November 21, 2024 • 44 mins
Host Dr. Elizabeth Economy sits down with Rhodium Group Co-founder Daniel Rosen for an in-depth look at the current state of the Chinese economy, the challenges it will face going forward and how a second Trump presidency may affect it. With an economy that is currently facing reduced growth, a cratering real estate sector, and increased scrutiny from US and EU counterparts over its exports of overcapacity in EVs, Rosen describes the issues at the heart of the problem: a failure to meaningfully reform the fiscal system, including rebalancing the share of central and local government revenues, weak domestic consumption and over-reliance on investment and exports, and high levels of local government debt. Rosen also outlines the challenges China faces on the global stage with its grand-scale infrastructure initiative, the Belt and Road. Rosen concludes that without a serious reboot of economic reform and opening the Chinese economy will only continue to lose steam. The two also discuss the effects of what a second Trump presidency, and tariffs up to 60%, may bring to China. And while it may not be time to press the panic button yet, an expected increase in tariffs is almost certain to have major macroeconomic effects.
ABOUT THE SPEAKERS
Daniel H. Rosen is the co-founder of Rhodium Group and leads the firm’s work on China. Mr. Rosen has worked professionally on China’s domestic economy and global commercial relations since 1992. He is widely recognized for his research on US-China relations and Asian commercial dynamics. He is affiliated with numerous think tanks focused on international economics and is an Adjunct Associate Professor at Columbia University.
From 2000-2001, Mr. Rosen was Senior Adviser for International Economic Policy at the White House National Economic Council and National Security Council. He is a member of the Council on Foreign Relations and the National Committee on US-China Relations.
A native of New York City, Mr. Rosen graduated with distinction from the graduate School of Foreign Service of Georgetown University (MSFS) and with honors in Asian Studies and Economics from the University of Texas, Austin (BA).
Elizabeth Economy is the Hargrove Senior Fellow and co-director of the Program on the US, China, and the World at the Hoover Institution. From 2021-2023, she took leave from Hoover to serve as the senior advisor for China to the US secretary of commerce. Before joining Hoover, she was the C.V. Starr Senior Fellow and director, Asia Studies at the Council on Foreign Relations. She is the author of four books on China, including most recently The World According to China (Polity, 2021), and the co-editor of two volumes. She serves on the boards of the National Endowment for Democracy and the National Committee on U.S.-China Relations. She is a member of the Aspen Strategy Group and Council on Foreign Relations and serves as a book reviewer for Foreign Affairs.
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ABOUT THE SERIES
China Considered with Elizabeth Economy is a Hoover Institution podcast series that features in-depth conversations with leading political figures, scholars, and activists from around the world. The series explores the ideas, events, and forces shaping China’s future and its global relationships, offering high-level expertise, clear-eyed analysis, and valuable
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
>> Elizabeth Economy (00:06):
Welcome to China Considered, a podcast that brings fresh
insights and informed discussion to one ofthe most consequential issues of our time,
how China is changing andchanging the world.
I'm Liz Economy, Hargrove Senior Fellowand Co-director of the US China and
the World Program at the HooverInstitution at Stanford University.
Every two weeks I'll be joined inconversation by senior government
(00:27):
officials, business leaders andprominent activists and
authors from around the world.
We'll discuss China's most importantpolitical and economic trends, its foreign
policy ambitions, and its relations withthe United States and other countries.
The China Considered podcast isproduced by the Hoover Institution, and
you can subscribe to it viathe Hoover Institution YouTube channel or
your favorite podcast platform.
(00:49):
Today I have with me, Dan Rosen, who is aco founder and head of the Rhodium Group,
which for two decades hasbeen one of the world's top
data driven research providers andconsultancies on the Chinese economy,
as well as on issues related to energy andclimate.
Dan is the author of several books andreports on China's economy and
on the US China economic relationship.
He also served as Senior Advisor for
(01:09):
International Economic Policy atthe National Economic Council and
National Security Council duringthe Clinton Administration.
Dan, thanks so much for joining me today.
>> Daniel Rosen (01:18):
Liz, pleasure to be with you, thanks for having me.
>> Elizabeth Economy (01:20):
So I want to start with your baseline assessment of
the Chinese economy.
It often feels as though we're floodedwith information about the Chinese economy
and much of it's contradictory.
What do you think are the most importantthings that we need to understand about
the current conditionsof the Chinese economy?
>> Daniel Rosen (01:35):
Well, yeah, it's a hard one to get started on, but
let's do it this way.
Let's just kind of level set what'sa reasonable expectation for
China's economic performance.
And I think it's important to startthere because there has been a political
preferred narrative around that comingout of Beijing that is increasingly out
(01:57):
of whack with what economic analysiswould suggest is actually happening.
So the official line that Beijingtakes is that the economy continues to
grow at about 5% orbetter a year, year on year.
So if you have a 17 or sotrillion dollar economy growing 5% a year,
you've got the better partof a trillion dollars of
(02:19):
additional activity every yearbeing added, if that's true.
I don't think the evidencesuggests that it is true,
although the International Monetary Fundcontinues to stamp that number and
say, yep, looks good to us, butit's more and more difficult for
most analysts to see howthat can be the case.
(02:40):
And I'll take three bites at that apple.
First, there's a structuralslowdown taking place.
When an economy gets tomiddle income level.
It doesn't grow, you know,6, 7, 8% anymore.
It naturally will slow down.
That's just the nature of every economywe've seen in history, number one.
Number two, China has already throwna lot of stimulus projects at growth
(03:01):
over the past couple ofyears since the pandemic.
And it's, as we say,moved forward in time demand.
So instead of an even distribution oftrade-ins of automobiles or dishwashers,
they announced big programs to do thata year ago or the year before that.
And so that creates a cyclical slashingaround where all of that was moved to
(03:23):
the front of a three year periodrather than being evenly distributed.
The result of that is that today weactually should expect to see some
subsidence in those sectors thatalready got these cyclicals shot in
the arm programs in 2022,2023, the beginning of 2024.
And then thirdly,
(03:44):
how well an economy is growing is also afunction of the quality of policy making.
Regardless of where you are ina structural kind of perspective or
in a cyclical dynamic.
There's the question of isgovernment doing it well or
are they not doing it well?
And I think we can.
The simplest way to speak to that isjust to note that since the pandemic
(04:06):
there have been many, many announcedefforts to stimulate improve growth
as there have been more andmore questions about it internationally.
And yet just a few months later, there'salways another program being announced.
So something is not working,folks are aware of that and
it's taking a big bite out of growth.
(04:26):
I would say rather than 5%,
the economy seems to be growingsomewhere between 0 and 2% right now.
And the easiest way to substantiatethat is just to look at how huge
the numbers forstimulus that are being talked about are.
We're talking 6 to 10 trillion renminbi.
You don't need that muchstimulus if you've got 5% growth.
(04:46):
And if you back that out andask, well, what is growth?
If you need that muchto get to your target,
it suggests that we're notdoing any better than 2%.
We might be doing much worse.
>> Elizabeth Economy (04:57):
And we hear a lot about the drag on the Chinese economy from
the property sector,the issues around local government debt.
Have any of the programs that China hasannounced, let's say, beginning this
past July and through until now, begunto address those in a meaningful way?
>> Daniel Rosen (05:14):
Well, if we Go back to July, you're including the delayed
third plenary meeting statementannouncement documents,
that happened nine monthsafter it was normally
scheduled to happen inthe Chinese political calendar.
And when it did come out,it was, I think, in the middle,
(05:36):
you know, 15,000 words or so of material.
And none of it really changedexpectations in the marketplace.
So if you look at the behavior ofinvestors, how they were trading
on expectations about the thingsthat go into property, steel,
plate glass, aluminum for windows,all sorts of stuff that big,
(06:00):
once every five years document didn'tseem to move the needle very much.
Subsequent to that, in September andthen more recently,
even coming up to last week,there have been additional
announcements which are focusedmore on cutting interest rates,
for example, and providing more liquidity.
(06:23):
Really we're on the verge of having tocall it quantitative easing, something
which just a few quarters ago, Beijinginsisted it was never going to do that.
That was something that lessprudent Western economies did.
And yet that's essentially, what wesee Beijing moving toward right now.
It creates a little bit of speculativeactivity in the property market, but
(06:43):
that's not a long termsolution to anything.
I mean, the basic reality here is thatthe whole complex of economic activity
around property had come to be as much asa quarter of the total Chinese economy,
which is just a unprecedentedweight on one industry.
We can see and we know and everyoneknows that a lot of the property built
(07:07):
out was never going to bereally valued by people.
It was speculative in nature.
And while we see a little bit of propertyspeculative activity by investors
right now, just in the past week,it's not the kind of signal that would
suggest that we're sort of turningthe corner and coming back.
We've worked through the property problemand we're in a healthier place right now.
(07:31):
If you look at the full 2024property sector set of indicators,
in terms of new starts andsales of finished property,
the year performed wayunderneath 2023 levels.
2023 was a shocker thatchanged the narrative,
I think everywhere about just howserious China's economic problems were.
(07:54):
So whatever those 2023 problems,they were worse in property in 2024.
At some point.
It's gotten sobad that there's nowhere to go but up.
And maybe we're startingto see that presently, but
that's a weak beer, as we would say.
>> Elizabeth Economy (08:11):
And one more point or one more question on this, on this
point, you don't think that Xi Jinping'smove to basically switch from invest,
have, you know, significant investment inthe property sector to the three news,
you know, the battery technology andEVs and, you know, energy storage and
sort of the whole idea of AI plusputting AI throughout the economy,
(08:32):
that advanced manufacturing, thatmoving local governments from investing
in the property sector to these new areas,
that that's going to do much tosort of reboot the Chinese economy.
>> Daniel Rosen (08:43):
Well, given enough time, it'll help.
But, you know, inside the five years,we're looking, you know,
we can look ahead to here right now,number one, the local government officials
whose job it was to figure out whichproperty investments to push support to
over the past 10 or 15 years, I don'tsee how they're skilled to make good
(09:07):
decisions about which batterymanufacturers should get state support.
And so the quality of, you know, smallbusiness lending in the American context,
we might call it something like that, ormore targeted industrial policy support,
such as we have inthe Inflation Reduction act,
the IRA way in the USover the past two years,
(09:29):
the quality of support for these newindustries is not really very high.
And if you look at even electricvehicle makers in China,
the vast majority ofthem are not profitable.
And what profitability they do have isover-dependent on exports right now,
which I'm sure is a topic, Liz, you'regonna wanna come to in a second probably.
(09:50):
But just suffice it to say that, again,
I'm talking about the qualityof policymaking being a new net
negative to the China storyrather than a net positive.
Which just a few years ago, Beijing notbeing tethered by all the regulatory drag
and due diligence andall that kind of democratic nastiness,
(10:11):
which we're occasionallyreminded of in the United States,
is that a plus ora minus on their growth potential?
Well, it has been a plus since 1979,and today we're sort of at
the point where what used to bea tailwind has become a headwind.
If you don't have, you know, some bettergovernance, quality in how support is
(10:31):
being doled out, you're just creatinggreater liabilities for the future.
You're not actually puttingsome support under the economy.
And then finally on this questionof property versus the three news,
over the past two or three years,
10 million jobs have beenlost in the property sector.
Under nobody's good news story didthe three new industries purport
(10:55):
to create even, I think, a third ormaybe a quarter of that many new
jobs to make up for the hole inthe economy that property left?
>> Elizabeth Economy (11:05):
That's a really interesting point.
So given what you've described,
obviously you think the Chinese leadershipis probably moving down the wrong path.
What should they be doing?
I mean, we hear a lot from Westerneconomists about the need for China to
move away from this investment and exportled growth to a consumer based economy.
(11:27):
What would that look like, what wouldthat necessitate in terms of reforms?
And why do you think Xi Jinping and
the rest of the Chinese leadershiphave resisted doing this?
>> Daniel Rosen (11:36):
Well, the ironic answer is that in the first instance,
Xi Jinping put the right set of ideas onthe table back at the beginning of his
tenure in 2013.
We know what the way ahead ought to looklike for China because they actually wrote
it out in great length in something calledthe 60 decisions in November of 2013.
(11:57):
And it included all of the majorelements that were necessary to put
the economy on a better track.
And it takes a two-day seminarto talk through all that,
Liz, and we->> Elizabeth Economy: Okay.
Just got a few minutes.
>> [LAUGH]>> Daniel Rosen: But let me offer a couple
things that are really crucial.
A lot of them start with finance.
(12:19):
Economists, when economists talk abouthow the economy of tomorrow comes to be,
we talk about factors that gointo creating economic assets for
tomorrow and the incentives thatdecide how those assets flow.
And China as a lower incomebounce back developing country,
(12:42):
had a system in which financewas pushed to heavy industrial
manufacturing build out atvery low cost of capital.
The problem with a lot of that investmentis that it doesn't create a lot of jobs.
A modern steel mill has justa few dozen workers really after
the construction is done,it's all, you know, technicians.
(13:05):
Also, it's white collar,it's not a very labor-intensive industry.
If you want to create a lotof jobs in an economy,
you don't actually want to bebuilding duplicative steel mills.
You want to be pushing money to retail, toeducation services, to medical services.
A lot of service activity.
That's the stuff that's laborintensive and pays higher wages.
(13:29):
And only by creating that wage flowto a growing middle class population
do you really set the table forsustainable consumption that's not
dependent on finding people to consumethat are just not even available in China.
And so that's where we are today.
They never finish these changes.
They stated very clearly in 2013,we need to change the incentives in
(13:54):
our financial system and we need tochange our center local fiscal system
to what we tell local governments to doand how do we give them money to do it.
Those things were identified as clear andpresent dangers that a decade out from
2013, if these things weren't fixed,China would find itself in a dead end.
And that's a quote from Xi Jinping, whowas paraphrasing something Deng Xiaoping
(14:18):
had said 20 years before him, okay?
So we started to changethe financial system.
There were efforts to make it moremarket decisive, more market oriented.
And that started to cause too muchinstability for anybody's taste.
And so by 2015, 2016,
the principal financial reformsthat had been discussed and
(14:39):
laid out were suspended, delayed taxreform was suspended and delayed.
So the incentives to buyproperty didn't change.
That was the only really thing to dowith your savings for too many Chinese.
And so there are these kindof deep questions about
what does the finance system do?
(15:00):
What kind of industries does it support,
just strategic industries that areattractive to national security officials?
Or does it really putthe emphasis on the consumers and
what they want down the road?
And those problems were diagnosed,and then they were not fixed.
And here we are, it's 2024 andthese things have still not been fixed.
(15:21):
And until they are, this misallocationin the system and under support for
creating a consumer economyis just going to get worse.
Now, China is superdependent on consumers,
just not its own->> [LAUGH]
Because
way too much of its growth is comingfrom foreign consumers right now,
which is creating an allergic responsenot just in the United States.
(15:43):
The European Union has imposed tariffs onChinese electric vehicles, surprisingly.
And countries all over the globalsouth as well are asking themselves,
you know, how do I avoid just becominga taker of Chinese products, but
have a chance to make some things formyself as well?
>> Elizabeth Economy (16:01):
And that, to me,
that issue of overcapacity which we'veseen in other areas like solar panels and
presumably we could see coming, you know,in the future in areas like legacy chips.
So what we're seeing now with the EVs andthe pushback,
not only from Europe, butas you suggest, from some middle and
emerging economies, do you think thatcould create a kind of feedback loop to
(16:24):
the Chinese government that that wouldactually get them to change their policy?
Because now it's not justthe United States saying,
stop these huge subsidies andthe overcapacity that results in
the failure of of you to developthis consumer economy at home and
your reliance on the rest of the world.
(16:46):
But now China's hearing itfrom a lot of other countries.
So do you see this as potentially having,A, a negative impact on the Chinese
economy itself with allthe tariffs coming into place?
But B, maybe changing the mindset andfinally causing Xi Jinping and
other Chinese leaders to move forward onthe kinds of reforms that you've outlined?
>> Daniel Rosen (17:06):
Definitely, there's potential for that.
For that potential to betranslated into reality,
it's gotta be more than justcommon concerns abroad.
There has to actuallybe coordination abroad.
So, yes, European folks in Europe,Britain, the United States, Japan,
(17:26):
Australia, throughout the OECD world,even Mexico and other parts of the oecd,
South Korea today share these concernsabout these systemic inefficiencies
in how the Chinese economy is running andthe problems that creates.
But are they really coordinatingto take a kind of common action
(17:47):
to put some pressure on Chinato prioritize domestic reform?
Certainly they are not.
Yet.There's been a lot of effort in that
direction.
I think there was pretty good sortof initial progress toward kind of
scoping out the makings ofa broader trade coalition,
if you will, in the Biden administration.
(18:08):
I don't think that hada chance to fully gel yet or
set by the time that Trumpadministration starts in January.
And I don't think there's anyhigh expectation that Trump
administration's gonna prioritize,solidifying the sort of
common position on the nature ofChina's trade problems, right?
(18:30):
And soI think from the Chinese perspective, yes,
they are concerned with hownations around the world
are starting to react differentlyto Chinese overcapacity exports.
At the same time,given the political challenge, pain and
difficulty and cost at home ofmaking these necessary changes,
(18:51):
it doesn't seem that Beijing is convincedyet that that's really the smart way for
them to go for that reason becauseof foreign pushback, right?
I think there's a much better reasonwhy Beijing should immediately turn
to a much more radical effortto address the imbalances
in the economy that we're talking about.
(19:12):
And that is, regardless of what foreignersdo, this is not a sustainable path for
China to be on.
And they're never gonna get out of thissort of under 3% GDP trap until they deal
more fundamentally with this sort ofmisallocation between sort of pushing all
their support to their supply sideat home versus their demand side.
Which means consumers haveto be the solution for
(19:35):
sustainable Chinesegrowth into the future.
>> Elizabeth Economy (19:39):
One of the other things that the Rhodium Group does really
well, you have your Pathfinder Report,which looks at Chinese reform,
sort of the progress of Chinesereform across six different metrics.
And you also track sort of the situationin terms of foreign direct investment into
China.
And we've seen a fall off in thatover the past couple of years.
(20:01):
How significant do you think that is?
Is that something the Chinesegovernment is worried about?
I've certainly heard Chineseleaders saying we are open for
business, multinationals come back.
What do you think is the impact, the realimpact of that drop in FDI into China and
do you expect that to continue?
>> Daniel Rosen (20:21):
Yeah, well, the FDI into China is a crucial story.
I'll make offer, offer a thought on it.
Chinese outbound investment is alsoa very big story that we're tracking and
is also important to think about forall sorts of reasons on the inbound side.
I think by 2021, 2022,up until that point,
(20:45):
I think many foreign investorswere willing to be patient
until the pandemic sort ofwas in the rear view mirror.
And into 2023, there was an expectationthat China was gonna get back.
Beijing was gonna get back to addressingthe necessary rebalancing between heavy
(21:06):
industry and consumer future foritself, as we've been discussing.
And there was also a sense, I think, thatthe economy would naturally find its way
back to 5, 6% growth,maybe higher in a bounce back from,
from COVID as we had seenelsewhere in the world.
Instead, 2023 suggested the opposite,
that the economy was really stuck inthe weeds and was not going to see
(21:30):
consumers were not ready to go out andkind of get back to business as usual.
They were concerned about their jobs,income growth was poor.
And this required a decisiveresponse from Beijing to acknowledge
the nature of the problem andsay very clearly we get it,
we understand that we're goingto address this the right way.
Instead, since that sort of moment ofreckoning in the first half of 2023,
(21:55):
the various proposals to restore growththat have come out have sort of denied
the nature of the problem.
And said, nope, we're gonna juststimulate a little bit here and
there andwe're gonna kinda get through this.
We're gonna export andthe world should be happy for that.
Leaders of international companiesinvesting in China have looked at that and
(22:17):
listened to that anddecided that's not going to work.
We're not putting anymore money at risk and
we need to diversify veryquickly into other economies.
The most recent quarterlydata we have is that net
Chinese FDI flows are almost$100 billion outbound.
That hasn't happened in all the timemodern data's been kept since the 1990s.
(22:43):
So this is quite a different patternthat we're seeing right now.
Any given month you'll see a littlebit of investment tick back in.
But it's increasingly kind of speculativemoney rather than a long only here for
the long term in China sortof foreign direct investment
that was characteristic forthe past three decades.
(23:05):
The problem for
China of that is that foreign directinvestment is not just about the money.
It's about creating links thatallow businesses in China to
export back to where thosecompanies came from.
It still brings in a lotof technological know how.
And despite how advanced China'sbecome in a lot of industries,
there are still big gaps in China'stechnological capabilities.
(23:29):
Nobody in the world can run semiconductormanufacturing equipment without
a whole bunch of vendors from Europe,United States and
elsewhere resident in their economyhelping keep the equipment going.
Right.So it's really quite a brave new world if
foreign firms are on net, taking money outof the country and putting it elsewhere.
(23:51):
Rather than voting with theircheckbooks and staying committed.
There's a handful of companies that arerunning sort of counter to that story, and
that Creates quite a bit of confusion,I think, in the media narrative and
headlines.
A couple of German automakers,for example.
But really, if you look at the sortof broad central tendency here,
(24:13):
it is a lot of riskavoidance by global firms.
And it's geopoliticsis a big part of that.
But the biggest surprise really inthe present couple years has been, wow,
the Chinese macro economy is just notas stable as we expected it to be and
they're not doing what they needto do to stabilize that outlook.
>> Elizabeth Economy (24:35):
And you mentioned Chinese outbound investment.
I just want to ask about that before weturn to sort of US Policy and China and
looking ahead.
But you mentioned outbound investment.
Obviously, one of the huge sort ofChinese initiatives has been the Belt and
Road Initiative.
Over $1 trillion reported interms of investment in hard
(24:55):
infrastructure, digital infrastructure.
They've got that Health Silk Road,and the Green Silk Road for
environmental technologies.
What about that?
Is that going to be impacted by, you know,
what you've described as a pretty bleaksituation for China's domestic economy?
How is China going to sort of change,if at all it's outbound investment?
>> Daniel Rosen (25:20):
Yeah, well, so let's see.
I mean, I think a very importantstarting point to look at
the question is to note thaton the past three years,
more money of debt repayment isgoing from Belt and Road countries
back to China than any new money fromChina is going to those countries, okay?
(25:44):
So the sort of steep kind of takeoff ofChinese wherewithal financial support for
its Belt and Road partners, that is behindus, it's kind of leveled off quite a bit.
A lot of debate inside China.
Why are we throwing money at countriesthat we can't count on to stay there for
(26:04):
in the future?
A lot of the investments that werehappening were in extractive industries to
bring minerals back to China thatwere going into the property sector.
So if you kind of think back to what wewere talking about in terms of property,
if that sector has been way over investedand there's not going to be as much demand
for all those minerals and materialsas we thought, then it's never going to
(26:29):
be possible to pay off that debt that'sbeen built up in Africa, Latin America,
Australia and elsewhere in order tocreate so much capacity to ship iron ore.
Iron ore dipped below $100 a ton today for
the first time in I don'tknow how many years.
And that's very mucha China property story.
So it kind of all ties together here.
All that said, not least because of thissort of Shortfall against expectations for
(26:55):
the Chinese consumer.
A lot of Chinese firms are looking forgrowth elsewhere and
they can see the writing on the wall.
It's not just going to be about exports,again, for
the reasons we've already touched on.
And so they're hearing fromtheir regulators in Mexico.
Maybe if you set up a manufacturingoperation here, you'd be more welcome
(27:17):
to stay engaged in a stream of activitythat creates profits for you, right?
No surprise there.
So, tremendous amount of newChinese greenfield investing,
building manufacturing aroundthe world to have a plan B.
If growing China's exports quarterafter quarter after quarter is
(27:38):
no longer a viable game plan,which I think for, you know,
if Donald Trump is to even be halftrusted in terms of what he's saying,
that'll absolutely,that'll absolutely be the case.
So a lot of new drivers.
At Rhodium's website, you'll find a lotof current research, by the way, on that
topic of new patterns in China outboundinvestment, which are very important.
(28:02):
Some of that is probably what wewould call trans-shipment as well.
There's not really a lot of newmanufacturing happening in Mexico.
It's just Chinese exports brieflytouching a third country before being
shipped on to Europe or the United States.
It doesn't take very long for
regulators to see thatnowadays given technology.
(28:26):
And so those things are going to be sortof quick to come and quick to go, I think.
>> Elizabeth Economy (28:30):
Yeah, I think that's a really important point.
Because, of course, one of the hallmarksof the Biden administration policy toward
China has been this effort to encourageUS firms to diversify their supply chain.
Some of which, as you suggestedearlier on, they're doing,
because it just makessmart economic sense.
But by the same token,
(28:51):
if what we're seeing is the Chinese firmssimply relocating to other countries and
becoming parts of supply chains thatotherwise would be hard to track them.
Then we're not getting the same kind ofbenefits from the types of activities that
the administration hasbeen pushing forward.
>> Daniel Rosen (29:09):
There's one underappreciated benefit,
benefit of that relocation,
though, that I think I've beenthinking about a lot lately.
I haven't figured out exactlyhow we want to research it.
And that is that one of the problemswith a very China heavy
production chain was that itwas made way too difficult for
companies to do due diligenceon their production chain.
(29:33):
Partners in China going into the factory,making sure that things that were being
installed in the equipment were whatwas supposed to be in the equipment,
and not anything else, right?
You understand what I'm talking about,these sort of security concerns.
If a Chinese firm, if that sameChinese firm has to relocate and
operate in Thailand or Mexico orVietnam or India or somewhere else,
(29:56):
then that problem is resolved.
It is possible for reasonable,normal commercial due diligence on what's
happening in a production facility to beundertaken in third countries in a way
that people are no longercomfortable doing in China.
So there are some advantagesto that sort of relocation,
even if it doesn't solve allof our trade balance concerns.
>> Elizabeth Economy (30:19):
Yeah, I think you make an important point on the security
front, but the other element of thatis on the economic coercion part.
And whether or not a firm, a Chinese firm,
that has a joint venture in Mexico oris operating a plant in Malaysia,
whether they're subject to the sametypes of sort of calls from Beijing,
(30:43):
should Beijing decide tolaunch a boycott again, say,
of exports or imports from Australia.
Is it possible that the Chinesegovernment can turn off the spigot for
those firms as well,causing pain to other countries?
I think that's the other issue that youhave to be concerned about when it comes
to supply chains.
We don't want China to controlpersonal protective equipment,
(31:07):
right, via manufacturing in Mexico,or Malaysia, either.
I think that would just be anotherpotential issue that we would have to
consider about the sort of relocation andtrans shipment.
Okay, but let's finish up bytalking about what's next.
We're about to open a new chapter onthe US-China economic relationship.
(31:29):
And there is probably noissue of greater interest and
importance to President-elect Trumpwhen it comes to
China than the issue of trade andinvestment between the two countries.
He's talked about levying 60% tariffs onChina, but he's also said he welcomes
Chinese investment in the US,he has no plans to ban TikTok.
How do you see the Trump administrationmoving forward on the economic
(31:53):
relationship with China?
What do you anticipate sort of overthe first 100 days that they're
gonna move Forward on.
>> Daniel Rosen (32:01):
Yeah, that's great.
It's the question, Liz, andI don't think I have answers.
I have some observations that Ithink bear on the question, but
we're very much still in learningmode here to get a sense of
what this policy first hundred daysis gonna look like I would say.
(32:23):
The first observation is that regardlessof what the sort of big political
announcement of tariff level is,that's rolled out say 60%.
That doesn't mean that that 60% is gonnabe enforced uniformly across all products.
In the Trump 1.0 policy package,there were quite a few carve
(32:46):
outs from the sort of top line levelof tariffs imposed on products
coming into the United States andcertainly on the Chinese side,
their reciprocal tariffsagainst the United States,
up to I think 95% of those orso friends at MOFCOM told me,
were not actually collected onproducts coming into China.
(33:10):
Quite a bit higher on the US side but
also very significant amountof sort of waiving of things.
And of course there was the de minimisrule as well, which accounted for
a huge share of US Trade.
And so first point is, whateverthe big number is, don't you know,
shut down your computer and go to lunchas soon as you hear that number because
(33:31):
there's going to be a lot more questionsthat need to be answered before we
know exactly how big a bite out ofbusiness as usual it's going to take.
Number two, almost any answer to thatquestion is gonna be macroeconomically
disruptive though [LAUGH].
We're talking now about levels ofintervention in international trade.
(33:53):
60% with China suggestion of 10% as astarting point with the rest of the world.
Again, countries canbe exempted from that,
I'm guessing if they're willing to bealigned in certain ways, we'll see, right?
But anyway, I think you implement that,
it is going to have prettysignificant macroeconomic effects.
(34:16):
What are macroeconomic effects?
They are price instability, AKA inflation,
which we have had a taste of in the pastcouple years coming off the pandemic.
Former US trade representative RobertLighthizer observed in a recent op ed
that there wasn't really much inflationaryeffect from Trump 1.0 tariffs,
(34:39):
narrowly speaking,during the period of the administration,
given that they were mostlyimplemented in the second half.
And then we had a pandemic that wasstarting to change the nature of things.
Well inside that period,we don't really know,
I think what the actual inflationaryimpact of something like a 60% tariff
(35:01):
level almost three times higher thanthe previous numbers used for China.
So we really need to beacutely aware of what changes
like that could do toour economic interests.
There's inflation, there is rapidshifts in investment activity.
(35:22):
We talked a minute ago abouthow problematic it is for
China that multinational companiesare not sending investment and
activity into China anymore.
This kind of a delinking of the UnitedStates from international trade norms
could have a deleterious effect oninvestment into the United States.
(35:42):
At the same time, as you noted,candidate Trump surprised, I think,
his own party by saying no, actually,I'd like to see Chinese automakers
investing in the US in those nicheswhere we don't have necessary inputs to
be competitive global electricvehicle makers, right?
So I think that's actually quiteencouraging that we could put that back
(36:05):
in play because I think the wholesaleexclusion of Chinese participation in
the US Economy is a mistake.
And we should, if possible,try to find ways to pick and
choose what is allowed inrather than just saying,
we're just gonna gratuitously cuteverything off and call it a day.
>> Elizabeth Economy (36:26):
Okay, so I think, great advice.
Don't press the panic button yet.
Take a little bit of a watch andwait and see.
I think it sounds like there may be some,you know,
disagreement within the Republican Partyitself, as you suggest, over issues like,
you know,Chinese investment in the United States.
Maybe President Trump will, you know, finda good, a good balance moving forward.
(36:48):
So.
All right, fingers crossed.
All right, so let's just finish upwith five quick rapid fire questions.
First, must read book or article on Chinathat you would recommend to our listeners.
>> Daniel Rosen (37:04):
I thought about this one a lot.
Liz, I think what I'm gonnaoffer is in the current issue of
the China Leadership Monitor,there's a piece called Peak China,
What Are China Beijing's Options Nowby my partner and colleague, Dr.
Logan Wright, which I think does the bestpossible job of helping people see
the long sort of structural arc of China'seconomic growth numbers and why the sort
(37:27):
of slower growth Chinese future opens upa lot of strategic opportunities for other
countries to look after their economic andgeopolitical interests differently.
So I'd recommend that.
>> Elizabeth Economy (37:39):
Great, I think it's a brilliant and sophisticated piece.
So agree.
Job you would most want to have in a new,maybe different administration.
>> Daniel Rosen (37:49):
Yeah, and you use the indefinite article A,
not the new administration, I see.
Give me a little bit of wiggle roomto decide how I was gonna answer it.
If it was gonna be the incomingadministration, I jokingly said to my
colleague this morning, archivist,because I thought that would be fun, Liz.
But if it were some theoretical futureadministration, I think it's clear
(38:12):
from this electoral outcome that partieson the more kind of internationalist,
progressive side of the spectrumhave an awful lot to learn about
how much outreach is necessary tothe full American electorate and
citizenry so that we can do a lot ofeducational work on why our enlightened
(38:34):
self interest is different than whatit might seem in the short run.
And sothat's gotta be an oval office priority.
Of course, I think it will be formany, many electoral cycles to come.
And while it's not a jobI've traditionally held or
thought of myself as qualified for,like many people,
I feel like I need to apply myself tothat challenge in the period ahead.
(38:58):
And so I've been thinkingabout something like that.
>> Elizabeth Economy (39:01):
It's great, I think many of us would agree with you there.
What one thing do you wish that the Bidenadministration had done differently with
regard to China policy?
>> Daniel Rosen (39:12):
As a China wonk and expert,
I gave the administrationextremely high marks.
I thought it was very adept atgetting the balance right between
domestic investment to put Americaback in the game in next generation
technology segments likeelectric vehicles and renewables,
where we had really been kind ofwaiting on the sidelines, frankly.
(39:36):
And I think that grade stands.
As a Columbia professor,I'm happy to give the easy A for that.
However, I think, you know,
the ultimate test is how well itholds up against popular opinion,
public opinion, and I think,you know, with hindsight,
we can say that much more effortneeded to be put into communicating.
(40:01):
Why?And simplifying why our policy was good
not just for the middle class, butmaybe for the lower middle class or
people who felt like they wereslipping behind the middle class.
And so big lesson learned there.
And yeah,I think my answer lies in that direction.
>> Elizabeth Economy (40:20):
Okay, what China issue do you think we don't know enough
about?
>> Daniel Rosen (40:24):
I've kind of already been using the time with you, Liz,
to try to emphasize this.
But it is a major elementof the Chinese system
that they don't air theirdirty laundry in public and
their problems in public.
And so a lot of our colleagues inthe China watching community over the past
(40:49):
decades have underappreciatedthe structural problems and
headwinds that China'sgrappling with right now.
A lot of nations that are behind Chinadevelopmentally and are thinking,
what's the right system,the right kind of political economy for
them to enjoy economic development?
Poverty alleviation suchas China did are over,
(41:14):
over estimating how wellthe Chinese approach is working.
And I think even in strategic America,where I've spent a little time
trying to offer analytic perspective,there's an underappreciation
of just how constraining China'spast economic choices now are.
(41:35):
And what opportunities that opens up fora smart,
enlightened American foreign policy andeconomic policy going forward.
>> Elizabeth Economy (41:44):
And then on a scale of 1 to 10, how likely are we to see
a Nixon Mao moment in the US Chinarelationship in the next decade?
>> Daniel Rosen (41:51):
So this one was easy for me.
It's a 1, Liz, forthe simple reason that to be at
a Mao Nixon moment,if I strictly kind of speak to that.
The Chinese side of that story would needto be at a certain point in its arc where
it had exhausted other alternatives forhow it saw its own interest going forward.
(42:16):
And unfortunately,I would say from an American perspective,
I think we're still maybe five orten years away from Beijing seeing its
interest in some sort of detent orrapprochement with the United States.
Also, of course,the dynamic in which the United States is
the sole global hegemon, essentially.
(42:38):
And the guy in second place,the USSR has started to show
that it just is not going to beable to keep pace with that.
That was essential tothe Mao Nixon moment.
We just don't have those circumstancesgeopolitically right now, I don't think.
Although I'm just an economist,so what do I know?
Maybe the geopoliticians might thinkdifferently, but I'm certainly looking for
(43:04):
some other grand, historic momentthat we can define for the future.
It won't be a Nixon Mao, just like China'sstory won't be Japan's lost decade story.
It won't be the Cold War as we knew it.
It'll be new things thathave characteristics and
dynamics that'll be just as importantanchors to how we train generations to
(43:25):
come in American foreign policy andinternational economic policy.
But I'm at the moment concerned that weget too stuck to those old metaphors about
what worked, who's the new Kissinger,this kind of thing,
I think time to let those go andfigure out what comes next.
>> Elizabeth Economy (43:43):
Dan, I cannot thank you enough.
You are not just an economist.
You are really an extraordinary,I think, scholar, scholar and
expert on China andUS China relations writ large.
And I really appreciate your takingthe time to with us today to talk about
what's going on inthe Chinese economy today.
Where it's likely to go in the future,and of course,
(44:07):
the question on everybody's mind,what does the US what is the US
likely to do moving forward ina Donald Trump 2.0 presidency?
If you enjoyed this podcast andwant to hear more reasoned discourse and
debate on China.
I encourage you to subscribeto China Considered via
The Hoover Institution YouTube channel orpodcast platform of your choice.
(44:28):
In the next episode, we'll continueour discussion of Chinese economy,
exploring how foreign investors arelooking at China today with Joerg Wuttke,
former China Chairman ofthe German company, BASF,
and now partner atDGA Albright Stonebridge Group.
Thanks very much.
[MUSIC]
[MUSIC]
>> Elizabeth Economy (00:06):
Welcome to China Considered, a podcast that brings fresh
insights and informed discussion to one ofthe most consequential issues of our time,
how China is changing andchanging the world.
I'm Liz Economy, Hargrove Senior Fellowand Co-director of the US China and
the World Program at the HooverInstitution at Stanford University.
Every two weeks I'll be joined inconversation by senior government
(00:27):
officials, business leaders andprominent activists and
authors from around the world.
We'll discuss China's most importantpolitical and economic trends, its foreign
policy ambitions, and its relations withthe United States and other countries.
The China Considered podcast isproduced by the Hoover Institution, and
you can subscribe to it viathe Hoover Institution YouTube channel or
your favorite podcast platform.
(00:49):
Today I have with me, Dan Rosen, who is aco founder and head of the Rhodium Group,
which for two decades hasbeen one of the world's top
data driven research providers andconsultancies on the Chinese economy,
as well as on issues related to energy andclimate.
Dan is the author of several books andreports on China's economy and
on the US China economic relationship.
He also served as Senior Advisor for
(01:09):
International Economic Policy atthe National Economic Council and
National Security Council duringthe Clinton Administration.
Dan, thanks so much for joining me today.
>> Daniel Rosen (01:18):
Liz, pleasure to be with you, thanks for having me.
>> Elizabeth Economy (01:20):
So I want to start with your baseline assessment of
the Chinese economy.
It often feels as though we're floodedwith information about the Chinese economy
and much of it's contradictory.
What do you think are the most importantthings that we need to understand about
the current conditionsof the Chinese economy?
>> Daniel Rosen (01:35):
Well, yeah, it's a hard one to get started on, but
let's do it this way.
Let's just kind of level set what'sa reasonable expectation for
China's economic performance.
And I think it's important to startthere because there has been a political
preferred narrative around that comingout of Beijing that is increasingly out
(01:57):
of whack with what economic analysiswould suggest is actually happening.
So the official line that Beijingtakes is that the economy continues to
grow at about 5% orbetter a year, year on year.
So if you have a 17 or sotrillion dollar economy growing 5% a year,
you've got the better partof a trillion dollars of
(02:19):
additional activity every yearbeing added, if that's true.
I don't think the evidencesuggests that it is true,
although the International Monetary Fundcontinues to stamp that number and
say, yep, looks good to us, butit's more and more difficult for
most analysts to see howthat can be the case.
(02:40):
And I'll take three bites at that apple.
First, there's a structuralslowdown taking place.
When an economy gets tomiddle income level.
It doesn't grow, you know,6, 7, 8% anymore.
It naturally will slow down.
That's just the nature of every economywe've seen in history, number one.
Number two, China has already throwna lot of stimulus projects at growth
(03:01):
over the past couple ofyears since the pandemic.
And it's, as we say,moved forward in time demand.
So instead of an even distribution oftrade-ins of automobiles or dishwashers,
they announced big programs to do thata year ago or the year before that.
And so that creates a cyclical slashingaround where all of that was moved to
(03:23):
the front of a three year periodrather than being evenly distributed.
The result of that is that today weactually should expect to see some
subsidence in those sectors thatalready got these cyclicals shot in
the arm programs in 2022,2023, the beginning of 2024.
And then thirdly,
(03:44):
how well an economy is growing is also afunction of the quality of policy making.
Regardless of where you are ina structural kind of perspective or
in a cyclical dynamic.
There's the question of isgovernment doing it well or
are they not doing it well?
And I think we can.
The simplest way to speak to that isjust to note that since the pandemic
(04:06):
there have been many, many announcedefforts to stimulate improve growth
as there have been more andmore questions about it internationally.
And yet just a few months later, there'salways another program being announced.
So something is not working,folks are aware of that and
it's taking a big bite out of growth.
(04:26):
I would say rather than 5%,
the economy seems to be growingsomewhere between 0 and 2% right now.
And the easiest way to substantiatethat is just to look at how huge
the numbers forstimulus that are being talked about are.
We're talking 6 to 10 trillion renminbi.
You don't need that muchstimulus if you've got 5% growth.
(04:46):
And if you back that out andask, well, what is growth?
If you need that muchto get to your target,
it suggests that we're notdoing any better than 2%.
We might be doing much worse.
>> Elizabeth Economy (04:57):
And we hear a lot about the drag on the Chinese economy from
the property sector,the issues around local government debt.
Have any of the programs that China hasannounced, let's say, beginning this
past July and through until now, begunto address those in a meaningful way?
>> Daniel Rosen (05:14):
Well, if we Go back to July, you're including the delayed
third plenary meeting statementannouncement documents,
that happened nine monthsafter it was normally
scheduled to happen inthe Chinese political calendar.
And when it did come out,it was, I think, in the middle,
(05:36):
you know, 15,000 words or so of material.
And none of it really changedexpectations in the marketplace.
So if you look at the behavior ofinvestors, how they were trading
on expectations about the thingsthat go into property, steel,
plate glass, aluminum for windows,all sorts of stuff that big,
(06:00):
once every five years document didn'tseem to move the needle very much.
Subsequent to that, in September andthen more recently,
even coming up to last week,there have been additional
announcements which are focusedmore on cutting interest rates,
for example, and providing more liquidity.
(06:23):
Really we're on the verge of having tocall it quantitative easing, something
which just a few quarters ago, Beijinginsisted it was never going to do that.
That was something that lessprudent Western economies did.
And yet that's essentially, what wesee Beijing moving toward right now.
It creates a little bit of speculativeactivity in the property market, but
(06:43):
that's not a long termsolution to anything.
I mean, the basic reality here is thatthe whole complex of economic activity
around property had come to be as much asa quarter of the total Chinese economy,
which is just a unprecedentedweight on one industry.
We can see and we know and everyoneknows that a lot of the property built
(07:07):
out was never going to bereally valued by people.
It was speculative in nature.
And while we see a little bit of propertyspeculative activity by investors
right now, just in the past week,it's not the kind of signal that would
suggest that we're sort of turningthe corner and coming back.
We've worked through the property problemand we're in a healthier place right now.
(07:31):
If you look at the full 2024property sector set of indicators,
in terms of new starts andsales of finished property,
the year performed wayunderneath 2023 levels.
2023 was a shocker thatchanged the narrative,
I think everywhere about just howserious China's economic problems were.
(07:54):
So whatever those 2023 problems,they were worse in property in 2024.
At some point.
It's gotten sobad that there's nowhere to go but up.
And maybe we're startingto see that presently, but
that's a weak beer, as we would say.
>> Elizabeth Economy (08:11):
And one more point or one more question on this, on this
point, you don't think that Xi Jinping'smove to basically switch from invest,
have, you know, significant investment inthe property sector to the three news,
you know, the battery technology andEVs and, you know, energy storage and
sort of the whole idea of AI plusputting AI throughout the economy,
(08:32):
that advanced manufacturing, thatmoving local governments from investing
in the property sector to these new areas,
that that's going to do much tosort of reboot the Chinese economy.
>> Daniel Rosen (08:43):
Well, given enough time, it'll help.
But, you know, inside the five years,we're looking, you know,
we can look ahead to here right now,number one, the local government officials
whose job it was to figure out whichproperty investments to push support to
over the past 10 or 15 years, I don'tsee how they're skilled to make good
(09:07):
decisions about which batterymanufacturers should get state support.
And so the quality of, you know, smallbusiness lending in the American context,
we might call it something like that, ormore targeted industrial policy support,
such as we have inthe Inflation Reduction act,
the IRA way in the USover the past two years,
(09:29):
the quality of support for these newindustries is not really very high.
And if you look at even electricvehicle makers in China,
the vast majority ofthem are not profitable.
And what profitability they do have isover-dependent on exports right now,
which I'm sure is a topic, Liz, you'regonna wanna come to in a second probably.
(09:50):
But just suffice it to say that, again,
I'm talking about the qualityof policymaking being a new net
negative to the China storyrather than a net positive.
Which just a few years ago, Beijing notbeing tethered by all the regulatory drag
and due diligence andall that kind of democratic nastiness,
(10:11):
which we're occasionallyreminded of in the United States,
is that a plus ora minus on their growth potential?
Well, it has been a plus since 1979,and today we're sort of at
the point where what used to bea tailwind has become a headwind.
If you don't have, you know, some bettergovernance, quality in how support is
(10:31):
being doled out, you're just creatinggreater liabilities for the future.
You're not actually puttingsome support under the economy.
And then finally on this questionof property versus the three news,
over the past two or three years,
10 million jobs have beenlost in the property sector.
Under nobody's good news story didthe three new industries purport
(10:55):
to create even, I think, a third ormaybe a quarter of that many new
jobs to make up for the hole inthe economy that property left?
>> Elizabeth Economy (11:05):
That's a really interesting point.
So given what you've described,
obviously you think the Chinese leadershipis probably moving down the wrong path.
What should they be doing?
I mean, we hear a lot from Westerneconomists about the need for China to
move away from this investment and exportled growth to a consumer based economy.
(11:27):
What would that look like, what wouldthat necessitate in terms of reforms?
And why do you think Xi Jinping and
the rest of the Chinese leadershiphave resisted doing this?
>> Daniel Rosen (11:36):
Well, the ironic answer is that in the first instance,
Xi Jinping put the right set of ideas onthe table back at the beginning of his
tenure in 2013.
We know what the way ahead ought to looklike for China because they actually wrote
it out in great length in something calledthe 60 decisions in November of 2013.
(11:57):
And it included all of the majorelements that were necessary to put
the economy on a better track.
And it takes a two-day seminarto talk through all that,
Liz, and we->> Elizabeth Economy: Okay.
Just got a few minutes.
>> [LAUGH]>> Daniel Rosen: But let me offer a couple
things that are really crucial.
A lot of them start with finance.
(12:19):
Economists, when economists talk abouthow the economy of tomorrow comes to be,
we talk about factors that gointo creating economic assets for
tomorrow and the incentives thatdecide how those assets flow.
And China as a lower incomebounce back developing country,
(12:42):
had a system in which financewas pushed to heavy industrial
manufacturing build out atvery low cost of capital.
The problem with a lot of that investmentis that it doesn't create a lot of jobs.
A modern steel mill has justa few dozen workers really after
the construction is done,it's all, you know, technicians.
(13:05):
Also, it's white collar,it's not a very labor-intensive industry.
If you want to create a lotof jobs in an economy,
you don't actually want to bebuilding duplicative steel mills.
You want to be pushing money to retail, toeducation services, to medical services.
A lot of service activity.
That's the stuff that's laborintensive and pays higher wages.
(13:29):
And only by creating that wage flowto a growing middle class population
do you really set the table forsustainable consumption that's not
dependent on finding people to consumethat are just not even available in China.
And so that's where we are today.
They never finish these changes.
They stated very clearly in 2013,we need to change the incentives in
(13:54):
our financial system and we need tochange our center local fiscal system
to what we tell local governments to doand how do we give them money to do it.
Those things were identified as clear andpresent dangers that a decade out from
2013, if these things weren't fixed,China would find itself in a dead end.
And that's a quote from Xi Jinping, whowas paraphrasing something Deng Xiaoping
(14:18):
had said 20 years before him, okay?
So we started to changethe financial system.
There were efforts to make it moremarket decisive, more market oriented.
And that started to cause too muchinstability for anybody's taste.
And so by 2015, 2016,
the principal financial reformsthat had been discussed and
(14:39):
laid out were suspended, delayed taxreform was suspended and delayed.
So the incentives to buyproperty didn't change.
That was the only really thing to dowith your savings for too many Chinese.
And so there are these kindof deep questions about
what does the finance system do?
(15:00):
What kind of industries does it support,
just strategic industries that areattractive to national security officials?
Or does it really putthe emphasis on the consumers and
what they want down the road?
And those problems were diagnosed,and then they were not fixed.
And here we are, it's 2024 andthese things have still not been fixed.
(15:21):
And until they are, this misallocationin the system and under support for
creating a consumer economyis just going to get worse.
Now, China is superdependent on consumers,
just not its own->> [LAUGH]
Because
way too much of its growth is comingfrom foreign consumers right now,
which is creating an allergic responsenot just in the United States.
(15:43):
The European Union has imposed tariffs onChinese electric vehicles, surprisingly.
And countries all over the globalsouth as well are asking themselves,
you know, how do I avoid just becominga taker of Chinese products, but
have a chance to make some things formyself as well?
>> Elizabeth Economy (16:01):
And that, to me,
that issue of overcapacity which we'veseen in other areas like solar panels and
presumably we could see coming, you know,in the future in areas like legacy chips.
So what we're seeing now with the EVs andthe pushback,
not only from Europe, butas you suggest, from some middle and
emerging economies, do you think thatcould create a kind of feedback loop to
(16:24):
the Chinese government that that wouldactually get them to change their policy?
Because now it's not justthe United States saying,
stop these huge subsidies andthe overcapacity that results in
the failure of of you to developthis consumer economy at home and
your reliance on the rest of the world.
(16:46):
But now China's hearing itfrom a lot of other countries.
So do you see this as potentially having,A, a negative impact on the Chinese
economy itself with allthe tariffs coming into place?
But B, maybe changing the mindset andfinally causing Xi Jinping and
other Chinese leaders to move forward onthe kinds of reforms that you've outlined?
>> Daniel Rosen (17:06):
Definitely, there's potential for that.
For that potential to betranslated into reality,
it's gotta be more than justcommon concerns abroad.
There has to actuallybe coordination abroad.
So, yes, European folks in Europe,Britain, the United States, Japan,
(17:26):
Australia, throughout the OECD world,even Mexico and other parts of the oecd,
South Korea today share these concernsabout these systemic inefficiencies
in how the Chinese economy is running andthe problems that creates.
But are they really coordinatingto take a kind of common action
(17:47):
to put some pressure on Chinato prioritize domestic reform?
Certainly they are not.
Yet.There's been a lot of effort in that
direction.
I think there was pretty good sortof initial progress toward kind of
scoping out the makings ofa broader trade coalition,
if you will, in the Biden administration.
(18:08):
I don't think that hada chance to fully gel yet or
set by the time that Trumpadministration starts in January.
And I don't think there's anyhigh expectation that Trump
administration's gonna prioritize,solidifying the sort of
common position on the nature ofChina's trade problems, right?
(18:30):
And soI think from the Chinese perspective, yes,
they are concerned with hownations around the world
are starting to react differentlyto Chinese overcapacity exports.
At the same time,given the political challenge, pain and
difficulty and cost at home ofmaking these necessary changes,
(18:51):
it doesn't seem that Beijing is convincedyet that that's really the smart way for
them to go for that reason becauseof foreign pushback, right?
I think there's a much better reasonwhy Beijing should immediately turn
to a much more radical effortto address the imbalances
in the economy that we're talking about.
(19:12):
And that is, regardless of what foreignersdo, this is not a sustainable path for
China to be on.
And they're never gonna get out of thissort of under 3% GDP trap until they deal
more fundamentally with this sort ofmisallocation between sort of pushing all
their support to their supply sideat home versus their demand side.
Which means consumers haveto be the solution for
(19:35):
sustainable Chinesegrowth into the future.
>> Elizabeth Economy (19:39):
One of the other things that the Rhodium Group does really
well, you have your Pathfinder Report,which looks at Chinese reform,
sort of the progress of Chinesereform across six different metrics.
And you also track sort of the situationin terms of foreign direct investment into
China.
And we've seen a fall off in thatover the past couple of years.
(20:01):
How significant do you think that is?
Is that something the Chinesegovernment is worried about?
I've certainly heard Chineseleaders saying we are open for
business, multinationals come back.
What do you think is the impact, the realimpact of that drop in FDI into China and
do you expect that to continue?
>> Daniel Rosen (20:21):
Yeah, well, the FDI into China is a crucial story.
I'll make offer, offer a thought on it.
Chinese outbound investment is alsoa very big story that we're tracking and
is also important to think about forall sorts of reasons on the inbound side.
I think by 2021, 2022,up until that point,
(20:45):
I think many foreign investorswere willing to be patient
until the pandemic sort ofwas in the rear view mirror.
And into 2023, there was an expectationthat China was gonna get back.
Beijing was gonna get back to addressingthe necessary rebalancing between heavy
(21:06):
industry and consumer future foritself, as we've been discussing.
And there was also a sense, I think, thatthe economy would naturally find its way
back to 5, 6% growth,maybe higher in a bounce back from,
from COVID as we had seenelsewhere in the world.
Instead, 2023 suggested the opposite,
that the economy was really stuck inthe weeds and was not going to see
(21:30):
consumers were not ready to go out andkind of get back to business as usual.
They were concerned about their jobs,income growth was poor.
And this required a decisiveresponse from Beijing to acknowledge
the nature of the problem andsay very clearly we get it,
we understand that we're goingto address this the right way.
Instead, since that sort of moment ofreckoning in the first half of 2023,
(21:55):
the various proposals to restore growththat have come out have sort of denied
the nature of the problem.
And said, nope, we're gonna juststimulate a little bit here and
there andwe're gonna kinda get through this.
We're gonna export andthe world should be happy for that.
Leaders of international companiesinvesting in China have looked at that and
(22:17):
listened to that anddecided that's not going to work.
We're not putting anymore money at risk and
we need to diversify veryquickly into other economies.
The most recent quarterlydata we have is that net
Chinese FDI flows are almost$100 billion outbound.
That hasn't happened in all the timemodern data's been kept since the 1990s.
(22:43):
So this is quite a different patternthat we're seeing right now.
Any given month you'll see a littlebit of investment tick back in.
But it's increasingly kind of speculativemoney rather than a long only here for
the long term in China sortof foreign direct investment
that was characteristic forthe past three decades.
(23:05):
The problem for
China of that is that foreign directinvestment is not just about the money.
It's about creating links thatallow businesses in China to
export back to where thosecompanies came from.
It still brings in a lotof technological know how.
And despite how advanced China'sbecome in a lot of industries,
there are still big gaps in China'stechnological capabilities.
(23:29):
Nobody in the world can run semiconductormanufacturing equipment without
a whole bunch of vendors from Europe,United States and
elsewhere resident in their economyhelping keep the equipment going.
Right.So it's really quite a brave new world if
foreign firms are on net, taking money outof the country and putting it elsewhere.
(23:51):
Rather than voting with theircheckbooks and staying committed.
There's a handful of companies that arerunning sort of counter to that story, and
that Creates quite a bit of confusion,I think, in the media narrative and
headlines.
A couple of German automakers,for example.
But really, if you look at the sortof broad central tendency here,
(24:13):
it is a lot of riskavoidance by global firms.
And it's geopoliticsis a big part of that.
But the biggest surprise really inthe present couple years has been, wow,
the Chinese macro economy is just notas stable as we expected it to be and
they're not doing what they needto do to stabilize that outlook.
>> Elizabeth Economy (24:35):
And you mentioned Chinese outbound investment.
I just want to ask about that before weturn to sort of US Policy and China and
looking ahead.
But you mentioned outbound investment.
Obviously, one of the huge sort ofChinese initiatives has been the Belt and
Road Initiative.
Over $1 trillion reported interms of investment in hard
(24:55):
infrastructure, digital infrastructure.
They've got that Health Silk Road,and the Green Silk Road for
environmental technologies.
What about that?
Is that going to be impacted by, you know,
what you've described as a pretty bleaksituation for China's domestic economy?
How is China going to sort of change,if at all it's outbound investment?
>> Daniel Rosen (25:20):
Yeah, well, so let's see.
I mean, I think a very importantstarting point to look at
the question is to note thaton the past three years,
more money of debt repayment isgoing from Belt and Road countries
back to China than any new money fromChina is going to those countries, okay?
(25:44):
So the sort of steep kind of takeoff ofChinese wherewithal financial support for
its Belt and Road partners, that is behindus, it's kind of leveled off quite a bit.
A lot of debate inside China.
Why are we throwing money at countriesthat we can't count on to stay there for
(26:04):
in the future?
A lot of the investments that werehappening were in extractive industries to
bring minerals back to China thatwere going into the property sector.
So if you kind of think back to what wewere talking about in terms of property,
if that sector has been way over investedand there's not going to be as much demand
for all those minerals and materialsas we thought, then it's never going to
(26:29):
be possible to pay off that debt that'sbeen built up in Africa, Latin America,
Australia and elsewhere in order tocreate so much capacity to ship iron ore.
Iron ore dipped below $100 a ton today for
the first time in I don'tknow how many years.
And that's very mucha China property story.
So it kind of all ties together here.
All that said, not least because of thissort of Shortfall against expectations for
(26:55):
the Chinese consumer.
A lot of Chinese firms are looking forgrowth elsewhere and
they can see the writing on the wall.
It's not just going to be about exports,again, for
the reasons we've already touched on.
And so they're hearing fromtheir regulators in Mexico.
Maybe if you set up a manufacturingoperation here, you'd be more welcome
(27:17):
to stay engaged in a stream of activitythat creates profits for you, right?
No surprise there.
So, tremendous amount of newChinese greenfield investing,
building manufacturing aroundthe world to have a plan B.
If growing China's exports quarterafter quarter after quarter is
(27:38):
no longer a viable game plan,which I think for, you know,
if Donald Trump is to even be halftrusted in terms of what he's saying,
that'll absolutely,that'll absolutely be the case.
So a lot of new drivers.
At Rhodium's website, you'll find a lotof current research, by the way, on that
topic of new patterns in China outboundinvestment, which are very important.
(28:02):
Some of that is probably what wewould call trans-shipment as well.
There's not really a lot of newmanufacturing happening in Mexico.
It's just Chinese exports brieflytouching a third country before being
shipped on to Europe or the United States.
It doesn't take very long for
regulators to see thatnowadays given technology.
(28:26):
And so those things are going to be sortof quick to come and quick to go, I think.
>> Elizabeth Economy (28:30):
Yeah, I think that's a really important point.
Because, of course, one of the hallmarksof the Biden administration policy toward
China has been this effort to encourageUS firms to diversify their supply chain.
Some of which, as you suggestedearlier on, they're doing,
because it just makessmart economic sense.
But by the same token,
(28:51):
if what we're seeing is the Chinese firmssimply relocating to other countries and
becoming parts of supply chains thatotherwise would be hard to track them.
Then we're not getting the same kind ofbenefits from the types of activities that
the administration hasbeen pushing forward.
>> Daniel Rosen (29:09):
There's one underappreciated benefit,
benefit of that relocation,
though, that I think I've beenthinking about a lot lately.
I haven't figured out exactlyhow we want to research it.
And that is that one of the problemswith a very China heavy
production chain was that itwas made way too difficult for
companies to do due diligenceon their production chain.
(29:33):
Partners in China going into the factory,making sure that things that were being
installed in the equipment were whatwas supposed to be in the equipment,
and not anything else, right?
You understand what I'm talking about,these sort of security concerns.
If a Chinese firm, if that sameChinese firm has to relocate and
operate in Thailand or Mexico orVietnam or India or somewhere else,
(29:56):
then that problem is resolved.
It is possible for reasonable,normal commercial due diligence on what's
happening in a production facility to beundertaken in third countries in a way
that people are no longercomfortable doing in China.
So there are some advantagesto that sort of relocation,
even if it doesn't solve allof our trade balance concerns.
>> Elizabeth Economy (30:19):
Yeah, I think you make an important point on the security
front, but the other element of thatis on the economic coercion part.
And whether or not a firm, a Chinese firm,
that has a joint venture in Mexico oris operating a plant in Malaysia,
whether they're subject to the sametypes of sort of calls from Beijing,
(30:43):
should Beijing decide tolaunch a boycott again, say,
of exports or imports from Australia.
Is it possible that the Chinesegovernment can turn off the spigot for
those firms as well,causing pain to other countries?
I think that's the other issue that youhave to be concerned about when it comes
to supply chains.
We don't want China to controlpersonal protective equipment,
(31:07):
right, via manufacturing in Mexico,or Malaysia, either.
I think that would just be anotherpotential issue that we would have to
consider about the sort of relocation andtrans shipment.
Okay, but let's finish up bytalking about what's next.
We're about to open a new chapter onthe US-China economic relationship.
(31:29):
And there is probably noissue of greater interest and
importance to President-elect Trumpwhen it comes to
China than the issue of trade andinvestment between the two countries.
He's talked about levying 60% tariffs onChina, but he's also said he welcomes
Chinese investment in the US,he has no plans to ban TikTok.
How do you see the Trump administrationmoving forward on the economic
(31:53):
relationship with China?
What do you anticipate sort of overthe first 100 days that they're
gonna move Forward on.
>> Daniel Rosen (32:01):
Yeah, that's great.
It's the question, Liz, andI don't think I have answers.
I have some observations that Ithink bear on the question, but
we're very much still in learningmode here to get a sense of
what this policy first hundred daysis gonna look like I would say.
(32:23):
The first observation is that regardlessof what the sort of big political
announcement of tariff level is,that's rolled out say 60%.
That doesn't mean that that 60% is gonnabe enforced uniformly across all products.
In the Trump 1.0 policy package,there were quite a few carve
(32:46):
outs from the sort of top line levelof tariffs imposed on products
coming into the United States andcertainly on the Chinese side,
their reciprocal tariffsagainst the United States,
up to I think 95% of those orso friends at MOFCOM told me,
were not actually collected onproducts coming into China.
(33:10):
Quite a bit higher on the US side but
also very significant amountof sort of waiving of things.
And of course there was the de minimisrule as well, which accounted for
a huge share of US Trade.
And so first point is, whateverthe big number is, don't you know,
shut down your computer and go to lunchas soon as you hear that number because
(33:31):
there's going to be a lot more questionsthat need to be answered before we
know exactly how big a bite out ofbusiness as usual it's going to take.
Number two, almost any answer to thatquestion is gonna be macroeconomically
disruptive though [LAUGH].
We're talking now about levels ofintervention in international trade.
(33:53):
60% with China suggestion of 10% as astarting point with the rest of the world.
Again, countries canbe exempted from that,
I'm guessing if they're willing to bealigned in certain ways, we'll see, right?
But anyway, I think you implement that,
it is going to have prettysignificant macroeconomic effects.
(34:16):
What are macroeconomic effects?
They are price instability, AKA inflation,
which we have had a taste of in the pastcouple years coming off the pandemic.
Former US trade representative RobertLighthizer observed in a recent op ed
that there wasn't really much inflationaryeffect from Trump 1.0 tariffs,
(34:39):
narrowly speaking,during the period of the administration,
given that they were mostlyimplemented in the second half.
And then we had a pandemic that wasstarting to change the nature of things.
Well inside that period,we don't really know,
I think what the actual inflationaryimpact of something like a 60% tariff
(35:01):
level almost three times higher thanthe previous numbers used for China.
So we really need to beacutely aware of what changes
like that could do toour economic interests.
There's inflation, there is rapidshifts in investment activity.
(35:22):
We talked a minute ago abouthow problematic it is for
China that multinational companiesare not sending investment and
activity into China anymore.
This kind of a delinking of the UnitedStates from international trade norms
could have a deleterious effect oninvestment into the United States.
(35:42):
At the same time, as you noted,candidate Trump surprised, I think,
his own party by saying no, actually,I'd like to see Chinese automakers
investing in the US in those nicheswhere we don't have necessary inputs to
be competitive global electricvehicle makers, right?
So I think that's actually quiteencouraging that we could put that back
(36:05):
in play because I think the wholesaleexclusion of Chinese participation in
the US Economy is a mistake.
And we should, if possible,try to find ways to pick and
choose what is allowed inrather than just saying,
we're just gonna gratuitously cuteverything off and call it a day.
>> Elizabeth Economy (36:26):
Okay, so I think, great advice.
Don't press the panic button yet.
Take a little bit of a watch andwait and see.
I think it sounds like there may be some,you know,
disagreement within the Republican Partyitself, as you suggest, over issues like,
you know,Chinese investment in the United States.
Maybe President Trump will, you know, finda good, a good balance moving forward.
(36:48):
So.
All right, fingers crossed.
All right, so let's just finish upwith five quick rapid fire questions.
First, must read book or article on Chinathat you would recommend to our listeners.
>> Daniel Rosen (37:04):
I thought about this one a lot.
Liz, I think what I'm gonnaoffer is in the current issue of
the China Leadership Monitor,there's a piece called Peak China,
What Are China Beijing's Options Nowby my partner and colleague, Dr.
Logan Wright, which I think does the bestpossible job of helping people see
the long sort of structural arc of China'seconomic growth numbers and why the sort
(37:27):
of slower growth Chinese future opens upa lot of strategic opportunities for other
countries to look after their economic andgeopolitical interests differently.
So I'd recommend that.
>> Elizabeth Economy (37:39):
Great, I think it's a brilliant and sophisticated piece.
So agree.
Job you would most want to have in a new,maybe different administration.
>> Daniel Rosen (37:49):
Yeah, and you use the indefinite article A,
not the new administration, I see.
Give me a little bit of wiggle roomto decide how I was gonna answer it.
If it was gonna be the incomingadministration, I jokingly said to my
colleague this morning, archivist,because I thought that would be fun, Liz.
But if it were some theoretical futureadministration, I think it's clear
(38:12):
from this electoral outcome that partieson the more kind of internationalist,
progressive side of the spectrumhave an awful lot to learn about
how much outreach is necessary tothe full American electorate and
citizenry so that we can do a lot ofeducational work on why our enlightened
(38:34):
self interest is different than whatit might seem in the short run.
And sothat's gotta be an oval office priority.
Of course, I think it will be formany, many electoral cycles to come.
And while it's not a jobI've traditionally held or
thought of myself as qualified for,like many people,
I feel like I need to apply myself tothat challenge in the period ahead.
(38:58):
And so I've been thinkingabout something like that.
>> Elizabeth Economy (39:01):
It's great, I think many of us would agree with you there.
What one thing do you wish that the Bidenadministration had done differently with
regard to China policy?
>> Daniel Rosen (39:12):
As a China wonk and expert,
I gave the administrationextremely high marks.
I thought it was very adept atgetting the balance right between
domestic investment to put Americaback in the game in next generation
technology segments likeelectric vehicles and renewables,
where we had really been kind ofwaiting on the sidelines, frankly.
(39:36):
And I think that grade stands.
As a Columbia professor,I'm happy to give the easy A for that.
However, I think, you know,
the ultimate test is how well itholds up against popular opinion,
public opinion, and I think,you know, with hindsight,
we can say that much more effortneeded to be put into communicating.
(40:01):
Why?And simplifying why our policy was good
not just for the middle class, butmaybe for the lower middle class or
people who felt like they wereslipping behind the middle class.
And so big lesson learned there.
And yeah,I think my answer lies in that direction.
>> Elizabeth Economy (40:20):
Okay, what China issue do you think we don't know enough
about?
>> Daniel Rosen (40:24):
I've kind of already been using the time with you, Liz,
to try to emphasize this.
But it is a major elementof the Chinese system
that they don't air theirdirty laundry in public and
their problems in public.
And so a lot of our colleagues inthe China watching community over the past
(40:49):
decades have underappreciatedthe structural problems and
headwinds that China'sgrappling with right now.
A lot of nations that are behind Chinadevelopmentally and are thinking,
what's the right system,the right kind of political economy for
them to enjoy economic development?
Poverty alleviation suchas China did are over,
(41:14):
over estimating how wellthe Chinese approach is working.
And I think even in strategic America,where I've spent a little time
trying to offer analytic perspective,there's an underappreciation
of just how constraining China'spast economic choices now are.
(41:35):
And what opportunities that opens up fora smart,
enlightened American foreign policy andeconomic policy going forward.
>> Elizabeth Economy (41:44):
And then on a scale of 1 to 10, how likely are we to see
a Nixon Mao moment in the US Chinarelationship in the next decade?
>> Daniel Rosen (41:51):
So this one was easy for me.
It's a 1, Liz, forthe simple reason that to be at
a Mao Nixon moment,if I strictly kind of speak to that.
The Chinese side of that story would needto be at a certain point in its arc where
it had exhausted other alternatives forhow it saw its own interest going forward.
(42:16):
And unfortunately,I would say from an American perspective,
I think we're still maybe five orten years away from Beijing seeing its
interest in some sort of detent orrapprochement with the United States.
Also, of course,the dynamic in which the United States is
the sole global hegemon, essentially.
(42:38):
And the guy in second place,the USSR has started to show
that it just is not going to beable to keep pace with that.
That was essential tothe Mao Nixon moment.
We just don't have those circumstancesgeopolitically right now, I don't think.
Although I'm just an economist,so what do I know?
Maybe the geopoliticians might thinkdifferently, but I'm certainly looking for
(43:04):
some other grand, historic momentthat we can define for the future.
It won't be a Nixon Mao, just like China'sstory won't be Japan's lost decade story.
It won't be the Cold War as we knew it.
It'll be new things thathave characteristics and
dynamics that'll be just as importantanchors to how we train generations to
(43:25):
come in American foreign policy andinternational economic policy.
But I'm at the moment concerned that weget too stuck to those old metaphors about
what worked, who's the new Kissinger,this kind of thing,
I think time to let those go andfigure out what comes next.
>> Elizabeth Economy (43:43):
Dan, I cannot thank you enough.
You are not just an economist.
You are really an extraordinary,I think, scholar, scholar and
expert on China andUS China relations writ large.
And I really appreciate your takingthe time to with us today to talk about
what's going on inthe Chinese economy today.
Where it's likely to go in the future,and of course,
(44:07):
the question on everybody's mind,what does the US what is the US
likely to do moving forward ina Donald Trump 2.0 presidency?
If you enjoyed this podcast andwant to hear more reasoned discourse and
debate on China.
I encourage you to subscribeto China Considered via
The Hoover Institution YouTube channel orpodcast platform of your choice.
(44:28):
In the next episode, we'll continueour discussion of Chinese economy,
exploring how foreign investors arelooking at China today with Joerg Wuttke,
former China Chairman ofthe German company, BASF,
and now partner atDGA Albright Stonebridge Group.
Thanks very much.
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