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The Chinese Consumer: Savings and Spending · Data Talks

• 0:01
  SPEAKER_00: Welcome everybody to another episode of Data Talk.
• 0:04
  SPEAKER_00: This is a very special session.
• 0:08
  SPEAKER_00: Yeah, but we know each other for more than 20 years, 25 years.
• 0:14
  SPEAKER_00: Don't know him, just watch CNN and DC long enough and you will see an open.
• 0:21
  SPEAKER_00: Thank you, but it's good to be here.
• 0:23
  SPEAKER_00: So, but you we know each other from the World Bank since the early 2000s.
• 0:27
  SPEAKER_00: Uh you have made a name as an expert in East Asia.
• 0:31
  SPEAKER_00: You lived in many of the key countries in East Asia and Southeast Asia as well.
• 0:36
  SPEAKER_00: I think you lived twice in China.
• 0:38
  SPEAKER_00: You're based in Indonesia, you were in Singapore and Philippines.
• 0:42
  SPEAKER_00: Tell us a bit, if you look back at your career and your work.
• 0:45
  SPEAKER_00: Tell us about your perspective on the region and then especially on China, how China transformed over the last decade.
• 0:52
  SPEAKER_01: All right.
• 0:53
  SPEAKER_01: Well, China was my first job in the World Bank.
• 0:56
  SPEAKER_01: When I, a week after I joined the World Bank, I packed my uh suitcases and traveled to China.
• 1:02
  SPEAKER_01: I was still based in Washington, but uh, so that was 1992.
• 1:06
  SPEAKER_01: I almost dare not say it, but it's a very long time ago.
• 1:10
  SPEAKER_01: And you know, at that time China was very interesting, uh, but also a country with$1,000 per capita.
• 1:18
  SPEAKER_01: So uh it got out of the real poor phase, which was 1978 till then, but it hadn't really become that that industrial and economic superpower that it is now.
• 1:29
  SPEAKER_01: So it was really interesting to follow that.
• 1:32
  SPEAKER_01: And I had three stints, two from one from Washington and two in country living in Beijing.
• 1:37
  SPEAKER_01: So the following that development and how China changed and how its development model changed, and frankly, how the people changed and how their uh welfare increased dramatically and how the cities changed.
• 1:52
  SPEAKER_01: Uh I remember the first time I landed in in Beijing, uh, it was still the old the number one terminal.
• 1:59
  SPEAKER_01: It's now no longer in use.
• 2:01
  SPEAKER_01: It's the number two and the number three terminal, but the number one terminal, and you basically walked into the terminal from the from the uh uh airplane.
• 2:09
  SPEAKER_01: And and then you drove into town.
• 2:11
  SPEAKER_01: There was not an airport road yet, and so it took a long time because there were all kinds of carts and old cars and buses that were heavily underpowered, and so it took about you know an hour and a half to get into town.
• 2:23
  SPEAKER_01: But that town was dark.
• 2:25
  SPEAKER_01: There was no street lighting at night uh because they wanted to save energy, because all the energy was necessary for industrialization.
• 2:33
  SPEAKER_01: It absolutely completely transformed.
• 2:35
  SPEAKER_01: And if you now look at the infrastructure, if you look at uh uh the the visual change that has happened, it is unrecognizable and and very interesting.
• 2:45
  SPEAKER_01: I also did a stint in in the Philippines, as you know, that is an interesting country.
• 2:50
  SPEAKER_01: It's politically more complex, and uh uh uh the World Bank and I got caught up in that a little bit.
• 2:57
  SPEAKER_01: And then, of course, Indonesia, where you and I spent time after the Asia financial crisis.
• 3:02
  SPEAKER_01: Uh and that was not a great time for Indonesian.
• 3:05
  SPEAKER_01: I remember the the reforms that the country went through and uh the democratization, the decentralization, the fiscal reforms, uh very difficult reforms, and and but done done in a you know in a time span where you really have to admire the Indonesians.
• 3:20
  SPEAKER_01: And it paid off because after those difficult reforms and after a real sharp, sharp contraction, the country started to grow again and grew five, six percent ever since then.
• 3:31
  SPEAKER_01: And so it's now uh it just joined an upper middle income country, and they have ambition, so they want to grow further.
• 3:39
  SPEAKER_01: So, in summary, it's it's a very interesting part of the world, and it's one of the reasons why I never left, frankly.
• 3:44
  SPEAKER_01: I I worked a little bit on Africa, uh, uh, but shame on me.
• 3:48
  SPEAKER_01: I largely uh uh worked on East Asia uh in the in my career in the world.
• 3:54
  SPEAKER_00: Well, you were riding the wave of global economic transformation and trend lines beat headlines again, something that that you also reflected as you spoke about Indonesia, the country we both lost lost.
• 4:05
  SPEAKER_00: That human on China is actually funny, I didn't realize that first because 1992 was my time I also was in China with my uh girlfriend and our wife a very, very long time ago.
• 4:17
  SPEAKER_00: Also that was the European railway.
• 4:21
  SPEAKER_00: You know, and they uh one of the things I remember from China and Beijing was the icing the traffic jam.
• 4:28
  SPEAKER_00: So that was the main thing.
• 4:29
  SPEAKER_00: And we haven't been active in Beijing, and you know, but this will inspire me to get back to that one one of the how that country transformed.
• 4:40
  SPEAKER_00: Pick up on that core transformation, which economists call it that uh growth or competitiveness what China uh got famous for and got successful with, and now others even say that it's troublesome with.
• 4:53
  SPEAKER_00: So tell us a bit about that economic model that made a poor country almost all right.
• 4:58
  SPEAKER_01: Well, uh uh let me talk about my turn.
• 5:00
  SPEAKER_01: There's a time before, and 1978, Deng Xiaoping uh says, you know, we're gonna reform and open up, and we need more market into our system.
• 5:09
  SPEAKER_01: That's ancient history.
• 5:10
  SPEAKER_01: It happened during the 80s, but it really started to take off during the 90s.
• 5:15
  SPEAKER_01: And and in actually in 1992, uh, as I was flying to China, Deng Xiaoping was taking his big tour through the south.
• 5:24
  SPEAKER_01: It's very famous among China watchers, where he visited places of reforms, including Shenzhen and Xiamen, uh, but basically to re-ignite the reforms that had stalled after China men.
• 5:37
  SPEAKER_01: And so uh the the purpose of reform was marketization.
• 5:43
  SPEAKER_01: And in the fall of 1992, they declared a socialist market economy.
• 5:48
  SPEAKER_01: Nobody really knew what it meant, but it did mean that uh a lot of institutions had to be reshaped to make China ready for the market, uh, for the market economy.
• 5:59
  SPEAKER_01: And that included fiscal reforms, financial sector reforms, state enterprise reforms, very painful.
• 6:05
  SPEAKER_01: Uh, after 1996, uh millions of people basically got fired from their from their uh state enterprise position.
• 6:14
  SPEAKER_01: Um, and then it got reinforced by this aim to join the World Trade Organization.
• 6:20
  SPEAKER_01: That happened quite late, 2001, but it did happen.
• 6:24
  SPEAKER_01: And it drove all these difficult reforms, and then China really entered a phase of hypergrowth because it had lots of people uh and not as much technology as they have now, and they welcomed foreign direct investment, and they had a very high savings rate and a big drive among local governments to progress, basically.
• 6:47
  SPEAKER_01: And that that combination of foreign involvement, uh domestic high savings, and then uh local government officials that really drove those reforms, that caused a hyper growth in the 2000s.
• 7:03
  SPEAKER_01: It got interrupted briefly by uh the global financial crisis in 2008, but but it wasn't it wasn't done.
• 7:11
  SPEAKER_01: And and one reaction of China was to stage a very big stimulus, um, both fiscal financial, basically they threw the kitchen sink at the stimulus, and they maintained growth at a very high level.
• 7:24
  SPEAKER_01: But then there came a phase where, upon reflection, and and the World Bank, I think, was part of that reflection, they said, look, we we need to go to a different growth model.
• 7:32
  SPEAKER_01: We can't just make T-shirts forever, we can't just be the assembly plant of the globe forever.
• 7:40
  SPEAKER_01: We need to go up the value chain.
• 7:42
  SPEAKER_01: As a matter of fact, that thinking already started in the in the mid-2000s when they started to lay the scientific and technological basis.
• 7:53
  SPEAKER_01: They literally have a plan, a medium-term plan, a medium-long-term plan of scientific and technology development, 2006, where they basically expressed, look, these are the type of technologies that we need to acquire, that we need to uh uh have expertise in and become among the best in the world.
• 8:10
  SPEAKER_01: Earlier on in 2000, because the fiscal situation had greatly improved, they started investing in education.
• 8:17
  SPEAKER_01: So you see the numbers of attendance at university doubling, tripling, quadrupling, tenfolding.
• 8:24
  SPEAKER_01: And so whereas whereas when I when I joined, it was 0.2% of the population that enjoyed uh an uh university education.
• 8:34
  SPEAKER_01: Uh, you know, by now it is 20-25% that has a tertiary education of some sort.
• 8:40
  SPEAKER_01: So tremendous change in in education, in science and technology, and also in in broadly the outlook of the government, sort of what do they aspire to and how to get there.
• 8:51
  SPEAKER_01: Now then comes in which is uh something which is not that popular, and that is industrial policy.
• 8:57
  SPEAKER_01: And that comes back with with events, it was there in the 60s and the 70s, if you want, but that wasn't a very successful industrial policy.
• 9:05
  SPEAKER_01: It comes back uh uh uh by in the by the means of uh what was called Made in China 2025, a plan published in in uh 2015 with all kinds of goals.
• 9:17
  SPEAKER_01: In the end, though those were not the goals in the plan, but later on somebody specified it as a goals basically of a lot of self-reliance in high-tech in high-tech industries.
• 9:28
  SPEAKER_01: And um alongside of that plan, there was uh quite a bit of subsidization, quite a bit of special, special arrangements for uh those companies that pursue public or private and foreign or domestic that pursue those goals in the Made in China 2025.
• 9:49
  SPEAKER_01: Uh, they probably went a little overboard with that, but we can talk about that later.
• 9:54
  SPEAKER_00: Um super interesting.
• 9:55
  SPEAKER_00: Thank you, but it shows all the the context and economic history you'll you'll bring in here.
• 10:00
  SPEAKER_00: Um so let's uh dive into one key part that we had been discussing earlier, and that is very relevant for all of our clients.
• 10:08
  SPEAKER_00: Consumption basically put it the money people spend on private consumption.
• 10:14
  SPEAKER_00: Um, and where Kenya had a model that you similar to my own country, Germany, which is you know savings is export weaker domestic demand.
• 10:25
  SPEAKER_00: And so I know you did some some new thinking and research on that topic.
• 10:30
  SPEAKER_00: So give us your perspective on that you know, two engine economy where you have a export engine that can have some you know raises all the discussions, but then also rather weak domestic consumption engine where once you look when you look at the numbers like the Chinese are there, not just high savers, but saving also at a very low level of income.
• 10:51
  SPEAKER_00: Like somebody who's poor in Europe is already starting to save in China.
• 10:56
  SPEAKER_00: So give us perspective on the philosophy in the economic Chinese savings and Chinese consumption.
• 11:02
  SPEAKER_01: Um I'll give you the short version because it's it's a very comp very interesting but very complex topic.
• 11:08
  SPEAKER_01: Um and and the first time I started talking about it was actually in the in the 2000s, where uh there was the same uh imbalances that started to emerge, and there was a large external surplus and very high savings and in insufficient domestic demand.
• 11:27
  SPEAKER_01: For that reason, the the stimulus after the global financial crisis became necessary because a lot of the external demand that dropped out, and so they had to move to towards domestic demand.
• 11:39
  SPEAKER_01: Uh, savings in China are spectacular for two two reasons, not one reason.
• 11:44
  SPEAKER_01: Households we're going to talk about more in depth, but the second part is enterprise savings, and it makes a very big difference with the rest of the world.
• 11:54
  SPEAKER_01: Uh, enterprise savings are about 20% of GDP, no, it's retained earnings basically.
• 12:00
  SPEAKER_01: And that's retained earnings of about profitability of about 20% of GDP is very similar all around the world.
• 12:08
  SPEAKER_01: I don't know why, but if you look at if you look at the EU, it's about 20%.
• 12:12
  SPEAKER_01: If you look at the US, it's about 21%.
• 12:14
  SPEAKER_01: It's all around that 20%, and sometimes it's 19, sometimes it's 18%.
• 12:18
  SPEAKER_01: But so in the difference, big difference is in the United States, most of that goes to the shareholders, i.e., they pay out dividends and then it it lands into people's pockets.
• 12:30
  SPEAKER_01: In the EU, a lot of it ends up in the state through taxes.
• 12:35
  SPEAKER_01: And and that then through Social Security and otherwise, it ends up also in the pockets of people or it ends up in spending by government.
• 12:44
  SPEAKER_01: In China, it's retained.
• 12:47
  SPEAKER_01: So enterprise savings in contrast to enterprise uh profits are very high in China compared to everybody else.
• 12:56
  SPEAKER_01: Let's put that aside.
• 12:57
  SPEAKER_01: And that hasn't really changed ever since the mid-2000s.
• 13:01
  SPEAKER_01: Uh but household savings are also high for a number of reasons.
• 13:05
  SPEAKER_01: Households save about, well, right now it's about 35-36% of their disposable income.
• 13:14
  SPEAKER_01: It depends a bit on where you look at.
• 13:15
  SPEAKER_01: If you look at the flow of funds, that includes all the rich people.
• 13:19
  SPEAKER_01: That's higher than if you look only at the household surveys.
• 13:23
  SPEAKER_01: The household surveys say about 32, but I think it's about 35, 36 because of the uh the household surveys are imperfect.
• 13:32
  SPEAKER_01: Um that's very high compared to anywhere else.
• 13:36
  SPEAKER_01: Even, I mean, Japan used to be the reputable high savers.
• 13:39
  SPEAKER_01: Well, no longer.
• 13:39
  SPEAKER_01: If you look at it now, below 10%, same with the United States and same with the EU.
• 13:46
  SPEAKER_01: And and and that hasn't it has come down a little bit, but far less than expected.
• 13:54
  SPEAKER_01: Why uh why hasn't it come down?
• 13:57
  SPEAKER_01: Well, there's two reasons, I think.
• 14:00
  SPEAKER_01: One one no, one you would expect savings to have come down.
• 14:04
  SPEAKER_01: The peak was actually, well, that was uh right after the global financial crisis, about they saved more than 40% of disposable income.
• 14:14
  SPEAKER_01: It's now 35.
• 14:15
  SPEAKER_01: So it has come down a little bit.
• 14:17
  SPEAKER_01: And demographics plays a big role, i.e., there's a lot of people that used to work, now they no longer work, so their savings rate goes down.
• 14:25
  SPEAKER_01: They now uh withdraw their savings from the past and live off that.
• 14:30
  SPEAKER_01: Uh but it hasn't gone down as much, and I think there is uh well, there's an overall issue with with Chinese that just they like to save, and it's not just in China, it is also in Singapore, it is also even in you know in the the Chinese minority in Indonesia, there's there's a cultural aspect, but there's also uh the effects of rising inequality, i.e., a lot of the gains in people's income disproportionately accrue to the higher incomes, and they save a lot.
• 15:08
  SPEAKER_01: So China has basically not become more equal, so that's more or less the same.
• 15:14
  SPEAKER_01: You can't attach an awful lot of explanation to that.
• 15:18
  SPEAKER_01: But the third is the uh the covert crisis.
• 15:22
  SPEAKER_01: And the covert crisis and the subsequent policy-driven, if you want, decline in housing prices.
• 15:30
  SPEAKER_01: Now that had a very big influence for the reason that housing is enormously important in people's portfolio.
• 15:36
  SPEAKER_01: It's about more than two-thirds of total wealth in people's portfolio was, it's now a bit less, but was housing.
• 15:45
  SPEAKER_01: And so when housing prices started to decline, a lot of people thought, okay, well, we need to save back what we lost in our housing.
• 15:54
  SPEAKER_01: Now that was a big factor that I think kept the savings rate much higher than you would expect based on the factors of inequality and the factors of demographics.
• 16:05
  SPEAKER_01: The other part is that, and that's a structural thing.
• 16:10
  SPEAKER_01: The the one reason why Chinese save high is that the social safety net is not as strong as in many other parts of the world.
• 16:21
  SPEAKER_01: And that's understandable.
• 16:23
  SPEAKER_01: It's you know, it's still a middle-income country, it's a high middle-income country, on the cusp of becoming a high income country, but they've been relatively parsimonious in building their safety net.
• 16:34
  SPEAKER_01: And frankly, it's more policy, as much as it is policy, as it is uh that they haven't come to it yet.
• 16:42
  SPEAKER_01: So the urban, the urban side, especially the urban workers, former worker side, they're fine.
• 16:51
  SPEAKER_01: They get a pretty high replacement rate in their pension, but everybody else is not so fine.
• 16:57
  SPEAKER_01: So they need to save a lot in order to write out uh to ride out their time that they no longer work.
• 17:03
  SPEAKER_01: And so all these reasons kept savings high.
• 17:07
  SPEAKER_01: The problem is that with the manu China's manufacturing base building up very rapidly, more so after the, I could say, collapse of the investments in real estate after 2020.
• 17:22
  SPEAKER_01: Um China is very strong in production, not very strong in demand.
• 17:27
  SPEAKER_01: And that has led to the large surpluses that uh that well, that are in part uh landing in Europe.
• 17:35
  SPEAKER_01: Uh there's special factors there, but but and but also land in a lot of developing countries that also get nervous about the enormous uh uh export competitiveness and and the manufacturing prowess of of China.
• 17:51
  SPEAKER_00: Let me pick up on the savings, the economics of savings and the cultural aspect you mentioned.
• 17:59
  SPEAKER_00: Let me add also a few of the big numbers.
• 18:01
  SPEAKER_00: So if we look at consumption quite well, and it was 70 trillion this year, savings will be roughly 14 trillion dollars this year.
• 18:09
  SPEAKER_00: And there's two main savers in the world, two main sources the American rich and the Chinese middle class to scale.
• 18:15
  SPEAKER_00: Um that is just interesting how important a Chinese middle class is for global savings.
• 18:22
  SPEAKER_00: And if you then kind of break it down further, um, and obviously you are associated with also the World Bank's poverty line, is at$3, we have a middle class line,$13, which is in power parity.
• 18:33
  SPEAKER_00: Uh a Chinese, average Chinese person start saving already at$8, somebody that would be considered vulnerable in the global scheme of things.
• 18:41
  SPEAKER_00: In the US, it's$60.
• 18:42
  SPEAKER_00: So$8 versus$60.
• 18:44
  SPEAKER_00: How can a Chinese person at say in the beginning of the middle class at eight to somehow what happens in their families?
• 18:50
  SPEAKER_00: Tell us a bit about their daily choices.
• 18:53
  SPEAKER_01: Well, one observation is that life is a lot cheaper in those people that make eight dollars per capita, you know, uh li life is cheaper.
• 19:04
  SPEAKER_01: If you live if you go beyond the the outskirts of the big cities, life becomes a lot a lot cheaper.
• 19:10
  SPEAKER_01: And so if you look at it in PPP, uh the difference is not is not as big.
• 19:15
  SPEAKER_01: Um second, uh I said there is a bit of a tradition, but there's also a number of motivations to save.
• 19:22
  SPEAKER_01: Just the pension motivation is a long-term motivation.
• 19:25
  SPEAKER_01: But there used to be another big motivation for saving is to get your housing.
• 19:30
  SPEAKER_01: So no matter what housing you aspire to, you wanted to have a housing because that would make you more competitive on the on the marriage market.
• 19:39
  SPEAKER_01: So no woman, and there's far fewer women than there are men in China because of the one-child policy, the consequence of the one-child policy.
• 19:50
  SPEAKER_01: Uh, you know, no woman would marry somebody without uh their own apartment.
• 19:55
  SPEAKER_01: So you that was really, really culturally very, very important.
• 19:59
  SPEAKER_01: Um so you try to save as much as you can.
• 20:02
  SPEAKER_01: And the third is that at the lower end of the income distribution, there's lots of bouts of unemployment and that are not really covered by the social safety net.
• 20:11
  SPEAKER_01: So you want to save in order to have your own your own personal personal safety net.
• 20:17
  SPEAKER_01: I think those are some of the explanations that I can come up with.
• 20:20
  SPEAKER_00: And so if we then think about that potential, well, first, is there an a realistic pathway to a rebalancing that domestic demand and consumption go up?
• 20:31
  SPEAKER_00: And how do you assess measures that are taken and what factory, even if China then is the high income?
• 20:39
  SPEAKER_01: Yeah, so so uh for me, and I again I've thought about it quite a bit, uh, as a fact, my first article on rebalancing of the Chinese economy was in 2006, together with a colleague of mine in uh in the World Bank's office.
• 20:54
  SPEAKER_01: Uh but uh, you know, nothing it it never really happened.
• 20:57
  SPEAKER_01: In those days, there was both the external and the internal uh uh imbalances.
• 21:02
  SPEAKER_01: And Wayne Jia Bao gave a uh a talk actually at a press conference, not not a formal talk, but at a press conference in in reply to uh to a question.
• 21:12
  SPEAKER_01: He became famous for the fun for uns, so the the unbalances, the external imbalances, the internal imbalances with amongst people, uh with nature and man.
• 21:24
  SPEAKER_01: There was the famous for un speech.
• 21:27
  SPEAKER_01: So there was an external imbalance and then there was an internal imbalance uh uh issue.
• 21:32
  SPEAKER_01: That is is not dissimilar, but now the internal imbalance is quite different.
• 21:37
  SPEAKER_01: So what you have is sort of the opposite of an IMF problem.
• 21:41
  SPEAKER_01: You have large external surpluses and too little ex too little domestic demand.
• 21:48
  SPEAKER_01: Could and and there's been lots of arguments about the exchange, but happy to go into that.
• 21:53
  SPEAKER_01: I don't want to go into this now.
• 21:56
  SPEAKER_01: So there's there's a couple of aspects that you can say, well, here's here's Where you can rebalance.
• 22:01
  SPEAKER_01: Because you don't just talk about household consumption.
• 22:06
  SPEAKER_01: There's also government consumption.
• 22:08
  SPEAKER_01: And there's two kinds of government consumption.
• 22:10
  SPEAKER_01: One is collective consumption, you know, defense, foreign policy, that's collective consumption.
• 22:16
  SPEAKER_01: Congratulations, those are consumption.
• 22:18
  SPEAKER_01: But then there's individualized consumption, such as healthcare, education, and particular goods that are produced by the government and delivered to people.
• 22:29
  SPEAKER_01: That's not trivial.
• 22:30
  SPEAKER_01: If you add up that part of consumption, of government consumption to the overall consumption, you come quite a bit higher in the consumption share of GDP in China, as well as everywhere else.
• 22:44
  SPEAKER_01: But you could say, well, all these factors that keep household savings high and therefore consumption relatively low, you can address better by first addressing government consumption.
• 23:03
  SPEAKER_01: Now, this is all under the assumption that you can't really expand the social safety net very quickly.
• 23:10
  SPEAKER_01: Why is that?
• 23:11
  SPEAKER_01: That's a political reason.
• 23:13
  SPEAKER_01: There's a political reason, and I think the leadership has made it quite clear.
• 23:16
  SPEAKER_01: They do not want to imitate Europe, they do not want to have a very strong welfare state because they think that's not appropriate for a higher middle-income country, be that as it may.
• 23:28
  SPEAKER_01: So, but what you can do is you can take more demand, uh expanded demand of the government, and both in investment as well as in government consumption.
• 23:39
  SPEAKER_01: Now, the investment side is a bit tricky because um for two for two reasons.
• 23:46
  SPEAKER_01: One is China's done already a lot of investment, a lot of infrastructure investments, a lot of government investment has been done.
• 23:53
  SPEAKER_01: And you know, and you could argue that there's a whole range of provinces that now have too many highways, too many railways, and and therefore they've probably overdone it.
• 24:03
  SPEAKER_01: And part of their debt problems, and those local governments have debt problems, is because they overbuilt infrastructure.
• 24:09
  SPEAKER_01: So that's not the most the most obvious way to go, the infrastructure side, but on the government consumption side, there's still a lot to be done.
• 24:17
  SPEAKER_01: You can have better education, more education, better health care, spread it much more to the to the countryside, have better schools there, and to equalize, if you want, the social service delivery in the local uh in the in the rural areas versus the city areas.
• 24:32
  SPEAKER_01: That would require a lot of investment.
• 24:34
  SPEAKER_01: There's a second part, and that is a mix of infrastructure and services that the government can accelerate, and that is to achieve their net zero ball.
• 24:43
  SPEAKER_01: They have a net zero bowl by 2060.
• 24:46
  SPEAKER_01: Well, they could also say, why don't we do that a little earlier?
• 24:49
  SPEAKER_01: And that translates into much more government spending at this particular point in time, in order to achieve that.
• 24:56
  SPEAKER_01: They spend uh government China spends quite a bit, and I don't have a specific number, but quite a bit, of course, on solar energy, on wind energy, on uh uh uh transfer uh the transfer of the high voltage transfer lines and etc.
• 25:11
  SPEAKER_01: All the all the all the infrastructure that comes with it, the loading stations for electric vehicles, but they could do more, and therefore they would end uh end uh at the net zero much earlier than currently planned.
• 25:25
  SPEAKER_01: So there's this viable spending categories that could make this work.
• 25:30
  SPEAKER_01: The problem is a little bit on the financing side.
• 25:35
  SPEAKER_01: And I believe there is opportunities, and here I come back to what I said earlier that is enterprise profits.
• 25:43
  SPEAKER_01: So if those enterprise profits were not retained, but either taxed or distributed to the shareholders, and mind you, a lot of the shareholders are actually state enterprises, so there's this there's a messy connection between the enterprises uh amongst themselves.
• 25:59
  SPEAKER_01: But that would give the finances necessary to do the extra spending that could rebalance, that could rebalance the um uh uh the economy internally, that would accelerate domestic demand.
• 26:13
  SPEAKER_01: There is the second part, and uh and I think especially on the pension side, uh China has turned the corner and said, yes, we need to give a decent pension to to everybody, not just to the urban workers, that and that's about a quarter of the total workforce, but to everybody.
• 26:32
  SPEAKER_01: Uh that would create demand over time, but I'm afraid that that that won't solve the immediate issue.
• 26:38
  SPEAKER_01: That will take a number of years to build that up and to equalize those pensions uh between urban and rural areas.
• 26:57
  SPEAKER_01: So I I believe there is this the there are policies that are doable, that are quite immediate, that can be done to rebalance the the economy.
• 27:06
  SPEAKER_00: Okay, thank you so much, Doug.
• 27:08
  SPEAKER_00: Interesting perspective.
• 27:09
  SPEAKER_00: Let's uh move to the future, both in terms of the economy as a whole.
• 27:14
  SPEAKER_00: So tell us a bit about how you see the state of the economy, how you see the technological transformation, which later I want to pick on.
• 27:21
  SPEAKER_00: If you also think of global companies that are investing in China and also the consumption trajectory, if you are in the business of opening a restaurant or having a coffee chain or selling cars, is China still a good place to be for the next five, ten years, or even a better place, or are there some watch out for?
• 27:42
  SPEAKER_01: Uh those are all not easy questions.
• 27:44
  SPEAKER_01: You can also say, well, within that, the household share in the economy can still grow.
• 27:50
  SPEAKER_01: And China was actually on that trajectory until 2019, and then things changed.
• 27:56
  SPEAKER_01: Uh so you could you would still have a uh a consumption growth possible.
• 28:01
  SPEAKER_01: So even without all these issues with consumption and high savings, China's consumption still grew with 5-6% over the over the last decade.
• 28:10
  SPEAKER_01: It's now a bit less, it's now 3 to 4% because wage development hasn't been that high, and because of the hit that the Chinese household wealth took because of the property crisis.
• 28:23
  SPEAKER_01: But once that crisis, you know, it has to bottom out somewhere, the property prices, and you could say, well, then you could still have uh uh a household consumption growth that is at least aligned with GDP growth, but there's a number of factors that would actually say, well, it's probably going to be higher because there would be uh a greater share of GDP growth going to households.
• 28:51
  SPEAKER_01: The reason is that the labor force is now declining already with 1% a year.
• 28:57
  SPEAKER_01: So labor, if you want, would should be getting a bigger piece of the pie.
• 29:02
  SPEAKER_01: And that would mean that that consumption would uh continue to have a boost from household income.
• 29:09
  SPEAKER_01: Second, the income distribution um over uh uh your categories, so there's still 300 million people that are out of the middle class in your terms, but are still in sort of the the non-consuming class, as you call it, and they would gradually be pushed into that.
• 29:27
  SPEAKER_01: Even if you only have relatively modest growth with 5%, 6% a year, they would in the end become the consumer class.
• 29:34
  SPEAKER_01: More so if a lot of structural reforms were to happen, more so if the hooko system were to be totally reformed, more so if uh social services in the rural areas would be as strong as in the uh in the in the cities.
• 29:49
  SPEAKER_01: But you would expect that there would be still more and more people joining the consumer class.
• 29:55
  SPEAKER_01: Um probably not as spectacular as India.
• 29:59
  SPEAKER_01: Uh the reason is that that simply this there's far more people out of the consumer class in India, and they over the next 10, 15 years, they will move in.
• 30:09
  SPEAKER_01: In the longer term, uh things I think start to change.
• 30:13
  SPEAKER_01: Right now, yes, China's demographic is such that the labor force is declining by about 1% a year.
• 30:20
  SPEAKER_01: But beyond 2050, you really start looking at a population decline that becomes is becoming significant.
• 30:26
  SPEAKER_01: And by the end of the century, you're looking at a labor force that from almost 800 million people has declined to something like 300 million people.
• 30:36
  SPEAKER_01: I think there you get you can't overcome that with productivity increases, unless artificial intelligence is going to give us something dramatic windfall.
• 30:49
  SPEAKER_01: But on current trajectory, you would say, well, at some point, uh the net the net of the of the decline in labor force and increased productivity would mean that China actually will not be growing anymore.
• 31:04
  SPEAKER_01: And then the internal distribution would then determine the trajectory of consumption.
• 31:09
  SPEAKER_01: Now that I can't say.
• 31:10
  SPEAKER_01: But until say 2035, 2040, I think things are pretty clear.
• 31:15
  SPEAKER_01: You would see increased consumption.
• 31:17
  SPEAKER_01: Uh, it can be faster if some of those policies that we have discussed would indeed occur.
• 31:24
  SPEAKER_01: It will be a bit slower if not, but it would still continue to grow as a as a as a market.
• 31:29
  SPEAKER_01: Where where whether you know companies can be competitive within that market is a totally different question.
• 31:37
  SPEAKER_01: And whether these are foreign companies or domestic companies and companies from different regions, that that's a very different question.
• 31:44
  SPEAKER_00: That's the last point uh Bert I want to touch on on competitiveness of Chinese companies and also the Chinese philosophy covert products.
• 31:55
  SPEAKER_00: Um and we see this, you know, any from any industry.
• 31:58
  SPEAKER_00: You can take restaurants, you can take uh the beauty industry, where there's what's called insurgent brands.
• 32:03
  SPEAKER_00: Uh, but then I think most visibly and most on the headline is the mobility sector.
• 32:08
  SPEAKER_00: Obviously, China has been taking a certain type of decision in terms of e-mobility, also in terms of innovation, driverless cars, and that's where there now there seems to be pressure on incumbents or global incumbents, uh, especially from Europe and including on premium brands, um, and not just under pressure in China but elsewhere in other parts of the world.
• 32:28
  SPEAKER_00: Um, what's some of what's your reflection on that, you know, on the BYD story, so to say, uh, and and its success.
• 32:36
  SPEAKER_00: And uh just give us your perspective from from that remarkable story.
• 32:41
  SPEAKER_01: So, I mean, again, a very interesting story because the the yes, there was a principal decision, and that was before 2015, the made in China 2025, but China saw that the world was going in the direction of decarbonization fairly early on.
• 33:01
  SPEAKER_01: And frankly, they were the largest polluter.
• 33:03
  SPEAKER_01: At that point, they still are the largest polluter in terms of carbon, but they did say, okay, so well, if that's the future, we need to arrange for our supply chains to make that the future.
• 33:14
  SPEAKER_01: Now, this came on top of a failure, frankly, a failure of their industrial industrial policy to create strong internal combustion engine companies.
• 33:27
  SPEAKER_01: Uh, they failed.
• 33:29
  SPEAKER_01: And they did uh joint ventures with the Volkswagens of the world with the with the Americans and they failed.
• 33:34
  SPEAKER_01: And the French, they failed.
• 33:36
  SPEAKER_01: But the private enterprises that said, okay, we're gonna take this, we're gonna take this serious, and we're gonna build cars in uh electric vehicles, uh, they became very competitive.
• 33:47
  SPEAKER_01: And it's in part because of state support.
• 33:49
  SPEAKER_01: They got no question they got state support, and especially on the demand side, they got strong state support.
• 33:54
  SPEAKER_01: There was subsidization of households that wanted to buy an electric car, and that was first and foremost because of reduction of local pollution, but later on it became this broader, broader uh policy.
• 34:08
  SPEAKER_01: But second, also, there was no competition, and and that is the amazing part, because if you look back into the history and you say the Europeans are now greatly under pressure, well, they they they were holding the baton.
• 34:20
  SPEAKER_01: They were had they had the lead in technology and in development, and they basically gave up.
• 34:25
  SPEAKER_01: And also the policies gave up in terms of subsidizing the demand side to create that technology that would be competitive with internal combustion engines.
• 34:36
  SPEAKER_01: So China basically jumped into that hole, and and because of their scale and and product product uh manufacturing capacity, they they made it work.
• 34:47
  SPEAKER_01: I mean, and it is quite amazing how rapidly that went.
• 34:51
  SPEAKER_01: And of course, the domestic demand uh uh uh let's say the suppressed domestic demand um does reflect on the external, the the export numbers in those electric vehicles.
• 35:06
  SPEAKER_01: But frankly, they build it for their domestic demand, they build it on the basis of uh a trend that they thought were important for China's development, i.e., creating clean cars so that they would not pollute themselves in in the cities that they were building.
• 35:22
  SPEAKER_01: And then that became a great export product.
• 35:25
  SPEAKER_01: Now, then within within that story, this just and and the Volkswagen of the world and the Mercedes of the world, they're as aware of that as the Chinese, but that's just remarkable things.
• 35:37
  SPEAKER_01: I I th is a great story, and it's it's the global leader at this point.
• 35:43
  SPEAKER_01: They also came from a background of making batteries, and then they started making cars.
• 35:48
  SPEAKER_01: Xiaomi is another uh an example, you know.
• 35:51
  SPEAKER_01: Until three years ago, they made phones, right?
• 35:53
  SPEAKER_01: The Xiaomi phone was uh that that was what they made.
• 35:56
  SPEAKER_01: And then they decided, okay, let's make a car.
• 35:58
  SPEAKER_01: And within three years, they got five models on the road, and they're selling hundreds of thousands of cars.
• 36:05
  SPEAKER_01: And why is that?
• 36:06
  SPEAKER_01: Because the whole manufacturing ecosystem in China is so strong and so deep that you can do that.
• 36:14
  SPEAKER_01: The idea to to wheels on the road in China is about a year and a half, and in Europe it usually takes four to five years before, you know, from conception, from initial design to a car on the road.
• 36:28
  SPEAKER_01: It's the one reason why Volkswagen and others say, well, we've got to be in China because we've got to learn this.
• 36:35
  SPEAKER_01: And if we don't learn this, then we we won't be competitive.
• 36:39
  SPEAKER_01: I think, and I only follow Volkswagen, frankly, maybe because I have some shares, but uh they I'm being transparent here.
• 36:49
  SPEAKER_01: I don't have any shares in BYD, but Volkswagen uh but they seem to have turned that corner because of the engagement in China.
• 36:57
  SPEAKER_01: Now there's another way where, and that's I'm not saying that's the solution between of the tensions currently between the between EU and China, but that's of course investments in the EU of EV companies, uh, Chinese EV companies.
• 37:16
  SPEAKER_01: And there's some hesitation.
• 37:17
  SPEAKER_01: I think Spain has fully embraced that, uh, just like they embraced Volkswagen in an earlier incarnation.
• 37:24
  SPEAKER_01: That's why the SEAT is part of Volkswagen and no longer independent.
• 37:29
  SPEAKER_01: So maybe this could be the next phase.
• 37:32
  SPEAKER_01: Irrespective, and I know I know the numbers in Europe are quite dramatic, and the car industry is losing a lot of people.
• 37:42
  SPEAKER_01: But they would have anyway, and that is because the technologies that go into electric vehicles just very different from the technology that goes into internal combustion engine.
• 37:54
  SPEAKER_01: The number of parts going into electric, uh, into internal combustion engine is multiple times the number of parts that go into an electric vehicle.
• 38:04
  SPEAKER_01: And and that translates into people at work.
• 38:09
  SPEAKER_01: And so, irrespective, that transition to electric vehicles will cost jobs.
• 38:15
  SPEAKER_01: And that needs to be recognized.
• 38:17
  SPEAKER_01: And I hope that that Europe has always been very strong in supporting workers uh in in finding finding different jobs or or you know, have some early retirement, a combination of social measures that would that would reduce some of the impact.
• 38:33
  SPEAKER_01: But I think irrespective whether the Chinese are there, that impact will be there because of the change in the industry that is going on.
• 38:42
  SPEAKER_00: It's still an innovation potential in the already level global paying field.
• 38:49
  SPEAKER_00: Bert, we covered uh a lot of uh a lot of time from I think the 1970s to 2100.
• 38:54
  SPEAKER_00: If you take all the uh the shows again, all your your depth in that subject.
• 38:59
  SPEAKER_00: The podcast uh always ends with uh uh to ask my guest of his or her favorite number.
• 39:06
  SPEAKER_00: So, Bert, what is your favorite number and tell us the story behind that number.
• 39:12
  SPEAKER_01: My favorite number is one.
• 39:16
  SPEAKER_01: And uh it actually applies to Europe.
• 39:18
  SPEAKER_01: I am still a European, even though I spent most of my time in Asia.
• 39:22
  SPEAKER_01: Uh, but uh, you know, one aspect we haven't talked about it, but but is I I want Europe to thrive and maybe at some point still live there.
• 39:34
  SPEAKER_01: But the uh and and and Europe has the plan.
• 39:39
  SPEAKER_01: Because, yes, there's lots of issues with China at the moment, but really Europe and Europe as one, one Europe, one market, one labor market, one capital market would be tremendously, tremendously competitive in the international competition.
• 39:56
  SPEAKER_01: And it is more important now.
• 39:57
  SPEAKER_01: We're no longer living in a wo in a world in which rules determine everything, and which you can hide behind the rules and you'd still have a happy life.
• 40:06
  SPEAKER_01: Those days are past, I think.
• 40:08
  SPEAKER_01: So you'd have to rely on your own strength and do your own business well, as Xi Jinping likes to say.
• 40:16
  SPEAKER_01: So Europe has a plan, it's called the Draghi Plan, and there's lots of you can debate it in many, many ways, but but implementing a plan, becoming one as one Europe, I think is the future, and it will be a shining and prosperous future for Europe.
• 40:31
  SPEAKER_01: So one is my number.
• 40:33
  SPEAKER_00: Thank you so much, Bert, and thank you for ending on this positive note for Europe.
• 40:36
  SPEAKER_00: That also will go again the tide now and it will be true to Uri.
• 40:41
  SPEAKER_00: Thanks so much.
• 40:42
  SPEAKER_01: Thanks for having me.
• 40:44
  SPEAKER_00: Good buddy.