Book Event: Precarious Ties with Meg Rithmire

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This transcript is from a CSIS event hosted on October 26, 2023. Watch the full video here.

Scott Kennedy: Good morning, or good afternoon, or good evening, wherever you find yourself. Welcome to this event hosted by the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. I’m Scott Kennedy, the director of the program. And I am delighted to host this conversation today about government-business ties in Asia.

As you know, our program focuses on China and its political economy and its relationship with the rest of the world, but to do so it’s very helpful to put China in comparative perspective with other countries in the region and the rest of the world, and to step back and not just focus on what’s happened in the last week. Makes us much smarter about trying to understand where China’s economy is today and what policymakers should be thinking about going forward.

Anyone looking at China has a myriad mix of ideas in their head about this country’s economy. We see an all-powerful Chinese state, but we also see an amazing amount of debt. We also see China as a tech superpower, an economic superpower, but we’ve also talked about peak China. It is really difficult to get our bearings on where China is headed.

And luckily, today we have the opportunity to do that. And we have the opportunity to do that because Meg Rithmire of Harvard Business School has written a fantastic book, “Precarious Ties: Business and the State in Authoritarian Asia.” I’m going to introduce Meg in just a minute. And then we will turn to two commentators who are going to give us some insights into this topic and her book: Joyce Chang from JPMorgan and Dan Rosen from the Rhodium Group. And then we’re going to turn to the audience, and those of you watching online can submit questions through this program’s event page on the CSIS website. And then we’ll have a back and forth, and we’ll see where things stand and try to pull all the threads together at the end of the hour. But let me first introduce Meg and our two commentators and then turn things over to them.

So Meg Rithmire is the F. Warren McFarlan associate professor in the Business, Government, and International Economy Unit at Harvard Business School. Professor Rithmire holds a Ph.D. in government from Harvard and her primary expertise is in the comparative political economy of development with a focus on China and Asia. Her first book, “Land Bargains and Chinese Capitalism,” examined the role of land politics, urban governments, and local property rights regimes in the Chinese economic reforms. It’s really great to have you here today with us, Meg.

Our first commentator after Meg makes her presentation is Dan Rosen, no stranger to those who watch CSIS programs. Dan is the co-founder of The Rhodium Group and leads the firm’s work on China. He’s a senior associate also here in the Trustee Chair at CSIS and is an adjunct associate professor at Columbia. And from 2000 to 2001, Dan was senior adviser for international economic policy at the White House’s National Economic Council and the National Security Council.

We’re also joined today, very happily, by Joyce Chang, who is chair of global research for JPMorgan’s Corporate and Investment Bank. And her team – I can’t believe that they’re able to do this, but I can because I’ve read their work and I’m a big fan – they study all sectors in which the bank does business, including equities, fixed income, currency and commodities, emerging markets, derivatives, and structured finance. Joyce was a managing director at Merrill Lynch and Salomon Brothers prior to joining JPMorgan Chase in 1999. She has been named as one of the Top 25 Most Powerful Women in Finance by American Banker since 2012 and was included in Barron’s 2020 and 2021 lists of the 100 Most Influential Women in Finance.

We have an awesome group this morning. I am really honored and humbled to be hosting today’s conversation.

So I’m going to turn things over to Meg, who’s going to introduce the themes and findings from her book, and then we’ll go to Dan and Joyce for their initial reactions. Meg, thanks for being with us.

Meg Rithmire: Thank you, Scott, so much for having me here, and to the team at the CSIS Trustee Chair for allowing me to talk about the book to your audience, which is a wonderful audience of people with a lot of different knowledge about China and a lot of different interests about China.

And thanks especially to Dan and Joyce, both of whom I’ve admired for so long. And I’ve learned so much from them, basically, in what they say and what they write and how they approach their research. And so it’s a really fantastic opportunity for me to get feedback on the work from two amazing people, as well as from Scott and his team, and from the audience.

So my mission was to talk for 15 minutes about the major findings of the book, and I’m going to do that. It is a long book. (Laughs.) It is a 400-page book that, as Scott says, does compare three regimes in Asia: China under the Chinese Communist Party, which I’ll call the CCP, from 1949 to the present; as well as Indonesia’s new order, Indonesia under Suharto from 1965 to 1998; and Malaysia under the Barisan Nasional from 1958 to 2018, when the Barisan Nasional actually lost power.

And the logic of comparing China, if I’m – if I’m honest, was – you know, I am deeply interested in the countries in Southeast Asia. I learned the language to write the book and I learned a lot from that. But my heart is in understanding China from the perspective of comparison. So we typically think about China as deeply exceptional, but in fact there are a lot of questions we can ask about state-business relations in China and answer them more effectively by comparing China to other places.

So the theoretical motivation of the book is the question: How do authoritarian regimes discipline business? So when you look around the contemporary landscape or the historical landscape, almost every authoritarian regime except for those that are really state-socialized like the USSR or China under Mao have private businesspeople and want economic growth through the innovative and investment activities of those private businesspeople. But they also seek to limit their political influence, so limit the extent to which they can garner political activity or political support and challenge the regime’s monopoly on political power.

Over the course of the 20th century, we sort of saw in the 1940s and 1950s a lot of scholarship on what the capitalist class should do in politics and two really different perspectives.

So the first is very typically related to Barrington Moore, the 1960s social scientist, who said, basically, if you have no bourgeois, you have no democracy. And his argument, really based on analysis of the process of democratic and economic development in what are now advanced democracies mostly in the West, is that the responsibility of the capitalist class and the historical role is to agitate for democracy to protect their property rights.

But if you look at the scholarship that comes out much later in the 20th century and in the early 21st century, a lot of it focused on China. The more common paradigm is crony capitalism. So we imagine that it’s not that the private-sector elites and regimes like Suharto’s Indonesia or the CCP’s China agitate for political change, but rather that they’re coopted; that they’re cronies that are, in fact, buttressing the regime’s monopoly on political power rather than challenging it.

But there’s a puzzle when you look at what’s happened within these authoritarian regimes, particularly in China and Indonesia – I’m going to focus mostly on China today, but say just a little bit about the comparison – which is that you have these regimes that are founded on what looked like alliances between autocrats and capitalists, but you see one side betraying the other quite dramatically over time and with serious consequences for political stability and for economic stability.

In China, I think that’s the case. I started working on this book in 2015. I wish it had come out three years ago, but it’s coming – it came out last month, right, September, from Oxford University Press. And what we really saw from 2015 all the way through 2018-2020 – and 2020, the key event was the sidelining of Jack Ma, the suspension of the IPO of Ant Financial, and then what we’re seeing now, which is the massive movement of private-sector entrepreneurs to places like Singapore and elsewhere, and the general feeling that the CCP has turned on business elites.

But before that, there was a lot of dramatic activity even in Xi Jinping’s China, which Scott correctly says we all think of as an all-powerful state. And let me start with four interesting facts.

So, first, the crackdown on the private sector – or what Lingling Wei calls, I think quite nicely, the crackdown on everything – did not start in 2020 with the suspension of Ant Financial’s IPO. In fact, in 2015 and even earlier we started to see very serious particularistic crackdowns on people in the private sector in China. Many people may have heard of Xiao Jianhua, who was the former financier to the regime’s kind of political elite, who cultivated relationships with political families well, you know, in the late 1980s all the way through the 1990s and 2000s, who disappeared from Xi Jinping’s China and was later, people say, kidnapped, really, from Hong Kong; so was in Hong Kong for several years, wanted by the regime, but left alone until he was taken from the Four Seasons back into China, and then was silent for five years until he was finally sentenced last summer to a term in prison. And another individual which many people may be aware of, Guo Wengui – Miles Kwok – the very famous Beijing-based Chinese billionaire who was very close, like Xiao Jianhua, to regime elites until he left for New York, and, you know, stayed in a New York penthouse for several years recording YouTube videos lodging accusations against all sorts of political elites in China about their corrupt business dealings and talking about the internal decay of the party itself. Many people think a lot of what he was saying was not true, but some things might be true. But in any case, why do we see these individuals, who were once very close to the regime, turning against it or being turned on in very serious ways?

The second fact, which is one of my favorite to tell people, is that if you look at China’s external economic balances, the course of time from really 2008 all the way to the present we think of as a time in which China became a financier to the world, and it did. Chinese outward foreign direct investment grew tenfold during this period of time. The assets that Chinese businesses and individuals and parts of the Chinese state held overseas quadrupled. But also, in the same period of time, the errors and omissions line in China’s balance of payments – meaning the money that leaves China basically illegally in suitcases without being formally registered – was just as high if not higher than its formal outward foreign direct investment almost every year from 2012 through 2017, meaning that people are leaving China with their assets illegally just as much as they’re investing abroad legally.

A third fact, which is really a brief story about a company that I like to tell, which is about the China Minsheng Investment Group, CMIG, which was founded – which was founded under the leadership of Li Keqiang in the Xi Jinping era to be China’s, quote, “JPMorgan” – so a privately-owned investment firm that would make efficient capital allocations, you know, towards strategic sectors that were important to the Chinese state, but with a private business logic. It had private investors who were investing their own capital in these firms. Within three years, the principals of that firm – which were dozens – had basically looted the firm’s assets, mortgaging their shares for loans, often dollar-denominated loans; self-dealing, lending to their own firms. And within three years, it was in state receivership with 350 million renminbi in debt.

The fourth fact is about the gray rhinos. So some of you who know the Chinese business landscape well may know what I’m talking about with these firms, and it’s a term used by Xi Jinping in 2015 to describe these large private conglomerates that were deeply indebted within China. They included companies like HNA and Anbang. Those companies are now defunct, nationalized, broken apart by the state, and their principals either in prison or dead. They also include companies that still are alive and well, such as Dalian Wanda as well as Fosun, headed by Guo Guangchang. It also includes Evergrande, right, a company that almost everyone’s familiar with, also deeply indebted, also deeply close to the regime over a long period of time.

If Xi Jinping is as powerful as everyone thinks he is, why do we find these kinds of behaviors – asset expatriation, abuse of the financial sector, crackdowns on individual private business elites, and leaving other ones kind of unscathed? Why do we see this pattern of behavior?

The main argument of the book is that cronyism is an insufficient description. We can call lots of things cronyism, we can call lots of people coopted, but it doesn’t tell us very much about their behaviors and how those behaviors may affect the stability of a country’s economy and of its political system. Instead, in the book I outline two major types of state-business relations in authoritarian regimes.

One I call mutual alignment, and it describes when informally rather than formally the institutions of an autocratic state are organized and relationships with private businesspeople are organized to facilitate economic development and economic growth. Its relationship with society is mutualistic in biological terms; meaning it’s not, you know, perfectly allocating capital, it’s not absent of corruption, but basically everyone gets some economic growth that basically benefits society.

The second type is not quite so beneficial, and I call it mutual endangerment. And it describes a relationship between economic and political elites in which their entwined and corrupt dealings and invested in perpetuating each other’s survival out of fear. So my – one of my favorite quotes from someone else’s work – John Osburg’s work – is that – he did this ethnography of wealthy businesspeople in Chengdu, and one of them says, you know, it’s very – it’s useful to do something, you know, to have a – have a political elite in your pocket. But to have a political elite who you did bad things with is infinitely more useful. (Laughs.) And that really captures the essence of mutual endangerment. Businesses cultivate ties with political elites to make themselves safe. They cultivate ties with all sorts of political elites, not just one faction or one family or one individual. And they’re both – both sides are invested in perpetuating each other’s dominance because the downfall of one side would mean the downfall of everyone.

Neither of these – mutual alignment nor mutual endangerment – can be described as a stable equilibrium. In fact, they’re both disequilibria.

In the context of mutual alignment, you get this alignment between state and business that tends to, over time, create stagnation. So you have these companies, these firms that have had access to the state and have had access to resources, and then once authoritarian regimes want to generate a different kind of development or new kinds of innovation they find that they have to dislodge these informal ties in order to do that. And so mutual alignment, in the argument of the book and the findings when looking at Malaysia and Indonesia and China, leads to a kind of economic stagnation that generates a desire on the part of the regime to break out of it. We see this happen in China in the 2000s.

Mutual endangerment is much more dangerous. Because both sides fear the downfall of the other, they both have incentives to try to outmaneuver the other side. This happens through expatriating assets, trying to get your personhood or your assets overseas to give yourself insurance should things go badly domestically. You’re incentivized to collect more and more incriminating information – kompromat – about political elites as well as your rivals, all of which can be used against you. And you’re incentivized with short time horizons to get everything you possibly can out of the economic system you’ve got while the getting is good.

So in the book I describe both of these in great detail and show how they apply to the cases of Malaysia, Indonesia, and China. I want to focus on China here.

In the argument that I make about what determines what type of state-business relations you get in any given authoritarian regime, I focus on two factors. The first is trust, whether or not political and business elites trust each other. And the second is about the financial sector.

Let me talk about trust briefly. I don’t mean love. (Laughs.) What I mean by trust is the basic security that your personhood will be protected, and that if things get bad for society or bad for the economy the state will protect you rather than betray you, rather than turn against you. I argue that in Malaysia business elites did trust the state. It wasn’t a love, but it was a trust. And a lot of that is built on the early experience in regime formation in the 1950s and ’60s. The same is true in terms of the time period in China and Indonesia, but the outcome is distrust, which turns out to be incredibly important when the financial sector gets liberalized.

The second argument – so I say trust and financial liberalization. Financial liberalization is the really important part of the story for China. We often think that the problem with China’s financial sector is that, in fact, private business elites did not have access to the financial system. But the irony is once they got that access in the early 2000s, the Chinese political economy started to accumulate massive amounts of risk and massive amounts of activities that I associate with mutual endangerment, specifically asset expatriation and what I call looting, which means a large amount of fraud, a large amount of abuse of the financial sector. And I’ll say a few more about those things. So the argument in the book is that when distrustful business elites access the financial system, they have incentives to capture resources and capture politicians, and mutual endangerment is the type of state-business relations that you get.

I’m going to focus on China briefly. The two big arguments I make about China that may be new to people, even those who know a lot about how the Chinese political economy works, is, first, that private-sector capitalists do not and have never trusted the Chinese Communist Party. So the book goes back to the 1940s and shows that over the course of the PRC’s history what I call a pattern of accommodation and reprisal has characterized state-business relations. This began very early, even with the process of revolution, in major Chinese cities.

Early experiences in nationalization, which was gradual in China over the course of the 1950s, allowed some private capitalists who still existed in China, who hadn’t fled to Hong Kong or further afield, to first sublimate their skills into the regime’s new mission to rebuild the economy. And so they were very delicate, the CCP, with these private-sector elites in the 1950s and even in the 1960s. They needed these private-sector elites, often some of whom were the only ones in various cities who knew how to read balance sheets or think about the finances of an enterprise, no matter who owned it. But these same business elites that in the late 1940s and 1950s worked as hard as they could to become national capitalists – so people who were running businesses with the imprimatur of the state and in order to support the CCP’s goals of economic rehabilitation – found themselves on the wrong side of radicalism, first in 1957 with the Anti-Rightist Campaign, later in the Cultural Revolution, and in subsequent cycles of radicalism that occur throughout the PRC’s history.

My focus in explaining this pattern of distrust is the importance of the campaign in China as a technology of politics of the CCP. Campaigns are fundamentally uncertain. They involve mobilization, propaganda, phases of radicalism, phases of recalibration. And almost every citizen in China knows how to weather a campaign – knows how to cast what they’re doing as part of what the campaign’s goals are, first; and then to hide, to obscure what they’re doing, and to protect themselves as the campaign reaches a radical phase and then a recalibration.

That fundamental uncertainty, the fundamental sense of insecurity – indeed, that’s why I call the book “Precarious Ties,” because it’s about vulnerability on both sides and the danger of state-business relations in authoritarian regimes – has led capitalists in China to establish patterns of adaptation that are sticky over time. In the book, I talk about many of these patterns of adaptation that we can observe.

So, first, in the 1980s, many private entrepreneurs wore the red hat, Dai Hong Mao Zi, disguising themselves as state-owned enterprises when they were, in fact, private enterprises. In the early 1990s, they roundtripped their foreign direct investment. It looked like they were foreign direct investors or international enterprises when, in fact, they were sending their assets out and sending them back in as a way of obtaining safety and benefits from the regime. And in the more modern period, they joined the CCP not because they love the CCP, but being closer to the party is being closer to information to understand what the next policy coming down might look like and how to protect oneself in that context. They also eventually establish opaque corporate forms, they expatriate their assets, and more.

Secondly, the second big argument I make about China is that the early reform era was disciplined for the private sector because they were excluded from the financial system. So I don’t dispute the major argument that if, you know – that capital allocated to state-owned firms was allocated inefficiently. That’s beyond dispute. The argument that many people make is that growth would have been faster in China had they allocated capital to the private sector. And the argument that I make is that’s only true if markets really discipline private sectors and if the financial sector is fully liberalized with competitive interest rates, competitive pricing of risk, and market discipline.

But almost by definition, authoritarian regimes do not allow that because they want capital to go to people they trust and they refuse to let markets discipline firms that are close to the state, principally state-owned firms. So what we get in China in the 2000s is a massive liberalization of the financial sector. Credit to GDP skyrockets, and most of that is going – even in the formal sector is going to private enterprises and not just state-owned enterprises – so almost an equal amount is what I show in the book – as well as a general loosening of the – of the financial sector that allowed patterns of informal finance such as shadow banking, other debt instruments by which private-sector capitalists could access China’s vast pool of household savings.

At the same time, local governments that had been incentivized for growth through the fiscal system – so by retaining the tax assets that they could generate based on economic activity within their jurisdiction – those incentives were replaced by the rise of land finance, which really was the subject of my first book but also features in this book, such that local government officials who wanted to boost GDP or get investment could get investment through bank loans and through real estate investment in a way that did not ensure there was much discipline or that that investment would go to productive economic activity.

Private-sector firms in the 1980s and the 1990s had to finance themselves based on retained earnings or foreign direct investment, which meant they had to kind of integrate themselves into global supply chains, which were very disciplined, or they had to be disciplined by a sort of short-armed financial markets from their family and their friends – curb finance in the work of Kellee Tsai, “Back-Alley Banking” – that was quite disciplined and that gave them incentives to run their businesses well. In the late 1990s and early 2000s, the financial sector opened. Connected firms – not all firms – have access to bank loans, to informal finance, and indeed to equity markets.

What we see over the course of 2000s in China is, I argue, mutual endangerment. We see weaponized information in the form of kompromat. We see all sorts of – and the book goes into all of these ways in which local officials, which we’ve been exposed to through the anti-corruption campaign, which has been a wealth of data, if nothing else, from China about the ways in which individuals in the private sector and local-level officials and national-level officials were entwined in corrupt dealings that were very opaque and hard to find.

And so there’s a lot of social-science work that likes to connect, you know, boards – board membership to loans and things like that, but what we find in China is the patterns are much more obscure than that. People do like to put the relatives of political officials on their board, but the names and the association with those people are hidden for good reason, because they don’t want it to be discovered. We see asset expatriation. So I already mentioned about kind of China’s external accounts, but part of what I do in the book is look at a bunch of the top couple dozen of private firms in China that are large conglomerate firms and look at ICIJ data like the Panama Papers to figure out how many of those companies had how many companies registered in jurisdictions that were tax havens that are hard to trace.

The result is almost all of these gray rhinos had a handful of firms. Almost every one of the largest conglomerate firms in China would have those kinds of secret offshore accounts and secret offshore manifestations. We see thousands of subsidiaries. So the hardest part of the book was working with the corporate filings for a lot of these large firms in China. And many of them we have, you know, publicly listed, and then in their public filings they’ll have a couple of hundred subsidiaries. But I found for companies like HNA, companies like Anbang, companies like Evergrande, it actually ran more into the thousands.

And in fact, the web of these companies are taking out loans from hundreds of banks. So many of us may have seen the news more recently that Cangzhou Bank has experienced a bank run because of its association with Evergrande. There’s a part of the book that looks at what kinds of banks Evergrande was lending from. And in fact, Cangzhou is one of dozens of local banks that is exposed to Evergrande. And in fact, we find hundreds of local banks from which Evergrande had borrowed.

Looting is this particular mode, and it’s a kind of topsy-turvy world of economics in which you find principals of firms in China actually involute the value of their own firms to extract personal value rather than build long-term value. So I’m going to read a quote from Desmond Shum’s book “Russian Roulette.” He says, “I came to believe in China that the short-term business model wouldn’t work. I began to understand what some of my entrepreneur friends had been telling me all along: The smart way to do business in China was to build something, sell it, take the money off the table, and go back in. If you invest one and you make 10, you take seven out and reinvest three. But if you keep 10 in, chances are you’ll lose it all. Another person said to me in the early days they didn’t know” – he’s talking about a company he worked for – “what would happen to their investments, so they took every opportunity they could. If a friend was in a high position at a bank they would borrow, because who knows what will happen tomorrow? For me, I could also lose my job anytime. So I took every opportunity to get rich. Get rich today because tomorrow you don’t know.” What we see here are profoundly short time horizons that are related to this feeling of vulnerability and distrust. Looting is this particular form of economic behavior where you have short time horizons and, in fact, bankrupt your own firm to benefit yourself because you don’t trust the future.

The most ironic thing about Evergrande is they were making thousands – (laughs) – or, really, donating hundreds of millions, U.S. dollars, to charitable causes outside of China as well as expatriating their assets at the same moment they were the most-indebted firm in China. So what we see here is this looting – the presence of massive amounts of fraud within the Chinese financial sector, massive amounts of self-dealing, and massive amounts of short time horizons, which has led to this kind of political economy in China the moral quality of which is really damaging.

It is not my argument that every firm in China behaves this way. That is far from the case. And in particular, the companies that are exposed to global supply chains still have that kind of discipline. But the moral economic argument I make is that if enough people are behaving in this way, kind of – kind of compromising one another with this kind of information or doing this kind of self-dealing or organizing their firms in a way that looks more like mafia systems than firms, it’s hard for everyone else to behave as if they have long time horizons and as if they’re investing rationally.

Let me say just a couple of things in conclusion and then I’m eager to hear what Dan and Joyce have to say about the book.

What do we see under Xi in China? What I argue in the book is that under Xi in the first few years mutual endangerment actually accelerates, and this is really because of the anticorruption campaign. The time horizons of people who had relied on these relationships – in these mutually compromised relationships with political elites to protect themselves – the time horizons got even shorter because they feared that at any point someone might betray them, or someone who knows a lot about them could go down and then tell that information to authorities and endanger them in turn. So you’ve seen massive capital flight from China, even before things got cracked down, you know, really bad in Xi Jinping’s China after 2016 and 2017. A lot of outward foreign direct investment, even if it was through legal means, was actually going to Europe and the United States, not in all strategic sectors but really in things like leisure, real estate, hotel chains, things like that, because those were seen as safe investments for entrepreneurs who felt fundamentally vulnerable within China.

After 2015, and in particular the stock market crisis in 2015, after which the Xi administration becomes extremely concerned about levels of corporate debt, about capital flight, about ties between the business sector and the state, the administration tries to reassert financial control. And it does it primarily through campaigns and crackdowns and the coercive apparatus of the state, which is familiar, but it also does it through corporate shareholding, so trying to get the state a seat on the board. The state has a minority share in many firms, private-sector firms in China. We often read this, especially those of us interested in U.S.-China relations and China’s role in the world, as the state taking shares in strategic firms which they want to do things abroad that serve the PRC’s interest or that accelerate China’s technological upgrading. But I find in the book that the vast majority of the minority shareholder firms, right – that the state holds a minority share in – are actually just domestic local firms. And the argument that I make is what the state really wants is insight – insight into what those firms are doing and the ability to discipline them.

What this actually looks like is very similar to Malaysia, the Barisan Nasional’s sort of corporate stakeholder/shareholder model, in which the state itself has a share in the vast majority of firms in Malaysia. It’s led to stagnation and frustration, but it’s fundamentally a lot more political discipline if not economic discipline for the corporate sector.

I want to conclude by asking two questions about China that I think the book helps us answer.

The first is: Can the state – can state financial control, the kind I just described under Xi Jinping, effectively allocate capital in that country? This is a profound question. And not many people think of it this way, but China is really one of the only authoritarian regimes – if not the only authoritarian regime outside of Singapore, which I would say is exceptional – that is trying to have a modern financial sector with a monopoly on political power. My answer would be no; that if you want half of the firms in China, the ones that are owned by the state, not to have to face market discipline, it’s very difficult to design technocratically some sort of financial sector that will allocate assets efficiently in the context of vulnerability that won’t lead to this kind of fraudulent moral-hazard type behavior that we see. So my answer would be no.

And the second question is – and we see this now – can the CCP regain the trust of the private sector? The argument that I would make is that they never had it in the first place. What we’re seeing now is a very serious but only the recent bout of accommodation and reprisal. Sure, there will be moments where private-sector individuals see opportunities and return to invest, but they will do it with the same sense of vulnerability and short time horizons that they – that they’ve always had, and we can’t expect for that long history of adaptation to suddenly be resolved in the context of some new overtures to the private sector.

So, in conclusion, a lot of the financial macroeconomic activity we see in China is fundamentally tied to how politics are practiced in that regime, and I don’t see them changing very quickly anytime soon. Thank you.

Dr. Kennedy: Thank you, Meg. Terrific overview of your book, the main arguments, and the importance of them to trying to understand where China is going.

Let’s turn first to Dan for his reactions and then to Joyce. Dan, over to you.

Daniel H. Rosen: Thank you, Scott. And thank you, Meg, for doing this work. And I’m delighted to have a chance to be part of this event here today.

You know, Meg said that she regretted that she didn’t get this out three years ago. I think three years ago people wouldn’t have appreciated the importance of this work the way that they do right now. Certainly, I mean, I largely work with CEOs and C-suites and boards of directors and company strategists, and three years ago this was a fascinating academic lecture that you all just heard the short version of from Dr. Rithmire but it wouldn’t have been something you would have sent up to business leaders to use their scarce time on.

I can attest that at the present moment the profundity of the long-term stay-or-go China investment questions is so great that even leaders of Fortune 100 firms are taking the time to have to think through, do I have conviction about the fiber and nature of this Chinese economy such that I can make these, you know, really existential decisions for my company about whether we can understand this well enough to find our way through? There’s a case to be made that these problems are absolutely enormous. But you look back, 40 years of growth, you know, you can argue, yeah, this is the reckoning that you get after having the world’s greatest spurt of growth in human history, and chances are the party will find a way through this, and thus for the world’s best MNCs you probably do want to keep an option on this thing and hang in there. But do you really understand the nature of growth, the nature of the choices that are being made, and what we’re up against? I think I’m going to be recommending if not the whole 400 pages, Meg, then at least some chapters of this for a lot of folks who have a very applied life compared to the academic rigor that went into this.

A couple observations about – that I take away from my first look at the work.

Things that were a feature at an earlier stage of development – and they really were. They weren’t a mistake in 1985 to let a little bit of corruption, a little bit of this, a little bit of that solve problems that weren’t otherwise solvable, because there was no kind of more mature political way to deal with these things at the time, right? Things that were a feature are today becoming bugs, because once you get to middle-income level the right answer to how to maximize resilient and sustainable growth changes profoundly. And on my second reading of the work, where I go past the quick-and-dirty read of it, I’m hoping to find some discussion about these sort of different phases – development phases – and how different it is because China has successfully gotten to middle-income level, which very few developing countries ever do. So that’s an important dimension of this, which – it doesn’t change the fact that the way things are running in this autocracy are not actually doing the trick right now – (laughs) – but it does help give us some context about the kind of handoff point that we – that we may be dealing with.

Secondly – and Meg already – Meg already spoke to this a little bit – but, yes, there are huge technocrat problems Beijing is confronting today, right? There are – there are technical choices about dealing with exchange rate tradeoffs versus domestic interest rates right now, right, for example, that we can get into if we wanted to. And Scott and the team at his chair are dealing with these technical, you know, things all the time, and that’s important work. But probably the lion’s share of the risks hanging over the Chinese outlook are not technocrat problems; they are deeply embedded political economy in the system problems that are for – you know, require a political solution, you know, that is way beyond conventional economics to offer the cheat sheet for what’s going to get us out of the deteriorating trend potential growth picture that we have right now. And that’s something that probably 80 or 90 percent of the China watchers I interact with are mostly talking about, the technocratic problems, and that’s a lamppost effect. We talk about those because we know how to talk about them as economists, but really – the really big question marks around how big the Chinese economy could be in 2030 or 2035 are not economic questions; they’re political. And that’s at the heart of the work that Meg has done here.

Thirdly, that this is not just a China story, right? And you know, at first Meg was almost a little apologetic that there were these other chapters on Indonesia and Malaysia in what would otherwise be a China conversation here, but it’s crucial. These are not uniquely, exceptionally Chinese phenomena; they are global, eternal problems of how you have a dynamic, privately-motivated economy with profit motives, and how do you reconcile that against the political optionality to deal with all the political problems and security problems a society has. So I think it’s crucial, in fact, that we at least recognize that this is not just a China story and we have to think of it in a comparative context in terms of what the answers will be going forward. It’s really a human-nature story at the end of the day, isn’t it, because those things that Meg’s describing about how Chinese entrepreneurs are trying to hide their assets or get them, you know, diversified out of one country, like, that’s exactly what, you know, American companies do when they invert their firms into Irish domiciles to avoid U.S. taxes. So it’s not a uniquely Chinese phenomenon. The question is, you know, how is the Chinese political system able to manage these universal, eternal human-nature realities, right? Can they be the engineers of the soul – (laughs) – that they – that they aspire to be?

And then, finally, one thing that Meg didn’t talk about but I found in the conclusions, she – and maybe she can get into this if we have time – she notes that just because she is documenting these flaws with what used to be thought of as a kind of more promising model for development for less-developed countries, right – just because she’s cataloguing the flaws doesn’t mean that the counter positive that liberalism is the right answer – and political liberalism as it relates to market democracy, right – she’s not telling us that that’s necessarily, therefore, the better answer, but she’s noting that it’s at least still a candidate for the right answer. And as China and Malaysia and Indonesia and any other country thinking about what the options are kind of go through that, this, relatively speaking, does lift the star of liberalism, I’d like to say, both politically and economically in the pedagogy at Harvard and I hope other universities as well, Meg, because I think it needs a lot closer look for its utility in helping to manage these universal challenges.

Thank you for the work and thanks for the chance to offer some quick reactions to it.

Dr. Kennedy: Let’s go over to Joyce now for your reactions.

Thanks, Dan.

Joyce Chang: No, thank you so much. I mean, it’s just such a pleasure to be part of this CSIS event. And I tell all of the people that we talk to in the market that one thing that I have just truly valued about CSIS, the work that Dan is doing, the work that Meg is doing, is that is really is a political economy question, and markets people tend to just look at the financial markets.

So I want to just start by saying, before I go into the specifics of the book, how much I just appreciate Meg’s whole approach, including the work that she had done on property rights. But you know, China’s approach to globalization, it is a series of campaigns and experiments, and they’re constantly adjusting. And I find right now that in the Washington dialogue it’s very easy to turn this into anti-authoritarian view of history, that China sort of had technocrats and then they went astray, and Xi Jinping, it’s his political thought leadership. And you know, what I’ve always seen is that the overriding goal of the CCP is to stay in power. And this approach means that they are pragmatic, they’re capable of shifting gears when necessary, and we’ve witnessed this, you know, during COVID with the abandonment of zero-COVID policies after a wave of protests. Even the additional stimulus measures that were announced, you know, this week was after China’s growth had disappointed.

But I also completely agree that the problems with cronyism, that’s too vague, cooptation doesn’t explain all of the causes. And I think that what I’d like to add are just some dimensions in talking about the buildup of debt, because I do think the debt crisis, you know, is one that is mutual endangerment. That probably is the third book that Meg could focus on as she really looks at where we’re at in the world right now.

But first let me just say that, you know, I applied her framework of mutual alignment and mutual endangerment to sort of the common prosperity. There’s the sort of conventional wisdom that, you know, this is a new direction for China, but common prosperity has always been an intrinsic part of China’s socialist country. The interpretation and the policy focus have varied over time. And I think the current misconception and simplification, it does not mean that growth is no longer important. It does not mean that there’s a shift to a welfare economy system or uniform egalitarianism or even a crackdown on all of the nonstate sectors. I mean, what the focus is on is redistribution – on economic strength rather than economic growth necessarily as the key objective, but it’s this redistribution aspect of it that I think is really going to come up when we look at some of the issues in dealing with China’s debt. And from Meg’s last book on property rights, which has come up when you look at the local government financing vehicles right now, that redistribution issues.

But I would say that I appreciated in this book that it went back all the way to the 1940s and agree that this first period that you had, like, Deng Xiaoping, 1985, that was, I think, mutual alignment. It was allowing some people to become rich first, and then the rich help the poor, and eventually everybody gets a little bit of this. That’s common prosperity, and common prosperity has been around for a long time. So poverty is not socialism. And I think that that kind of lasted all of the way through until President Hu’s second term. You know, after the global financial crisis, this is where you then had this focus, this sort of harmony society, more inclusive model of development, and then just look back on how much you have seen the debt accumulate that became just this real problem that we’re sitting in today.

But let me just go through some of the debt numbers because I think that is something where, you know, the market really is focused. And I agree with very much Dan if this had come out three years ago you would not have had the focus that you have right now on China’s debt.

So if you look at this period that Meg has talked about as she’s seen the shift from mutual alignment to mutual endangerment, so China’s total debt-to-GDP ratio increased almost fourfold, from 70 percent of GDP in the mid-1980s to 272 percent of GDP now, you know, close to the U.S. level. You look at global debt, the U.S. and China are 50 percent of global debt. People talk about an EM debt crisis. Actually, ex-China, EM debt has gone down. So you have this massive increase that looks like a hockey stick that really started in China’s debt becoming considerably steeper from 2008 onwards. Notably – and I think as Meg points out in her book – that nonfinancial corporate debt, which has really not been studied by social scientists – and there’s a very good chronology in this book that goes from – went from 10 banks to early ’90s to, you know, 80 by 2005. You had the massive credit growth that, you know, Meg talked about. And you know, really with this, the key point I would make was that, you know, it’s not only that you did not develop the functioning financial markets; that you kind of ruled this with financial repression. And this is kind of what we’re sitting in today as far as, you know, the problem.

So if you look at – over the debt increase that China has gone through from the global financial crisis to now, you know, the – over half of the increase in the whole global debt has come from China. So it is not something that is truly in the spotlight in a way that I think that at the height of the pandemic would not have gotten the attention it’s getting now, as everybody’s looking at the size of the U.S. fiscal debt and financing it.

But I want to say something just to put her last book together, this one on the local government financial vehicles – local government financing vehicles, the debt, because you had during this period of mutual alignment and credit growth, you know, this ballooning of your local government financing vehicles. This fueled 4 trillion stimulus that went into all these different channels, you know, where you basically have had this now, you know, recognized, you know, more as corporate debt. So, you know, as they’ve had to swap this out, all this borrowing that they did during the stimulus, it’s now treated as corporate debt. And we’re sort of sitting in this point right now looking at the nonfinancial corporate debt, the defaults, the way that property developers are being treated, and the dilemma that China has that they have to keep household – you know, housing prices high. But what do you do with the property developers at this point in time? And we’re talking about the broader issue of the sustainability of the local government financing debt models, you know, over the medium and the longer term.

So I think this actually raises a great point for sort of the next chapter of what to look for in using, you know, this whole framework, which is, you know, now that you are in this period of what I would call the debt crisis which is mutual endangerment, how do you get out of it? And I very much agree with Meg that mutual alignment – (laughs) – probably makes this worse right now. There isn’t a good answer to that right now as far as will the regulatory and some of these other things, you know, make this, you know, better and improve it, you know. I don’t think that China is facing a systemic debt crisis. And I would point out that, you know – you know, that it is something with the local government financing vehicles they’re going to prevent the contagion. They’re not going to, you know, have the kinds of liquidity stress that you’re observing with the private developers. They know that, you know, once they trigger something like this, that you would have a loss of the whole province’s, you know, access to capital. But how do you – what do you do now that you’re in mutual endangerment, given the size of this problem, that you don’t have a financial system? You’ve had a financial system that has functioned on financial, you know, repression. And I agree that the private investment and trust is just not going to come back that easily, something that Scott has very much, you know, talked about and written about, as has Dan, in all of their studies.

I wanted to also add, you know, one more, you know, comment on Meg’s work as well, which I also, you know, agree with. You know, this whole notion of debt-trap diplomacy, you know, and that China – you know, this whole discussion of the Common Framework. I look at sovereign debt. This has also been something that I feel, you know, has been oversimplified, and a lot of that has been in sort of the – a lot of the discussions that you see, you know – you know, sort of in the U.S.-China tensions. But you know, look, if not for China, sub-Saharan Africa would not have had a lot of the financing. And what we do see with the recent agreements that have come out in Zambia is that China has participated; they just have a very different way of looking at net present value losses and what they classify as official lending. But they have actually limited this just to their Export-Import Bank and they classify the other institutions otherwise.

I just found this book very rich for framing just sort of where we come right now as we’ve built up the steps to this period of mutual endangerment. How we get out of it I don’t know, but I agree that the private trust is not back there. And it’s become a much more complicated issue because you’ve turned a lot of this property debt into local government debt. So I feel that’s a great framework to think about the problems that lie ahead, and the way that China will make decisions and make tradeoffs, and the way that we need to understand what they’re doing as they come into more of these international agreements such as the Common Framework to understand what their thought process is.

So, you know, as a career researcher, just also appreciate the depth of the research in looking at a lot of the actual contracts and agreements, and the anecdotes and the interviews that were just so extensive over such a long period of time.

Dr. Kennedy: Terrific. Thank you, Joyce, and Dan as well.

I’m going to – I’m going to pile on here with additional praise and thoughts just briefly, and then I wanted to give Meg a chance to react to the comments, and then we’ll see where we are. I realize we’re getting relatively close to the end of the hour.

But I guess – so, sitting in Washington, D.C., I think, you know, three questions jump up to me.

The first has to do with China’s economic development trajectory. Yes, we see rising debt; productivity numbers which are very, very low. If you look at total-factor productivity, it’s just dropped dramatically, right? But we see China – Chinese companies, many of which you discuss in your book, being leaders in telecom and electric vehicles, in other sectors really making progress. What is it about those market leaders in different industries that – how does that fit with your argument? Are they the outliers of where China is going because they’ve been disciplined, or are – can you have mutual endangerment and successful economic growth at the same time?

The second question is – and it goes exactly to what Joyce said, and Dan alluded to this before – is I can see how it’s pretty easy to go from mutual alignment to mutual distrust and pulling apart. How do you get it back together? Is that something that they ought to think of? Is it really – is really full-scale political liberalization the only real path? Because you suggested that a – that a disciplinary Communist Party, even with all the tools that they have, isn’t enough.

And then I think the last question has to do with, again, being in Washington; is about U.S. policy. So the dominant view right now in Washington is that China is a pile of risks; and it’s a risk economically/politically/geostrategically, and therefore policy number one is to reduce our vulnerabilities, reduce our connectivity. So we’re seeing folks talk about the need to move supply chains, investment. As Dan said, there are all these discussions going on in C-suites. But you imply – and I don’t know if you meant to imply it, or at least I heard – that Chinese connectivity to the global financial system and global supply chains provides some important sources of discipline for Chinese economic actors, and that actually staying connected to China might be a form of discipline which helps their economy stabilize and helps the global economy. So might, ironically, we need to hug the porcupine on this to – as a policy choice to avoid the worst outcomes and reduce the kinds of risks that you talk about in the – in the book and that we’re talking about in Washington?

So those are sort of three types of things sitting in Washington I think about. We have, the three of us, put a lot on your plate, and we don’t – we’re not going to give you near enough time to respond, but wanted to turn the floor back to you, Meg.

Dr. Rithmire: Thank you, Scott. And you know, I’ve learned so much from your work as I’ve done this. I feel like I’m standing on the shoulders of giants, but now I’m literally looking at them while I do this. So thank you for all your comments, and there’s a lot of rich reflection here, and of course I can’t respond to it all. But some common threads.

And let me just say a few things, sort of starting where Dan was and where Scott is with the first question. Which is, you know, when we’re looking at what’s likely to happen to the Chinese economy over the next few years and, you know, this question of how do we have this economy that has so much debt, so much lying flat, the feeling of paralysis, right, when you talk to people in China right now, as well as the world’s most innovative electric vehicle market, battery market, right? There’s a bunch of stuff that’s going really right in China.

And I would say that that reflects, yes – I think the answer to your question, Scott, is yes, there’s a lot of discipline in those markets. It doesn’t just come from global supply chains, but there is – and I’m trying to do some work now that would empirically substantiate this, but there is a kind of pattern of new sector development in China which we might think of as a kind of battle royale where, like, there’s a new sector that’s a focus, you know, a bunch of firms get credit, they’re incentivized to do things, local governments support their own champions, and then they fight it out. And it’s – and it's incredibly competitive. It’s ruthless, actually. But then you get, you know, a couple winners, and then those winners become global champions, national champions, et cetera. That’s kind of the Huawei story in telecom to me. I mean, this is, you know, Scott’s work more than anybody’s. But – and so when you see that, you know, and you see these new sectors, they’re still able, I think, to generate, especially with global connectivity and exposure to global markets, that kind of competitive energy in a lot of these sectors.

And in fact, you know, these political problems don’t apply universally. There’s always going to be entrepreneurs in China who are willing to build a startup around something – some interesting tech and then sell it to someone else, right? It’s not as if everyone’s going to lie flat in perpetuity. But there are a bunch of sectors where I think it’s going to be hard to work out some of the crises of mutual endangerment.

And you know, I point people – and I always do – to Dan Rosen’s 2021 Foreign Affairs article about, basically, the economic reckoning. But in fact, before Xi Jinping was some crazed ideologue, as we think, he was trying to do market-oriented reforms. The problem is the party, it’s not tolerant of markets when they discipline people. And so they prefer to do what they’re doing now, which is basically bailing out Evergrande in some ways and arresting its principals for following them, right? (Laughs.) That’s a typical pattern. And so, you know, a lot of these more domestic-facing industries – I think we’ll have, basically, a bifurcated Chinese economy, right? So some – you know, financial repression I don’t see as likely to leave anytime soon. I think they’re skeptical of loosening capital controls. They’re skeptical of liberalizing, you know, interest rates and deposit rates, et cetera. But we’re going to find some of these competitive, you know, energies in these companies and these sectors that are really important to global markets.

And then, you know, Scott, just briefly, your question, you know, what should the U.S. do? Well, you know, my thoughts on that are really complicated and more than 90 seconds.

But I think the hard thing about risk, and when – you know, when the U.S. government says, oh, China’s so risky, we’ve got to protect American companies from it, my experience is American companies know exactly how to deal with this, right? (Laughs.) So even in the stock market crisis of 2015, all of the qualified foreign institutional investors made – you know, made their money and got out before the thing hit because they know what they’re doing and they’re not ignorant of how things work in China. And even if China peaks or fails, it’s still going to have the world’s largest middle class. And if we want the best companies in the world, we have to have those companies engaged at least to some extent, right, to the competitive ecosystem that’s around China’s large middle class and the competition for the middle market.

And so, as you know, you know, I’m kind of a fan of de-risking in a sense – in a narrow sense, and so I kind of – I appreciate that focus on the high fence around the small yard because I think it should be left to firms. Call me a capitalist, but I think it should be left to firms to decide, you know, how exposed to risk they are. Whether that – you know, what they do accords with U.S. national security risk, that’s a different question and a public-policy question that’s much harder to solve.

And then, lastly, I’ll just say very briefly, you know, on common prosperity, I think Joyce is exactly right. This has always been part of the DNA of the party.

And the last thing I’ll say is that I don’t see Xi Jinping as an ideologue, right? And in fact, my favorite thing to say is when he said, you know, the disorderly expansion of capital has to be stopped, I focused on the disorderly. And he’s right; it was disorderly. It was a disorderly expansion of capital. And so what the – what the party is constantly trying to do is dance that line between having markets to provide some discipline but not having markets discipline the state or the people it’s friendly with.

So, all right. Thank you.

Dr. Kennedy: Well, we have reached the witching hour for this program but not the witching hour for this conversation, because, Meg, you have really opened up our eyes to some very important perspectives on how we ought to think about China and get our arms around the challenge. And the comparisons with Indonesia and Malaysia are extremely valuable. And I want to just foot-stomp what Dan said at the beginning of his remarks, is that this needs to be a discussion at the highest levels of business and here in Washington.

I also want to thank Joyce, as well, for her comments and reactions to the book. This is really – we’re really trying to understand multiple trends in China at the exact same time, and want to thank her for all of her support not just today but with CSIS for many, many years.

And, Meg, thanks to you for writing such a fantastic book. No pressure, but we look forward to the third part of the trilogy that Joyce mentioned as well. Again, thank you for bringing us together with this very important work. For everyone listening, I know they’ve all learned a lot. And we will be talking about this work and your contribution for a very, very long time.

So I want to thank the three of you for joining us today. For everyone in the audience, thank you so much. And we’ll see you all again soon.

Dr. Rithmire: Thank you. Thank you so much, Scott.