Latest / Trumponomics / Who's Running China's Economy Now?

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Who's Running China's Economy Now? · Trumponomics

• 0:00
  Speaker 1: She Jinping, the President of China has been in office
• 0:03
  Speaker 1: for five years, and it looks like he will be
• 0:05
  Speaker 1: around a lot longer. While he's at it. Here are
• 0:08
  Speaker 1: some more names you might want to become familiar with,
• 0:11
  Speaker 1: Leo Chu, E Gong, Leo Kun. These three men will
• 0:15
  Speaker 1: be the brains behind China's economic and financial policy, probably
• 0:19
  Speaker 1: for at least the next five years, and that means
• 0:22
  Speaker 1: they could also help direct or deflect a possible trade
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  Speaker 1: war between the US and China. All in all, they
• 0:29
  Speaker 1: will shape the world's second largest economy and in turn
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  Speaker 1: have a major impact on the rest of the world.
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  Speaker 1: Welcome to Benchmark. I'm Scott landman and economics editor at
• 0:48
  Speaker 1: The Bloomberg News in Washington, And I'm Daniel Moss, economics
• 0:52
  Speaker 1: writer and editor at Bloomberg View in New York. So,
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  Speaker 1: Dan she Jinping seems pretty firmly in control of China
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  Speaker 1: these days. Why should we care about some of his underlings.
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  Speaker 1: She may be firmly in control, but he can't be
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  Speaker 1: everywhere doing everything at all times. He also knows that
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  Speaker 1: the party's success depends on economic stability. That means no
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  Speaker 1: economic blow ups. The more range of opinions you can
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  Speaker 1: listen to the safer you'll be all right. Well, let's
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  Speaker 1: find out some more about this range of opinions with
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  Speaker 1: our guest, Nicholas Lardie is one of the foremost scholars
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  Speaker 1: on China's economy, having studied it for decades. He's been
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  Speaker 1: a senior fellow at the Peterson Institute for International Economics
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  Speaker 1: in Washington for fifteen years, and his most recent book
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  Speaker 1: is Markets Over Mao, The Rise of Private Business in China. Nick,
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  Speaker 1: welcome to Benchmark. Thank you. First of all, Nick, who
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  Speaker 1: is Leocha? Well, Leocha is a sort of economic technocrat
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  Speaker 1: who has served in a couple of administrations over the
• 2:01
  Speaker 1: past decade at fairly high positions. He hasn't been extremely visible,
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  Speaker 1: but he's been vice chairman of one of the most
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  Speaker 1: important committees that deals with the economies of National Economic
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  Speaker 1: Development and Reform Commission. He's also been head of a
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  Speaker 1: small leading group on sin Anton economics, which is a
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  Speaker 1: very important behind the scenes advisor. And now he's going
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  Speaker 1: to be a Vice Premier with a pretty broad economic portfolio.
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  Speaker 1: How did he get so close to sheet and ping
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  Speaker 1: over the years to eventually get into this kind of position. Well,
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  Speaker 1: you're right, he has developed a good relationship with Seejing Ping,
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  Speaker 1: and all indications are that he will continue to be
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  Speaker 1: a fairly influential voice. I would caution, however, that a
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  Speaker 1: little bit hard to know exactly where Leucha stands on
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  Speaker 1: some issues. He seems to be able to serve masters
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  Speaker 1: that have disparate views on economic issues, so I don't
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  Speaker 1: necessarily think he's going to be in the driver's seat,
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  Speaker 1: but he will be a very strong implementer of the
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  Speaker 1: policies that he wants to support. Taking a broader look
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  Speaker 1: at the Chinese economy, Nick, you've written that China is
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  Speaker 1: much more of a private sector economy than popular discourse
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  Speaker 1: would seem to recognize. There's a lot of talk about
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  Speaker 1: how President she has semantic control of the political system,
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  Speaker 1: what's happening on the ground with the economy, how much
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  Speaker 1: day to date control does he have. Over the last
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  Speaker 1: few years, he has exerted a great deal more control
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  Speaker 1: over the economy. There has been what I think is
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  Speaker 1: fairly described as a bit of a resurgence of the state.
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  Speaker 1: About three quarters of China's GDP is being generated by
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  Speaker 1: private firms, but under She, we've seen proliferation of industrial policies.
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  Speaker 1: State banks have been lending more money to state companies,
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  Speaker 1: and she aspires that the state will play a much
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  Speaker 1: bigger in the economy. How successful that will be ultimately,
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  Speaker 1: I think remains to be seen. But when we talk
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  Speaker 1: about private companies in China, don't a lot of them
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  Speaker 1: have Communist Party cells or leaders that are installed to
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  Speaker 1: help direct the company business in line with objectives that
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  Speaker 1: the party has set. Ultimately by President she Well, China
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  Speaker 1: for more than two decades has required Party committees in
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  Speaker 1: all enterprises, whether they're state owned or privately owned. So
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  Speaker 1: this is not a new development, at least in a
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  Speaker 1: technical sense. Now, what really remains to be seen is
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  Speaker 1: are these committees going to take a much stronger role
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  Speaker 1: than they have had in the past. Certainly, there's not
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  Speaker 1: much evidence that party committees in private enterprises have persuaded
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  Speaker 1: these companies to do things that they think are against
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  Speaker 1: their interests. On the other hand, if you're a big
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  Speaker 1: company like Ali Baba and your Jack Ma the billionaire CEO,
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  Speaker 1: you certainly want to be perceived as carrying out policies
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  Speaker 1: that are consistent with those of the party. Talk to
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  Speaker 1: us about Ye Gung, the new Central Bank governor. Last
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  Speaker 1: month in Hong Kong, there was some chat that Leo
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  Speaker 1: would get both jobs vice Premier and governor of the
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  Speaker 1: People's Bank of China. What does it say that the
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  Speaker 1: deputy governor has been elevated. Well, I think it's a
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  Speaker 1: very important move. I think it would have been unrealistic
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  Speaker 1: for Leucha to be a Vice Premier and of the
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  Speaker 1: Central Bank governor simultaneously. This is something Drew m g
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  Speaker 1: did back in the late nineties. But I think the
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  Speaker 1: Central Bank governor's job has become much more important, much
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  Speaker 1: more time consuming, and requires a lot more international travel
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  Speaker 1: than Liuhu could undertake. I think the fact that he
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  Speaker 1: Gang has been elevated implies that we will have a
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  Speaker 1: substantial continuity on monetary policy, exchange rate policy, and all
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  Speaker 1: the things at the Central Bank has an influence on
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  Speaker 1: He is Western educated, he went back to China in
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  Speaker 1: He's worked his way up in the Central Bank over
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  Speaker 1: a period of several decades, and he has been the
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  Speaker 1: lead brains behind some of the most important reforms in
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  Speaker 1: the financial sector over the last twenty years, and most
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  Speaker 1: notably he was the architect for the liberalization of interest rates,
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  Speaker 1: which started in the late nineties and was not really
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  Speaker 1: completed until about the middle of twenty thirteen. So it
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  Speaker 1: was a very long, gradual process in which they moved
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  Speaker 1: from a system in which all interest rates on both
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  Speaker 1: deposits and loans were fixed and immovable to one in
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  Speaker 1: which these rates are now being determined largely by market forces. Nick.
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  Speaker 1: As long as we're talking about China Central Bank, can
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  Speaker 1: we talk about how much power central bank actually has
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  Speaker 1: the People's Bank of China. The independence of China Central
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  Speaker 1: Bank is differ from that of say, the Federal Reserve
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  Speaker 1: or European Central Bank. Right, yes, the Chinese Central Bank
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  Speaker 1: is not independent in the traditional sense of that word.
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  Speaker 1: It needs to get approval for any major changes in
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  Speaker 1: the interest rates that it tries to influence, or things
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  Speaker 1: like the discount rates and so forth. Changes in exchange
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  Speaker 1: rate policy that it manages have to be approved at
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  Speaker 1: much higher level. On the other hand, the Central Bank
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  Speaker 1: in China, at least under the previous governor, has had
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  Speaker 1: an enormous influence on the economy and they have hit
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  Speaker 1: The bank has weighed in on a range of economic policies,
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  Speaker 1: fiscal policy, tax policy. So yes, it's not independent, it's
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  Speaker 1: not completely free to carry out the usual kinds of
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  Speaker 1: monetary operations without approval. But you would not find the
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  Speaker 1: head of the Federal Reserve in the United States offering
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  Speaker 1: opinions about tax policy fiscal policy in the same way
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  Speaker 1: that we've seen in China. So the Central Bank governor
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  Speaker 1: has been a key economic policy maker weighing in on
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  Speaker 1: a very broad range of economic issues. In the West,
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  Speaker 1: nick Way used to the finance minister or the treasury
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  Speaker 1: secretary of a given nation being the big economic cheese.
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  Speaker 1: Is that the case in China, Well, it certainly hasn't
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  Speaker 1: been in recent years. The Ministry of Finance in China
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  Speaker 1: seems to focus primarily on the tax side, the collection
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  Speaker 1: of taxes, changes in the tax laws, enforcement of tax laws,
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  Speaker 1: and so forth, and they have not been a big
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  Speaker 1: shaper of broad macro economical policy in the same way
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  Speaker 1: that we would be familiar with in the United States.
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  Speaker 1: So I think the Central Bank has actually been more
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  Speaker 1: important in that domain than most other agencies in China.
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  Speaker 1: So the name that we have as the new Finance
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  Speaker 1: Minister as someone named Leo Kuhn, and I can as
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  Speaker 1: even as somebody who who spent a few years in
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  Speaker 1: China covering China's economy. I was not familiar with him.
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  Speaker 1: What do we know about him and what does his
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  Speaker 1: appointment say about any kind of direction of policy? Well,
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  Speaker 1: I think very little. The previous Ministry of Finance was
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  Speaker 1: a man who came out of the tax Bureau of
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  Speaker 1: the Ministry and was promoted to be minister. I'm not
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  Speaker 1: even aware, as you aren't, about the background of Leo Clinton,
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  Speaker 1: but I would not expect him to be a main
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  Speaker 1: shaper of policy. I would expect the person that we
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  Speaker 1: haven't talked about who would be much more important is
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  Speaker 1: Gauasu Ching, who has now been named to head, who
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  Speaker 1: has been head of the Central Bank, the Bank Regulatory Commission,
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  Speaker 1: and is now going to take charge of the merged
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  Speaker 1: Bank and Insurance Regulator. He's a very strong reformer. He's
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  Speaker 1: a much stronger personality, and I think he'll work very
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  Speaker 1: well together with people like Leo and e Gun. Let's
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  Speaker 1: switch to look at the broader economic dynamic, particularly between
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  Speaker 1: the world's two largest economies, China and the United States.
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  Speaker 1: We hear a lot about the Trump administration's desire to
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  Speaker 1: reduce America's trade deficit with China. We also hear a
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  Speaker 1: lot about tariffs and other measures that may be imposed.
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  Speaker 1: Can you break this down a bit for us? In particular,
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  Speaker 1: I'm wondering, given the extent of global supply chains, how
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  Speaker 1: much of the stuff the US imports from China actually
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  Speaker 1: originates somewhere else from an American company. Well, a very
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  Speaker 1: large share of what China sells to US is actually
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  Speaker 1: produced by what we would call for an affiliates, that is,
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  Speaker 1: multinational companies based in China. Many of them, of course,
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  Speaker 1: are US multinationals, but there's some European and other multinationals
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  Speaker 1: operating in China. It and these companies typically supply final
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  Speaker 1: products that are based on long production chains. As your
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  Speaker 1: questions suggests, they're buying inputs from all over the world,
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  Speaker 1: producing products in China, and then selling them back into
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  Speaker 1: the United States. So the Chinese content of these products
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  Speaker 1: is typically very low. Obviously, the best examples are the
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  Speaker 1: Apple products iPhones, iPads, which are made almost exclusively in China,
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  Speaker 1: and the foreign content is of the value of the product. Now,
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  Speaker 1: what this means is if tariffs are put on those
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  Speaker 1: kinds of products consumer electronics in particular, we will impose
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  Speaker 1: some pain on China, but a great deal of the
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  Speaker 1: pain will be transferred to the countries and the companies
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  Speaker 1: that are supplying all the inputs that go in to
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  Speaker 1: these consumer electronic products. So this will have an adverse
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  Speaker 1: effect on companies in Korea, Japan, Taiwan, Singapore, Malaysia and others.
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  Speaker 1: So this is where I think Mr Trump makes a
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  Speaker 1: mistake when he says it's easy to win a trade war.
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  Speaker 1: Both countries will lose if there's a trade war, and
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  Speaker 1: we will not just impose costs on China, but a
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  Speaker 1: lot of these costs will be transmitted to other countries,
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  Speaker 1: particularly those in East Asia. Your example of the iPhone
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  Speaker 1: is an interesting one. Apple an iconic American company headquartered
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  Speaker 1: in California. But if I hear you correctly, Nick iPhones
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  Speaker 1: might be subject to tariffs, well, they could be that.
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  Speaker 1: The rumor is consumer electronics will be on the list.
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  Speaker 1: And interestingly, Apple doesn't make any of these products. The
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  Speaker 1: products are actually made by a time when he's company
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  Speaker 1: that operates in China, it's actually one of China's biggest employers,
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  Speaker 1: a company that is technically hun High or it sometimes
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  Speaker 1: goes by its trade name of Fox Con. So it
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  Speaker 1: just shows the complexity you have an iconic American designed
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  Speaker 1: product by an American firm, Apple sold in the United States,
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  Speaker 1: but it's being produced in China by a Taiwanese company
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  Speaker 1: that is drawing parts and components from the global supply chain.
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  Speaker 1: Now as we record this, some of the details are
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  Speaker 1: still in flux, but it does seem like there will
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  Speaker 1: be a trade conflict between the US and China that
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  Speaker 1: could go on for some time. Nick, how do you
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  Speaker 1: see this playing out? And also when we talk about
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  Speaker 1: again people like Leocha and e Gong, when they're making
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  Speaker 1: decisions that affect China's economy or how China approaches these issues,
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  Speaker 1: what objectives are they going for and what are they
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  Speaker 1: trying to protect as far as China's economy goes well,
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  Speaker 1: I think they're doing everything possible to avoid a trade
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  Speaker 1: conflict with the United States. Leoha made a trip to
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  Speaker 1: Washington several weeks ago to try to enter into serious
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  Speaker 1: discussions with the US administration. Quite frankly, he was basically rebuffed.
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  Speaker 1: Posture of the administration seems to be, we don't want
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  Speaker 1: to negotiate anymore. That hasn't been sufficiently effective in the past.
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  Speaker 1: We want to see some results, so they're going to
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  Speaker 1: this more unilateral approach. I think the other person to
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  Speaker 1: figure in this discussion should be Wang Chi Shan. Wang
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  Speaker 1: Chi Shan has been named Vice president of China. He
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  Speaker 1: is well known to many Americans in the financial sector,
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  Speaker 1: in the business sector, and I think he will play
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  Speaker 1: a similarly large role in trying to manage the economic
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  Speaker 1: relationship with the United States. So, Nick, when we see
• 14:44
  Speaker 1: large headline numbers fifty billion, sixty billion associated with US
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  Speaker 1: actions against China, is that really just a negotiation? How
• 14:57
  Speaker 1: should we be looking at this? Well, I think that
• 14:59
  Speaker 1: remained to be seen. The administration is probably going to
• 15:02
  Speaker 1: announce a target of a very big number thirty six.
• 15:06
  Speaker 1: We don't know exactly, but we will take some time
• 15:09
  Speaker 1: to identify the exact products that they're going to impose
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  Speaker 1: these tariffs on. So this currently certainly could set up
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  Speaker 1: a window in which negotiations ensued, and it might not
• 15:20
  Speaker 1: just be with the Chinese. If consumer electronic products are
• 15:23
  Speaker 1: on the list to be subject to high tariffs, then
• 15:27
  Speaker 1: you would probably have companies like Apple and other US
• 15:30
  Speaker 1: consumer products companies lobbying the administration to exempt their products
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  Speaker 1: from such tariffs. And quite frankly, I think one of
• 15:39
  Speaker 1: the reasons has taken a long time for this to
• 15:41
  Speaker 1: play out is it's very difficult to identify products that
• 15:44
  Speaker 1: we could impose tariffs on that would not have adverse
• 15:47
  Speaker 1: effects on our own companies for other countries in Asia
• 15:52
  Speaker 1: that supply inputs to the products that are being exported
• 15:55
  Speaker 1: from China. So thinking about how this might play out,
• 16:00
  Speaker 1: does China have more to lose from a trade war,
• 16:03
  Speaker 1: does the US have more to lose from a trade war?
• 16:06
  Speaker 1: Or are they both likely to lose in a trade war? Well,
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  Speaker 1: I think in a trade war, if it comes to that,
• 16:12
  Speaker 1: both countries would lose quite substantially. US consumers are going
• 16:16
  Speaker 1: to pay more. We're not going to create any new
• 16:19
  Speaker 1: jobs if pariffs are put on consumer electronic products. You know,
• 16:23
  Speaker 1: Apple is not going to start producing iPhones in Silicon
• 16:27
  Speaker 1: Valley tomorrow. That we simply don't have the capability to
• 16:30
  Speaker 1: produce many of the products that we import from from China.
• 16:34
  Speaker 1: So what would happen is some of these electronic manufacturing
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  Speaker 1: services companies like con also have production facilities elsewhere in Asia,
• 16:44
  Speaker 1: so they will simply switch the production of these products
• 16:47
  Speaker 1: from China to Vietnam or India or other places where
• 16:52
  Speaker 1: they have facilities already in place. They couldn't do a
• 16:56
  Speaker 1: complete substitution in the short run because their capacity is
• 16:59
  Speaker 1: very heavily concentrated in China, but some of the production
• 17:02
  Speaker 1: would move. So this is a long way of saying
• 17:06
  Speaker 1: not likely to have any positive effect on employment in
• 17:11
  Speaker 1: the United States. Likely to have very large negative impact
• 17:15
  Speaker 1: on consumers because prices will go up. Nick, how much
• 17:19
  Speaker 1: is the US to blame for its large trade deficit
• 17:23
  Speaker 1: with China. It's pursuing a policy of fiscal expansion at
• 17:29
  Speaker 1: a time when China is pursuing a policy of fiscal consolidation.
• 17:35
  Speaker 1: What's going on here? Well, I think what's going on
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  Speaker 1: is that the level of saving in the United States
• 17:44
  Speaker 1: is very low, and the expansion of the fiscal deficit,
• 17:47
  Speaker 1: which is occurring and will continue for quite a few
• 17:49
  Speaker 1: more years, means that are saving short spot from a
• 17:54
  Speaker 1: national perspective, will be getting bigger and bigger, which means
• 17:58
  Speaker 1: we need to borrow money from the rest of the world.
• 18:00
  Speaker 1: And the only way the rest of the world will
• 18:02
  Speaker 1: have the money to lend to us is if they
• 18:06
  Speaker 1: sell us more products than we buy from them. So ultimately,
• 18:11
  Speaker 1: the trade imbalances are largely a function of these macroeconomic
• 18:16
  Speaker 1: variables much more than they are a function of tariffs
• 18:20
  Speaker 1: or trade restrictions or protectionism. And I think you can
• 18:23
  Speaker 1: see that very clearly. In the case of China, their
• 18:27
  Speaker 1: current account surplus, which is a broad measure of goods
• 18:30
  Speaker 1: and services and a couple of other things, is only
• 18:33
  Speaker 1: one point two percent of their GDP. It's extremely small
• 18:38
  Speaker 1: by international standards. So globally they did not have a
• 18:41
  Speaker 1: big surplus, but they have a big surplus with the
• 18:44
  Speaker 1: United States. The United States has a big deficit with China,
• 18:47
  Speaker 1: and I think it's a function of problems that originates
• 18:51
  Speaker 1: in the US economy. In other words, the administration portrays
• 18:55
  Speaker 1: China is being highly protectionists, and it certainly his protection
• 18:57
  Speaker 1: is in some domains, but it is not I have
• 19:00
  Speaker 1: a big global trader plus. It's global trade surplus is
• 19:04
  Speaker 1: very small relative to the size of its economy. It's
• 19:08
  Speaker 1: much much less than the surplus of Germany, for example. Well, Nick,
• 19:12
  Speaker 1: this story is obviously far from over, and we'll all
• 19:15
  Speaker 1: be listening to what you have to say in the
• 19:17
  Speaker 1: coming months on whatever happens between the US and China
• 19:20
  Speaker 1: on trade. Thank you so much for coming on our podcast.
• 19:23
  Speaker 1: Thank you. Benchmark will be back next week. Until then,
• 19:30
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