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There are major fault lines appearing within the Chinese economy, particularly within many of the state governments' budgets. Large debts are now all coming due, and the leadership in Beijing will be faced with several tough decisions within the next few months.
Will Xi choose to plunge the country into a self-imposed, but managed downturn, or will the bubble burst on its own, throwing the country into economic chaos? We sit down with our panel of experts to find out.
Episode Overview:
Part 1: Broke, Breaking, or Burgeoning? (4:15)
Joanna Chiu takes aim at the perception that the Chinese Communist Party (CCP) has been an economic powerhouse in lifting millions of people out of poverty, noting that income equality and living conditions continue to be stratified and immobile.
We discuss how to interpret and validate China's GDP and economic performance, given the notoriously unreliable data released by the CCP. We also discuss what was behind the decision to not release economic figures ahead of last November's National Congress.
We unpack the dominant role of real estate in the Chinese economy, with Chiu noting a cultural preference towards real estate, as well as economic and regulatory difficulties in investing in other wealth assets.
Part 2: Price Tags and Red Flags (21:33)
Wright notes that China's economic performance over the last decade is unprecedented, an impressive feat, but that by that very fact there will be a structural slowdown and diminishing returns at some point into the future, and possibly already manifesting.
Wright explains the local government financing vehicle (LGFV) debt crisis, created from over-enthusiastic local government spending on development encouraged by Beijing to drive domestic growth and fuelled by a market hungry for real estate and speculators looking to profit.
We look at the factors that drove economic growth over the last decade and what the future will require to maintain growth while addressing infrastructure needs and operating in a high debt environment.
We discuss the impact on credit domestically and the financial sector struggling to stay afloat in difficult economic conditions, with significant rising pressure on the smaller banks and financial institutions.
Part 3: An All In Bet on Skyrocketing Debt (57:34)
David Dollar assesses the CCP's economic policies in responding to the challenges facing the Chinese economy, noting some sensible, positive changes but other questionable pursuits, such as the crackdown on the digital economy and WeChat users.
Dollar notes the recent investment into Chinese real estate has been driven by speculation and the current housing stock is unaligned with demand in population centres. He notes that significant time will be required to build the capital and stock markets required to allow Chinese investors to diversify away from real estate.
We note the increasing trade and investment in South East Asian and East Asia, helping to diversify the Chinese economy away from the US and to a lesser extent Europe, and discuss the prospects for the future.
We discuss the role of the US dollar as a crucial reserve currency and the likelihood of the renminbi ever reaching a similar status in international markets.
We discuss the policy options open to the US in order to decouple from the Chinese economy or to at least insulate the US economy from any potential Chinese economic crises.
Episode Guests:
Joanna Chiu
Journalist for the Toronto Star, covering national and international news
Former correspondent based in Hong Kong and Beijing, and a regular expert commentator on regional issues for international broadcast media
Chair of the not-for-profit NüVoices network to support women and minorities in China-related fields
Logan Wright
Partner at Rhodium Group and leads the firm's China Markets Research work
His research focuses on China’s financial system and credit conditions in shaping outcomes within China’s economy, as well as the policies of China’s central bank
Adjunct Fellow of the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies
Previously head of China research for Medley Global Advisors and a China analyst with Stone & McCarthy Research Associates, both in Beijing
David Dollar
Senior Fellow in the John L. Thornton China Center at the Brookings Institution and Host of the Brookings trade podcast, Dollar&Sense
Formerly the U.S. Treasury’s Economic and Financial Emissary to China, based in Beijing, facilitating the macroeconomic and financial policy dialogue between the United States and China
Prior to joining Treasury, Dollar worked 20 years for the World Bank, serving as country director for China and Mongolia, based in Beijing (2004-2009)
The Red Line's Chinese Economy Reading List:
We’ve compiled a list of further reading to better understand the geopolitics of China's economic growth.
Books:
China Unbound
Joanna Chiu
China: The Bubble That Never Pops
Thomas Orlik
Superpower China
Hermann Rupold
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