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Welcome to Geopolitics Decanted.

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I'm Dmitri Alperovitch, Chairman of
Silverado Policy Accelerator,

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a geopolitic think tank in Washington,

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DC. According to China's own economic
data,

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which is chronically underreported,

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China peaked as a proportion of the global
economy in 2021

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at 18.5% of global GDP and has declined
ever since.

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The United States, by contrast,

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accounts for around 26% of global GDP,

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up from 24% since 2021.

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Not only is there virtually no chance of
China overtaking the United States

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as the world's largest economy,

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but it is also likely that the U.S.

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advantage in economic strength will expand
further in the next decade.

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That is the argument presented in the
latest foreign affairs piece entitled
China's

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Moment of Weakness: Economic Decay and
America's Strategic Opening by my guest,

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Logan Wright, who is a partner at Rhodium
Group and leads its research

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on China's economy and financial markets.

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He's also the author of the book Broken
China:

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How the Economic Miracle Shattered and
What It Means for the World.

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Logan, welcome to the show.

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Thanks, Dmitri. Great to be here.

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really appreciate it.

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Terrific.

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So what I found so interesting about this
piece and your argument in it

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is that it actually dovetails into what I
wrote in my book,

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World on the Brink, How America Could Beat
China in the race for the 21st century,

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and that China is much weaker than we
think they are,

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and we're actually a lot stronger than we
often give ourselves credit for.

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But make the argument that you make in
your piece about why it

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is that China's economic miracle is
getting shattered,

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as your book is also titled.

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Sure. So it's pretty straightforward.

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I mean, I think that it's underappreciated
that a lot of China's growth

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has depended upon an unprecedented
expansion of credit.

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And the net result of the end of that
credit expansion has been

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a slowdown in economic growth,

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particularly in investment.

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China has, you know, very weak operating
cash flows

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in most of its local government and
state-owned enterprises.

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So if you slow down credit, you typically
slow down investment activity altogether.

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And so since the global financial crisis,

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China saw basically an expansion of around
a third of global GDP in

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new credit in just eight years.

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And we've never seen anything like this.

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That started slowing down in 2018.

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And as credit was gradually cut in half,

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and now it's about a third of where it was
at its peak,

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credit averaged growth averaged 18% from
2007 to 2016.

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And then it averaged only 9% starting in
2017.

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Right now it's just over 5%. So as you
start to see credit growth slow,

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borrowers suddenly cannot refinance,

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investment activity has to slow.

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And because China's economy has not
rebalanced toward domestic consumption

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and away from investment, that's had a
huge impact on aggregate growth.

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And so officially China has reported that
they've still grown,

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even despite the collapse of the property
bubble and despite the end

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of the the impact of the zero COVID
restrictions,

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they've officially reported.

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you know, five point two percent growth in
twenty twenty three,

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five percent growth in twenty twenty four
and twenty twenty five.

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The reality is growth is much,

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much weaker. but the bottom line is

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What what do you what do you think it is?

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even on the only thing

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Two, three percent?

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one point five to two percent on average
over the last basically since twenty
twenty

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two. So in twenty twenty two,

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That that's less than the US growth.

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that's right. And so like it I I make this
argument in the in

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the foreign affairs piece. If you told
anyone on average,

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you know, anyone in the Washington
community and

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you know, just any media literate person
that the US has outgrown China over

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the last five years, even on the official
data.

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They probably wouldn't believe that.

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but it's undoubtedly true, even just in
RMB terms.

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It's definitely true in dollar terms.

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And so therefore, you look forward and you
say,

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is the US likely to outgrow China over the
next five years given these headwinds?

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It's like on balance, probably.

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it has a reasonable chance of doing so.

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And the five years after that,

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it becomes a better bet given the
demographic headwinds that China

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is facing overall, the notable decline in
financial efficiency,

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the inability to continue to generate
credit out of its current financial
system,

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and the inability to use fiscal resources
to power growth.

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So one of the reasons I wrote this is
precisely because this isn't

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in consensus at all.

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You know, in reality, we do not face a
long-term strategic economic rivalry with

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China. We face a very different set of
security challenges,

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which has to do with their concentrated
controls over certain supply chain choke

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points, and increasingly using the
weakness of their domestic economy

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to continue to aggregate manufacturing
capacity

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at lower and lower prices. And this is
sort of the the overcapacity argument that

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you're hearing around the world.

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So ~

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The China Shock.

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yeah, I can get into this in much in much
more detail,

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but that's that's basically the case.

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and so we should rethink the way we think
about the the challenge from from China

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at this point. We should think about it as
it's not only a short-term problem,

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and it's not purely a short-term problem,

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but you do not have the risk

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that this is an economy that's going to
generate more and more resources

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to be able to counter Western interests.

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You instead have problems that are likely
deterrable,

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problems that are likely manageable,

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and a threat that is not inexorable.

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It requires a different strategy and
response.

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That that's the argument of the piece and
much of the book in Broken China as well.

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The underappreciated aspect of all of
this,

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and and just for background of your of
your listeners,

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so I lived in Beijing from 2001 to 2015,

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in Hong Kong from 2015 to 2022.

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my entire career has been following the
financial system.

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And so no one who has looked at the
financial system in great detail would
ever

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assume that there has been a long-term
plan in place for how China

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has managed its economy over time.

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So let me,

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you know, ~ I

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Yeah, there's very little evidence of
this.

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I'm I'm very sympathetic to this view,

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but let me play devil's advocate for a
second.

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Yeah. Sure.

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So

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one argument that a critic of your piece
might use is to say,

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well, you're looking at nominal GDP,

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not purchase power, parity, PPP metric of
GDP by which China

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has already exceeded the United States.

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You're also not taking into account that
the currency is vastly undervalued.

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And you know, you could also say is GDP
even the right metric to look

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at the power of the economy? How how do
you answer these?

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Sure. there's a very legitimate debate
about whether GDP is the right metric

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to look at, you know, economic power.

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This is a system that was designed,

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you know, in the World War II era between
the US and Britain about measuring wartime

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capacity. I mean, it there's there's
reasons to to be skeptical about what
you're

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measuring overall. But the PPP argument
doesn't really make any sense.

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I mean, essentially you'd be rewarding
China for creating deflation

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if you were scaring scoring this based on

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based on PPP, you'd be saying that the
lower the domestic prices are,

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the more powerful the economy is when
deflation is actually the problem that
China

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is countering. you use purchasing power
parity when you're comparing,

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you know, developing economies against
developed economies.

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You don't use it when you're comparing the
two largest economies in the world.

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it's also a very difficult calculation to
sort of update over time.

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the moment that you engage in
international transactions and a trading
economy

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in general, PPP becomes just less
relevant.

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So I I don't think there's anyone who
would seriously sort of take

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the the PPP argument out there,

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even though it's, you know, can be can be
a talking point.

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The reason you use nominal growth and
focus on the exchange rate is because,

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you know, basically debts are paid in
nominal dollars,

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not real dollars, and nominal RMB not real
RMB .

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so if you have a problem generating
domestic inflation and you have

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a problem generating domestic nominal
growth,

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it's going to impact the sustainability of
your economy over time.

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So this is exactly why that's important.

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you ultimately need a base of comparison.

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And the interesting thing about the
exchange rate is in China it

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is indicative of China's policy capacity
to influence the exchange rate.

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So, in other words,

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China is, you know, constantly in this
struggle between mounting capital outflows

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and encouraging inflows into its domestic
you know,

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bond and and equity markets to balance
that.

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Its inability to keep the exchange rate
stable and therefore to

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see lower nominal GDP level would be
indicative of policy

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Failures and would be indicative of
weakness in in policy levers.

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What I mean in that outflows are
inevitable is China has the largest single
dollar

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money supply in the world at about $52
trillion at this point.

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Now, why is that? It's because credit
growth has been so extensive.

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It's been overwhelmingly denominated in
RMB,

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and there have been capital controls that
have kept that RMB inside of China.

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So the moment at which you relax those
capital controls.

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you would likely trigger capital outflows
that would weaken the currency.

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So, in essence, I I like to talk about
this in you know financial terms.

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China's financial system is a bunch of
assets without markets for them.

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And so when you reprice those assets,

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you can reprice them either by assessing
credit risk that those assets might

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default, and that's been happening as the
slowdown in credit has occurred,

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or you can reprice it in terms of currency
risk.

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That those assets aren't worth as much in
global markets where China

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is valuing them domestically. And the
exchange rate is the metric for that.

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So I don't view the exchange rate as
exogenous.

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I view it as sort of endogenous to the
attempt to maintain global influence

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for Beijing. And that's exactly why I
think it's it's important to to

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use a a relevant comparison, which is sort
of the the dollar GDP levels.

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There's also this problem of just like
what do you use if you're

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not using nominal dollar GDP. you know,

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I've seen other assessments that look at
okay,

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if you take this in twenty fifteen,

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it doesn't look as severe a decline in
terms of global GDP.

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But this is kind of nitpicking because in
twenty fifteen you had the peak

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of RMB valuations as well. So is that the
fair comparison?

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Probably not. ~ I'm open yeah.

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And to be clear, you picked twenty

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twenty one as a metric, as a starting
metric,

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because that's when the Chinese GDP
peaked,

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right?

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That's when GDP peaked as a percentage of
global GDP,

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so at 18.5 in dollar terms, and has
declined since then.

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So the official data would put it in the
mid sixteens right now.

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And I think on our adjustments,

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we're in the low 15s as a proportion of
global GDP.

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Global GDP doesn't mean very much.

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it's just we're we're talking about
aggregate measures,

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but this speaks to a larger story,

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which is that.

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China can only grow relative to the rest
of the world if they

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are an investment-led economy.

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I mean, if you're a manufacturing economy
that depends upon global demand,

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you can only grow as fast as your
customers.

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which means you can't grow relative to the
rest of the world.

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The only way you can grow relative to the
rest of the world is

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by displacing your customers and therefore
by gaining global export market share.

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So that's the debate we're having.

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How much of those gains in global export
market share

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will continue. You know, how plausible is
that?

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You you run into several limits.

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You run into sectoral limits, just,

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you know, how many cars can the world buy
at any given moment?

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You run into macroeconomic limits.

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How large can the Philippines trade
deficit expand vis-a-vis China over time?

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how large can developing economy trade

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trade deficits expand. And then you run
into political limits.

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How long will you know European publics
put up with losses of manufacturing jobs

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to lower cost Chinese goods? And so those
are,

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you know, some of the limits that I think
are intrinsic within

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an investment-led growth model that
continues to need to expand investment.

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And it's the collapse in domestic growth
that has caused this dynamic.

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You know, I think

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What's underappreciated is that none of
this is externally caused.

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00:12:09,178 --> 00:12:12,574
there's not a single foreign official who
ever made China add a third

234
00:12:12,574 --> 00:12:17,022
of global GDP in new credit. There's not a
single foreign official who

235
00:12:17,022 --> 00:12:21,485
led to the creation of a multi-trillion
dollar shadow banking system inside

236
00:12:21,485 --> 00:12:25,886
of China. And it's been the bust of that
shadow banking system

237
00:12:25,886 --> 00:12:30,137
and the associated fallout of the property
market that has been responsible for.

238
00:12:30,521 --> 00:12:33,687
the increasing competitiveness of Chinese
goods abroad,

239
00:12:33,687 --> 00:12:38,846
precisely because domestic prices and
domestic demand has been so anemic that
it's

240
00:12:38,846 --> 00:12:40,389
created these deflationary pressures.

241
00:12:41,324 --> 00:12:45,413
So a couple more counterpoints in my
attempt to to be a devil's advocate here.

242
00:12:44,858 --> 00:12:46,456
No, it's it's fine, please. Yeah.

243
00:12:45,413 --> 00:12:46,831
~

244
00:12:46,993 --> 00:12:50,784
so one is on the capital outflows issue,

245
00:12:50,784 --> 00:12:53,440
you're absolutely right. The capital
controls are making it very,

246
00:12:53,440 --> 00:12:54,811
very difficult to get money out.

247
00:12:54,811 --> 00:12:58,402
Ironically, it's not just making it
difficult for Chinese companies

248
00:12:58,402 --> 00:13:02,973
to get money out, but for Western
companies that have bet all in on China,

249
00:13:02,973 --> 00:13:04,453
particularly Germans and others,

250
00:13:04,453 --> 00:13:06,565
and now they're generating profits.

251
00:13:06,767 --> 00:13:08,688
in China that they can't get out.

252
00:13:08,688 --> 00:13:11,422
And as a result, they're reinvesting them
domestically.

253
00:13:11,422 --> 00:13:13,865
So it's you could argue that it's helpful,

254
00:13:13,865 --> 00:13:17,659
at least in the near term, because it's
bringing in more investment from those

255
00:13:17,659 --> 00:13:20,262
profits that would otherwise leave the
country that can

256
00:13:20,262 --> 00:13:21,633
now be reinvested domestically.

257
00:13:23,018 --> 00:13:25,020
sure thing. The capital controls are
difficult.

258
00:13:25,020 --> 00:13:27,574
in reality, capital controls are never
going to be a panacea

259
00:13:27,574 --> 00:13:29,552
for a huge macroeconomic imbalance.

260
00:13:29,552 --> 00:13:31,166
there's the impossible trinity,

261
00:13:31,166 --> 00:13:34,874
the balance between control of
cross-border capital flows,

262
00:13:34,874 --> 00:13:38,176
control of the exchange rate, and control
of domestic monetary policy.

263
00:13:38,176 --> 00:13:40,218
You can only have two out of three.

264
00:13:40,218 --> 00:13:43,741
China's long tried to control all three to
some extent.

265
00:13:43,741 --> 00:13:44,741
and

266
00:13:44,547 --> 00:13:45,828
The whole point is that, you know,

267
00:13:45,828 --> 00:13:48,049
I don't think any of the Chinese
regulators think that,

268
00:13:48,049 --> 00:13:49,440
well, we have capital controls,

269
00:13:49,440 --> 00:13:51,772
therefore we'll never have a problem with
capital outflows.

270
00:13:51,772 --> 00:13:53,443
capital does leave the country,

271
00:13:53,443 --> 00:13:57,245
and virtually everyone can square their
foreign exchange position given enough
time

272
00:13:57,245 --> 00:14:01,706
and enough cost. what capital controls do
is they buy time and they prevent

273
00:14:01,706 --> 00:14:05,849
a lot of the rapid cross border movements
that can lead to destabilizing moves

274
00:14:05,849 --> 00:14:08,230
in the exchange rates, such as what they
saw in August,

275
00:14:08,230 --> 00:14:09,471
September twenty fifteen.

276
00:14:10,047 --> 00:14:11,988
So I think that's really where the focus
is.

277
00:14:11,988 --> 00:14:13,839
It's not really on stopping the flow,

278
00:14:13,839 --> 00:14:18,145
it's on sort of regulating it to a certain
extent and on channeling it

279
00:14:18,145 --> 00:14:24,060
to the extent possible through areas that
are more visible to the Chinese state,

280
00:14:24,060 --> 00:14:25,060
including

281
00:14:24,243 --> 00:14:25,243
Is that

282
00:14:24,643 --> 00:14:27,908
what's happening with Huawei and BYD?

283
00:14:27,908 --> 00:14:31,424
They're able to invest huge sums of money
around the world to build data centers,

284
00:14:31,424 --> 00:14:33,477
to build manufacturing facilities.

285
00:14:33,477 --> 00:14:37,264
So obviously some capital is allowed to
leave officially China,

286
00:14:37,264 --> 00:14:38,264
right?

287
00:14:37,876 --> 00:14:38,876
Yeah, exactly.

288
00:14:38,766 --> 00:14:42,698
Meanwhile, compare that to some of the
acquisitive Chinese private firms like

289
00:14:42,698 --> 00:14:47,880
HNA Group and others that were facing
these shutdowns of of capital outflows

290
00:14:47,880 --> 00:14:49,881
and their outbound investments in 2016.

291
00:14:49,881 --> 00:14:53,030
So there's been a very different kind of
dynamic there.

292
00:14:53,030 --> 00:14:56,363
But look, if China relaxed capital
controls altogether,

293
00:14:56,363 --> 00:14:58,904
it would arguably be very bad for the
world.

294
00:14:58,904 --> 00:14:59,904
you would have a

295
00:14:59,966 --> 00:15:02,407
really rapid depreciation of China's
exchange rate.

296
00:15:02,407 --> 00:15:06,956
That would exacerbate deflationary
pressures in the rest of the world,

297
00:15:06,956 --> 00:15:09,871
especially in emerging economies as well.

298
00:15:09,871 --> 00:15:14,234
It would likely increase China's trade
surplus further,

299
00:15:14,234 --> 00:15:16,736
but it would weaken China's overall,

300
00:15:16,736 --> 00:15:19,187
you know, influence in the rest of the
world as well.

301
00:15:19,187 --> 00:15:20,818
So Beijing wouldn't be, you know,

302
00:15:20,818 --> 00:15:21,818
happy with this.

303
00:15:21,668 --> 00:15:24,340
This is just a part of the reality they've
operated under.

304
00:15:24,340 --> 00:15:28,264
And the interesting thing is when they've
had better opportunities

305
00:15:28,485 --> 00:15:32,318
to relax capital controls, like early
2021,

306
00:15:32,318 --> 00:15:37,282
late 2020, you had very few people
traveling outside of China precisely
because

307
00:15:37,282 --> 00:15:40,094
of COVID restrictions. You had steady
inflows.

308
00:15:40,094 --> 00:15:43,577
If there was ever a time to float the
exchange rate.

309
00:15:44,512 --> 00:15:46,533
Or relax capital controls to allow,

310
00:15:46,533 --> 00:15:50,857
you know, more of this offset to occur and
therefore more market forces

311
00:15:50,857 --> 00:15:52,726
to have an influence over the exchange
rate.

312
00:15:52,726 --> 00:15:58,550
That was it. It would arguably have very
minimal impact on cross border flows

313
00:15:58,550 --> 00:16:00,972
at that point. And then you would have
seen these relax,

314
00:16:00,972 --> 00:16:03,754
you know, going forward. but they didn't
do that,

315
00:16:03,754 --> 00:16:07,907
which I think reflects this underlying
fear that the outflows are inevitable,

316
00:16:07,907 --> 00:16:11,700
the inflows are not. And that's the
problem they they you know,

317
00:16:11,514 --> 00:16:12,516
Well, it also

318
00:16:11,700 --> 00:16:12,700
they're

319
00:16:12,674 --> 00:16:16,765
goes against Xi Jinping's desire to have
full control over all aspects

320
00:16:16,765 --> 00:16:17,765
of the economy.

321
00:16:18,067 --> 00:16:20,290
you know, very possible, very possible.

322
00:16:20,290 --> 00:16:24,044
I think there's there's always this
tendency of you can't control volatility

323
00:16:24,044 --> 00:16:27,247
everywhere. You try to control it in a few
places and it shows up where

324
00:16:27,247 --> 00:16:31,452
you don't expect. So if you're trying to
control all sorts of domestic pricing,

325
00:16:31,452 --> 00:16:34,885
you'll end up in, you know, distortions
and pricing somewhere that you're

326
00:16:34,885 --> 00:16:37,829
not expecting. this is just the nature of
you know,

327
00:16:37,829 --> 00:16:39,502
the nature of attempted controls.

328
00:16:39,502 --> 00:16:40,502
And so

329
00:16:40,483 --> 00:16:42,545
In China, you always see this happen.

330
00:16:42,545 --> 00:16:46,662
Everything looks very stable until the
government itself introduces changes

331
00:16:46,662 --> 00:16:50,655
and implied guarantees. The the risk of a
financial crisis in China

332
00:16:50,655 --> 00:16:54,048
is not some external shock. It's it's it's
actually from reform.

333
00:16:54,048 --> 00:16:58,597
It's for actually from when the government
decides that you know these assets

334
00:16:58,597 --> 00:17:00,138
are no longer worth supporting.

335
00:17:00,138 --> 00:17:03,461
And then all of a sudden, everyone is
holding those assets,

336
00:17:03,461 --> 00:17:07,935
thought that they had what was guaranteed
that Xi Jinping wanted to control.

337
00:17:08,505 --> 00:17:11,209
And all of a sudden Xi Jinping doesn't
want to control that.

338
00:17:11,209 --> 00:17:12,698
And so you have to price this,

339
00:17:12,698 --> 00:17:13,923
you know, very different risk.

340
00:17:14,640 --> 00:17:16,271
What what about the argument that,

341
00:17:16,271 --> 00:17:20,029
you know, while you're absolutely right
that credit has decreased dramatically

342
00:17:20,490 --> 00:17:25,991
in China, that it has been in effect
channeled into much more productive areas

343
00:17:25,991 --> 00:17:30,452
of the economy. So no longer do we see a
massive property boom and zombie

344
00:17:30,613 --> 00:17:35,618
or ghost cities being built. Now you're
focused on manufacturing of

345
00:17:35,618 --> 00:17:38,819
the latest and greatest technologies like
EVs,

346
00:17:38,819 --> 00:17:39,819
like

347
00:17:39,509 --> 00:17:43,729
you know, semiconductors like AI
technologies that they're now investing

348
00:17:43,729 --> 00:17:48,109
in which present great potential for
accelerating growth.

349
00:17:48,109 --> 00:17:49,109
How do you answer that?

350
00:17:49,807 --> 00:17:53,688
well, the shortest answer is that the
evidence indicates the exact opposite,

351
00:17:53,688 --> 00:17:58,890
that more and more credit is actually
going to the least productive areas

352
00:17:58,890 --> 00:17:59,890
of the economy.

353
00:17:59,770 --> 00:18:03,620
And the ways in which we can track this
are through the financial system.

354
00:18:03,620 --> 00:18:07,018
You know, the the PBOC (People's Bank of
China) releases a data series

355
00:18:07,258 --> 00:18:11,532
on the proportion of loans extended at or
below the loan prime rate.

356
00:18:11,532 --> 00:18:14,680
So the loan prime rate in China is right
now three percent.

357
00:18:14,680 --> 00:18:15,680
It's fallen.

358
00:18:15,530 --> 00:18:17,101
Along with overall interest rates.

359
00:18:17,101 --> 00:18:20,742
So if lending was becoming more
productive,

360
00:18:20,742 --> 00:18:25,704
and if lending was going toward private
sector firms that were capable

361
00:18:25,704 --> 00:18:28,946
of generating higher nominal growth rates
than the state firms,

362
00:18:28,946 --> 00:18:33,348
we would expect that this proportion of
loans extended at or below

363
00:18:33,348 --> 00:18:35,208
the loan prime rate would be falling.

364
00:18:35,181 --> 00:18:36,181
Golf.

365
00:18:35,208 --> 00:18:36,208
So

366
00:18:35,518 --> 00:18:38,959
in other words, we'd see fewer and fewer
loans below the line.

367
00:18:39,081 --> 00:18:42,639
We'd see more profitable loans extended
above the line.

368
00:18:42,639 --> 00:18:45,301
instead, we see that proportion rising
very,

369
00:18:45,301 --> 00:18:49,276
very sharply. So the proportion of loans
extended at or below the loan prime rate

370
00:18:49,276 --> 00:18:54,832
right now is 59%. I mean, and that's up
from the mid-20s and it's risen virtually

371
00:18:54,832 --> 00:18:55,832
on a line.

372
00:18:56,235 --> 00:18:57,235
But that but that

373
00:18:56,677 --> 00:18:58,835
just means that they're subsidizing more
and more.

374
00:18:58,835 --> 00:19:01,104
Doesn't mean that it's unproductive
subsidization,

375
00:19:01,104 --> 00:19:02,104
right?

376
00:19:01,897 --> 00:19:04,444
well, I mean, you you might be saying the
same thing there.

377
00:19:04,444 --> 00:19:05,685
if you need to subsidize something,

378
00:19:05,685 --> 00:19:08,666
how are you measuring the productivity of
it in the absence of that subsidy?

379
00:19:08,666 --> 00:19:11,499
becomes the question. And then it's an
open question about how much,

380
00:19:11,499 --> 00:19:15,331
you know, overall below market credit is
definitely a form of subsidy that,

381
00:19:15,331 --> 00:19:17,672
you know, that that needs to be taken into
account.

382
00:19:17,672 --> 00:19:18,672
But

383
00:19:17,800 --> 00:19:18,800
But but if the goal

384
00:19:18,621 --> 00:19:23,506
is to dominate these sectors of global
economy and if you believe that these
sectors

385
00:19:23,506 --> 00:19:27,748
are gonna be incredibly economically
lucrative down the line,

386
00:19:27,748 --> 00:19:29,490
particularly if you destroy all
competition,

387
00:19:29,490 --> 00:19:31,112
then it might be worth subsidizing,

388
00:19:31,112 --> 00:19:32,112
right?

389
00:19:31,712 --> 00:19:35,644
Right. My broader point is that there is
really no evidence that credit

390
00:19:35,644 --> 00:19:37,896
is being allocated toward more productive
sectors.

391
00:19:37,896 --> 00:19:41,318
I mean, if you look at the actual state of
the financial system.

392
00:19:41,318 --> 00:19:43,393
We can measure this in many different
ways.

393
00:19:43,393 --> 00:19:46,985
So we monitor every single industrial land
transaction in China.

394
00:19:46,985 --> 00:19:52,704
So if you saw a huge increase in
investment by different sectors,

395
00:19:52,704 --> 00:19:54,275
you would probably see it in that data.

396
00:19:54,275 --> 00:19:57,337
Overall industrial land is still slowing.

397
00:19:57,337 --> 00:19:58,337
And

398
00:19:58,039 --> 00:20:00,900
There is a marginal adjustment within
individual sectors,

399
00:20:00,900 --> 00:20:05,306
but this is not an overall acceleration in
manufacturing investment

400
00:20:05,306 --> 00:20:07,158
in more productive areas. if

401
00:20:06,905 --> 00:20:07,905
So where's it going then?

402
00:20:08,799 --> 00:20:11,079
so largely this is the decay of the
system.

403
00:20:11,079 --> 00:20:15,161
So the other data source I was going to
point to you is we track every special

404
00:20:15,161 --> 00:20:18,922
revenue bond in China. So every local
government special revenue bond,

405
00:20:18,922 --> 00:20:21,600
the prospectuses demonstrate at the
project level,

406
00:20:21,600 --> 00:20:22,600
like where things are going.

407
00:20:23,002 --> 00:20:24,603
So we can sort those by industry.

408
00:20:24,603 --> 00:20:27,295
So the increase in proportion of what we
would call the

409
00:20:27,295 --> 00:20:33,190
new strategic industries from 2021 to 2025
is about from 2% to 6%.

410
00:20:33,190 --> 00:20:37,733
Meanwhile, the overwhelming proportion is
still toward traditional industries.

411
00:20:37,733 --> 00:20:39,495
This is the decay of the system.

412
00:20:39,495 --> 00:20:42,306
They're throwing more good money after bad
because it's becoming more

413
00:20:42,306 --> 00:20:44,458
and more expensive to maintain the debt
burdens.

414
00:20:44,458 --> 00:20:45,479
And so

415
00:20:45,784 --> 00:20:47,065
When people make this argument,

416
00:20:47,065 --> 00:20:50,527
there's this very famous chart that shows
like lending to real estate down this

417
00:20:50,527 --> 00:20:52,488
much, lending to manufacturing up this
much.

418
00:20:52,488 --> 00:20:56,625
It's completely wrong. it's it's often
cited as one of the most misapplied charts

419
00:20:56,635 --> 00:21:00,594
in Chinese economics. there are industrial
policy applications in China that

420
00:21:00,594 --> 00:21:02,285
are channeling things toward these
industries,

421
00:21:02,285 --> 00:21:06,537
but in aggregate, most of that increase in
lending to new industries,

422
00:21:06,537 --> 00:21:09,489
and it uses a definition that they
discarded back in 2010.

423
00:21:09,861 --> 00:21:13,323
Is forbearance. It's forbearance of loans
that was extended during

424
00:21:13,414 --> 00:21:16,872
and it's its refinancing of loans to local
government financing vehicles.

425
00:21:16,872 --> 00:21:18,921
So it's not really in you know,

426
00:21:18,921 --> 00:21:21,248
new industrial lending overall.

427
00:21:21,248 --> 00:21:25,961
The other point is just that it is
completely fair to say that China's
putting

428
00:21:25,961 --> 00:21:28,332
a lot of resources, fiscal resources,

429
00:21:28,332 --> 00:21:31,282
government guidance funds into new
industries.

430
00:21:31,282 --> 00:21:33,944
But in macro terms, these are very small.

431
00:21:34,877 --> 00:21:36,798
we've tried to add them all up,

432
00:21:36,798 --> 00:21:39,235
electric vehicles, lithium-ion batteries,

433
00:21:39,235 --> 00:21:42,522
AI, advanced robotics, solar
photovoltaics,

434
00:21:42,522 --> 00:21:46,576
and measure the decline of property and
infrastructure investment relative

435
00:21:46,576 --> 00:21:48,637
to the acceleration in new strategic
industries.

436
00:21:48,637 --> 00:21:53,171
So there was newly released 2023
input-output tables that offered

437
00:21:53,171 --> 00:21:57,094
you the first visibility into some of the
upstream and downstream implications

438
00:21:57,094 --> 00:21:58,876
of some of these new strategic industries.

439
00:21:59,688 --> 00:22:01,972
released last November, using those
tables,

440
00:22:01,972 --> 00:22:04,282
and you have to extrapolate a bit because
they don't include much

441
00:22:04,282 --> 00:22:07,606
on AI and robotics, but you're talking
about six point three percent

442
00:22:07,606 --> 00:22:11,216
of GDP collectively, relative to the
decline in property

443
00:22:11,216 --> 00:22:12,646
and infrastructure investment,

444
00:22:12,646 --> 00:22:17,127
which was roughly six times the
acceleration in the new strategic
industries from

445
00:22:17,127 --> 00:22:18,628
twenty twenty three to twenty twenty five.

446
00:22:18,628 --> 00:22:22,689
Now we can be wrong about that exact
number six point three.

447
00:22:22,689 --> 00:22:24,189
We're not wrong by a factor of two.

448
00:22:24,189 --> 00:22:26,230
You know, we're not under counting

449
00:22:26,873 --> 00:22:29,090
six percentage points of GDP in new
investment.

450
00:22:29,090 --> 00:22:30,090
So the point is

451
00:22:29,258 --> 00:22:30,258
But you you know, that that's

452
00:22:30,219 --> 00:22:35,074
almost scarier because if they're
investing relatively little in those
sectors

453
00:22:35,074 --> 00:22:39,270
and already achieving dominance in
batteries and solar and you know,

454
00:22:39,270 --> 00:22:41,196
lots of these industries, E Vs,

455
00:22:41,196 --> 00:22:43,132
imagine if that investment was larger.

456
00:22:43,711 --> 00:22:46,903
Well, I mean, this is China's the largest
investor in the world and has been

457
00:22:46,903 --> 00:22:49,134
in a long time. China has twenty-six,

458
00:22:49,134 --> 00:22:50,947
twenty-seven percent of global investment.

459
00:22:50,947 --> 00:22:53,264
So, yeah, and this financial system,

460
00:22:53,264 --> 00:22:56,014
even as it's slowing down, is still
generating four,

461
00:22:56,014 --> 00:22:58,755
four and a half trillion dollars in new
credit every year.

462
00:22:58,755 --> 00:23:04,638
So, but the point is that I'm making is
that from a macro perspective,

463
00:23:04,638 --> 00:23:06,169
I'm sure some of these will come out,

464
00:23:06,169 --> 00:23:07,589
but I haven't seen a single study.

465
00:23:07,589 --> 00:23:10,801
And Yasheng Huang of MIT made this point
recently as well.

466
00:23:10,801 --> 00:23:14,503
I haven't seen a s seen a single study
that suggested that Chinese total factor

467
00:23:14,503 --> 00:23:16,694
productivity growth is improving at this
point,

468
00:23:16,694 --> 00:23:19,715
like even despite all of these
technological improvements.

469
00:23:19,715 --> 00:23:20,715
So

470
00:23:20,275 --> 00:23:21,275
So even with

471
00:23:21,078 --> 00:23:24,241
automation taking hold in Chinese
factories,

472
00:23:24,241 --> 00:23:26,009
you have not seen a productivity.

473
00:23:25,756 --> 00:23:26,756
Well,

474
00:23:26,296 --> 00:23:27,477
TFP (Total Factor Productivity) is hard to
measure,

475
00:23:27,477 --> 00:23:30,398
but the point is the past is strangling
the future here.

476
00:23:30,398 --> 00:23:33,560
The past is and the the traditional
industries,

477
00:23:33,560 --> 00:23:37,581
the problem is continuing to throw more
and more good money after

478
00:23:37,581 --> 00:23:40,463
bad into the traditional industries
because you're so afraid that if

479
00:23:40,463 --> 00:23:43,544
you cut off those sectors and write down
the capital stock,

480
00:23:43,544 --> 00:23:46,739
growth is going to collapse that much more
and impact,

481
00:23:46,739 --> 00:23:48,377
you know, the overall momentum of the
economy.

482
00:23:48,377 --> 00:23:49,878
It's a very legitimate concern.

483
00:23:50,136 --> 00:23:52,425
You know, how do you write down the
capital stock?

484
00:23:52,425 --> 00:23:55,022
but you know, the argument I make is just
look,

485
00:23:55,022 --> 00:23:59,545
a lot of the gains externally in China's
export markets have been because of
prices.

486
00:23:59,545 --> 00:24:04,695
And it's the weakness in domestic demand
that have pointed to this rise in prices.

487
00:24:04,695 --> 00:24:07,197
So from a strategic industries
perspective,

488
00:24:07,197 --> 00:24:11,580
I I think it's best to understand these as
national security related investments,

489
00:24:11,580 --> 00:24:13,821
not as an economic growth strategy.

490
00:24:13,821 --> 00:24:16,641
And therefore we should counter them and
think about them as

491
00:24:17,056 --> 00:24:19,148
These are choke points that China is
developing,

492
00:24:19,148 --> 00:24:21,168
and this is how we will, you know,

493
00:24:21,168 --> 00:24:24,652
mitigate against the use of those using
demand-side metrics,

494
00:24:24,652 --> 00:24:26,872
which is what I argue for in the foreign
affairs piece.

495
00:24:26,872 --> 00:24:31,663
My point is the campaign to say China is
going to remain dominant

496
00:24:31,663 --> 00:24:36,246
in these sectors is partially an attempt
to discourage investment

497
00:24:36,246 --> 00:24:37,354
in those sectors abroad.

498
00:24:37,513 --> 00:24:39,745
And so a lot of the tours that people go
and say,

499
00:24:39,745 --> 00:24:42,967
I've seen the future and Chinese robotics
is going to be this dominant,

500
00:24:42,967 --> 00:24:44,548
there's no chance that we'll ever catch
up.

501
00:24:44,548 --> 00:24:46,290
I mean, that's the message they want.

502
00:24:46,290 --> 00:24:49,592
The message they want is those that
investment is not useful elsewhere.

503
00:24:49,592 --> 00:24:55,650
but the truth is that if other countries
do invest and protect those industries,

504
00:24:55,650 --> 00:24:59,173
China still has to sell everything that
they produce.

505
00:24:59,173 --> 00:25:02,416
The marginal demand for everything they
produce is outside of China rather than

506
00:25:02,416 --> 00:25:03,416
inside of China.

507
00:25:03,760 --> 00:25:08,424
They have to remain overwhelmingly focused
on keeping global export markets open.

508
00:25:08,424 --> 00:25:12,470
and if you do not care about ever
developing an electric vehicle industry

509
00:25:12,470 --> 00:25:13,821
or an advanced robotics industry,

510
00:25:13,821 --> 00:25:15,782
you're happy to take the implied
subsidized,

511
00:25:15,782 --> 00:25:18,032
you know, lower-cost goods. if you do,

512
00:25:18,032 --> 00:25:20,820
and you're more concerned about the
defense industrial base

513
00:25:20,820 --> 00:25:26,223
and you're more concerned about China's
industrialization and concentration.

514
00:25:26,559 --> 00:25:30,967
Of shares exceeding red lines of strategic
resilience that

515
00:25:30,967 --> 00:25:32,949
are important in developed economies,

516
00:25:32,949 --> 00:25:37,452
then it's a call for redoubling
investments in those sectors

517
00:25:37,479 --> 00:25:40,190
and protecting them precisely to counter
this.

518
00:25:40,190 --> 00:25:43,293
And the the pressure on China comes
through deflation.

519
00:25:43,293 --> 00:25:45,254
This is the point that's often lost.

520
00:25:45,254 --> 00:25:49,457
It's not that you're gonna see evidence of
sudden bankruptcies or or defaults.

521
00:25:49,457 --> 00:25:50,457
I mean, the

522
00:25:50,736 --> 00:25:52,399
state-owned enterprises can continue.

523
00:25:52,399 --> 00:25:54,410
This is why it's I describe in the book,

524
00:25:54,410 --> 00:25:58,145
it's not crisis or collapse, it's decay
that you're seeing in terms

525
00:25:58,145 --> 00:25:59,255
of this pressure. But with

526
00:25:59,318 --> 00:26:00,318
It's just

527
00:25:59,625 --> 00:26:03,704
deflation, you cannot necessarily generate
the same nominal growth.

528
00:26:03,704 --> 00:26:06,025
You cannot therefore repay debts as
easily.

529
00:26:06,025 --> 00:26:10,792
It forces more difficult trade-offs and it
impacts fiscal revenues at the same time,

530
00:26:10,792 --> 00:26:14,594
which impacts your capacity to continue
funding new industrial policy objectives.

531
00:26:15,099 --> 00:26:19,261
China runs a fiscal deficit of around $2
trillion a year,

532
00:26:19,261 --> 00:26:23,847
just in deficit terms. Like it's about
9.5% of GDP at present.

533
00:26:23,847 --> 00:26:25,828
This is still underappreciated.

534
00:26:25,828 --> 00:26:28,009
That it's not that you can't run those
deficits,

535
00:26:28,009 --> 00:26:29,630
you can finance them internally,

536
00:26:29,630 --> 00:26:32,692
but you don't get the same bang for your
buck ramping up.

537
00:26:32,692 --> 00:26:36,254
We would think about this economy entirely
differently if it was growing

538
00:26:36,254 --> 00:26:39,216
at six to seven percent, five or seven
percent real.

539
00:26:39,708 --> 00:26:44,763
six to eight percent nominal in a very
sustainable way versus what it is growing
at,

540
00:26:44,763 --> 00:26:48,878
which is roughly, you know, zero to one
percent right now in real terms

541
00:26:48,938 --> 00:26:51,400
and arguably about the same in nominal
terms.

542
00:26:51,400 --> 00:26:54,103
It's not that they don't have capacity to,

543
00:26:54,103 --> 00:26:56,065
you know, deploy fiscal resources,

544
00:26:56,065 --> 00:26:58,398
but they don't have the same as what they
did in the past.

545
00:26:59,019 --> 00:27:01,161
So with the US turning protectionist,

546
00:27:01,161 --> 00:27:03,703
and not just in recent couple of years,

547
00:27:03,703 --> 00:27:09,107
but really the trend line has been going
on since 2018 and only accelerated.

548
00:27:09,107 --> 00:27:11,245
now there's still lots of transshipment
going on,

549
00:27:11,245 --> 00:27:12,917
and you know, we have to deal with it,

550
00:27:12,917 --> 00:27:17,171
but they can't transship, everything that
they would sell to us normally.

551
00:27:17,171 --> 00:27:21,038
so clearly the US market is is getting
harder and harder for them.

552
00:27:21,038 --> 00:27:23,006
So given that, is

553
00:27:23,290 --> 00:27:25,341
The answer about China's economic future,

554
00:27:25,341 --> 00:27:27,174
all about Europe, what Europe is gonna do,

555
00:27:27,174 --> 00:27:33,629
because there's no other huge block that
can take in all of this overcapacity other

556
00:27:33,629 --> 00:27:37,183
than Europe, right? The developing world
can't can't take it in and

557
00:27:37,183 --> 00:27:41,527
and continue to finance even the moderate
growth that they've had.

558
00:27:41,527 --> 00:27:42,538
So if Europe

559
00:27:41,989 --> 00:27:42,989
It's

560
00:27:42,538 --> 00:27:44,600
turns protectionist, are they really
screwed?

561
00:27:45,436 --> 00:27:48,989
I think so. And I think there's more
European leverage involved

562
00:27:48,989 --> 00:27:52,832
in this upcoming dispute that you're
seeing with the European Council debate

563
00:27:52,832 --> 00:27:56,545
in June and some of the the talks that are
being set up that,

564
00:27:56,545 --> 00:27:59,647
you know, presumably are gonna then
catalyze additional discussions

565
00:27:59,647 --> 00:28:01,124
of safeguards later in the year.

566
00:28:01,124 --> 00:28:02,986
I think Beijing has been, you know,

567
00:28:02,986 --> 00:28:06,489
a bit complacent and thought that
basically they can play European states

568
00:28:06,489 --> 00:28:07,639
off against each other,

569
00:28:07,639 --> 00:28:10,236
and there's real problems with European
unity on this front,

570
00:28:10,236 --> 00:28:12,465
you know, to be to be perfectly clear.

571
00:28:12,465 --> 00:28:15,947
But Europe does have a lot of leverage for
exactly those reasons.

572
00:28:15,947 --> 00:28:18,069
It's hard to see what what other markets
are.

573
00:28:18,069 --> 00:28:20,102
but you know, China's still exporting a
lot to the US,

574
00:28:20,102 --> 00:28:22,229
just transshipping you know, goods also.

575
00:28:22,229 --> 00:28:26,415
I I think there's there's far too much
focus in the US on bilateral deficits.

576
00:28:26,415 --> 00:28:30,174
You know, the US trade deficit is
determined by the savings investment
imbalance.

577
00:28:30,174 --> 00:28:31,445
Tariffs are really just

578
00:28:31,839 --> 00:28:34,170
reapportioning and transshipment
penalties,

579
00:28:34,170 --> 00:28:35,220
however you want to think about it,

580
00:28:35,220 --> 00:28:39,002
are just reshuffling the that deficit
between different countries.

581
00:28:39,002 --> 00:28:42,802
The question, I think, for from a security
perspective is like,

582
00:28:42,802 --> 00:28:44,943
are we comfortable with transshipment?

583
00:28:44,943 --> 00:28:49,045
Are we comfortable with overseas Chinese
investment in Mexico,

584
00:28:49,045 --> 00:28:52,409
in Vietnam, you know, and in other
countries?

585
00:28:52,409 --> 00:28:54,898
Because there's a good argument that you
should be,

586
00:28:54,898 --> 00:28:56,738
precisely because there's more,

587
00:28:56,738 --> 00:28:57,839
you have more

588
00:28:58,101 --> 00:29:02,660
exercise over the underlying economic
activity through influencing those
governments

589
00:29:02,660 --> 00:29:04,471
rather than through influencing Beijing,

590
00:29:04,471 --> 00:29:07,464
there's also a good argument that you
shouldn't be because you need

591
00:29:07,464 --> 00:29:11,734
to be developing alternative supply chains
that are completely separate from China's

592
00:29:11,734 --> 00:29:14,677
influence, where they could still
influence the intermediate goods they're
in.

593
00:29:14,677 --> 00:29:18,958
But the problem is if you if you punish
countries for transshipment just by
raising,

594
00:29:18,958 --> 00:29:22,051
just by raising tariffs, you'll probably
just get more transshipment.

595
00:29:22,437 --> 00:29:25,718
if you're just not addressing sort of the
fundamental economic imbalances.

596
00:29:25,718 --> 00:29:30,601
So you know, I think the administration is
it's still unclear exactly what

597
00:29:30,601 --> 00:29:33,732
the tariff system is designed to
accomplish,

598
00:29:33,732 --> 00:29:36,542
whether that's restricting the trade
deficit,

599
00:29:36,542 --> 00:29:39,385
in which case you need sort of more
macroeconomic adjustments,

600
00:29:39,385 --> 00:29:42,648
creating alternative supply chains,

601
00:29:42,648 --> 00:29:44,579
and reducing Chinese value added,

602
00:29:44,579 --> 00:29:45,579
which is

603
00:29:45,515 --> 00:29:48,485
you know, a I think a more appropriate
goal,

604
00:29:48,485 --> 00:29:50,556
or just raising revenue, which is just

605
00:29:50,112 --> 00:29:51,112
Well, I think I

606
00:29:50,635 --> 00:29:52,467
think the administration would tell you
all of the above.

607
00:29:52,968 --> 00:29:55,946
Yeah, and but but it that doesn't make any
sense because those are at

608
00:29:55,955 --> 00:29:58,154
at odds with one another. I mean if you're
raising too much revenue,

609
00:29:58,154 --> 00:29:59,896
it means you're not redirecting any trade.

610
00:29:59,896 --> 00:30:03,467
so you know, in economics, revealed
preferences are powerful things.

611
00:30:03,467 --> 00:30:07,128
You can tell what you actually are
intending to do based on,

612
00:30:07,128 --> 00:30:09,019
you know, how your policies are set.

613
00:30:09,019 --> 00:30:14,546
So USTR has this difficult decision to
make because they're beholden to

614
00:30:14,726 --> 00:30:15,947
the sort of diplomatic

615
00:30:16,455 --> 00:30:20,403
de facto detente that's been set in the
the truce that's been set

616
00:30:20,403 --> 00:30:24,359
in place over Busan, where they've said
they won't raise tariffs above

617
00:30:24,359 --> 00:30:29,780
the pre-Supreme court levels after the
Supreme Court invalidated the IEAPA
tariffs,

618
00:30:29,780 --> 00:30:32,452
which would mean that you basically have
to announce

619
00:30:32,452 --> 00:30:38,087
the excess capacity investigation and then
only raise tariffs by 7.5% in order

620
00:30:38,087 --> 00:30:39,087
to be within that.

621
00:30:39,138 --> 00:30:40,667
you'll have sectoral tariffs, right?

622
00:30:40,667 --> 00:30:43,657
301s 232s that that that will go higher.

623
00:30:43,032 --> 00:30:45,886
Exactly. But you you see my point.

624
00:30:43,657 --> 00:30:46,898
But but look, ~ Busan Yeah.

625
00:30:45,886 --> 00:30:48,640
Like it's a it's a difficult it's a
difficult dance.

626
00:30:46,898 --> 00:30:49,016
Yeah,

627
00:30:48,640 --> 00:30:49,640
Yeah.

628
00:30:49,099 --> 00:30:51,459
I think Busan truce is all about rare
earths,

629
00:30:51,459 --> 00:30:53,680
right? And the fact that China played this
card,

630
00:30:53,680 --> 00:30:55,888
we were completely unprepared for it,

631
00:30:55,888 --> 00:31:00,505
and it hurt a lot, right? Our factories
were days away from shutting down

632
00:31:00,505 --> 00:31:03,646
in Detroit and defense sector was in a lot
of pain.

633
00:31:03,646 --> 00:31:07,069
So that was I think a wake up call for the
administration that

634
00:31:07,576 --> 00:31:10,439
We can't push this too hard until we find
other sources.

635
00:31:10,439 --> 00:31:11,660
And, you know, to their credit,

636
00:31:11,660 --> 00:31:14,793
they're diversifying rapidly, investing in
new production,

637
00:31:14,793 --> 00:31:16,565
new refining, processing capacity,

638
00:31:16,565 --> 00:31:19,849
recycling, all of the above. But it's
gonna take time for that for that

639
00:31:19,849 --> 00:31:22,842
to to work itself out. But coming back to
the European question,

640
00:31:22,842 --> 00:31:28,327
I mean, if Europe actually moves on
restricting Chinese imports,

641
00:31:28,327 --> 00:31:31,010
you know, will China face a depression?

642
00:31:32,587 --> 00:31:36,290
I would argue, look, I think there would
be significant impacts

643
00:31:36,290 --> 00:31:40,203
on several industries, especially those
industries where they are most
competitive,

644
00:31:40,203 --> 00:31:42,938
with German manufacturers in particular.

645
00:31:42,938 --> 00:31:46,818
If you started to face significant trade
restrictions that are more structural

646
00:31:46,818 --> 00:31:50,817
in nature, you're gonna see a lot of
deflationary pressures within those
industries.

647
00:31:50,817 --> 00:31:54,260
there's already a lot of employment
pressure in China precisely because.

648
00:31:54,826 --> 00:31:57,897
Capital, you know, the industries that
they're favoring are capital intensive,

649
00:31:57,897 --> 00:32:01,018
not labor intensive. So they don't
generate a lot of jobs anyway.

650
00:32:01,018 --> 00:32:04,046
I mean, one of the stories I I tell people
is that when I talk

651
00:32:04,046 --> 00:32:06,760
to reporters coming back from Beijing and
Shanghai these days,

652
00:32:06,760 --> 00:32:10,100
they basically say, like, we want to write
stories about jobs because that's what

653
00:32:10,100 --> 00:32:13,511
everybody's talking about. Our editors
just want us to write stories about tech.

654
00:32:13,511 --> 00:32:17,757
And, you know, finally, you just had the
FT publish a a really extensive review

655
00:32:17,757 --> 00:32:20,168
of the difficulties in employment
prospects.

656
00:32:20,343 --> 00:32:22,013
And this is structural because,

657
00:32:22,013 --> 00:32:26,687
you know, in the early 2000s, you had one
one and a half million college graduates

658
00:32:26,687 --> 00:32:30,049
a year, about 10% of the incoming labor
force was college educated.

659
00:32:30,049 --> 00:32:31,850
Now you have 12 million every year,

660
00:32:31,850 --> 00:32:36,926
and it's closer to 60 to 70 percent of the
incoming labor force is college educated,

661
00:32:36,926 --> 00:32:39,222
but the economy hasn't adjusted to it.

662
00:32:39,222 --> 00:32:41,331
So when you you use words like depression,

663
00:32:41,331 --> 00:32:43,632
I mean, first growth has already
collapsed.

664
00:32:43,632 --> 00:32:46,073
Like if I if I everyone wants to know the

665
00:32:46,521 --> 00:32:50,002
What's the cathartic sort of you know
financial crisis moment,

666
00:32:50,002 --> 00:32:52,573
the Lehman Brothers moment, the Northern
Rock moment,

667
00:32:52,573 --> 00:32:55,087
where you have depositors lining up you
know,

668
00:32:55,087 --> 00:32:58,480
outside the bank and you you have a clear
liquidity crisis?

669
00:32:58,304 --> 00:32:59,651
That that's unlikely to happen,

670
00:32:58,480 --> 00:33:00,760
Well, it didn't

671
00:32:59,651 --> 00:33:00,651
right? They have tools.

672
00:33:01,100 --> 00:33:04,421
it did happen in China, but it happened in
property developers.

673
00:33:04,421 --> 00:33:07,562
It was, you know, this is who collapsed.

674
00:33:07,562 --> 00:33:12,404
So the the book leads off with an anecdote
of exactly one of these events

675
00:33:12,424 --> 00:33:13,764
in the headquarters of Evergrande.

676
00:33:14,377 --> 00:33:16,619
What was a de facto bank run on Evergrand,

677
00:33:16,619 --> 00:33:19,570
but Evergrande wasn't a bank, but it was
operating like a bank.

678
00:33:19,570 --> 00:33:23,783
It had borrowed $310 billion in total
debt.

679
00:33:23,783 --> 00:33:25,925
It had borrowed the GDP of Finland,

680
00:33:25,925 --> 00:33:30,268
you know, at that time. It was that large
and it couldn't meet its obligations.

681
00:33:30,268 --> 00:33:32,589
And so when the property developers
started collapsing,

682
00:33:32,589 --> 00:33:37,613
you had a collapse in the most largest
firms in China's most important industry.

683
00:33:37,613 --> 00:33:40,155
The obvious question is sort of what comes
next?

684
00:33:40,155 --> 00:33:41,506
And if I told you that.

685
00:33:42,052 --> 00:33:44,474
There was a financial crisis in date X.

686
00:33:44,474 --> 00:33:49,036
Like, what would you expect to see five
years after date X?

687
00:33:49,036 --> 00:33:52,358
You would see exactly what you're seeing
in China's economy today,

688
00:33:52,358 --> 00:33:55,421
which is deflation, low growth,

689
00:33:55,421 --> 00:33:58,563
weak fiscal resources, employment
pressures,

690
00:33:58,563 --> 00:34:02,226
low consumer confidence, policy tools that
are impaired,

691
00:34:02,226 --> 00:34:04,286
a reliance upon the export market.

692
00:34:04,286 --> 00:34:05,747
this is, you know,

693
00:34:05,748 --> 00:34:08,947
It doesn't have to be called a quote
unquote financial crisis,

694
00:34:08,947 --> 00:34:12,039
but it has all the same consequences of a
financial crisis.

695
00:34:12,449 --> 00:34:15,263
Domestic demand is weak or negative right
now.

696
00:34:15,263 --> 00:34:17,336
So if China cannot grow via exports,

697
00:34:17,336 --> 00:34:19,279
there is effectively no driver of growth.

698
00:34:19,279 --> 00:34:20,279
I

699
00:34:19,324 --> 00:34:20,324
strategy will not

700
00:34:19,447 --> 00:34:20,510
is there anything they can

701
00:34:20,510 --> 00:34:22,633
do to increase domestic demand?

702
00:34:24,031 --> 00:34:26,112
the argument of the book is, I mean,

703
00:34:26,112 --> 00:34:31,413
the answer is yes, and it involves very
complicated political decisions that

704
00:34:31,413 --> 00:34:34,452
the Soviet Union struggled with in the
late 1960s.

705
00:34:34,452 --> 00:34:38,220
And there's remarkable work by Yakov
Feygin called Building a Ruin,

706
00:34:38,220 --> 00:34:41,801
he's a historian and did this from the
Soviet archives and chronicled

707
00:34:42,081 --> 00:34:43,912
the history of the Kosygin reforms,

708
00:34:43,912 --> 00:34:48,303
the 1960s, and how Brezhnev came to this
point where he basically

709
00:34:48,303 --> 00:34:50,945
Could have continued to push forward with
reforms,

710
00:34:50,945 --> 00:34:54,063
but would have jeopardized sort of the
ideological foundation of

711
00:34:54,063 --> 00:34:58,519
the Soviet state and instead turned to the
scientific technical revolution

712
00:34:58,519 --> 00:35:01,173
and cybernetics as sort of this
alternative,

713
00:35:01,173 --> 00:35:03,683
you know, that could have sort of bridged
the gap.

714
00:35:03,683 --> 00:35:07,563
and, you know, Feygin is very good on this
and and recognizes the parallels

715
00:35:07,563 --> 00:35:09,415
to to where China is right now.

716
00:35:09,475 --> 00:35:13,136
Can you imagine anyone in China stopping
Xi Jinping from going

717
00:35:13,136 --> 00:35:15,678
on television tomorrow and saying,

718
00:35:15,678 --> 00:35:20,680
you know, comrades, the fiscal and
financial system we've had has worked well

719
00:35:20,680 --> 00:35:25,612
for the last 10 to 15 years. It's not
gonna work well for the next 10 to 15
years.

720
00:35:25,612 --> 00:35:29,252
and so in order to improve all of our
lives and you know,

721
00:35:29,252 --> 00:35:33,083
make this more sustainable, we're gonna
cut down a lot of these risky investments.

722
00:35:33,083 --> 00:35:34,514
We're gonna tax the wealthy.

723
00:35:34,710 --> 00:35:38,792
we're going to you know confiscate you
know some of their ill-gotten gains

724
00:35:38,792 --> 00:35:40,052
in via corruption.

725
00:35:40,748 --> 00:35:42,313
This sounds like the DSA platform.

726
00:35:42,744 --> 00:35:47,694
I mean it's like so so or you know think
about I I'm just and and then we're gonna

727
00:35:47,694 --> 00:35:53,974
basically create a a consumer focused
economy with subsidies for having children

728
00:35:54,034 --> 00:35:55,956
and restructure the tax system
accordingly.

729
00:35:56,335 --> 00:35:58,497
And this involves slower growth in the
meantime,

730
00:35:58,497 --> 00:35:59,888
but this is better for all of you,

731
00:35:59,888 --> 00:36:04,200
right? so the reason I say that is because
like the savings pools in China that

732
00:36:04,200 --> 00:36:06,652
you can access are high net worth
individuals,

733
00:36:06,652 --> 00:36:09,974
state-owned enterprises, and private firms
that are basically cut

734
00:36:09,974 --> 00:36:11,095
off from the financial system.

735
00:36:11,095 --> 00:36:14,468
You can get at those, but it takes tax
policy to do it.

736
00:36:14,468 --> 00:36:17,580
Like it's basically just a taxation
decision on what to do.

737
00:36:17,580 --> 00:36:20,823
And so, you know, the net result is you
have slower growth.

738
00:36:20,823 --> 00:36:23,155
Well, you have slower growth, but
everyone's happier.

739
00:36:23,855 --> 00:36:25,025
you have higher standards of living,

740
00:36:25,025 --> 00:36:29,306
you have higher consumption. It's just not
an economy that's competing with

741
00:36:29,306 --> 00:36:34,075
the United States, right? And so the
obvious answer is that China

742
00:36:34,075 --> 00:36:35,836
can relax strategic competition.

743
00:36:35,836 --> 00:36:39,257
And that sounds overwhelmingly simplistic,

744
00:36:39,257 --> 00:36:45,723
but it is these decisions will probably
come to the forefront precisely because

745
00:36:46,124 --> 00:36:50,565
it's not really possible for China to
continue competing if they're using

746
00:36:50,931 --> 00:36:54,163
more and more sticks rather than carrots
to do this.

747
00:36:54,163 --> 00:36:56,645
Now why doesn't Xi Jinping go and make
this speech?

748
00:36:56,645 --> 00:36:58,401
Well, A, he doesn't believe it,

749
00:36:58,401 --> 00:37:00,376
and the Chinese leadership doesn't believe
it.

750
00:37:00,376 --> 00:37:03,068
They don't probably don't believe they're
in the kind of dire straits that

751
00:37:03,068 --> 00:37:06,326
I think they are. and so there's an
analytical kind of

752
00:37:05,727 --> 00:37:06,727
I think they're actually

753
00:37:06,460 --> 00:37:08,911
very optimistic. They think we are in the
decline,

754
00:37:08,911 --> 00:37:10,780
they're on the rise, it's inevitable,

755
00:37:10,780 --> 00:37:11,780
right?

756
00:37:11,536 --> 00:37:13,167
Well, that's the ideological component.

757
00:37:13,167 --> 00:37:15,368
So if you believed the opposite,

758
00:37:15,368 --> 00:37:18,449
do you think you could get that message to
the Chinese leadership?

759
00:37:18,449 --> 00:37:20,830
I ask this of Chinese political scientists
all the time.

760
00:37:20,830 --> 00:37:24,342
Like, if I'm right and time is not curing
all wounds,

761
00:37:24,342 --> 00:37:26,508
time is the wound. how are you,

762
00:37:26,508 --> 00:37:29,765
you know, how do you tell Xi Jinping that
if the East is rising and

763
00:37:29,765 --> 00:37:32,211
the West is declining? Do you think he
ever gets that message?

764
00:37:32,211 --> 00:37:34,202
And what how would we see that?

765
00:37:34,202 --> 00:37:35,932
I I ask this question, like honestly,

766
00:37:35,932 --> 00:37:37,553
because I don't think it's really
possible.

767
00:37:38,025 --> 00:37:39,536
But the real reason they maintain this,

768
00:37:39,536 --> 00:37:41,126
I think, is strategic. I mean,

769
00:37:41,126 --> 00:37:43,248
I think the whole point is if this is your
strategy,

770
00:37:43,248 --> 00:37:46,249
that means you're pushing back against
de-risking and developing

771
00:37:46,249 --> 00:37:48,860
of alternative supply chains. You want
more and more choke points and

772
00:37:48,860 --> 00:37:52,242
you want to dominate some of these
industries and continue to use this
leverage.

773
00:37:52,242 --> 00:37:56,717
So you have a propaganda campaign that's
designed to break down export controls.

774
00:37:56,717 --> 00:37:59,278
And therefore you say, We are close,

775
00:37:59,278 --> 00:38:01,999
we are close the frontier, we're getting
close to the frontier.

776
00:38:01,999 --> 00:38:03,460
There's no point in restricting us.

777
00:38:04,137 --> 00:38:07,998
And second, there's no point in investing
because we're this much more dominance

778
00:38:07,998 --> 00:38:11,640
in all of these sectors. So that's part of
this,

779
00:38:11,640 --> 00:38:13,981
that's part of the deliberate messaging.

780
00:38:13,981 --> 00:38:19,333
Second, you you want to break down export
controls and ~ sanctions.

781
00:38:19,333 --> 00:38:23,495
So you say, look, look, it's better to
trade with us even if the US cuts us off,

782
00:38:23,495 --> 00:38:26,016
because our market is still worth arguing
over,

783
00:38:26,016 --> 00:38:28,087
is still worth fighting for. You know,

784
00:38:28,087 --> 00:38:30,078
we're still going to grow over time.

785
00:38:30,078 --> 00:38:31,078
And

786
00:38:30,796 --> 00:38:33,650
This is sort of exactly why you would you
know,

787
00:38:33,650 --> 00:38:36,611
maintain the idea that, we're still
growing at five percent.

788
00:38:36,611 --> 00:38:38,751
when it's very obvious that you're not.

789
00:38:38,751 --> 00:38:40,990
And I mean, I ask this question of anyone,

790
00:38:40,990 --> 00:38:44,581
have we ever seen an economy that's grown
at five percent in real terms over three

791
00:38:44,581 --> 00:38:46,131
years with three years of deflation?

792
00:38:46,131 --> 00:38:48,099
Like especially an investment led economy.

793
00:38:47,462 --> 00:38:48,462
Assume the answer is no.

794
00:38:48,880 --> 00:38:51,420
I I I mean, I'd be interested.

795
00:38:51,420 --> 00:38:55,071
I don't think there is one. I certainly
can't think of like certain there aren't

796
00:38:55,071 --> 00:38:56,902
that many episodes of sustained deflation.

797
00:38:56,902 --> 00:38:57,982
I mean, period.

798
00:38:58,800 --> 00:39:00,814
Yeah. Logan, you don't have a crystal
ball,

799
00:39:00,814 --> 00:39:04,059
no one does. But if this trajectory
continues,

800
00:39:04,059 --> 00:39:06,281
if there's no significant changes in
policy,

801
00:39:06,281 --> 00:39:09,692
and certainly I think the ones that you
are proposing are very,

802
00:39:09,692 --> 00:39:11,653
very unlikely to even get to Xi Jinping,

803
00:39:11,653 --> 00:39:13,473
much less get accepted by him.

804
00:39:13,473 --> 00:39:17,095
What do you think the Chinese economy
looks like ten years from now,

805
00:39:17,095 --> 00:39:18,285
say twenty thirty five?

806
00:39:18,987 --> 00:39:23,131
Yeah. I mean, I think by twenty thirty
five you you've you have run out of road,

807
00:39:23,131 --> 00:39:25,185
but the constraints are are really
external.

808
00:39:25,185 --> 00:39:27,183
so I mean I think that the like I said,

809
00:39:27,183 --> 00:39:30,796
there's limits to how much export led
growth can be sustained because

810
00:39:30,796 --> 00:39:34,059
you eventually undermine the capacity of
your own export markets

811
00:39:34,059 --> 00:39:36,534
to sustain these these purchases.

812
00:39:36,534 --> 00:39:39,487
And you know, we've done Yeah.

813
00:39:37,353 --> 00:39:38,896
And by the way, in twenty thirty five,

814
00:39:38,896 --> 00:39:39,896
that's when the

815
00:39:39,578 --> 00:39:41,531
demographics really start kicking in.

816
00:39:41,531 --> 00:39:42,834
I mean, they're already declining,

817
00:39:42,834 --> 00:39:45,940
but that's when, you know, the migration
from the rural areas to

818
00:39:45,940 --> 00:39:49,367
the cities no longer allows you to be as
productive,

819
00:39:49,367 --> 00:39:50,367
right?

820
00:39:50,228 --> 00:39:51,852
I argue that future is already now.

821
00:39:51,852 --> 00:39:55,459
and and and no one who's looked at China's
demographics in great detail,

822
00:39:55,459 --> 00:39:59,227
you know, becomes, you know, thinks that
this is a next decade problem.

823
00:39:59,227 --> 00:40:04,244
so China had a you know, the life
expectancy is 79.

824
00:40:04,244 --> 00:40:06,152
but the that assumes you're born today.

825
00:40:06,152 --> 00:40:09,523
The average age at which people die is 73
in China.

826
00:40:09,523 --> 00:40:14,104
And so there was a baby boom basically
right after the end of the Civil War.

827
00:40:14,406 --> 00:40:16,857
And the establishment of the People's
Republic in 49,

828
00:40:16,857 --> 00:40:20,664
that is going to lead to a wave of deaths
over the next decade,

829
00:40:20,664 --> 00:40:25,106
which means by our math, even if you
assume that births stay steady

830
00:40:25,106 --> 00:40:29,438
at where they were last year, which was an
astonishingly low 7.92 million births,

831
00:40:29,438 --> 00:40:31,923
you're looking at a loss of about 50 to 60
million people.

832
00:40:31,923 --> 00:40:35,329
So you're looking at a loss of about 3 to
4% of the population.

833
00:40:35,329 --> 00:40:38,459
It's it's it's pretty shocking in terms of
where the headwinds are.

834
00:40:38,573 --> 00:40:42,374
The broader answer to where is it it looks
kind of similar to Japan's adjustment.

835
00:40:42,374 --> 00:40:45,320
and you know, there's there's going to be
many caveats therein.

836
00:40:45,320 --> 00:40:49,334
but that's where Chinese economists are
going to look at the future

837
00:40:49,334 --> 00:40:52,195
of the Chinese economy. They're they're
talking to Japanese economists.

838
00:40:52,195 --> 00:40:54,676
And I spend a lot of time in Japan for
exactly that reason,

839
00:40:54,676 --> 00:40:56,827
because that's where many of these
conversations are.

840
00:40:57,467 --> 00:40:59,538
You're likely to see more persistent
deflation.

841
00:40:59,538 --> 00:41:02,280
You're likely to see more persistent
external surpluses.

842
00:41:02,280 --> 00:41:04,472
You're likely to see downward pressure,

843
00:41:04,472 --> 00:41:07,744
depreciation pressure on the currency
rather than appreciation pressure

844
00:41:07,744 --> 00:41:10,171
on the currency from from repatriating
assets,

845
00:41:10,171 --> 00:41:12,752
I would argue. And you'll see lower
interest rates.

846
00:41:12,752 --> 00:41:16,250
That's kind of where the economy will end
up looking looking like.

847
00:41:16,250 --> 00:41:19,463
The more interesting thing is kind of what
that means,

848
00:41:19,463 --> 00:41:21,685
you know, how the the politics of this
adjust.

849
00:41:21,685 --> 00:41:23,126
I think there is a moment at which

850
00:41:23,623 --> 00:41:28,174
China does sort of recapitulate and think
about some of these objectives,

851
00:41:28,174 --> 00:41:30,192
these industrial policy focused
objectives.

852
00:41:30,192 --> 00:41:34,953
And I would argue that the the sooner that
the West can accelerate that process,

853
00:41:34,953 --> 00:41:39,759
probably the better off for global welfare
in terms of driving that reconsideration.

854
00:41:39,759 --> 00:41:43,701
If you can reveal to the Chinese that this
strategy isn't going to work,

855
00:41:43,701 --> 00:41:44,701
it's not going

856
00:41:44,291 --> 00:41:47,795
to generate growth. It's not even going to
generate more choke points because we're

857
00:41:47,795 --> 00:41:51,135
going to develop alternative supplies for
many key sectors.

858
00:41:51,135 --> 00:41:53,207
And rare earths are probably the best,

859
00:41:53,207 --> 00:41:55,259
you know, most valuable one they have.

860
00:41:55,259 --> 00:41:59,040
you want to keep China engaged and
negotiating over these things.

861
00:41:58,026 --> 00:42:01,057
Yeah, but but rare earths is not a good
one because it's

862
00:41:59,040 --> 00:42:00,962
No.

863
00:42:01,057 --> 00:42:04,419
relatively easy to process and refine rare
earths,

864
00:42:04,419 --> 00:42:06,340
certainly relatively easy to mine them.

865
00:42:06,340 --> 00:42:09,782
This is not rocket science. This
technology has been known for many,

866
00:42:09,782 --> 00:42:13,753
many decades, right? So it's just that we
let them have this monopoly

867
00:42:13,753 --> 00:42:17,424
and capture the market through dumping and
industrial policy.

868
00:42:17,424 --> 00:42:19,025
We're now reversing that, right?

869
00:42:19,025 --> 00:42:20,646
There's lots of investments going on,

870
00:42:20,646 --> 00:42:21,646
including

871
00:42:21,542 --> 00:42:23,975
US government taking equity positions in
mining companies,

872
00:42:23,975 --> 00:42:26,457
refining companies, processing companies,

873
00:42:26,457 --> 00:42:30,043
recycling companies, and European Union is
engaging there as well.

874
00:42:30,043 --> 00:42:33,077
So this is a near term problem that's
gonna get solved.

875
00:42:33,077 --> 00:42:36,275
and you know, it's gonna be painful for
the next few years,

876
00:42:36,275 --> 00:42:37,646
but it's not a forever problem.

877
00:42:38,448 --> 00:42:40,559
I agree. I think I have a very different
focus on it,

878
00:42:40,559 --> 00:42:45,359
which is that it can be solved tomorrow
with the right negotiation strategy.

879
00:42:45,359 --> 00:42:50,752
In other words, the structure of the
global economy is such that the G7 runs

880
00:42:50,752 --> 00:42:54,865
a trade deficit, China commodity exporters
run a trade surplus.

881
00:42:54,865 --> 00:42:59,643
In that world, China will always have
choke points of industrial capacity that
they

882
00:42:59,643 --> 00:43:01,794
can deploy. The question is how salient
they are.

883
00:43:02,647 --> 00:43:06,088
And whether there's substitutes and how
much alternative capacity is elsewhere.

884
00:43:06,088 --> 00:43:07,948
But if you're concerned about them using
it,

885
00:43:07,948 --> 00:43:12,730
the answer is to negotiate with them over
the,

886
00:43:12,730 --> 00:43:17,351
and this is exactly why I call for you
know retaliation using demand-side
controls,

887
00:43:17,351 --> 00:43:19,711
because those become more salient over
time,

888
00:43:19,711 --> 00:43:22,612
whereas supply-side controls become less
salient over time.

889
00:43:22,612 --> 00:43:25,373
And so I would argue you could solve this,

890
00:43:25,373 --> 00:43:28,180
you know, much more easily. but the

891
00:43:28,846 --> 00:43:30,549
Development of alternative supplies,

892
00:43:30,549 --> 00:43:34,466
as you suggest, is a very powerful signal
in that negotiation

893
00:43:34,646 --> 00:43:37,531
and becomes more significant over time,

894
00:43:37,531 --> 00:43:39,995
the better the more you can do it
credibly.

895
00:43:37,854 --> 00:43:39,945
But the the problem, Logan, is that

896
00:43:40,066 --> 00:43:44,639
there's no evidence that Xi Jinping
actually deeply cares about economics

897
00:43:44,639 --> 00:43:47,662
or understands economics and and all
evidence to the contrary that

898
00:43:47,662 --> 00:43:51,955
he actually prioritizes national security
for the first time in in decades,

899
00:43:51,955 --> 00:43:52,986
right, since Deng Xiaoping.

900
00:43:53,530 --> 00:43:56,202
I get I get that. And then the question
becomes,

901
00:43:56,202 --> 00:44:01,411
if the focus is to keep China's external
environment relatively stable,

902
00:44:01,411 --> 00:44:04,393
continued economic escalation is not you
know,

903
00:44:04,393 --> 00:44:07,835
is not consistent with that. I don't think
there's a world in which you know,

904
00:44:07,835 --> 00:44:10,257
China's overwhelming focus has been

905
00:44:10,889 --> 00:44:14,010
stabilizing the relationship with the
United States and stopping

906
00:44:14,010 --> 00:44:16,771
US escalation of controls over China,

907
00:44:16,771 --> 00:44:18,952
you know, throughout this administration.

908
00:44:18,952 --> 00:44:22,554
And so if economic security is national
security in,

909
00:44:22,554 --> 00:44:25,935
you know, in their minds, this goes to the
heart of that,

910
00:44:25,935 --> 00:44:28,039
at the same time. But I totally agree.

911
00:44:28,039 --> 00:44:31,040
I don't think that Xi Jinping comes to a
calculation that says,

912
00:44:31,040 --> 00:44:33,261
well, if growth is going to drop below X,

913
00:44:33,261 --> 00:44:36,072
then I'm going to have X amount of
problems and therefore I have to,

914
00:44:36,072 --> 00:44:37,072
you know, cave on

915
00:44:37,148 --> 00:44:41,377
this issue. It's more that if the rest of
the world is pushing back against

916
00:44:41,377 --> 00:44:43,088
everything that we're trying to export,

917
00:44:43,088 --> 00:44:46,187
why are we trying to do this? and is this,

918
00:44:46,187 --> 00:44:48,296
is any of this worth it? that is sort of,

919
00:44:48,296 --> 00:44:50,647
I think, the trade-off that will
eventually come into focus,

920
00:44:50,647 --> 00:44:53,508
and the the dilemma that Xi faces,

921
00:44:53,508 --> 00:44:55,746
the dilemma that China faces is if you
win,

922
00:44:55,746 --> 00:44:57,383
you lose. Because

923
00:44:57,486 --> 00:45:00,977
Let's say you do manage to continue to
increase your export market share

924
00:45:00,977 --> 00:45:02,644
for two or three more years. I mean,

925
00:45:02,644 --> 00:45:04,626
do you think countries just give up and
say,

926
00:45:04,626 --> 00:45:08,089
like, okay, it's fine. I guess we won't
have resilient supply chains.

927
00:45:08,089 --> 00:45:12,239
I guess we will leave our militaries
capable to foreign influence.

928
00:45:12,239 --> 00:45:16,244
I guess, you know, we will just accept
declining manufacturing jobs.

929
00:45:16,244 --> 00:45:21,275
I mean, some might, but more likely there
will be different political alignments

930
00:45:21,275 --> 00:45:23,666
that will capitalize upon those and will.

931
00:45:24,226 --> 00:45:26,921
You know, throw up barriers to trade from
both the left and the right.

932
00:45:27,568 --> 00:45:32,958
But his hope is that he gets to the point
of so much influence over economies that

933
00:45:32,958 --> 00:45:34,371
we won't be able to say no

934
00:45:34,371 --> 00:45:37,612
But we're arguably I mean, i i this is the
point.

935
00:45:37,612 --> 00:45:39,799
I mean fast forward that into the future.

936
00:45:39,799 --> 00:45:41,679
What does that look like compared to
today?

937
00:45:41,679 --> 00:45:44,381
this is something that they are already
negotiating over.

938
00:45:44,381 --> 00:45:46,422
They have a powerful choke point in rare
earths.

939
00:45:46,422 --> 00:45:48,722
They have several other choke points that
they could use.

940
00:45:48,722 --> 00:45:50,124
They're probably

941
00:45:49,500 --> 00:45:50,500
A c a couple,

942
00:45:50,500 --> 00:45:52,462
you know, they have pharmaceutical APIs,

943
00:45:52,462 --> 00:45:53,623
they have some semiconductors,

944
00:45:53,623 --> 00:45:58,066
foundational semiconductors, obviously E
Vs and some form of green energy,

945
00:45:58,066 --> 00:46:00,968
but you know, imagine that being a hundred
different choke points.

946
00:46:02,272 --> 00:46:06,333
I would say it already is. My point is
we're not imagining what

947
00:46:06,333 --> 00:46:08,804
the escalation ladder can look like on the
other side.

948
00:46:08,804 --> 00:46:11,085
If you say, like, hypothetically,

949
00:46:11,085 --> 00:46:14,227
you can do all these things. We're going
to raise the cost of you doing it.

950
00:46:14,227 --> 00:46:18,050
And you're need to consider that cost
before you consider doing it.

951
00:46:18,050 --> 00:46:24,162
And after that happens, like which set of
tools becomes more powerful over time

952
00:46:24,162 --> 00:46:25,273
becomes the critical question.

953
00:46:25,273 --> 00:46:27,284
That's kind of what I wanted to raise in
the Foreign Affairs piece,

954
00:46:27,284 --> 00:46:28,284
which is that

955
00:46:28,922 --> 00:46:31,704
if China cannot generate demand for what
what is producing,

956
00:46:31,704 --> 00:46:34,306
the controls over demand are far more
salient.

957
00:46:34,306 --> 00:46:35,828
There's good arguments, I think,

958
00:46:35,828 --> 00:46:39,601
that that frankly this isn't the job of
democratic governments,

959
00:46:39,601 --> 00:46:44,595
like that democratic governments shouldn't
be waging economic warfare with consumer

960
00:46:44,595 --> 00:46:48,126
goods, you know, in this way, or that you
have to be more concerned about consumer

961
00:46:48,126 --> 00:46:50,748
welfare and that therefore there's just
not,

962
00:46:50,748 --> 00:46:54,367
you know, the same sort of priority
attached to this in.

963
00:46:55,003 --> 00:46:57,085
Western democracies as there is in China.

964
00:46:57,085 --> 00:47:00,409
But I would argue that the the moment this
becomes a security issue,

965
00:47:00,409 --> 00:47:02,130
these supply chains are not efficient.

966
00:47:02,130 --> 00:47:04,021
and the supply chains need to be
reconsidered.

967
00:47:04,021 --> 00:47:07,258
And so I I think Yeah.

968
00:47:04,879 --> 00:47:06,500
Well, it's also about jobs, right?

969
00:47:06,500 --> 00:47:08,732
And and the number one political

970
00:47:07,258 --> 00:47:08,489
Exactly.

971
00:47:08,732 --> 00:47:12,104
issue is jobs and and preserving economic
growth,

972
00:47:12,104 --> 00:47:16,567
even if that means rising prices for
consumers in lots of areas,

973
00:47:16,567 --> 00:47:19,349
maybe not gas prices. That that's a very
sensitive one.

974
00:47:19,349 --> 00:47:21,750
But in others we're able to tolerate a lot
more.

975
00:47:21,750 --> 00:47:24,055
Logan, this debate will continue.

976
00:47:24,055 --> 00:47:25,597
the good news is that we will know,

977
00:47:25,597 --> 00:47:27,583
according to you in a relatively short
period of time,

978
00:47:27,583 --> 00:47:31,724
which path China takes. so hope you come
back and thanks so much for coming on.

979
00:47:32,300 --> 00:47:34,130
Thanks so much, Dmitri. Really appreciate
it.

980
00:47:34,130 --> 00:47:36,873
And appreciate if everyone takes a look at
the book.

981
00:47:36,873 --> 00:47:40,370
I I would argue it is less a prediction
and more of a a diagnosis

982
00:47:40,370 --> 00:47:41,911
or an explanation of what's happened.

983
00:47:41,911 --> 00:47:45,099
But it's exactly where what I think is
underappreciated at this point.

984
00:47:45,631 --> 00:47:47,504
Well, the book is Broken China,

985
00:47:47,504 --> 00:47:50,541
How the Economic Miracle Shattered and
What It Means for the World.

986
00:47:50,541 --> 00:47:52,355
Logan Wright, thank you.

987
00:47:52,355 --> 00:47:53,355
Thanks, Dmitri.