September 18, 2025 • 55 mins
Host Dr. Elizabeth Economy interviews Oliver Melton, who shares insider perspectives on China's complex economy, drawing from his years as a diplomat in Beijing and his current role at the Rhodium Group. Economy and Melton discuss how China's structural imbalances, high savings rates, and over-investment in real estate have created fundamental economic challenges that the leadership struggles to address through consumption-boosting policies. Melton also evaluates three major Chinese initiatives: the Belt and Road's evolution from sprawling campaign to targeted strategic investments, Made in China 2025's mixed success, and China's approach to de-dollarization focused on sanctions-proofing. The two also touch on the difficulties of US-China economic diplomacy and that any effective response to China's industrial policies requires coordinated action among the US, Europe, Japan, and other allies rather than unilateral American measures.
Recorded on September 11, 2025.
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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 insights to demystify China’s evolving dynamics and what they may mean for ordinary citizens and key decision makers across societies, governments, and the private sector.
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[MUSIC]
>> Elizabeth Economy (00:08):
Welcome to China Considered, a podcast that brings fresh
insight and informed discussion to one ofthe most consequential issues of our time,
how China's changing andchanging the world.
I'm Liz Economy Hargrove Senior Fellow andco-director of the program on the U.S.
china and the World at the HooverInstitution at Stanford University.
Today, we're going to return toone of those fascinating but
(00:29):
often vexing issues that we allconfront when we're thinking and
working on China, namely,what's going on with the Chinese economy.
The stock market is up,exports are up, but
the property sector still seems to bea drag, and consumption is still low.
Fortunately, we have withus today Oliver Melton.
Oliver just returned from five yearsas the Treasury Department's financial
(00:51):
attache in Beijing.
He's now the director of Rhodium Group,an economics consulting and
research organization.
Welcome, Oliver.
>> Oliver Melton (01:02):
Hey, Liz.
It's really great to be here.
>> Elizabeth Economy (01:04):
Really great to have you.
All right, and I should say, I guess,
welcome back to the United Statesafter five years in Beijing.
How does it feel to be back?
>> Oliver Melton (01:12):
It's really, really nice to be back.
And coming back to D.C.
is always really great because it's sogreen and small compared to Beijing.
>> Elizabeth Economy (01:20):
Anything you miss, anything you miss about.
>> Oliver Melton (01:22):
China right now,
the food is going to bereally hard to do without.
We need to really improve that in the US,I think.
>> Elizabeth Economy (01:28):
Improve the Chinese food, or
just in genera,l the Chinese food.
>> Oliver Melton (01:33):
The Chinese food we're really lacking here.
>> Elizabeth Economy (01:35):
Okay.
All right, so let's get started.
We're going to focus on the Chineseeconomy, but let's start with what
it was like to be the Treasury's financialattache for five years in Beijing.
What did, what does that even mean?
What did you do on a daily basis?
>> Oliver Melton (01:56):
Yeah, so no day was really the same.
I spent probably about half my timebeing Treasury's sort of chief analyst
in the field.
So my job was to go around and
talk to really smart people aboutwhat was happening in the economy,
what we thought the policy direction was,what the leadership was thinking.
So that could involvetalking to economists,
(02:17):
that could involve traveling around,talking to real estate developers.
Really, just about anything.
That was a lot of fun.
And you had to be resourceful andtry to find people who'd have interesting
insights into an absolutely massive,ever changing and complicated economy.
And then the second half of myjob was to be a diplomat, right?
It was to facilitate communication betweenthe Treasury Department, Secretary Yellen
(02:40):
and her team, primarily, but thenSecretary Bessen with Chinese leadership.
And so that would involve Negotiations,it would involve a lot of planning for
the contacts that we had, the engagementswe had, and a degree of advice
back to headquarters about what Ithought the Chinese were thinking or
how I thought that they would respond, orwhy they were acting in a certain way.
>> Elizabeth Economy (03:00):
Great. I want to
come back to the negotiationside of it and, and, you know,
hear something from you about what it waslike to sit in those negotiations and
your impressions of, of the US andthe Chinese and how they negotiated.
But let's just focus a little bit in on,you know, what you thought about
the Chinese economy and whether what youwere seeing, you know, being on the ground
(03:21):
there, you know, did it differ a lot fromwhat you might read in the Western press?
Did you think this is so radically nothow I understand the Chinese economy, or
did what you were seeing,roughly speaking,
dovetail with what we might begetting back here in the U.S. you.
>> Oliver Melton (03:38):
Know, both probably, is the answer.
So, you know, living in Beijing,
you're not really living inthe Chinese economy, right?
You're living in this very different,this very sort of isolated,
niche component of the Chinese economy.
It's a capital city, so
it's a little bit more resistant to thefluctuations in the rest of the economy.
(03:59):
It's much more service sector orientedthan the vast majority of the economy.
And so you really had to get out ofBeijing to get any sort of sense of what
the rest of the economy was like,what the majority of the economy was like.
And even then,China is incredibly diversified, Right.
It's as big and complex as Europe.
And so talking about what the Chineseeconomy is like is as nonsensical as
talking about, like, what Romania islike in, in the context of London.
(04:23):
Right.And these are just two fun.
It's just an enormous and varied economy,
and parts of it can be doing really badlyand parts of it can be doing pretty well.
And that, that was certainlyhappening when I was there.
So I would say that we always struggledgetting a sense of what real growth was.
Right now I'm at the Rhodium Group andmy colleague down the hall,
Logan Wright,has done a lot of forensic data analysis,
(04:43):
the kind of stuff that we certainly dida lot of inside the Treasury Department
to get a sense of what wereally thought was happening.
But the hardest part of the job, andmaybe even arguably the most important,
was to try to figure out what was comingnext, what the policy direction was for
the leadership.
And that was very difficult,the Chinese have gotten stricter and
(05:06):
stricter under the current leadership,but even in the last few years,
they've gotten much more aggressivewith information controls and
censorship and sort of oversight,you could say nicely,
of who says what to yourfriendly foreign diplomats.
And so it's difficult to get an honestassessment of what the leadership
(05:31):
recognizes to be weaknesses orshortcomings in the policy strategy.
So we really all had to becomeexperts in how the Communist Party
communicates to itself, right?
So I had a large stack ofpeople's dailies on my.
On my desk.
We spent a lot of time reading Xi Jinpingspeeches and other leadership speeches to
(05:52):
try to understand whatthe intellectual framework was for
their policy strategy andthen also the institution.
So you can't skimp on understandinghow China is structured.
There's a very strong leader at the top,but
the institutions reallystill matter quite a bit.
And you have to understandwhat they control,
what they're trying to achieve andhow they're structured if you
(06:14):
want to understand how policyevolves in that system.
So there's a lot of kind of Kremlinologyin my job and a lot of going around trying
to, you know, talk to people aboutwhat they were seeing as well.
>> Elizabeth Economy (06:25):
So did you see a vast gap between, you know,
what you were reading in the People'sDaily or in Xi Jinping speeches and
what you would see on the ground?
Or was it really a function of.
Here, Xi Jinping announcessomething like made in China 2025.
And then you go out and, how much ofthe country did you actually see?
How many provinces did you visit actually?
But you go out and you look andyou see, actually, I am seeing.
(06:48):
These policies translate verydirectly into change on the ground.
>> Oliver Melton (06:54):
How many provinces do we go to?
You know, we know we haven't counted,[LAUGH] l really.
>> Elizabeth Economy (06:58):
You do keep track of how many provinces you went to?
>> Oliver Melton (07:01):
[LAUGH] Okay, I think, to be honest, in one meeting, one very,
very boring meeting, I think Ilisted all the places I'd been, but
I don't have that in front of me.
But we went to the majority of provincesand we made a real point as a family and
also as a diplomat trying to go toa diverse set of regions in China to see
places that were heavily industrial,hyper modern, like Shanghai or
(07:22):
Shenzhen, and fairly rural and so forth.
And yeah, you do see,you do see transmission quickly, but
it doesn't work always.
Right.
It's a normal country where they trythings and it doesn't always happen.
It doesn't always work.
And so real estate is probably the bestexample of that, where no issue could have
been closer to the center or closer tothe leadership's attention in the economy.
(07:45):
And some of the things they didwere incredibly effective, right?
So when they decided to cut off realestate finance for highly speculative
investments, they were hyper successful,arguably way too successful,
and developers of allstripes hyper over leveraged.
Pretty healthy developers.
Nobody could get finance anymore.
And the industry came to a grinding halt.
(08:05):
And they basically engineered,on purpose or by accident,
a total collapse in the sector.
And then when they decided to kind of tryto turn that back on several years later,
not, not to reflate the property sector,but to restore finance to healthy
developers, or at least healthy projects,they really struggled to do that.
And so there was a lot of effort,there was a lot of motion in the system,
(08:27):
but they didn't imposethe right kinds of guarantees.
They didn't line up the incentivestructure with the economic institutions.
And so nothing really happened at first.
So you had a lot of action,a lot of activity, a lot of talking, and
that worked, but you didn't have a lotof financing going out the door.
>> Elizabeth Economy (08:44):
So give us the time frame here.
When are we talking about?
>> Oliver Melton (08:47):
I think 20.
I think we're at this point,2020, late 2023, early 2024.
There were two rounds of trying to restorefinance to the whitelisted projects.
This is when the citiesstarted to have whitelists for
the projects that should receivefinancing for completions.
And it didn't work because the banks aresmart enough to know that if they lose all
their money on a project, the government'sgoing to come after them in the future, or
(09:09):
they're going to.
I mean, frankly,they're just going to lose the money and
they're going to have to deal with that.
And so, you know, the Communist Partyhas an enormous amount of authority over
certain types of decisions,
but they can't just will economicactivity if it's against their interest.
And so they really can besuccessful sometimes and
they can fail in other times.
>> Elizabeth Economy (09:29):
So the banks were not confident
that the Chinese Communist Party wouldrecapitalize them, is what you're saying.
Right, which they've done in the past.
>> Oliver Melton (09:37):
Yeah, they weren't confident that they would get
recapitalized, and they initially weren'teven confident, it seems they weren't
even confident that they wouldn't be heldresponsible for loans that went bad.
There's sort of two layersin the banking system.
One is the, you know, your profits andlosses, which can be managed rationally.
(09:57):
You can take more risks andget more profits, and
the banks can kind of handle that.
But then there's also the.
The corruption side of it.
And bankers are often investigated for
corruption if they lose moneyon an investment or on a loan.
And so there's a huge amount ofconservatism in the banking system and
frankly, in the investment community.
(10:18):
Because if you lose the state's money,
it can suggest corruption even when itwas actually a good business decision.
And so when the, when the governmentcame along and said, hey, we want you to
lend to these loss making or near lossmaking property developments so that they
can complete the houses, banks werecorrectly or rationally wary to do so.
(10:39):
And then they came along and thenthe party had to promise a year later and
said, okay, look,
we won't investigate you for corruptionif you lose money on these deals.
And that was sort of a prerequisite forthings to go forward.
But it still hasn't turned back on.
>> Elizabeth Economy (10:52):
Right. I was just going to say
that the property sector stillhasn't really rebounded though.
Right.
Maybe less of a drag, butstill a drag on economic growth.
>> Oliver Melton (11:01):
Yeah, and nor will it.
And, and for their,you know, in their defense,
they were not trying toreflate the property sector.
They were trying to just getthe half finished apartments,
complete ones that hadalready been sold to folks.
>> Elizabeth Economy (11:14):
So take the property sector and fit it into sort of
the overall, as you mentioned,very complex, complicated Chinese economy.
So that's a little bit of a drag.
But where, where else isthe Chinese economy having trouble?
Where is it, you know, doing well?
And how do you see all thesepieces fitting together?
I guess what is your model in your own
(11:38):
head of how the Chinese economy works?
>> Oliver Melton (11:44):
Maybe a simple version would be better that basically China,
as everyone knows, has a,an economy that's,
that has a really high savings rate.
Right.So too much of national income is saved by
your households or the government.
And as a result that moneyneeds to be invested or
(12:06):
China needs to run a really largesurplus for the rest of the world.
In the early two, in the mid-2000s,they ran a huge surplus, you know, 10,
10, 10% orgreater current account surplus.
And a lot of that savings wasthen absorbed in this massive
investment boom in the 2010-2017,2018 period.
(12:28):
First with infrastructure andthen with real estate.
And so real estate,
the way I think of this is thatreal estate was a non tradable,
somewhat productive investment target thatallowed China to get for about, you know,
five or six or seven years to allowed themto extend this imbalanced model, right?
So super high savings rate doesn't havea huge current account surplus because
(12:51):
they're investing this money domestically.
But you can only build so many houses andso many, so many new cities or so
many railways before,before you run out of places to build.
And so they, they definitely reached thatpoint where they had more Stuff than they
needed more, more apartments andthan they need.
And that came, that came crashing downreally quickly partly because of policy
(13:13):
decisions, but partly just becauseof the kind of the physics of it.
They had enough houses at this point andso now we're kind of back where we
started, which is you havean imbalanced economy and
you either need to significantlyincrease consumption or
you're going to return to reallysignificant trade surpluses.
And so right now, I think, you know,for the last few years you've seen
(13:36):
the government kind of trying tofeel its way through this problem,
on the one hand, trying to findnew destinations for investment.
So if real estate wasn't goingto absorb all this investment,
maybe advanced manufacturing would maybenew, you know, maybe electric vehicles,
maybe robotics, other sectors.
And that's what the last administrationwas particularly nervous about,
(13:56):
was that this kind of massive tidalwave of, of investment cash could be,
could be channeled away from realestate into these sectors and
create really significant disruptions forthe rest of the world.
And indeed we started to see that.
And on the other hand, you see thegovernment trying to boost consumption so
saving less.
But they're not really exploringthe kinds of policies or
(14:18):
they're not really pursuing the kindof policies you would need to have
a fundamental shift in the overalllevel of savings in the economy.
So I see real estate asa drag on the economy, but
also sort of the elimination of sortof a temporary band aid or a temporary,
sort of a transitional or a temporaryfix to a structural problem that's
(14:38):
been around for 20 years thatnow is really coming to a head.
>> Elizabeth Economy (14:43):
Right. So you mentioned that
the Chinese government is not undertakingthe types of policies that it needs to,
to boost consumption.
And certainly we've heard a lot aboutthis and we know that they've done these
trade in programs for, you know,goods and even for cars in some places.
I guess they've, you know,increased salaries in some areas for
(15:05):
civil servants or forteachers at some, in some places.
So there have been some moves.
But what, what would you be looking for
when you say the policiesthat they need to undertake?
What would be sort of your set of two orthree things if they started to make moves
in those areas, you'd be like,check, check, check.
They're getting it right.
>> Oliver Melton (15:23):
Yeah, I mean.
Well, Rhodium has a wholepaper on this that,
that was published recentlythat we can link to.
But I would say probably the samething that the World bank and
the IMF have been saying.
And honestly, frankly, a huge number ofChinese economists have said publicly or
privately.
The first is you need a much morecomprehensive social safety net.
(15:45):
You need government transfers basicallyto households in the form of pensions and
social welfare or social insuranceprograms, healthcare in particular,
healthcare spending, and
the quality has improved significantlyover the last 10 years and.
People might not appreciate that.
Liz, I'm sure you've been to a Chinesehospital or a doctor 20 years ago or
(16:06):
five years ago andthere's a massive difference.
>> Elizabeth Economy (16:08):
Yeah, no, I haven't been, but
my daughter spent several days ata Chinese hospital with an ulcer.
I don't think it was a great.
Experience, but I'm sorry,sorry to hear that.
>> Oliver Melton (16:18):
But it would have been worse 20 years ago, I guess, but-
>> Elizabeth Economy (16:20):
No doubt.
>> Oliver Melton (16:22):
So there's, there has been progress, but
there needs to be justmassively more progress, right?
Because Chinese families still socialself insurers, they keep a pretty
significant amount of their income andsavings just in case something goes wrong.
And the state has the power to reduce thatprecautionary savings through greater
investment in social services.
(16:44):
One of the biggest areas is definitelythe share of the state in the economy.
So a little bit of a complex argument,but basically the problem is,
is that the state controls a prettysignificant amount of corporate revenue or
corporate profits in the economy andis prone to reinvest those profits,
sometimes in the, in the same business,sometimes in other businesses or other
(17:08):
government controlled ventures, includinggovernment vc, which is kind of new.
But it doesn't ever get to a pointwhere it says, you know what,
my rate of return on this project is only2%, I'm going to consume this, right?
And if you're a household and you,your investments reach a level,
a rate of return that's too low,you'll consume it, right?
(17:29):
You'll make a rational decision aboutdeferred consumption or consumption today.
And so you stop investing when it'sno longer profitable to invest and
you can kind of enjoythe fruits of your labor today.
And that doesn't happen inthe Chinese system, right?
The state profits are kind of insensitiveto intertemporal substitution.
So they just keep investing andkeep investing and that needs to change.
(17:53):
And that can happen eitherthrough transfers or
through greater privatization orprivate ownership of state assets.
So that's a big one andreally, really hard to see.
I think the number one thingthough that we would like to see,
that I would like to see is more ambitionfor household income as a share of GDP.
I think 10 years ago this was in the fiveyear plan and in some of the party
(18:18):
documents and certainly in the,in the work reports that the,
that the state was actively pursuinghigher wage growth than GDP growth.
And now, and for the last maybe five orsix years at least, the,
the target has been household incomeshould grow in line with gdp,
which means that the party is not tryingto see its people get richer faster.
(18:44):
And if people don't have a higher andhigher share of national income,
there's a ceiling on how fastconsumption should grow.
And as a corollary, Larry, to that,they used to promote the service sector.
They used to think that the servicesector white collar jobs, you know,
the kind of jobs that dominate, I meanto completely dominate the US Economy,
(19:06):
have a much higher wage share of output.
You know, the, the amount of revenuethat then goes into household
bank accounts is much higher than forfactories.
And I would be encouraged to see the,the party kind of reduce its focus on
manufacturing and the productionof physical stuff and you know,
(19:27):
the building of factories and more humancentric jobs to, to raise wages as well.
>> Elizabeth Economy (19:33):
That's a really interesting point that I actually have not
heard made before.
You know, one of the things that,that I've been thinking about or
I have thought about isjust the really slow rate
of growth in per capita GDP in ruralsector over the past several years.
I actually, you know, Common Prosperity,for whatever that was worth,
I think was targeted at the, you know,absolute most impoverished in the country.
(19:58):
But I mean,this is still a country with, you know,
600 million people living ona couple of $100 a month.
And I've really been surprised at howlittle attention seems to be being
paid to this, you know, very significantpart of the Chinese population and
their sort of consumption ability andalso just their ability to participate
(20:21):
in the 21st century economy because Idon't even see that the government is
doing much to train them up for this, youknow, incredible sort of technological,
you know, revolution that's underwayin much of the rest of the country.
>> Oliver Melton (20:38):
Yeah, and your, your colleague Scott Rosel has done some
of the best work in the world onthis to highlight not just the,
the severity of the, the wealth gapbetween rural areas and urban areas,
but also the fact that the HUCOsystem actively prevents workers
from bringing their childreninto urban environments.
(20:59):
And because of the, the gap in educationquality is really leaving behind
millions of children in waysthat are a human tragedy, but
also really counterproductiveto China's long term growth.
So it's a, it's a mystery to me as well.
It's, it's, there's,there's really just no fundamental,
there's no compelling reason to do thisother than just sort of a failure to
(21:23):
address basic fiscal transfer issues.
And you're right that withCommon Prosperity they talked it up.
It was on the front pageof the People's Daily.
I very Very, very wrongly predicted to myheadquarters that if you put something
on the front page of the People's Daily,
it means you're going to follow upwith it, follow up with real dollars.
And they, they just didn't do it.
They just didn't follow up with actualfiscal transfers of the magnitude that
(21:46):
would really make a huge difference.
There was, there were some,usually city to county, but
we just didn't see the scale needed tomake a, a really fundamental difference.
>> Elizabeth Economy (21:56):
No. And
there's a great book by Steve Tsung andOlivia Chung that looks at,
you know, what Xi Jinping has said,you know, are the priorities.
And then actually if you trackhow policy was implemented,
what really is a priority andcommon prosperity, you know, didn't,
didn't make it onto the list of,of actual priorities for Xi Jinping.
(22:19):
So follow through wasactually not terribly robust.
So let's pivot a little bit.
You know, one of the things aboutChina is that they often, you know,
Chinese leadership is prone to havemassive campaigns of one sort or another.
And I want to just get your take on whereyou think three of them sort of stand.
(22:40):
How successful has, you know,
the leadership been inpushing forward with them?
What do you see as the sort of up anddown sides of each?
And they're the Belt andRoad Initiative made in China 2025 and
de dollarizing the global economy.
So let's just start with the Belt andRoad Initiative because this is one where
(23:00):
you may be aware,since you were just in the U.S.
government, that there lot of chatterin Washington that the Belt and
Road Initiative had kind of failed,that it was over.
Beijing didn't have the resourcesto push forward with it.
That wasn't a positionthat I subscribe to.
But I'm curious, what's your take onwhere the Belt and Road stands today?
>> Oliver Melton (23:27):
Yeah, so I think it's, it's fair to say that
the criticism is right andwrong at the same time.
Right.So most definitely it had
the characteristics of a campaign.
Right.You know, they said go forth, you know,
2013, 2014, everybody go out,everybody do this.
(23:49):
All the banks are authorized to lend,take your forex and
use it for something abroad.
And everybody did it.
It was kind of kids soccer witheverybody chasing the ball and.
Then lo and behold, about three orfour years later, right,
as the first repayments were scheduledfrom these projects, they started to
figure out pretty quickly that a lot ofthem weren't going to make money, right?
(24:12):
The political risks in Africa andLatin America and
Central Asia that had depressed inforeign investment before China showed
up were in fact applicableto Chinese firms as well.
And you had a whole lot of,you know, spectacular failures,
moderate failures, delays, etc.
(24:33):
You also had a huge amount of corruption,right?
There it is, there's still a massivetrail of corruption investigations that
are chasing some of these deals.
Some of them are kind of lower,lower in the headlines.
But there's a long hangoverfrom this period in, in China.
And they got burned, right?
And we saw pretty quicklythat these firms and
(24:56):
financial institutions pulled back,got a whole lot more conservative.
The better firms were able to keepinvesting or keep lending, but
the sort of cowboy firms or the folks thatweren't particularly good at learning
from mistakes pulled back and a lot.
So from that perspective,you could say, yeah,
(25:16):
it was probably overly ambitious, evenyou could say something worse than that.
And they got burned and it waspredictable and look how funny that was.
On the other hand, they achieveda lot of their strategic objectives.
So buried within the sort of generalrush of, you know, thousands and
(25:36):
thousands of companies going abroad were anumber of very carefully orchestrated and
targeted investments and projectsthat fulfilled strategic objectives.
You know, ports that could be dual use,that are dual use,
vertical control over minerals andprocessing of,
of minerals that are really crucial formodern industry.
(26:00):
I mean, you know, at the time wewere all reading the, you know,
we were reading the plants,these were public.
They, they were not concealingwhat they were doing,
going after minerals thatI had to look up first,
you know, first in Chinese and then inEnglish to see what they were doing.
And, andwe knew they were going after this.
But the scale andthe fact that these resources would be so
(26:22):
integral in things like batterieswasn't as apparent back then.
But even then, you know,they had foresight and they,
they may have lost some money on some ofthese deals and they may have overpaid,
they may have investedkind of too prematurely or
at the wrong point in the cycle,but they did pretty well.
And so I think the,the ultimate evaluation of the Belt and
(26:42):
Road initiative really dependson what your perspective is.
And my guess is that Beijing would say,okay, we made some mistakes,
we learned a lot of lessons, but weachieved a huge percentage of our goals.
And as we go for round two or round threewe'll be smarter, we'll be more targeted.
We'll be a little bit more marketdisciplined in the sense that
we won't lose as much money, but
(27:04):
we're still going to be able to pursueour strategic objectives carefully.
>> Elizabeth Economy (27:09):
Yeah, I mean, from my perspective, you know, I think looking
at the, you know, point at whichXi Jinping seemed to take a step back and
talk about small is beautiful and
there seemed to be a littlebit of a retrenchment.
Actually what they did was they just gotsmall, smarter and more efficient and, and
more targeted.
And so the real push now is,you know, in the clean tech space.
(27:30):
You know, it's in the digital space.
And it still, I think,is in minerals and mining and
then some infrastructure projects thatare, you know, very carefully chosen.
So you know, I think,you know, Washington and
other places should be more concernedas opposed to less concerned because I
think the Chinese have learned that andthey don't want to build palaces and
(27:52):
soccer stadiums anymore or big whiteelephant infrastructure projects.
They're really focused on whattheir strategic needs are and
I think in extending their sortof infrastructure globally in
these extremely core areas forexample of Digital Stack, right?
The Digital Silk Road and Cleantech.
So I think the alarm bells shouldbe going off more in Washington
(28:16):
if we're thinking about competitionspace as opposed to less.
And in that same vein, of course, made inChina 2025 and there have been some good
studies that have come out by Merix, forexample, maybe Rhodium has done some work
in this area as well of evaluating howwell made in China 2025 has actually done.
(28:38):
And this of course was, you know,the big plan, you know,
around 10 critical cutting edge areasof technology where China, China wanted
Chinese companies to dominate in themanufacturer up to certain percentages,
70, 80, 90% would be controlledby Chinese companies.
And then of course, you know, China, thesecompanies would become global champions.
(28:58):
So you know, new materials,semiconductors, AI.
How do you see it?
I see it as a success.
But what do you, what do you think?
>> Oliver Melton (29:07):
Yeah, yeah, so Rhodium did do a study a little while ago and
Merrick did a really good study as well,
evaluating their successrelative to different metrics.
And I think they key isto look at the different,
different competing goals that they had.
So on the one hand was the sortof loftier, more ambitious
goal of dominating certain sectors orbeing a world leader in certain sectors.
(29:30):
But the core goal was to eliminatedependence and vulnerability on foreigners
and particularly the United States in,in these technologies.
Right.So it's, you know,
offensive goal is to be dominant defensivegoal is to just eliminate the U.S. u.S.
Ability to sort of choke China, whichis a vocabulary they use quite often.
(29:52):
And in several sectors theydid a really good job, right?
They, and, and you know, in a few sectorsthey achieved their maximum goal.
Right?EVs are just unambiguously world leading
and incredibly good.
And they've done really well with clean,clean energy as well.
I should also say that,
that Xi Jinping himself has also said thatthey wanted to choose a select number of,
(30:15):
of technologies where they would makethe rest of the world dependent on China.
And they have absolutely done that for thepurpose of deriving political leverage.
And they have succeeded in that as well.
So I'd say on their securitygoals they've done pretty well.
There's still obviouslyseveral choke points in,
in the economy where they remaindependent on foreign producers, but
(30:38):
in some of those sectors like aviation,they have secondary suppliers.
And so it's not a total concentrationon the United States, but
as we've seen in recent months, they've,they have also developed countermeasures.
Right?So their dominance
of things like rare earths and, andeven more than the rare earths,
the higher value added manufacturingof intermediate inputs like magnets and
(30:58):
motors have really given themleverage over the global economy.
That has been used fairly effectivelyto neutralize the US Dominance of
semiconductors in this case.
So I would say, I would say that they're,they're pretty confident.
The other thing that Made inChina did was it wasn't just,
it wasn't just the ambition and theindustries that Made in China pioneered.
(31:23):
It was also the way in which they werewilling to work with commercial firms or,
or private or semi private firmsto commercialize technologies.
Right.So they recognized that it wasn't
sufficient to have,you know, a state lab or
a state owned enterprisedeveloped a technology.
You had to be able to make itat a competitive price and
(31:44):
it had to be designed fora consumer market.
And so they used made in China 25in that period to experiment with
different approaches to industrial policywhere they would help private firms.
Invest and develop capabilities.
But they would do it in a way thatmaximized competition within that
(32:07):
sector to improve the efficiencyof resource allocation,
but also the quality of products.
And they would alsobasically draw out the input
output tables of an entire sector and makesure that there weren't any choke points.
Right.So they didn't just go after evs,
they went after batteries.
And they didn't just go after batteries,they went after the minerals.
And they literally had input output tablesthat could take up your whole wall.
(32:30):
And they made sure that in everysingle sector the banks and
the local governments were, were helping,helping companies along to ensure that
they could produce at scale and at qualitythe individual inputs that they needed.
And most importantly, again, that therewere enough of those firms that they
could compete like crazy to ensurethat they didn't just kind of sort of
(32:53):
extract rents from the sector orperform badly.
And they look back at this experience andthey,
they recognize that theyproduced over capacity.
They over invested in a lot of sectors.
There's a lot of boom bust cycles wherecompanies do really great work but
then they can't make any money becausethe state encouraged too many entrants and
frankly prevents bad firmsfrom going out of business.
(33:14):
But by and large they,they think they did a hell of a job.
And so they know that theyneed to tweak their toolkit.
They need to, you know, they,Maybe they wanted 30 EV companies.
They didn't need 130.
>> Elizabeth Economy (33:26):
I think they had over 200 at one point [CROSSTALK].
So no, it was, it was, yeah, right,but this idea of involution, right,
I think is a,a big issue now that you're talking about.
>> Oliver Melton (33:36):
Yeah, but I think that they
think they've got the recipe for success.
They know that, you know, in round two,around three, they're gonna, I think they
think they're gonna be able to build offtheir successes and they're gonna be able
to, they're going to be able to do thismore efficiently with less disruption and
they're going to be able to do it acrossa much broader range of industries.
And I'll just say, sorry to go on for solong, but tying into the belt and road,
(33:59):
you're seeing Chinese firms go globalin a way that they hadn't before,
partly because of slowing domestic growth,partly because of trade frictions, but
also partly because Chinese firms havereached a level of sophistication and
product quality that there's realmoney to be made abroad now.
And so you're seeing some ofthe fruits of made in China.
(34:19):
25 and the, the development model andthe success of the technology or
technology investment starting tospill out into the rest of the world.
And so I think that going forward forMick 30 or made in China 35 or belt and
road 2.0 or whatever we want to call it,one of the things we are seeing already is
more greenfield investment, moreglobalization of the Chinese supply chain.
(34:41):
That will be complicated andcan't be dealt with just through tariffs.
So it's going to be a new challenge.
>> Elizabeth Economy (34:50):
There's always a,
there's always a new challengewhen it comes to China.
Speaking of which,the last of the three China's efforts to,
let's call it de dollarizethe global economy and
you know, I think most economistshere say not going to happen.
Don't, don't get all worked up about it.
Nonetheless, you know, China is prettyconsistently pushing forward not only
(35:13):
with, you know,renminbi internationalization, but
with this whole idea that all countriesshould be able to use, you know,
their own currencies, you know, fortrade and investment settlements.
And certainly we've seen,you know, China, you know,
it's moved down the ladder in terms of,of its holdings of U.S. treasuries.
So what's your, your take forsort of China's effort in this regard?
(35:37):
And you know, what, what actuallydoes it think it can accomplish?
>> Oliver Melton (35:44):
So I think that it's.
So I think that actually theirprimary objective has been and
is, but especially now, is defensive.
They want to insulatethemselves from sanctions risk.
And so this is less about, in my mind,this is less about the international
financial architecture or reservecurrencies and things like that, and
(36:09):
much more about payment systems, right?
And so we saw them pivot in the lastfive years towards not just trying
to get more countries to usethe renminbi in trade settlement,
but to establish the physicalinfrastructure, in some cases or
technical infrastructure tosettle transactions bilaterally.
(36:33):
And the primary objective there isnot to convince the Argentines or
the Pakistanis orsomebody to hold renminbi.
It's to convince them.
It's to set up the architecture to beable to make payments that don't touch
the United States oreven Hong Kong or London.
So to me, it's the biggest objectiveat this point is sanctions defense.
(36:55):
And I think that they've more orless downgraded the ambition
of trying to convince foreigners toreally, to really hold their mmb,
recognizing that they're not going to,I mean, this is, this is my private view,
but recognizing that they're not going toopen the capital account anytime soon.
Maybe there had been hope of that five,10 years ago, but
absent the liberalization ofthe capital account, foreigners
(37:18):
are not going to hold large amountsof Chinese assets or renminbi assets.
And if you don't have that,you can't truly internationalize currency.
And so my, my sense is that they'verecognized that and they're settling for
the sort of the core securityobjective of sanctions insulation,
and they're going to chip away at that.
You know, there's a settlement bank in,in the capitals of, of several countries
(37:42):
that would give them a degree ofinsulation from sanctions if needed.
But it's, it's not a perfect defense,obviously.
>> Elizabeth Economy (37:51):
Right, I mean, they also have sips, right.
Their sort of own payment systemthat they're trying to take global.
And you know, when I last looked,I think there were about 1100 banks or
something that had signed up to,which wasn't many.
Now there are probably many more.
But what about that is,I mean, that's also, I think,
a clear sanction proofing measure.
>> Oliver Melton (38:10):
Yeah, it's part of it.
Right.So CIPS is the,
the settlement information system.
And then you still need to find a way,you know, at some point you need
a sort of a hierarchy of correspondentaccounts where your company in Moscow or
in, well, let's just say Moscow fornow can, can settle its bills
(38:31):
with a Chinese bank or a Chinesecompany through its ICBC account or,
or through SIPs in ICBC to another,a third bank into, in China.
>> Elizabeth Economy (38:43):
So I want to finish up by talking a little bit about
the US China negotiations that you've,you know, been part of, where you,
you know, been at the table or at leastyou've been backbenching them and, and
get your sense for, you know, what youthink each side at this point, what you
think each side is trying to accomplishin negotiations with the other and then
(39:07):
a little bit about the negotiating stylesthat you see and, and how they differ.
>> Oliver Melton (39:13):
So I think that the styles are very different.
Obviously there may have beena time before I was, you know,
20 years ago, 30 years ago,where, you know,
Brent Scowcroft would go forlong hikes or, and, and
there was a lot of wine flowing andyou might be able to.
>> Elizabeth Economy (39:36):
Personal diplomacy.
>> Oliver Melton (39:37):
Personal diplomacy.
Yeah, exactly.
Or you might, you know, you know,in the, I mean, even not that long ago,
where you would have the meetings at thetable and then you would have the dinner
conversation and then you would havethe conversation in the hallway and
you had a much better sense of whatyour interlocutors were thinking.
China has really clamped down.
There's much less of that, andso it's much more formal and
it's difficult for US Diplomats and.
(40:00):
Some of our folks in our, especially inour foreign policy, so foreign affairs
side found their conversations withthe Chinese pretty frustrating because you
would get a lot of talking points andnot a lot of introspection or
reflection that, that deviated fromwhat they were supposed to tell you.
So it's difficult.
(40:20):
And, and even some of the track twoconversations actually are, are.
I would say that the message disciplineon the Chinese side is, is near infinite.
And so it makes it extremely difficultto have honest exchanges back and
forth to understand each other.
But that said, I think, you know,we, on certain issues were able to,
(40:44):
you know, certain issues,including some really thorny issues that
could have been fairly escalatory inour time, the last administration
were able to have pretty effectivecommunication at a kind of a mid level,
I won't elaborate on that, butthey're still very talented and
very thoughtful people on the Chineseside when they need to be.
(41:07):
But at the high level, as we sort ofpresent our, our major concerns to
the Chinese, I think that basicallytheir objective is to buy time.
You know, they understand that their tradesurplus, especially their goods trade
surplus, is causing tradefriction in the United States.
And frankly with all of their majortrade partners, they understand that.
I don't think they're going to takemajor decisive action to address that.
(41:29):
And so their goal is tobasically draw out, you know,
draw us out orto prolong the negotiations.
So that's,that's a little bit frustrating.
>> Elizabeth Economy (41:42):
Yeah. Your boss, though,
I think your former boss,Janet Yellen, you know,
seemed to have a bit of respect,I think from the Chinese leadership.
At least that's the way that I read it.
A few moments there was a little bitof some rock star status almost.
What was, what was that like?
(42:03):
You know, do, am I,am I reading that right or, or.
>> Oliver Melton (42:06):
I, I think so.
I mean, I think it's, you couldn'treally invent someone who would be
more credible than Secretary Yellen.
She was, she answered almost all of theirquestions with an academic anecdote and
then an anecdote from her personalexperience, either either as a Chair of
Council of Economic Advisors, Chair ofthe Fed, or the Secretary of Treasury.
(42:31):
Yeah, they, I think that they,
they genuinely did respectSecretary Yellen quite a bit.
And it's, it's easy to understand why.
I mean, you couldn't design somebodywho has more credibility either from
an academic perspective ora policy perspective.
And they would ask hard questions, right?
They, they asked questions that wereclearly relevant to their own thinking and
she would answer withan economic explanation and
(42:52):
Then she would answer with a story fromwhen she confronted a similar problem in,
in her time in government, either asthe Chair of Council of Economic Advisors,
the Fed Chair or Secretary of Treasury.
And, and they were all writing it down.
And I, andI don't think it was just perfunctory.
So I do think that, I think we madea small amount of headway in explaining
our understanding or our assessmentof the structural tensions and
(43:16):
the bilateral relationship and the factthat we were on a collision course.
That wasn't good for us, butit wasn't good for China either.
And I think that she was credible insaying that she didn't want that, right?
We don't want China to over invest tothe point where it's dependent on external
demand, causes deindustrialization inthird countries, and then there's a trade
(43:39):
backlash that hurts China butalso hurts the rest of the world.
And so China boosting consumptionis in its own interest and
it's in the US Interest.
And Secretary Yellen I think was crediblein explaining that although it didn't get.
>> Elizabeth Economy (43:52):
Them to change their behavior, let's be, let's be honest.
Right.>> Oliver Melton: It has not yet
gotten them to change their behavior.
But I, yeah, yeah, I did think there wasone area where some progress was made and
that was in terms ofthe debt sustainability and
working with some ofthe emerging economies.
Not, not like gigantic progress, but
(44:14):
that there were a few steps that theChinese began to take with some countries.
Can you share a little bit about that?
>> Oliver Melton (44:22):
We tried very hard to raise this issue to the highest levels,
but to do so in a quiet way thatdidn't look like the US was trying to
shame the Chinese andto encourage them to take it seriously and
to move as quickly as possible.
And I, I would like to think that ourleadership kind of hit the sweet spot of
(44:43):
that, of putting public pressure on Chinawhen it was necessary and helpful, but
was also able to convey the urgencyof this issue to really the top of
the Chinese government in a way that mightnot otherwise have happened and would not
have been as effective if we had just beenscreaming about it and criticize them.
So I think that we playeda small role in that.
(45:07):
And, and yeah, soI think that that was effective and,
but, but, but not fast enough, frankly.
>> Elizabeth Economy (45:16):
Right, right.
Okay.
So you're out of government now andable to speak freely and, and
recommend things to people.
You're watching the tradenegotiations going on.
Right.With USTR Greer and Howard Lutnick,
Secretary of Commerce andSecretary of Treasury Scott Besant.
(45:41):
You know, clearly some, some hardfought negotiations underway right now.
If you had to offer a tip or two to them,what, what might you suggest?
It could be big recommendations like justpack your bags, go home, give it up.
(46:03):
Or it can be like,
here's some ways I think that you couldspeak more effectively to the Chinese,
or here's some leverage maybe youhaven't thought of or whatever.
>> Oliver Melton (46:13):
Yeah, so these are smart guys and they know this.
But what I would say is that thereis no approach to China that can
convince them to change theirdevelopment and manufacturing oriented
growth model that doesn't meet,that doesn't involve the US,
(46:33):
Japan, Korea andEurope operating in complete lockstep.
We have to move with our allies orwe will fail.
And this isn't just sort of the kneejerk reaction of a globalist,
retired globalist, deep stater whobelieves in partners and allies.
This is a real, this is math, right?
(46:54):
We can defend ourselves, we can put upa wall, maybe we can get the Mexicans and
the Canadians to beinside this wall with us.
But if we want to incentivize orprotect the investment in modern
infrastructure and modern technology andsupply chains outside of China,
if we want that investment to happen,the combined market that that
(47:14):
investment feeds into has to be muchlarger than what we have alone.
And so if you, as the Chinese move intorobotics and biotech and other sectors and
threaten to do what they did in solar orwind and totally dominate it,
we need to have German,Japanese and Korean and Indian and
Brazilian companies that can survive,that can survive that threat.
(47:39):
And if we don't find a way for thosecompanies to feed into our market and
Europe's market and Japanese, the Japanesemarket in a way that accounts for
China's subsidies and industrial policies,we're going to end up with this small
little rump of the world that we protectand it just simply won't be effective.
And so Picking a trade fightwith the entire world doesn't
(48:03):
really work unless you'readvancing this goal.
And I don't,
I frankly just don't see us moving towardsthat global response quickly enough.
>> Elizabeth Economy (48:14):
Yeah, I think wise, wise words.
Maybe somebody's listening.
So I always end with a couple of veryquick questions just to get your
quick take.
What do you think that now that you'reback in the US and you're hearing,
you know, all about China,you know, from the US Perspective,
what do you think Americans don't knowenough about China that they need to know?
>> Oliver Melton (48:41):
You know, I, I would say Americans are afraid of China,
feel afraid of China right now.
And I would say that people are,are, are right about the,
the censorship,the surveillance state, the kind of,
the state's reach into the economy andsociety.
(49:01):
And these things are all quiteconcerning and alarming,
including to people who live there.
But it's important to appreciate thatChina is also incredibly dynamic.
It's fun.
People are smart and clever and creativeand subversive with a lowercase S.
You know, I mean, people have, you know,
(49:23):
there's a lot of clever sarcasm and,and rebelliousness within a boundary.
And so it's a really vibrant andexciting and
fun society to be in,even though all of the negative things or
many of the negative things thatAmericans see are also true.
And so that's that.
It's not easy to square those two things,but it's, it's true.
>> Elizabeth Economy (49:45):
It's a really important point and I think,
unfortunately, it's one that fewerAmericans probably than almost ever before
are going to experience because so few areactually traveling to China these days,
whether as students or, you know,as tourists or anything.
So I think it's a great, a great point is,you know, realize the diversity and
(50:09):
the sort of just the sheer vibrancyof the people and the culture.
What about a book or an articlethat you would recommend to people?
Any topic related to China?
>> Oliver Melton (50:23):
You know, I'm cleaning out or I'm moving back into our house in
the US and so I've got old bookspacked up five years ago in my mind.
And so I wanted to recommend How AsiaWorks by Joe Stadwall, which is about,
it's about industrial policy andit's about the fact that know.
And now that we're alldoing industrial policy,
(50:44):
I think we could use a refresher inwhat learned over the last 50 years.
And it's all about how the key toindustrial policy is letting bad firms go
bankrupt, basically.
And so as we roll up our sleeves andstart doing it ourselves.
We need to figure out how to.
How to deal with failure better.
>> Elizabeth Economy (51:01):
That truly a great recommendation.
And what about a recommendation forPresident Trump?
He gave your recommendation tothe negotiators, but what about for
our president as he tries to navigate,you know,
one of the most important relationshipsthat the United States has in the world?
>> Oliver Melton (51:19):
I would.
Well, I don't even know anymore.
But I would say that you have to have.
You have to have a realisticset of objectives, and
then you got to work back from there.
And, you know, whatever you think you wantthe world to look like in 2030 or 2035,
(51:40):
you need to figure out the thingsthat you need to get there, and
then you got to deploy tools andpolicies that advance those causes, and
we don't do a lot of that.
And the other thing I would say, comingfrom the Treasury Department, is that and
background in macroeconomics, is that ifyou would like to have balanced trade,
you cannot have a massive fiscal deficit.
(52:01):
Your fiscal deficit is goingto cause a trade deficit,
no matter how high your tariffs are.
And that fact, ironically,
was conveyed to us by the communistleadership of China many times.
>> Elizabeth Economy (52:13):
Okay, good advice.
Have a China strategy andhave a domestic economic strategy.
Okay, I'll take both of those points.
Okay, last question.
Scale of 1 to 10, how likely doyou think it is that assuming
that President Trump meets withPresident Xi, you know, as they're kind of
talking about on the margins of apec, orPresident Trump actually goes to China,
(52:37):
how likely do you thinkit is that you get.
We get a big, you know, breakthrough,a big Nixon Mao moment,
scale of 1 to 10,10 being the most likely.
>> Oliver Melton (52:49):
I would put that very low.
I can imagine a lot of theatrics.
It's hard for me to imagine any sort
of strategic alignment that changes our.
Our policy approach to each other.
At best, I think you could finda sort of a tactical pause.
(53:11):
I mean, what we have now, basically,which is a tactical pause that.
That turns the volume down.
>> Elizabeth Economy (53:18):
Yeah, okay, I think, yes,
most people who've appeared on thispodcast are right with you on.
On that one.
I think we had one personwho said that they.
They were optimistic that youcould get a real breakthrough.
So, Oliver, let me just say thank you fortaking the time to do this with us.
(53:40):
You've given us a masterclass on theChinese economy, and I have to say that
it's a real loss, frankly, tothe US Government that you are now back in
the private sector, or I guess maybethe first time in the private sector,
given your long sort of time alsoat State Department beforehand.
But, but my good friend Dan Rosen is veryfortunate to have you, that's for sure.
(54:06):
He got a real gem.
So congratulations on the new job andhopefully you'll find your way back into
government work because you know,our country could use you.
>> Oliver Melton (54:16):
Same for you, Liz.
We were all sad to lose you.
And maybe,maybe someday we'll serve together.
Who knows?
>> Elizabeth Economy (54:20):
Okay, that.
That would be great.
So if you enjoyed this podcast andwant to hear more recent discourse and
debate on China,please subscribe to China Considered on
the Hoover Institution YouTube channel orthe podcast platform of your choice.
>> Oliver Melton (54:38):
Thank you so much, Liz.
>> Elizabeth Economy (54:39):
Thanks, Oliver.
[MUSIC]
>> Elizabeth Economy (00:08):
Welcome to China Considered, a podcast that brings fresh
insight and informed discussion to one ofthe most consequential issues of our time,
how China's changing andchanging the world.
I'm Liz Economy Hargrove Senior Fellow andco-director of the program on the U.S.
china and the World at the HooverInstitution at Stanford University.
Today, we're going to return toone of those fascinating but
(00:29):
often vexing issues that we allconfront when we're thinking and
working on China, namely,what's going on with the Chinese economy.
The stock market is up,exports are up, but
the property sector still seems to bea drag, and consumption is still low.
Fortunately, we have withus today Oliver Melton.
Oliver just returned from five yearsas the Treasury Department's financial
(00:51):
attache in Beijing.
He's now the director of Rhodium Group,an economics consulting and
research organization.
Welcome, Oliver.
>> Oliver Melton (01:02):
Hey, Liz.
It's really great to be here.
>> Elizabeth Economy (01:04):
Really great to have you.
All right, and I should say, I guess,
welcome back to the United Statesafter five years in Beijing.
How does it feel to be back?
>> Oliver Melton (01:12):
It's really, really nice to be back.
And coming back to D.C.
is always really great because it's sogreen and small compared to Beijing.
>> Elizabeth Economy (01:20):
Anything you miss, anything you miss about.
>> Oliver Melton (01:22):
China right now,
the food is going to bereally hard to do without.
We need to really improve that in the US,I think.
>> Elizabeth Economy (01:28):
Improve the Chinese food, or
just in genera,l the Chinese food.
>> Oliver Melton (01:33):
The Chinese food we're really lacking here.
>> Elizabeth Economy (01:35):
Okay.
All right, so let's get started.
We're going to focus on the Chineseeconomy, but let's start with what
it was like to be the Treasury's financialattache for five years in Beijing.
What did, what does that even mean?
What did you do on a daily basis?
>> Oliver Melton (01:56):
Yeah, so no day was really the same.
I spent probably about half my timebeing Treasury's sort of chief analyst
in the field.
So my job was to go around and
talk to really smart people aboutwhat was happening in the economy,
what we thought the policy direction was,what the leadership was thinking.
So that could involvetalking to economists,
(02:17):
that could involve traveling around,talking to real estate developers.
Really, just about anything.
That was a lot of fun.
And you had to be resourceful andtry to find people who'd have interesting
insights into an absolutely massive,ever changing and complicated economy.
And then the second half of myjob was to be a diplomat, right?
It was to facilitate communication betweenthe Treasury Department, Secretary Yellen
(02:40):
and her team, primarily, but thenSecretary Bessen with Chinese leadership.
And so that would involve Negotiations,it would involve a lot of planning for
the contacts that we had, the engagementswe had, and a degree of advice
back to headquarters about what Ithought the Chinese were thinking or
how I thought that they would respond, orwhy they were acting in a certain way.
>> Elizabeth Economy (03:00):
Great. I want to
come back to the negotiationside of it and, and, you know,
hear something from you about what it waslike to sit in those negotiations and
your impressions of, of the US andthe Chinese and how they negotiated.
But let's just focus a little bit in on,you know, what you thought about
the Chinese economy and whether what youwere seeing, you know, being on the ground
(03:21):
there, you know, did it differ a lot fromwhat you might read in the Western press?
Did you think this is so radically nothow I understand the Chinese economy, or
did what you were seeing,roughly speaking,
dovetail with what we might begetting back here in the U.S. you.
>> Oliver Melton (03:38):
Know, both probably, is the answer.
So, you know, living in Beijing,
you're not really living inthe Chinese economy, right?
You're living in this very different,this very sort of isolated,
niche component of the Chinese economy.
It's a capital city, so
it's a little bit more resistant to thefluctuations in the rest of the economy.
(03:59):
It's much more service sector orientedthan the vast majority of the economy.
And so you really had to get out ofBeijing to get any sort of sense of what
the rest of the economy was like,what the majority of the economy was like.
And even then,China is incredibly diversified, Right.
It's as big and complex as Europe.
And so talking about what the Chineseeconomy is like is as nonsensical as
talking about, like, what Romania islike in, in the context of London.
(04:23):
Right.And these are just two fun.
It's just an enormous and varied economy,
and parts of it can be doing really badlyand parts of it can be doing pretty well.
And that, that was certainlyhappening when I was there.
So I would say that we always struggledgetting a sense of what real growth was.
Right now I'm at the Rhodium Group andmy colleague down the hall,
Logan Wright,has done a lot of forensic data analysis,
(04:43):
the kind of stuff that we certainly dida lot of inside the Treasury Department
to get a sense of what wereally thought was happening.
But the hardest part of the job, andmaybe even arguably the most important,
was to try to figure out what was comingnext, what the policy direction was for
the leadership.
And that was very difficult,the Chinese have gotten stricter and
(05:06):
stricter under the current leadership,but even in the last few years,
they've gotten much more aggressivewith information controls and
censorship and sort of oversight,you could say nicely,
of who says what to yourfriendly foreign diplomats.
And so it's difficult to get an honestassessment of what the leadership
(05:31):
recognizes to be weaknesses orshortcomings in the policy strategy.
So we really all had to becomeexperts in how the Communist Party
communicates to itself, right?
So I had a large stack ofpeople's dailies on my.
On my desk.
We spent a lot of time reading Xi Jinpingspeeches and other leadership speeches to
(05:52):
try to understand whatthe intellectual framework was for
their policy strategy andthen also the institution.
So you can't skimp on understandinghow China is structured.
There's a very strong leader at the top,but
the institutions reallystill matter quite a bit.
And you have to understandwhat they control,
what they're trying to achieve andhow they're structured if you
(06:14):
want to understand how policyevolves in that system.
So there's a lot of kind of Kremlinologyin my job and a lot of going around trying
to, you know, talk to people aboutwhat they were seeing as well.
>> Elizabeth Economy (06:25):
So did you see a vast gap between, you know,
what you were reading in the People'sDaily or in Xi Jinping speeches and
what you would see on the ground?
Or was it really a function of.
Here, Xi Jinping announcessomething like made in China 2025.
And then you go out and, how much ofthe country did you actually see?
How many provinces did you visit actually?
But you go out and you look andyou see, actually, I am seeing.
(06:48):
These policies translate verydirectly into change on the ground.
>> Oliver Melton (06:54):
How many provinces do we go to?
You know, we know we haven't counted,[LAUGH] l really.
>> Elizabeth Economy (06:58):
You do keep track of how many provinces you went to?
>> Oliver Melton (07:01):
[LAUGH] Okay, I think, to be honest, in one meeting, one very,
very boring meeting, I think Ilisted all the places I'd been, but
I don't have that in front of me.
But we went to the majority of provincesand we made a real point as a family and
also as a diplomat trying to go toa diverse set of regions in China to see
places that were heavily industrial,hyper modern, like Shanghai or
(07:22):
Shenzhen, and fairly rural and so forth.
And yeah, you do see,you do see transmission quickly, but
it doesn't work always.
Right.
It's a normal country where they trythings and it doesn't always happen.
It doesn't always work.
And so real estate is probably the bestexample of that, where no issue could have
been closer to the center or closer tothe leadership's attention in the economy.
(07:45):
And some of the things they didwere incredibly effective, right?
So when they decided to cut off realestate finance for highly speculative
investments, they were hyper successful,arguably way too successful,
and developers of allstripes hyper over leveraged.
Pretty healthy developers.
Nobody could get finance anymore.
And the industry came to a grinding halt.
(08:05):
And they basically engineered,on purpose or by accident,
a total collapse in the sector.
And then when they decided to kind of tryto turn that back on several years later,
not, not to reflate the property sector,but to restore finance to healthy
developers, or at least healthy projects,they really struggled to do that.
And so there was a lot of effort,there was a lot of motion in the system,
(08:27):
but they didn't imposethe right kinds of guarantees.
They didn't line up the incentivestructure with the economic institutions.
And so nothing really happened at first.
So you had a lot of action,a lot of activity, a lot of talking, and
that worked, but you didn't have a lotof financing going out the door.
>> Elizabeth Economy (08:44):
So give us the time frame here.
When are we talking about?
>> Oliver Melton (08:47):
I think 20.
I think we're at this point,2020, late 2023, early 2024.
There were two rounds of trying to restorefinance to the whitelisted projects.
This is when the citiesstarted to have whitelists for
the projects that should receivefinancing for completions.
And it didn't work because the banks aresmart enough to know that if they lose all
their money on a project, the government'sgoing to come after them in the future, or
(09:09):
they're going to.
I mean, frankly,they're just going to lose the money and
they're going to have to deal with that.
And so, you know, the Communist Partyhas an enormous amount of authority over
certain types of decisions,
but they can't just will economicactivity if it's against their interest.
And so they really can besuccessful sometimes and
they can fail in other times.
>> Elizabeth Economy (09:29):
So the banks were not confident
that the Chinese Communist Party wouldrecapitalize them, is what you're saying.
Right, which they've done in the past.
>> Oliver Melton (09:37):
Yeah, they weren't confident that they would get
recapitalized, and they initially weren'teven confident, it seems they weren't
even confident that they wouldn't be heldresponsible for loans that went bad.
There's sort of two layersin the banking system.
One is the, you know, your profits andlosses, which can be managed rationally.
(09:57):
You can take more risks andget more profits, and
the banks can kind of handle that.
But then there's also the.
The corruption side of it.
And bankers are often investigated for
corruption if they lose moneyon an investment or on a loan.
And so there's a huge amount ofconservatism in the banking system and
frankly, in the investment community.
(10:18):
Because if you lose the state's money,
it can suggest corruption even when itwas actually a good business decision.
And so when the, when the governmentcame along and said, hey, we want you to
lend to these loss making or near lossmaking property developments so that they
can complete the houses, banks werecorrectly or rationally wary to do so.
(10:39):
And then they came along and thenthe party had to promise a year later and
said, okay, look,
we won't investigate you for corruptionif you lose money on these deals.
And that was sort of a prerequisite forthings to go forward.
But it still hasn't turned back on.
>> Elizabeth Economy (10:52):
Right. I was just going to say
that the property sector stillhasn't really rebounded though.
Right.
Maybe less of a drag, butstill a drag on economic growth.
>> Oliver Melton (11:01):
Yeah, and nor will it.
And, and for their,you know, in their defense,
they were not trying toreflate the property sector.
They were trying to just getthe half finished apartments,
complete ones that hadalready been sold to folks.
>> Elizabeth Economy (11:14):
So take the property sector and fit it into sort of
the overall, as you mentioned,very complex, complicated Chinese economy.
So that's a little bit of a drag.
But where, where else isthe Chinese economy having trouble?
Where is it, you know, doing well?
And how do you see all thesepieces fitting together?
I guess what is your model in your own
(11:38):
head of how the Chinese economy works?
>> Oliver Melton (11:44):
Maybe a simple version would be better that basically China,
as everyone knows, has a,an economy that's,
that has a really high savings rate.
Right.So too much of national income is saved by
your households or the government.
And as a result that moneyneeds to be invested or
(12:06):
China needs to run a really largesurplus for the rest of the world.
In the early two, in the mid-2000s,they ran a huge surplus, you know, 10,
10, 10% orgreater current account surplus.
And a lot of that savings wasthen absorbed in this massive
investment boom in the 2010-2017,2018 period.
(12:28):
First with infrastructure andthen with real estate.
And so real estate,
the way I think of this is thatreal estate was a non tradable,
somewhat productive investment target thatallowed China to get for about, you know,
five or six or seven years to allowed themto extend this imbalanced model, right?
So super high savings rate doesn't havea huge current account surplus because
(12:51):
they're investing this money domestically.
But you can only build so many houses andso many, so many new cities or so
many railways before,before you run out of places to build.
And so they, they definitely reached thatpoint where they had more Stuff than they
needed more, more apartments andthan they need.
And that came, that came crashing downreally quickly partly because of policy
(13:13):
decisions, but partly just becauseof the kind of the physics of it.
They had enough houses at this point andso now we're kind of back where we
started, which is you havean imbalanced economy and
you either need to significantlyincrease consumption or
you're going to return to reallysignificant trade surpluses.
And so right now, I think, you know,for the last few years you've seen
(13:36):
the government kind of trying tofeel its way through this problem,
on the one hand, trying to findnew destinations for investment.
So if real estate wasn't goingto absorb all this investment,
maybe advanced manufacturing would maybenew, you know, maybe electric vehicles,
maybe robotics, other sectors.
And that's what the last administrationwas particularly nervous about,
(13:56):
was that this kind of massive tidalwave of, of investment cash could be,
could be channeled away from realestate into these sectors and
create really significant disruptions forthe rest of the world.
And indeed we started to see that.
And on the other hand, you see thegovernment trying to boost consumption so
saving less.
But they're not really exploringthe kinds of policies or
(14:18):
they're not really pursuing the kindof policies you would need to have
a fundamental shift in the overalllevel of savings in the economy.
So I see real estate asa drag on the economy, but
also sort of the elimination of sortof a temporary band aid or a temporary,
sort of a transitional or a temporaryfix to a structural problem that's
(14:38):
been around for 20 years thatnow is really coming to a head.
>> Elizabeth Economy (14:43):
Right. So you mentioned that
the Chinese government is not undertakingthe types of policies that it needs to,
to boost consumption.
And certainly we've heard a lot aboutthis and we know that they've done these
trade in programs for, you know,goods and even for cars in some places.
I guess they've, you know,increased salaries in some areas for
(15:05):
civil servants or forteachers at some, in some places.
So there have been some moves.
But what, what would you be looking for
when you say the policiesthat they need to undertake?
What would be sort of your set of two orthree things if they started to make moves
in those areas, you'd be like,check, check, check.
They're getting it right.
>> Oliver Melton (15:23):
Yeah, I mean.
Well, Rhodium has a wholepaper on this that,
that was published recentlythat we can link to.
But I would say probably the samething that the World bank and
the IMF have been saying.
And honestly, frankly, a huge number ofChinese economists have said publicly or
privately.
The first is you need a much morecomprehensive social safety net.
(15:45):
You need government transfers basicallyto households in the form of pensions and
social welfare or social insuranceprograms, healthcare in particular,
healthcare spending, and
the quality has improved significantlyover the last 10 years and.
People might not appreciate that.
Liz, I'm sure you've been to a Chinesehospital or a doctor 20 years ago or
(16:06):
five years ago andthere's a massive difference.
>> Elizabeth Economy (16:08):
Yeah, no, I haven't been, but
my daughter spent several days ata Chinese hospital with an ulcer.
I don't think it was a great.
Experience, but I'm sorry,sorry to hear that.
>> Oliver Melton (16:18):
But it would have been worse 20 years ago, I guess, but-
>> Elizabeth Economy (16:20):
No doubt.
>> Oliver Melton (16:22):
So there's, there has been progress, but
there needs to be justmassively more progress, right?
Because Chinese families still socialself insurers, they keep a pretty
significant amount of their income andsavings just in case something goes wrong.
And the state has the power to reduce thatprecautionary savings through greater
investment in social services.
(16:44):
One of the biggest areas is definitelythe share of the state in the economy.
So a little bit of a complex argument,but basically the problem is,
is that the state controls a prettysignificant amount of corporate revenue or
corporate profits in the economy andis prone to reinvest those profits,
sometimes in the, in the same business,sometimes in other businesses or other
(17:08):
government controlled ventures, includinggovernment vc, which is kind of new.
But it doesn't ever get to a pointwhere it says, you know what,
my rate of return on this project is only2%, I'm going to consume this, right?
And if you're a household and you,your investments reach a level,
a rate of return that's too low,you'll consume it, right?
(17:29):
You'll make a rational decision aboutdeferred consumption or consumption today.
And so you stop investing when it'sno longer profitable to invest and
you can kind of enjoythe fruits of your labor today.
And that doesn't happen inthe Chinese system, right?
The state profits are kind of insensitiveto intertemporal substitution.
So they just keep investing andkeep investing and that needs to change.
(17:53):
And that can happen eitherthrough transfers or
through greater privatization orprivate ownership of state assets.
So that's a big one andreally, really hard to see.
I think the number one thingthough that we would like to see,
that I would like to see is more ambitionfor household income as a share of GDP.
I think 10 years ago this was in the fiveyear plan and in some of the party
(18:18):
documents and certainly in the,in the work reports that the,
that the state was actively pursuinghigher wage growth than GDP growth.
And now, and for the last maybe five orsix years at least, the,
the target has been household incomeshould grow in line with gdp,
which means that the party is not tryingto see its people get richer faster.
(18:44):
And if people don't have a higher andhigher share of national income,
there's a ceiling on how fastconsumption should grow.
And as a corollary, Larry, to that,they used to promote the service sector.
They used to think that the servicesector white collar jobs, you know,
the kind of jobs that dominate, I meanto completely dominate the US Economy,
(19:06):
have a much higher wage share of output.
You know, the, the amount of revenuethat then goes into household
bank accounts is much higher than forfactories.
And I would be encouraged to see the,the party kind of reduce its focus on
manufacturing and the productionof physical stuff and you know,
(19:27):
the building of factories and more humancentric jobs to, to raise wages as well.
>> Elizabeth Economy (19:33):
That's a really interesting point that I actually have not
heard made before.
You know, one of the things that,that I've been thinking about or
I have thought about isjust the really slow rate
of growth in per capita GDP in ruralsector over the past several years.
I actually, you know, Common Prosperity,for whatever that was worth,
I think was targeted at the, you know,absolute most impoverished in the country.
(19:58):
But I mean,this is still a country with, you know,
600 million people living ona couple of $100 a month.
And I've really been surprised at howlittle attention seems to be being
paid to this, you know, very significantpart of the Chinese population and
their sort of consumption ability andalso just their ability to participate
(20:21):
in the 21st century economy because Idon't even see that the government is
doing much to train them up for this, youknow, incredible sort of technological,
you know, revolution that's underwayin much of the rest of the country.
>> Oliver Melton (20:38):
Yeah, and your, your colleague Scott Rosel has done some
of the best work in the world onthis to highlight not just the,
the severity of the, the wealth gapbetween rural areas and urban areas,
but also the fact that the HUCOsystem actively prevents workers
from bringing their childreninto urban environments.
(20:59):
And because of the, the gap in educationquality is really leaving behind
millions of children in waysthat are a human tragedy, but
also really counterproductiveto China's long term growth.
So it's a, it's a mystery to me as well.
It's, it's, there's,there's really just no fundamental,
there's no compelling reason to do thisother than just sort of a failure to
(21:23):
address basic fiscal transfer issues.
And you're right that withCommon Prosperity they talked it up.
It was on the front pageof the People's Daily.
I very Very, very wrongly predicted to myheadquarters that if you put something
on the front page of the People's Daily,
it means you're going to follow upwith it, follow up with real dollars.
And they, they just didn't do it.
They just didn't follow up with actualfiscal transfers of the magnitude that
(21:46):
would really make a huge difference.
There was, there were some,usually city to county, but
we just didn't see the scale needed tomake a, a really fundamental difference.
>> Elizabeth Economy (21:56):
No. And
there's a great book by Steve Tsung andOlivia Chung that looks at,
you know, what Xi Jinping has said,you know, are the priorities.
And then actually if you trackhow policy was implemented,
what really is a priority andcommon prosperity, you know, didn't,
didn't make it onto the list of,of actual priorities for Xi Jinping.
(22:19):
So follow through wasactually not terribly robust.
So let's pivot a little bit.
You know, one of the things aboutChina is that they often, you know,
Chinese leadership is prone to havemassive campaigns of one sort or another.
And I want to just get your take on whereyou think three of them sort of stand.
(22:40):
How successful has, you know,
the leadership been inpushing forward with them?
What do you see as the sort of up anddown sides of each?
And they're the Belt andRoad Initiative made in China 2025 and
de dollarizing the global economy.
So let's just start with the Belt andRoad Initiative because this is one where
(23:00):
you may be aware,since you were just in the U.S.
government, that there lot of chatterin Washington that the Belt and
Road Initiative had kind of failed,that it was over.
Beijing didn't have the resourcesto push forward with it.
That wasn't a positionthat I subscribe to.
But I'm curious, what's your take onwhere the Belt and Road stands today?
>> Oliver Melton (23:27):
Yeah, so I think it's, it's fair to say that
the criticism is right andwrong at the same time.
Right.So most definitely it had
the characteristics of a campaign.
Right.You know, they said go forth, you know,
2013, 2014, everybody go out,everybody do this.
(23:49):
All the banks are authorized to lend,take your forex and
use it for something abroad.
And everybody did it.
It was kind of kids soccer witheverybody chasing the ball and.
Then lo and behold, about three orfour years later, right,
as the first repayments were scheduledfrom these projects, they started to
figure out pretty quickly that a lot ofthem weren't going to make money, right?
(24:12):
The political risks in Africa andLatin America and
Central Asia that had depressed inforeign investment before China showed
up were in fact applicableto Chinese firms as well.
And you had a whole lot of,you know, spectacular failures,
moderate failures, delays, etc.
(24:33):
You also had a huge amount of corruption,right?
There it is, there's still a massivetrail of corruption investigations that
are chasing some of these deals.
Some of them are kind of lower,lower in the headlines.
But there's a long hangoverfrom this period in, in China.
And they got burned, right?
And we saw pretty quicklythat these firms and
(24:56):
financial institutions pulled back,got a whole lot more conservative.
The better firms were able to keepinvesting or keep lending, but
the sort of cowboy firms or the folks thatweren't particularly good at learning
from mistakes pulled back and a lot.
So from that perspective,you could say, yeah,
(25:16):
it was probably overly ambitious, evenyou could say something worse than that.
And they got burned and it waspredictable and look how funny that was.
On the other hand, they achieveda lot of their strategic objectives.
So buried within the sort of generalrush of, you know, thousands and
(25:36):
thousands of companies going abroad were anumber of very carefully orchestrated and
targeted investments and projectsthat fulfilled strategic objectives.
You know, ports that could be dual use,that are dual use,
vertical control over minerals andprocessing of,
of minerals that are really crucial formodern industry.
(26:00):
I mean, you know, at the time wewere all reading the, you know,
we were reading the plants,these were public.
They, they were not concealingwhat they were doing,
going after minerals thatI had to look up first,
you know, first in Chinese and then inEnglish to see what they were doing.
And, andwe knew they were going after this.
But the scale andthe fact that these resources would be so
(26:22):
integral in things like batterieswasn't as apparent back then.
But even then, you know,they had foresight and they,
they may have lost some money on some ofthese deals and they may have overpaid,
they may have investedkind of too prematurely or
at the wrong point in the cycle,but they did pretty well.
And so I think the,the ultimate evaluation of the Belt and
(26:42):
Road initiative really dependson what your perspective is.
And my guess is that Beijing would say,okay, we made some mistakes,
we learned a lot of lessons, but weachieved a huge percentage of our goals.
And as we go for round two or round threewe'll be smarter, we'll be more targeted.
We'll be a little bit more marketdisciplined in the sense that
we won't lose as much money, but
(27:04):
we're still going to be able to pursueour strategic objectives carefully.
>> Elizabeth Economy (27:09):
Yeah, I mean, from my perspective, you know, I think looking
at the, you know, point at whichXi Jinping seemed to take a step back and
talk about small is beautiful and
there seemed to be a littlebit of a retrenchment.
Actually what they did was they just gotsmall, smarter and more efficient and, and
more targeted.
And so the real push now is,you know, in the clean tech space.
(27:30):
You know, it's in the digital space.
And it still, I think,is in minerals and mining and
then some infrastructure projects thatare, you know, very carefully chosen.
So you know, I think,you know, Washington and
other places should be more concernedas opposed to less concerned because I
think the Chinese have learned that andthey don't want to build palaces and
(27:52):
soccer stadiums anymore or big whiteelephant infrastructure projects.
They're really focused on whattheir strategic needs are and
I think in extending their sortof infrastructure globally in
these extremely core areas forexample of Digital Stack, right?
The Digital Silk Road and Cleantech.
So I think the alarm bells shouldbe going off more in Washington
(28:16):
if we're thinking about competitionspace as opposed to less.
And in that same vein, of course, made inChina 2025 and there have been some good
studies that have come out by Merix, forexample, maybe Rhodium has done some work
in this area as well of evaluating howwell made in China 2025 has actually done.
(28:38):
And this of course was, you know,the big plan, you know,
around 10 critical cutting edge areasof technology where China, China wanted
Chinese companies to dominate in themanufacturer up to certain percentages,
70, 80, 90% would be controlledby Chinese companies.
And then of course, you know, China, thesecompanies would become global champions.
(28:58):
So you know, new materials,semiconductors, AI.
How do you see it?
I see it as a success.
But what do you, what do you think?
>> Oliver Melton (29:07):
Yeah, yeah, so Rhodium did do a study a little while ago and
Merrick did a really good study as well,
evaluating their successrelative to different metrics.
And I think they key isto look at the different,
different competing goals that they had.
So on the one hand was the sortof loftier, more ambitious
goal of dominating certain sectors orbeing a world leader in certain sectors.
(29:30):
But the core goal was to eliminatedependence and vulnerability on foreigners
and particularly the United States in,in these technologies.
Right.So it's, you know,
offensive goal is to be dominant defensivegoal is to just eliminate the U.S. u.S.
Ability to sort of choke China, whichis a vocabulary they use quite often.
(29:52):
And in several sectors theydid a really good job, right?
They, and, and you know, in a few sectorsthey achieved their maximum goal.
Right?EVs are just unambiguously world leading
and incredibly good.
And they've done really well with clean,clean energy as well.
I should also say that,
that Xi Jinping himself has also said thatthey wanted to choose a select number of,
(30:15):
of technologies where they would makethe rest of the world dependent on China.
And they have absolutely done that for thepurpose of deriving political leverage.
And they have succeeded in that as well.
So I'd say on their securitygoals they've done pretty well.
There's still obviouslyseveral choke points in,
in the economy where they remaindependent on foreign producers, but
(30:38):
in some of those sectors like aviation,they have secondary suppliers.
And so it's not a total concentrationon the United States, but
as we've seen in recent months, they've,they have also developed countermeasures.
Right?So their dominance
of things like rare earths and, andeven more than the rare earths,
the higher value added manufacturingof intermediate inputs like magnets and
(30:58):
motors have really given themleverage over the global economy.
That has been used fairly effectivelyto neutralize the US Dominance of
semiconductors in this case.
So I would say, I would say that they're,they're pretty confident.
The other thing that Made inChina did was it wasn't just,
it wasn't just the ambition and theindustries that Made in China pioneered.
(31:23):
It was also the way in which they werewilling to work with commercial firms or,
or private or semi private firmsto commercialize technologies.
Right.So they recognized that it wasn't
sufficient to have,you know, a state lab or
a state owned enterprisedeveloped a technology.
You had to be able to make itat a competitive price and
(31:44):
it had to be designed fora consumer market.
And so they used made in China 25in that period to experiment with
different approaches to industrial policywhere they would help private firms.
Invest and develop capabilities.
But they would do it in a way thatmaximized competition within that
(32:07):
sector to improve the efficiencyof resource allocation,
but also the quality of products.
And they would alsobasically draw out the input
output tables of an entire sector and makesure that there weren't any choke points.
Right.So they didn't just go after evs,
they went after batteries.
And they didn't just go after batteries,they went after the minerals.
And they literally had input output tablesthat could take up your whole wall.
(32:30):
And they made sure that in everysingle sector the banks and
the local governments were, were helping,helping companies along to ensure that
they could produce at scale and at qualitythe individual inputs that they needed.
And most importantly, again, that therewere enough of those firms that they
could compete like crazy to ensurethat they didn't just kind of sort of
(32:53):
extract rents from the sector orperform badly.
And they look back at this experience andthey,
they recognize that theyproduced over capacity.
They over invested in a lot of sectors.
There's a lot of boom bust cycles wherecompanies do really great work but
then they can't make any money becausethe state encouraged too many entrants and
frankly prevents bad firmsfrom going out of business.
(33:14):
But by and large they,they think they did a hell of a job.
And so they know that theyneed to tweak their toolkit.
They need to, you know, they,Maybe they wanted 30 EV companies.
They didn't need 130.
>> Elizabeth Economy (33:26):
I think they had over 200 at one point [CROSSTALK].
So no, it was, it was, yeah, right,but this idea of involution, right,
I think is a,a big issue now that you're talking about.
>> Oliver Melton (33:36):
Yeah, but I think that they
think they've got the recipe for success.
They know that, you know, in round two,around three, they're gonna, I think they
think they're gonna be able to build offtheir successes and they're gonna be able
to, they're going to be able to do thismore efficiently with less disruption and
they're going to be able to do it acrossa much broader range of industries.
And I'll just say, sorry to go on for solong, but tying into the belt and road,
(33:59):
you're seeing Chinese firms go globalin a way that they hadn't before,
partly because of slowing domestic growth,partly because of trade frictions, but
also partly because Chinese firms havereached a level of sophistication and
product quality that there's realmoney to be made abroad now.
And so you're seeing some ofthe fruits of made in China.
(34:19):
25 and the, the development model andthe success of the technology or
technology investment starting tospill out into the rest of the world.
And so I think that going forward forMick 30 or made in China 35 or belt and
road 2.0 or whatever we want to call it,one of the things we are seeing already is
more greenfield investment, moreglobalization of the Chinese supply chain.
(34:41):
That will be complicated andcan't be dealt with just through tariffs.
So it's going to be a new challenge.
>> Elizabeth Economy (34:50):
There's always a,
there's always a new challengewhen it comes to China.
Speaking of which,the last of the three China's efforts to,
let's call it de dollarizethe global economy and
you know, I think most economistshere say not going to happen.
Don't, don't get all worked up about it.
Nonetheless, you know, China is prettyconsistently pushing forward not only
(35:13):
with, you know,renminbi internationalization, but
with this whole idea that all countriesshould be able to use, you know,
their own currencies, you know, fortrade and investment settlements.
And certainly we've seen,you know, China, you know,
it's moved down the ladder in terms of,of its holdings of U.S. treasuries.
So what's your, your take forsort of China's effort in this regard?
(35:37):
And you know, what, what actuallydoes it think it can accomplish?
>> Oliver Melton (35:44):
So I think that it's.
So I think that actually theirprimary objective has been and
is, but especially now, is defensive.
They want to insulatethemselves from sanctions risk.
And so this is less about, in my mind,this is less about the international
financial architecture or reservecurrencies and things like that, and
(36:09):
much more about payment systems, right?
And so we saw them pivot in the lastfive years towards not just trying
to get more countries to usethe renminbi in trade settlement,
but to establish the physicalinfrastructure, in some cases or
technical infrastructure tosettle transactions bilaterally.
(36:33):
And the primary objective there isnot to convince the Argentines or
the Pakistanis orsomebody to hold renminbi.
It's to convince them.
It's to set up the architecture to beable to make payments that don't touch
the United States oreven Hong Kong or London.
So to me, it's the biggest objectiveat this point is sanctions defense.
(36:55):
And I think that they've more orless downgraded the ambition
of trying to convince foreigners toreally, to really hold their mmb,
recognizing that they're not going to,I mean, this is, this is my private view,
but recognizing that they're not going toopen the capital account anytime soon.
Maybe there had been hope of that five,10 years ago, but
absent the liberalization ofthe capital account, foreigners
(37:18):
are not going to hold large amountsof Chinese assets or renminbi assets.
And if you don't have that,you can't truly internationalize currency.
And so my, my sense is that they'verecognized that and they're settling for
the sort of the core securityobjective of sanctions insulation,
and they're going to chip away at that.
You know, there's a settlement bank in,in the capitals of, of several countries
(37:42):
that would give them a degree ofinsulation from sanctions if needed.
But it's, it's not a perfect defense,obviously.
>> Elizabeth Economy (37:51):
Right, I mean, they also have sips, right.
Their sort of own payment systemthat they're trying to take global.
And you know, when I last looked,I think there were about 1100 banks or
something that had signed up to,which wasn't many.
Now there are probably many more.
But what about that is,I mean, that's also, I think,
a clear sanction proofing measure.
>> Oliver Melton (38:10):
Yeah, it's part of it.
Right.So CIPS is the,
the settlement information system.
And then you still need to find a way,you know, at some point you need
a sort of a hierarchy of correspondentaccounts where your company in Moscow or
in, well, let's just say Moscow fornow can, can settle its bills
(38:31):
with a Chinese bank or a Chinesecompany through its ICBC account or,
or through SIPs in ICBC to another,a third bank into, in China.
>> Elizabeth Economy (38:43):
So I want to finish up by talking a little bit about
the US China negotiations that you've,you know, been part of, where you,
you know, been at the table or at leastyou've been backbenching them and, and
get your sense for, you know, what youthink each side at this point, what you
think each side is trying to accomplishin negotiations with the other and then
(39:07):
a little bit about the negotiating stylesthat you see and, and how they differ.
>> Oliver Melton (39:13):
So I think that the styles are very different.
Obviously there may have beena time before I was, you know,
20 years ago, 30 years ago,where, you know,
Brent Scowcroft would go forlong hikes or, and, and
there was a lot of wine flowing andyou might be able to.
>> Elizabeth Economy (39:36):
Personal diplomacy.
>> Oliver Melton (39:37):
Personal diplomacy.
Yeah, exactly.
Or you might, you know, you know,in the, I mean, even not that long ago,
where you would have the meetings at thetable and then you would have the dinner
conversation and then you would havethe conversation in the hallway and
you had a much better sense of whatyour interlocutors were thinking.
China has really clamped down.
There's much less of that, andso it's much more formal and
it's difficult for US Diplomats and.
(40:00):
Some of our folks in our, especially inour foreign policy, so foreign affairs
side found their conversations withthe Chinese pretty frustrating because you
would get a lot of talking points andnot a lot of introspection or
reflection that, that deviated fromwhat they were supposed to tell you.
So it's difficult.
(40:20):
And, and even some of the track twoconversations actually are, are.
I would say that the message disciplineon the Chinese side is, is near infinite.
And so it makes it extremely difficultto have honest exchanges back and
forth to understand each other.
But that said, I think, you know,we, on certain issues were able to,
(40:44):
you know, certain issues,including some really thorny issues that
could have been fairly escalatory inour time, the last administration
were able to have pretty effectivecommunication at a kind of a mid level,
I won't elaborate on that, butthey're still very talented and
very thoughtful people on the Chineseside when they need to be.
(41:07):
But at the high level, as we sort ofpresent our, our major concerns to
the Chinese, I think that basicallytheir objective is to buy time.
You know, they understand that their tradesurplus, especially their goods trade
surplus, is causing tradefriction in the United States.
And frankly with all of their majortrade partners, they understand that.
I don't think they're going to takemajor decisive action to address that.
(41:29):
And so their goal is tobasically draw out, you know,
draw us out orto prolong the negotiations.
So that's,that's a little bit frustrating.
>> Elizabeth Economy (41:42):
Yeah. Your boss, though,
I think your former boss,Janet Yellen, you know,
seemed to have a bit of respect,I think from the Chinese leadership.
At least that's the way that I read it.
A few moments there was a little bitof some rock star status almost.
What was, what was that like?
(42:03):
You know, do, am I,am I reading that right or, or.
>> Oliver Melton (42:06):
I, I think so.
I mean, I think it's, you couldn'treally invent someone who would be
more credible than Secretary Yellen.
She was, she answered almost all of theirquestions with an academic anecdote and
then an anecdote from her personalexperience, either either as a Chair of
Council of Economic Advisors, Chair ofthe Fed, or the Secretary of Treasury.
(42:31):
Yeah, they, I think that they,
they genuinely did respectSecretary Yellen quite a bit.
And it's, it's easy to understand why.
I mean, you couldn't design somebodywho has more credibility either from
an academic perspective ora policy perspective.
And they would ask hard questions, right?
They, they asked questions that wereclearly relevant to their own thinking and
she would answer withan economic explanation and
(42:52):
Then she would answer with a story fromwhen she confronted a similar problem in,
in her time in government, either asthe Chair of Council of Economic Advisors,
the Fed Chair or Secretary of Treasury.
And, and they were all writing it down.
And I, andI don't think it was just perfunctory.
So I do think that, I think we madea small amount of headway in explaining
our understanding or our assessmentof the structural tensions and
(43:16):
the bilateral relationship and the factthat we were on a collision course.
That wasn't good for us, butit wasn't good for China either.
And I think that she was credible insaying that she didn't want that, right?
We don't want China to over invest tothe point where it's dependent on external
demand, causes deindustrialization inthird countries, and then there's a trade
(43:39):
backlash that hurts China butalso hurts the rest of the world.
And so China boosting consumptionis in its own interest and
it's in the US Interest.
And Secretary Yellen I think was crediblein explaining that although it didn't get.
>> Elizabeth Economy (43:52):
Them to change their behavior, let's be, let's be honest.
Right.>> Oliver Melton: It has not yet
gotten them to change their behavior.
But I, yeah, yeah, I did think there wasone area where some progress was made and
that was in terms ofthe debt sustainability and
working with some ofthe emerging economies.
Not, not like gigantic progress, but
(44:14):
that there were a few steps that theChinese began to take with some countries.
Can you share a little bit about that?
>> Oliver Melton (44:22):
We tried very hard to raise this issue to the highest levels,
but to do so in a quiet way thatdidn't look like the US was trying to
shame the Chinese andto encourage them to take it seriously and
to move as quickly as possible.
And I, I would like to think that ourleadership kind of hit the sweet spot of
(44:43):
that, of putting public pressure on Chinawhen it was necessary and helpful, but
was also able to convey the urgencyof this issue to really the top of
the Chinese government in a way that mightnot otherwise have happened and would not
have been as effective if we had just beenscreaming about it and criticize them.
So I think that we playeda small role in that.
(45:07):
And, and yeah, soI think that that was effective and,
but, but, but not fast enough, frankly.
>> Elizabeth Economy (45:16):
Right, right.
Okay.
So you're out of government now andable to speak freely and, and
recommend things to people.
You're watching the tradenegotiations going on.
Right.With USTR Greer and Howard Lutnick,
Secretary of Commerce andSecretary of Treasury Scott Besant.
(45:41):
You know, clearly some, some hardfought negotiations underway right now.
If you had to offer a tip or two to them,what, what might you suggest?
It could be big recommendations like justpack your bags, go home, give it up.
(46:03):
Or it can be like,
here's some ways I think that you couldspeak more effectively to the Chinese,
or here's some leverage maybe youhaven't thought of or whatever.
>> Oliver Melton (46:13):
Yeah, so these are smart guys and they know this.
But what I would say is that thereis no approach to China that can
convince them to change theirdevelopment and manufacturing oriented
growth model that doesn't meet,that doesn't involve the US,
(46:33):
Japan, Korea andEurope operating in complete lockstep.
We have to move with our allies orwe will fail.
And this isn't just sort of the kneejerk reaction of a globalist,
retired globalist, deep stater whobelieves in partners and allies.
This is a real, this is math, right?
(46:54):
We can defend ourselves, we can put upa wall, maybe we can get the Mexicans and
the Canadians to beinside this wall with us.
But if we want to incentivize orprotect the investment in modern
infrastructure and modern technology andsupply chains outside of China,
if we want that investment to happen,the combined market that that
(47:14):
investment feeds into has to be muchlarger than what we have alone.
And so if you, as the Chinese move intorobotics and biotech and other sectors and
threaten to do what they did in solar orwind and totally dominate it,
we need to have German,Japanese and Korean and Indian and
Brazilian companies that can survive,that can survive that threat.
(47:39):
And if we don't find a way for thosecompanies to feed into our market and
Europe's market and Japanese, the Japanesemarket in a way that accounts for
China's subsidies and industrial policies,we're going to end up with this small
little rump of the world that we protectand it just simply won't be effective.
And so Picking a trade fightwith the entire world doesn't
(48:03):
really work unless you'readvancing this goal.
And I don't,
I frankly just don't see us moving towardsthat global response quickly enough.
>> Elizabeth Economy (48:14):
Yeah, I think wise, wise words.
Maybe somebody's listening.
So I always end with a couple of veryquick questions just to get your
quick take.
What do you think that now that you'reback in the US and you're hearing,
you know, all about China,you know, from the US Perspective,
what do you think Americans don't knowenough about China that they need to know?
>> Oliver Melton (48:41):
You know, I, I would say Americans are afraid of China,
feel afraid of China right now.
And I would say that people are,are, are right about the,
the censorship,the surveillance state, the kind of,
the state's reach into the economy andsociety.
(49:01):
And these things are all quiteconcerning and alarming,
including to people who live there.
But it's important to appreciate thatChina is also incredibly dynamic.
It's fun.
People are smart and clever and creativeand subversive with a lowercase S.
You know, I mean, people have, you know,
(49:23):
there's a lot of clever sarcasm and,and rebelliousness within a boundary.
And so it's a really vibrant andexciting and
fun society to be in,even though all of the negative things or
many of the negative things thatAmericans see are also true.
And so that's that.
It's not easy to square those two things,but it's, it's true.
>> Elizabeth Economy (49:45):
It's a really important point and I think,
unfortunately, it's one that fewerAmericans probably than almost ever before
are going to experience because so few areactually traveling to China these days,
whether as students or, you know,as tourists or anything.
So I think it's a great, a great point is,you know, realize the diversity and
(50:09):
the sort of just the sheer vibrancyof the people and the culture.
What about a book or an articlethat you would recommend to people?
Any topic related to China?
>> Oliver Melton (50:23):
You know, I'm cleaning out or I'm moving back into our house in
the US and so I've got old bookspacked up five years ago in my mind.
And so I wanted to recommend How AsiaWorks by Joe Stadwall, which is about,
it's about industrial policy andit's about the fact that know.
And now that we're alldoing industrial policy,
(50:44):
I think we could use a refresher inwhat learned over the last 50 years.
And it's all about how the key toindustrial policy is letting bad firms go
bankrupt, basically.
And so as we roll up our sleeves andstart doing it ourselves.
We need to figure out how to.
How to deal with failure better.
>> Elizabeth Economy (51:01):
That truly a great recommendation.
And what about a recommendation forPresident Trump?
He gave your recommendation tothe negotiators, but what about for
our president as he tries to navigate,you know,
one of the most important relationshipsthat the United States has in the world?
>> Oliver Melton (51:19):
I would.
Well, I don't even know anymore.
But I would say that you have to have.
You have to have a realisticset of objectives, and
then you got to work back from there.
And, you know, whatever you think you wantthe world to look like in 2030 or 2035,
(51:40):
you need to figure out the thingsthat you need to get there, and
then you got to deploy tools andpolicies that advance those causes, and
we don't do a lot of that.
And the other thing I would say, comingfrom the Treasury Department, is that and
background in macroeconomics, is that ifyou would like to have balanced trade,
you cannot have a massive fiscal deficit.
(52:01):
Your fiscal deficit is goingto cause a trade deficit,
no matter how high your tariffs are.
And that fact, ironically,
was conveyed to us by the communistleadership of China many times.
>> Elizabeth Economy (52:13):
Okay, good advice.
Have a China strategy andhave a domestic economic strategy.
Okay, I'll take both of those points.
Okay, last question.
Scale of 1 to 10, how likely doyou think it is that assuming
that President Trump meets withPresident Xi, you know, as they're kind of
talking about on the margins of apec, orPresident Trump actually goes to China,
(52:37):
how likely do you thinkit is that you get.
We get a big, you know, breakthrough,a big Nixon Mao moment,
scale of 1 to 10,10 being the most likely.
>> Oliver Melton (52:49):
I would put that very low.
I can imagine a lot of theatrics.
It's hard for me to imagine any sort
of strategic alignment that changes our.
Our policy approach to each other.
At best, I think you could finda sort of a tactical pause.
(53:11):
I mean, what we have now, basically,which is a tactical pause that.
That turns the volume down.
>> Elizabeth Economy (53:18):
Yeah, okay, I think, yes,
most people who've appeared on thispodcast are right with you on.
On that one.
I think we had one personwho said that they.
They were optimistic that youcould get a real breakthrough.
So, Oliver, let me just say thank you fortaking the time to do this with us.
(53:40):
You've given us a masterclass on theChinese economy, and I have to say that
it's a real loss, frankly, tothe US Government that you are now back in
the private sector, or I guess maybethe first time in the private sector,
given your long sort of time alsoat State Department beforehand.
But, but my good friend Dan Rosen is veryfortunate to have you, that's for sure.
(54:06):
He got a real gem.
So congratulations on the new job andhopefully you'll find your way back into
government work because you know,our country could use you.
>> Oliver Melton (54:16):
Same for you, Liz.
We were all sad to lose you.
And maybe,maybe someday we'll serve together.
Who knows?
>> Elizabeth Economy (54:20):
Okay, that.
That would be great.
So if you enjoyed this podcast andwant to hear more recent discourse and
debate on China,please subscribe to China Considered on
the Hoover Institution YouTube channel orthe podcast platform of your choice.
>> Oliver Melton (54:38):
Thank you so much, Liz.
>> Elizabeth Economy (54:39):
Thanks, Oliver.
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