Transcripts For CSPAN2 The Bubble That Never Pops 20240712

For you and not a lot of time. This hour is going to fly by. Toms book is really a fantastic read and but i do think folks especially in the United States are going to find the book controversial, thats a great thing about about because if a book doesnt generate conversation, then it may not be worth reading. This is a Glass Half Full story of chinas economy and the management of the Financial System. Box offered at a time when u. S. China relations are declining and attacks from all different corners in the United States of chinas system are going. There is this argument that chinas economy, how it manages that economy is incompatible with the International System and as a result of the u. S. And others need to reduce their exposure to chinas unique risk. The book tries to answer the question, how did china managed to do it, how they managed to continue to grow without a major financial crisis. And can they keep it up . Im going to turn the floor over to tom in just a minute, he will introduce his book and then we will hear from several commentators all leading experts on chinas Financial System in their own right. Then we will open up things to discussion with our online audience, you have ways to submit questions through the chat function or through email to our staff who will forward me the questions and then i will help moderate the conversation for the remainder of the program. We were expecting a small audience for a specialty topic like this, hence a zoom room that can accommodate about 500 folks but we are overflowing. We had almost a thousand people registered for the event and so no matter what, folks will be able to watch this now or online and just a bit. Im going to turn things over to tom, he is bloombergs chief economist prior to joining Bloomberg Tom worked as china economics correspondent for the wall street journal. As an advisor to the uk executive director of the ims and policy analyst at the British Treasury and european commission. Hes also an author of understanding chinas Economic Indicators which delve deeply into chinese statistics. Tom, thank you so much writing this book. We look forward to your per dissipation and the conversation this morning. You veryabthank you very muc. Just give me a moment while i share my presentation. That looks fantastic. Does it move . It does. Fabulous. Its really never been more important that all of us understand not just chinas economy but the intersection between chinas economy, chinas Financial System, china business, china leadership, china security, and i cant think of anyone in the world who pulls the pieces together more smartly and more prohibitively than the team at csis. Im delighted that csis would host this book talk, thank you scott and the team there for helping pull this together. As i prepare to launch my book over the internet i was thrilled to be doing it with csis but i also have a concern when you do a book launching person the audience is physically their mac the kind of moral obligation to buy a copy of the book. When you do a book over the internet, perhaps that sense of moral obligation as they are or isnt quite as strong. I devised an extremely clever mechanism, which im not going to use to try to ensure i engineer maximum sales to this event. Before i start my presentation i would like everyone to raise their right hand and repeat after me b i tom orlik pledge immediately after the presentation i will order a copy of the bubble that never pops. That the compulsorily part of the pledge, im not an unreasonable man the second part is voluntary feel free to follow along if you want to and also one for each of my friends and relatives and i will also leave a positive review on amazon. With that done, let me jump into my presentation, i lived in china for 11 years from 2007 to 2018 and that entire time there was a consistent thread of pessimism even a threat of doom running through the western view on what was happening in china. Yes the story when 10 great looks pretty impressive but a little bit beneath the surface and there are problems. That is too high, china will have a financial crisis leadership cant execute on reform at two abtoo conservative, too trapped. The state sector is too big and too inefficient and chinas medium tone the prospect of that strong as a middle income track of the demographic problem is the workforce agents and yet here we are in 2020 in the china bubble has not popped. My motivation is putting pen to paper for my book was to try to understand why, what are the hidden sources of resilience and chinas economy, how does china continue to defy the pessimistic predictions of collapse and how should that shape the way we in the u. S. And europe think about engagement with china Going Forward the presentation today i want to touch on four areas where i think we didnt have the story wrong on china but we have the emphasis in the roleplays, i want to talk in particular about debt reform, the state sector and the future. First lets talk about debt, this chart tells you, i think, the way in which most foreign economists and many chinese economists think about the biggest risk of chinas economy, it shows you the ratio of debt to gdp in china. In 2008 chinas debt to gdp was arraigned 140 percent. Fastforward 2015 i met debt level has leapt 250 percent. If we look around the world we scan the history books we cant find any other countries that have taken on as much debt as china as quickly as china has. But we can find a number of countries that took on significant debt, less debt than china and still had a financial crisis. Korea in 1997 took on a lot of debt, not as much debt as china, they had a financial crisis. The u. S. In 2006 2007 took on a lot of debt, not as much debt as china, they still had the lehman shock but the great financial crisis. If we think about the borrowers, we have zombie enterprises, we have Real Estate Developers building ghost times in the desert, we have government building roots to know where, and if we look at the lender site we have the explosive growth of a shouting banker sector. Skirting the rules and regulations and growing faster than they should be. If you put all of that together it looks like an extremely risky picture. But what that picture mrs. Is something really important about financial crisis as something really important about chinas Financial System and thats whats happening on the liability side of ab remember the financial crisis do not start and did not follower because it had too many investments in Mortgage Backed securities, koreas banks did not for later because they had too much exposure to crony capitalist corporations, financial crisis start on the liability side of abfinancial crisis start because banks run out of funding. Lehman fell over because the money market decided they didnt want to fund it anymore, koreas banks and the Asian Financial crisis fell over because Foreign Investors pulled their money out of the country. What does that mean for china . China has an extremely high savings rate and has controls on moving money out of the country. What that means is that there is a continued pileup of funds in the banking business. Chinas deposit base deposit base the banks continues to grow and that means us the funding for the banks is very secure so even as problems on the asset site of the Balance Sheet increase, i am sure there are a vast quantity of hidden a athe trigger for crisis is that there stop the second area i want to talk about is chinas leadership and the capacity to execute meaningful reform on the economy and on the Financial System. Here you can see chinas previous leader aband chinas current leader xi jinping, you can see both of them plotting politely one of my observations from watching chinas leadership meetings, chinese leadership meetings more than i care to mention, is that the ability to applaud politely for sustained period of time is actually a key requirement to make it to the top of chinas leadership, if you cant applaud politely for sustained period of time you not to make it onto the standing committee. Thats a subject i think maybe western china watchers should pay more attention to. More seriously, the we have through the xi jinping era has been a consistent narrative about reform in china and its been a narrative about reform failure too much of a committeeman to push through difficult reforms, xi jinping withheld too conservative to push through the needed liberalizations. I think that narrative blinds us to some very significant progress that chinas leadership have in fact been able to make. Lets think about the two most important instruments to control the economy, the Exchange Rate and the Interest Rate, the Exchange Rate sets the price of chinese goods relative to foreign goods the Interest Rates shut sets the point of money abthe Exchange Rate and Interest Rate were managed by the government and set a low rate. If you fling the calendar forward until today in 2020 the Exchange Rate is not close to fair value and on the Interest Rate not quite so much progress has been made but Interest Rates today are substantially more market set than five, 10, 15 years ago. Because we view chinas leadership through a kind of red mist, i think we are unable to recognize some of the important progress they make on reform. That also means we then pay sufficient attention to their ability server ab significantly move the dial and Financial Risks. I want to talk about chinas a agenda. 2016 leo hur, chief Economic Advisor at the xi jinping kicked off the campaign. Nationwide campaign to reduce risk and chinas Financial Sector. With that signal from leo hur, the chinese bank of abthey knocked on the door of everything a commercial bank and said, show us your Balance Sheet. If they didnt like what they saw, either on the asset side are the liability side, if they thought the banks were taking too many risks in their lending are too many risks in terms of the sources of funding they relied on may impose meaningful punishment almost banks i remember traveling in the summer of 2017 and speaking to a group of banks and for all of them this campaign had meaningful impact, we see that in the data, this chart shows you the grace in bank lending, the riskiest part of chinas Financial System. When the Campaign Kicks off first decelerated rapidly and then actually contracted the best part of two years. We underestimate chinas leaders ability to execute underestimate chinas leadership and leadership abilities to meaningfully take steps to manage risks in the Financial System. The third area i want to talk about is the state sector, theres really no area where the contrast between the u. S. Market system and chinas state census economy is more obvious and more sharply drawn on state ownership, the u. S. The private sector the key driver of dynamism in the economy in china of the state sector plays a aba vivid illustration of that consider the revenue of chinas stateowned industrial firms, as you can see in this chart, china stateowned industrial burns were and economy, would they would be the Third Largest economy in the world. China state sector on its own is bigger than the entire german economy. In the west we view that entirely through a negative lens. We view it through the lens of inefficiency and corruption thats not an incorrect way to view it, china state sector is very inefficient. Thats not the only way to think about china state sector and that is not the way in which chinas own leadership think about the state sector, lets take a step back and try to roll with the state sector in china through the eyes of chinas leaders and to do that lets hear what abchinas gate though my great reformer, thought of mikhail gorbachev, the great reformer of the soviet union. Heres what his son said about his father, my father thinks gorbachev is an idiot, so why did he think that gorbachev was an idiot . One important reason is that gorbachev attempt to reform the soviet economy by taking his hands off the levers which control the soviet economy. By doing so he ultimately lost control and failed to execute his objectives. Chinas leaders have taken a different approach, chinas leaders have kept their hands on the levers which control the economy, the commanding heights of the bank, the oil firms, the abmany Large Industrial firms remained state owned, and that gives chinas leaders a powerful lever which they can use to execute on Development Objectives and on management of the cycle. On Development Objectives, chinas leaders can direct state banks and state firms to acquire technologies and put those technologies to work at enormous scale in the chinese economy. Bringing china closer to the productivity frontier. On management of the economic cycle, chinas leaders can direct state sector to hold onto their workers and to invest when private firms have become more cautious and that is a powerful tool of avoiding or questioning recessions, the state sector is big, the state sector is an efficient but by focusing only on those negatives we miss the crucial role that china state sector also plays as a driver of development and a powerful tool that can be used to manage the economic cycle. The last area where i think our focus in terms of thinking about china focuses only on the negatives and miss some of the positives is on chinas mediumterm great prospects. When we think about chinas mediums prospects we tend to focus on a few stumbling blocks that china faces, the working age population is shrinking, there is a middle income trap and perhaps china would be able to innovate enough a trap and a middle level of development trade wars may block chinas access to global markets. These things are true and real problems but china also has very significant positives working in its favor. These positives are so obvious that they were obvious even to adam smith, the grandfather of modern economics when he wrote his book the wealth of nations all the way back in 1776. Im just going to quite briefly from what adam smith wrote about china more than 200 years ago the great extent of the empire china, the vast multitude of its inhabitants wonder the market of that country of so great extent as to be alone sufficient to support very great manufacturers and to admit a very considerable subdivisions of labor, thats the first Crucial Point because china is so big they can achieve massive economies of scale and massive efficiency gains through my new subdivision of tasks. The second Crucial Point from adam smith, by more extensive navigation the chinese were naturally learn the art of using constructing themselves all the different machines make use in other countries as whether the other improvements of office and industry which are practiced in all the different parts of the world smith was right on that as well he was also early he was 200 years too early but when they open the door between china and the world in 1978 and even more when china joined the wto in 2001 these two powerful drivers came together and china had enormous scale and the capacity to learn from foreign technologies. When you put these two things together you have an extraordinary engine of growth. The question then becomes, has this engine run out of steam . I think the answer to that is no. The reason i think that is because of the comparison between china and japan. Lets think about when japans economy fell over in 1989, japans gdp per capita in 1989 has already caught up to the lever in the United States. Japan was already on the frontier of what was possible in terms of using technology and becoming more productive. Chinas gdp per capita today is very significantly below the level in the United States. That means there are still significant touchups to face. I think of the middle of this decade is entirely possible china will still be growing, i think the end of this decade is entirely possible china will still be growing at three percent or four percent a year. Im going to wrap up in a second but before i do, let me try to pull these pieces together and apply them to thinking about what has happened to china in the last six months. Covid19 is of course human tragedy, its also an economic and financial strapped task of the world and for china in the last two months income for the biggest borrowers in chinas economy state enterprises, Real Estate Developers, local governments has all contracted if there was a moment by the chinese bubble going to part it would be now, as income for the biggest borrowers fold their ability to serve as loans disappears and thats the moment where youd expect to see some kind of day of reckoning for chinas economy. Of course that is not what happened, in this chart you can see daily activity indicators that we built and china and other Major Economies and what you can see is that yes china fell but they didnt fall as far as other Major Economies and they picked up more quickly and now closer to normal levels of activity than most economies in the world. Why didnt we see a financial crisis . This brings me back to some of the unrecognized sources of strength in chinas economy. Chinas banks because their wellfunded can afford to give forbearance to companies abwe want you to invest more because they can do that they can prevent financial crisis breaking out and they can manage aand make it shallower and make a recovery quicker than other economies in the world. Thats why i think the china hit the bubble that never pops, im going to head back to hand back to scott to hear from some of our great discussions logan hugger. Really terrific presentation and i think you did an excellent job of summarizing your book and the overall story and really appreciate that. You have a dry sense of humor and but also that make points. I appreciate that too. As you said, adam smith was right, he just had very bad timing. He may be a very good economist but he would be a terrible investor. Now we are going to turn to our commentators, i would not call this group murderers row, even if they have a variety of different opinions but if you were going to form a Dissertation Committee of the best and the brightest, who work on chinas economy and Financial System, this would be the group so this is a real treat to have them with us, let me briefly introduce them and then im going to turn it over to allow them to offer a few minutes of commentary. One of the leading analysts on chinas economy anywhere she helped top ranking Institutional Investor surveys from emerging markets and she before joining j. P. Morgan was managing director of Merrill Lynch and solomon abis previously taught at princeton as well, and rutledge is the founding principle of the 20yearold Credit Ratings Advisory Firm quick credit spectrum, shes an expert on the logic of Capital Market development to testified the u. S. Senate and advisor to Hong Kong Monetary authorities and just one of the leading experts on all issues related to credit. Logan wright as director at Rhodium Group leaves the firms China Market Research hes also nonresident adjunct fellow part of the trustee chair at csis, previously logan was head of China Research for bradley local advisors abhe is joining us from hong kong today. Im going to turn things over to joyce first, then logan and hellcat in that order ab hellcat and logan in that order and look at questions from the audience, joyce, over to you. Thank you so much, its a really pleasure to be here with you and i also want to congratulate you on all the work youve been doing, we look at your work closely and a great group of panelists, i really want to congratulate tom, somebody whos been looking at china the last three decades i highly recommend this book goes through the four different stages of the cycle that china is in and what they learned from each stage of the cycle that has caused them to take a more gradual approach, theres a few things that tom highlights i think are worth emphasizing, china has never experienced an economy wide door shut panic, and i think the other thing that stands out in this book is how much china learns from the Asian Financial crisis. Thats been a list by the Global Financial crisis, the Great Recession we are in now, china learned very important lessons and i think tom very clearly points out that this is not japan. Japan ran a surplus, china is running abthats gonna be 15 percent of gdp, many of the countries on the same category. Its also not korea because korea had to rely on export similar but played a very major role as china managing this very gradually fori like to mak points on how we are seeing china right now, talk about the current and the mediumterm forecast that j. P. Morgan has, why we agree china is on the path for selfsufficiency at some of the geopolitical risks we are monitoring. We think china is having a vshaped recovery this year, weve taken that forecast we have it at two percent this year we had below one percent, we have the rest of the world the local economy contracting four percent so two percent growth in china next year 2020 we have China Growing at over eight percent. I think ive been very amazed by how theyve actually been able to return to some type of normalcy i dont think this can be located elsewhere given chinas ability to control so many parts of the economy but i think china has enormous source of strength tom writes in the book, the Stable Funding from the Financial Sector a single party that commercial resources we see them doing enormous external if this year and the fiscal deficit that will be north of 15 percent of gdp. I would say this, i agree ab we estimate every one percentage point the client in chinas growth takes about. 4 percent off Global Growth as much as onetoone in the economy exporting countries in latin america but the important thing is that we see chinas growth slowing but what we are looking at something more in the range of 4 a4 and have percent of the end of the decade. Muck not something that is a clap. We also have Global Growth coming down just off the cost of the crisis and on average we see Public Sector debt rising across the globe, around 15 to 20 percentage points. China has a debt problem but the rest of the world is also going to come out of it with a lot of debt. The second point i would make is on selfsufficiency cannot we think that china is very wellplaced selfsufficiency and Global Leadership is in some areas. I would just say that we think china has already attained selfsufficiency in the Consumer Tech areas that have been growing at National Growing an increased importance on the tech infrastructure, they upgraded a lot of their homegrown tech supply chains, the higher value areas and i dont pick up that easy to move the supply chain but we see intact telecommunications ai syntax, the internet and in clean energy where there is a true need and china where they will have selfsufficiency by 2030 making it harder to make the case that china is a bubble that will pop that quickly. I would like to conclude with a few of the things we are watching on the geopolitical side of the geopolitical construct because i think there are redlines in chinas mind and one of those red lines National Security legislation the mpc has amended into the basic law of hong kong as they are, i think a stand toward taipei, the territorial disputes in the south china sea. They want to remain key player in the korea peninsula and i think they also are very much seeing their approach to how they are fighting epidemics and pandemics as a better model for the world. I agree with tom that china is a bubble that never pops and if it were to pop there would be mother many other things popping first. Thank you joyce, i appreciate that, thank you. Scott, you can hear me this is a fantastic book, i told you earlier, actually bought it even though i didnt have to sell i didnt have to take the pledge. I think it has important messages for china today but i think its also less than humbled that somebody like you who knows the country so well still a lot to learn in looking back to history to do it i think we all need to. What i like as a side view describing a very complicate it subject, many things are interacting to form the whole and its really hard to think about abut even harder to write clearly about it, i think its fantastic book. And with you when you describe the strength of china and support not to underestimate the countrys potential to growth the ability to its policymakers to at least try to manage, even though sometimes its not a big plan, you point to all the right places size and scale, potential to grow, and i like the stress you put on the ability of all policymakers to act decisively, i think the cobit episode is important here. However, the cobit episode also has a reminder that some of these strengths that china has made ultimately sort of lead to more blinding economic constraints and while chinas large economy and important economy very talented policymakers could also apply to that country. Budget constraint matters and many distress some of these issues that i feel in your summary leading to the very optimistic bubble that never pops in the headline that still on the screen, to give a little bit underrated. There are basically two broad areas, one is the ability to have all hands on deck and tackle any problem anytime in a top down approach is an asset but it also comes with risks, you yourself point to the overshooting that can happen if you put all your eggs in one basket the stimulus went way too far in hindsight we know and brought a lot of problems and narrowed policy space Going Forward. Well aware of the system is flexible at times but other times it is empty. Under policymaking part, its important that policymakers i feel these are points that are worth stressing. Budget constraints matter for china and the policymaking elite aging is important, but stressing in the area of the access to technology, it is truly that china has made great leaps its good to have ample savings but not good to have savings at the national level, its just not. There are inefficiencies that lead to the inefficiencies that come from it narrow this down a little bit to talk about corporate debt, the country has between 130a70 percent of gdp orbit depends on if you assume what the local corporation is come every other country on the planet averages around 90 , my appeal to the readers of the book is to take all that material thats there but focus on chapter 11 where trump is wargaming a crisis. That need to be taken on the policymakers. They are strong, flexible but they have to work cut out for them. Terrific, thank you. Lets turn to and. Paid for it and Oxford University press is a great press. Also deserve the income. So at a professional and personal level, i like this book. The i think it shifts the dialogue but a chinas economy in three important ways the first thing i want to say is by walking us through the four cycle odd chinas financial history, tom motivates thinking about financial history as a continuous process. I loved through a lot of the ohio history personally and this narrative has integrity. Its kind of eerie and liberating to read another persons narration of my private experience. So, ill just say i arrived in hong kong ten day before mao died and i lived in hong kong through the fall of the gang of four. I knew the credit markets back story. The first cycle. I worked and that is the story that has not been welltold. The first time that ive actually seen it welllaid out. I worked in a Hong Kong Future Exchange during the second cycle and toms retelling is faith follow any experience. The perspective of the book, models that he usually reed in u. S. Centric economic studies ss and towards a more china centric anywhere tim thats hugely valuable and rolled back the red myself. Kept skipping ahead to see if there was a pronouncement white the bubble has not burst but the point of the book is bubbles are in the eye of the story teller. One persons bubble is another persons garden variety economic dysfunction and every nation has those. It just of adjusts the lens from an economic story to a financial story. Thats also very valuable. Chinas financial narrative is a difficult story to tell as joyce and helge have both said and i think tom does a great job in point out social differences especially between how the u. S. And china understand finance. I say social rather than cultural because finance experts speak a specialty language of money that transcends whether youre operating in finance in china or the u. S. As im sure tom knows well. Everybody reads bloomberg. It is truly a language because it allows us to debate ideas. Vigorous debate is lacking in culture of finance but this says more about n parochialism of the practitioners than about what finance can do. So hooray for new paradigms. If they come from china, the more the better, finance betters from competition and ideas. But i would say from my experience, both professional and personal, that Financial System evolutionary history ising a complicate as it is dynamic. In i a ate goat stew when i visited in 1979. I was there again when the First Commodities Exchange opened in 1990. Im going to actually bring up a slide on this because it illustrates a point. If i can. This is the opening. Can you see it . Yes. This is the opening of the commodities exchange. First you see the clock before it opened on the very first day. You see the rapt and happy faces of the floor trader and then the observer inside Observation Deck five multiples after the market launched successfully, and one thing we forgets that ill stop my share well thing we forget is that this is also the real finance. Now, china if we were going totle the story of chinas evolution we would also talk about all the exchange how long toes of exchanges, trading thousand of different assets. And another point that thats not for tom to do but i want to talk about a theme i think did belong in the telling and that is the role of the shadow market. Tom talks about Interest Rate issues which are complicate expelled the role of real estate and talked pout Asian Financial crisis and lessons learn with respoke to Exchange Rate control but securitization played a large role. China has the second largest securitization market in the world. This is going to back bubble. China and the u. S. Have both embarked on financial policies designed i think to eliminate rather than harness financial on opportunityize. The glint in the eyes of the floor traderes is want mean by financial opportunism. Neither one gets i right, the u. S. Or china and thats very apparent to a neutral eye but the shadow market holds the key and i leave with a comment, i somewhat disagree with tom residents the sills about where bubbles begin if the begin on the asset side of the Balance Sheet. Banks dont run out of funding. Its that economies run out intangible value to monetize and a generation of intangible value is a function of information quality and i thing this is an area where we all have lot to learn still. Thanks. Thanks, ann. Now to logan wright. Thank you to the and tom and appreciate the invitation, and tom just want to join the call of congratulations for this book. It is a very impressive coverage of a wide range of events throughout chinas financial history, and i found most impressive was it really integrates a lot of the political insights and the key events within chinas economic history together and ive seen very few books even really attempt this. I also found a discussion of the debt dynamics in terms of borrowers dwight up the borrowers and lenders and then telling the history. A very novel way of addressing Different Actors within the system and really innovative. So, in of he an neck totes are great anecdotes are great weapon youre talk to entrepreneurs and borrowers and the other integrations of contemporary references to Chinese Literature for example. So i highly recommend everyone pick up the book. Its within financial becomes or field is generally fairly boring. Its difficult to actually slog through many different titles. Its very refreshing to read something far more interesting. So, would heartily recommend everybody listening to pick up toms book. I focus my comments on the substance in two areas. One on the Deleveraging Campaign that you described and i would have a slightly different interpretation of it. The second is on the nature of state capacity as youre describing it. I think the Deleveraging Campaign is being described with a bit of its being describe as if it was somewhat costless in this telling, and i think its actually still an Ongoing Development in terms of the crackdown on credit that shadow credit underway, and i would argue its not been costless. Whats really happened is a substitution of some of the funding side risk for a slowdown in Economic Growth which is exactly what has taken play. China hasnt really avoided the tradeoff here, just more risk are now materializing within the Banking Sector themselves in the form of credit risk, and one of the reasons for that is shadow lenders broadly speaking, a lot of speculative activity but the fund the real economy and their there are ways of many shadow lenders are basically engaging in that activity to high nonperforming loans from the formal Banking System or violate credit policy to get around restrictions on lehning to Property Developers or local government financing vehicles or something of that nature. Our own analysis demonstrates its about we can demonstrate at least 52 of nonbank Financial Institution assets are basically nord credit sort of nonstandard credit and thats consecutive. Conservative. And it impacts growth and in 2018 a very sharp impact on growth. You basically the impact was that Corporate Credit growth was cut more than in half, probably by twothirds, and theres no nuance to that approach. I argue it actually highlights the bluntness of the approach that china took rather than a statement about state capacity overall. And if you look at industrial output a 2018 for 70 out of the 130 indicators that, dei clined outright in year terms and the waked average, 6 to 7 fallen industrial output overall and policymakers were forced to respond. Were also seeing since that time new credit risk materialize within the system, and including on the bank Balance Sheets. He the bank failure in 2019 was largely the byproduct of certainly a corruption investigation and had political overtones but was largely the byproduct of an excess of shadow lending, and the pdoc made the decision to basically impose some costs on lenders that were expand using the shadow using the shadow liabilities but at the same time after the failure took place, we ended up seeing a video a water shed in terms of new credit risk. Local governments couldnt protect their own soe and interbank funding was being withheld. Trust companies are facing pros outside their front doors. Four in the last three months. Two Smaller Banks facing bank runs over the past weekend. Im interested in your reaction to this interpretation, the de. Hing campaign is Deleveraging Campaign is less costless and how it might change your perception of state capacity. The second set of comment is on crisis manage independent general. You place emphasis on the savings rate, rightfully so. But its really hard to redirect savings in a crisis and i think youre completely correct to focus on the fund side of banks Balance Sheets about those are eroding. Think the interesting thing here is that if the pdoc can always inject liquidity to imagine a crisis but unless the crisis is acknowledged as a crisis, and china might not ever actually acknowledge a crisis. They dont necessarily have that capacity to do so. So, i think the argument relies a lot on government creativity. Can you deploy Crisis Management tool if youre never going to admit that you are facing a crisis . And if you do so doesnt that make it look like financial crisis . The second is, government creativity has clear limits. If property prices are down 30 to 50 which seems within the realm of possibility, in the future, given the imbalance within the property sector are tools china can use that other countries cant when youre dealing with problems of this magnitude . Ill stop there but thank you very much. Terrific. Thank you, logan. Is a told you, told everyone at the beginning, with my warning, is that we would this hour would fly by. Still have about eight or nine minutes left and im willing to go a few minutes longer because this is such a rich conversation prompted by a terrific back. Everything i heard from the commenters was that theyd sign off that form that circulated in the room and with flying colors. Obviously theres but its not to say that arch agrees on everything but what we have is a very important conversation where we have highlighted what at the true areas of debate that are needed to engage. While we have been listening, our audience has been submitting questions which ive collected and they come good the groups if want to mention some of these and then turn give tom a few minutes to pick and choose amongst them and then actually go back through our commentators in reverse order, logan, ann, helge and joyce, for final riskes from their side as well. Reaction from their side as well. And i know were trying dont feel like were putting too much on your plate. Really just this is the start of the conversation, not the end. So, from our audience, three kinds of questions. The first has to do with chinas system and whether or not its too brittle. We heard a some from the commentator inch your telling xi jinping still seems relatively pragmatic. The system seems adaptable. Can you explain that a little bit further . Second type of question has to do with sort of whether or not the description of chinas Economic Performance is overly rosy, and they point to people ask but chinas technology abilities, questions about debt and productivity, and what can you say about what is at the proper standard to judge chinas Economic Performance, and third, questions about u. S. China relations and the International System, the cold war, what happens if the u. S. Tries to lock china out of swift, or really clamps down on Technology Much further. Is this really going to constrain china and lead to a popping of the bubble . So lets turn things back to you, and get some initial reactions from the commentators and from our audience questions. Tom . Thanks very much, scott, and thanks very much to all of the discussions. I think all of you got the balance between effusive and undeserved praise and gentle but completely correct pushback, really completely right. So, thank you for that. So let me try and take on a few of these. So, first of all, to logans opinion on the costs of deleveraging, so, i think thats completely right. Deleveraging has not been a painless or cost free process. And it certainly true that if we look at alternative indicators, chinas growth in 201620172018 may well have been significantly below what the official data suggests. Kind of macro cost of deleveraging. The point i would make, though, is that the fact that chinas leaders were willing to embark on a painful Deleveraging Campaign is itself an evidence of their willingness to grasp the nettle. What are the choices . The choices are, dont delever, continue growing really fast and then have a financial crisis, or attempt to manage the problems and take some costs now. Most economies around the world let things run and then have a crisis. China moved early and exacted some costs. I think that in itself guess to some of the goes to the strength of some of the strength and economic Financial System in china. I appear made an interested point where finance crises come from and they come when we run out of intangible value for the Financial System to monetize, and i think what that speaks to really is a question about chinas underlying great story. So if we really think that chinas great story is over, and, yes, we would be extremely worried pout a financial crisis because the resources which banks, corporations and governments, have to paper over the cracks would be flat or even shrinking and thats when the crisis happens. So, underpin something of my optimism is that more positive longer term view on chinas outlook. Forecast for chinas great which i think is sort of broadly in line with where joyces numbers came in on where china would be no 2030 and where el bes imf numbers would come in for china around 2030. Dont think china has run out of intangible value to generate. So, we had a question from the audience about brittleness. And we didnt get to talking about the social side of china, but i think this is also an area where we underestimate the robustness. For as long as ive been thinking and writing about china theres been a story that has been a kind of fusan pact between the Chinese People in the communist party. You give us growth and well give you control. And the story has been if grace disappears and unemployment rise then look out because theres going to be social unstable and thats why china is so determined to grow at 8 a year, even though theres these costs in terms of increasing imbalances. Well, in the first half of 2020 we have had a stress test on that as well, right . The economy has shrunk 6. 8 . Household income contracted. Unemployment risennen. And if we look at most chinese provinces, we dont see social unstable. So i think the story about brittleness in china is society actually is considerably overstated. The last question but the cold war. So, i think if we went back to 1978, when if he the u. S. Said, no, youre innovate coming into the Global Economy, we wont trade with you, woe wont end visit you or share our technology and setter tease that would have been a crushing blow to chinas early reform ambitions and maybe the Global Economy today would look very different. But here we are in 2020, china is the second biggest economy in the world, the biggest exporter in the world, and an experter increasingly capital to many emerging markets. Multinationals here in the u. S. And europe and japan and korea are deeply invested in their china relationship, both as a source of supply and as a source of demand. So, its clear there has been a change in the way the world views china. Its very clear here in the u. S. And europe and other parts of the world theres been a shift in focus from thinking but the opportunities to worrying about the risks and thinking but how to manage them. Is that going mean a decoupling or a cold war in a meaningful sense where economic ties are comprehensively broken . I find that very hard to imagine. Im afraid i dent get to all of the amazing comments from panel or the interesting questions from the audience but i hope that deals with some of the big points. Now back to scott. Terrific, tom. Masterful reaction to some of the comments from the commentators and the audience. I want to give a minute or so to each of our commentators, going in reverse ordinary, logan, ann, helge and joyce to reaction to either anything tom said now or things you have heard from your fellow commentators, and then ill wrap things up. So, logan. Thanks, scott. Just Say Something very briefly about the covid19 outbreak and the effect we think it should have on the Financial System and Financial System stability. I think its far too early to say that we have really seen the effects so far. But the other issue is that when government guarantees for state owned enter prizes, for banks and Government Support is being extended, i wouldnt necessarily expect to see financial risk rise. I would expect to see that occur after in a system lick china where everything is assumed to be guaranteed, when government guarantees are being withdrawn. And when conditions are normalizing. So, it may be too early to see when its really after sort of china has a recovery and we get back to more reagan layings of the banking regular senior regulation of the banking estimate we secreted risk emerge because of nonperforming loans will start to appear. That being said, im also concerned about the the risk we are already seeing within nonbank Financial Institutions such as trusts or Smaller Banks. Terrific. Ann . Im going to try to keep this short. First of all, with respect to the deleveraging, a great story but lets not flint that china has a 7. 7 trillion decide securitization market not counted in that. So not to say that securitization is wrong. Im a practitioner. But simply to say it was chinas express strategy to move so much out of banking into securitization so theres leverage there, too. Number two, from my experience as a securitization analyst, i know that every reporting agency counts debt incollect by because incorrectly on a marginal basis instead of a cumulative basis. Cumulatively the actual amount of debt by each country is between two times and four times what is reported. How die know that . Because you count count it different in point number three im very worried about not just the fragility of china but the fragility of the Global Economy because i see a direct attack on science. Good by point how you count default is part of that. The same gains that go on in manipulating default statistics have again on in manipulating covid mortality statistics. Its shocking. But there arent enough people who actually understand statistics to stand up and say this is the wrong way to do it and the right way. The attack on science takes two different forms. From the United States i think we control the sources of science and in china i think they control interpretation. Of what science is. And i think that some of the problems we see related to hong kong are not just beijing but beijing coming to terms with an Information Culture that is foreign. Our control of science is a relatively new mom and the last thing want to say, i dont talk about politics but the other thing want to say is that in 2014, the state Council Published what i thought was the best policy peace on capital structure. It was published its a a few ideas but the development of sustainable multitier capital system and that was going to be the way forward but thats not the way china is progressing. And we do not have a stable concept of capital struck noor any of the countries i operate on, the rating agencies in the western world are in control of that and ill say that is enough. Enough said. So, i am worried about fragility, not particularly with respect to china but with respect to the United States as well and if both countries have it wrong were all in trouble. Helge. Thank you. Great discussion. Two opinion, one, covid is a success so far but im with logan we have to be careful before we celebrate in part because many of the measures we need now in china as elsewhere do have ram fig indications for Going Forward if you stop dealing with npls properry ultimately its going to hurt you. And important point on the sources of growth. Yes, there is the income level relative to other countries and tangible nontangible assets but theres also improving efficiency and this country has lot of potential improving sufficiency in the we it yous it forces and so there is a lot of growth on the table that policymakers can pick up. Joyce. Thank you so much. I want to add a couple of comments on the Financial Sector. So, we talk about chinas global reach and the tech market, manufacturing, the geopolitical consequences but their global reach in Financial Markets has been very limited and this is one key area to watch. If you look at overseas holdings of chinese assets and portfolio, its 2. 3 and so will china be able to become a more mainstream Financial Holding . I think is a key issue to look at as they come out of this crisis and we are seeing china beginning to go into the mainstream equity and fixed income investors, j. P. Morgan is a third of the way through the process of putting it into indexes but how they develop their Financial Markets is going to be one important determinant of how the future for china looks ahead. The households are heavily underinvested in Financial Markets. Bank deposits are still twothirds of household assets. Stocks and mutual funds are 16 and 4 . A question whether the emergency markets will continue to develop as china progresses, i think is an important question. I think globalization will be very slow to react to covid19 crisis. The whole issue of trust and how and transparency and their able to integrate as great does slow down. Its a key requirement for china goingford but they have a risk of a manmade financial crisis as all the other speakers have talk but, and one thing they really will need to do is see if they can continue to attract thats kind of investment flows. The fbi has come down as everybody is looking at the supply chains and the greater need to diversify. Terrific. Thank you so much, joyce. This has been a fantastic discussion and credit goes to tom for writing a great book to gets all started on this. I want to emphasize why we wanted to host this program, and why i think its different than for folks who are in new york or london or working in Financial Markets, obviously very important but i cant emphasize enough how important it is for the washington policy community to get china right. I think each administration that comes in as well as folks on capitol hill have in their mind a vision of china as either partner or competitor that looks at how their views about how sustainable chinas economic trajectory is, how fragile the system is, whether or not chinas economic trajectory is a net opportunity or risk for the United States. And i think washington has been consumed by a certain kind of image of china that looks a lot at the risks and downside which are definitely there but tom add balance to that conversation and we need to continue to investigate this so that when we think about economic policies towards china and globally, we are we have as accurate a picture as we possibly can. And so tom really thank you very much for helping us develop that picture today and with your become. It will have a very long shelf life, im certain. I want to thank our csis staff, alyssa, enters for organizing todays event. And doing a masterful job. Also to our commentators, joyce, helge, ann and logan, terrific commentary. I hope we get the band together again. To our audience for tuning in, for asking good questions. And to everybody, please be back with us on september 22nd when we have a rollout of logan wrights report about Financial Risks in china as welch this is a topic which is not going away, which we really need to understand, and were going to stay on it and so we will be providing more information about that report and the event in the weeks ahead. So, to everyone there, wherever you are, hope you have a good evening, good afternoon, or good rest of the day. Thank you so much for tuning in and take care. At aesculins at the Wilson Center . Walk, ben buchanan talked but the normalize ago cyber warfare as a geopolitical tool. Heres a portion of his talk. The way i like to phrase it is the United States has the nyeest rocks but we still live in a very glassy house. When it comes to intricate, beautiful cyberoffense, american capabilities are truly extraordinary. Talk about extraordinary intricate operation against the Iranian Nuclear program. Just because we can do that doesnt mean we can defend very well and have a long tale of vulnerability or adversaries have not been shy but exploiting no better example than the recent equifax indictment from the department of justice where the chinese basically because they could, hacked the personal information of 140 million americans, everybody has a credit card is likely in this file maintainment by equifax and this is a case in which most americans dont know the company are exist the companies are clearly not defend against china adequately but its reames of information and the chinese are happy to say well rell take that and thats the glass house. To watch this Program Visit our website and search for ben buchanan for the title of this book, the hacker and the state, using the search box at the top of the page. Welcome. Welcome to our session here on china. This is probably among the most distinguished panelists well have at this conference on the most important subject which is the peoples republican of china and the communist party of china to look at the problems there. And id like to first introduce our panelists and including myself. Dr. Michael pillsbury is one of the for most china expert the world, current lay senior fellow and director of the chinese strategy at the hudson institution. Hudson institute. A distinguished defen