Get started now. Folks are still arriving which is fine. But we want to get started because weve got a fantastic program for you and not a lot of time. This hour is going to flyby. Toms book is really a fantastic read. But i do think that folks especially in the United States are going to find the book controversial. Thats a great thing about a book. If the book doesnt generate a conversation then it may not be worth reading. This is a glass halffull story about chinas economy in the management of the Financial System. Its offered at a time when u. S. China relations are declining. And attacks from all different corners in the United States of china system are growing. And theres this argument that chinas economy, how it manages that economy, is incompatible with the international system. And as a result the u. S. And others need to reduce their exposure to chinas unique risk. The book tries to answer the question, how did china japan should do it . How did they manage to continue to grow without a major financial crisis . And, can they keep it up . Im going to turn the floor over to tom in just a minute. He will introduce his book and then we will hear from several commentators, all leading experts on chinas Financial System in their own right. And then well open up things to discussion with our online audience. You have ways to submit questions through the chat function or through email to our staff who will forward me the questions. And then ill help moderate that conversation for the remainder of the program. We were expecting a small audience for a specialty topic like this, hence exuma room that can accommodate about 500 folks. We are overflowing. We had almost a thousand people register for the event. So no matter what, folks will be able to watch this now or online and just a bit. So im going to turn things over to tom. He is a bluebirds chief economist, prior to joining bloomberg, orkut chinas economics correspondent for the wall street journal. Hes an advisor the uk executive director the imf and policy analyst for the British Treasury and commission. He is also an author of understanding chinas economic indicators, which delved deeply into chinese statistics. Tom, thank you so much for writing this book. Im really looking forward to your presentation in the conversation this morning. Over to you. Thank you very much. Just give me a minute while i share my presentation. Now is that working . That looks fantastic. And if i move it, does it move . It does. Fabulous. Well look, its really never been more important than to understand not just chinas economy but the intersection between chinas economy, chinas Financial System, chinas business, china leadership, china security, and i cant think of anyone in the world who pulls these pieces together more smartly and more comprehensively than the team at sea sif. So im delighted that they have this book talk and thank you for helping pull this together. So, as i prepared to launch my book for the internet. I was thrilled to be doing it with sea sif. You do a book launch in person, the audience is physically there and they see a moral obligation to buy a copy of the book. When you do a book launch over the internet, perhaps that sense of moral obligation isnt there are quite as strong. So devise an extremely clever mechanism which im going to ensure i engineer maxim sales miss event. So before i start my presentation i like everyone to raise the right hand and repeat after me, i tom orlik. And here you insert you the right name. Im easily pledged after the preparation ill order a copy of china, the bubble that never pops. And thats a compulsory part of the presentation, the pledge, and im not an unreasonable manse of the second part is voluntary. But feel free to follow along if you want to. Also purchase one for friends or relatives in also leave a positive review on amazon. Okay so with that done, let me jump into my presentation. So i lived in china for 11 years, from 2007 through 2018. And for that entire time there was a consistent thread of pessimism, even a thread of doom running through the western view on what was happening in china. Ask, the story went 10 rate looks impressive. But poke a little bit beneath the surface and there are problems. That is too high china will have a financial crisis. Leadership cant execute on reform, they are too conservative, two trapped by vested interest. The state sector is too big into inefficient. And chinas medium group grassy prospects just arent that strong as a middle income track. And yet here we are in 2020 in the china bubble has not popped. So my motivation and putting pen to paper for my book was to try and understand why. What are the hidden sources of resilience and chinas economy . How does china continue to defy that pessimistic prediction of collapse . And how should that shape the way we in the u. S. And europe think about engagement with china Going Forward . So the presentation today, i want to touch on four areas where i think we dont have the story wrong on china, but we have the emphasis in the wrong place. So want to talk in particular about debt, reform, the state sector, and the future. So first, lets talk about debt. This chart tells you, i think, the way in which most foreign economists, and many chinese economists think about the biggest risk for chinas econom economy. It shows you the ratio of debt to gdp in china. In 2008, chinas it debt to gdp was 140 . Fast forwarded 2015 and that is it to hunter 50 . If we look around the world and we scan the history books, we cant find any other countries that have taken on as much debt as china, as quickly as china has. But we can find a number of countries that took on significant debt, that left debt in china and still had a financial crisis. Career in 1997. Took on a lot of debt. Not as much debt as china. They had a financial crisis. The u. S. In 2006 2007 took on a lot of debt, not as much debt as china, they still had the lehman shock and the great financial crisis. If you look a bit deeper into chinas Financial System, well, if we think about the borrowers, we have zombie enterprises, we have Real Estate Developers building ghost towns in the desert, we have local governments building roads to nowhere. And if we look at the lender side we have the explosive growth of a shadow Banking Sector skirting the rules, skirting the regulations and growing faster than they should. If you put all of that together looks like an extremely risky picture. But what that picture misses is something really important about financial crises something really important about chinas Financial System. And thats whats happening on the liability side. Remember the financial crises do not start on the asset side of the Balance Sheet. Lehman brothers did not fall over because it had too many investments in mortgagebacked securities. Koreas bags did not fall over because they had too much exposure to clone the capitalist organizations. Financial crises start when the banks round of funding. Lehman fell over because the money markets decided they didnt want to fund it anymore. Koreas banks in the Asian Financial crisis, fell over because Foreign Investors pulled their money out of the country. What does that mean for china . Well, china has an extremely high savings rate and it has controls on moving money out of the country. And what that means is there is continued pileup of funds in the Banking System. Chinas deposit base for the banks continues to grow. And that means the funding for the bank is very secure. And even so as problems on the asset side of the Balance Sheet increase and i ensure there are a vast quantity of hidden bad loans on chinas bank Balance Sheets, trigger for the crisis isnt there. The second area want to talk about is chinas leadership and their propensity to execute meaningful reform on the economy and the Financial System. So here you can see chinas previous leader, chinas current leader. You can see both of them applauding politely. One of my observations on watching what chinas leadership that i care to mention is that the ability to applaud politely for a sustained period of time is actually a key requirement to make it to the top of chinas leadership. If you cant applaud politely for sustained period of time, youre not going to make it onto the standing committee. Thats a subject that maybe our western china watcher should pay bit more attention. Most seriously, through the air at theres been a consistent narrative about reform in china and has been a narrative about reform failure. We were told was to consensus oriented, too much of a committeeman to push through difficult reforms. She paying we were told is too conservative to push through the needed. We think that narrative and lights just some significant process that chinas leadership has been able to make. Lets think about the two most important instruments that control the economy. The Exchange Rate and the Interest Rate. The Exchange Rate chinese goods relative to foreign goods, the Interest Rates with funding. Theres really nothing more important than driving the economy is in and the economy it right for these two instruments if we go back to 2003 when his coming into office with the Exchange Rate in the Interest Rate were managed by the government and not officially low rate. And if you swing forward to today in 2020 the Exchange Rate is close to the value and move substantially by iraqi forces. And on the Interest Rate quite similar to progress has been made but Interest Rates today substantially more market set than they were ten or 15 years ago. Because we view chinas leadership theory kind of red mist and that also means we dont have sufficient attention to move the dial in managing the Financial Risks. Here he went to talk about chinas leveraging agenda. He was a chief advisory to xi jinping. Theres a nationwide campaign to reduce risk and chinas financial sector. And with that the peoples bank of china traveled around the country they knocked on the door of every single commercial bank. And they said scioscia Balance Sheet. And if they didnt like what they saw either on the asset side or the liability side, of the Balance Sheet if they thought the bank was taking too many risks in their lending are too many risks in the funding they imposed meaningful punishment on those banks. I remember traveling in the summer of 2017 and speaking to a group of local banks and all of them with the campaign was the leveraging campaign to have it meaningful impact. We see that in the data. This chart shows you the lending, the riskiest part of chinas Financial System. 2006 he was growing at a rapid pace. When the d leveraging campaign kicked off lending first decelerated rapidly and then actually contracted for the best part of two years. We underestimate chinas leaders abilities to execute on meaningful reforms and we underestimate chinas leaders ability to meaningfully take steps to manage risks in the Financial System. The third area i want to talk about is the state sector. Now, theres really no area where the contrast between the u. S. Market system and chinas state centered economy is more obvious and more sharply drawn than on state ownership. In the u. S. , the private sector as a key driver of dynamism in the economy. In china, the state sector plays an outsized role. A vivid illustration of that consider the revenue of chinas state owned industrial firms. As you can see in this chart, if chinas state owned industrial firms were an economy, theyd be the Third Largest economy in the world. Chinas state sector, on its own is bigger than the entire german economy. Now, in the west, we view that entirely through a negative len lens. We view it through lens of inefficiency and corruption. And that is not an incorrect way to view it. Chinas state sector is very inefficient. Return on asset for china state sector is much lower than return on asset of chinas private sector. That is not the only way to think about chinas state sector and that is not the way in which chinas leadership think about the state sector. Lets take a step back and try and see the role of the state sector in china through the eyes of chinas leaders. To do that, lets hear what xi jinping thought of me shall go which great reformer of the soviet union. In what his son said about his father. He says my father thanks goper chop is an idiot. So why did duncan think that goper chart was an idiot . One important reason is that goper chart attempted to reform economy by taking his hands off the leaders that was on the economy and by doing so he ultimately lost control and failed to execute the objective objectives. Chinas leaders have taken a different approach. Chinas leaders have kept their hands on the levers that control the economy. The commanding of the bank, the oil firms, many industrial firms remain state owned. A powerful leader to execute on Development Objectives and on management. On Development Objectives chinas leaders can direct state banks and state firms to acquire technologies and put these technologies to work at enormous scale in the chinese economy. Bringing china closer towards the productivity frontier. On management of the economic cycle, chinas leaders can correct the hold onto their workers and to invest when private firms become more cautious and that is a powerful tool for cushioning recessions. The state sector is big, state sector is inefficient but by focusing only on the negatives we missed a crucial role in the china state sector plays as a driver of development in a private tool that the economic cycle. The last area where our focus in terms of thinking about china is only on the negatives in the midst of some of the positives is on chinas media term prospects. So when we think about chinas prospects we tend to focus on you stumbling blocks that china faces. The working age population is shrinking. There is a middle income track may be china will not be able to innovate the middle level of development. Trade wars may block access to global markets. In these things are true and they are real problems. But china also has some very significant positives working in its favors. These positives are so obvious that they were obvious even to adam smith, the grandfather of modern economics when he wrote his book the wealth of nations all the way back in 1776. So im going to quite briefly went out of smith wrote about china more than 200 years ago. Two important points. Lets see. The great extent of the empire of china, the vast multitude of bids and habitant tenants, render the whole market done throughs of so great extent it be alone sufficient to support a very great manufacturing admit very considerable subdivision of labor. So thats the first Crucial Point. Because china is so big they can achieve maximum economies of scale and massive efficiency gains through subdivisions of tasks. The second Crucial Point of smith, the more extensive navigation, the chinese would naturally learn the art of using and constructing themselves all the different machines made useful in other countries as well as the other improvements of art and industry which are practiced at all the different parts of the world. Now, smith was right on that as well. And also early. He was 200 years too early. But when xi jinping opened the door between china and the world in 1998 and when join the wto 2001, these two powerful drivers of growth came together. In china had enormous scale and the capacity to learn from foreign technologies. And when you put these two things together you have an extraordinarily powerful engine of growth. The question then becomes has this engine run out of steam . And i think the answer to that is no. And the reason i think that is because the comparison between china and japan. Lets think about when japans economy fell over in 1989. Japans gdp. Capita in 1989 hit arctic, up to the level in the United States. Japan was already on the front tier of what was possible in terms of using technology and becoming more productive. Chinas gdp. Capita todays very significantly below the level in the United States. And for me, that means there is still significant catch ups. I think in the middle of this decade its entirely possible china will still be growing 5 a year. I think at the end of this decade its entirely possible that china will still be growing at three or 4 a year. So, im going to wrap up in a Second Period but before i do let me try to pull these pieces together and applied them to thinking about what has happened to china in the last six months. Now, covid19 is of course a human tragedy. It is also an economic and Financial Stress test for the world and for china. In the last few months, income for the biggest borrowers in chinas economy, state enterprises, Real Estate Developers, local governments, have all contracted. If there was a moment where the chinese bubble was going to pop, it would be now. As income for the biggest borrowers fold, their ability to Service Loans disappears and that is the moment we would expect to see some kind of day of reckoning for chinas economy. And of course that is not what happened. In this chart, you can see daily activity indicators that we built for china and other major economies. What you can see is yes china fell, but they didnt follows far as other major economies. And they picked up more quickly. They are now closer to normal levels of activity than most other economies in the world. So why is that . Why didnt we see a financial crisis . Why has chinas banks been shallower and its recovery quicker than other economies . Well, this brings a baptism those unrecognized sources of strength in chinas economy. Chinas banks, because they are wellfunded, can afford to give forbearance to companies. They can say yes, we know you cant pay us back this quarter. Thats fine you pay us back next quarter and maybe even next year. Chinas leaders, because they can pull the lever of the state enterprises have a powerful kind of cyclical instruments. They can tell China Enterprises dont let go of any of your workers, maybe even hire more workers. In fact want you to invest more. And they can do that they can prevent financial crisis breaking out. And they can manage the downturn of making shallower, making the recovery quicker than other economies in the world. Thats why i think the china bubble that never pops. Im going to hand back, going to hand back to scott to hear from some of our great discussants, logan, helga, joyce and hans. Thank you. Thanks so much, tom. Really, really terrific presentation. And i think you did an excellent job of summarizing your book in the overall story. And really, really appreciate that. I like you have a dry sense of humor. But also make the point. I appreciate that too. As you said, adam smith was right. Just had really bad timing. And so we may be a very good economist but to be a terrible investor. Right . So now were going to turn to our commentators. I would not call this group murderers row. Even if they have a variety of different opinions. But, if youre going to form a Dissertation Committee of the best and brightest her work on chinas economy and Financial System this to be the group. And so this is a real treat to have them with us. Let me briefly introduce them. And then im going to turn it over to each of them allow them to offer a few moments of commentary. Joyce chang is a chair at j. P. Morgan is one of the leading analysts on chinas economy anywhere. She helped top ranking Institutional Investor survey emerging markets, and she come before joining j. P. Morgan was managing director of merrill lynch. Helge berger is that the economics in berlin where he served as a served as a tenured full professor. He previously taught at princeton as well. And rutledge is a founding principle of a credit sector. Shes an expert on the Logic Development testify for the u. S. Senate advisor to hong kongs monetary and is just one of the leading experts on all issues related to credit. Logan wright is the director of the rhodium group. With research shes a nonresident adjunct fellow. Beasley logan was head of China Research for global advice will advisors in beijing. He is joining us from hong kong today. So im going to turn things over to joyce first. And then we will look at questions from the audience. So joyce over to you. Thank you so much scott. It is a real pleasure to be with you scott i want to congratulate you with all of the work you have been doing. I really want to be here to congratulate tom. Because someone whose work with china for the last three decades i highly recommend this book. That goes through the four different stages of what china is in an each stage of the cycle to take a more gradual approach. Theres a few things that tom highlights that i thanks worth emphasizing. First of all that chinas not very experienced economy wide, and i think the other thing that stands out in this book is how much china learn from the financial crisis. Thats a list by the Global Financial crisis. The Great Recession we are in right now. Both the china as very important lessons. I think tom very clearly points out that this is not. [inaudible] china is running a deficit issues many advances in that categorys also not korea. Korea has experts that are similar but from a place role in managing the version gradual role. Very insightful book. For what it says about what china has learned from crisis in the region and how it managed different stages. I would just like to make three points on how we are seeing china right now. Talk about the current and why we do agree that china has a self efficiency and the geopolitical risks we are monitoring. We do think that china is having a vshaped recovery. We have it 2 this year. We had it below 1 . With the rest the world of the Global Economy less than 4 printed 2 less than china. Ive been very amazed by how quickly weve been able to return some type of normalcy. I dont think this can be replicated elsewhere. Chinas ability to control so many parts of the economy. I think china has a normas forces of strength. Their Stable Funding from the financial sector. We do see them doing a normal a stimulus this year. With physical deficit that will be north of 15 of gdp. Thats to say i agree its a bubble that never pops. But if it pop the rest the world would pop. With every 1 decline in china it would take. 4 off of Global Growth rate as much as 121 in the economy in latin america. So the important thing i would say as its growing slowly but what we are looking at is something thats more in the range of 4. 5 of the decade. Not something that we also Global Growth coming down off of cost of this crisis. And on average we see the Public Sector that is rising across the globe around 15 to 20 percentage points. So china has a debt problem and the old thrust of the world will ultimate come out of this with a lot of debt. Thats the point i would make on selfsufficiency. We think china is very well placed for selfsufficiency. In the leadership areas. And i would just say that we think china has already attained it selfsufficiency and most Consumer Tech areas that have been growing as National Security concerns. There is an increased importance on the infrastructure, theyve upgraded a lot of their homegrown supply chains for the higher value areas. And of the colusa supply chain that we do have intense, and nai the engine theres also clean energy over there is a true need in china where they will have some selfsufficiency by 2030. I think we harder to make the case that china is a bubble bubble pop that that quickly. I just want to conclude with a few of the things we are watching on the geopolitical side of the geopolitical conflict spread because i do think their red lines in chinas mind. And what are those red lines . The National Security legislation by the mpc as amended into the basic law of hong kong as they are. I think a tougher stance towards taipei. The site china sea, and also one of the key players in the Korean Peninsula and i think they are very much seeing their approach to help their fighting epidemics and pandemics at the better model for the world. But i do agree with tom that china is a bubble that never pops. And if it were to pop, thered be many other things popping first. Host thank you joyce, really appreciate that. Lets turn to helge berger now. Guest thank you. Scott can hear me . Yes. Guest this is a fantastic book. I told you i already bought it even though i didnt have to. Inside didnt have to take the pledge. I think it has important messages for china today. I think it also for people who know the country so well theres still a lot to learn in looking back to history to do it i think we all need to. While i would like as an aside is that youre describing brake obligated subject. There are many things interacting to form the whole. And it is really hard to think about general criticism but even harder to write clearly about it if thats what youre doing. Im with you when you describe sort of the strength of china its important to not underestimate the country, its potential the ability of the policymakers to at least try to manage, even though sometimes thats not a big plan. You point to all of the right places, size of scale, and i like the stress you put on the ability of all actors to act decisively. I think the covid episode is important here. However, covid also has a reminder that some of these strengths china has meant ultimately sort of lead to more binding economic and will chinas large economy is in important economy with policymakers economics also apply to that country. Budget constraints matter and let me just address some of these issues there that i feel in your overall summary leading to the optimistic bubble that never pops. The headline is still on the screen. That its underrated. There are basically two broad areas i think. One is the ability to have all hands on deck to tackle any problem at any time. It is an asset of course. Its an asset right now. It also comes with risk. You talk about the overshooting that can happen if you put all of your eggs in one basket. Global crisis isnt a good example pigment waste before using hindsight we know that and brought a lot of problems Going Forward. You are well aware of it and stressing it. Also have an episode you have them in the book, the one child policy. Thats an example of longerterm. Its flexible at times but other times its not. Its on the policymaking side its important policymakers and on. Bigger point for me, and thats not because my paycheck is coming from imf and were paid to worry about risks. Because i feel their points are worth it. The economic Budget Constraints matter for china prayed the policy make our elites of faces otherwise you will not see the optimistic growth Going Forward of the four to 5 that joyce was talking about. Aging is important. You can have great numbers that stressed that. But stressed in the area the access it technology. It is true that china has made great leaps here. Joyce cited a couple of areas where this is the case. But its also important to remember that in the ways china is still significantly below the global frontier in terms of technology. Now that has an impact on productivity, impact on growth. So enormous potential for reforms if you actually pick them up. Savings, its good to have ample savings. Its not healthy to have savings at the National Level of 45 of the gdp. Its just not. There are inefficiencies that lead that come from it and they have to face it. Debt levels are way too high. You, tom put out that property black colored chart on debt. But narrow this down a little bit, talk about corporate debt. The country has between 130, 170 gdp debt. That depends on what you assume a corporation is at the local government level. Every other country on the planet averages around 90 . Thats emerging economics. You see the tension. So my appeal to the readers of the book is take all of that material that is there. But focus on chapter 11, i believe, or tom is wargaming a crisis. And there are some these issues that he himself has described are listed that need to be taken up by these policymakers. They are strong, they are flexible, but they have their work cut out for them. Thanks. Host terrific thanks now lets turn to and. First i want to ask ross my gratitude to Scott Kennedy and csi f including me and my views on china. Which you do frequently and liberally. I took the pledge, i really like toms book very much. I want to reddit again. It deserves to be paid for it Oxford University press is great press. At a professional and personal level i like this book. I think it should see dialogue about chinas economy in very important ways. Before i say that the first thing i want to say is by walking us through the four cycles of chinas financial history through china 2025. Thompson came out the financial history is a continuous process. I live through a lot of this history personally. This narrative has integrity. Its kind of eerie and kind of liberating to read another persons thoughts of my private experience for its all just say i write in hong kong ten days before mao died. And i lived in hong kong through the gang of four. As a pressure in reader Chinese Press and knew the credit markets back story of the first cycle. And that is a story thats not been well told. This is the first time ive seen it well laid out. I worked in the Hong Kong Futures Exchange during the second cycle and faithful to my expense thereto. The perspective of the book, skirts the false choice of free market versus state authority in capital model we read in the economic studies and moves it tour the china centric narrative. I think thats usually valuable as tom said it rolls back some of the red mist. I kept skipping ahead to see if the story ends with the prophetic announcement of why the bubble hasnt burst. But maybe the point of the book is also the bubbles are in the eye of the storyteller. One persons bubble is anothers gardenvariety economic dysfunction. And every nation has those. It adjusts the lens from an economic story to a financial story prayed thats also very valuable. Chinas financial narrative is a different story to tell. As joyce and helga both said. I think tom did a great job pointing up social differences between how the u. S. And china understand finance. I say social rather than cultural because finance experts have their own culture. They speak a special language of money that transcends where the your operating and finance in china or the u. S. As im sure tom knows well. Everybody reads bloomberg. But it is truly a language because it allows you to debate ideas. Now vigorous debate is lacking in the culture of finance. I think it says more about the policy than the practitioners about what finance can do. So the new paradigm if you come from china the more the better. Financing competition and ideas. But i would say from my experience both professional and personal, the history is as complicated as it is dynamic. In i ate goat stew from a cauldron. In a railroad station in 1979. I was there in the First Commodities Exchange opened in 1990. Im going to ask her bring up a slide on this because it illustrates the point. If i can. Okay. Going to the second slide. This is the opening. Can yall see it . Two this is the opening of the Commodities Exchange bread you can see the cross before it opens on the very first day. Is he the left and the happy faces of the floor traders. And then you see the observers up in the Observation Deck five minutes after the market launched successfully. And i think one of the things that we forget is that, i will stop my share. One of the things that we forget is that this is difficult for the real finance. Now china which act by the evolution with thousands of exchanges with different assets. Thats not for tom to do. But what i want to talk a little bit about, they did belong in the telling and that is the rolls of shadow market. Tom does a great job talking about answers and trent Interest Rate issues and the role of real estate. He talks about the Asian Financial crisis and lessons learned. This played a large role in the financial crisis to pray china has now the second largest Security Market in the world. Its going to become a bubble. China and the u. S. Have both embarked on International Policies designed to eliminate brother to harness the national opportunity. thanks dont run out of funding, its the economies that run out of intangible value to economize and the definition of that is a function of information quality and this is an area where we all have a lot to learn still. Thanks. Thanks and, really appreciate that. Lets go to logan right, thanks for joining us. Thank you scott and thank you tom. I really appreciate the invitation and tom, just want to say joined the halls of congratulations for this book. Its a very impressive coverage of a wide range of events throughout chinas National History and why i found it most impressive was it integrates a lot of the political insight and some of the key events within economic history together and ive seen very few books even really attempts this. I also found this discussion of the debt dynamics in terms of borrowers dividing up the borrowers and lenders and then telling the history. It was a very novel way of addressing Different Actors within the system and really innovative so some of the anecdotes here are great, particularly when youre talking to entrepreneurs and the borrowers and a lot of the other integrations of contemporary references to Chinese Literature for example so i highly recommend everyone pick up this book. Its within finance books appeal is generally very boring. Its difficult to actually slog through many different titles. Its very refreshing to read something thats far more polymath in an interesting so with i would heartily recommend everyone listening to pick up toms book. I focused my comments on the substance in sort of 2 areas. One is on the Deleveraging Campaign that you described and i would have a slightly different interpretation of it but i like you to ask you to react to and the second is on the nature of state capacity as youre describing it. I think that the leveraging campaign is being described with a bit of, its being described as if it was somewhat costless in this telling and i think its actually still an Ongoing Development in terms of the shadow credit thats underway and i would argue it has not been costless which whats really happened is a substitution of some of the funding side risk for a slowdown in Economic Growth which is exactly whats taken place. Its kind of as it really avoided the tradeoff here, just more risks are now materializing within the Banking Sector themselves in the form of credit risk and one of the reasons for that is shadow lenders broadly speaking there is alot of speculative activity but they do fund the real economy. And there are ways of many shadow lenders are basically engaging in that activity to hide nonperforming loans with the formal Banking System or to violate credit policy to get around sections on lending to Property Developers or financing vehicles or something of that nature. Our own analysis demonstrates at least we can demonstrate 52 percent of nonbank Financial Institution assets are basically standard credit or sort of nonstandard credit and thats probably conservative so this really does have an impact on growth and in 2019 and had a very sharp impact on growth. You basically the impact was that Corporate Credit growth was cut more than in half, probably by about two thirds and theres no nuance to that approach. I would argue it highlights some of the bluntness of the approach that china took rather than a statement about state capacity overall. And if you look at industrial output in 2018, 470 out of the 103 indicators that china publishes formal data for a declined outright the weight of average is about 6 to 7 percent fall in industrial output overall and policymakers were forced to respond. There also seem since that time new credit risks materialize within the system and including on the wider side of the bank Balance Sheet. About sean bank failure in 2019 was largely a byproduct of certainly a corruption investigation and add political overtones but was largely a byproduct of an excess of shadow lending and the pb oc made the decision to basically impose some costs on lenders that were expanding using the shadow liabilities but at the same time after that failure took place, we ended up seeing watershed in terms of new credit risk so we started devolving, local governments couldnt protect their own sobs and other banks are seeing interbank funding being withheld. Trust companies this year are facing tests outside their front doors read four of them the last three months alone, to Smaller Banks just over the past weekend so im interested in your reaction to this interpretation at the leveraging campaign has left, is less costless so to speak and how it might change your perception of state capacity and the second set of comments is on Crisis Management in general. You place emphasis on the Savings Rates rightfully so but its hard to redirect savings in a crisis and i think youre completely correct to focus on the funding side of bank Balance Sheets but thoseare sort of eroding. I think the interesting thing here is that if the pb oc can always inject liquidity to manage a crisis but unless this crisis is acknowledged, as a crisis and china might not ever acknowledge a crisis , they dont necessarily have the capacity to do so. So i think the argument relies a lot on government creativity. I just put this, these questions to you. Can you really deploy Crisis Management tools if youre never going to admit that you are facing a crisis in self and if you do so doesnt that make it look like a financial crisis and the second is creativity really has clear limits. Property prices are down 30 to 50 percent which seems within the realm of possibility in the future given the imbalances within the property sector. Are there tools china can use that other countries cant youre dealing with problems of this magnitude . Ill stop there thank you very much. Thank you logan, really appreciate it. As i told everyone at the beginning with my warning is that we would, this hour would fly by and we still have about eight or nine minutes left and im willing to go a few minutes longer because this is such a rich conversation prompted by a terrific book. I said the commentators might be considered as like a Dissertation Committee and everything i heard from them was that at the end of the day they sign off that form that circulated in the room and with flying colors. They obviously its not to say that everyone agrees on everything but what we have is a very important conversation where we highlighted what the true areas of debate that are needed to engage. While weve been listening, our audience has been submitting questions which ive collected and they come in these sort of three groups and what i wanted to do is mention some of these and i wanted to then give tom a few minutes to pick and choose amongst them and actually then go back through our commentators in reverse order , logan and helga and joyce for final reactions from their side as well. And tom, i know we are trying, dont feel like were putting too much on your plate. Really this is the start of the conversation, not the end so from our audience as i said three kinds of questions and the first has to do with chinas system and whether or not its too brittle and we heard some of that from the commentators but in your telling gigi thing still seems relatively pragmatic. The system seems adaptable. Can you explain that a little bit further mark tech and type of questions had to do with sort of whether or not the description of chinas Economic Performance is overly rosy. And the point to, people ask about chinas technology ability, questions about debt and productivity and what can you say about what is the proper standard to judge chinas Economic Performance and third are questions about us china relations in the international system. The cold war, what happens if the us tries to lock china out of swift or clamps down on Technology Much further than its done so far, is this going to constrain china and lead to a popping of the bubble so lets turn things back toyou. Ask and get some initial reactions from commentators and from our audience questions. Thanks very much to all of the discussions. I think all of you got the balance to use it and undeserved praise but completely correct pushback really completely right. Let me try to take on a few of these. Labeling on the cost, i think thats completely right. The leveraging has not been a painless or a cost free process and its certainly true that if we look at alternative indicators , chinas graded in 2016 2017, 2008 may have been significantly below what the official data just, the macro cost of the leveraging and point i would make is that fact that chinas leaders were willing to embark on a painful Deleveraging Campaign is itself an evidence of their willingness to grass about. Or the choices, the choices are continue growing really fast and then hide the financial crisis or attempt to manage the problems and pay some costs now. Most economies around the world gave option 2 area and let things run and i had a crisis. China moved early and accepted costs and that itself is to some of the strengths of the chinese economic and Financial System. And i thought they made a really interesting point about where financial crisis come from and when we run out other intangible value for the Financial System to monetize. And i think what that speaks to really is a question about chinas story so if we think that china is a great story and we would be extremely worried about the financial crisis because the resources that banks, corporations and governments have would be flat or even shrinking and thats when the crisis happens. So underpinning some of my optimism is that more positive longerterm view on sinus outlook forecast for chinas greatness which is probably in line with where joyces numbers came in on where china would be in 2030 and the world where helgas imf numbers would come in for china in 2030. Eventually china has run out of intangible money to generate. So we had a question from the audience about brittleness and we didnt get to talking about the sort of social side ofchina. So i think this is also an area where we underestimate the robustness read for as long as ive been thinking and writing about china theres been a story that theres been a kind of felt the impact to the Chinese People and communist party. You give us brief and we will give you control and we will contest that control and the story has always been if unemployment rises and look out because theres going to be social instability and thats why china is so determined to grow at eight percent a year even though these costs in terms of increasing imbalances. In the first part of 20 20 we had a stress test on that as well. The economy has shrunk 6. 8 percent. Household income as contracted and unemployment has risen and if we look at most chinese provinces we see social instability so the choice is about brittleness in chinas society. I think actually its considerably overstated. And let me just take on that last question from the audience about a cold war. So i think if we went back to 1978 when deng xiaoping, and the us said we wont share our technology and expertise and that would have been a crushing blow to chinas early reformambitions. And maybe the Global Economy today would have been different to how it actually does here we are in 2020, china is the second biggest economy in the world. Biggest exporter in the world and exporter increasingly of technical to many emerging markets, multinationals here in the us and europe and japan and chorion are deeply invested in their china relationship both as a source of supply and a source of demand so its clear that there has been a change in the way theworld views china. Its very clear here in the us and europe and other parts of the world has been a shift in focus from thinking about the opportunities to worrying about the risks and thinking about out to manage them. Is that going to mean a decoupling . Is that going to mean a cold war in a meaningful sense where economic ties are comprehensively broken . I find that very hard to imagine. Im afraid i didnt get to all the amazing comments we have from the panel and all the interesting questions from the audience but i think that deals with some of the points now handedback to scott. Terrific tom, masterful reaction to some of the comments from the commentators and the audience. I want to give a minute or so to each of our commentators again, going in reverse order. Logan, and, helga and joyce to react to anything thomas said now where things youve heard from your fellow commentators and then ill wrap things up. So logan. I just Say Something briefly about the covid19 outbreak and the effect we think it should have on the Financial System and Financial System stability. I think its far too early to say that weve really seen the effects so far. But the other issue is that when government guarantees for state owned enterprises, for banks and the Government Support being extended, i wouldnt necessarily expect to see Financial Risks rise read i would expect to see that occur after in a system like china where everything was assumed to be guaranteed, when government guarantees are being withdrawn and when conditions are normalizing. So it may be too early to see when its really after sort of china as a recovery and we get back to more regular regulation of the Banking System that we see more credit risks emerge because of the losses from nonperforming loans extended during this timewill start to appear. That being said im also concerned about the risks we are already seeing within nonbank Financial Institutions suchas trusts and even Smaller Banks. Terrific, ann. Im going to try to keep this short but with respect to the leveraging that was a great story lets not forget mine has a seven point seven Million Dollar securitization market in that so not to say that securitization is wrong, and im a practitioner but simply to say that it was chinas express strategy to move so much other banking into securitization. Number two, from my experience as a securitization analyst i know that every reporting agency counts debt incorrectly because they count it on a marginal basis instead of on a cumulative basis. To militarily the actual amount of debt by each country is somewhere between 2 times and 4 times whats reported. You count differently in securitization, defaults not get and i am very worried about not just the fragility of china but the fragility of the Global Economy because i see a direct attack on science and i see that the way, my point about how you count default is part of that. The same gains that go on in manipulating the salt statistics have gone on in manipulating covid mortality statistics, its shocking that there arent enough people who understand statistics to say this is the right way to do it, this is the wrong way to do it but the attack on science takes two different forms read from the United States we control the sources of science and in china i think they control the interpretation of what science is. And i think some of the problems that you see related to hong kong are not just a shame that beijing coming to termswith an Information Culture thats born. Or control of science as a relatively new phenomenon and the last thing i want to say, the other thing, i dont talk about politics but the other thing i want to say is in 2014 Estate Council published what i thought was the best policy piece on capital structure. Its called. [speaking chinese] a few ideas about this development of a sustainable multiyear capital system and that was going to be the way forward but thats not how ohi is progressing and we do not have the stable concept of capitalstructure in any of the countries that i operate on, the rating agencies in the western world or any control of that. Thats enough said. So i am worried about fragility not particularly with respect to china but the United States as well and if both countries have it wrong and we are all in trouble. August. Great discussion, we should do this again next week. Two points, covid isnt a success so far but we have to be careful before we celebrate in part because many of the measures we need now in china as elsewhere should have ramifications for growth Going Forward. You should stop dealing with and yells properly and ultimately its going to hurt you so you have to keep an eye on this and an important point on the sources of growth. Yes there is the income level relative to other countries and there is tangible, nontangible at assets but theres also improving efficiency and this country has a lot of potential improving efficiency in the way it uses resources and so reform is a big part of it. Theres a lot of growth on the table that policymakers can pick up. Joyce. Thank you so much. I just wanted to add a couple comments on the financial sector. We talk about chinas global reach in the tech market, manufacturing and geopolitical consequences but the global reach in Financial Markets has been limited and this is one key area to watch and if you look at overseas holdings of chinese assets in portfolio terms about 2. 3 percent so it will china be able to become a more mainstream Financial Holding i think is a key issue to look at here as they come out of this crisis and we are seeing china beginning to go into the mainstream equity and fixed income investors, j. P. Morgan is one third of the way through the process of putting into these indexes but i think how they develop their Financial Markets is going to be one important determinant of how the future for china looks ahead. So households are heavily under invested in Financial Markets, deposits are two thirds of household assets, stocks and mutual funds are 16 and four percent question on whether the Financial Markets will continue to develop as china progresses i think is an important question. I think globalization is going to be very moving very slowly after the covid19 crisis and theres the issue of trust and how and transparency and their ability to integrate as growth does flow down there. So i think this is a key requirement for china Going Forward because they do have a risk of a manmade financial crisis as all the other speakers have talked about and one thing that they will need to do is see if they can continue to attract these kinds of investment flows that the fbi has come down, as everybody is looking at the supply chain and the greater needs to diversify. Terrific and thank you so much joyce. This has been a fantastic discussion and credit goes to tom for writing agreat book to get us all started on this. I want to emphasize why we wanted to host this program. And why i think its different for folks who are in you know, new york or london or folks that work in Financial Markets, its obviously very important but i cant emphasize enough how important it is for the washington policy community to get china right. I think each administration that comes in as well as folks on capitol hill have in their mind a vision of china as either partner or competitor that looks at how their views about how sustainable chinas economic trajectory is, how fragile the system is, whether or not chinas economic trajectory is a net opportunity or risk for the United States and i think washington has been consumed by a certain kind of image of china that looks a lot at the risks and downsides which aredefinitely there. I think what tom has done add some balance to that conversation and i think we would need to continue to investigate this so that when we think about economic policies towards china and globally, we have as accurate a picture as we possibly can. So tom, thank you very much for helping us develop that picture today and with your book it will have a very long shelf life, im certain. I want to thank our staff, alyssa schoening and our intern or organizing todays event. And doing a masterful job. Also to our commentators joyce and logan, terrific commentary. A great Dissertation Committee and i hope we get the band together again. To our audience for tuning in , for asking good questions and to everybody, please be back with us on september 22 when we have a rollout of logan rights report about Financial Risks in china as well. This is a topic that is not going away which we need to understand and were going to stay on it so we will be providing more information about that report in the events in the weeks ahead. So to everyone there, wherever you are you have a good evening, a good afternoon or a goodrest of the day. You so much were tuning in and take care. Historian Rick Perlstein completes his trilogy on the rise of modern conservatism in american politics in the reagan land. In doesnt hurt to ask attorney and former republican congressman trey gaudi provides his guidance on how to effectively communicate with others and jonathan raven, father of the Public Defense organization gideons promise offers his thoughts on how to change the criminal justice system. Also this week in till right msnbc political analyst rick tyler ask his face for how conservative principles can tackle todays medical issues. Nation magazine and shepherding writer richard kreisler by the history of secession movements in the us in rake it up and political commentators Lynette Hardaway and Richelle Richardson known as diamond and self reflect on their lives and uprising you find these titles this week wherever books are sold and watch for many of the authors in the near future on book tv on cspan2. At a discussion in the Wilson Center Georgetown University ben buchanan talked about the normalizing of cyber warfare as a geopolitical tool. Heres a portion of histalk. The phrase you hear a lot is the United States as the nicest rocks but we still live in a very classy house when it comes to intricate, i dont use this word likely, beautiful cyber offense american capabilities are extraordinary. Extraordinary intricate operations against the Iranian Nuclear program but just because we can do that mean we can defend very well and we got this long ale of for more ability our adversaries have not been shy about exploiting. Theres no better example and the recent equifax indictment where the chinese packed the personal information of anyone here. Anyone who has a credit card is likely in this file maintained by equifax and most americans where these companies exist, but its reaming their information about Many American adults and the chinese are more than happy to say we will take that and thats the glasshouse. To watch the rest of this Program Visit our website booktv. Org and search for the hacker and the state using the search box at the top of the page. One of the issues with the john bolton book the room where it happened was a prepublication review bythe government. Tom blanche is the director of the National Security archives at George Washington university and he joins us now on book tv to talk about this prepublication review system. How did this develop . The original prepublication review was an artifact of the 1970s when