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What Wuhan Can Teach Us About Recovery · Stephanomics

• 0:00
  Speaker 1: So COVID nineteen is um is a kind of stress
• 0:03
  Speaker 1: test for for how economic systems function, and if you
• 0:08
  Speaker 1: look at how China and the US have performed in
• 0:11
  Speaker 1: the last six months, China is actually doing rather better. Hello,
• 0:21
  Speaker 1: and welcome to Stephanomics, the podcast that brings the COVID
• 0:23
  Speaker 1: global economy to you. We're all about China this week,
• 0:27
  Speaker 1: and that was Tom Aulick, Bloomberg's chief economist and old
• 0:30
  Speaker 1: China hand, who has just published a book that helps
• 0:32
  Speaker 1: explain why China's economy has not had the big crisis
• 0:36
  Speaker 1: that so many experts have confidently predicted over the years,
• 0:40
  Speaker 1: and why it also appears to be winning the fight
• 0:42
  Speaker 1: against COVID nineteen. But first, you'll remember we spoke to
• 0:46
  Speaker 1: Sharon Chen, Bloomberg's Beijing bureau chief, back in April. She
• 0:50
  Speaker 1: was in quarantine then in her apartment after a reporting
• 0:53
  Speaker 1: trip to Wuhan. That city was just coming out of lockdown.
• 0:57
  Speaker 1: Then first into the COVID crisis and first out. We
• 1:00
  Speaker 1: spoke to her then about the early signs of recovery
• 1:03
  Speaker 1: there and what it might tell us about the road
• 1:05
  Speaker 1: ahead for the rest of us. Well three months on,
• 1:08
  Speaker 1: I was interested to find out what life has been
• 1:10
  Speaker 1: like in China since then, and whether the authorities still
• 1:14
  Speaker 1: feel good about the way they've handled the pandemic. Sharon,
• 1:23
  Speaker 1: it's great to talk to you again. I know that
• 1:25
  Speaker 1: you're planning another trip to Wuhan, but you've been talking
• 1:28
  Speaker 1: to businesses there about what's what's happening. When we spoke
• 1:31
  Speaker 1: at the beginning, it seemed to show something that we
• 1:34
  Speaker 1: have seen in other places, that it's a twin track economy,
• 1:37
  Speaker 1: that production side coming back but not so much the
• 1:41
  Speaker 1: consumer side. Is that's still true? Yes, so um you know,
• 1:45
  Speaker 1: bought the data and the anecdotes kind of indicate that
• 1:48
  Speaker 1: that's what's happening. Unfortunately, obviously the data is a bit
• 1:52
  Speaker 1: of a lagging indicator, but we have factory production and
• 1:55
  Speaker 1: retail sales, exports, fixed st investment up till me UM
• 1:59
  Speaker 1: and you know, the economy reopened in April, and even
• 2:02
  Speaker 1: in May, we saw that local manufacturers had basically almost recovered.
• 2:07
  Speaker 1: You know, industrial production was only zero point four percent UM,
• 2:10
  Speaker 1: not lower than the year before in growth, but consumptions
• 2:14
  Speaker 1: obviously still lagging UM and exports as well. I mean
• 2:18
  Speaker 1: some more recent data, you know, we look at subway
• 2:21
  Speaker 1: data and a lot of the cities, and in Buhan
• 2:23
  Speaker 1: it shows that traffic passenger traffic has recovered to about
• 2:27
  Speaker 1: half the level, which is you know, decent. And also
• 2:31
  Speaker 1: it could be one of the reasons which we talked
• 2:33
  Speaker 1: about earlier, that people are buying cars and just driving
• 2:36
  Speaker 1: themselves instead of taking public transport, so it's not entirely
• 2:39
  Speaker 1: reflective of how you know, how much people are out again.
• 2:43
  Speaker 1: And we should mention that Wuhan had a flare up
• 2:46
  Speaker 1: in May, so it reopened um in early April, and
• 2:49
  Speaker 1: then in May and new cluster of cases was discovered,
• 2:52
  Speaker 1: and you know, the city reacted very strongly. Obviously, they
• 2:55
  Speaker 1: put in place a lot of strict restrictions and then
• 2:57
  Speaker 1: they tested the entire population of level million people in
• 3:01
  Speaker 1: the span of two weeks and since then they haven't
• 3:03
  Speaker 1: reported a single case. So, you know, just based on
• 3:06
  Speaker 1: the anecdotes as well, we do see that factories are
• 3:09
  Speaker 1: back up a full capacity UM, a lot of the
• 3:12
  Speaker 1: exporters are benefiting. Trade did search as soon as the
• 3:16
  Speaker 1: city reopened, but of course it depends on what kind
• 3:19
  Speaker 1: of product you're making. You know. We spoke to one
• 3:21
  Speaker 1: factory manager who they make plastic cups for airlines and
• 3:25
  Speaker 1: for hotels, and you know, business has just evaporated because
• 3:29
  Speaker 1: the travel industry just collapsed, like they just don't have
• 3:32
  Speaker 1: any demand. But then we talked to another factory that
• 3:35
  Speaker 1: was making helmets and then pivoted to making more face
• 3:38
  Speaker 1: shields and protective gear, and they've seen, you know, demand
• 3:41
  Speaker 1: from South America double because the virus cases there keep increasing.
• 3:45
  Speaker 1: And then it's the same on the consumption front as well.
• 3:47
  Speaker 1: You know, restaurant owners they are struggling because people don't
• 3:51
  Speaker 1: really feel safe and also some of the habits like
• 3:53
  Speaker 1: eating at home, they've just persisted. Um. But on the
• 3:56
  Speaker 1: other hand, you know, we spoke to a factory owner.
• 3:58
  Speaker 1: He produces hot dry noodles, but the instant kind like
• 4:02
  Speaker 1: instant raman where you add hot water, and you know,
• 4:05
  Speaker 1: business is just going through the roof. He's even expanded,
• 4:07
  Speaker 1: he's now delivering to the next city because people just
• 4:10
  Speaker 1: want to stay at home, but they want to eat
• 4:12
  Speaker 1: your favorite food still, so you know, it's just definitely
• 4:15
  Speaker 1: a mixed bag. So if you're if you're involved in
• 4:19
  Speaker 1: the COVID business or you're providing, you're able to provide
• 4:22
  Speaker 1: food that people don't need to be sitting in a
• 4:23
  Speaker 1: restaurant to eat. You're doing You're doing all right. That
• 4:26
  Speaker 1: was interesting what you said about the exports, because one
• 4:29
  Speaker 1: of the concerns looking at China was that we saw
• 4:32
  Speaker 1: the sort of early signs of a V shaped recovery,
• 4:35
  Speaker 1: at least when it came to production, and then the
• 4:38
  Speaker 1: fear was that the terrible things that were going on
• 4:41
  Speaker 1: in the rest of the world would then bring China
• 4:44
  Speaker 1: down again because of it's dependent on exports. But it's
• 4:47
  Speaker 1: so what you're saying is there is that's a twin
• 4:50
  Speaker 1: track as well. If you're on the consumption side, you're
• 4:52
  Speaker 1: doing badly, but actually some of the core products are exporting.
• 4:56
  Speaker 1: Well yeah, I mean, like the supply chain is so
• 5:00
  Speaker 1: global and so integrated now as well, right, I mean,
• 5:02
  Speaker 1: they also feel the impact on the raw material side,
• 5:05
  Speaker 1: but I think you know, the trade story. What's interesting
• 5:08
  Speaker 1: has is that it's also kind of shown the limits
• 5:11
  Speaker 1: of government intervention on government support. You know, the government
• 5:14
  Speaker 1: has rolled out a lot of support for these businesses
• 5:17
  Speaker 1: and especially the smaller ones, but until global demand recovers,
• 5:22
  Speaker 1: there is a limit to what the government can do.
• 5:25
  Speaker 1: And you know, some of the companies that we spoke
• 5:27
  Speaker 1: to said that they can apply for loans and they
• 5:30
  Speaker 1: can apply for grants, but until their own clients overseas
• 5:34
  Speaker 1: are really able to um bring those orders back, you know,
• 5:37
  Speaker 1: there's there's really not much they can do. And then
• 5:40
  Speaker 1: another option for them is to try to get new clients.
• 5:43
  Speaker 1: But then with travel basically understand still, these these trade
• 5:46
  Speaker 1: fairs and everything, I mean, those things aren't happening as well.
• 5:50
  Speaker 1: You mentioned that they had tried in Wuhan to have
• 5:52
  Speaker 1: various measures to stimulate consumption, and of course that's something
• 5:56
  Speaker 1: we've had this week. The British government has been trying
• 5:58
  Speaker 1: to throw a lot of the economy to to get
• 6:02
  Speaker 1: consumers out and about now that the lockdown is easy,
• 6:05
  Speaker 1: we've seen lots of consideration of that in the US
• 6:09
  Speaker 1: as well. Does it work to be putting more money
• 6:13
  Speaker 1: into consumers pockets or is it really all about confidence
• 6:16
  Speaker 1: in the virus? I mean, I think it does work.
• 6:19
  Speaker 1: They've given out about five hundred million grand or shopping vultures,
• 6:23
  Speaker 1: that's about seventy three million U S dollars and you know,
• 6:26
  Speaker 1: people that we spoke to said that they regularly use
• 6:28
  Speaker 1: those vultures, and I think it does get people spending,
• 6:32
  Speaker 1: although it's unclear how much of that spending happens in
• 6:34
  Speaker 1: person and how much of it is happening online because
• 6:37
  Speaker 1: you know, a lot of transactions in China shop online
• 6:40
  Speaker 1: very easily. Um So I don't know how much that
• 6:43
  Speaker 1: is really helping encourage people to go outside and to
• 6:46
  Speaker 1: do things that they used to do. Interestingly, one of
• 6:50
  Speaker 1: the restaurant owners we spoke to said that it was
• 6:53
  Speaker 1: the mass testing campaign that Juhan executed that was the
• 6:57
  Speaker 1: big confidence booster. You know, he saw the most number
• 7:00
  Speaker 1: of customers come in the day after they finished their
• 7:02
  Speaker 1: campaign and announced that they had tested every single person
• 7:05
  Speaker 1: in the city. And you know, if the city is
• 7:07
  Speaker 1: able to pull that off, like, I think that that
• 7:10
  Speaker 1: does kind of really reap dividends in terms of making
• 7:13
  Speaker 1: people feel confident and making them feel safe. Of course,
• 7:20
  Speaker 1: we're also looking ahead wondering how long we're going to
• 7:24
  Speaker 1: feel like we're in uh what you described it when
• 7:28
  Speaker 1: you came back from Wuhan last time, a sort of
• 7:30
  Speaker 1: dystopian post lockdown world where everyone's getting temperature tests or
• 7:36
  Speaker 1: where you're being socially distanced. How far when you're in
• 7:41
  Speaker 1: your day to laid life and when you go out
• 7:44
  Speaker 1: with friends in Beijing. I mean, how far do you
• 7:47
  Speaker 1: still feel you are from normal life? Does it feel
• 7:50
  Speaker 1: when you have these outbreaks that it's still one step
• 7:53
  Speaker 1: forward one step back? Or is it are you starting
• 7:56
  Speaker 1: to see the light at the end of the tunnel?
• 7:58
  Speaker 1: I mean, personally, I do you like life is pretty
• 8:01
  Speaker 1: much back to normal? So we had an outbreak in
• 8:03
  Speaker 1: Beijing a couple of weeks ago, and you know, they
• 8:08
  Speaker 1: they didn't employ the same kind of city wide lockdown
• 8:11
  Speaker 1: that they've used in China and other places, in part
• 8:14
  Speaker 1: because you know, the states are just higher in Beijing.
• 8:16
  Speaker 1: They can't really bring the city to a stand still
• 8:19
  Speaker 1: because there's just so much commerce going on, and then
• 8:22
  Speaker 1: also the halls of government are here as well. So
• 8:26
  Speaker 1: what they did was that they really took this very
• 8:28
  Speaker 1: targeted approach. They broke up the entire city, you know,
• 8:31
  Speaker 1: by district by street, and they determined whether each place
• 8:34
  Speaker 1: was low risk, high risk, a medium risk, and they
• 8:37
  Speaker 1: lockdown areas very specifically, and then they also did huge
• 8:42
  Speaker 1: mass mass testing and they restricted people from leaving the
• 8:45
  Speaker 1: city depending on you know, how risk of their areas were.
• 8:49
  Speaker 1: But they did manage to maintain a large part of
• 8:52
  Speaker 1: normal activity. You know, shops and restaurants all remained open.
• 8:57
  Speaker 1: The main difference was that UM a lot of housing
• 9:00
  Speaker 1: compounds didn't allow visitors in and out, although some did
• 9:03
  Speaker 1: continue to do that. UM And also you know, by
• 9:06
  Speaker 1: now China's developed a lot of the tools that it
• 9:08
  Speaker 1: needs for contact tracing, so everyone has the ability to
• 9:12
  Speaker 1: check on their phone whether they've been in contact with
• 9:15
  Speaker 1: anyone who's a risk, or they've been to any risky areas,
• 9:18
  Speaker 1: or they've traveled. So as long as you're able to
• 9:20
  Speaker 1: show that you have that green call, you can basically
• 9:23
  Speaker 1: go anywhere. So I do think it's like much less
• 9:27
  Speaker 1: dramatic now when there are flare ups, like the government
• 9:29
  Speaker 1: has developed the ability to board test and contact trace
• 9:32
  Speaker 1: and be more targeted in its restrictions. Do you feel
• 9:36
  Speaker 1: I mean we should perhaps say that we were we
• 9:38
  Speaker 1: were hoping to play some clips from some of the
• 9:41
  Speaker 1: people you spoke to Wan who then said they didn't
• 9:43
  Speaker 1: feel comfortable and actually they've been discouraged from talking to
• 9:46
  Speaker 1: foreign media after the last time that you went there.
• 9:50
  Speaker 1: There's a lot of scrutiny on China at the moment
• 9:54
  Speaker 1: in terms of not just what's happened in Hong Kong.
• 9:56
  Speaker 1: But how how it's handled the pandemic. Do you feel
• 10:02
  Speaker 1: as a reporter that the restrictions are tighter or the
• 10:06
  Speaker 1: more limits on what you can do, or is this
• 10:08
  Speaker 1: more or less business as usual? I mean, you know,
• 10:11
  Speaker 1: for Bloomberg, we focus a lot on economic and financial news,
• 10:14
  Speaker 1: and you know, most of the time that's fine, but yeah,
• 10:17
  Speaker 1: I mean, the environment is changing. I mean, you look
• 10:19
  Speaker 1: at what's happening in Hong Kong obviously, and you know,
• 10:22
  Speaker 1: the Chinese government has also taken steps that seemed to
• 10:25
  Speaker 1: be moves towards silencing more criticism and being more focused
• 10:31
  Speaker 1: on making sure that social unrest doesn't take hold. Um.
• 10:34
  Speaker 1: You know, the President Jumping himself has said that social
• 10:37
  Speaker 1: stability is a concern in the wake of the virus,
• 10:40
  Speaker 1: and I think they are hyper aware of anything that
• 10:43
  Speaker 1: may kind of, you know, foment the same amount of
• 10:46
  Speaker 1: unhappiness that happened when the virus was really bad. And
• 10:50
  Speaker 1: you know about the whistleblowers who are silenced and all that,
• 10:54
  Speaker 1: and you know, simultaneously we're seeing this increasing tension between
• 10:58
  Speaker 1: China and the US word the media. So China kicked
• 11:02
  Speaker 1: out several reporters and the US has also been cracking
• 11:04
  Speaker 1: down on American news organizations. Then now we have this
• 11:07
  Speaker 1: spat between the UK and c GTN statement media about
• 11:12
  Speaker 1: airing force confessions and so, you know, I think as
• 11:15
  Speaker 1: China becomes more assertive, yeah, I mean, it definitely is
• 11:19
  Speaker 1: narrowing the scope from for us to act freely. Not
• 11:24
  Speaker 1: that it was free before, but yeah, well you still
• 11:27
  Speaker 1: do you still produce a lot of stories. Will you
• 11:29
  Speaker 1: have to do the same quarantine if you go to
• 11:33
  Speaker 1: Wuhan or is that now you just you just have
• 11:36
  Speaker 1: to show people your at your foot apple and your phone. Yeah.
• 11:40
  Speaker 1: And in fact, um, you know, Wuhan is considered a
• 11:42
  Speaker 1: low risk area. Now there's no cases and they've tested everybody.
• 11:45
  Speaker 1: So actually do you have you were saying they do
• 11:48
  Speaker 1: have floods they just can't break. They've now got people
• 11:52
  Speaker 1: dying from floods. Yeah, I mean there's floods. There's flooding
• 11:56
  Speaker 1: now in southern China. I mean it's a problem every year,
• 11:58
  Speaker 1: but this year it's one of it's it's really becoming
• 12:02
  Speaker 1: more severe. Um, so it's been tough for people in Well, Sharon,
• 12:06
  Speaker 1: I'm sure we might we might check in on you
• 12:08
  Speaker 1: again in in a few months, I mean time, Thank
• 12:11
  Speaker 1: you very much. Yeah, no problem. M Well, that was
• 12:21
  Speaker 1: the view this week from Beijing and Mouhan. Now, as
• 12:25
  Speaker 1: I mentioned at the start, we have the long view
• 12:27
  Speaker 1: on China from our chief economists, Tom Worlick. He's based
• 12:30
  Speaker 1: in Washington now, but he spent eleven years in Beijing,
• 12:33
  Speaker 1: and he's just published a book based on his time there,
• 12:36
  Speaker 1: at least in part, called China The Bubble That Never Pops. Tom.
• 12:41
  Speaker 1: Nice to have you back on the podcast. In your
• 12:44
  Speaker 1: recent piece for Business Week about your book, you started
• 12:47
  Speaker 1: with this line, don't tell Trump, but China's winning. Is
• 12:51
  Speaker 1: China winning everything or just the fight against COVID nineteen.
• 12:56
  Speaker 1: So COVID nineteen is is a kind of stress test
• 12:59
  Speaker 1: for for how economic systems function. And if you look
• 13:04
  Speaker 1: at how China and the US have performed in the
• 13:07
  Speaker 1: last six months, China is actually doing rather better. China's
• 13:11
  Speaker 1: got the virus under control. The US doesn't have the
• 13:14
  Speaker 1: virus under control. China managed to control unemployment, the U
• 13:18
  Speaker 1: saw unemployment rise to levels not seen since the Great Depression.
• 13:23
  Speaker 1: China's poised to get back to growth. Factories are already
• 13:26
  Speaker 1: in a better place than they were a year ago.
• 13:29
  Speaker 1: The US is still a long way underwater, so there's
• 13:33
  Speaker 1: a broader point there as well. I think the way
• 13:36
  Speaker 1: we look at the Chinese model is flawed. We only
• 13:40
  Speaker 1: see the downsides and the stresses. We don't see the
• 13:43
  Speaker 1: strengths and the sources of resilience well, and the general,
• 13:47
  Speaker 1: as you say, the general thesis of your book is
• 13:49
  Speaker 1: that China is stronger than it looks economically. Certainly. I
• 13:53
  Speaker 1: know when I was working in the investment world and
• 13:55
  Speaker 1: people would say, what are your top three or top
• 13:57
  Speaker 1: five risks for the year, And when you hear the
• 14:02
  Speaker 1: sort of strategist talk about it, if they had sort
• 14:04
  Speaker 1: of run out of one, they would just throw in
• 14:06
  Speaker 1: China blowing up, because it was sort of a standard
• 14:08
  Speaker 1: thing that you would expect China's debt issues and financial
• 14:12
  Speaker 1: problems to finally all come home to roost. You're saying
• 14:16
  Speaker 1: that we could carry on waiting quite a long time. Yeah,
• 14:20
  Speaker 1: so I was in I was in China for eleven years,
• 14:23
  Speaker 1: and for that entire time, there was this sort of
• 14:26
  Speaker 1: thread of pessimism, thread of doom, almost running through the
• 14:30
  Speaker 1: Western commentary on China. Yes, the story went tem percent
• 14:35
  Speaker 1: growth looks impressive, but if you pope beneath the surface,
• 14:38
  Speaker 1: it's all financed by debt. All the debt is being misallocated.
• 14:42
  Speaker 1: It's a bubble and it's going to blow up, and
• 14:45
  Speaker 1: of course it doesn't ever blow up. So my motivation
• 14:48
  Speaker 1: in putting pen to paper for this book was, of
• 14:51
  Speaker 1: course mainly fame and wealth beyond my wildest dreams, but
• 14:55
  Speaker 1: beyond that, I also wanted to explain why the bubble
• 14:59
  Speaker 1: never pops, and I think an important reason is we
• 15:02
  Speaker 1: look at the negatives, we don't consider the positives. And
• 15:06
  Speaker 1: on the financial system, what that means is we look
• 15:09
  Speaker 1: at the massive build up of debt. We look at
• 15:11
  Speaker 1: how the debt has been allocated to zombie firms and
• 15:16
  Speaker 1: real estate developers building ghost towns in the desert, and
• 15:19
  Speaker 1: those are big problems. But what we forget is for
• 15:22
  Speaker 1: bad loans to turn into a financial crisis, you also
• 15:25
  Speaker 1: need to have a funding problem for the banks. And
• 15:28
  Speaker 1: because China's saving rate is so high, and because it's
• 15:31
  Speaker 1: hard to take money out of the country, the funding
• 15:33
  Speaker 1: base for the banks is actually really solid. And as
• 15:37
  Speaker 1: you say, there's all the things that people identify that
• 15:39
  Speaker 1: a weaknesses. You know that debt exists um, But you're
• 15:43
  Speaker 1: saying that there is also that there is a corresponding
• 15:45
  Speaker 1: strength there which the government has room to support the
• 15:48
  Speaker 1: banks in a way they don't in other countries. I
• 15:51
  Speaker 1: think you know some one of a couple of your
• 15:53
  Speaker 1: other strengths that you point out is that state intervention
• 15:57
  Speaker 1: that you have there is actually effective and strength, not
• 16:01
  Speaker 1: just a question of of meddling in the economy and
• 16:04
  Speaker 1: getting in the way of markets. And you have the
• 16:06
  Speaker 1: sheer scale of the economy. That's also an advantage, isn't it. Yeah.
• 16:11
  Speaker 1: When we look at the state system in China from
• 16:14
  Speaker 1: our perspective here in the West, where we, you know,
• 16:16
  Speaker 1: firmly believe that free markets of the answer, we just
• 16:20
  Speaker 1: see corruption and we see inefficiency, and those are real problems.
• 16:24
  Speaker 1: If you look at return on assets for China's state firms,
• 16:27
  Speaker 1: they're much lower than return on assets for private firms.
• 16:32
  Speaker 1: But what we miss is that for countries that are
• 16:35
  Speaker 1: big and that have somewhat effective industrial planners and which
• 16:40
  Speaker 1: are still at an early stage in their development, state
• 16:43
  Speaker 1: ownership can be a powerful instrument of development. The state
• 16:48
  Speaker 1: banks can finance acquisitions of new technologies, the state and
• 16:52
  Speaker 1: enterprises can deploy those technologies at a massive scale, and
• 16:56
  Speaker 1: that becomes an instrument which can take China's on me
• 17:00
  Speaker 1: as a whole closer to the technology frontier and make
• 17:03
  Speaker 1: it more productive, even as the state sector itself is
• 17:07
  Speaker 1: inefficient when looked at from a sort of narrow balance
• 17:10
  Speaker 1: sheet accounting perspective. No, and obviously that's something we're being
• 17:14
  Speaker 1: reminded of in many countries of the important In some areas,
• 17:18
  Speaker 1: the government really is the only one that can intervene,
• 17:22
  Speaker 1: and boy if they've done so in response to COVID nineteen. Now,
• 17:25
  Speaker 1: obviously you've achieved one important thing. You've managed to get
• 17:28
  Speaker 1: this book out before the bubble pops, which I'm sure
• 17:31
  Speaker 1: was a concern for your publisher, But you probably weren't
• 17:34
  Speaker 1: expecting to have it come out in the middle of
• 17:36
  Speaker 1: a pandemic, which clearly has meant that you weren't able
• 17:39
  Speaker 1: to have any lavish book party. So I'm sorry, not
• 17:41
  Speaker 1: that Bloomberg would have thrown you any but has the
• 17:45
  Speaker 1: last few months changed your view on any of the
• 17:47
  Speaker 1: arguments you've made in your book or put them in
• 17:49
  Speaker 1: a different perspective. Perhaps it's it's an emotional roller coaster
• 17:53
  Speaker 1: being on this podcast. Stephanitiely, I thought you were offering
• 17:56
  Speaker 1: me a lavish book party, and then in the very
• 17:58
  Speaker 1: next sentence it was yanked away from me. Um. Fortunately,
• 18:02
  Speaker 1: I'm going to be working from home for the foreseeable future,
• 18:04
  Speaker 1: so no one will be able to see the disappointment
• 18:06
  Speaker 1: on my face. So so so covid' is a stress
• 18:09
  Speaker 1: test for the Chinese economy. And let's think about what
• 18:12
  Speaker 1: happened in the first six months of the year. So
• 18:15
  Speaker 1: real estate developers didn't sell any houses, state owned enterprises
• 18:20
  Speaker 1: saw their profits turn into losses. Local governments didn't sell
• 18:24
  Speaker 1: any land, and they saw their tax revenue collapse. And
• 18:28
  Speaker 1: who are the biggest borrowers in China's economy, Well, it's
• 18:31
  Speaker 1: the real estate developers, the state owned enterprises, and the
• 18:35
  Speaker 1: local governments. So if there was going to be a
• 18:37
  Speaker 1: financial crisis in China, presumably it would have just happened.
• 18:42
  Speaker 1: All of the biggest borrowers saw their income collapse, they
• 18:45
  Speaker 1: couldn't service their loans. This was the moment when we
• 18:48
  Speaker 1: should have seen a financial crisis, and clearly that didn't happen. Um.
• 18:53
  Speaker 1: And I think that's a reminder of some of the
• 18:56
  Speaker 1: sort of hiding in plain site sources of strength in
• 18:59
  Speaker 1: China as economy. In China's financial system, the banks have
• 19:02
  Speaker 1: a very strong funding base, and so they don't actually
• 19:06
  Speaker 1: need loans to be repaid on time. They can say
• 19:09
  Speaker 1: to the borrowers, you know what, we know this is
• 19:11
  Speaker 1: a really difficult quarter, maybe even a very difficult year.
• 19:14
  Speaker 1: You pay us back in the second half, or even
• 19:17
  Speaker 1: you pay us back in one Private businesses are going
• 19:21
  Speaker 1: to be letting go of workers and canceling investment projects.
• 19:25
  Speaker 1: But China has a massive state sector inefficient, but the
• 19:29
  Speaker 1: government can use the state sector as a kind of
• 19:32
  Speaker 1: a counter cyclical instrument and say to the state sector,
• 19:35
  Speaker 1: you know what, don't let any workers go, and accelerate
• 19:39
  Speaker 1: that investment project. And what that means is the economy
• 19:42
  Speaker 1: can climb out of the COVID hole a bit quicker
• 19:45
  Speaker 1: than it otherwise would. So we have obviously had the
• 19:56
  Speaker 1: events in Hong Kong, the passing of the legislation in
• 19:58
  Speaker 1: Hong Kong in the last few weeks, and and one
• 20:00
  Speaker 1: thing that has been very striking is the way that
• 20:04
  Speaker 1: along with the economic success and apparent resilience, the Chinese
• 20:10
  Speaker 1: government is sort of doubling down on some of the
• 20:13
  Speaker 1: more uncompromising aspects of its economic models. Shall we say,
• 20:19
  Speaker 1: you look at China and you know the major change
• 20:21
  Speaker 1: it has to have over the next few years, and
• 20:24
  Speaker 1: then the government is trying to achieve is to move
• 20:26
  Speaker 1: from being an export driven economy to a consumer driven economy.
• 20:30
  Speaker 1: And I guess the fond belief of many economists and
• 20:34
  Speaker 1: certainly many outside policymakers has always been that it's quite
• 20:38
  Speaker 1: hard to be a really successful kind of individualistic, consumer
• 20:43
  Speaker 1: driven economy when you're not giving those consumers rights as
• 20:49
  Speaker 1: citizens and moving towards a democracy. Is that being proved
• 20:55
  Speaker 1: wrong in China? So I don't want to come across
• 20:58
  Speaker 1: as um. I don't want to come across as as
• 21:01
  Speaker 1: like a Pollyanna on China's social system. Clearly there are
• 21:07
  Speaker 1: absolutely enormous costs to China's social system. The question is
• 21:14
  Speaker 1: is that going to be Is that going to translate
• 21:16
  Speaker 1: into economic costs? And the answer so far has been no.
• 21:22
  Speaker 1: And I think there's two reasons for that. Um. So
• 21:24
  Speaker 1: the first reason we sort of alluded to Stephanie is
• 21:28
  Speaker 1: China's position in the development process. Right, so, when do
• 21:32
  Speaker 1: you need freethinking innovators, Well, you really need freethinking innovators
• 21:37
  Speaker 1: when you get to the technology frontier and you need
• 21:40
  Speaker 1: to innovate, and that's not where China is. China's GDP
• 21:43
  Speaker 1: per capita is the third of the level in the
• 21:45
  Speaker 1: United States. There are a long way from the technology frontier,
• 21:49
  Speaker 1: and that means that for the next foreseeable future, growth
• 21:53
  Speaker 1: is going to be a process of catching up and copying,
• 21:56
  Speaker 1: not necessarily a process of pushing act and developing innovative
• 22:02
  Speaker 1: technologies themselves. The second reason I think is that actually
• 22:08
  Speaker 1: we have a somewhat we have a settled view of
• 22:13
  Speaker 1: the relationship between social systems and economic progress, which actually
• 22:20
  Speaker 1: China is challenging. Right. Um, we think that democracy, markets
• 22:25
  Speaker 1: and growth go together, right, And if you have markets,
• 22:31
  Speaker 1: then you will grow, and also also if you have markets,
• 22:33
  Speaker 1: that will be a driver of democracy. And actually what
• 22:36
  Speaker 1: we're seeing in China is that these relationships which seems
• 22:41
  Speaker 1: so settled in the West don't actually necessarily hold well.
• 22:45
  Speaker 1: These relationships kind of reassert themselves over the long term.
• 22:50
  Speaker 1: I think as we get closer to the technology front frontier,
• 22:53
  Speaker 1: the chances are that they will Is that going to
• 22:56
  Speaker 1: matter for China in the next three for five years
• 23:01
  Speaker 1: when g d P per capita is still a third
• 23:03
  Speaker 1: of the level in the United States. I think the
• 23:05
  Speaker 1: answer is probably no. But isn't the mess lesson of
• 23:09
  Speaker 1: the Huawei controversy and some of these others involving China
• 23:14
  Speaker 1: technology is that they are closer to that frontier than
• 23:17
  Speaker 1: we like to think. And indeed, in that sector that
• 23:20
  Speaker 1: they seem to be, they have one company that is
• 23:22
  Speaker 1: pretty much dominant. Yeah. I think there's two things there.
• 23:26
  Speaker 1: So the first thing is UM, technological progress is unevenly distributed, right, So, Yeah,
• 23:33
  Speaker 1: if you look at five G or AI or sustainable
• 23:38
  Speaker 1: energy for example, China is at or near or pushing
• 23:42
  Speaker 1: back the technology frontier. UM. If you look at other areas,
• 23:46
  Speaker 1: China still lags by a considerable margin. China can't make
• 23:49
  Speaker 1: competitive semiconductors, China can't make competitive airplanes for example. UM.
• 23:56
  Speaker 1: And then the second point I would make is that
• 23:58
  Speaker 1: sort of the success of Huawei UM and sort of
• 24:02
  Speaker 1: the advances they've made in five G I think goes
• 24:05
  Speaker 1: to UM the sort of confused approach that we have
• 24:09
  Speaker 1: to thinking about China in the West. Right, on the
• 24:11
  Speaker 1: one hand, we say state and enterprise is a huge
• 24:14
  Speaker 1: and inefficient and corrupt, and they are an impediment to
• 24:18
  Speaker 1: China's growth um And we also say Huawei is pretending
• 24:22
  Speaker 1: to be a private company, but secretly it's state and enterprise.
• 24:25
  Speaker 1: And then in the same breath we say Huawei is
• 24:29
  Speaker 1: dominating the next generation of the most critical technology for
• 24:32
  Speaker 1: the future of the world economy. So which is it
• 24:35
  Speaker 1: the state and enterprises? These kind of like corrupt, inefficient
• 24:39
  Speaker 1: dinosaurs who are dragging China down, or are they technology
• 24:44
  Speaker 1: innovators who are going to dominate the future of communication?
• 24:50
  Speaker 1: Can't be both right? Either argument stems from fear, and
• 24:53
  Speaker 1: I think that's probably the uniting force in in quite
• 24:56
  Speaker 1: a lot of the commentary around China these days. But
• 24:58
  Speaker 1: we have certainly done the long term view, and I'm
• 25:02
  Speaker 1: sure we'll talk about this again. I'm interested, just as
• 25:06
  Speaker 1: a final question, if the bubble had popped before you've
• 25:10
  Speaker 1: got this book out, had you and your publisher had
• 25:12
  Speaker 1: any conversation about changing the title or what what would
• 25:14
  Speaker 1: plan b So the bubble that took a long time
• 25:20
  Speaker 1: to hop with a quick with a new forward. So
• 25:23
  Speaker 1: clearly by publishing a book with this title, Stephanie, I
• 25:26
  Speaker 1: have tempted fate and increase the chances that the bubble
• 25:30
  Speaker 1: will pop. So what's absolutely critical is that list listeners
• 25:35
  Speaker 1: to the Stephonomics podcast go out immediately and buy a
• 25:38
  Speaker 1: copy of the book so I can enjoy some royalties
• 25:41
  Speaker 1: before my arguments and conclusions are falsified by events. To all,
• 25:45
  Speaker 1: thank you very much, Thanks Stephanie, thanks for listening to Stephanomics.
• 25:52
  Speaker 1: We'll be back next week with more on how COVID
• 25:54
  Speaker 1: nineteen is transforming the global economy. In the meantime, you
• 25:57
  Speaker 1: can find us on the Bloomberg Terminal, webs app or
• 26:01
  Speaker 1: wherever you get your podcasts, and for more news and
• 26:03
  Speaker 1: analysis from Bloomberg Economics, you just have to follow at
• 26:07
  Speaker 1: Economics on Twitter. This episode was produced by Magnets Hendrickson
• 26:11
  Speaker 1: special thanks to Sharon Chen and Tom Orlick. Lucy Meekin
• 26:15
  Speaker 1: is the acting executive producer of Stephonomics and the head
• 26:18
  Speaker 1: of Bloomberg Podcast is Francesca Levy.