China’s Economic Downturn: Structural, Cyclical, or Both?

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This transcript is from a CSIS event hosted on August 31, 2023. Watch the full video here. 

Scott Kennedy: Good morning, or good evening, or good afternoon, wherever you are. Welcome to this CSIS event, “China’s Economic Downturn: Structural, Cyclical, or Both?” I’m Scott Kennedy. I’m the Trustee Chair in Chinese business and economics here at CSIS. And I am delighted to partner with Jude Blanchette, the Freeman Chair in China studies here at CSIS, for this program.

I think everybody who’s tuning in today has been reading the news and watching reports of China’s economic slowdown and the challenges the Chinese economy faces. And it’s really reached a fever pitch in the media. And commentators in think tanks, universities, banks, are all weighing in, trying to help us understand. But there is a lot of noise out there. And the purpose of today’s program is to break through that noise and really understand where there is a consensus about the reasons for China’s economic trajectory, where there are differences, what are the guideposts that can help us continue to observe the Chinese economy as it moves forward, and, finally, what does it mean for the United States and the rest of the world?

Jude, who I will pass the baton to in a little while, we are joined today by four fantastic experts who really understand how the Chinese economy works. I’m going to briefly introduce the four of them. And then we’ll begin the questioning of the – of our guests. All of you watching can go to the webpage for this event and submit your questions. We’ll then get to those in the latter half of the program. And so we want all of you there to participate with us today.

So let me first introduce our guests.

Zoe Liu is the Maurice R. Greenberg fellow for China studies at the Council on Foreign Relations. Her work focuses on international political economy, global financial markets, sovereign wealth funds, supply chains of critical minerals, development finance, emerging markets, energy, climate change, and East Asia-Middle East relations. There’s almost nothing that she doesn’t know extremely well. And she is the author of a recent book, “Sovereign Funds: How the Communist Party of China Finances its Global Ambitions.”

Logan Wright is director of China markets research at the Rhodium Group, where he focuses on the impact of credit expansion on the Chinese financial system, Chinese exchange rate policies, and influence of the country on global currency and capital markets. He’s also a nonresident, senior associate with the Trustee Chair here at CSIS. And he’s the author of the recent report that we issued, “Grasping Shadows,” which came out just a couple months ago. It’s the best retelling of China’s effort to get its financial risks under control over the last five to six years.

Lingling Wei is the chief China correspondent for The Wall Street Journal and coauthor of “Superpower Showdown,” which is one of the best books out there about U.S.-China relations in the last decade. She covers China’s political economy, focusing on the intersection of business and politics. She has an M.A. in journalism from NYU. She originally started covering the U.S. real estate sector and she’s won many awards for her China coverage in 2021. She was among a team of reporters and editors whose work was a Pulitzer Prize finalist.

Finally, Nick Lardy is a nonresident senior fellow at the Peterson Institute for International Economics and an expert on the Chinese economy. He was the institute’s Anthony M. Solomon senior fellow during – from 2010 to 2021. He had joined Peterson Institute in 2003, after being at the Brookings Institution for eight years, and previously at the University of Washington where he was director of the Henry M. Jackson School of International Studies. And we are all students of Nick. He’s written some of the most important books on China’s economy from agriculture, to its WTO entry, to its banking system, to how China responded to the global financial crisis, and recently a book about support for state-owned enterprises.

So thank you all for being with us today. So let me get the questions started. I’m going to first actually start with Nick Lardy. So, Nick, I know that you’ve been watching the news and the reports about China’s economic slowdown and this discussion of, quote-unquote, “structural factors” slowing things down. You seem to be a little bit skeptical about a lot of the reporting. And so wanted to just let you begin sort of giving your case for why we ought to be careful with the numbers and analysis that we’ve been seeing. So let me turn things over to you.

Nicholas Lardy: Well, let me – let me start with some of the positive signs. One is the fact that wages and disposable income in the first half of this year have grown relatively rapidly, way over 6 percent, wages almost 7 percent. Disposable income growth is growing much more rapidly than it did last year, 5.4 percent in urban areas, 7.8 percent in rural areas. So incomes are rising. I think there is a question about confidence, but I think if that kind of income growth continues confidence will improve.

Secondly, consumption growth is actually accelerating. It grew 8.4 percent in the first half. That’s way faster than the growth of nominal GDP. And the third positive thing is that the savings rate is falling. That is clearly demonstrated by the fact that consumption is growing much more rapidly than disposable income. And the only way that can happen is if people’s savings are going down. There’s a very strong interaction around these three things. If wages are growing, and the savings rate is falling, then consumption is sure to keep up. Now, there are no guarantees this will continue, but compared to where we were in the pandemic it looks like a turning point, or what could be a turning point. We’ll know in a few more quarters.

Now, let me just say something about some of the evidence that I regard as not so – not so valid or, shall I even say, somewhat dubious. Some people have pointed to the fact that there was a very large flow of household money into the banking system in the form of bank deposits, and have argued that this is because of uncertainty. People are shifting to liquid assets. They’re worried about the intervention of the party, and so forth. I think this is mostly due to lockdowns.

And we can see the reason – the reason I think that is in the first half of this year savings deposits did go up, but disposable income was growing much more rapidly. As I mentioned earlier, 5.4 percent for urban. Last year, was 3.6 percent. So the share of disposable income that’s going into bank deposits is collapsing in the first half of 2023. So I think that idea that there is a loss of confidence in the party and the government, it could still be correct, but I don’t think it’s strongly supported by the data.

Second thing that I think is not necessarily very – is also dubious, some people have pointed to weak imports. Imports declined by almost 8 percent in the first seven months. But we have to take into account that these are measured in current prices or in value terms. If you look at the volume of imports, that is constant prices, the volume of imports was up 1 percent in the first half. In the first half of last year, it declined by more than 6 percent. So the evidence from imports is showing us that domestic demand is not weakening, but actually picking up.

The third thing that has caught a lot of people’s attention is deflation. The CPI showed a small decline in July, three-tenths of 1 percent. And many people think this is the beginning of the deflation, the bad D word that once people figure out prices are falling they’ll quit consuming on the assumption they’ll be able to buy it cheaper tomorrow, and that will undermine the growth of consumption, and thus slow down the overall economy. But the reason prices fell in July is – can be summed up in one word: pigs.

Last year, there was a swine flu. The herds were getting culled. There was a shortage of pork. The price went up 30 percent. Food is a very large item in the CPI, and China is a relatively low-income economy. Now the herds have been rebuilt and the price of pork has gone back down. If you take out the food, prices rose by eight-tenths of 1 percent in July, twice the pace of June. So maybe they will have deflation eventually but to argue, as many have, that they’re now in deflation because of one month of negative numbers on the CPI, without kind of looking under the hood to see what’s causing it, I think is premature.

The fourth thing that I want to criticize is this argument that there’s been a massive decline in private investment. You know, the argument here is all the entrepreneurs have shipped their money and their families to Singapore and they’re getting out of China as fast as they can because they can’t deal with the uncertainty caused by regulatory changes and other party policies. The evidence doesn’t really support that. Some people have said private investment declined by 25 percent during the pandemic. In 2019, before the pandemic, private investment was 29 trillion RMB. Last year, it was 31 trillion RMB. So it’s not going down, it’s going up relatively slowly. Its share of overall investment has declined by two percentage points, but it’s still 54 percent. So over half of all investment in China is still in the hands of private companies.

Now, why did it – why is the share falling slightly? Well, we have a big buildup of manufacturing inventories from the pandemic. China didn’t distribute cash, but they cut some taxes and they told enterprises not to lay off so many workers. So they kept producing. Sales were down. So at the end of 2022, manufacturing inventories were at an all-time historic level. Those inventory levels are coming down now, so I think eventually when they reach a more sustainable level they could – we could see a pickup there.

The second reason private investment has slowed down a bit was the big campaign against the platform companies, the internet platform companies. The revenues of those companies declined by more than 800 billion RMB in 2022 and that depressed their investment. It led to layoffs, no hiring. That has now begun to turn around. Their profits are growing very rapidly. Their hiring has picked up and I think we will see their investment pick up as well.

So finally, I should say, externally, some of you will remember there was this big controversy about PCAOB, and whether or not this organization in the U.S. could have access to the audit papers of Chinese companies listed in New York and elsewhere abroad. And what happened in that period is that funds raised offshore – and almost all these companies that list offshore are private – they raised $1.4 trillion U.S. in 2020. By 2022, that fell to 100 billion (dollars). So there was a collapse in, you know, outside, external financing. But at the end of 2022, the PCAOB controversy was settled, this cloud is lifted, the number of listings has picked up in New York. And at the end of March, the securities regulator put out a new set of regulations that are supposed to make it easier for companies to list offshore.

Now, whether that will materialize, I think it remains to be seen. But those are my – the negatives that I think really aren’t as negative as some people think. I don’t think they’re – I don’t think they’re in deflation. I don’t think households are pouring money into bank accounts at an unusually high rate. I don’t think imports are weak. And there has not been a massive decline in private investment.

Dr. Kennedy: So, well, thank you very much, Nick. If I could try to summarize what you’ve just said, the points essentially suggest, from your perspective, that on a cyclical level that the data points that others have been citing are not telling the full picture. And if you look at some of these trends, there has been a stabilization and maybe a slight turnaround that isn’t getting enough attention. I think that’s – I hope that’s – I think that’s what you’re trying to say, with – very empirically.

Let me turn to –

Dr. Lardy: Let me just say, I think a lot of what we’ve been reading in the press is anecdotes, individuals who are having difficulty, companies that have failed, individuals who are very unhappy with government and party policy. All of which is probably true, but I think you kind of have to look at some of the aggregate data rather than, you know, picking out a few individuals.

Dr. Kennedy: Well, Logan is going to definitely help us look at some of the aggregate data now. So, Logan, you’ve written for us and for Rhodium about structural challenges, particularly related to debt, which I guess you’ve written about creates a ceiling for growth. Could you sort of give your perspective on where the Chinese economy is going and the extent to which the slowdown that appears to be going is something that is going to be with us for a long time or is something that could be of shorter duration?

Logan Wright: Thanks, Scott. Thanks, everyone. Appreciate you all joining.

I do think China’s slowdown is structural in nature at this stage. And this is simply because many of the factors that drove China’s growth over the last decade are not going to be capable of being repeated in the next decade. And first and foremost among those was China’s unprecedented credit and investment expansion. This was the largest single-country credit expansion that the world had seen in well over a century, from 2008 to 2016. And it primarily had its expression in terms of property and local government investment in the Chinese economy. And those are exactly the factors that have driven this very significant discontinuity and slowdown in growth over the last three to four years.

The property story is particularly relevant just today. In the last hour, the PBOC has cut national downpayment requirements on first home and second home purchases, indicating they’re aware and are reversing many of the previous controls on the sector in an attempt to stimulate property sector demand. The only real surprise when credit started slowing after the deleveraging campaign was initiated 2016, and its most intense period in 2018, was how long the property sector persisted as a source of growth, and why the sector responded to – you know, basically they responded to the end of China’s shadow banking sector, which we discussed in the “Grasping Shadows” report that Scott highlighted.

Developers were able to extend the property bubble by relying upon credit from homebuyers in the form of pre-construction sales to repay some of these shadow banking loans. And that introduced sort of a Ponzi-type element into China’s property sector. But no matter how you slice it, the property sector was around, at its peak, 20 to 25 percent of the economy. Some people have that estimate much higher, you know, into the 25 to 30 percent range. But activity – you know, the data clearly shows activity in the property sector has been cut more than in half.

And that adjustment has happened very quickly since the end of – since about the middle of 2021. New housing starts are down 57 percent from their peak on an annualized basis. Sales are down 39 percent from their peak on an annualized basis. Land sales fell 53 percent in 2022, and they stopped publishing the nationwide data on land sales in 2023. But revenues from land sales are down 21 percent. One hundred city land sales in the area are consistently down over 30 percent over the course of this year.

These are major corrections in property investment. The top 50 property developers, if you look at their land purchases which includes state-owned firms, they are buying less – 85 to 90 percent less land in 2022 and 2023 relative to what they did in 2017 to 2020. This is really the primary factor that has driven a huge reversal in China’s overall investment, which was certainly negative in 2022 and is very probably negative in 2023 so far. So if you look at secondary indicators of activity, cement output was down 11 percent last year. Komatsu average hours worked in the construction equipment that they released were down 14 percent in 2022 and are still in negative territory this year. Cement output is only up 0.6 percent so far this year. So this has been a significant adjustment with no real signs of a rebound or recovery so far in 2023.

The property sector’s adjustment also impacts China’s fiscal stability and its capacity to respond with infrastructure investment and aggravates the stress that’s building in local government debt, which is also the byproduct of the slowdown in China’s credit and investment expansion. Land sales revenues fell 2.2 trillion yuan in 2022. They’re on pace to be down 1.4 trillion yuan in 2023. And they will continue to decline in 2024 because land sales are paid – you know, are paid in – with one year in arrears. Property sales alone produce VAT revenues equivalent to around 5 percent of China’s total tax take last year.

So the big argument we would make is that it’s simply not realistic to argue that post-pandemic growth after the recovery can pick up from pre-pandemic growth rates at roughly the same rates without the property sector driving it because growth is much, much weaker and the property sector’s impact on the economy has not been replaced with any other meaningful source of aggregate demand. Which places all of the pressure on China’s growth to come from household consumption, which is only 38 percent of the economy.

And just speaking to the point on household savings, I mean what’s going on really in household savings is a deleveraging cycle among households that’s tied to the property sector. Money is moving out of wealth management products and, based on wealth management products being market-to-market, and moving into time deposits. This is actually what’s driving the adjustment in savings. It’s not really precautionary, per se. It’s really wealthy individuals trying to unwind a carry trade where they had been borrowing money at 4, 4 ½ percent in order to – and placing proceeds in wealth management products at 5 ½, 6 percent to earn a positive carry. They can’t get that anymore, so they’re trying to minimize the negative carry by placing funds in time deposits.

That’s really been responsible for the change in household savings. But it also shows just how much – if households are deleveraging, we should not really be expecting a huge acceleration in consumption growth this year. That has historically not the pattern. And that is also consistent with the data. Retail sales, I can get into the data adjustments that have been done with retail sales over the course of this year, but it’s only 7.3 percent even in aggregate terms. Alibaba nationwide retail online sales are down 4 percent so far in 2023. Individual income tax revenues, you know, what’s actually paid on individual income tax, are down 0.6 percent so far in 2023. So I’ll stop there. But this is really the source of the adjustment that the property sector has created.

Jude Blanchette: Logan, thank you. That was great. And, again, we’re going to give everyone on the panel a chance to respond to everybody else after we get through the next couple questions.

Lingling, I wanted to turn to you next. And I wonder if I could quote from something that you co-wrote recently in The Wall Street Journal, a piece that I think got a lot of people’s attention and articulated what I think many have felt. You opened up a piece by writing, “For decades, China powered its economy by investing in factories, skyscrapers, and roads. The model sparked an extraordinary period of growth that lifted China out of poverty and turned it into a global giant whose export prowess washed across the globe. Now that model is broken.” Why is it broken? And the subtitle of your piece is, “What Comes Next?” So let me pose that as a two-parter. What comes next?

Lingling Wei: Thank you so much, Jude. Thank you for reading the story.

You know, the gist of the story is, you know, what we’re witnessing here is an end of an era in China. The era, you know, was one where China experienced extraordinary rates of GDP growth, lifted more than 800 million people out of poverty. China, you know, by many measures, was one of the most successful economic stories in the whole world. That kind of a model is broken. The kind of model we’re referring to is the kind of investment-driven, debt-fueled model that has made China the factory floor for the whole world. You know, made-in-China products have dominated the, you know, shelves of many, many shopping malls throughout the world.

And so that model worked when China was really poor, lacked infrastructure. No good roads, right? The remote regions in China almost looked like separate countries because there was no way to travel – no easy way to travel from places like Sichuan, Chengdu, to the coastal areas. So the government – you know, the model worked at the beginning because, you know, the government really galvanized resources to start investing in that kind of infrastructure.

And, you know, the net effect was it linked the vast hinterland of China to the coastal areas, where factories were being built. A lot of those factories were being built by government, by various levels of government, by private businesses, including foreign companies – a lot of foreign joint ventures. So, you know, that power the growth because, you know, China’s cheap laborers, the migrant workers, you know, made it easier for them to work in coastal areas. And you know, basically starts this amazing rise of China being this huge manufacturing power.

Obviously, Logan talked about the property market. That was part of it, right? Investment in fixed assets, like factories, like roads, like infrastructure, like housing. So that was part of the boom era. It’s no longer working because it’s just too much debt among various levels of government. I think Logan’s team just did a new report showing, actually, China’s physical space is more – even more limited than meets the eye. You know, a lot of people think only local governments have had too much debt, but the central government’s balance sheet not that pretty either, let alone China also has ambitions to spend money in other ways – strategic spending, so to speak – defense-related.

So the model is broken because, you know, they can’t just keep borrowing, keep – you know, the debt, you know, already has reached the level that’s no longer sustainable. It’s not me saying this. I’m a journalist. I talk to the top-notch economists in the whole world, including some of yours today, and including people who work at the IMF, work at the World Bank. The structural problems are so deep you can’t just look at last quarter’s number. You can’t just look at the first year’s number and compare that to the pre-pandemic number. That is missing the big picture here.

And also, I think the bigger question you asked – you know, our article also raised this bigger question. So the boom is over. What’s next? There are many scenarios. A question is whether or not it’s a prolonged slowdown, or crash, or petering out. Another related question is how China will respond to this slowdown. Will it back to market reform or greater state control? The implications are huge for the rest of the world. It’s not just about China. It’s about – also about China’s behavior on the world stage. People rightfully worried China would become even more aggressive outside of China, because of the slowdown domestically.

So, you know, we posed this question for the precise reason that, you know, we can have very healthy and diverse debates and conversation about it about all, you know, all that is happening in China. And one more point I want to address, that, you know, we do stories that, you know, not just – we have a combination of anecdotes and data, as not just anecdotes. And we try really hard to talk to people on the ground. It’s not just one person, two people, one company, two companies saying they’re pulling back on spending. It’s universal. The mood in China on the ground these days can be summed up in one word, which is “downbeat.”

That, to me, is one of the most worrisome signs for the Chinese economy, because during many decades before, you all know, you have traveled to China so many times. You know, probably will be hard stretched for any of you to think of one person saying, oh, I’m lying flat. There’s no hope for me anymore. I’m just not going to do it. It’s hard for me to get up every day. You know, it was – the kind of animal spirit, entrepreneurial drive was so great, you know, in decades past. But nowadays, that’s gone. So, you know, on top of all the numbers, all the data, all the structure of economic issues, are this more worrying trend of people losing faith and losing hope. And obviously, we probably need to convene another panel to talk about why that is happening. So thank you.

Mr. Blanchette: Thanks, Lingling. I think that last part is really important, especially as we’re remote from China, failing to appreciate just how much of a human impact this has. And if we’re thinking about, you know, Logan’s comments on the real estate market, you know, for so many Chinese the real estate market is where you invest in your future. And so it’s just fundamentally important to remember these human stories as we talk about data. So I appreciate your point.

Zoe, I’m going to go to you. A quick reminder to the audience, please do, if you have any questions, go to the Click on the events page, and you can submit a question. Zoe, I wanted to get your take on this, including I think you have a helpful heuristic for us to think about this known as the four Ds. What are the four Ds? And why do you think they’re relevant to the story of China’s economy today?

Zongyuan Zoe Liu: Can you hear me now? All right. Thank you very much, Jude for having me, and, Scott, for having me.

And as Scott pointed out, we are all Dr. Nicholas Lardy students. And my 4 Ds actually is a derivative from Dr. Nicholas Lardy’s analysis and his whole theory – his analysis of financial repression. So when you think about the Chinese economic growth model, you can separate it in terms of export versus – export, investment, and consumption. And this is where my 4 Ds comes from, in terms of – from the financial repressions perspective. And the reason why the Chinese economy can sustain an export-driven, government-led investment model is specifically because of financial repression, as Dr. Nicholas Lardy pointed out throughout his career.

But embedded in this financial repression model, there are, I would argue, three inherent Ds. And now the last – the final D is exacerbated or accelerated because of the way Chinese politics as well as the party’s expanding geopolitical ambitions in the world. So the three Ds that are embedded in the Chinese growth model are debt, demand, and demographics. And let me just elaborate on that a little bit. I think Logan talked a lot, very elegantly and very rich in data, in terms of debt. But I would want to take a step back by saying that debt growth itself is not necessarily a bad thing. Because finance 101, leverage. You’re just leveraging the hell out of your balance sheet, as long as you can make a profit. Therefore, it is not that debt itself is bad, it’s actually debt in a low-growth environment that becomes not sustainable.

And I wanted to elaborate on demand. And because demand really from my framework, I analyze demand from both external demand and domestic demand. External demand, I look at export growth. I think in the current – the current economic model – in the current economic model, boosting export growth is important. But I’m afraid that its marginal effects at this point are limited. I mean, if we look at the numbers, China became the world’s largest exporter in 2009. And then I believe in 2020, China’s share of a global export already reached 14.7 percent. That is a number that is more than the combined share of the United States and Japan. And when we think about export as a percentage of GDP, it peaked around 2006 at around – at about 36 percent and has since declined around or even below 20 percent.

So from that perspective, even if China could increase its service export while maintaining its dominance in the export of goods, I think there is really only a narrow space for export to GDP growth ratio. And then on top of that, I would say my biggest concern about the long-term development of the Chinese economy relying on the existing model really comes from domestic demand. Really, I’m talking about household demand. And this household demand comes from two sides. One is demand for housing, and then just the household balance sheet.

The demand for housing in particular, we’ve already – we are familiar with the story about first-tier cities. You know, demand is always – has been there, but it has since declined. And a lot of the analysts right now are posing hopes for the second- and the third-tier cities. And that’s actually also where the Chinese government is trying to boost the demand in terms of housing. But I am afraid that the fundamental demand for housing across the board is being eroded by demographic trends. And that’s my third – my other D.

And the reason – there are two reasons, I think, that long-term demand for housing demand declines. First is because urbanization rate has peaked. And I’m afraid that that is going to be a terminal decline trajectory because if you look at the data since around 2017, the ratio of new city dwellers relative to the whole population has consistently declined year after year. And this trend has been exacerbated by COVID trend.

And the whole idea of why I – the laying flat or “bai lan” phenomenon, the idea that the younger generation of the Chinese youth no longer felt the same – the meaning or the personal development to participate in this highly competitive labor market. And then the second aspect – the second demographic trend contributing to demand for housing decline really comes down to the family trend. The new family formation rate in China has been declining since 2013. So a lot of this happened – it really is not just because of COVID. It happened before COVID.

And then my second point with regard to domestic demand really comes down to the household balance sheet, as well as the debt build-up. The balance sheet of an average Chinese household – I think they have gotten increasingly worse over the past 15 years. This comes down to net asset growth has declined and also the household debt growth has also been faster than income growth. So a lot of this trend, it really, it does not speak well for the Chinese government to stimulate consumption. And then I think it is really – the government or the Party, since December last year, they put out a strategic plan to boost domestic demand. And in that piece of document, they prioritized household consumption, in addition – in front of effective investment for the first time.

I think that is a really good sign, but my concern of that is it is really good economics, but it probably is bad politics because, on the one hand, to enrich individuals and the household, you need entrepreneurship, you need to basically eliminate or reduce the Party’s position in this financial repression model. I think the financial repression model works because the Party and the government have been able to build a system that can channel, invest capital into – they prioritize the sector. But I’m afraid that boosting consumption runs, again, head-on-head against the existing model. In other words, without changing the model there are serious structural problems.

And finally, decoupling – or, now the narrative is de-risking – really exacerbate a lot of these structural problems. And that’s why I think I am really concerned about this shorter run on confidence in the Chinese economy. But in the long run, as long as the politics work, as long as the party can be more self-constrained in terms of not expanding geopolitically in the world, perhaps, perhaps the party can re-learn that China’s near four decades of reform and open up – yes, the great import has been technologies expertise. But perhaps the animal spirit that a global market has been giving China and the Chinese market also matters a lot.

Mr. Blanchette: Great. Thank you, Zoe. That was great.

I think what we’ll do is, Nick, there are different views here, but maybe, Nick, because you have a slightly different-er view than the three others, maybe just give you a moment to give a response to some of the comments you’ve heard so far. You’re on mute.

Dr. Lardy: Well, let me just say, to begin with, I agree with much of what has been said. Certainly, the boom is over if you’re defining the boom as, you know, this extended period of growth in the high single digits. I hope nobody took my comments to suggest that I believe they’re going back up to 8 or 9 percent. They’re not. They’re never going back to that growth rate. There are huge structural problems.

The question in my mind is, you know, the title of this is “downturn.” The implication is, are we worried – is it likely that China will grow even slower in the future than they’ve been growing recently? They grew at about 3 percent last year. They grew at about 3 percent in the second quarter. Some people are arguing the growth is really going to go down from here. You read about a downward spiral. Well, a downward spiral to me implies that you’re heading towards 2 percent, maybe, or 2 ½ percent. That’s what I doubt, or at least I don’t see any evidence for. I think they will go up. I’m not saying they’re going up to the high single digits, but I think – and I’m not a forecaster – but I do think that their growth over the next few years is likely to be significantly higher than the 3 percent that we saw in the – in the second quarter, for some of the reasons.

I agree with Logan; property is a big problem. It’s not going to be solved soon. But a lot of the data that he cited shows that the adjustment is underway. The fact that land sales have collapsed is a good thing. That means property developers have gotten the message that, you know, we’re maybe past peak demand for housing. It’s important, though, to recognize that the sector has not collapsed. The level of investment in property last year was the same as it was in 2019, pre-pandemic. The surprising thing to me is that investment in property hasn’t fallen more rapidly. In fact, it’s not fallen at all. It’s fallen a bit from the levels of 2020 and 2021. We’re back down to the level of 2019, which is probably still unsustainably high for all the reasons that a number of people have commented on.

On the export side, I think China will be doing better next year. The fund is estimating that the growth of global exports next year will be twice what it is this year. We’re in a very low rate of growth of trade globally this year. But it’s expected to double next year. China may benefit from that. That could be another little boost. Not huge, but at the margin could contribute to some improvement. So I certainly agree the boom is over. I certainly think there are a lot of structural problems. There are a number of them that we haven’t even addressed. But I don’t think they’re going south from here.

Mr. Blanchette: And, Nick, just a quick, quick follow-up. I mean, just in terms of recent-ish data in the real estate market, we’ve got – you know, we’ve got existing home prices down pretty significantly. We’ve got new housing, you know, construction starts to, you know, half or 40 percent of their pre-COVID level. You know, bankruptcies rippling through developers. Local government finances are a mess. I just want to – so last year’s investment, one story, sort of what we’re seeing right now in the market. But you think this is something they’re going to be able to work through, or maybe an at the margin positive in the sense that it’s a –

Dr. Lardy: Well, again, I think the fact that housing starts are down by a huge amount is a good sign. But investment is not down that much. And it looks like the run rate this year on investment will not be down significantly from what it was last year. Which, to me, implies that a lot of the investment that’s going on now is completing the pre-sold projects – pre-sold houses that Logan identified as a big problem. I think, you know, property recovery depends, first of all, on people that have paid for a house already, actually being able to see it finished and to occupy it. And that would, I think, help put a floor on property as an asset class.

I think property has always been viewed as a superior asset class. That’s under attack now. And it will be a drag on economic growth, there’s no question about it. But hopefully the fact that there’s still – investment hasn’t fallen very much, compared to new starts and compared to the collapse of land sales – I think the collapse of new starts and the collapse of land sales are all positive signs. Just for starting.

Mr. Blanchette: With such an important topic, I realized it’s a little bit unfair that I’m going to give Nick that slight last word. But we could probably continue in this topic for six more hours. So I hate to do that, but I also want to get one or two quick questions in on something adjacent but I think fundamentally important. And, Lingling, I might go to you first, but also want to get everyone else on this. Which is, so much of what has provided a foundation for confidence is not the fundamentals in China’s economy, which I think everyone have known for a while have been a bit janky. It is fundamental confidence in policymakers. The view that whatever happens, another rabbit is in the hat. Or, whatever happens, they’re going to keep the plates spinning.

I feel like fundamentally that story is collapsing on itself partly – you know, this has been a multiyear phenomenon where people scratching their heads at both the aggressiveness of Beijing towards the private sector. Nick, this was the subject of your last great book on the “State Strikes Back,” you know this, this resurgence of partyization, of state control. So Lingling, start with you, you’ve been following the policymaking ecosystem and policymakers for so long. Do you also feel a qualitative deterioration in confidence in policymakers’ ability to pull rabbits out of hat? And do you also notice yourself that the technocracy is declining in qualitative capabilities? You’re on mute, Lingling.

Ms. Wei: Thank you, Jude. Excellent questions. So I have to be careful about what I say because we’re obviously working on more stories about all this.

So, you know, today’s economic problems are not economic problems. There are political problems. The loss of confidence in China’s economy among the Chinese people, and Chinese businesses, and foreign businesses – not because, you know, one-quarter of data, three years of lockdowns that are – you know, really hurt spending, and all that. It’s because of gradual deterioration in the quality of China’s policymaking. We have been, you know, reporting on China’s political economy for so long, and so have all of you here.

We know that in the past, especially during downturns, Chinese policymakers have demonstrated ability to be proactive, right? Especially back during the 2008 global financial crisis. We wrote about this in “Superpower Showdown,” how quickly they turned the policy, you know, from, you know, more conservative, you know, with inflation-fighting its main purpose, quickly turned to supporting growth. And how they sought out advice from Western experts, including those at World Bank. It was pretty amazing era. Obviously, you know, another topic is some of the, you know, negative consequences from that massive stimulus.

But I just wanted to give example, between, you know, then and now. Fast forward to today, we have seen Chinese policymakers giving out very confusing, conflicting signals. On one hand, the securities regulator launched a campaign to prop up stock markets. On the other hand, you’re seeing other agencies, you know, continuing to go after some types of private companies, especially the really small ones. And on one hand, the government is saying we still want foreign capital. On the other hand, they have downward rates, investigations with very little explanation, and mostly recently imposed foreign security law.

You know, that have had impact of scaring off foreign investors, including those who spent years building up supply chains in China. I just talked to a fashion designer yesterday. She said for the past 20 decades she always sourced materials from China. But very recently she said she’s had enough. Now she’s sourcing materials, building, you know, factories in India. This is just one of many, many other examples of foreign companies divesting out of China. It was due to a combination of reasons. The slowdown is one of them. Geopolitical tensions is one of them. And another very important one of them is the heightened risks of policy uncertainty, heightened risks of policy mistakes. Thank you.

Mr. Blanchette: Comrade Kennedy, why don’t I turn it over to you to ask a few more questions, and then land the plane?

Dr. Kennedy: Okey dokey. All right. This is a fantastic discussion. I’ve got two questions. Both to everybody. One about the analysis, a second question about the implications for the rest of the world.

So the first question is, so we’ve got sort of different theories here about the extent to which this is structural or cyclical, the extent to which it – Xi Jinping and his governance has created a loss of confidence. What would be the most important single piece of evidence that someone would look – that you all would look for to challenge your own current view of things, or that you would see that things are turning around? Would it be some type of policy statement from Xi Jinping backing private companies or doing something else? Would it be some piece of economic data regarding private investment, or relations with the U.S., or something? What is that one piece of news that you would be looking for to either fully confirm where you are or would lead you to reevaluate your current conclusion?

Let’s start with – we’ll go Logan, Nick, Zoe, Lingling.

Dr. Wright: Absolutely, Scott. And I think you’re asking the relevant question at this point, which is: How do you deliver, if you’re Beijing, a very credible counter-cyclical policy signal? How do you deliver a credible reform signal in this environment, after some of the crackdowns on private firms, after the, you know, decade of sort of backtracking and attempted reforms following the third plenum agenda, and then backtracking and reversals of those reforms as the market consequences and the economic consequences of those decisions became apparent?

And so I think the signal that we would be thinking is most important has to come basically from the very top. It has to come from Xi Jinping himself. And it has to be a reinvigoration of the commitment to the reform agenda that was outlined in the third plenum. And therefore, it has to start with some sort of, you know, Big Bang kind of symbol that something is going to be different in the future – whether that is the privatization or liberalization of a major state-owned sector, or whether that is some sort of, you know, significant commitment to breaking implicit guarantees among local governments or state-owned enterprises that would signal a more open and liberal capital market.

Those are the kind of signals that I think we need to see to think that things are changing. But the barriers to delivering such a signal are extremely high because it will naturally be questioned. And something has to be both, you know, very substantive and very – and irreversible at the same time. Something that China cannot move back on. So those are – this is the irony of the current debate in China, is that while there’s a lot of censorship of domestic internal discussions about the economy, there’s also this sort of quiet, you know, upswell of new commentaries among former officials on the structural problems the economy and the need to reform as well.

Dr. Kennedy: Zoe, what’s the one piece of evidence you’re looking for?

Dr. Liu: The one piece of evidence that I would be looking for is a recommitment to reform and open up, and something like a renewed tour of the south, just like Deng Xiaoping did right after Tiananmen would be something that I would welcome. I will stop there.

Dr. Kennedy: OK. Nick. You’re muted.

Dr. Lardy: The one thing that would cause me to fall off my view quite a bit would be if consumption growth doesn’t continue to be fairly strong. I don’t think the government – I agree with Logan – they’re not going to go back to the third plenum whole hog. I don’t think they’re going to have a big stimulus program. They’re trying to reduce financial risk for reasons that Logan has written about very exhaustively. So I wouldn’t – I’m not critical of them for not having a big stimulus program at this point. I think it would – you know, you’d be just digging a deeper hole. So the key, in my opinion, is what happens to growth of private consumption.

Dr. Kennedy: OK. Lingling.

Ms. Wei: In my view, talk is cheap. Whatever statements they’re putting out don’t mean much these days. Just look at, you know, the last statement about encouraging private enterprises. The word “guide,” appeared more than 20 times, and continued talking about setting up traffic lights for capital. How would that help build confidence in the private sector? The signs I would be looking for that they’re sincere about changing course – meaningful course correction in China’s economic policy – free Sun Dawu. Free Ren Zhiqiang. Free all those wrongfully detained, private entrepreneurs. Really help foster another generation of Jack Mas.

Dr. Kennedy: That’s a serious line that you’ve set for folks. You know, if it was me answering the question, I would think, beside something to really reassure private companies, is to make state-owned companies feel less privileged in some obvious, big way. But I think also, given that China’s global footprint is so important for relations with the U.S., Xi Jinping, obviously, attending APEC, and China trying to really show that it appreciates some of the concerns about China, that would, I think, go a significant way. So I don’t think it’s just domestic. I think there’s some international component to it.

Let me ask another question, since – one final question, which is what all this means for the rest of the world. And you can pick. I’m going to – there’s sort of three buckets of implications here, three actors. And you all can pick whichever ones you want to focus on. The first is Washington policymakers, governments elsewhere. They’ve, you know, impose some restrictions on Chinese technology, criticized China’s growth model, pushed for de-risking, perhaps more. Does China’s economic challenges affect that policy decision-making in D.C., and elsewhere? Should it?

Second, multinationals. China’s growing slower. I don’t see them running for the exits dramatically, although they’re diversifying and hedging. Should China’s slowdown make multinationals really rethink their presence in China? And lastly, institutional investors. Do they also need to be really thinking significantly about changing their portfolio distribution to make China much less significant going forward? Why don’t we start with – why don’t we go Zoe, Nick, Lingling, Logan.

Dr. Liu: Sure. I think even if the Chinese economy continues to slow down, I don’t – I do think the impact on the world would be different. Perhaps, oil demand might be slowing down, but China’s demand for critical minerals would continue to grow, and specifically because the government still prioritizes sectors that are critical for the energy transition. Therefore, I would say China is still very much investable, especially in areas where the government focused on – quantum computing, artificial intelligence, and renewables.

Dr. Kennedy: OK. Alright. Nick, what’s the – what are the implications you want to focus on?

Dr. Lardy: Well, I think it’s easy to overemphasize the importance of China to the global economy. When we – when you look at these figures, like China’s accounting for 30, or 35 percent of global growth, that’s just looking at the increment of output in China compared to the increment of output in the rest of the world. There’s not necessarily a very strong causal link between those two. You really have to look at the trade flows, the financial flows. And those are not very large in terms of the overall size of the global economy.

So I think China’s slowdown could have a big effect – if it continues – it could have a big effect on certain commodities. It could have a big effect on certain economies that are closely tied – more closely tied to China. It’s going to have a bigger effect on Germany than it would have an effect on the United States. But if you’re looking globally, I think there’s a tendency to overstate the importance of China to the global economy.

Dr. Kennedy: Lingling.

Ms. Wei: I think the implications are more than economic implications. You know, how China will behave if the slowdown turns to be very prolonged and jacked out, or even if it’s a crash, as some people have feared. So I think that’s just really a huge question. So I – you know, most recently, we have seen Xi Jinping continuing to expand, you know, his ambitions, especially in global south, right? The most recent BRICS summit, China, again, pouring resources into that part of the world.

Meantime, domestically Chinese households are struggling, and trying to see if government will help them in any way. So we will really have to see the implications, not just from the economic perspective but geopolitically. In any way, China is here to stay, as many people in Washington have said. It remains the biggest competitor to the United States. And what kind of – the question of whether or not a weaker China is more dangerous, a richer China is more dangerous, that’s still very relevant question. And really should be the core of the U.S. policy toward China. Just how to – how do you deal with a potentially economically weaker China?

Dr. Kennedy: Logan, you get the last word.

Dr. Wright: Yeah. I would echo much of what Lingling said, and much of what I was going to say in response to this question. I think the key takeaway from China’s slowdown and the significant break in growth from the recent past to present is that the United States really no longer faces a growth challenge from China. None of the problems the United States faces from China are going to be materially impacted or exacerbated by China’s continued growth at this point. They are going – those challenges are serious, they will persist. But U.S. efforts should be more narrowly focused on the national security implications of the economic relationship with China rather than broader concerns about whether China is going to become 150 or 200 percent of U.S. GDP. Because that’s never going to happen anymore.

And many of the measures that are being discussed right now, such as, you know, financial decoupling risks, you know, look very high risk – high risk in terms of their impact on U.S. market credibility and low return in terms of what they actually deliver in terms of changes in Chinese behavior or activity.

Dr. Kennedy: Yeah. This has been a fantastic discussion. Zoe, Lingling, Logan, Nick, you’ve shed a lot of light on where China’s economy is going and what it means for us. I think, actually, there’s probably more agreement than at first meets the eye because even Nick identifies that there are some significant slowdowns long term that China’s economy is facing. But there’s also reasons maybe in the short term, while these numbers will just be a beeline straight for zero or negative growth. But there’s also challenges that China needs to grapple with. Some of those are in the inbox of Xi Jinping, that if he wants to turn around confidence there’s a lot that he will need to do. Regardless, there are big questions for Washington, for multinationals, for investors, for other governments that will have to be deciding how to interact with China and what it means for them.

Thank you all for helping us. Jude, thank you for co-hosting today. Welcome feedback from everyone who’s out there. This discussion is far from over. Thank you all.