Latest / Trumponomics / How Will a Trade War Impact China's Economy?

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How Will a Trade War Impact China's Economy? · Trumponomics

• 0:00
  Speaker 1: The U S And China are on the verge of
• 0:02
  Speaker 1: a trade war now that the Trump administration has moved
• 0:05
  Speaker 1: forward with tariffs. China has vowed to retaliate, and President
• 0:08
  Speaker 1: Trump threatened to retaliate an even bigger fashion. He says
• 0:12
  Speaker 1: that trade wars are easy to win. But how will
• 0:15
  Speaker 1: this really impact China's economy? Is it really growing at
• 0:19
  Speaker 1: an incredible seven percent rate? Or is it about to
• 0:23
  Speaker 1: collapse from a mountain of debt and an aging population.
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  Speaker 1: Which are the myths and which are the facts? Welcome
• 0:39
  Speaker 1: to Benchmark. I'm Scott Landman, an economics editor with Bloomberg
• 0:43
  Speaker 1: News in Washington. Joining me today is my Bloomberg colleague,
• 0:46
  Speaker 1: Jeff Kerns, also here in d C. Jeff, welcome back
• 0:50
  Speaker 1: to Benchmark. Thanks Scott. It's great to be back, So Jeff.
• 0:53
  Speaker 1: The last time we had you on Benchmark, you were
• 0:56
  Speaker 1: in Beijing, and now you've just returned from almost three
• 1:00
  Speaker 1: years there as China economy editor. How does it feel
• 1:03
  Speaker 1: to be back? Indeed, it was two years, ten months
• 1:05
  Speaker 1: and ten days, and it's a little bitter sweet to
• 1:08
  Speaker 1: leave China. But it's great to be back here in Washington,
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  Speaker 1: and we're happy to have you back here. Uh so, Now,
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  Speaker 1: since I actually held the same position as you did
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  Speaker 1: in Beijing as economy editor for three years before you
• 1:22
  Speaker 1: were there, we thought it would be a good idea
• 1:24
  Speaker 1: to talk about China what we saw on the ground
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  Speaker 1: there and address some common perceptions or misperceptions about the
• 1:32
  Speaker 1: world's second largest economy. We'll call it myth or fact.
• 1:37
  Speaker 1: Are you ready, chef? I'm ready? All right, So let's
• 1:40
  Speaker 1: talk about trade first. China's economy is so dependent on
• 1:44
  Speaker 1: trade that Trump says he can win a trade war
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  Speaker 1: with China easily, and China does actually export about four
• 1:51
  Speaker 1: times as many goods to the United States as it imports.
• 1:54
  Speaker 1: Is this a myth or a fact? That China is
• 1:57
  Speaker 1: so dependent on trade and Trump can win this trade
• 2:00
  Speaker 1: were easily. What was the thinking over in China when
• 2:03
  Speaker 1: you were there. One of the clear themes that the
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  Speaker 1: government said is that they're prepared to suffer the consequences,
• 2:10
  Speaker 1: that they're not going to be pushed around into making
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  Speaker 1: concessions that they're not prepared to make or that they
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  Speaker 1: don't believe they should, and that they're ready to take
• 2:20
  Speaker 1: the pain for a little while. And the system there
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  Speaker 1: is a unique one that positions them to be able
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  Speaker 1: to do that without worries about political blowback or anything
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  Speaker 1: like that. And so that's been a really clear theme
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  Speaker 1: from the government that they are ready to take on
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  Speaker 1: this battle and that they didn't want it and didn't
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  Speaker 1: ask for it. So let's talk about the perception then
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  Speaker 1: that China is really dependent on exports. I mean, you
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  Speaker 1: said they're willing to take some pain, so obviously tariffs
• 2:50
  Speaker 1: would cause some pain for the economy. But you know,
• 2:53
  Speaker 1: for for decades China was really dependent on exports on
• 2:58
  Speaker 1: its manufacturing sector. How has its economy evolved in recent
• 3:02
  Speaker 1: years as it still has depended on manufacturing or have
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  Speaker 1: other kinds of industries sprung up to to take up
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  Speaker 1: some of that economic growth. Well, that's a really good point.
• 3:12
  Speaker 1: The economy is definitely evolving. The big theme is the
• 3:16
  Speaker 1: rebalancing and the economy away from the old smoke stack
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  Speaker 1: industries and the traditional focus of the last three or
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  Speaker 1: four decades on exports and toward the consumer and towards services.
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  Speaker 1: Services since two thousand and fifteen have accounted for more
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  Speaker 1: than of output, so that was a big milestone. And
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  Speaker 1: the consumer is getting stronger and stronger as a as
• 3:41
  Speaker 1: a domestic prop for growth. So you're right, there's a
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  Speaker 1: real shift that continues to slowly push shuring it away
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  Speaker 1: from that old dependence on making, uh, you know, exporting
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  Speaker 1: things and making cheap things to celebroad it's a it's
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  Speaker 1: a really different world than it was maybe five or
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  Speaker 1: ten years ago. Yeah, yeah, I can remember about even
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  Speaker 1: six or seven years ago. I forget exactly when, but
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  Speaker 1: services did pass uh manufacturing part of the economy to
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  Speaker 1: become the largest sector. And uh, there is still a
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  Speaker 1: lot of manufacturing in China that is still a very
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  Speaker 1: important part of the economy, but there has been this
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  Speaker 1: steady shift toward the consumer towards the services that you know,
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  Speaker 1: that show that the economy is just not this massive
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  Speaker 1: made in China thing that it was for a long time.
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  Speaker 1: And that's why I think the government is pushing this
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  Speaker 1: made in China, which is sort of this evolution of
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  Speaker 1: what it means to to make things in China and
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  Speaker 1: focus more on high technology and that sort of thing.
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  Speaker 1: Is that right, Yeah? I mean in China is probably
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  Speaker 1: one of the more underappreciated goals of the government, and
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  Speaker 1: it is really an ambitious target to really dominate a
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  Speaker 1: number of the you know, high tech sectors. One of
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  Speaker 1: the one the really interesting things that is a minor
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  Speaker 1: thing that came in the last year was the the
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  Speaker 1: new high speed rail line. The new high speed rail
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  Speaker 1: trains that rolled out the Fu Shing which means rejuvenation,
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  Speaker 1: were domestic technology and this was rolled out with a
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  Speaker 1: big fan fair last fall around the time of the
• 5:21
  Speaker 1: Party Congress, UH to show that this doesn't depend on
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  Speaker 1: German or Japanese imports to run these high speed rail trains,
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  Speaker 1: which are really the kind of the pride of the
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  Speaker 1: industrial economy there. It's definitely something that's UH an under
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  Speaker 1: appreciated point at this time that we're talking a lot
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  Speaker 1: about trade. Now you mentioned this point about state developed
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  Speaker 1: technology or technology developed in China, it's maybe a good
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  Speaker 1: time to segue to another myth or fact. Does the
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  Speaker 1: state control the economy or does the state let the
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  Speaker 1: private sector really do what it wants to do just
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  Speaker 1: without having full free reign to um, you know, to
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  Speaker 1: do whatever business it wants. Well, I think the answer
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  Speaker 1: might be both. It might be that the there is
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  Speaker 1: a definite Communist party control that's been tightening over not
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  Speaker 1: just over state owned enterprises but also over other countries,
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  Speaker 1: but there's also a real high level focus on putting
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  Speaker 1: more support into startups and innovative companies that will rise
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  Speaker 1: to become the next Ali, Babo or Tencent and really
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  Speaker 1: push the economy forward. And so there's two two different
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  Speaker 1: things going on there. There's been more state control over
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  Speaker 1: the state owned enterprises, but also trying to make them
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  Speaker 1: leaner and more nimble to kind of get away from
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  Speaker 1: the old, bloated and debt ridden enterprises that they used
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  Speaker 1: to be in the past. So both of these things
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  Speaker 1: are happening concurrently. One of the things that's really interesting
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  Speaker 1: though with debt is that this is one of the
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  Speaker 1: main risks and that total control can kind of be
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  Speaker 1: exerted on companies that don't look like they're acting carefully
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  Speaker 1: and they can be forced to reduce borrowing or sell assets.
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  Speaker 1: And so there is both an encouragement of the government
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  Speaker 1: to uh to have more party control over companies to
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  Speaker 1: make sure that they're serving the government that way, but
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  Speaker 1: also to also to support the new engines that it
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  Speaker 1: sees it self needing in the future. Right right, there's
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  Speaker 1: really this combination of hands on in some ways and
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  Speaker 1: hands off in other ways, but it's never really going
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  Speaker 1: to get to a fully hands off um kind of approach,
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  Speaker 1: because you do have this need for the Communist Party
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  Speaker 1: to maintain state control or you know, maintain control of
• 7:44
  Speaker 1: the government of the country. And you mentioned what you
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  Speaker 1: mentioned debt, and that brings us to another point that
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  Speaker 1: we need to address and something that really you know
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  Speaker 1: that that I remember I um edit a lot of
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  Speaker 1: stories about when I was over there. It's kind of
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  Speaker 1: this growing theme. UM, let's ask this question, is it
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  Speaker 1: a myth or a fact that China's debt is so
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  Speaker 1: out of hand that a crisis could be coming any
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  Speaker 1: day now? Well, we've heard a lot of that. There's
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  Speaker 1: probably been more of a focus on debt during the
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  Speaker 1: three years I was there from two thousand fifteen to
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  Speaker 1: to this year than was during the I guess the
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  Speaker 1: three prior years when you were there, when there was
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  Speaker 1: probably more of a boom in adding to debt. And
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  Speaker 1: in the last couple of years there's been really focused
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  Speaker 1: on maybe not reducing it, but flattening the pace of growth.
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  Speaker 1: And so the with debt, there was a real focus
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  Speaker 1: on these these kind of large conglomerates. That was really interesting.
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  Speaker 1: It was a way to show that the government was
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  Speaker 1: addressing problems and risks, but also by taking on some
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  Speaker 1: of the biggest names. And one of the best examples
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  Speaker 1: of that was the on Bud Insurance Group, which was
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  Speaker 1: um around the world. It was buying large, expensive assets UH,
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  Speaker 1: most notably the Wall Offer story in Manhattan and UH
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  Speaker 1: building what looked like an increasingly unsustainable portfolio with a
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  Speaker 1: lot of debts. So the government has seized the company
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  Speaker 1: and its prosecuting the the founder for fraud and now
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  Speaker 1: is overseeing the stabilization of this this big company. And
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  Speaker 1: there's similar things happening with other large conglomerates like Dali
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  Speaker 1: and Wanda Group and also h n A, which are
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  Speaker 1: in similar positions with the government has come in to say,
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  Speaker 1: you're gonna need to peel back a little bit of
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  Speaker 1: that debt and be careful. Yeah, it seems like you
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  Speaker 1: made the point. When when I was there, there was
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  Speaker 1: just this acknowledgement that there was an issue with debt,
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  Speaker 1: or at least you know, a growing number of economists
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  Speaker 1: were pointing it out, and it was starting to kind
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  Speaker 1: of seep into the um you know, the public statements
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  Speaker 1: of official or at least the thinking of what we
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  Speaker 1: could suss out of us another journalists were able to
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  Speaker 1: figure out. And at the same time, you know, a
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  Speaker 1: lot of people are started making dire predictions this is
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  Speaker 1: going to be the beginning of a big financial crisis
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  Speaker 1: in China, and of course, you know that has not
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  Speaker 1: come to pass. The government has taken these kinds of
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  Speaker 1: steps that you mentioned to deal with you know what,
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  Speaker 1: we're some of the biggest offenders on this issue, and
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  Speaker 1: you know, has has tried a variety of solutions, different
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  Speaker 1: programs to to kind of, um address the debt issue
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  Speaker 1: and make sure it doesn't balloon out of hand. And
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  Speaker 1: yet at the same time, um, you know, they do
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  Speaker 1: still use debt to support growth and it doesn't seem
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  Speaker 1: like that's about to end any time as soon as
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  Speaker 1: that is that fair to say? That sounds about right
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  Speaker 1: all right? Well, speaking of GDP growth, that brings us
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  Speaker 1: to another key issue with China's economy that a lot
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  Speaker 1: of people like to talk about, and that's the uh.
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  Speaker 1: Those are the numbers that the Chinese government puts out
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  Speaker 1: on the economy every quarter, and I think it's close
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  Speaker 1: to four years now, somewhere in that range, we have
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  Speaker 1: had a GDP number every quarter that's been somewhere between
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  Speaker 1: six point five and seven percent. Uh, you know, it
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  Speaker 1: seems pretty unrealistic from the outside. So but let's ask
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  Speaker 1: the question, is China's GDP really growing at this kind
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  Speaker 1: of seven percent? Right? Well, what I can't tell you
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  Speaker 1: is that our own uh Bloomberg Growth Tracker for China,
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  Speaker 1: which is developed by our economists in in Beijing and
• 11:37
  Speaker 1: Hong Kong, is showing that it's about six point just
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  Speaker 1: under seven percent at six and uh the three and
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  Speaker 1: twelve month averages are right around the same seven percent
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  Speaker 1: level there. So that's something that's kind of an affirmation.
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  Speaker 1: And and they've also done examinations looking at kind of
• 11:54
  Speaker 1: what other data sources like big data say about this,
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  Speaker 1: and they've they've shown some affirmation that the economy isn't
• 12:00
  Speaker 1: really actually growing at three percent. But the question about
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  Speaker 1: growth is an interesting one because China, one of the
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  Speaker 1: important things remember is that there's a growth target that's
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  Speaker 1: set by the government, and so there's a a reason
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  Speaker 1: that you would kind of want to see that that
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  Speaker 1: you might expect growth to be steered towards a certain
• 12:17
  Speaker 1: level or really said to be at a certain level.
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  Speaker 1: And this year that's at six point five percent, and
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  Speaker 1: so coincidentally, that's what economists are projecting for this year's expansion.
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  Speaker 1: And that's an interesting, uh interesting coincidence with the growth figures.
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  Speaker 1: Are You're right, they're very stable. They haven't moved for
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  Speaker 1: the last three years, uh, quarter and quarter by more
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  Speaker 1: than zero point one percentage point. Uh. And so there's
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  Speaker 1: there's a real uncanny stability that really doesn't compare to
• 12:44
  Speaker 1: any other major economy out there. Yeah, especially here in
• 12:47
  Speaker 1: the US, where the GDP numbers swinging from quarter to quarter.
• 12:51
  Speaker 1: We went from two point two percent annualized pace in
• 12:54
  Speaker 1: the first quarter, you know, now the forecasts are for
• 12:56
  Speaker 1: around four percent in the second quarter. That's a little
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  Speaker 1: bit different way of looking at it. That's quarter on
• 13:01
  Speaker 1: quarter annualized. Uh. China uses year over year. But even
• 13:05
  Speaker 1: with that, we've seen stronger variations in the US and
• 13:08
  Speaker 1: just about you know, every other major developed economy. Uh.
• 13:12
  Speaker 1: So to wrap up, I wanted to turn to one
• 13:15
  Speaker 1: last major issue hanging over China's economy, and that's the demographics.
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  Speaker 1: You know, one theme that was also coming up while
• 13:25
  Speaker 1: I was over there is that the workforce was starting
• 13:28
  Speaker 1: to shrink, meeting the working age population was actually starting
• 13:32
  Speaker 1: to get smaller. Uh, you know, people were getting older,
• 13:35
  Speaker 1: not enough babies were being born. This is partly the
• 13:38
  Speaker 1: result of government policies. You have the one child policy
• 13:41
  Speaker 1: for a long time. It's now a two child policy.
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  Speaker 1: But even then, I'm not sure if birth rates are
• 13:47
  Speaker 1: really taking off. But that brings us to the question
• 13:50
  Speaker 1: of how this is going to affect the economy. And
• 13:54
  Speaker 1: the question is is it a myth or a fact
• 13:57
  Speaker 1: that the shrinking workforce, the aging workforce is going to
• 14:01
  Speaker 1: post a big risk to China's growth in coming decades. Well,
• 14:05
  Speaker 1: let's say it's a fact that it's a big worry
• 14:07
  Speaker 1: for policymakers, and they've they've talked about this concern. The
• 14:12
  Speaker 1: one of the big milestones was that repealing of that
• 14:15
  Speaker 1: one child rule. And now our own reportings is that
• 14:19
  Speaker 1: that's uh, the new limit of two children is due
• 14:23
  Speaker 1: to be scrapped all together, so there's no limit. Uh.
• 14:26
  Speaker 1: When that one child rule was first uh eliminated, there
• 14:31
  Speaker 1: was a little bit of a pop in the birth rates,
• 14:33
  Speaker 1: but then the following year that kind of settled right
• 14:36
  Speaker 1: back down to seventeen million a year, so it didn't
• 14:39
  Speaker 1: really sustain for more than one year, which might have
• 14:43
  Speaker 1: been a little unsettling and might have been the reason
• 14:44
  Speaker 1: that there's uh consideration of just dropping that that rule together.
• 14:50
  Speaker 1: But there is the long term trends are not are
• 14:54
  Speaker 1: not encouraging, and by there the projections showed there's going
• 15:00
  Speaker 1: to be more people who are sixty or older than
• 15:05
  Speaker 1: those who are fourteen and younger. So that's a big
• 15:08
  Speaker 1: potential headache for for policy makers to address, and it
• 15:11
  Speaker 1: doesn't argue well for the long term growth trends. And
• 15:15
  Speaker 1: coming back to our original theme of how trade tensions
• 15:18
  Speaker 1: will affect China's economy or whether you know, Trump can
• 15:21
  Speaker 1: win a trade war with China, it's actually one area
• 15:25
  Speaker 1: where in the long term, the US may actually hold
• 15:29
  Speaker 1: a structural advantage if the US population can grow uh
• 15:35
  Speaker 1: faster than than China or or not shrink actually, but
• 15:39
  Speaker 1: you know, like like we've also reported here that depends
• 15:42
  Speaker 1: on immigration, and if immigration is subject to restrictions, then
• 15:48
  Speaker 1: you know that actually will result in a labor force
• 15:51
  Speaker 1: in the United States that's stable or shrinking. So uh,
• 15:55
  Speaker 1: you know, I think it is pretty interesting to compare
• 15:57
  Speaker 1: the long term demographic trends that aren't really all that
• 16:02
  Speaker 1: different in both countries in in a really big picture.
• 16:05
  Speaker 1: Would you agree with that, Jeff, I I would. I
• 16:08
  Speaker 1: think that's a really compelling point. So, Jeff, thinking about
• 16:11
  Speaker 1: all these things that we've been talking about, ken Trump
• 16:14
  Speaker 1: easily win a trade war with China, Well, I guess
• 16:19
  Speaker 1: that depends on what the definition of victory is. But
• 16:22
  Speaker 1: right now it's UH. It looks like a pretty chaotic outlook.
• 16:26
  Speaker 1: So I'm not really sure how to judge that, But
• 16:28
  Speaker 1: I think that the UH for China, the country is
• 16:32
  Speaker 1: confident that they can sustain anything thrown at them. And
• 16:37
  Speaker 1: the other thing for China that I think is the
• 16:39
  Speaker 1: one thing I'm gonta learned is that don't bet against China.
• 16:42
  Speaker 1: It's full of surprises. I'll never forget. We arrived on Monday,
• 16:46
  Speaker 1: August ten, two fifty and the next day was the
• 16:49
  Speaker 1: yuand evaluation, which was a major crisis for the whole world.
• 16:55
  Speaker 1: Uh and markets fell around the world, and there were
• 16:58
  Speaker 1: all kinds of predictions ab out the downfall of the
• 17:02
  Speaker 1: the unsustainable debt and uh inflated stock markets, and here
• 17:07
  Speaker 1: we are that the economy is looking pretty darn rob Us. Now, Jeff,
• 17:11
  Speaker 1: I remember that day well too, And what you say
• 17:14
  Speaker 1: is correct about the predictions that were made at that
• 17:17
  Speaker 1: time and how we should all have a little humility
• 17:20
  Speaker 1: in what we judged to be the outlook for China
• 17:24
  Speaker 1: and this budding trade war as it takes off. Jeff Kerns,
• 17:29
  Speaker 1: thanks for joining us on Benchmark. Thanks great to talk
• 17:32
  Speaker 1: to you. Benchmark will be back next week. Until then,
• 17:42
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