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 which china participates in the process is going to be i think were the rubber hits the road for their external diplomacy. Because it reveals the constraints of their own domestic political system in their own Financial Stress at the same time as their external attachment to trying to provide debt relief and engagement with the global south as well. Chair cleveland just quickly, do you see that there will be a slowdown in external landing . Because that certainly would have diplomatic consequences for the Chinese Government also. Panelist we have already seen a slowdown since 2018 2019 over that time, and the rising risk of defaults and renegotiation of those loans suggests there will continue to be an ongoing slowdown in external loans. Commissioner thank you very much. Panelist if i can just add two points with regards to the question about trust of faith and evidence with regard to what extent the chinese model might be appealing on the question about faith, i think right now what we are observing of the chinese economy really is a run on confidence. It comes from both domestic and international. There reason i said that right now we are observing the crisis at this particular moment, is because the timing. Chinas domestic structural problems have been existing for a long time and there is a pretty good argument to be made that going back to 2000 nine and even 2012, a lot of these structural problems already dragged on chinese growth. But those problems were not necessarily crushing of the chinese economy. Now it seems that there is a crushing and it comes down to the run on confidence that comes from international and domestic. In the domestic, it comes from, on the one hand, the Consumer Confidence index has been in a downward trajectory. April of this year was the last time the Chinese Government updated the Consumer Confidence index end date caused in updating it. From january to march of this year, Consumer Confidence was about 90. Most of the time, it was below 90. That basically means the consumer in china are deeply not confident about the economy. Part of the reason comes from, their Income Growth has slowed down, and part of that is they were waiting for the government to make more stimulus incentives. There is a popular saying on chinese social media in chinese [speaking another language] translated into english, it says, if you dont buy and i dont buy, the price will go down ¥200 by next week. The policy right now is very much deflationary. Consumers, households and individuals are not confident about the economy. For that matter, at an individual level, they are also concerned that their Economic Security would be bogged down or fall victim to a broader geoeconomic confidence. And with regard to international, it really comes down to president xi jinpings policy swings and policy uncertainties generated lots of risk and uncertainty. So ill just stop there with the interest of time. Thank you. Commissioner thank you very much. Commissioner wow, so many questions and so the return. What a great panel. Thank you all very, very much. I started my own business in the early 1980s, and within just a couple of years, we had all the savings and loans in the country broke, largely for the reasons you are describing occurring in china right now, which is surprising to me a little, although i have been reading about it. So i have a sense of what is going to happen, because we have all the developers in the United States effectively borrowing against future promises. Then the market changed a little bit. We passed a law that changed and everybody failed. All of you have talked a bit about the debt ratio to the gdp. And i understand that in the private sector in america, it is common to have a large loan with the bank where quarterly, you have to talk about your debt versus your overall income. And when it hits a certain number, in my case in the 1990s, we got up to around twothirds of our gross with our gdp. We suddenly had to come up with money to lower that ratio. So it is something that is, and in business and government and obviously not in china. I will ask a question first of mr. Borst, then i guess in order, if we have time, dr. Wright and dr. Lou. Dr. Wright and dr. Liu. You talk about the debt to gdp ratio. That strikes a chord in with me, because as a country, they are one of the best in the world, in the high 60s. America has continually increased, for a very, very long time. In fact, we have the 12th worst ratio in the world, behind countries like venezuela, japan, greece, lebanon, singapore and bahrain, they all have worse ratios. So my question to you, mr. Borst, if our debt to gdp ratio in the country is better than the world, why isnt that a disaster compared to china and what they are facing. It would seem like each of you have said that systemically, the Central Government could bail them out, but probably will not. I am inclined to agree. How do they compare what ours is so high and there is so low . Are we really at risk if they have a further slowdown . Panelist thank you for the great question. The u. S. And chinas total debt to gdp ratio, if you are at both households, business, and Government Debt, it is about the same i think china has surpassed the u. S. In the last year, but both are about 300 . But the real issue i think is the structure of that debt. We think of economies as they advance, this process called financial deepening. It is much more sustainable and normal for an advanced economy to have higher levels of debt. Well, china has hit advanced economy levels of debt at a much lower level of gdp per capita. Which country levels of debt at middle income levels of gdp development. Rich country levels of debt, that middle income levels of gdp development. You mentioned on the government side, it is true that Central Government of china has a very low debt to gdp ratio. It is about 25 , which is extraordinarily low compared to most other major economies. You know, the u. S. Is about 100 . Japan is you know, 250 . So, from that direct effect, you could say, well, the Chinese Government has all of this fiscal capacity. But the problem is as we , discussed earlier, is the local Government Debt situation. And so a lot of debt that in other countries would probably be considered central Government Debt, has been really foisted upon the local governments. And theres this core imbalance in chinas fiscal system that i talk about in my testimony, that has been the source of so many problems in the economy. And that is that chinese local governments are responsible for 80 of total spending but the only get 50 of the revenues. So the Central Government takes more than its share of revenues and it does distribute that back to the provinces a little bit through transfers, but local governments in china are constantly facing a structural fiscal deficit. They have invented all sorts of ways to get around that. Part of that is making money through land sales, although that line of business has dried up due to the real estate correction. The other has been these offBalance Sheet vehicles that weve talked about the lgfps. The lgfvs. Local governments have used offbalance vehicles to borrow heavily and spend on their behalf. But the problem is that these offBalance Sheet vehicles really dont have any revenues of their own. Theyre completely dependent on new borrowing or from financial injections from the local governments. And so this issue of local governments having all these spending responsibilities, but not enough revenues to do it, has not been resolved. And and it, im very pessimistic about some of these financial problems. There are possibilities where they could take steps that i think would help change this. I talk about it in my testimony the Central Government could take on more of these debts or could give more revenue to local governments, or they could finally sell some state assets to cover these. Debts. The problem is all those different policy choices are very difficult from an ideological perspective in china today. And so, you know, the debt levels are high, but the real problem is the way the debt is structured. And i think theyre ideologically constrained from taking some of the steps that would be necessary to resolve that problem. Commissioner i think were are out of time, so i will defer to the chair. Chair cleveland thank you. Commissioner freberg. Commissioner thank you. It seems that all of you to the extent that youve touched on this point seem to be agreed that china is headed for perhaps a sustained period of slower growth. And that the reason for that is something thats deep in the structure of the system as it currently exists. Its not just the result of shortterm policy. I guess my question is, for all three, one, is there any reason to believe that the ccp is perhaps ok with this, they let prefer growing more rapidly, but they seem to be making the point that growth is not the only objective, and that control and security and so on are critical. So first, is there a reason to think they are ok with it . Second, if not, what exactly could they do about it . There is one answer to that that is implicit in the testimony, and that is that they could go back to the direction in which both out they were moving 10 or 15 years ago, towards losing ccp control. If thats not likely in the short term, what are the alternatives for that . Could they push exports . Could they rely more on technological innovation . What could they do to get out of this corner . Mr. Borst, maybe we could start with you . Panelist sure, i will speak briefly because i want to leave time for the other panelists to chime in. I think we are seeing a real struggle. We have seen over the past month or so, a suite of new, private sector reforms, really aimed at improving the operating environment for the private sector. I think at the end of the day, the chinese economy knows they cant grow entirely through soes , they need the private sector for employment, revenue and for innovation. But it has been difficult. I would note that even these private sector, reform initiatives still talk about increasing the role of party committees, private companies, having private companies to National Policy objectives, which, in my opinion, are not great drivers of growth. There is a struggle going on right now to figure out what the new driver of growth is. And from my conversations with chinese economists, i think they are most likely to lean on the old playbook, which is build more infrastructure even if the country doesnt need it. Commissioner thank you. Dr. Wright . Panelist certainly. Lily i would answer the question is, there is an understanding in china and beijing that there are constraints on the previous growth rate, that the forwardlooking expectations are still more contingent on political objectives to double chinese gdp by 2035 for example, and that rates of growth that are probably higher than what can be sustainably financed with chinas system or under these new structural constraints. So if you tell chinese leaders that growth needs to be lower in the future, everyone can accept that. If you say that growth needs to be lower in the future and that probably means people will question whether we are inevitably rising in great power status, and that the great rejuvenation of the chinese nation will be complete, then thats unacceptable. Then you get into these constraints about what can actually be done in terms of structural reform. And dr. Friedberg, just in response to the question, i mean, i think youre exactly right. The unit some sort of reinvigoration of the reform agenda that was put in place with the 60 decisions of the third plenum in 2013. It has been obvious that there has been initial attempts along those lines. And then rapid backtracking when the market implications, the economic implications of those reforms become apparent. So the problem now is that after 10 years of backtracking and more status direction of the economy, how do you actually send that sort of big bang signal that things are actually different . How do you credibly do it . Because there really is an inverse relationship between the concentration of political power and the credibility of some of these countercyclical and reform signals. Commissioner thank you. Dr. Liu . Panelist thank you for the question. I would emphasize two aspects. The first part, in terms of if the ccp is not ok with lower growth, what are they going to do . The two aspects that the ccp would emphasize the and they have given clear policy signals to do, is emphasize incentivized Consumer Spending, and to focus on efficient investment. With regard to incentivizing Consumer Spending, since last december, they put out for the very first time, a Strategic Plan to incentivize domestic demand. On the domestic demand expansion aspects, for the very first time, deprioritized incentivized Consumer Spending rather than focusing on governmentled investment. Since the beginning of this year , there have been guidelines focusing on using consumer credit, the environment, and all that. They incentivized private consumption. It is one important aspect. They do have reason to do that, because right now, private consumption as a percentage of chinese gdp, is about 40 , whereas the global average is about 60 . So from that perspective, the chinese economy has significantly been under consuming. Then the second point with regard to efficient investment, the primary aspect of the sling is related to strategic sectors, such as electric vehicles, quantum computing artificial , intelligence and all that. But but there is also very important or practical aspect that xi jinping is prioritizing, which is rural revitalization. Focusing not just on farmland, but also food security. The idea is to strengthen the rural base of the chinese economy because major cities have basically been built out. Whereas the further investment potential area would be the rural area. Commissioner thank you very much. Chair cleveland commisioner goodwin. Commissioner thank you, madam chair, and my appreciation to the panel. Dr. Wright and mr. Borst, i want to return to this conversation about chinas efforts to address local Government Debt problems. Chair cleveland was exploring this earlier on in her questions, but earlier this month, the politburo announced what they refer to as a basket of measures to help address this challenge. And some news reports earlier this month suggested among those measures, will be a refinancing bond program. Authorizing these local governments and municipalities to issue ap to 140 billion in bonds to repay refinance outstanding lgdf debt with better Interest Rates. So, i want your thoughts on the wisdom of that, potentially going into debt to repay outstanding debt, but also, if you have any insight into the structure of those refinancing issues, have they identified dedicated revenue stream to pay the debt service on those bonds and to what extent will the Central Government be involved in backing those issues . Panelist i will start, if thats all right. The problems in local Government Debt refinancing, it is really a fourfold problem that china has to grapple with all at once. First, you have the stock of existing debt. Second, you have the flow of how you are going to find or finance new investment in the future. Third, you have the entire basis of the central local fiscal relationship and how you can more sustainably put local government finances on a new plane. Fourth, you have a broader problem of how to raise fiscal revenues in the system altogether, because most of the tax system in china is heavily dependent upon investmentled growth and local Government Investmentled growth and proper and the property sector overall. This is a huge structural problem of which the measure you were discussing. The announcement is a very tiny, first step in terms of alleviating some of the shortterm financial pressure when you are talking about 1,000,000,000,001 or 1. 5 trillion yuan, something that would meaningfully address the stock of local Government Investment, probably needs to be in the range of ¥50 trillion. And ultimately, the only source of financing for this type of bond issuance to refinance older high interest debt with lower lower interest Government Bonds is probably going to be the central bank Balance Sheet and that could be done quickly, it could be done slowly. Beijing has a lot of choices in this regard. None of them are good. Do you want to start small and then sort of expand this program over time so as to not frighten markets . Do you want to start with individual provinces or cities or individual debt instruments . But when you do that, you hypothetically expose those others that are not directly guaranteed to market risk. Not an easy choice. Or do you want to try to break the implicit guarantees in local governments by allowing a few of these to default . And then coming in with sort of a rescue package. These are uncharted waters, is what i would say. The kind of measures you are hearing so far, they are very tiny, incremental steps along those lines. I think we will see a plan emerge in the next six to 12 months, but i think it would be a reactive incremental plan to , address this rather than something more comprehensive and proactive. Panelist i would just add, i think all of us are having deja vu because we have seen this happen before. Go back to 2011, 2013, theyre trying to get a handle on just the sheer amount of local Government Debt setting out audit and inspection teams. 2023, that is happening yet again. The Central Government still does not know exactly how much local Government Debt is out there. And then one of the main changes being talked about is, local governments issuing more bonds, taking some of that offBalance Sheet debt, making it explicit. That happened in 2015. In general it is good to take high Interest Rate and very shortterm debt and transform it into something thats a lower Interest Rate, more sustainable over the long run. But it doesnt solve the fundamental issue, as long as these local governments come today to have the structural financial deficit, they are going to keep borrowing through these channels. A little bit of a blast from the past, we are seeing the old playbook. Not as aggressively as it was pursued in 2015. The other thing is that the losses from some of these debts are really being hidden. The way that is occurring is, for example, with many of the offBalance Sheet, local Government Bank loans, banks are being told to extend that, you know, extend the loan tender 5, 10 years. Zero Interest Payments for five years. That sort of thing. It has the same effect of recognizing that debt, you are just regular different way. I believe a lot of these losses will ultimately show up on the Balance Sheets of banks, the Balance Sheets of Insurance Companies and other investors in these bonds and other other investors. Commissioner thank you. Chair cleveland commissioner helberg. Commissioner thank you. And thank you to our witnesses for their testimony today. Having seemingly run out of dissidents and Business Leaders to disappear, it looks like the Chinese Government has now graduated to disappearing its data. The economists and the and the guardian have described chinas Real Estate Market as a giant ponzi scheme. The Washington Post also reported that a study of satellite imagery suggests that china may be inflating its gdp by up to 30 on any given year. If real estate activity makes up the lions share of chinas gdp growth, if china lies about its gdp numbers, if the Chinese Government is juggling debt by using its right pocket to fill up its left pocket, if china is now hiding all of its underlying gdp data and investors arent able to do any meaningful Due Diligence, can you explain to me how any investors can be confident that chinas economy is not at giant ponzi scheme, and would any of you hypothetically invest your own familys retirement accounts in china . Panelist maybe i can start with that one. I think we are very concerned about the trend and direction of chinese data transparency. I have been following chinese data for a long time. A decade or so ago, it was Getting Better in terms of frequency and transparency. Particularly in the past two or three years, we have seen more and more data sets not reflect what were seeing in reality. And also the data sets that we have relied on the longer being published, or being published infrequently. That is a major concern. Thats macro data. For company data, which is what i primarily deal with, we are always skeptical of every companys data. We ask investors to approach companys data with a skeptical mind. We look at othered financial results, combing through financial models, talking to outside analysts, really make sure a company data can betray undiluted in a variety of different fashions. But i think investors as a whole, if they cant get comfortable with either the macro data or the Company Level data coming out of china will reduce their exposure to that market. We will reduce their exposure to that market. Commissioner how do you triangulate data about a company in china . Panelist a variety of different methods, whether that is going and talking to the Company Looking at outside sources of , data that might be able to be matched against the data that the company itself is putting out, comparing that company not only to its domestic competitors, but what we see in International Companies that are in a similar industry or a similar Business Model. Really trying to look at it from a variety of different ways and see if it passes the smell test. Commissioner next witness please. Panelist in response to that, one of the things we try to do is follow the money in chinas Financial System, rather than the official data. There is fairly reasonable data on chinas credit expansion, the state of the Banking System, and one of the reasons we have done this for so long is precisely because, that is a very robust sort of area of data that is available, while headline Economic Data is less reliable. Particularly in terms of gdp. It is just not realistic to assume that chinas gdp was more stable than any other countries that we could find over the 2014 to 2019 period where gdp growth barely moved at all. Despite the fact that policy changes, both monetary and fiscal adjusted quite a lot over that timeframe and were more indicative of a regular economic cycle. Similarly, its not really realistic to say that chinas economy grew at all in 2022. Its far more likely that the economy contracted in 2022 given the the impact of lockdowns and other restrictions on activity. Headline chinese consumption growth was negative. Investment from the property sector certainly commissioner how do you follow the money in a system that basically treats as espionage and criminalizes doing basic Due Diligence in a company . Would any of you invest your own familys retirements in china at at this point, in 2023 . Panelist i think the point on that that i would argue is that, china faces this longterm problem in restoring Investor Confidence. The outflows from chinas system are inevitable. The inflows are not. The inflows are highly contingent. The outflows are inevitable because china has the Worlds Largest money supply in dollar terms. The inflows depend upon all those individual decisions that investors make. And investors have different priorities. Absence of information can sometimes be a benefit to certain to certain investors, if they think thats an opportunity that they have information that others dont. And thats a different type of market environment, not the one where china has been trying to develop over the last two decades, but this is sort of where we are. Panelist i would just add on that, too, i can only speak to my personal experience, but i have done two trips to the country this year. I have met with more than two dozen Chinese Companies. Found them very willing to talk to me. Open and transparent about the challenges they were facing. To answer your question, commissioner, i do have my human personal funds invested in some i do have my own personal funds invested in some chinese investments. Commissioner so you talk to Chinese Business executive in china and you dont think that Chinese Business executives have a long history of misrepresenting their books and misrepresenting their information to american visitors . You dont find that there is a long, 20 year track record misrepresentations and characterizations of their economy . You trust we should invest billions of dollars of Pension Fund Money in the Chinese Market at this point . Panelist yeah. We invest in a little difficult markets around the world, and i would say we always approach every single investment with a skeptical eye and we never invest in unless we can get beyond some of those thresholds. Commissioner and you think, from the u. S. Government standpoint, the u. S. Government should allow american Pension Funds to deploy billions of dollars of funds based on a smell test and verbal conversations with Business Executives in china . Not based off of objective Due Diligence that every American Company has to go through here in the United States that is based on disclosure, accounting rules, and so forth . Panelist yeah, i think the most important things from, a u. S. Investor perspective, i think is transparency and disclosure. Commissioner do we have transparency in china . Panelist so, i am talking about the funds themselves. So i think its very important for funds to be very clear about what their investment objective is, what exposure they will have. And most importantly, what are the risks that investors in a particular fund will face . And so that is a key component of investor education. And i think theres always a lot more we can do to make sure that american investors, when they invest in china or any other overseas market, really understand the risks associated with their investment. Commissioner well, i dont want to take out more time, but my view based on this exchange, is that it is high time to suspend the deployment of american Pension Funds in china. And typically american Pension Funds are not in the gambling business. They are in and we will have around uh two of time allots. Uh commissioner price. Hello. And thank you all for your testimony today. Um, i found it very, very compelling. Um, uh, i want to pivot to some of your recommendations, um, that you put in your written testimony. Some of them were very interesting and id like to them out a little bit more. So i have questions for each of you. Ill put them, ill, ill ask them all at top. Um, and if we run out of time, well either go over, well come back to it uh afterwards. So, thank you. Um so dr wright, um in your 2nd and 3rd recommendations, you talk about taking more active steps for Financial Support to emerging economies, struggling to renegotiate debt. Can you talk about that a little bit more . And also trade policy that facilitates derisk, you probably could do a whole another 20 minutes on that. But give me some, some your, your, your Top Priorities for derisk. Mr boris, you talk about giving investors clear rules. Can you expand on that . A little bit briefly . And doctor liu, you, you talk about a shared entity list, make recommendation around that. Id like you to flesh that out a little bit more as well. So, certainly thank you for the question. So i think that the, the point is that unless there is an alternative to chinese lending and additional source of finance that its going to be put a lot of pressure on emerging economies. To beijing is still going to stay at the center of that diplomacy in terms of how to renegotiate the external loans that countries are struggling with. At this point, what congress can do, what other lenders can, what other in combination with the private sector is provide a realistic alternative for alternative sources of financing and that can help at least at the very to be an effective bargaining chip and force beijing sort of back to the table in negotiations, even if it doesnt, even if, even if its not necessarily you know, productive in the in the short term. The point being that all of these countries are going to continue to be dependent upon beijing actually acting renegotiating and extending debt unless we can offer something Something Else as a source of financing. And so we need to actively consider what that would be and what that might do for a more positive and externally oriented aspect of us financial diplomacy to the rest of the world and to the global south where beijing has been extending influence in recent years. So thats thats the argument within that recommendation. And similarly, when were talking about de risking chinas from chinas economy, were talking talking about diversifying supply chains. We need to have a trade policy that is lowering trade barriers and facilitating the kind of Public Private investment that is consistent with those markets where were developing alternative manufacturing capacity, being able to access us and allied markets more effectively. And thats the argument. Thank you. So just to add a little bit about about the clear rules, so i think, you know, us policymakers have rightfully identified areas where there are key National Security risks to providing Chinese Companies with capital. And i think the vast majority of investors understand that support it. But i think the key is setting out a framework that is transparent, predictable, gives us investors plenty of time to understand the new rules is very clear about how investors can comply with those new rules. And i think really importantly is being a review mechanism in some of these restrictions as they go into effect over the course of years, you know, its once once a restriction goes into place, it can prove to be very difficult to unwind it even if the situation has changed if its creating unintended consequences. So i would really just advocate as, as policymakers rightfully target specific areas of the chinese economy to prohibit that theyre also thinking about you know, what look backs are we doing . 1234 years out to make sure that these rules are really working the way we thought they would, that theyre not having unintended consequences and that theres a clear framework for us investors to comply with this and not inadvertently trip over some of these restrictions. Thank you doctor liu. Thank you, commissioner price for the question. The shared and the list that i proposed as a recommendation is really with regards to a in the broader context of a coordinated fd i screening both inbound and outbound and off bound, both in the United States and with our european allies because the European Union has implemented their own screening. But they are not necessarily to the same expertise or the same extent as the United States. The whole idea is not to implement protectionist policies, but really to strengthen us leadership in shaping the fd investment environment in the world. And i think there are some ground rules should be adopted in with regard to both a shared entity list in terms of companies or in Foreign Investors that are not welcomed and an exempted foreign entity list that are sort of, you know, the so called white list. These are ok and the the whole idea is to convey to um our strategic rivals in such as china or other other competitors. The idea is not to constrain chinas growth but really is to not put, put a boundary with regards to what are off the limit. Because right now, i think in the us china relationship, the the the point of the contention is that americas idea or americas intention of not to not focusing on containing china. This message is not delivered to the communist party and chinese leaders therefore, by having a white list and, and um another, the, the a restricted list perhaps would be a good way to communicate americas intention. Thank you. Very helpful, commissioner schriver. Thank you. This has been a fascinating discussion and that was actually an excellent segue to what i wanted to, to ask about. But thank you to all our witnesses. So focusing on what the us policy tool kit is and, and what we might do in response to the trajectory of the economy. I mean, mostly weve talked about insulating ourselves from spill spillover and protecting ourselves. Weve talked a little bit about how we can stabilize and, but i want to ask a different question. This is our strategic adversary, our rival. What if we wanted to pile on . What if we wanted to make these problems worse . What if we wanted to put xi jinping under tremendous pressure . What if we wanted to divert their attention in ways that they never bother us on the outside again by having to focus, you know, very intently on the economic problems and youth unemployment and the like. So even if you dont agree with it and even if its marginal, what are things we could do to kick them while theyre down, if you will put pressure on them, given the, the experiences that theyre having right now, the trajectory theyre on. I would argue against that sort of approach simply because beijing is going to blame the United States for doing that anyway, as that occurs, sorry, go ahead. No, i said even if you dont agree with it marginally understood, i mean, i think that the, the challenges that that course of action confronts are also about alignment with our allies and partners. And so any direct action we would take would have be far more difficult to maintain the sort of agreement and trans and transatlantic alignment to policies and um you know, preventing backfilling among sort of controls on supply chains and changes in Manufacturing Policy that we would, that we would expect. I mean, i think that the thats sort of the concern we would have, thats sort of the concern we would have. I mean, in terms of hypotheticals about what could in terms of hypotheticals about what could hurt the chinese economy in greater sense. Its very difficult for me to come up with anything externally that would do more than what has already taken place in china over the last 5 to 10 years. In other words, if you were going to think about how to sort of undermine the vitality of a robust private sector in china, you would do roughly what beijing has done in trying to single out some of these firms for political as political targets in the last couple of years. So its a hard question to answer just because i mean, is anything that the United States thinks about likely to have anywhere close to the same effect as a signal from chinas government itself in that context. Just to add on that. I totally agree with that, that most of the, the problems china is facing now are self created. So in that sense, you know, they, theyre their own worst enemy at this point. But you know, for the hypothetical, if we want to continue to increase economic pressure on china, i think, you know, further decoupling will increase pressure on china. Theres been more extreme measures that have been discussed in the policy world and those those could be put forward, those will have a direct cost on us companies and us investors. But maybe, you know, if you weigh the costs, it will be more heavily on, on the chinese side. But you know, just to echo some of the comments, i think the that approach in the short run will increase pressure on on china. But i think over the long run, it will actually be damaging to us interests because i think i continue to believe that a angry and isolated china is a greater danger to us interests than one that is interconnected. And weve seen you know, the approach of sanction and isolate applied to many different countries, even smaller, more isolated countries that really hasnt paid paid real dividends. Chinese economy is too big, too interconnected too dynamic to be isolated in that sense. And i, i think if we dont, if we pull away the ladder and tell, you know, policymakers in beijing and, and Chinese Businesses that theres no room for them in the international economy. I think were going to see some behavior and reactions in china that are much worse than what were dealing with right now. Thank you for the question commissioner. And i would also want to echo my panelist key argument with regards to perhaps there is more harm, the the harm to the United States in terms of further pressure in china, especially right now, when the Economic Growth slows down is probably the it hurts trans Trans Atlantic Partnership as well as are trying to build a strong strengthening our alliance with japan and korea. And on top of a lot of this supply chain pressure spill over effect, there is perhaps another underappreciated challenge that for the United States for if the chinese economy continue to work. And that is immigration problem since the covid pandemic, chinese Illegal Immigrants came across, came across the Mexican Border actually have more than doubled. So from that perspective, i think the further pressurizing china probably would create more harm to the United States, both economic wise and for us to dealing with our immigration problem. And in a hypothetical world in terms of pressure in china, perhaps trade is a very important aspect because the chinese economy is still very much export driven. But again, trade would be hurting American Companies interest as well. Thank you just for the record. I think if we were on our back heels, i dont think the discussion in judo high would be how can we help the United States . And i think weve got problems with fentanyl right now. We got all kinds of problems and i see them pouring fuel on the fire at every opportunity they get. But thanks for the thoughtful answers. Commissioner wes thank you all to the witnesses. And miss liu, i was hoping to be there today to have you sign the book, your recent book appreciated it and followed your work at cfr and elsewhere. So, thank you. Id like to um go up for altitude maybe literally as well. I think it was the economist that had a article earlier this summer. I think that the headline on the or the cover was peak china. And what im hearing from each of the Witnesses Today is in some ways that china has peaked. And i think that is underappreciate what china is doing that it is rising. Whether its through belt and road, whether its through other industrial policies, whether its through Outbound Investment approaches with indonesia and nickel supply chains or many other things. And i think what all of this, what ive heard today. It is um potentially following some of the flaws in our earlier approach, earlier analysis of china. First, that reform would come from, from Economic Engagement. As you said, mr boris, weve been through this somewhat before in the 2010 or so. And were, you know, following the debt issues, we continue to evaluate chinas approaches through a western lens rather than through the ccps lens. And i think that leads to fundamental flaws in terms of how policy makers are being told to respond to china. And what i hear is deescalation. What i hear is de risking. What i hear is dont push too hard, too fast rather than what are western interests first, the us, how should we pursue them and worry a little less about how the ccp is gonna how the ccp leadership is going to respond. So, at first, the question of, has china peaked is that is there a different uh trajectory theyre on . And we dont appreciate it. And is, is the current reset in us policy with a limited outbound exec investment executive order, slowdown of congressional action on china. A sign that you know, potentially were in reaching the new stasis. Mr bush you want to start. Sure. Yeah, its a great question. You know, it, its, it i saw the economist cover too. It was very provocative, i guess. I dont quite know what they mean by peak. You know, i and others have argued that the the growth miracle in china is over, were not going back to eight or nine or 10 growth. And so from that perspective, we have entered a new era but china is still going to be around. I dont think the chinese economy is collapsing. I think theres many scenarios where the chinese economy could grow slower but still healthily at a 3, 4, 5 level for the next decade or more. So china will continue to be an important Global Economy. It will continue to be a major source of Global Economic growth. I think the imf is projecting that even with the slowdown in growth, china is still going to be about of total Global Growth and the us will continue to have significant business interests in china. And i think now as i say in my written testimony is a really opportune moment where tables have turned a little bit. The us economy is doing quite well. The chinese economy is on the back foot. These have been the periods in chinese history when theyre actually most open to economic reform. You know, china doesnt reform just to reform, it doesnt do it out of the good nature of its heart, does it because it knows it needs to continue Economic Growth and how important Economic Growth is for the country. So i think this is a good moment. If we understand that china is not going anywhere, theyre not going to disappear. I dont think the soviet union outcome is likely. How do we continue to live with the chinese . And how do we proactively advocate for us interests as it comes to the us, China Economic relationship . Thats what i think i would hope that policy makers would really be focused on right now. I, i wouldnt agree with much of what nick, just what nick just said as well. And i think this is an opportunity. Its not that the peak in china, so to speak is probably true in a broader Economic Growth or economic trajectory sense. But that still doesnt mean that the challenges that were facing from china in many senses have peaked whether we think and instead, i would argue that this is an opportunity to refocus us efforts, not on what the interaction between chinas growth and inevitable rise will do to those challenges, but instead focus on these individually, focus on them far more narrowly when were dealing with military and security challenges in taiwan and the South China Sea where were dealing about with spread of advanced technologies and competition and advanced industries. And chinas politicized influence over, over some of the next Generation Industries were dealing with. And thats the only thing id add, i think. Thank you, mr for your question. Uh with regard to the question about the peak china, i would say, i agree with my, my panelist and logan and in particular, i would want to that actually china is still very much a leader in Renewable Technologies in the transition towards a cleaner energy future. And china is still very much dominating the supply chains of critical mineral that are necessary for the world to transition to a renewable future. So from that perspective, i think yes, if we measure the chinese gdp growth or measure export as a percentage of gdp, chinese china or chinas Economic Growth model or the old playbook perhaps has reached running out of the pages perhaps. But depending upon how the government reform goes out goes forward. And in particular, the politics of that, there is a chance that china can sustain. But we given the current current political environment is not clear and with regard to the deescalating or the the tension, i very much appreciate that question. And i think there are perhaps both countries or policymakers in both countries can borrow from a page book by bismarck. I remember he once said, i forgot which year, but he once said diplomacy is about the art of building letters to let people climb down. And in chinese, i think it basically means to get let somebody gracefully climb down. And i think perhaps right now, american leaders should lead the moral high ground to give president xi jinping and the chinese leaders an opportunity to gracefully climb down. Thank you. I would like to recognize vice chairman wong. Since bismarck was in vote, he also said war is diplomacy i dont know how that fits but anyway, dr. Wright, i want to focus on some of your recommendations. You recommend the term alternative channels of Financial Support for economies that are struggling to renegotiate debt with china. What do you mean by that . If it doesnt mean the kind of current Multilateral Lending Institution or Development Lending that we do with our allies. That would likely be a component of it i would say. But he would probably need some additional policy support private sector to invigorate private Sector Support for that as well. The problem is you need an alternative if beijing is not going to provide meaningful debt relief in the negotiations are starting to bog down in that respect and countries are struggling with significant Financial Stress, they will need some sort of marginal source of new financing and ultimately this means we will need to provide an alternative for that which has the added benefit of if you will removing beijing from the center of that aspect of economic diplomacy with some of their primary allies in those countries aligned with them because of belton road related lending. So would that be the u. S. And are allies helping to refinance debt to china . The argument would be that if china will not provide meaningful relief, then you need to provide an alternative saying you can walk away from your debts to china and we will still provide and that will not impact your broader credit status and worthiness in global markets. Thats what we need to offer renegotiating with everyone else. The strategic impetus behind that is that for us to blunt chinese influence, is that humanitarian . Is it to maintain Global Financial stability or is it all three . Parks it can definitely be all three. You can argue that it has fulfilled the strategic objective because many emerging economies will be struggling to maintain basic services. Theres various measures of how stressed and given the rise in u. S. Dollar financing costs, rise in debt in recent years, there will be significant pressure in emerging economies unless someone provides that form of debt relief. You can argue its explicitly self in that respect that we maintain Global Financial stability through those channels but it also had the added benefit of expanding the u. S. Channels of influence with countries with whom china has engaged most directly in recent years. Can i clarify something . In that context, are you suggesting that the underlying asset or the project, they are separate severed from . So International Donors to offer the relief, what is the ongoing relationship with china and how do you avoid free writing . Im not sure how that will work out. That will be a problem. Without an alternative, these countries will still be within beijings orbit and engaged in a situation where beijing is not providing it but the mechanics of how renegotiation will work, i can imagine a situation where they would be walking away from this projects. I can imagine some scenarios in which you would find alternative financing channels for them. Ok, i think i will send some followup questions. It is a nuanced and detailed topic. I also want to talk a little bit about your phrase in one of your other recommendations about the next generation trade and Investment Policies to aid in derisking the supply chain. You touched on this in another q a session with commissioner price. On to ask at the risk of being sensitive, the term nextgeneration i know is stylish but are we really just talking about old Generation Investment treaties and trade agreements . Whether its more broadly based . Parks absolutely. Im not sure theres anything innovative or different about this, i think what we need to do is if we are ensuring, and order to reinvigorate the trade policy agenda to try to reduce barriers over time if you are going to be trying to provide or offer alternatives sources of manufacturing supply chains from occasions in china, you will need to be reducing trade barriers so countries can be and byproducts can be traded more regularly. It is a basic call for reinvigorating trade policy. That is the argument is if you are thinking about derisking or decoupling, you need to think about the next step of this as well. Thats what i was trying to say in the recommendation. Thank you very much. We are running up against time. I know several will be submitting questions for the record. This is very rich testimony. Thank you so much. We will adjourn until the second panel. Nice to see you, thank you for being here. Mobile video app, and online at cspan. Org. A discussion on how to disperse address discrimination in the classroom. People of the office of civil rights. We hear from assistant education secretary for civilrights Catherine Lehman with the center of american progress