when I say the end of the Chinese miracle what I'm pointing to is a further sustained deceleration of growth off that long-term path that's the distinction I'm making sorry if that was too nerdy I'm sure you could follow it but it might have been too nerdy uh yeah the gentleman there hi Adam it's Dan Albert um good to see you again thanks for coming um so you know I think we I think we can all agree that at 1.4 billion people China is sort of sweet generous in terms of economic examples I I actually completely reject that AR okay fine don't we don't good that's fine but I I I I feel very strongly that it is it's monetarily Sovereign at least for now um it has a uh you know access to global markets in terms of exports it definitely is making those deals you spoke of uh in terms of resources um and so some of the insecurity that you know we spoke about I think your example of Japan is actually quite correct thus far um China has you know obviously not had domestic consumption at a level where it can avoid what I'll call punitive levels of investment dragging uh things forward in a way that uh creates over Supply um and you know to the in the terms of the third component exports um you know it had been able to pull uh the pedal off a little bit and is now becoming more dependent on it as as investment gets pulled back the social contract however was basically making jobs available for people in a in an economy that is still divided between urban and non-urban population so my my question for you is how you know you had about 12 million people turning 18 every year in China even with an aging population those people needed jobs and to the extent that China can't provide those jobs do you see internal social disharmony fomenting and is that a perhaps bigger risk than some of the economic risks that we're talking about going forward thanks I didn't realize that's where you were going Dan um um so thank you for clarifying at the end um simple answer is yes I mean we know again though it's not a su generous China thing we know across the one the very robust results in political science is across societies over time uh bulges of youth unemployment particularly of unemployment of relatively higher educated youth is a recipe for social unrest so there were demographers who were predicting the Arab Spring a few years before it happened because there was a huge bulge of underemployed and unemployed people who went to college and had frustrated expectations I I know you know this I just say so I do think that's more you know this is why I talk mostly in terms of the political economy aspects and and don't make any Grand predictions about regime stability or social tension because a I don't know enough and B I do think there are things like that that are are not strictly speaking economic that are are very fundamental that said um I also believe that the decisions and rhetoric being made by She uh at present as I read them in Translation I don't read Mandarin um are reinforcing this and making this worse than it has to be you know we all saw the the reports about when he says You must young people have to learn to eat bitterness you you boys have to stop being Nancy boys and dressing up in metrosexual and be aggressive your kids have to stop wasting so much time on video games and I'm going to you know interview in your life this is scary stuff and sometimes you can sustain that for a very long time and sometimes it blows up and I do not have any clue as to the relative risks on that I will just acknowledge that that's really important and it underlines to me just how aggressively she is going down this I mean I hate saying cultural revolution but you know that Echoes of that path that's very scary so Henny you want to pick who who goes next you pick okay um I think the gentleman in the gray suit there I'm not seeing anybody on the right side of the room so feel free to wave your hand and we'll we'll do common Prosperity um thank you very much Mr Posen for being here with us and sharing your thoughts hearkening back to what you mentioned earlier about Japan and Korea and the many analogies which apply in the situation I know you know both those countries well and I'm sure you're aware that in the 1980s till the end of the 80s the bank of Japan administered the financial system and directed credit quotas to each of the individual financial institutions after the fact it took like almost a decade for this to come out but the banks all basically admitted you know if they were told 8% was your volume growth this year they grew their loans by 8% and that in the end of the day there were other issues but that was a critical component of what ended up being a lack of responsibility at the individual institution level to take responsibility for the loans they were making they were being told to generate loans the same thing happened in Korea and so I mean to to a slightly lesser extent but it was very analogous Korea we know what happened there in the late 90s Japan suffered for a long period of time but they were wealthy enough to get through that but as you know since the early 1980s China has been doing the exact same thing in their financial system going from0 to $65 trillion in their financial system and to this day total social financing is growing exactly as directed whether it's the CCP or the The People's Bank of China do you think that China will be able to emerge from this and have a normalization of their financial system in a way that the banks can get away from directed volume quotas of lending to grow the economy thank you um I guess I I have to start that I actually do somewhat disagree with your characterization of the Japanese and Korean experience um there's no question all that was going on but one of the Striking things going back to my imaginary graph of this is Japan this is Korea 15 years later this is China 15 years later is that Kore uh for all that happened acutely in 9798 they did not have the property crash they did not have the extended um damage throughout their economy that the Japanese did uh they did not have the interruptions in investment for good or for ill the Japanese did and yet they follow basically the same growth path so I I I just I I don't want to be contentious here but I I just fundamentally push back at the idea that the banking decisions are are are the main driver here um I do think and here's where I agree with you um I do think that government directed credit does have real costs and there is no question that the kind of characterization you make is entirely accurate for China the and so one way of telling the story of the last 10 15 years in China or one strand I shouldn't say telling the story one strand um which is part of the reason frankly why I think a number of us didn't see what was happening in China fully is there was this large number of technocrats at the People's Bank at the csrc the CBC what's now the cbirc these are the acronyms of the various Regulators Financial Regulators in China um we trying with pretty Express support from the top of the Poo to try to change things and um you did have in a way that we I I wouldn't say never but I think not on a scale that we we have much bigger scale than we saw ever in Korea or Japan examples made of people who lost money I mean the big policy banks in China like big Banks everywhere we're safe but there a lot of small medium-sized institutions got into trouble there was the various repeated crashes including of the um sorry I forget its name the the the tech uh stock index that was in uh shenzen um anyway there were these various Bubbles and crashes people lost a lot of money there were the wealth management products that were a huge scam that lost a lot of money so in a sense they did better on moral hazard not for the bankers but for the investors than the US did in the run up to 2008 and certainly than Japan did in the late 80s and early 90s so it's a very mixed bag and and I think it's just not a TI it's not that tidy a story but I just want to say that part of the reason why I was optimistic and slow to recognize some of what was going on is because there very clearly was I see hen's really to cut me off but I'm going to take another another minute um there very clearly was for all the monolithic all of she's asserting power there clearly was a group of high level senior officials who believed that she had given them orders and encouragement to try to keep out the rot and you can even argue that part of the reason we have the crash we have now is because in was it 2000 or 2001 they changed the regulation on the real estate um and that's part of what led to the crash and ever Grand and all these things happening um so again it doesn't go against your position so then the the I just want to stress that this is you know even under she this is a very messy history so I I reread as I was finishing my article I reread most of parts of um Ezra vogel's biography of dung which for those of you who can read Chinese you know there may be many better sources but for English language is a very good source and one of the things I had forgotten about that was very striking was how there was this from 79 to almost 92 there was an ongoing debate I guess between dung and the head of the China Development Bank and the head of the China Development Bank who was also a longtime historical communist leader was like fire and brimstone against moral hazard he didn't want there to be too much lending he didn't want there to be too fast growth he didn't want welfarism and I've checked and so when she refers to welfarism which sounds to us accurately like marold Reagan saying we don't want welfare queens getting fat which is offensive but that's what it sounds like this person was using the same term debating with same term in Chinese debating with dung in in in the um ' 80s and early 90s so ultimately and this is why I pushed back a bit at Dan about the the uniqueness ultimately there are these political economy dynamics of financial management and the the perverse incentives of various people and the difficulties of policy makers calling a stop to things when it causes a mess um that I think Drive the story I hope that wasn't too unresponsive to your question I mean that's just I see it as Messier I guess one of the reasons I love being at the Asia Society is how exciting the questions are for the audience great and I I wanted just to pick up on your point because in addition to Capital misallocation there's also huge opportunity costs and time so I happen to live in Japan for the bubble years and it's 1992 and I moved to Hong Kong and I'm having my farewell the Sanara meal with the vice Minister of Finance at the time then sakakibara oh Jes and he describes long-term capital um long-term credit bank of Japan as the carp of the Japanese Financial system they take bites of every piece of garbage at the bottom of the sea and at the time LTC CB's top clients borrowing clients nine out of 10 were bubble companies and the one that wasn't was actually TECO right it it did not end well so you have this opportunity cost with time when you're not dealing with the misallocation of capital in a timely manner and you know it was only 10 years after I had that conversation with sakaki Bara that they finally dealt with banks like long-term credit bank of Japan and you know I think you do see that misallocation of capital in China and one of the problems with the stimulus that as you rightly point out has no effect is almost all the s the problem in China as you point out is insufficient demand but almost all the measures they've adopted act on the supply side so actually the supply demand imbalance gets worse not better it's really interesting you put it that way Hy because um as I may have mentioned uh Peterson Institute we had our board of directors meeting yesterday here in New York um so thank you for coming tonight not last night um but uh or rather thank you to the HSI for scheduling it tonight not last night um but anyway someone I won't identify but who is M of our board and is very involved in China and very knowledgeable was talking was claiming that she or he had had exactly that conversation with the new Finance Minister that you all are treating this like it's a supply problem and it's really a demand problem or you're treating us like a demand problem it's really a supply problem you know it's at that level of of debate and um you know I as as bring it back to the gentleman's question about what lies ahead you know part of where I came out in my anales of Japan which not everybody agrees with but I think have largely been proven to be right is there very little was written in stone you could get away from the Bad Assets you you would take the losses and you move on that's what capitalists do and and I pushed back against some people who were insistent that Japan could never grow again or it had to work off all the assets well never did but it grew again and so I I guess that's all I'm trying to say is that China can change I just feel like under she it's very unlikely to work or to be pursued um why don't I leave it there um so Le let's turn to the other side of the equation now you you describe American policy and I think all of us would agree as confrontational restrictive and punitive how do we get to the point where we can have a more constructive attitude and have an open door for people in capital well to be fair um I do think the Biden Administration since the speech by treasury secretary Yellen and the in my opinion less constructive speech by National Security adviser Jake suin last April um there has been a a obviously a thought tall wall yeah speech yeah um that and then we've seen the succession of Yellen and Rondo and blinkin and Carrie and notably not Tha uh go to China and we have coming up at the Apex Summit a bilateral supposedly between a summit type bilateral between she and Biden coming up so they have the B Administration has chosen in the last several months to to to try to ease things up a bit um the reason I brought out the thing about the tension between I'm scared of China because they're weak I'm scared to China because they're strong I is is is to emphasize what you're saying which is how do we get to something more useful now if you're a true China Hawk um which there are people in this Administration and in the previous administration who genuinely are um you know it's it's we have a small window before China is militarily dominant and threatening and we have to weaken them directly before that happens in a world as you stress where everything is dual use technology yeah and and and I find this chilling probably wrong but especially I want to emphasize what you just pointed out that the the sanctions regime the economic measures are unlikely to work very well um so part of it is we don't have an if you take that point of view we don't have an endgame for China sanctions tend to work and my colleagues at the Pearson have done some of the foundational work on this sanctions tend to work best when they're multilateral r or at least plurilateral not just one country doing it and when you have a clear goal if you stop doing this we will stop beating you on the head you know it's so interesting Jamie Diamond was speaking at a conference who two weeks ago Jamie Diamond and he said no seriously who the the head of JP Morgan oh a banker okay sorry go he said the US has substituted sanctions for diplomacy and that's exactly what you're saying and I hear that more and more and I I think that's I'm actually saying something a little more sophisticated which is um you can use never be invited back no no I'll never be invited back you're fine um um that um that you actually you can use sanctions but only in certain circumstances and you actually have to have a goal and part of the problem so the Trump administration had a goal which was simply undeliverable they said we want to put up tariff barriers and other sanctions to make sure that there's a trade balance that's in favor of the us and that just simply wasn't going to happen um and then the bid Administration came in and as far as we could tell their only goal was to weaken China which it okay may be a legitimate goal for various reasons but isn't going to you're not going to get there through sanctions and and this kind of policy um so anyway uh you know I I think there's been a lot of statements recently from Biden Administration top officials backing off some of that and I think that's wise um and saying we're not out explicitly we're not out to make China poorer we're out to prevent them from having she's doing a good enough job on it well maybe that allows the Biden Administration to say it but okay that good diplomacy you take advantage of the situation that's kind of where I end up in my article is when I argue for taking advantage of of of the situation in China I don't mean haha they're down let's kick them I mean take advantage of the situation to more clearly make a distinction between being concerned about certain behaviors of the Communist Party regime from the Chinese economy as a whole and from average Chinese whatever that means as as opposed to party officials and not fearing the money the talent the technology that comes out of China if anything encouraging it to exit going back to that concept we were talking about a little bit ago and this is one of the places where it's not even diplomacy it's it's a choice the US makes we can be as I would like us to be welcoming to Chinese students Chinese Talent Chinese workers Chinese Capital Chinese knowledge or we can be hostile to it and you know when people talk about containment in the Cold War of the of the Soviet Union one aspect of the policy that was successful was we were not trying to contain those aspects we were if anything encouraging desire for exit from the Soviet Union of people of money of ideas um and so I think we can do that again with China but but if you have twoo aggressive uh hostility that's based on some racial or cultural basis and is to and every human being who comes from China's a spy and um all these things then you can't do that and that puts us I think it squanders a potential Advantage do you think that this speaks to a lack of of confidence in the US you know the way we have demonized so many Chinese academics here well again there there's there's I think there's two aspects of this argument and I've talked with I'm not a security expert but I've talked with people in Washington who are Security Experts and who are security officials so I think just's two aspects to this before we get to the high concept of are we too insecure there's just the Practical aspect I mean I've talked to somebody who's in Counter Intelligence and they point out that even if somebody is a spy it isn't necessarily a net negative to have them in the country it may be that they provide benefits that they unsuccessfully offset by spying it may be that you can turn them it may be that you can feed them false information that leads to other Behavior it may be that you can learn more you capture them at the right moment you can learn a lot more about what's going on in China than what you did what they learned from you at the same time in a world of artificial intelligence and satellites and various Technologies I know nothing about it's kind of absurd to think that if the Chinese Communist party or a favorite company in the Chinese system wants a particular American Technology the most efficient way for them to do it is to get 10K kids out of beta have them apply to MIT wait 6 months find out if they get scholarships five of them get here somehow surreptitiously train them to be spies without tipping mit's hand get them in the right Labs get them there and three years later versus press a button on the North Korean hacker and have the North Korean hacker steal the plans so I before we get to the concept of is the US you know too scared I I think we have to start with the very practical concept of no matter how many senators stand up with pun teeth pointing I need to get rid of these Chinese I'm much more worried about good old-fashioned Espionage of the of the of the electronic sort and and deterring or preventing that is far more important than this stuff but anyway on this on the fear side I mean so you know this is a very sophisticated audience you've all read things like you've got Kevin Rudd's new book on the Chinese motivation which is very much focused on Chi you've got gram Allison's was it the war trap you've got these various things um you know there's many arguments out there and there's a long international relations history of countries misperceiving their enemies both in intention and capability and we've got brave people like Jessica Chen Weiss so I think is that Cornell now you know who are out there a Chinese American political scientist who's out there saying you know calm down a little it's not that we have to say that the Chinese Communist party or she in particular is a good person or doesn't have designs on Taiwan but you don't have to make them out to be uniformly hostile evil always looking for the next violent advantage and so as a secondhand student of History I remember very much going to Germany in 1990 and then living there in 1992 93 and at that time I got to see what East Germany was really like after reunification and I have been brought up on the sometimes classified sometimes not and mostly Declassified intelligence reports of the US intelligence community that East German per capita GDP was 2/3 or more of West German per capita GDP this was a highly functioning Society this was this this was that and East Germany was less than onethird per capita income and per capita income is shorthand as well for technological sophistication functionality of the society I mean that's basically it's it's the best Shand you got and again and Dan Albert went through this too um you know we had the long lag in the 90s where to cite as Vogal again Japan as number one or chmer Johnson on meti and all these perceptions of Japan as this Juggernaut persisted well through the mid99s um so and then out of all of this there is the Pacific Ocean between us and China there is nuclear deterrence between the US and China and whenever I push and so again this has nothing to do with my I mean I've called shei repeatedly an autocrat I'm not I'm not in In Cahoots with any any Chinese organizations I'm not going back to China anytime soon but you know the this I keep asking the Security Experts you know essentially what is the threat you're so scared of and isn't the best way to confront that threat is to confront it since it's really about invasions of Taiwan South China Seas threats to Korea and Japan isn't the way to confront that threat by continuing to expand military forward presence in those places and military spending in those countries and why do you need all this other stuff which isn't going to work and what I'm always told is you don't understand and it's classified okay I don't understand and I don't have access to classified information but fine can I ask the audience one question how many of you think that we should encourage the best and brightest from China to come here and study and study specifically stem subjects how many think we should encourage that cool the Asia Society in New York um the reason I asked this I I happen to be in Shanghai for the lat sway forum and it was June of 2019 so preco and um actually just before the first demonstration in Hong Kong and I had somebody on my panel who bounced between MIT and Shanghai jaia Tong dasu one of the universities in Shanghai and he said virtually no student who was admitted to MIT from mainland China could get the visa mhm and I thought what a shame and then I carefully checked made sure Adam wasn't a graduate of you Chicago and asked the US Chicago head they have a branch a beautiful campus in Hong Kong do you have that problem and he said no because obviously the US government does not consider economists a threat it's true we're we're more in that Capital misallocation category um um wasted opportunities not direct threats um no but it it it look um it is it I I do maybe I'm blinded by my sort of leftwing biases that I don't view it as a coincidence at the same time there's a huge spread of nativism in the US and fears of people coming up from the below the southern border who are going to do terrible things to us is the same time at which we're saying oh my God we can't let the Chinese students in or the Chinese visitors in I view it as part of a general Trend in Congress and a trend which I think is exaggerated in perception in terms of its extent but there in the broader American Body politic and we've seen this be driven in the past in the US historically I don't want to say there's fixed cycles and waves but we've seen it come and go again I assume everybody in this room is familiar with the China Exclusion Act on immigration in the late 19th century where you know they kept the Jews out during World War II but that was a matter of arbitrary policy they could have let them in they explicitly said no Chinese in law in the late 19th century the Japanese were on the winning side and they couldn't get the other powers to recognize Japanese rights of immigration and eliminate all the Privileges of extra territoriality that the foreign powers had in Japan yeah and in China as well and so I just again I don't want to sort of dismiss it I just want to suggest that China and us are both very large as you mentioned I I think talking about food or energy and security for China is a bit misleading because they do have Hydro power if they don't care about global warming for the time being they've got an enormous amount of coal an absolutely enormous amount of coal that it can burn very easily they if they don't do the Great Leap Forward they can grow a lot of rice and wheat uh they like soybeans they like pork but they can they can CH so us and China both are Continental powers that are largely closed economies that are very big and so we have this tendency to view as you were saying earlier I think in my view hype up external threats whereas things are very much driven by domestic problems including the youth unemployment in China that someone was raising a little bit ago you know the Science and Technology agreement which has been in effect since Carter was president is coming up for Renewal and you know there is a view in Washington that China is developing biological weapons let me ask you a very personal subjective question if people in was if the average person in the Department of Defense in Washington today was listening to our conversation would they think we're just incredibly naive well I would think they're incredibly off base because their ability to develop biological weapons has absolutely zero to do with their ability even to get high-tech um semiconductors let alone any of these other economic things I I was in a dinner and me sort of name dropping I was in a dinner with in Washington last week with the foreign minister and Finance Minister of an Asian non-china Asian country and I sort of pose them a version of this question and they said to me well you know North Korea doesn't have a very good economy and they do a lot of damage so you know it's it's it's not that China isn't a threat or and under certain circumstances couldn't be a very very dangerous threat it's just that it's not about the economic relationship ship I mean North Korea is and you know and all the stuff about China is you know producing fentanyl I believe it I believe it I believe they even probably rationalize it in certain quarters of themselves this is no different than the Opium War that that the that the West foisted on us so why shouldn't we why shouldn't we sell them what they're addicted to and let them suffer you know and and I think it's and if that's true I think it's criminal and we should be opposing it it's not high-tech to produce fentanyl it's not requiring huge allocations of capital to produce fentanyl all that's required is you are nasty enough to want to do it so then comes the question well then why can't we use economics to get them to stop doing it and the answer is we've had economic sanctions in North Korea of incredible Effectiveness putting them into recurrent famine based on their own decisions but unalleviated because of our s putting them in recurrent famine and that hasn't stopped them Distributing malware and negative intelligence and drugs and so on sorry to sound agitated but I'm imagining you as the putative uh National Security person so um you know if if you know it's like again the the the my my anger isn't so much that people are worried about North Korea or about China it's that supposed Professionals in security don't seem to look at the evidence which is these economic tools don't do very much for you in this regard it's like with nuclear weapons in the 50s the the the Eisenhower Administration got very into talking about little tactical nuclear weapons and advanced deployment of nuclear weapons and it was all because they wanted to get defense on the cheap they didn't want to actually have to put troops at risk they didn't want to actually have to put spend on armaments it's much cheaper to have nuclear weapons similar and it was just as ineffective because it was not a credible threat that you were going to start throwing around God forbid tactical nuclear weapons in the middle of Germany similarly not through the exact same mechanism but similarly this is all about a bunch of people who take the Chinese threat seriously perhaps too seriously perhaps rightly seriously but do not want to engage in actual military threatening and and and forward deployment and deterrence on a direct basis they want to do it through economics and then they want to sell it that by the way this is going to be great for the American people rather than depriving them of money because it's going to take all these jobs from China and bring them here which is a lie so you know that person that that nominal National Security person who I've met multiple times um can say I'm naive and I'll just say they're just blind you know I'm just going to ask one or two more questions and then I want all of you if you have any final questions but in a way you know China is part of a larger phenomenon of Del globalization so we could talk about decoupling and we have talked about decoupling with China but don't you think to some extent the us is decoupling from the whole world when you look at things like the IRA which gets a lot of Kudos here but in Asia it's seen as American first protectionism yeah and it's seen that way by all of our allies including Singapore and Korea yep so three years ago I published an article on Foreign Affairs called the price of nostalgia and it didn't hit it quite as big as this one but it did it reasonably big the reason I mention it is to complement that article and cited in that article we put out a bunch of simple charts at the Peterson Institute showing that the US had basically been de globalizing under both Democrats and Republicans since depending which measure roughly 1999 2000 so for all the talk about the China shock and globalization being at fault for this and that basically the share of trade in the US economy barely moves over the last 23 years whereas every other country in the world including China including Germany but not North Korea and and and um uh Myanmar um their their trade goes up enormously in this period uh our immigration rate has been going down steadily since the mid late 90s it is a fraction even before Trump and coid it was a fraction of what it was in the mid90s uh the last real trade deal we concluded in terms of all us neoliberals selling out the American people by concluding trade deals the last one was the US Korea deal which passed in 2007 and which was revised by Congress unilaterally after the deal was signed to protect American Auto Workers um foreign direct investment is a share of US GDP has been flat to down it fluctuates a lot year to year because they're occasional big deals but it's basically been flat to down for the last 25 years as a as a percentage of GDP the US has been deliberately de globalizing on a range of areas in a period when all the other economies from China to Europe were globalizing further and this is the same period in which we tell all these lies about immigration and uh trade stealing all our jobs which is by the way part of the problem with inflation of wages when you cut immigration you will get yeah you get shortages of workers um at both ends of the spectrum yeah so anyway so this this it is very much a uh when we talk about the I also had an article two years ago called the end of globalization question mark and I was forced to that title uh by the Foreign Affairs editors because my original title was the corrosion of globalization which they didn't like as well which is fine they're the boss but um but the reason I wanted to call the corrosion of globalization and that's what I refer to it in the article is globalization is a multi-layered fabric it is not just trade it is not just immigration it is business business relationships it is students and technological networks it is flow of ideas it is flow of soft power culture from Korean soap operas to San pepper corns to Ying playing NBA basketball it is capital flows it is long-term direct investment it is so many things and the focus so much of our politics and our press and our discussion is on trade and that's what these export controls are about and all these things and that's actually in many ways the most resilient part so what we've seen now a colleague of mine at the Peterson Institute Mary lovely has documented this a new colleague of ours Richard Baldwin is also looked at this in recent work uh hun shin and his team at the bis have talked about this Barry iing everybody's coming up with the same answer which is basically what I forecast that trade just gets reallocated it doesn't really go away so if you look at total trade in the world it's barely moved the last few years it came back up after Co but total trade's barely moved and even in these sectors where we're supposed to be decoupling what's happening is China moves some production some assembly some trans shipment to Vietnam or Mexico or Indonesia or wherever us does the same to Mexico or wherever and so you get a v trade where you used to get a straight line and for a country like Vietnam or Mexico this is a big deal they get some share of rents of work that they didn't already have and this has some benefits as it diversifies Supply chains a bit makes them a bit more resilient and um costs money because you're building redundancies and every additional node you're taking some money out of it makes it a little more expensive but in the end the trade basically is still going on there's no real decoupling there except again very specifically high-end semiconductor chips and related Technologies however the things we were talking about earlier the scientific networks the exchange of ideas and Technology um some of the capital and capital isn't just money it's it's business practices it's respect for intellectual property it's it's interaction these are the things that are eroding and these are the things that to me are more important and so that's the corrosion of globalization that's going on and that's again it's certainly fed and a concerning part of it is us China conflict but it's mostly driven by the choices the US has made over the last 25 years to just withdraw I warned all of you that I doubt that we would end up on anything other than a fairly Bleak note but at least we're among soul and I'll give the last word to Phillip

Channel: Asia Society

Views: 200,199

Keywords: asia society new york, current affairs, program, china, global economy, the end of china’s economic miracle, adam posen, henny sender

Id: FPitJ8Rpklc

Length: 82min 26sec (4946 seconds)

Published: Wed Oct 18 2023