Transcripts For CSPAN3 U.S.-China 20240703

The seventh hearing of the u. S. China economic and secure review commissions 2023 annual report cycle. I want to first thank staff, many of whom worked on several other hearings. And so, i appreciate the heroic effort that was involved in getting this hearing set up. So, thank you, jonathan and daniel, in particular, charles, i dont see. Many of us that have watched china for years appreciate that the magnitude of the economic challenges china must address now are not new rather, they have been worsening for years and were amplified by covid and the poor policy choices made during that time. Notwithstanding the ccps push for chinese households and non state businesses to drive recovery. Household consumption has been cautious. Government lending practices continue to favor unproductive state owned enterprises, higher performing non state sector at the expense of higher performing non state sectors. In most cities, property prices have plunged and Business Confidence has eroded as deflation sets in two years ago, we reported on the rise, rising concerns related to debt and demographics. Those challenges are only intensifying. Over the past decade, chinas Banking Sector has grown from nine trillion to a staggering 56 trillion in assets. Those assets are somewhat questionable. By the end of 2022, chinas debt to gdp ratio exceeded 297 , more than double what it was in 2008. This unprecedented expansion in credit largely flowed into a building boom that contributed roughly 30 of gdp, more troubling in terms of the human dimension of the problem. In terms of economic instability and political confidence in the ccp, roughly 70 of Household Wealth is tied up in the real estate sector, which experienced across the board significant declines in sales, starts and land purchases for building. China simply cannot sustain the policy approach of credit expansion, nor will it be able to continue to shield unproductive entities from default. After 20 years of relying on debt fueled stimulus, china confronts twin challenges of lacking viable Infrastructure Projects sufficient to stimulate growth, and developers and local governments overburdened with debt. Whether local governments and the opaque funding vehicles they create to raise money are stable and sustainable is very much in doubt. A recent report indicated 43 lgfbs failed to redeem maturing commercial paper. Was this due to a lack of Investor Confidence . Adding to the significant challenges by mid 23, chinas official youth Unemployment Rate had soared above 21 . At which point, the party of state abruptly stopped releasing data. Although transparency into chinas Economic Data is vanishing, the countrys economic weakness is now far too pronounced for the ccp to hide. For years, we talked about shadow lending as a challenge. Now, the problem is shadow data. International investors cannot have confidence in buying stock on u. S. Exchanges or directly investing in china. If data are inadequate, misleading, overstated, censored or withheld. Our fabulous Witnesses Today have deep and diverse expertise, researching chinas domestic economy and supply chain policies. Im pleased that four or five have not previously testified before the commission and bring forward new perspectives on key elements and outcomes of chinas economic model. Ill now hand it over to my cochair for the hearing. Commissioner glass. Who will introduce the panels and make some compelling remarks. Thank you, commissioner cleveland, and good morning, everyone. Todays hearing will call into question the health of chinas economy and the overall implications for the ccps influence over Technology Supply chains. The partys state dual circulation strategy aims to eradicate its own external vulnerabilities while increasing the worlds dependence on chinese technology. Today, u. S. Policymakers are moving to address some of the risks stemming from supply chains that are overly dependent on china. However, much more remains to be done. In may of this year, the Biden Administration announced that the United States aims to de risk its relationship with china, focusing u. S. Policy on fortifying areas core to u. S. National and security interests, congressional action through the Inflation Reduction Act and chips and science act took major steps towards diversifying us supply chains in semiconductors and Clean Energy Technologies if implemented properly. Nonetheless, these efforts are still early and further action is needed to reduce u. S. Other vulnerabilities to chinese control over critical supply nodes, from pharmaceuticals to green energy. The recent spike in chinese electric Vehicle Production and exports exemplifies the party states ongoing efforts to expand control over crucial segments of global production. U. S. Businesses are discussing options to derisk their own operations, but china is simultaneously moving to ensure u. S. Companies and investors remain intertwined with chinese markets. While a 19 drop in trade with china and a nearly 90 drop in Foreign Investment in china in the previous quarter may be seen as a signal of decreasing reliance on chinese markets, overseas investments by Chinese Companies simultaneously surged. Chinese companies are looking to offshore production to other countries in Southeast Asia and even mexico, evading tariffs by locating production in other jurisdictions. They are also continuing to export through other secondary markets to avoid tariffs and also customs scrutiny under the uighur forced labor prevention act as a result. Even where trade data shows a decrease in direct us dependency on china, the true value of chinese content in us supply chains is much higher. U. S. Supply chains is much higher. This hearing provides an opportunity to consider the kinds of guard rails that businesses can follow to address these increasingly complex supply chain risks. Before we begin, id like to remind you all that the testimonies and transcripts from todays hearing will be posted on our website. Id also like to thank the Senate Committee on health education, labor and pensions for securing this room for our use today and the Senate Recording Studio for theiristance in Live Streaming this event. Well now begin todays hearing with our first panel. Ive had the honor to introduce our first panel. Our first panel will provide an overview of the economic and financial challenges confronting china. We will also explore how these issues impact the Global Economy and how Investor Sentiment toward the country is changing. Well start with dr. Logan wright, who is a partner at Rhodium Group and leads the firms China Market Research work. His testimony will provide an overview of chinas economic and financial challenges. Next, well hear from mr. Nicholas bost, who is appearing virtually, mr. Bose is Vice President and director of China Research at sea fair Capital Partners and he will discuss chinas fiscal challenges and Investor Sentiment. Finally, dr. Lu will provide her testimony, and please correct me, doctor liu is the maurice r greenberg, fellow for china studies at the council on Foreign Relations and she will address the role of state owned capital, particularly chinas sovereign wealth funds in financing the countrys domestic and overseas ambitions. Thank you all so much for your testimony. And appearing before the commission today. We all look forward to hearing your remarks. I ask all the witnesses to please keep the remarks to seven minutes. Dr. Wright, well begin with you. Thank you, commissioner cleveland, commissioner glass, all the commissioners and staff for your kind invitation to testify at this important hearing today. My testimony focuses on three principal arguments related to developments in chinas economy and Financial System and their implications for the United States. First, the severity of chinas ongoing economic weakness is still widely under appreciated and the United States no longer faces a growth challenge from china. Beijing is no longer an economic pacing threat or likely to overtake the United States in any significant measure of economic power in the next two decades. Assuming us Growth Continues at roughly current rates, beijing will never be able to make a credible claim to Global Economic primacy. The challenges the United States faces in strategic competition with china are highly significant but they will not be impacted by marginal changes in chinas Economic Performance in the years ahead. Chinas current economic slowdown is structural in nature. Simply put, most of the factors that contributed to chinas rapid growth over the last two decades cannot be repeated in the next decade. These include an expanding labor force, unprecedented credit and investment growth, a booming property sector, a one time build up of infrastructure and a constructive external environment. Most analysts agree that growth in china will not recover to its previous rates. But theres still considerable disagreement about how severe the slowdown will become and the implications of those changes for the United States. One of the least understood aspects of chinas economic record over the past decade has been the linkage between the rapid growth of chinas Financial System and its Economic Performance. Chinas current economic slowdown is structural primarily because the credit and investment expansion that took place from 2008 to 2016 was also unprecedented. This was the largest single Country Credit expansion relative to global gdp in over a century. Credit growth of this magnitude not only powered significant volumes of local Government Investment and Property Construction, but most importantly, it provided a shock absorber insulating chinas economy from bankruptcies, defaults, and unemployment. And that credit expansion has ended. Chinas economy is measured through gdp in 2022 is around two thirds the size of the u. S. Economy in dollar terms, 65 at Current Exchange rates even based on chinas suspect official data. Given chinas long Term Economic challenges, there is no realistic scenario in which chinas economy becomes 150 or 200 of u. S. Gdp in the future. Surpassing the United States by a wide margin. The United States will continue to be challenged by chinas military build up related to taiwan and the south china sea. Chinas outsized and politicized influence within specific next Generation Industries and manufacturing supply chains, economic policies, artificially boosting chinese firms competitiveness and behavior to influence Democratic Political system around the world. Those problems are exactly where u. S. Policy and legislative efforts should focus. But none of these military, diplomatic, or ideological areas of strategic competition with china will be changed by marginal adjustments in chinas economy from current levels. Even if china were to improbably reach the level of u. S. Gdp. And chinas slow pace of Economic Growth is more likely to weaken beijings capacity to confront the United States and its allies in these areas rather than rapid Economic Growth, boosting chinas capabilities over time. Second, beijing is attempting to downplay public recognition of chinas economic slowdown, both inside china and internationally. The most important propaganda message for chinas leaders related to the economy is that the argument that chinas economic rise is inevitable and that this will reinforce chinas rise in great power status. Chinese leaders believe they can influence the narratives about the economy through conventional domestic propaganda, but also by restricting the availability of Economic Data and stories they dislike. Chinas Economic Data, meaning the data points likely to generate Media Coverage such as gdp growth, should be understood as critical elements of chinas internal and external narrative management concerning the economy. Tighter controls over data and censorship of discussion of chinas economy should also be understood as reactive responses to real uncertainty among economic actors in china about beijings policy making. The narrative about china and its economy is important to the United States. The success or failure of beijings policy making in an estate driven economic model determines not just the relative performance of these two competitors, but the attraction and hence the global soft power of the chinese system and its ability to displace commitment to traditional liberal democratic and market economic norms. Third, the property and local Government Debt crises in china are intrinsically linked as credit growth slows investment growth will follow. And significant proportions of that credit and investment have been channeled into Property Construction and infrastructure over the past decade. Property developers delayed a long anticipated slowdown in the industry by relying upon increasingly risky forms of financing, such as the proceeds of housing sales before actual construction took place. This introduced a ponzi type element into the financing of chinas property sector. As sales suddenly declined, a trend that was exacerbated by lockdowns in major cities in 2022, Property Developers not only struggled to complete construction of homes they had already sold and promised to deliver, but also stopped buying new land from local governments. Local governments fiscal revenues are heavily dependent upon these land sales and the sudden loss of revenues has made it far more difficult for localities to service debt accrued during the last decade, as this investment was not funded directly by fiscal spending. The property sectors adjustment has been severe. New Housing Starts are down over 50 , 60 from their peak. And theres no easy solution for the local debt problem without changing chinas entire growth model to make it less dependent upon investment. The structural slowdown in china means that the United States can be more narrowly concerned about the National Security implications of specific economic transactions rather than whether or not a particular action will help or hurt the chinese economy as a whole. There is a Significant National there is a significant National Security concerns related to the transfer of advanced technologies with military or dual use applications. But there is little at stake for the United States and u. S. Or ireland investors buying stocks u. S. Or allied investors buying stocks in Chinese Consumer focused companies or Chinese Government bonds. Most trade and investment activity between the United States and china is mutually economically beneficial and poses no National Security concerns. U. S. Commitments to free market principles are a valuable asset that facilitates greater alignment among our allies and partners, many of whom will be far more reluctant to impose trade and investment restrictions upon beijing. Given the challenges that chinese behavior and economic statecraft poses, derisking from chinas economy is widely supported and necessary. But in a decade in which china will slow significantly independently of any action by the United States, we can more confidently keep the limits around u. S. And allied Economic Engagement with china narrow. Thank you. Yes, could you hear me. Thank you so much. I would like to start by thanking the commissioners for the opportunity to participate in todays hearing. I will relay my observations from reviewing chinas recent Economic Data and visits to 10 different chinese cities over the course of this year. The chinese economy is currently in a weak position. While the economy performed well in the early years of the pandemic, growth accelerated sharply in 2022 due to lockdowns and a severe decline in the real estate sector. Since beijing abruptly reopened the country at the beginning of the year, the Economic Situation has improved somewhat, however, activity is substantially weaker than many of the projections made at the beginning of 2023. China has not only failed to have a reopening boom, it is now in danger of losing economic momentum. The current state of the chinese economy can be primarily attributed to three policy decisions made over the past several years a failure to moderate the real estate deleveraging campaign, a crackdown on the private sector that has damaged Business Confidence, and a failure to adequately prepare for the postcovid era. Equally important, the Chinese Government has backtracked during this period on addressing fiscal imbalances between the central and local governments. This has created new financial risk and further hindered the countrys economic recovery. The first policy mistake was the real estate deleveraging campaign. In 2020, the Chinese Government decided to push ahead with a major restructuring of the property sector. A primary focus of this effort was to force Property Developers to deleverage their Balance Sheets. However, these policies soon created a severe financing crunch across the entire industry. The riskiest and most overleveraged Property Developers ran into trouble first. But the Financial Stress soon expanded to the entire sector. No longer able to obtain financing, Property Developers began pausing work on new housing projects. Many chinese home buyers who had prepurchased apartments refused to make mortgage payments fearing that their homes would not be completed. The government has since tried to unwind many of these policies. However, the Property Market remains weak and financing challenges for Real Estate Developers have not been resolved. The second policy mistake was there crackdown on the private sector. Chinese regulators were initiated a Sweeping Campaign that became known as a regulatory storm. Chinese social media and ecommerce platforms were forced to restructure their Business Models. Certain industries, most notably, the private Education Sector were nearly regulated out of business. Chinas Creative Industries faced stringent new censorship rules and a freeze on content approvals. The retail payment and Consumer Lending industries were put under new regulations that fundamentally crimped demand. At the same time, the communist party redoubled its efforts to establish Party Organizations within private companies and exert greater control. The cumulative effect of these new policies has been devastating for many of chinas leading private firms, and has contributed to the sharp decline in private investment. The third policy mistake was the lack of planning for the postpandemic era. At the end of 2020, it became clear that effective covid19 vaccines were possible and that countries needed to begin adjusting their approach to the pandemic. However, china held steadfast to a zero covid policy that effectively sealed it off from the rest of the world. While most countries unbound unwound pandemic controls in 2021 and 2022 chinese authorities engaged in a series of strict lockdowns and quarantine measures. The economic damage from these lockdowns was tremendous, especially to Small Businesses who received insufficient government support. Businesses had direct these have had a direct impact on youth unemployment levels today. Even though pandemic restrictions have now been lifted, consumers are understandably cautious and unwilling to increase their spending. Perhaps most importantly, beijing has failed to address local Government Debt problems during this period. The severe fiscal imbalances between the Central Government and local governments are at the heart of many distortions in the chinese economy and are the most pressing financial risk facing the country. Local governments burrowed extensively, both directly and through Balance Sheet vehicles called lgfes. While some of this investment may be going into useful projects such as infrastructure, there is also likely to be a significant amount of waste. Further compounding problems, most lgfes have limited cash flows and must rely on new financing to remain financially solvent. They must either continue to borrow or receive Financial Support from local governments. However, the Financial Condition of local governments has deteriorated due to lower land sales and high levels of pandemic spending. This has increased the risk that local governments may no longer be able to bail out struggling lgfes leading to an increase in defaults. Chinas unresolved debt problems mean that the economy is likely to continue slowing beijings past approach has been to muddle through by providing support to struggling borrowers and relying on rapid Economic Growth to lessen debt burdens over time. However, this is unlikely to work well this time. The economy slowing trajectory means china cannot easily group its way out of date. Additionally, local governments are constrained in their ability to support the economy due to highly indebted Balance Sheets. If china neglects to undertake important fiscal reforms, it faces the risk of a prolonged period of slow Economic Growth. Fiscal reform could be an opportunity to set china on the path to its more rapid growth and understanding of the core imbalances in the economy. However, i believe this course of action is unlikely given many of the adjustments required directly conflict with the ideological priorities of the xi jinping government. While these issues are primarily domestic for china, i believe there are implications for the u. S. The economic challenge from china has changed. Chinas economy has slowed and it is unlikely to recover its rapid growth trajectory. The Chinese Government is likely to be intensely focused on efforts to address its own internal economic challenges over the next several years. The partys efforts to exert greater control over the private sector have damaged some of the most dynamic and innovative parts of the chinese economy. And chinese local governments will have fewer Financial Resources to support beijings policy initiatives and stimulate the economy. Chinas economic slowdown combined with the Strong Performance of the american. China needs Foreign Investment and access to overseas markets to sustain its economy. China is still one of the United States most important export and investment markets and improving conditions for American Companies doing business with china should be a priority. The current moment is a favorable one to see greater Market Access and other reforms that will directly benefit american firms and boost exports. Thank you. Thank you. Dr. Liu. Thank you, chair cleveland, chair glass and commissioners, as well as all the Staff Members of the us china commission. I really appreciate the opportunity today to testify in front of you with regards to the role of chinas sovereign funds in finance, the communist party of chinas global ambitions. For the past two decades, chinas server in front played a significant role in chinas economy making financial crisis and tempering exogenous shocks. They have supported chinas industrial policies by financing the states procurement of strategic overseas assets, and bankrolling chinese enterprises, mergers and acquisitions abroad, and sponsoring the development of indigenous chinese technological startups. I would like to make three points today. The first point is that while the communist party of china first leveraged the Foreign Exchange reserve to establish such a sovereign funds for what that first time was to address a domestic financial crisis in the early 2000s. But despite the first time the crisis driven, since xi jinping came into power, the communist party has been more productively using Foreign Exchange reserves to finance its global ambitions. And my second point is that chinese sovereign funds have involved evolved and changed their domestic strategies in response to the enhanced investment screening. In areas where domestic investment became more difficult, they have resorted to establish joint ventures and partnerships to mitigate scrutiny risk. My third point is that chinas sovereign funds and their overseas assets are not necessarily uncompromised strengths, but actually, they can be strategic vulnerabilities. This means the Chinese Government is likely to advance the development of alternative nondollar based Financial Systems to reduce your strategic vulnerabilities. Let me elaborate on these three points. The first time that the Chinese Government Leveraged Foreign Exchange reserves was to create central huijin back in 2003. And at that time, chinese Banking System was crippled with non performing loans. But since president xi jinping came to power, and the rollout of the belt and road initiative, or the socalled bri, it has leveraged the party to it has motivated the party to leverage chinas Foreign Exchange reserves as a strategic financial power to advance chinas overseas interest. Since 2013, the party has used the foreign reserves to replenish chinese policy banks, establish more sovereign funds, and these include the socalled chinalatin America Production capacity Corporation Investment fund, chinaafrica industrial capacity corporation fund, and the International Investment cooperation limited. It is created by president xi xi jinping to finance the belt and road initiative, and has since then not just invested in overseas strategic assets, but also financed Chinese Companies overseas acquisitions, including supporting costco shipping port in investing overseas port project. And on top of that, supporting chinas overseas acquisitions, the fund has also received capital injections using renminbi back in 2017. The purpose of using renminbi to recapitalize of the silk fund was on the one part to strengthen its capital base. The other part, to advance the capacity of the silk road fund, and through the belt and road initiative, to broaden the renminbis use through regional and multilateral frameworks. This brings me to my second point, which is chinese sovereign funds have evolved and changed their Investment Strategies over the years. Wordverif investments have become more difficult, they establish joint ventures. For example, silk road fund is the sole sponsor of a 2 billion chinakazakhstan Production Capacity Cooperation Fund and , the China Investment corporation, since 2016, has also been resorting to multilateral investment partnerships. And my third point is that chinese policy thinkers, they have realized the strategic vulnerabilities that chinas overseas investment has exposed them to. They have learned the lesson from russias war against ukraine, as well as the wests collective sanction against russia. Therefore, the current policy debate inside china is not necessarily with regard to how to further diversify Foreign Exchange reserves, because diversification cannot diversify away Systematic Risk for the communist party. In this current scenario, it means a war possible militarized contention with regard to taiwan. Therefore, they are likely to further promote the development of alternative Financial System that is not necessarily based on the u. S. Dollar. I will stop there, thank you. Chair cleveland thank you so much. Mr. Wright, i would like to begin with you just so i have a clear picture of what is at stake. In your testimony, you talk about lgfes borrowing from banks representing 76 of debt, and then bonds issued at 1. 8 trillion. The total debt was 7. 545 trillion dollars. Can you do sort of a cascade for me of whats the total debt at the local level, whats bonds, whats loans and what do you view as inherently riskier in terms of the Overall Economic picture . Panelist sure. Basically total local Government Debt is around chinas gdp, somewhere between 90 to 110 of gdp, meaning somewhere between 16 for 10 and 17 trillion. The riskiest part of that is probably what is happening in shortterm payables, in privately placed notes, and in the Corporate Bond market. Shortterm payables are close to 800 billion. Total local government interestbearing debt is 54 trillion yuan as of the end of 2022. The riskiest part of that interest bearing debt is the Corporate Bonds which have been shrinking in duration and around ¥13. 5 trillion. Average duration on those lgfe debt is around 2. 5 years, the remaining portion of so in total, all of that lgfe accrued debt is half of the stock, which is about half of chinas gdp. So the remaining portion, it has been especially guaranteed by beijing, local Government Bond issuance that is officially issued, that is ¥36 trillion as of 2022. And there is an unknown portion which is issued by schools, hospitals, other government affiliated institutions at the local level that nobody counts, that is also implicit. So roughly, we are talking 70 of gdp, roughly 11 trillion to 12 trillion in debt that needs to be restructured. And the problem with the local Government Debt structuring is not just of the stock, but the flow. When you manage the existing obligations and prevent the immediate Financial Market risk on a wide range of assets that are perceived to be guaranteed in chinas Financial Markets, but how do you more sustainably finance investment in the future at a lower rate . Chair cleveland and as you see it now, what entities are responsible for purchasing each of these pieces of the pie . Because in my pea brain, i just see this as the debt keeps washing to the systems, the policy banks buy and then they push it off on regional banks, and it just keeps money washing through the system. Panelist yes, my colleagues have done a lot of work on exactly where the concentration of lending is held. In the chinese Financial System. The most exposed is not in the bond portfolio, but in the loan portfolio. Loans to lgfes are 20 to 25 of the total norms in chinas Banking System, quite a high level of exposure. The banks most exposed are most likely the city and commercial banks. The smaller city banks that kind of serve as quasi fiscal institutions to chinese cities and towns. Among the bond portfolio, the highest exposure is among privately placed notes, privately placed lgfe notes , because those are shorterterm in duration and we dont have a great visibility of where the holdings are. What happens in chinas system is that there is still a shadow banking component where banks will sell products from thirdparty institutions that will then try to basically add leverage or obtain higheryielding assets in order to repay investors at higher rates. And lgfe bones were a good source of yield because everyone assumes them to be guaranteed by the government. But they are still trading at a premium term Government Bonds. So that is a reasonable place to go and search for what is assumed to be safe yield. That is where you have greater exposure within some of this shadow banking components, trust companies, Asset Management companies and in some cases, brokerages and Asset Management arms. Thats where exposure i think is most concentrated at this point. It is still unknown exactly where all of this can be concentrated. Chair cleveland and all of those instances, are the assets owned exclusively by chinese entities . Or is there access to Foreign Investors, access via Foreign Investors . Panelist there is some forward ownership of chinas onshore Corporate Bonds, but extremely small. There is some forward ownership of lgfe debt issued alshabaab are also relatively small, there is no significant foreign component. Everyone likes to say that chinas data is owed to itself, a left pocketright pocket game that can be reorganized internally. That is a politically fraught process, because what youre actually talking about in that case is who is going to bear the losses, not just how the losses will be allocated within the system and the implications that has for future growth and the stability of that system. The problem now is that all of this borrowing is implicitly guaranteed. Someone in beijing needs to decide that we need to expose certain borrowers to market risk , and risk some of these loans , therefore, being cut off or not being rolled over. And someone has to decide that thats enough market risk and not too much that might spill over into broader contagion in a financial crisis. That is difficult. Chair cleveland sorry, i am way over time do you see the article that was in the magazine a few months ago where 43 lgfes did not rollover their paper . To see that as an indicator of beijing suggesting that they will let some of these localities go . Panelist i dont view it as an indication that beijing has made that decision yet. I think it is an indication of the stress that is building among local government financing vehicles. The payables, the shortterm corporate acceptances, we see other evidence of more defaults. We can track those on a monthly basis and they have been rising steadily. Local government financing vehicles are not currently able to meet their obligations within their existing debt burdens and beijing needs to intervene to restructure that debt. The politburo called for a comprehensive plan to address local Government Debt as of their late july statement on the economy. But i dont think the fact that some of these instruments have defaulted, necessarily indicates that there is a decision that has been reached about what to do about this or to allow some cities to default or some types of bonds to default. Those are very difficult decisions. Chair cleveland thank you. Questions for the other witnesses . I will go next and then go in the other order. First, thank you to all of you for appearing before us today in preparing such great testimony. I am struggling here a little bit. I think all of you are mirroring each other in what you have said about the economic slowdown, its trajectory over the next couple of decades, over the next five years. I am not sure what the cristobal says. But i think policymakers in washington, rightly so, dr. Lu, as you pointed out in your testimony, they need to ingrain this in their thinking about what is happening in the chinese economy. Are we getting out front as aggressively as we should about implications to the u. S. Economy if the chinese economy continues to slow down not just risk to u. S. Investors who are making investments in china, but also to our own sectors here at home . And what could congress be doing right now in anticipation that this will have serious implications not just here, but globally . I will start with you, mr. Borst, but dr. Lou, fill free to chime in. I think the primary immediate spillover we will see is through disInflationary Pressure, through chinas currency and through global commodity prices, which is what weve started to see some of this dynamic already. In which case, some of that pressure is salary for the u. S. Economy, taking some pressure off of inflation. The concern is about china and the longer being a source of growth in the region for our allies and partners as well, and the potential for greater this Inflationary Pressure from chinas currency, if you will, feeding into other pressures to devalue other currencies as well. Let me stop there. Commissioner any other witnesses . Panelist sure, i will add a couple remarks. I think at least in terms of Financial Markets, the slowdown in china is is well understood now. It is very reflective in the performance of the Major Chinese investment indices over the course of this year. So i think theres a lot of transparency and lookthrough to a pretty broad consensus that the chinese economy is slowing. In terms of the direct implications for the u. S. , adversely, despite the slowdown in the bilateral trade relationship, china continues to be a major export market for a a lot of u. S. Companies, and so that will certainly impact their growth. China is also a major investment focused market for a lot of u. S. Investors and that will ultimately filter through to lower investment returns going forward. I think this notion of maternal slowdown is much broader than just the country itself. In many ways, it has been kind of the heart of growth in the asian economic region. To the extent that china continues to slow in the way many of us are predicting, it will have a direct Economic Impact on many of our allies in the region who have huge economic ties to china. So i think the impact on growth will be significant. But i would also say that there is a variety of different ways that this could play out. I think there is a pretty broad consensus that the growth miracle is over. That we will see chinese growth go back to 8 or 9 . There is a range of other outcomes that can occur. That could be a relatively soft landing, something in the 3 to 4 ratio, or if they dont handle many of these Financial Risks that we have covered, could be something much lower and more volatile than that. Thank you. Panelist thank you very much for the question. I will make two points. The first point is with regard to the deflationary pressure right now. And its likely that the deflationary pressure in the chinese economy could be transitory. Could be temporary. Because the component driving Consumer Prices down right now from the latest data, mainly comes from significant reduction in pork prices that can potentially be temporary. But if this became a prolonged process, then they deflationary chinese economy would also mean the chinese export prices could be cheaper. And that makes chinese goods more competitive in with the global market. The second point that i would want to make is that a slowdown of the chinese economy, yes, would create or would relieve some of the commodity prices, from oil to gas. But that doesnt necessarily mean every commodity price would go down, because in areas where the Chinese Government put a lot of emphasis in, such as chips, electric vehicles, Renewable Technologies and renewable energies, those critical mineral demand in china is still going to be very high. Therefore, even as the chinese economy slows down, it doesnt necessarily mean that every country would be impacted to the same extent. Commissioner thank you. I will now recognize chairwoman bartholomew. Chairwoman, you are on new. Commissioner sorry about that. Thank you very much and thank you witnesses for your testimony. I guess what i am trying to think about right now is, what are the implications both within china and how chinas model is being pursued elsewhere in the world as a result of these economic problems . I know that watching the people of china going through covid, and the faith and their trust in the system was quite shakenbake a lockdowns, for example. Do you think that it is having any impact within china on Peoples Trust or faith in the ability of the ccp to manage the economy in a way that benefits people . That is the first piece. The second piece is, for countries around the world that have been finding the chinese model attractive, no Economic Growth and authoritarianism, is there any evidence these structural problems might be having any impact on how these countries are fighting this is an attractive option . That is for any of you. Panelist i can start, and i am happy to yield the time to my fellow panelists. I think the events of the past few years have shaken a lot of faith in the chinese economic model. Historically, there has been this implicit guarantee between the party and the people. Stay out of politics and focus on the economy and everything will get better over time. The severe direct impact on many peoples daytoday lives from the covid lockdowns have shaken that out of a lot of people. So i think people are cautious about what this means. That is the reason we havent seen a strong resumption in consumption spending people were predicting. I think it was outlook on the future has changed for the negative. That is also quite true in the business world. China previously had a very vibrant, dynamic private sector that made a lot of progress throughout the 2010s. I think the revelatory strong i referred to in the beginning of my testimony the regulatory storm i referred to in the beginning of my testimony has really shaken that. You cant have modern companies without rule of law. When you implement policies in a nontransparent and draconian way, it shakes the confidence in businesses. People lose confidence to invest in the future because they dont need their assets will be safe, government regulatory policy could come down at any time and fundamentally disrupt their Business Model and the businesses have spent so many years building. In a variety of different ways, i think it has really shaken internal domestic confidence. Then as we have all hinted that, their role of local governments within chinese chinas economy is changing now and that is due to the high levels of debt that they are now burdened with. Local governments have been a key player in the real estate boom. A key player in stimulating the chinese economy during downturns and they have been a key player in many of beijings National Level policy priorities, whether it is creating the Semiconductor Industry or belt and road projects. Now that these financial constraints are growing larger, they will not be able to play that same rule. So whether beijings key tools in its toolbox are stimulating the economy and pushing forward some of these National Policy priorities, it will not work as well as it did in the past. For the question about global implications, i think that will take time to filter through. China has had such a strong economic track record for the past two or three decades. I am not sure many countries are trying to model the chinese Economic System as a whole. It is far too distinctive and really driven kind of by the party and state dynamics that are so important in china. By the idea of a real focus on infrastructure, infrastructure lead development, i think were seeing the consequences of one that goes too far and that can have implications for a lot of different countries. Chair cleveland thank you. Do any of our witnesses have anything further they wish to add . Panelist if i could add a point on the external impact on the external impact of the chinese slowdowns so far, it is obviously hard to monitor Public Opinion in other countries, but if you look at the pew Research Surveys that have been released lately, negative impressions of china have risen to alltime highs. The issue that i would urge everyone to watch is how china manages negotiations on its external loans and its external debt at this point, because thats really where the slow down and the inability of the chinese domestic system to absorb financial losses from some of these loans, and our own work illustrates that there has been about 78 billion in loans that are either in default or under renegotiation since 2020 alone, in terms of chinas external landing. The way in