Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Welcome to the HSBC Perspectives podcast series. My name is Fred Newman. I'm a Chief Asia Economist here at HSBC. I'm delighted to welcome Michael Pettis, Senior Fellow at the Carnegie Endowment for International Peace and really a renowned China scholar, international scholar. Michael, you've been commenting on you know China and the world for for decades now. So your books, published books on the matters. We're delighted to be here, that you're here. And you're still a Beijing native.
Speaker: ah Pretty much so. Thank you, Fred. Yes. um Now, i wanted to start really on the domestic Chinese economic situation. Now, we read a lot about weak consumer spending. The economy is still growing, but how would you characterize how the economy looks from your perspective? Sitting in Beijing, is it soft? Is it, is it I mean, there's a lot of investment tech coming through. How would you characterize the growth perspective right now?
Speaker: The thing everyone is saying, the thing everyone's been talking about is the thing this current K-shaped economy. So you have a part of the economy that's doing extremely well, the high tech part, the AI part, et cetera.
Speaker: And then you have much of the economy doing extremely poorly. And the hope within Beijing is that by continuing to invest in the high KK value-added new productive forces, you can eventually shift the entire Chinese economy from the lower leg of VK to the upper leg of VK. So is this like a trickle-down kind of theory where you think one part of economy pulls the other one with it? right And probably as effective as trickle-down. In other words, it's not going to be terribly effective.
Speaker: the The upward part of decay is really, really small. ah The vast majority of the economy is really on the downward part of decay. And although you know there's always difficulties and in in quantifying it, um unemployment is probably quite high in China. Officially, as you know, it's 5, 5.1%.
Speaker: um Unofficially, if you include all of the people who've given up job hunts and gone home, one very well known Chinese academic very close to the government ah said that a month ago that is about 10.2%.
Speaker: What really surprised us was not the number, but that he was able to say it so openly. And in addition, there's been explosive growth in employment in the Gedi economy. the You know, Gedi, which is the Chinese ah Uber and the and the motorcycle Gliberti guys. And we don't really know how to include those numbers, but if you included those numbers into the unemployment, we would probably see easily double-gidget unemployment. So they're in a pretty tough position.
Speaker: They need to shift or they plan to shift at the It's Impractical out of the old part of the economy into the new part of the economy, until they that until they do that, it'll be very hard to regenerate growth. Now, if you observe the Chinese economy, there are tremendous technological advances. There's eye-popping, really, if you think about autonomous driving, if you think about even some of the semiconductor advances, AI, for example.
Speaker: and ah But you're characterizing that as being insufficient to pull the rest of the economy along. In other words, the trickle down is not enough. um Is it just a question of the size, of the small size of the advanced K-shape that's going up, or is there something else that's kind of blocking that trickle down mechanism?
Speaker: That's a great question. And what I would argue is the answer is probably two things. One, it's simply not big enough. The vast majority of employment is not in the good part of the economy. i It's in the bad part.
Speaker: But more importantly, um while China has spectacular technology, spectacular infrastructure, all of this really great stuff, it's not very clear that any of that is economically viable.
Speaker: Reich, of course, China, where it is very successful is in terms of its exports. So China is gaining global export market share, and that you know speaks to its competitiveness. um How sustainable is it that you have an economy of China size grow through exports over time? Because there is a risk of saturating global markets. There is protectionist ah perhaps reaction in the U.S. with terrorists. Right now, we've seen some friction with Europe. How much how viable a growth path is it?
Speaker: Well, if you exclude a few periods where countries like the United States were running massive surpluses to supply Europe and Japan, who had been devastated by war, we've never seen these level of imbalances. We've never seen such a large economy depend so heavily on exports.
Speaker: And the reason is pretty straightforward. um In China, everything is focused towards subsidizing production. As you know, domestic demand is incredibly weak. If you produce a lot of stuff and you can't absorb it at home through consumption of investments, then by definition, you must ah absorb it through net exploits, and that's what's happening.
Speaker: and You talk about imbalances and and and we we mentioned the Chinese economic imbalances to some extent, um but isn't that also reflected then in overseas economic balance? I'm thinking about the United States, for example, having the opposite problem, absorbing more that it can produce or save. How do you look at that if you look at US and China? and Is that imbalance really just one side? Is it China or is is there also kind of the the issue on the other side? How how do you relate the two imbalances? sure By definition, it's impossible to have an imbalance on one side, right? If there's an imbalance on one side, there must be an imbalance on the other. And by ah by coincidence, or maybe not coincidence, my next book, which will come out in April, really tries to address that.
Speaker: So there are two theories, or there are three theories. One theory is that the imbalances exist because the Americans save too little, and so they force the Chinese to save a lot in order to accommodate very low saving in the U.S.,
Speaker: ah The second theory is that ah China saves too much for structural reasons and those savings have to go abroad. And by definition, when savings are exported, if they're exported to developing countries, they result in a rise in investment. And if they're exported to advanced economies, they result in a reduction in saving in the advanced economy.
Speaker: And then the third theory, which is quite silly, but implicitly it's what most people believe is that the US has a deficit because of internal reasons. China has a surplus because of internal reasons and through some lucky coincidence or perhaps because there's a special God who orders these things, both imbalances are always perfectly matched.
Speaker: So I think that's where the debate is. I would argue that if you look at the Chinese economy, it's very hard to argue that the imbalances in the Chinese economy, which are the most extreme in history, are a result of China's need to accommodate low-sated in the U.S. I would turn it around.
Speaker: And I would also argue that it's more likely for a country that that controls its external account to export domestic imbalances than it is for a country that doesn't control this external account. So what I would argue is that as the Chinese imbalances of adjust, much of the remaining imbalances in the world would also adjust.
Speaker: And that brings us then to policy solutions potentially. So if there is a and need to rebalance the mainland Chinese economy, and that would ultimately also help to rebalance other economies by by extension, is the prescription here to revive demand in China through a big fiscal stimulus? Is it to go through the ah exchange rate, for example, how would you, how what would be your policy advice to address some of these imbalances?
Speaker: Well, I don't think there's any big secret here, Fred. ah For nearly 20 years, there's been recognition that China needs to increase consumption. And for at least five years, there's been discussion at least privately among Chinese economists that the only substantial way to do that is to increase the household income share of GDP. And in the last year, that's gone quite public. and You can see it in People's Daily, in Seixian, everywhere. We need to raise the household income share of GDP. But how do you do that?
Speaker: um One way is to reduce the share that goes to government or um or a a business, so simply transfer income from those sectors. That's incredibly difficult to do um because governments are are really struggling with revenues and businesses are really struggling with profits. So anything that you do there would be either disruptive politically or or economically. The other possibility is the one that you mentioned, an increasing number of Chinese economists and foreign economists to say, expand your fiscal expenditures.
Speaker: um And the problem there is that ah I don't think people understand this. China already has the highest debt in the world after Japan, deputy GDP ratio. You mean public debt? ah Total debt. total And in total debt, um ah China's debt to GDP ratio is officially 320%.
Speaker: But more importantly, it's rising at a rate that we have never seen in history. So to give you a comparison, Satan, the US, A lot of people are worried that debt will rise by 10 percentage points of GDP over the next five to 10 years.
Speaker: Well, as you know, in China, we do more than that every year. Last year grew by 12 percentage points. This year it's on track to grow by more than that. So that's the problem. If you increase the fiscal deficit now to direct funding into the household sector,
Speaker: We're talking about taking the fastest growing fiscal back asset, the fastest growing ah debt leverage of the world and significantly expanding it.
Speaker: And the question there is, can you really do that? And if so, how much longer can you do that before you run into debt capacity constraints? But what is then the solution? Because a fiscal expansion is not necessarily good solution. ah What other ways are there then to rebalance?
Speaker: um I had dinner with an advisor to one of the um um ah presidents, one of the largest countries in Europe, and he said, we need a solution that will make the Americans happy, that'll make the Chinese happy, and that'll make Europe happy.
Speaker: ah And my response was, I don't think that solution exists. And so it's the same thing that I would answer to you. Is there a good solution that'll make everyone happy? I doubt it. I think it's really difficult to make this um adjustment. And if you look at the historical track records,
Speaker: Any country that has had very, very low consumption and very rapid growth in debt along with a large trade surplus, we've seen this many times before, never as extreme as China's, but we've seen this many times and before, they always adjust either in the form of an economic contraction like the US in the nineteen thirty s or in the form of decades of stagnation like ji Japan did after 1991. So I'm not sure there's a way to do this that doesn't involve a significant slowdown in growth.
Speaker: um Michael, i could we could talk to you for hours about this very complex and nuanced topic, of course, and and I'm conscious we just touched the the tip of the iceberg here. But um for anybody who wants to follow up, you have a whole range of publications and you have a book coming out as well. So maybe that's where some of our listeners can take up the the analysis. But I want to thank you very much, and thank you very much for joining us. Thank you, Fred. Thank you for joining us at HSBC Global Viewpoint.
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