Up being really bad, you end of making poor decisions. Watch the rest of this Program Visit our website, booktv. Org. Search for barack obama or the title of his memoir a Promised Land using the box at the top of the page. Welcome to csi s online. The way we bring you events is changing but we prevent present live analysis and awardwinning ideas all on your time, live or on demand. This is csi s online. We are going to get started, 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 fly by. This book is really a fantastic read. But i do think that especially in the United States they will find the book controversial and that is the great thing about a book. If a book doesnt generate a conversation it might not be worth reading but this is a Glass Half Full story of chinas economy and the management of the Financial System and offered at a time when us china relations are declining and attacks from all different corners in the United States of chinas system are growing and there is this argument the chinas economy, how it manages that economy is incompatible with the International System and as a result the us and others need to reduce their exposure to chinas unique risk. The book tries to answer the question how did china manage to do it, to continue to grow without a major financial crisis and can they keep it up . I will turn the floor over to tom in just a minute who will introduce his book and we will hear from several commentators, all leading experts on chinas Financial System in their own right and open up the discussion with our online audience, to submit questions through chat functions or through email to our staff and then i will help moderate that conversation for the remainder of the program. We were expecting a small audience for a specialty conference like this hence the zoom room that can accommodate 500 folks but we are overflowing. We had almost 1000 people register for the event. No matter what, folks will be able to watch this now or online in just a bit. I will turn things over to tom, who is a bloomberg sheet economist. Prior to joining bloomberg he worked as China Economic correspondent for the wall street journal, was an advisor to the uk executive director of the imf and policy analyst at the British Treasury and european commission. He is also an author of understanding chinas Economic Indicators which delve deeply into chinese statistics. Thank you for writing this book, really look forward to your presentation and the conversation this morning. Give me a minute while i share my presentation. Is that working . That looks fantastic. Does this move . It does. Fabulous. It has never been more important that all of us understand the intersection between chinas economy, Financial System, business, leadership, security and i cant think of anyone who pools those pieces together more smartly and comprehensively than the team at csi s so im glad you host this book talk and thank you for helping to pull this together. As i prepared to launch my book over the internet i was thrilled but also have a concern. When you do a book launch in person the audience is physically there and feel 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 as strong. So i devised an extreme the clever mechanism which im not going to use to make sure i engineer maximum sales from this event so before i start my presentation like everyone to raise their right hand and repeat after me, i, insert your own name, pledge that immediately after the presentation i will order a copy of china the bubble that never pops. That is the compulsory part of the pledge and im not an unreasonable man, the second part is voluntary, feel free to follow along if you want. And for each of my friends relatives, i will leave a positive review on amazon. With that done i will jump into my presentation. I lived in china for 11 years. In 20072018, for that entire time there was a consistent threat of pessimism, even doom running through the western view of what was happening in china. The story was impressive but a little beneath the surface and there are problems. China will have a financial crisis. Leadership execute reformat too conservative and trapped by vested interests. The state sector is too big and too inefficient and the mediumterm Growth Prospects not that strong, there is a missing contract and demographic problem and yet here we are in 2020 and the china bubble has not popped so my motivation in putting pen to paper for my book is to understand why. What are the hidden sources of resilience in chinas economy. Why does china define the pessimistic predictions of collapse and how should that shape the way we in the us and europe engage with china Going Forward . In the presentation today i want to touch on all areas where i think we dont have the story wrong on china but we have the emphasis in the wrong place. I want to talk in particular about the state sector and the future so lets talk about debt. This chart tells you i think a way in which most foreign economists and many chinese economists think about the biggest risk for chinas economy. It shows you the ratio of debt to gdp interest. In 2008 chinas gdp was 140 . Fast forward to 2015 and that level is 257. If we look around the world, we scan the history books, we cant find any other countries that have taken on as much debt as china as quickly as china has but we can find a number of countries that took on significant debt and had a financial crisis. Korea in 1997 took on a lot of debt, they had a financial crisis. The us in 20062007 took on a lot of debt, not as much as china. They still had a great financial crisis. If we look deeper into chinas Financial System, look at the borrowers, zombie enterprise, Real Estate Developers, roads to nowhere and if we look at the lender site we have the explosive growth processing the rules and growing faster than they should. Put that to gather it looks like an extremely risky picture but it misses something important about financial crises, something important about chinas Financial System and that is what is happening on the liability side. The financial crises do not start on the asset side of the Balance Sheet we even brothers did not fall over because they had too many investors in mortgagebacked security. Korea is all over because they had too much exposure to crony capitalist corporations. Financial crises start on the liability side, because banks run out of funding. Lehman fellow, the money markets decided they didnt want to fund it anymore. Korean banks in the asia crisis fell over because Foreign Investors out of the country. What does that mean for china . China has a high savings rate and controls on moving money out of the country. That means there is a continued pile up of funds, the deposit base continues to grow and that means the funding for the bank is very secure so even has problems on the asset side of the Balance Sheet increase, i am sure there are let bad loans on chinas bank Balance Sheet. The trick is the crisis. So the secondary area i want to talk about his chinas leadership and their capacity to execute meaningful reform on the economy and the Financial System so here you can see chinas previous leader and the current leader xi jinping, applauding politely, watching chinese leadership meetings, applaud for sustained time, a key requirement to make it to the top of chinas leadership. If you cant applaud politely for the same time you are not going to make it. That is the subject our western china watchers should pay more attention to. More seriously, through the xi jinping area there has been a consistent narrative about china, a narrative about reform failure, two consensus oriented, too much of the committeeman pushing through difficult reforms. Xi jinping is too conservative to push through the needed liberalization. That narrative blinds us to significant progress to chinas leadership. Lets think about the two most important instruments the control the economy, the Exchange Rate and the Interest Rate, the price of chinese goods, foreign goods, the Interest Rates set the price of money, really nothing more important to driving efficiency and dynamism in the economy getting it right on those two instruments. If we go back to 2003, the Exchange Rate and Interest Rates were managed by the government and set as artificially low rates and if you swing the calendar forward to today, 2020 the Exchange Rate is close to fair value and moved substantially by Market Forces and on the Interest Rate not much progress has been made but Interest Rates today are substantially more than they were 51015 years ago. Because we view chinas leadership through a kind of red mist i think we are unable to recognize the important progress they make on reform and that also means we dont Pay Attention to their ability to significantly move the dial in managing Financial Risks so here i want to talk about chinas agenda. In 2016 the chief Economic Advisor to xi jinping kicks off the need for a campaign to reduce risk in chinas Financial Sector and with that signal the peoples bank of china traveled as they knocked on the door of every single commercial bank and they said show us your Balance Sheet and if they didnt like what they saw on the asset side or liability side if they thought the banks were taking too many risks in their lending or in terms of sources of funding they relied on, they impose meaningful punishment on those banks, in the summer of 2017 speaking to a group of local banks, all of them, the Deleveraging Campaign had meaningful impact. We see this chart that shows you a growth in shadow bank lending, the riskiest part of chinas Financial System through 2016 growing at a rapid pace and the Deleveraging Campaign kicks off, decelerated rapidly and contracted for the best part of two years. We underestimate chinas leaders ability to execute meaningful reforms and 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 vector. There is no area the contrast between the us market system in chinas economy is more obvious and more sharply drawn than on state ownership. In the us the privatesector is a key driver of dynamism in the economy. In china the state sector, a vivid illustration of that consider the revenue of stateowned industrial, as you see in this chart of chinas stateowned industrial firms were an economy they would be the Third Largest economy in the world. Chinas state sector on its own, the entire german economy. In the west we view that entirely through negative lens, through the lens of inefficiency and corruption and that is not an incorrect way to view it. Chinas state sector is very an efficient. The state sector is much lower than return on assets of chinas privatesector but that is not the only way to think about chinas state sector and not the way in which chinas own leadership in the state sector so lets take a step back and see the role of the state sector in china through the eyes of chinas leaders and to do that lets hear what paying, chinas great reformer thought of mikael gorbachev, the great reformer of the soviet union, what he said about his fathers view. My father is an idiot. Why did he think gorbachev was an idiot . One important reason is gorbachev attempted to reform the soviet economy by taking his hands off the lever that control the soviet economy and by doing so ultimately lost control and failed to execute his objectives. Chinas leaders have taken a different approach. Chinas leaders kept their hands on the levers the control the economy, the banks, the oil firms, the telecom firms, many Large Industrial firms remain state owned and that gives chinas leaders are powerful lever they can use to execute developed objectives, and management of the Economic Cycle. On Development Objectives chinas leaders can direct state banks, state firms to acquire technologies and put those technologies to work at enormous scale in the chinese economy bringing china closer to the productivity frontier. On management of the Economic Cycle chinas leaders can direct the state sector to hold onto their workers and invest when private firms, that is a powerful tool that avoiding or cushioning, the state sector is big, in efficient but by focusing only on those negatives we miss the crucial role china plays as a Driver Development and a powerful tool that can be used to manage the Economic Cycle. The last area where i think our focus in terms of thinking about china focuses only on the negatives into missing the positive is chinas mediumterm Growth Prospects so what we think about chinas mediumterm prospects we tend to focus on a few stumbling blocks china faces, the working age population is shrinking, theres a middle income trap the china could innovate, trade wars may block chinas access to Global Marketing these things are true and real problems but china also has significant positives working in its favor and these are so obvious 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. I will quote briefly from what adam smith wrote about china more than 200 years ago. Two important points. Firstly, the great extent of the empire of china, the vast multitude of its inhabitants render it of such great extent as to be alone sufficient to support great manufacturers and to admit very considerable subdivisions of labor but at the first Crucial Point because china is so big, they achieve massive economies of scale and massive efficiency gains through my new subdivisions. The second Crucial Point from adam smith, more extensive navigation, the chinese naturally learn the art of constructing themselves as well as the other improvements of industry which are practiced in all the different parts of the world. Smith was right on that as well. He was too he was 200 years too early. But when ping opened up the world in 1978 and even more when china joined the wto in 2001, these powerful drivers came together and china had enormous scale and the capacity to learn from foreign technologies and when you put these things together you have an extra ordinarily powerful engine. The question becomes has the engine run out of steam . I think the answer to that is no. The reason i think that is the comparison between china and japan. Remember when japans economy fell over in 1989, gdp per capita has caught up to the level in the United States, it was on the frontier of what was possible. Becoming more productive. And below the level in the United States and that means theres significant catch up space. In the middle of this decade entirely possible china will still be growing, china is growing 3 or 4 a year. I am going to wrap up in a second, we will pull these pieces together and apply them to thinking what has happened to china, it is a human tragedy. And economic and Financial Stress test for china, income for the biggest borrowers, Real Estate Developers has all contracted. When the chinese bubble was going to pop, as income for the biggest, when you see some day of reckoning. In this chart you see daily activity indicators, china and other Major Economies, what you can see is china fell but they didnt fall as far as other Major Economies and they picked up more quickly and closer to normal levels of activity. Why is that . Why we dont see a financial crisis, it is quicker than other economies. This brings me back to those unrecognized sources in chinas economy. Chinas banks because they are wellfunded can afford to give forbearance to companies. They can say you cant pay us back this quarter, pay us back next quarter or next year. Chinas leaders because they can pull the lever on state enterprises have a powerful countercyclical instrument, they can tell China State Owned Enterprises you dont let go of any of your workers, higher small workers. You have to invest more, they can prevent financial crisis breaking down and they can manage to make the recovery quicker than economies in the world. That is why china is the bubble that never pops. I will hand back to scott to hear some of our great discussions, look forward to hearing your comments. And you did an excellent job summarizing your book and the overall story. He may be a very good economist but he would be a terrible investor, right . So that 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 the brightest who work on chinas economy and Financial System this would 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 over to each of them to allow them to offer a few minutes of commentary. Joyce cheng is the chair of Global Research at jpmorgan, and is one of the leading analysts on chinas economy anywhere. Shes helped top rankings at institutional survey for emerging markets and she before joining jpmorgan was managing director at Merrill Lynch and salomon brothers. Helge berger is an assistant director in the imf asia and Pacific Department and an adjunct professor of monitor economics at Free University of berlin where he served as a tenured, where he served as a tenured full professor. He has taught at princeton as well. Ann rutledge is a founding principle of the 20yearold Credit Ratings Advisory Firm credit spectrum, shes an expert on the logic of Capital Market development and testifies before the use senate, an adviser to hong kongs monetary authorities and is just one of the leading experts on all issues related to credit. Logan wright is director at rhodium group, leads the firms china market research. Hes also nonresident adjunct fellow with us in the trustee chair at csis. Previously logan was head of China Research for advisors and shine analyst with stone and Mccarthy Research Associates both inpatient and he is joining us from hong kong today. Im going to turn things over to joyce first and then helge, ann, and logan in that order and can look at questions from the audience. Joyce, over to you. Thank you so much, scott. Its a real pleasure to be with you and i also want to congratulate you on all the work youve been doing with the tech issues. We look at your work very closely and look to a great group of panels but it really want to be a to congratulate i highly recommend this book because it really goes through the four different stages of the cycle chine is in and what they have learned from each stage of the cycle that has cost causedm to take a gradual approach. Theres a few things tom highlights that i think are worth emphasizing. First of all the china has never experienced an economy wide door shut panic. The other thing that stands out from his book is how much china learn from the Asian Financial crisis. Thats been eclipsed by the Global Financial crisis, the Great Recession were in right now but china learn some very important lessons and i think tom very clearly points out that this is not japan. Japan minister plus after their bubble collapse and china is running a deficit that will be 15 gdp, many of assets and ine country in the same category. This is also not korea because korea had relied on exports that were similar but played a major role and china has been in managing this very gradually. Very insightful for what it says about what china has learned from past crises in the region and also how it is managed the different stages of the cycle. I would like to make three points and how were seeing china right now. Talk about the current and mediumterm forecast the jpmorgan has come why we do agree chinas on a path for selfsufficiency and some of the geopolitical risk were monitoring. We do think china is having a vshaped recovery this year. Weve taken up our china forecast. We have 2 . We had below 1 . We have the rest of the world, the Global Economy contracting for . 2 growth in china and next year in 2020 we have China Growing at over 8 . I have been very amazed by how quickly they have been able to return to some type of normalcy. I dont think this can be replicated elsewhere, just given chinas ability to control so many parts of the economy. China has enormous sources of strength. Tom outlines them in the book, the Stable Funding from the Financial Sector, a single party that can marshal resources if we do see them doing an enormous stimulus of this year. A fiscal deficit that will be north of 15 of gdp. But i would just say i agree its a bubble that never pops but if it were to pop the rest of the world would also pop. We estimate everyone percentage point decline in chinas growth takes about. 4 of Global Growth and is much as one to one in the commodity exporting emerging Market Countries in latin america. The important thing i would say is we do see chinas growth slowing but what we are looking at is something more in the range of four 4. 5 at the end of the decade. Not something that is a collapse. With Global Growth coming down just off of the cost of this crisis and on average we see publicsector debt rising across the globe but arrest 1520 percentage points. China has a debt problem that the rest of the world will come out of this with a lot of debt. The second point i would make his on selfsufficiency. We think china is very wellplaced to achieve selfsufficiency and global ship in certain areas. I would just say that we think china has already attained selfsufficiency in most Consumer Tech areas that have been growing as National Security concerns. Theres been an increase importance on the tech infrastructure. The upgrade a lot of their homegrown tech supply chain, the higher value areas and dont think its that easy to move the supply chain but we do see in tech, telecommute haitian, ai, the internet and also in clean energy where theres a true need in china where they will have selfsufficiency by 2030. Its harder to make the case china is a bubble that will pop that quickly. I would like to conclude with a few the things we are watching on the geopolitical side of the geopolitical conflict because i think there are red lines in chinas mind and one of those red lines, the National Security legislation by the mpc has amended into the basic law of hong kong. I think a tougher stance towards taipei, the territorial disputes in the south china sea, also they want to remain a key player in the korea peninsula and i think they also are very much seeing their approach to how their fighting epidemics and pandemics as a better model for the world. But i do agree with tom that china is a bubble that never pops, edit the were to pop there would be many other things that would be popping first. Ninety, joyce. Really appreciate that. Lets turn to helge now. All right. Thank you. Scott, you can hear me . Yes. Super. Tom, this is a fantastic book. I already told you earlier i actually bought it even though i didnt have to and so i didnt have to take the pledge. I think it has important messages for china today but i think its also someone who knows a country so will there still want to learn and is looking back to history to do it, i think we all need to. What i would like as in the site is you are describing a very competent subject. There are many things architecting to form the whole and its really hard to think about general criticism but its even harder to write clearly about it if thats what youre e doing. I think its a fantastic book. I am with you when you described sort of the strength of china. Its important not to underestimate the country, its potential to growth, the ability of its policymakers to at least try to manage even though sometimes theres not a big plan, you point to all the right places, size and skill come potential to grow, i saving rates, and i like the stress you put on the ability of policymakers to act decisively and flexibly, and i think the covid sort of episode is important here. However, the covid episode also has reminder that some of these strengths that china has met ultimately sort of lead to more binding economic Budget Constraints and what china is aa large economy and an important economy and has very talented policymakers, economics also apply to the country, Budget Constraints matter and let me just stress some of these issues there that i feel in your overall summary leading to the optimistic bubble that never pops headline that still on the screen. The ability to all hands on deck and tackle any problem anytime in a topdown approach is an asset of course. It is an asset right now but it also comes with risks. You yourself point to the overshooting that can happen if you put all your eggs in one basket in the stimulus after the Global Financial crisis is a good example of that, when we depart at least with hindsight we know that and brought a lot of problems and narrowed narroy space Going Forward. You are well aware and stressing it. You have an episode where you test them in the book, the one child policy and that is an example of longerterm rigidity. The system is flexible at times but at other times it isnt. So on the policymaking part its important to policymakers [inaudible] the bigger point for me and thats not because my paycheck is coming from the imf and we are paid to worry about risks, it is because i feel these are points that are worth stressing. My main point is economic Budget Constraints matter also for china, and the policymaking elite has to stand up and face those. Otherwise we will not see the optimistic growth Going Forward at the four or 5 level that joyce was talking about. Aging is important, falling with great numbers in your book that stress that. Let me stress in this area the access to technology. It is true that china has made great leaves here, and joyce cited a couple of areas where this is the case but its also important to remember that in the china significantly below the global frontier in terms of technology. That has an effect on productivity, an effect on growth so enormous potential for reforms if you pick them up. Savings, its good to have ample savings but its not healthy to savings at the National Level of 45 of gdp. Its just not. So there are inefficiencies that lead to inefficiencies that come from it and they have to fight the debt levels are way too high. You, tom, put out a properly black colored chart on debt but narrow this down a little bit, talk about corporate debt. So the country has between 130170 of gdp corporate debt. That depends on what you assume what a corporation is at the local government level. Every other country on the planet averages around 90 . Use the tension that needs tackling. My appeal to the readers of the book, take all that material that is there that focus on chapter 11 i believe what tom is again wargaming a crisis, and theres some of these issues that he himself has described are listed that need to be taken up by the policymakers. Thanks. Lets turn now to ann. First want to express my gratitude to Scott Kennedy and csis for including me and my views on china and finance which you do frequently and liberally, and i take the pledge. I really like toms book very much. I want to read it again. He deserves to be paid for it and Oxford University press is a great press. They also do deserve the income. At a press personal and personal level i like the book. I think it shows the dialogue about chinas economy in three 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, tom motivates thinking about the fil history as a continuous process. I lived through a lot of this history personally and this narrative has integrity. Its eerie and liberating to read another persons narration of my private experience. I will just say i arrived in hong kong ten days before mao died in a bid in hong kong to the gang of four or as a practitioner and reader of the Chinese Press i knew the credit market, the back story, the first cycle. That is the story that has not been well told. This is a first time i have seen it well laid out. I worked in Hong Kong Futures Exchange during the second cycle and toms retelling my experience there, too. The respective of the book skirts the false choice of free market versus authoritarian capital model we usually read in u. S. Centric economic studies and visit towards a more china centric narrative. I think that is hugely valuable as tonja said it rolls back some of the red myth. I kept skipping ahead to see if the story ends with a definitive pronouncement about why the bubble has burst that may be a point of book is also that 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 and thats also very valuable. Chinas financial narrative is a difficult story to tell as joyce and helge both said but i think tom does a great job in pointing out social differences especially 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 whether you are operating in finance in china or the u. S. , as im sure tom knows well. Everybody reads bloomberg. It is truly a language because it allows us to debate ideas. Figures debate is lacking in the culture of finance but i think this is more about the parochialism of the practitioner than it does about what finance can do. So hooray for new paradigms. Finance benefits from competition nd ideas. But but i would say from my experience both professional and personal the Financial System evolutionary history is as complicated as it is dynamic. I ate goat stew from an open cauldron near the railroad station when i visited in 1979 and i was there again when the First Commodities Exchange opened in 1990. I am going to actually bring up a a slide on this because it illustrates the point if i can. This is the opening. Can you all see it . Yes. This is the opening of the commodity exchange. First you see the clock before opens on the very first day. You see the happy faces of the four trader and then use 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 ill stop my share one of the things we forget is that this is also the real finance. China, if were going to tell the story of chinas evolution would also talk about all the exchanges, it is thousands of exchanges, trading thousands of different assets. I mean, thats not for time to do, but i want to talk a little bit about a team that i think they belong in the telling, and that is the role of the shadow market. Tom does a great job of talking and sure issues which are complicated and the role of real estate, and he talks the Asian Financial crisis and Lessons Learned with respect Exchange Rate control but securitization played a large role in the Asian Financial crisis. China has the secondlargest securitization market in the world. This is going to become a bubble. China and the u. S. Have both embarked on financial policies that are designed to eliminate rather than harness financial opportunism. The growth you saw in the eyes of the traders, the floor traders, thats what i mean by financial opportunism. Neither one gets it right, neither u. S. Nor china gets it right and that is appear to a neutral eye but the shadow market holds the key and i would just leave with a comment, i somewhat disagree with times pieces about where bubbles begin. I think they begin on the asset side of the Balance Sheet. Banks dont run out of funding. Its economies that run out of intangible value to monetize, and a generation of intangible value is a function of information quality. This is an area where we all have a lot to learn still. Thanks. Thanks, ann. Appreciate that. Lets go now to logan wright. Thanks for joining us, logan. Thank you scott and thank you, tom, really appreciate the invitation and tom, just want to say joined the calls of congratulations for this book. Its a very impressive coverage of of the wide range of events throughout chinas financial history. What i found most impressive was it really integrates a lot of the political insights and some of the key events within chinas economic history together. I have seen very few books even really attempt 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 novel way of addressing Different Actors within the system and really innovative. Some of the attic notes here are, particularly when you are talking to entrepreneurs and borrowers, and a lot of the other integrations, contemporary references to chinese literature. I highly recommend everyone pick up this book with, heartily recommend edwin listening to pick up toms book. I focus my comments on the substance in sort of two areas. One is on the Deleveraging Campaign that you described, and i would have slightly different interpretation of it but i think i would like to ask you to react to. The second is on the nature of state capacity as youre describing it. The Deleveraging Campaign is being described with a bit of, its been described as if it was somewhat costless in this telling, and its still an Ongoing Development in terms of a crackdown on credit that, shadow credit that is underway. I would argue it has not been costless. Whats really happened is sort of a a substitution of some ofe funding side risk for a slowdown in Economic Growth which is exactly whats taken place. China hasnt avoided the tradeoff here, just more risks are now materializing within the Banking Sector themselves in the form of credit risk. One of the reasons is shadow lenders, broadly speaking, there is a lot of speculative activity but they do funds the real economy, and there are ways of many shadow lenders are basically engaging in that activity to hide nonperforming loan for the formal Banking System or to violate credit policy to get around restrictions on lending to property developers, government financing vehicles or something of that nature. Our own analysis demonstrates its about at least we can demonstrate at least 52 of nonbank Financial Institution and assets are basically standard credit, or sort of nonstandard credit. Thats probably conservative. This does have an impact on growth and in 2018 it had a very, very sharp impact on growth. Basically the impact was Corporate Credit growth was cut more than in half, probably by about twothirds, and theres no new nuance to that approach. I would argue that highlights some of the bluntness of the approach that china took rather than a statement about state capacity over all. If you look at industrial output in 2018, 2018, her 70 out of t3 indicators that china publishes formal data for, they declined out right and youre on your terms. The weighted average was about six7 fall in industrial output overall, policymakers were forced to respond. We are also seen since that time new credit risks materialize within the system, and including on the liability side of things, Balance Sheet. The bank failure in 2019 was largely a byproduct of certainly a corruption investigation and political overtones. But largely a byproduct of the excess of shadow lending, and the pbmc made the decision to basically compose some costs on lenders that were expanding using these shadow liabilities but at the same time after that failure to place, we ended up seeing a variety, a watershed in terms of new credit risk as they start defaulting, and of the bank started seeing interbank funding being withheld trust Companies Even this year facing protest outside their front doors, two Smaller Banks face bankrupt bankruptcy over the past weekend. So i am interested in your reaction, this interpretation the Deleveraging Campaign has left, is less costless so to speak and how might change your perception of state capacity. The second set of comments is on Crisis Management in general. You placed emphasis on the savings rate, rightfully so but its hard to redirect savings in a crisis and to think you are completely correct to focus on the funding side of banks Balance Sheet but as i said those are eroding. I think the interesting thing here is that if the pboc can always inject liquidity to manage the crisis, but unless this crisis is acknowledged as a crisis and china might not ever actually acknowledge a crisis, they dont have that 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 itself . And if you do so, doesnt that make it look like a financial crisis . The second is, government creativity has clear limits. If property prices are down 3050 which it seems within the realm of possibility, in the future, given the unbalances within the property sector, are there tools china can use other countries cant when youre dealing with problems of this magnitude . I will stop there but thank you very much. Very terrific. Thank you, logan. Really appreciate it. As i told you, told everyone at the beginning with my warning is that this i would fly by. 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 would sign off that form that circulated in the room. With flying colors. But thats not to say everyone agrees on everything but what we have is a very important conversation where we have highlighted what the true areas of debate that are needed to engage. While the we have been listening, our audience has been submitting questions which i have collected, and they come in sort of three groups. What i wanted to do is mention some of these and i want to then give tom a few minutes to pick and choose amongst them, then actually go back through our commentators in reverse order, logan, ann, helge, and joyce for final reaction from their site as well. Tom, i know we are trying dont feel like were putting too much on your plate. Really, this is just the start of the conversation, not the end. Our audience three kinds of questions. The first has to do with chinas system and whether or not its too brittle. We heard some of that from the commentators, but in your telling xi jinping still seems relatively pragmatic. The system seems adaptable. Can you explain that a little further . Second type of questions have to do with sort of whether or not the description of chinas Economic Performance is overly rosy. And people ask about chinas technology abilities, questions about that productivity, and what can you say about what is the proper standard to judge chinas Economic Performance . And third, our questions about u. S. China relations and the International System, the cold war, what happens if the u. S. Tries to lock china out of swift or will the client step 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 to you. And get some initial reactions from the commentators and from our audience questions here tom . Thanks thanks very much, sco, thanks very much to all of the discussants. I think all of you got the balance between a piece of an undeserved praise and gentle but completely correct push back, really completely right. So thank you for that. Let me try and take on a few of these. So first of all, to logan point on the cost of deleveraging. I think that is completely right, deleveraging has not been a painless or a cost free process, and it is certainly true that if we look at alternative indicators, chinas growth in 201620172018 mayweather been significantly below what the official data suggests kind of macro cost of deleveraging. The point i would make though is that the fact that chinas leaders willing to embark on a painful Deleveraging Campaign is itself an evidence of their willingness to grasp the nettle. What are the choices . The choices are dont deliver. Continue going really fast and then have financial crisis, or attempt to manage the problems and take some costs now. Most economies around the world go for option to make. Them that things run and then have crisis. China moved early and then accepted the cost. That goes to some of the strengths of the chinas economic and Financial System. Ann i thought made an interesting point about where financial crisis come from, and they come when we run out of intangible value for the Financial System monetize. What that speaks to really is a question about chinas underlying story, right . If we really think chinas great story is over, then yes, we would be extremely worried about a financial crisis against the resources which banks, corporations and governments have to paper over the cracks would be flat or even shrinking, thats when the crisis happens. So underpinning some of my optimism optimism is more positive longerterm view on chinas outlook forecast for chinas growth which i think a sort of broadly in line with where joyce numbers came in overtime would be in 2030 and where helge numbers would come in for china around 2030. I dont think china has run out of intangible value to generate. We had a question from the audience about brittleness. We didnt get to talking about the sort of social side of china, but i think this is also an area where we underestimate the robustness. For as long as i been thinking of writing about china, theres been a story that is been a kind of faustian pact between the Chinese People and the communist party, right . You give us a growth and we will give you control and we wont contest that control. The story has always been, well, if unemployment rises look up because there will be social instability and thats why china is so determined to grow at 8 a year, even though theres these costs increasing in and balanc. In the first half of 2020 weve had a stress test on that as well, right . The economy has shrunk 6. 8 . Household income has contracted, unemployment has risen and if we look at most chinas provinces whittlesey social instability. So i think the story about brittleness in chinas society i think actually is considerably overstated. Let me take on that last question from the audience about cold war. So i think if we went back to 1978 when Deng Xiaoping started to reform the process, if the u. S. At that time had said no, youre not come into the Global Economy, we wont trade with you, we wont invest in you, e wont share our technology and expertise, that would be a crushing blow to chinas early reform ambitions, and maybe the Global Economy today would look very different to how it actually does. But here we are in 2020. China is a second biggest economy in the world. The biggest exporter in the world, and export increasingly of capital to many emerging markets, multinationals here in the u. S. , in europe and japan and korea are deeply invested in their china relationship both as a source of supply and as a source of demand. So its clear theres been a change in the way the world views china, its very clear here in the u. S. And europe, and other parts of the world there has been a shift in focus on thinking about the opportunities from worrying about the risks and thinking about how to manage them. But is that going to mean a decoupling . Is that going to mean a cold war any meaningful sense for economic ties are comprehensively broken . I find that very hard to imagine. So im afraid i didnt get all of the amazing comics we have the panel or all of the interesting questions from the audience but i think that deals with some of the big points andd i will hand back to scott. Terrific, tom. Masterful reaction to some of the comments from the commentators and the audience. I want to give a minute or so to each of our commentators again going in reverse order, logan, ann, helge, joyce, to just react to anything either tom has said now or things you heard from your fellow commentators, and then i will wrap things up. So, logan. Thanks, scott. I will Say Something very briefly about the covid19s outbreak and the effect we think it should have on the Financial System. And Financial System stability. I think its far too early to say that we have releasing the effects so far. But the other issue is that when government guarantees for stateowned enterprises, for banks and Government Support is being extended, i i wouldnt necessarily expect to see financial risk rise. I would expect to see that occur in in a system like china where everything is assumed to be guaranteed when government guarantees are being withdrawn, and when conditions are normalizing. So it may be too early to see when its really after sort of china as a recovery, get back to more regular regulation of the Banking System that we see more credit risks emerge because the losses from nonperforming loans extended during this time start to appear. That being said im also concerned about the risks we are already seeing within nonbank Financial Institution such as trusts and even in Smaller Banks. Terrific. Ann . Im going to try to keep this short, but first of all with respect to deleveraging, yes, that was a great story but lets not forget china has 7. 7 trillion securitization market that isnt counted in that. So not to say securitization is wrong. On the practitioner but simply to say that it was chinas express strategy to move some shadow banking to securitization, so theres going to be that. Number two, from my experience as a securitization analyst i know every reporting agency counts that incorrectly because a count it on a marginal basis instead of on a cumulative basis. Cumulatively the actual amount of debt by each country summer between two times and four times whats reported. How do i know that . Because you count that, you count defaults differently. Number three, 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 the way, and my point about how you count default as part of that. The same games that go on in manipulating default statistics had gone in manipulating covid mortality statistics. Its shocking. But there are not enough people who actually understand statistics who stand up and say this is the right way to do, this is a long to do. The attack on site takes two different forms from the United States we control the sources of science and in china i think they control the interpretation. Of what science is. I think some of the problems we see related to hong kong are not just beijing but beijing, to terms with an Information Culture that is foreign. Our control the site is relatively new phenomenon, its a commercial control. The lesson you want to see, the other thing, i dont talk about politics but the other thing i want to say is that in 2014 the state Council Published what i thought was the best policy piece on capital structure. Its called was published, a few ideas about the development of a sustainable multi tiered capital system. That was going to be the way forward but thats not the way china is progressing. We do not have a stable concept of capital structure in any of the countries that operate on, the rating agencies in the western world are in control of that and i will say, thats enough, enough said. I am worried about fragility, not particularly with respect to china but with respect to the United States as well, and if both countries have it wrong then were all in trouble. Helge . Thank you. Great discussion we should do this again next week two points. One, covid we have to be careful before we celebrate in part because many of the measures that we need now in china as elsewhere from education Going Forward is stopped eating with ultimately it is going to hurt you. So you have to keep an eye of this. An important point on the sources of growth. Yes, there is the income level relative to other countries. There is tangible, nontangible assets the Financial Markets can work with but theres also improving efficiency. This country has a lot of potential in improving efficiency wages is its resources is a big part of it. So there is a lot of growth on the table that policymakers can pick up. Joyce. Thank you so much. I just want to add a couple of comments on the Financial Sector. We talked about chinas global reach in the tech markets in manufacturing, the geopolitical consequences but their global reach and Financial Markets has been very limited. I think this is one key area to watch. If you look at overseas holdings of chinese assets in the portfolios about 2. 3 , and so will china be able to become a more mainstream Financial Holding i think is a key issue to look at as they come out of this crisis. We are seeing china beginning to go into the mainstream through equity and fixed income investment. Jpmorgan is that once third of the way through the process of putting into these indexes. Its going to be one important determinant of how the future for china looks ahead. Households are heavily underinvested in Financial Markets. Bank deposits are still about twothirds of household assets, stocks and mutual funds are 16 and pacifica question whether the Financial Market will continue to develop as china progresses, i think is an important question. I think globalization will be very, very active to covid19 crisis. There is a whole issue of stress and how and transparency and their ability to integrate as growth does slow down there. I think that this is a key requirement for china Going Forward because they do still have a risk of a manmade financial crisis, as all the other speakers have talked about. One thing they really will need to do to see if they continue to attract these kinds of investment flows and the fbi has come dunnage everybody is looking at the supply chains and a greater need to diversify. Terrific, thank you so much, joyce. This has been a fantastic discussion and the credit goes to tom providing a great 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 than for folks who are in new york or london or folks who 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 books on capitol hill have in their mind aviation of china as either partner or competitor that looks at how their views about how sustainable chinas economic trajectory is, how fragile this system is, whether or not chinas economic trajectory is a net opportunity or risk for the United States. I think washington has been consumed by a certain kind of image of china that looks at a lot of the risks and the downsides which are definitely there. I think what tom has done is add some balance to the conversation and he 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. And so tom, really thank you so much for helping us develop that picture today and with your book. Book. It will have a very long shelf life, im certain you got what you think our csis staff, alyssa, are in terms for organizing todays event and doing a masterful job. Also to our commentators, terrific commentary, a great Dissertation Committee. I hope we get the band together again. Your audience for tuning income for asking good questions, and to everybody, these be back with us on september 22 when we have a rollout of logan reports about Financial Risks in china as well. This is a topic which is not going away which we really need to understand and were going to stay on it and so we will be providing more information about that report and the event in the weeks ahead. So to anyone there, wherever you are, hope you have a good evening, a good afternoon or a good rest of the day. Thank you so much for tuning in, and take care. Weeknights this month we feature booktv programs to preview whats available every weekend on cspan2. 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