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Perspectives: China's economy
676 Plays5 days ago
Keyu Jin, Professor of Economics and Author, joins Jing Liu, Chief Economist, Greater China, HSBC, for a dynamic discussion about China’s economic development.
Watch or listen to their expert insights covering China’s export competitiveness, domestic consumption, structural reforms, real estate and technology sectors, and relationship with the US.
This episode was recorded on the sidelines of the HSBC Global Investment Summit in Hong Kong on 25 March 2025. Find out more here: grp.hsbc/gis
Keyu Jin is the author of 'The New China Playbook: Beyond Socialism and Capitalism' (2023)
Disclaimer: Views of external guest speakers do not represent those of HSBC.
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Transcript
Introduction to the HSBC Global Investment Summit
00:00:05
Speaker
Welcome to Perspectives from HSBC. Thanks for joining us. And now on to today's show.
00:00:14
Speaker
Hello everyone, thanks for joining HSBC podcast series of perspectives. Today's episode is being recorded behind the scene at the HSBC Global Investment Summit happening in Hong Kong.
00:00:29
Speaker
My name is Jing Liu, HSBC Chief China Economist.
China's Economic Development Strategies
00:00:33
Speaker
I'm very pleased to be joined by Yu Jing, Professor of Economics at Harvard University and Hong Kong University of Science and Technology.
00:00:43
Speaker
So today we're going to talk about China's economic development and its new playbook. Hi, Ke Yu. Great to be you with you, Jing. We have a lot to talk about. Nowadays, we see a lot of trading partners, in addition to the start to complain about China is getting too competitive in its export.
00:01:02
Speaker
And some people are saying that China is exporting deflation. Apparently, especially with the US-China trade tension, some other economists start to worry about they might see more inflow of Chinese goods that could, to some extent, put some pressure on their domestic
China's Export Competitiveness and Global Impact
00:01:20
Speaker
manufacturing. So what's your view on this?
00:01:23
Speaker
I do believe that there is a structural issue at heart that needs to be solved over time for the benefit of China and for the rest of the world, and indeed to maintain China's position as a global player in the world.
00:01:38
Speaker
that the model is steered towards scaling up supply, right? The whole, the local governments are not incentivized to spend as much on social services as they are in nurturing champions, whether it's BYD or Neo DeepSeek, although DeepSeek is not actually backed by local governments, but the idea... It's not plan. Exactly. The idea is to nurture these kind of companies, but they really should be spending more on social services to give the boost in demand.
00:02:04
Speaker
And also Chinese companies are really competitive and it has... very little to do with subsidies. If you look at majority of manufacturing, 90 percent of manufacturing ah companies, there is no overinvestment.
00:02:16
Speaker
Actually, it is responding to market forces. The 10 percent is in some of the new sectors. Yeah. um But in general, um that's going to cause tension. The fact that China absolutely dominates so much in manufacturing is going to be a problem for
Balancing Exports with Domestic Demand in China
00:02:33
Speaker
other developing countries. And I think there will be a backlash and until they they structure that, they they redress that imbalance.
00:02:40
Speaker
And how to do that? Well, I mean, the easiest way is still coming back to domestic demand, but maybe they need to have some voluntary restraints on exports as well. That's a very interesting point you're mentioning because we also noticed that yeah ah China seems to be trying to address the issue with both the demand side and supply side. On the demand side, um it's a pivot towards stimulating consumption might be one way.
00:03:06
Speaker
And it also starts to talk about sector-specific measures in order to cut the capacity and, as you said, maybe restrict the export.
China's Outbound Investment and Global Strategy
00:03:16
Speaker
Does the outbound direct investment also so play a role?
00:03:20
Speaker
I think outbound direct investment is very much encouraged by the rest of the world, well with the exception of countries that don't welcome Chinese money, which is I think is not not smart, but you know that's the fact.
00:03:33
Speaker
um If you look at around the developing world, actually in the world today, there's a massive deficit in investment. right Agri-investment in the world is down, especially to developing countries.
00:03:44
Speaker
And some country needs to fill that gap. I think China is very interested in doing so by not only investing, but but maybe bringing some of its technology. But they really need to obviously help the local economy build its own economy on its own feet.
00:04:02
Speaker
And so i think that should continue. That's a very different set of issues from exporting goods, where developing countries could also manufacture those things as well. Yeah, this ah kind of resembles what Japan did in the last century. Japan ramped the outbound direct investment after a Plaza Accord and then as an alternative to the export.
Shift Towards Domestic Consumption in China
00:04:23
Speaker
Do you think China will kind of look into that kind of solution? I don't see where it could be a substitute for for exports because You know, investment abroad is obviously yeah you know buying assets globally, which is good for diversification of of Chinese wealth, but um it has a very different implication from Chinese suppliers and Chinese companies being able to sell to the rest of the world.
00:04:53
Speaker
But one thing that we do need to keep in mind is that China is actually looking more and more like a big and rich country. So if you look at its export share of GDP, it's actually falling.
00:05:06
Speaker
yeah over time and converging to the US and Europe, which means that it's absorbing more of its own own goods. And I think that's just a trend that it will continue.
00:05:17
Speaker
um I think they just need to think about whether... I still come back to this model issue, right? Because Does 80 cities in China, do 80 cities really all need to do EVs? you know um Do they all need to do ah solar panels because it's a policy?
00:05:35
Speaker
So there is too much competition because there's a lot of resources devoted on one thing. So rather than doing the same thing, they can they they should find how to do complementary things as well.
00:05:46
Speaker
So there there are lots of things in the economy that can still be adjusted to redress this problem. there seems to be a lot of focus on stimulating the domestic demand, in particular on
Stimulating Consumption and Social Infrastructure Challenges
00:05:57
Speaker
consumption side. And actually, just several days after the National People's Congress, um China rose out a very comprehensive plan on stimulating the consumption. So can you discuss a little bit about that? yeah Well, first of all, I think that China's model, or let me be precise, political economy model, is really brilliant at scaling up supply and quite weak at raising personal consumption and therefore demand. And that has caused a lot of not only domestic issues but raised some international
00:06:30
Speaker
ah controversies as as well. um Consumption is the big focus now. The government is steadfast, focused on raising consumption. That was very different from, let's say, 10, 20 years ago, where the focus was much more on supply on the firms. you know The whole economy was geared to subsidize supply, basically, and ah very weak focus on demand.
00:06:53
Speaker
Now, there's a cyclical and structural component to raising consumption that I think deserves ah differentiation. Cyclically, in the last few years, a lot of it was precautionary saving.
00:07:04
Speaker
um It was due to ah low wages or ah low growth in real wages and ah also expectations about the future. I think people's expectations about jobs in the future is not as rosy as it was before, so they want to save.
00:07:20
Speaker
And of course, the household balance sheet was also weakened by the real estate um a downturn. More fundamentally, it's the rural population, hundreds of millions of people who still have a lack of access to social insurance and social infrastructure.
00:07:38
Speaker
Now, if we dig dig a little bit deeper, um it also ah stems from the tax structure, which I think has to be reformed as well, a very narrow tax base, um ah income tax base.
00:07:49
Speaker
But also, the government is heavily reliant on indirect taxation like VAT, So, direct taxation, which helps with redistribution, is quite weak. And then the secondary redistribution through social insurance is obviously also inadequate, given that rule, um consumers have, what, an average of 5% of an average pension of the urban household.
00:08:11
Speaker
um And also, the 300 million migrant workers, you know, they have, even if with the same income as an urban worker, they spend only one-third of that equivalent of ah consumption of urban worker.
Reforming Social Services and Local Government Challenges
00:08:23
Speaker
So um this is the focus of the current government policy. So I want to follow up on that. Actually, this sounds like a very ambitious ah plan. When we look at that, there's a mention of in the future, the migrant workers and their families can tap into the basic public services, basically according to their permanent residence.
00:08:45
Speaker
In the past, we have seen China trying to push forward the household registration reform, but with limited success. So what makes it different this time?
00:08:57
Speaker
First of all, there is a real intention that they need to stabilize the real estate problem. And there is you know sufficient demand if urbanization can continue and the rural population can be properly integrated into the formal economy.
00:09:14
Speaker
um But also, i still think that there are challenges because local governments, they operate in their own kind of autonomous sort of way. Like any other government, they care about social stability.
00:09:27
Speaker
Maybe this is very um politically incorrect to mention this, but it's kind of like the immigration issue, right? When you have lots of people coming into their jurisdiction, what do they do about local employment and jobs and stability and so forth? So I think there are some challenges. but One example is in Tianjin, they want to obviously stabilize the real estate sector. So one policy they proposed was, well, anyone who buys ah property here can have access to local schools.
00:09:56
Speaker
That will stimulate a lot of demand. So you see that there's still a lot of controls in place in China, even in the first tier cities, in property and the social infrastructure. And if you loosen them, there will be a proper rebound of domestic demand.
00:10:10
Speaker
Yeah, mentioning about the school choice, it just reminds me of another city, the capital city of ah Inner Mongolia, which actually roll out these subsidies for childcare, including if a family has three children, then they can pretty much choose wherever their kids go to school. So it's also a big step for Chinese government to start subsidizing the childcare and maybe elder elderly care as well.
00:10:35
Speaker
Yeah, well, I think that's the right thing to do. i think that China has to learn from other countries that have been relatively successful in raising fertility. And obviously, ah providing so child care services obviously gives more freedom to the working women of the household.
00:10:52
Speaker
And this is the kind of social services that will not only stimulate things like fertility, but also ah free up some resources for
Structural Reforms and Economic Growth Balance
00:11:01
Speaker
demand. So I think lots of lessons to be learned from those countries. Do you think you know what type of structural reform would be necessary in order to push China to make those changes? Like in the past, probably if one city government managed to invite more manufacturers to set shop in their place, then they actually get rewarded by tax and many other things.
00:11:25
Speaker
So what needs to be changed? It is true that unless a few fundamental core challenges in the Chinese economy is not resolved over time, you're going to continue with that imbalance, whether China's economically weak or economically strong.
00:11:42
Speaker
And one is the relationship between local and central government. Local governments still have the burden of doing taking up the majority of the expenditure and the social and local.
00:11:52
Speaker
ah economy, but it obviously relied in the past a lot on land sales and real estate as a source of revenue. And they have to ramp up a lot of debt to undertake that, those kind of responsibilities. But maybe the local government KPI should be changed from looking at GDP growth and investment to other things. Maybe maybe consumption, maybe you know jobs, need to think these things through, but it has to be more balanced um approach.
00:12:21
Speaker
I think that another fundamental reform should be the redistribution system, taxation. um I think still lots of people are not paying taxes. And direct income taxes is not very strong as a redistributionary force.
00:12:36
Speaker
A lot of the wealthy people are not really paying very high ah tax rates. It's actually in the end a bit regressive given that the tax system relies a lot of us. It's global issue.
00:12:46
Speaker
Yeah, it is a global issue, but China is not going to escape from that. But actually, Chinese taxation is more regressive than in many other advanced economies. But again, coming back to the the social protection, social insurance, um you know once people think that they have sustained rising wages and employment security, they're obviously going to be more free to to spend. and That will boost some kind of consumption.
00:13:15
Speaker
What about housing market? Are you still worried about the housing market? The real estate downturn, I think, is the really the primary factor causing China's cyclical economic downturn in the last few years because the property sector really went beyond property.
00:13:30
Speaker
unlike in other countries, which all had their ups and downs in property, because it represented two core pillars of the economy, a shadow fiscal system and a shadow financial system.
Economic Transition from Real Estate to High-Tech
00:13:42
Speaker
Something like 90% of local government debt is tied to real estate and 70% of national debt is tied to real estate. And talking about this, coming back to this mayor economy, political economy model, there was an urbanization craze.
00:13:55
Speaker
They actually went through, they went from industrialization craze to urbanization craze because property became even easier source of revenue. And so when that came down, it brought really down two pillars of the economy.
00:14:08
Speaker
So stabilizing real estate is absolutely crucial. In a good scenario, five to seven years. Stabilize, China can move on. Now, you've already seen signs. Five to seven years. Counting starting from 2022. we're halfway.
00:14:21
Speaker
ah In the good scenario. but And that's coming from international data. A bad scenario would be 10 years. So... um I think if you look at the wealth effect, ah you know, if if Chinese people's wealth really dropped by a third, that has major consequences on consumption as well. So, you really need to stabilize real estate to build that foundation for a stable ah rebound. But also to mention that um you're seeing signs of a transition already in the economic structure.
00:14:53
Speaker
a bit away from the real estate into broadly categorized as high-tech sector. So the government coming back to the recent ah Congress ah really is focusing on two things, consumption, so domestic demand, and productivity based on innovation.
00:15:10
Speaker
Yeah, indeed. We have seen some green shoots in terms of a housing stabilization and in terms of business confidence. I think deep-sick disruption really has made a big difference.
00:15:22
Speaker
Well, it was interesting because I was still debating foreign policy on peak China, the concept of peak China. I went from peak China to a few months later, sink moment, a major pendulum swing. And I keep ah keep on having to remind the Western audience that this is what always happens when you predict China like that, you know, going from collapse, oops, no, second edition collapse, oops, no, third edition, then peak China.
00:15:49
Speaker
Oh, and then deep sink and suddenly everybody's interested in China again. right Yeah, nobody's ah talking about China is uninvestable. and not Not anymore. And that was major thing about clients are asking me about what's going on in China, what kind of the next deep sick moment will be.
00:16:04
Speaker
Exactly. So this is what I've been trying to argue, that China's fundamentals are there. China's long-term potential is there. Just look at the people, the skills, the hard work, the scale, the market, the innovation.
00:16:17
Speaker
Yes, in the short term, confidence has been the major hindrance to the Chinese economic situation. But that's also very hard to rebuild, of course, but the fundamentals are there.
US-China Competition and Innovation Implications
00:16:28
Speaker
It's a very different ah country from just the normal countries that fall into the middle income trap.
00:16:34
Speaker
Yeah, indeed. i think nobody would expect all of a sudden tech companies and other type of companies are interested in increasing capex because of the deep seek, because of the potential integrate AI into their production.
00:16:48
Speaker
Actually, Deep sea caught the world by surprise, but I don't think it caught China by that much of a surprise. Of course, china and Chinese people were very ah thrilled because, you know, hey, look what what happened to these export controls and tech restrictions.
00:17:01
Speaker
China is still able to to make these um major achievements. ah Because if we look and live in China and observe that the daily lives, you know innovation is happening here and there all the time.
00:17:16
Speaker
Breakthroughs, small and large, are at every level. So um that's something to keep in mind, and it does permeate throughout the the economy. that the interesting thing is that I don't think this is head-on competition with the US. The US does these breakthroughs, more systematic, model-based.
00:17:36
Speaker
The Chinese applications are really, really useful because ultimately, the success of the technology and how much it actually impacts the economy depends on how much it's adopted, how accessible it is, and how much it permeates throughout society and everyday lives.
00:17:52
Speaker
And Chinese applications and and Chinese technology are much suited for that because I think the approach of Chinese innovators first start from trying to address a problem, solve a problem.
00:18:03
Speaker
And um if we look at much of the developing world, it really isn't about access to advanced technologies as that matters, but it's really about adoptability. Very interesting. Since you mentioned about the US-China rivalry, maybe we can end with that question.
00:18:20
Speaker
So do you think it's still possible for China and US s to reach a deal? What would the deal look like? ah You know, it's very interesting that Mr. Trump or President Trump, his view of China seems to be evolving over time.
00:18:37
Speaker
We don't really know, but I think that in terms of competition, it's always going to be there. U.S. s and Japan competition was quite ferocious in major tech sectors, but it really pushed U.S. to improve, U.S. to spend a lot more on its innovation system and reform its innovation system.
00:18:55
Speaker
And in turn, so did Japan. And as a result, we all have cheaper, better products.
Closing Remarks
00:19:00
Speaker
So for investors, at least from what I'm observing, if I were an investor, i think about being in both camps if I can to the extent possible, because there'll be some that will be successful and in China and the U.S. And you just don't know. you don't know which one because both have its respective advantages, but it's also on a more sanguine note, it's also less likely that they're going to converge um rather than move in parallel. Thanks for sitting down with us and discuss all those interesting issues today. Hope to see you again in the near future.
00:19:31
Speaker
Thanks. Thank you for joining us for this episode of Perspectives. Make sure you're subscribed to HSBC Global Viewpoint to stay connected