Prospects and Consequences of China’s Economic Slowdown

Tuesday, December 13, 2022

Senior Fellow, John L. Thornton China Center, Brookings Institution

Correspondent, Beijing, NPR

Fellow for International Political Economy, Council on Foreign Relations; @ZongyuanZoeLiu


Associate Editor, Wall Street Journal; CFR Member

Panelists discuss the cost of China’s zero-COVID policy, the country’s dwindling economic growth, and the consequences of China’s economic slowdown at home and on its international economic relations.


BUSSEY: Well, thank you very much and thank you, everybody for joining us today. We have a big topic: “The Prospects and Consequences of China’s Economic Slowdown.”

And we have three experts to help us kind of navigate that topic. David Dollar is a senior fellow at the John L. Thornton Center at the Brookings Institution, the China Center; Emily Feng is a correspondent in Beijing for NPR; and Zoe Liu is the fellow for international political economy at the Council on Foreign Relations—three people who can talk to us about the economic slowdown, but also some of the social implications.

So, David, let me start with you. COVID and China’s zero-COVID policies have had an enormous effect on the economy. They’ve also shaken supply chains around the world. They’ve fueled global inflation. Now they’re starting to slowly roll that back—maybe not so slowly, a little bit kind of more accelerated than many people thought that the roll back would be. So what’s the outlook for 2023, some of the trends that you’re looking at that’s going to affect momentum in the economy in China?

DOLLAR: Well, you’re right, John, that they’re rolling back their zero-COVID policy pretty quickly. I’m personally quite surprised at what they’re doing.

So I think it’s creating an unusual amount of uncertainty. It has to have some positive effect on the economy because the strict zero COVID had been a real constraint, particularly on consumption. So as they ease up on the zero tolerance policy, there has to be some positive effect, but I think it’s impossible to predict how strong that’ll be.

There are clearly going to be some resurgence of the COVID disease. We don’t know how serious that’s going to be. We don’t know how effective the vaccinations are going to be in this environment and how people are going to react.

From what I’m reading, it sounds like people initially are reacting very cautiously. So we shouldn’t be surprised if there’s only a modest effect of this.

You know, China’s going at about 3 percent during 2022, and most forecasters are adding about a percentage point to that for 2023. You know, forecasting is extremely inexact business so that could be completely wrong.

But the basic sentiment is things will be a little bit better in 2023 mostly because of this relaxation of the COVID policy, but they also face a lot of structural problems that I’m sure we’ll get into. So, you know, don’t expect a dramatic rebound.

BUSSEY: Yeah, touch on that for a second would you, David? I want to ask Zoe the same question.

If you peel back COVID and the policy toward COVID, what are some of the cyclical and structural issues that China would be contending with anyways at this stage?

DOLLAR: Well, one of the most important is demographics. The labor force has basically peaked and is going to start to decline, and it’s hard to have a dynamic economy once your labor force is declining.

And then if I were going to point to one other, it’s that they’ve really overbuilt the housing stock and certain types of capital stock more generally. You know, so the problems we see in the financial sector, to me what they mainly reflect is something on the real side, which is they’ve built too much housing the wrong places. They’ve overbuilt infrastructure in many cities, and the result of that is a lot of debt without really great assets, basically.

And that’s a problem they’re going to have to work out. So on the one hand there’s a risk of financial crisis, and then on the real side the problem is there’s just not as much need for investment as they’re used to be.

So if consumption’s constrained by worries of COVID and investment is constrained because they’ve already overbuilt a lot of capital stock, you know, then there really aren’t too many other options for getting your economy to grow well.

BUSSEY: Yeah. So, Zoe, what are you looking at in terms of decisive trends in and factors in the economy in China? And how does the roll back of zero COVID likely affect those?

LIU: Thank you very much, John, for the very good question, and I have to say, I agree with a lot of the point that David just mentioned—in particular, you know, on the debt perspective, as well as the demographic part.

And I’ll just input two additional ds there. One is demand, and the other is decoupling. And I’m happy to go into more details of that—which I consider, you know, like the four ds, you know, demand, debt, decoupling, and the demographic are the long-term structural changes that—

BUSSEY: Decoupling from?

LIU: Decoupling from the—you know, when Xi Jinping talk about the internal circulation, external circulation, I think the emphasis on the internal circulation actually departs from what China’s long-term going out strategy has been because going out is an emphasis on making sure that we use the global market as much as possible, participate in international rules so that we can benefit. Whereas Xi Jinping’s—the emphasis on the internal circulation actually make the international market as supplementary to Chinese economy, right.

But I wouldn’t say, you know, in the medium-term growth prospect in the next, you know, one to three years period of time. I think it’s going to be probably dependent upon two important factors.

One is China’s domestic adjustment in industrial policies because that is going to determine who can get easy and relatively access to credit. And then the other part is going to depend upon China’s relationship with the rest of the world, and in the particular the West because that’s where China—on the one hand, used to be China’s major market—exporter market, and now, on the other hand, it’s where China used to get a lot of inbound investment as well as access to technology.

So I’ll just stop there.

BUSSEY: Yeah, well, I mean—and that relationship with the West—not just with Europe and the United States, but kind of more broadly—is a little bit, you know, fractious at this point. It does not look as if that’s going to be contributing to China’s growth.

LIU: I think that is largely right and in particular, you know, when we think about U.S. export controls and a lot of major, you know, lesser brand—or even accelerating not just leaving China, but thinking about strategies to put, again—pull the entire supply China outside—out of China.

So I think that’s put a lot of economic uncertainties to the Chinese economy in the long run. However, I would say, you know, while there are some companies leaving China, you also have, you know, a lot of BMW—you know, especially the electric vehicle moving into China, and then on the other hand, the Chinese companies are considering establishing factories in Mexico and elsewhere.

And then, finally, China is also trying very hard to make sure that—to be an expanding marketing in the nontraditional market, for example, in the Middle East or other developing area.

BUSSEY: Yeah. We’ll come back to trade and what the business community in China’s thinking. But you know, there’s always been a lot of grumbling within the business community in China.

You can go back decades and people were saying this is a really, really hard place; I’d love to get out or move my supply chain out. And then they think, well, 1.4 billion, you know, marketplace, and they rethink.

Emily, let’s stay on COVID for just a second. I recall working in Hong Kong in 2002 and 2003 how SARS completely overwhelmed the health-care system. We saw the exact same thing happen in the United States in 2020 and 2021 with Omicron.

Is China prepared for what might happen next? Are you expecting the health-care system to be able to deal with the caseload? Or is this going to be an additionally destabilizing factor for Xi Jinping to contend with?

FENG: No, no, and yes. I mean they’re absolutely not prepared, and this is why there’s been a lot of speculation about what caused this dramatic rollback of zero COVID. Was it planned? If so, how far in advance was it planned? Did the mass protests earlier—what is it, last month, it’s December now—yeah, last month contribute to this decision?

In part, yes, but I think a lot of this is being made up on the fly just like a lot of big reform measures historically in China are. You kind of know the general direction that you’re heading, but you don’t know the exact steps that you’re taking to get there.

Just, you know, the key thing is to keep walking. But I get the sense that there was absolutely no planning. The protests fed into that in the sense that there must have been epidemiological data that showed the clusters that broke out in Beijing, Shanghai, and Guangzhou in the last couple of weeks.

We’re at a level that we’re simply not containable unless you wanted to impose a Shanghai lockdown—a Shanghai-style lockdown, which is absolutely shutting down an entire city of tens of millions of people—locking them in their homes, risking potentially other hospitalizations and deaths, leaving people to starve out in the streets or stuck in their homes because they can’t get deliveries.

That clearly was not possible anymore, and the reason why that’s not possible was very evident because of these protests. So that was what they were facing if they wanted to maintain zero COVID. But on the other hand, they had all of this infrastructure built up that was strangling their own economy, and they knew that had to go at some point.

And so I think that this was—you know, Xi Jinping does not control Omicron. This was not the trigger that he was hoping to have, but it pushed him—this is my theory—to finally say, all right, the rollback needs to begin now because we simply have no other choice.

We can’t lock our people down any further because they’re going to revolt or going to get low-level mutinies at the local level, and we can’t continue strangling our own economy, so let’s just start now. And so you see this enormous mess. You’ve seen the rollback of the digital health kit, which has happened at the national level, but local health kits at the provincial and state level still remain. So it’s still—

BUSSEY: Getting testing, that sort of thing?

FENG: The testing requirement has now largely been dropped in stages over the last two weeks, but the testing booths themselves from Beijing to much smaller third-tier cities have largely disappeared. And 80-90 percent of those testing booths have disappeared in the last week despite requirements to get tested every forty to seventy-two hours—not being dropped until about, you know, a couple of days ago depending on which city you were in.

So there’s been a lot of lack of coordination, and all of this suggests to me that this was done really, really last minute. It was not something the Chinese government wanted to do, and they simply hadn’t prepared for it.

Because you look at your health-care system and the medication they’re stocking up, their vaccination levels, the retro vials they’ve stocked up—I mean, there’s been no long ramp-up to any kind of massive opening. So I think this came as a shock to many people, and you’re starting to see that in the local economy.

I mean, full disclosure I’m in Taiwan now, but that was, you know—I love Taiwan, but it’s because the Chinese government didn’t let me go back to China. So I still have my apartment there. I have friends there.

Beijing is completely shut down. I would say now that 60-70 percent of my friends have gotten COVID. These are people who are foreigners, Chinese, American workers, very wealthy, all across the social spectrum.

It's spreading like wild through the service sector. So the kind of consumption that people were hoping would come back with the opening up of the rollback of zero COVID is not going to happen for at least a couple more months.

You look at other countries that have opened up slowly over COVID, it’s taken them two to three months to kind of ease back into pre-opening up levels, and so we should expect to see that with China—maybe a little bit faster because they already had 60 to 80 percent vaccination levels, which you mentioned, depending on the age range. But it’s going to be a couple of weeks until we see the economic activity pick back up again.

BUSSEY: A way low—but a way low booster—yeah, but a way low booster rate for the very vulnerable set, the, you know, over sixty—and that’s the one that’s going to burden the health-care system.

You know, Foxconn’s Terry Gou had been writing, you know, and saying, look, we just can’t continue this. There was a lot of business pressure on Xi Jinping to make this happen, but you also did have protests in the streets. And let’s just avert for a second into politics because that can have an enormous effect on slow growth or the acceleration of growth.

How much of this was driven by political sentiment? And did what happen—in other words, the government responding rather substantially to that political settlement, do you think that’s emboldened the public? Are we going to see additional protests over other issues—over debt, over housing, over other matters?

FENG: It’s a really interesting sociological issue. I sense potentially yes, but that’s just a wild gander on my part. I think a lot of it rides on how well the state security services do their job in the next coming months.

I was reporting on how people were getting arrested, you know, days after the protests, but these were quite obvious people. They were very, very active in online Instagram and Telegram groups organizing small protests.

They were very, very active in getting information out. These are the people who are shouting slogans the loudest and getting there earliest at protests, and then a lot of other people who were detained afterwards simply for showing up. Their phone GPS data showed that they were in the area at the wrong time.

But it seems like there is a slow-moving law enforcement effort to actually arrest and charge and put people in prison long-term for their participation in those protests, and that does have a chilling effect when word trickles out on other activism. So I don’t know whether that push-pull, whether that control or sense of empowerment—that yes, they actually did provide some kind of social feedback to the government to tell them that Shanghai-style lockdowns in the future were not going to be possible or welcome in the country—whether that might embolden future protests. I think it depends on how strong—how pervasive China’s technological surveillance

controls are. You know, this might be a good litmus test, actually, for how well-developed China’s surveillance state really is.

BUSSEY: David, let’s take a step back and look at kind of a macro issue. An economy the size of China, can it get its mojo back without more liberalization of the private sector?

We’ve seen the government step in. There’s positives—a clampdown on corruption. There’s potential negatives, which is stultification of entrepreneurism. Is Xi Jinping going to have to liberalize more to get that slow economy back to faster rate?

DOLLAR: So I’m in the camp that thinks that the kind of more statist policies under Xi Jinping are retarding entrepreneurship and innovation, and that, you know, if they want to get back toward a sustained decent growth rate, they’re going to need more entrepreneurial activity, more innovation, more private sector, basically, you know.

So there’s always been something of a tension within the Chinese leadership about the extent of relying on market forces versus statism, and Xi Jinping leans towards the statist point of view. And you know, I think that’s bad for the economy, basically.

You know, he’s cracked down on some very specific sectors like online tutoring, for example, online platforms more generally, but that tends to have a chilling effect on the whole private sector. And it is still largely a private sector economy, you know, with a lot of dynamism.

So I think, you know, he definitely faces a trade-off there, and he seems to lean toward the statist side pretty obviously. But presumably, the whole top leadership is pragmatic to some extent, you know. I think they—if their growth rate slows down too much then a lot of their other aspirations basically go away.

So I do take—like, for example, what we were just discussing, you know, I take that as, you know—as an example of Xi Jinping and the leadership being somewhat responsive to the actual situation. And hopefully on the entrepreneurial side they’ll have a similar attitude.

So yeah, I wouldn’t expect complete flowering of entrepreneurship, but I could easily see some pendulum swing back toward more focus on the private sector. They certainly need that.

BUSSEY: Where would we see the early evidence of that pendulum swing?

DOLLAR: Well, I think their export sector has continued to do well, and you know, a lot of that—a lot of the value added in their export comes from the Chinese domestic private sector.

Now they’re—you know, global demand, what’s happened in the global economy has an important influence on that, but they’ve basically held up pretty well in terms of their share of global exports. So I think, you know, continuing to see that kind of dynamism in the export sector, it would be a good signal, for example.

BUSSEY: So, Zoe, you mentioned decoupling. It feels like there’s a bit of containment going on right now in trade relations between the United States and China.

You’ve got restrictions on semiconductor sales to China. You’ve got industrial policy reemerging or emerging with greater fervor in the United States—$50 billion investment in semiconductor manufacturing in the U.S. All sorts of talk about bringing home structural—you know, production critical to the supply chain in the United States.

Looks like trade relations is going in a negative direction between the two countries. Where would we see early indications that that might be altering in a new, more positive direction?

LIU: Yeah, thank you very much, John, for this great question. I would say, you know, yes, there are lot of challenges in U.S.-China trade relations, and if we—especially if we read the news headline, it almost feel like, you know, the trade relationship between the two countries have always been deteriorating.

But I would say, you know, despite a lot of these talks about a decoupling, when you look at the number, China is actually still very large trade partner that has maintained the top three, in terms of total export destination, actually—even as a result—even after the effect of the trade war and all that.

And if we look at—yes, you know, I study decoupling, export control, and investment screening. But when I look into the data, actually, you know, the data is not all that bad. For example, taking export control under the license—the export license application, as one example, only 1 percent of all these U.S. export to China are subjected to export control, and of all these 1 percent, you know, about 80 percent—meaning 80 percent out of this 1 percent actually get approved. So from that perspective, it’s not necessarily all is bad.

But I have to circle back to what David just mentioned, the role of private sector, and in particular small and medium-sized enterprises. Because they actually do contribute directly to the U.S.-China trade from toys to, you know, more sophisticated industrial manufacturing.

And more specifically I would say previously you have people like Liu He, you know, who emphasize the role of private sector, small and medium-sized enterprises. You know, he has this line, like, great, right? You know, he says small and medium-sized enterprises that comprise about 50 percent of revenue contribution, 60 percent of GDP, 70 percent of technological innovation, 80 percent of employment, and just the number per se they are like, you know, 90 percent of the total Chinese companies.

But then, on the other hand, a lot of small and medium-sized enterprises, both in terms of their domestic contribution to GDP as well as their contribution to export growth, they actually suffered a lot because of COVID as well as the weak international—weak consumer demand from the global—from global market. This happened—I would say this is not unique to China. You know, small and medium-sized enterprises—or you know, small businesses—suffered here in the United States as well. But I would say the recovery of small and medium-sized enterprises and the private sector would actually depend a lot on where China’s industrial policies is going to move. If China is going to continue to channel the majority of the money and focus into strategic sectors that are largely dominated by SOEs, and in order to apply for grant for R&D you have to have some sort of affiliation with SOE, I think that is still not necessarily—

BUSSEY: State-owned enterprises.

LIU: Exactly.

BUSSEY: Yeah. Well, and that gets also to the nub of the problem between the United States and China, which is the U.S. has been complaining for decades now about state subsidizing of select industries—making them, as a result of being state subsidized, too competitive in global markets against private sector companies that are out there trying to get a rail contract in Pakistan or you know, someplace else.

But why should we expect any of that to change? Massive government subsidies of select industries continue intellectual property theft. It’s worked for China up until now. It seems to be, you know, a winning combination.

Why would Xi Jinping change that industrial policy, and if he doesn’t, doesn’t that just suggest that we’re going to be in tighter worse relations on a trade front with China?

LIU: No, that’s a terrific question. I would have to say, if I look at this question, I would look at the fundamental challenge, which is, from the U.S. perspective, which is for a long period of time we are not necessarily—excel at identifying inbound investment, especially who actually is behind the money.

And for a lot of—but over the years, CFIUS and we have improved our investment screening regime, and especially through our forensic financial analysis we try to identify who is behind the money, what is the ownership implication could be. So that from—very much would deter a lot of potential strategic-oriented Chinese investment into the United States.

And it’s not that we are doing it; the European Union is doing it. And on the other hand, the Canadians are also upgrading their investment screening regime. And you know, many of them are even forcing Chinese state-owned ownership to divest from critical minerals, critical—other kind of advanced technologies. So that is a challenge for China’s state-led investment and state-oriented or state-financed capitalism.

But I would say a lot of—we would probably see a lot of new varieties of Chinese joint venture partnership, not just inside of China but outside of China as well. And probably Xi Jinping is going to double down on his so-called—I study sovereign funds, and I think it’s very interesting that Xi Jinping has consistently emphasized sovereign wealth fund in his diplomacy with France, now in his diplomacy with Saudi Arabia and the Gulf countries. So we will see different varieties of partnership between state-led capitalism.

BUSSEY: Yeah. Emily, you’re in Taiwan. It’s difficult to get back into Beijing. The Wall Street Journal’s had the same problem—booted all reporters out.

This is in general. It’s dicey-er being in China. It’s a little bit more unpredictable.

But in your discussions with CEOs and other U.S. companies, as much as Apple might talk about diversifying production to India and Vietnam, some of that is just diversifying the growth of its infrastructure in China. Is there really any serious move for disengagement with China from European and American business, or is this more grumbling?

FENG: I think it depends on the size, and it depends on where they are, how far long they’re invested in China.

So I spent quite a number of months in Europe, and particularly Eastern Europe over the last couple of months when I was still waiting to see if China would let me back. And if you talk to small and medium-sized businesses there—or you know, big enough at least when it has a couple hundred million dollars into a business in China—they’re extremely pessimistic. They’ve already basically exited the market from China because they maybe spent the last decade building up a presence there—building relationships, building a couple of small-ish factories—but it’s not so big that they cannot just walk away after three years of being locked out.

They’ve sold whatever they can at a fire sale price to their Chinese partners and just given up, and they are not going back. But if you’re massive, if you’re a German car company, for example, that’s not something that you just give up on. That’s something you’ve built up over decades through political capital and through actual financial capital, and so you’re kind of locked into that.

I think you’re still going to see market sentiment dampen over the next couple of months because basically everything that makes China a good place to do business still—logistics, cheap labor—that’s still not there. In fact, it’s only going to get worse.

Just kind of anecdotally, for example, the Omicron variant is spreading so quickly through the migrant worker community—that in Beijing friends are sending me videos of massive logistics piles up of boxes on the sidewalk.

I’m trying to assemble a cabinet. I got a call from a company yesterday saying literally all of our workers are coming down with COVID, so if can you please come earlier because if we wait until Friday—which is when I wanted it assembled—we’re going to have no workers left. (Laughs.) So can they please come Tuesday?

BUSSEY: Shades of what happened in the U.S.

FENG: I said, sure, but the problem is there’s no one to let you in because my housekeeper also has COVID. I mean, it’s just everything has been breaking down for the last three years, and it’s only going to get worse until it gets better.

But to circle back to your first question, I think that you’re going to see this divergence. For the really, really truly big players that have made China their biggest market, it’s going to be a very, very slow shift away.

We’ve seen the beginnings of that. I don’t know if that momentum, that motivation to stick with that mission will continue. But for everything below a certain threshold, they’ve already left, they’re scarred, they’re not going back.

BUSSEY: We have just one minute left before we go to questions, and I’d like to get to the elephant in the room. And Emily, maybe you could just address this for us quickly, and maybe we can come back to it during the questions.

The country’s getting older. They don’t have a young workforce. This is going to put all sources, stresses, and strains on productivity.

Is anything that the government is doing encouraging larger families? Is anything that the government’s doing correcting that problem?

Emily, I’m going to ask you that question.

FENG: So far, no, and that’s how I interpreted the whole common prosperity push, and the crackdown on private education. It was a means of social control, but it was also—and also a bit of kind of virtuous signaling of what kind of values do you want your society to have.

But also, I saw it as a measure to lower the cost of raising a child and having a family. But I don’t think it has had yet any meaningful impact on people’s decisions, whether or not to have more than—well, to have a child to begin with.

And you know, I am friends with a lot of people in their 20s and 30s because that’s how old I am, and I can tell you that people in China of that age range are not interested in getting married and having children. If they live in a city, they have a good job. They’re facing a lot of other pressures—professional, financial, whatever—and they’re certainly not going to have two.

And I think the way that zero COVID has gone over the last three years has also not encouraged that. It’s pretty depressing to be stuck in your home for months on end every year.

But it’s also—particularly in cities, which is exactly where you would want people to have larger families—not given people a measure of confidence that they can raise their children safely.

BUSSEY: Good. We’ll leave it there for the moment, and we’ll go to questions. And if the operator can come in and give the instructions for that, again?

OPERATOR: As a reminder, to ask a question, please click on the raise hand icon on your Zoom window. When you’re called on, accept the unmute now button and proceed with your name, affiliation, and question.

To view the roster of CFR members registered to attend this meeting, please click on the link in your Zoom chat box. We’ll take our first question from Tara Hariharan.

Q: Thank you so much. My name is Tara Hariharan. I work for a hedge fund called NWI based in New York.

My question is sort of an extension of the excellent discussion on demographics that you have had already, and that is how the prospects for youth unemployment are going to develop in China as we come out of the COVID pandemic. Is this something that was very COVID-related or is this a more structural issue that youth are going to find themselves out of jobs or with a skills mismatch?

And then related to that, how do you see the Chinese consumer progressing out of COVID because it seems that even pre-pandemic, the Chinese household was much more conservative and saved more, for instance, than Western households. And so how do you see the Chinese consumer emerging out of this situation? Thank you.

BUSSEY: Yeah, thank you—core questions. David, can you tackle that one?

DOLLAR: Well, I think it’s an interesting paradox that we’ve been talking about the demographic change in China and aging of the country, the decline of the workforce, and yet at the same time, as implicit in this question, there’s very a serious problem of youth unemployment—I think about 20 percent, though government statistics on unemployment are really not very good.

And so I do think what’s happening there is China is graduating a very large number of young people from colleges and, you know, there’s a shortage of factory workers that’s starting to develop, but there’s an excess supply of college-educated workers looking for—you know, looking for work and different kind of work than obviously factory work.

The college educated mostly go to work in service sectors, you know, a lot of which are consumer-oriented ultimately. So, you know, China’s problems are interrelated. I mean, if they could develop more of a consumption-based growth pattern, there would be more jobs for college educated. They could cut into that problem. You know, they’re still going to have the shortage of factory workers; there’s probably not much they can do about that.

BUSSEY: And the consumer? The questioner also wanted to look at the consumer.

DOLLAR: Yeah, so I—yeah, so I think that, you know, it’s hard—obviously, it’s hard to predict, but my instinct is that China was gradually developing more of a consumer economy and that the whole COVID thing sets them back. I mean, obviously it set them back while it was happening, but I think even now, you know, it has just been one more lesson for people about being cautious, and that you can’t really trust the state to take care of you effectively.

So in general, as societies age, we would normally see the overall savings rate come down and the consumption rate go up, but I’m not sure we’re going to see that in China. Old people seem to save an awful lot there, so I think breaking that excess savings mentality, highly risk-averse mentality is going to be quite difficult.

BUSSEY: Operator, let’s take the next question.

OPERATOR: We’ll take our next question from Bob Grady. (Pause.) Mr. Grady, please accept the unmute now butt

Q: Thank you very much.

In raising the topic of decoupling, we kind of attributed it in this conversation to Xi Jinping’s, you know, sort of ideological disposition. But recall that, of course, the United States imposed substantial tariffs on Chinese imports under the Trump administration, and they have not been removed under the Biden administration. In fact, controls have—trade controls have increased, of course, with pretty strict controls on semiconductor, you know, components and even rather pedestrian technology in terms of electronics and (semiconductors ?), not just national security sensitive items.

So my question is, I guess, twofold. One, in a world of high inflation, is it not in our interest to remove those tariffs against Chinese imports to ease the price pressure on the U.S. economy, but also, to what extent do you think some of Xi Jinping’s reaction and sort of contribution—if you want to call it that—to the decoupling phenomenon has been in reaction to the United States evincing, you know, less interest in a cooperative relationship with China?

BUSSEY: Zoe, can you tackle that one—maybe take the second part of that first?

ZONGYUAN: Yeah, sure. Absolutely. I think, Mr. Grady, it’s great to hear your voice, and I think you are absolutely right. You know, it takes two to tango, right? Yes, I’ll touch upon the issue from China’s perspective, but absolutely, Chinese foreign policies, and in particular, foreign economic policies are very much reactive. And to a large extent, so is the United States, as well, right? So it’s hard to say that Xi Jinping’s dual circulation policies, and in particular, his emphasis on domestic circulation or the emphasis on the domestic economy as a driver for the Chinese economic in the long run is not a reaction towards the U.S. export controls or, you know, some screening and so on and so forth. And then on the other hand, it’s also in the broader context of the narrative of the relative decline of the West since the global financial crisis, so all of these kind of like—you know, all—they bake in together.

But to go back to your first—the first part of your question in terms of to what extent—what was the first part again? To what extent they—

BUSSEY: It’s inflation—inflation and doesn’t the policy just worsen inflation in the U.S? Shouldn’t we roll back tariffs on China?

ZONGYUAN: Right—absolutely. So that—I think that’s an excellent question. There are a lot of discussions, especially at the beginning of the year when we are very worried about the prospect of the inflation, right? There are a lot of discussions about we should relax or remove the tariffs on Chinese goods so that we can relieve the tariff pressure. I agree. I think I subscribe myself to that camp.

But what worries me even more is that, yes, Chinese CPI this month only increased by 1 percent or so compared with the last month’s, but as the Chinese—as China relaxes COVID policy and the Chinese—the people think of China’s still very large stick with very much stimulus policy, I’m worried in terms of the central bank policy divergence between the PBOC and major Western central banks because if we learn anything from the global financial crisis, it’s coordinating central bank policies. But now we are not seeing that. We are not seeing that from the People’s Bank of China, or from that matter, Bank of Japan. So I’ve relatively concerned about further inflationary pressure as China comes out.

BUSSEY: Emily, Mr. Grady pointed out that this current administration has not rolled back Trump administration initiatives against China. Shouldn’t Xi Jinping take that as a worrisome indicator that the attitude toward China is one of the very few things that is bipartisan in Washington, D.C., and that a harder line on China is wanted by both Republicans and Democrats? Is that registering?

FENG: Oh, absolutely. It has been registering for the last, I would say, four years or so in China at a very, very visceral level where ordinary people read the news, and they ask you, you are American; explain to me why we are not allowed to develop like any other country in the world? Why is the U.S. trying to contain China? So it has trickled down to a very, very grassroots level. Ordinary people feel it and they perceive it as impacting their lives.

And so far, I mean, this year you see that—I think next year you are going to see China start to play nice because they know that this is baked in; that this kind of economics is political, and the political is deeply ideological, is going to stay for a while. And so there is no reason to speed things up; it’s a marathon. But the fundamental issues are not going to change. I think U.S.-China relations will get better, but it doesn’t mean that the fundamental issues are going away.

BUSSEY: Operator, let’s take the next question.

OPERATOR: Let’s take our next question from Edwin Truman. Mr. Truman, please accept the unmute now button.

Q: Thank you very much. Ted Truman at the Mossavar-Rahmani Center for Business and Government at Harvard.

I’d be interested—picking up the last couple of questions—I’m interested in the outlook for U.S. and China cooperation on a range of issues—economic issues in the world, or do we see the geopolitics of the situation—each of you see the geopolitics of the situation as forestalling that or limiting that? My hope is actually—my hope—my hypothesis is that there will be some areas where the two countries and their like-minded fellow countries will be able to cooperate, but maybe less so than has been the case in the past. But I’d be interested in your views which relates to these trade issues that you were just discussing. Thank you.

BUSSEY: David?

DOLLAR: Good to hear from you, Ted Truman. I think your instinct is right that there are global issues where the U.S. and China are going to have to grudgingly cooperate. Climate change is one of them, developing country debt problems are another one. The cooperation, for example, in dealing with developing country debt, it’s not very smooth.

The Chinese are not part of the Paris Club group of creditors, as you know, Ted, but we do see some progress in countries like Sri Lanka and Zambia, you know. And so China and the U.S.—you know, given that the U.S. is the main mover within the IMF, it’s fair to say that the U.S. and China are grudgingly cooperating on some of these issues.

But the cooperation could be a lot smoother, obviously. You know, these are two—these are the two overwhelmingly biggest economies in the world. I think people often don’t appreciate or mention this, that not only are the U.S. and China about the same size, but then when you jump to number three, Japan, it’s really a big, big change from the size of Japan compared to, say, the United States or China. So we live in a world where you’ve got two dominant economic powers, and I think they do grudgingly have to work together.

I would have thought trade would be an issue, as well, but clearly it’s hard to see any example of cooperation on trade between the U.S. and China at this point. I’m sure you all saw there was a WTO decision saying that, you know, some of the Trump-era tariffs are clearly violating the WTO, and the Biden administration response is basically, you know, who cares; we’re not going to do anything to change our trade policy even though it violates the WTO.

So it’s distressing to see the lack of cooperation in trade, but I do think there are other global issues. You know, I’m sure there will be another health pandemic at some point. That’s another area where you could get cooperation between China and the U.S., but we’ll have to see how smooth or how grudging that is.

BUSSEY: Could we get the next question?

OPERATOR: We’ll take our next question from Adam Silverschotz.

Q: Hi. Thank you all for a great panel.

On the comment that Emily made a moment ago about playing nice being a bit more of a new tone from the Chinese side over the next couple of years, would love to hear the group’s views on that with respect to capital markets, which, you know, has been in a deep freeze over the last couple of years, you know—from the Chinese side blocking IPOs of big tech companies; from the U.S. side, you know, tightening the screws around PCAOB. Accounting standards—I know we’re in the kind of final strokes of those meeting that have been going on.

And clearly from an institutional investment standpoint, there has been kind of a pencils-down, you know, viewpoint with a few exceptions in terms of, you know, large, you know, private capital investment, you know, from the U.S. into China, and a huge diversion of that into India and other markets that have been—that have been a recipient of those money flows.

So I would just like to hear kind of the thoughts, you know, next couple of years does anyone anticipate, you know, kind of flagship, you know, reopening-type events on that front, whether it’s a financial lPO, a ByteDance IPO, full resolution of the accounting issues, and kind of, you know, long-term visibility for the Chinese ADRs in the U.S. market—you know, just those kind of topics, I’d love to hear your views.

BUSSEY: Zoe, your thoughts?

ZONGYUAN: Yeah, sure. I just wanted to say that it is great to hear Adam’s voice, but before that, I’d like to say thank you very much, Professor Truman, for joining the conversation today. I’ve been a student of yours for many years, so good to hear your voice.

So go back to Adam’s question, right? I would say I’m relatively optimistic but very cautious in a sense that I don’t necessarily see swift policy changes with regard to China allowing or even encouraging major Chinese companies to—both private or even floating additional shares of SOE in Western market. I don’t necessarily see that happening any time soon specifically because China—a very important piece of regulation is regard to the data policy and data standard setting. And to a large extent that is very much in Beijing’s broader kind of standard of setting statecraft or engagement with the West.

So very much I would anticipate that Beijing is going to figure out what exactly it wants its data policy and data privacy laws, in particular, to be implemented before encouraging any major Chinese tech companies in particular to invest—to float shares abroad.

And then on the other hand, inviting—China has always been inviting—or hoping that international capital still coming into China. So the day after the close of the 20th Party Congress, that NDRC issued a guideline, and one of which is about signaling China’s continued effort to allow international investors and international professionals with the right type or desired expertise to go into China. So I think the—we are going to see different directions at different area.

BUSSEY: David—

FENG: May I jump in real quick?

BUSSEY: Please.

FENG: Adam, I think it will get slightly better, but the problem is national security. The U.S. and China are obsessed now with protecting national security interests and the vast expansion of what is considered part of national security—TikTok is now part of U.S. national security interests—means that you have vast sectors in China—and it’s closely related to what Zoe is talking about with data policy—are now considered sensitive because you are obtaining potential information about even Chinese consumers; what they buy and what they eat. And in China’s view, that is now sensitive data, particularly if an American company has access to it.

And so I’m kind of pessimistic about the long term of them opening that up and letting Chinese companies go abroad again and do IPOs abroad because—and this is where the instability comes in. One day this is considered just purely consumer tech, and another day it’s considered sensitive national security information.

BUSSEY: It’s Huawei. David, your thoughts?

DOLLAR: Yeah, basically I agree with Emily’s largely pessimistic assessment. You know, aside from the Chinese attitude, I would say on the U.S. side if you think about both the Democratic Party and the Republican Party, you know, nobody really wants to carry water for Wall Street basically.

So I just think it’s not a high priority on the U.S. side to, you know, push for China to open up its capital markets.

BUSSEY: Can we get the next question?

OPERATOR: Let’s take our next question from Lindsay Iversen.

Q: Good morning. Thank you for a terrific discussion. I’m Lindsay Iversen, an adjunct senior fellow with the American Security Project.

I wanted to introduce a new topic, which hopefully you will have some views on, which is climate change. China and the U.S., in addition to being the world’s two largest economies are obviously also its two largest emitters. Climate change is an area that the United States at least has tried to protect and separate from bilateral relations; China has obviously recently indicated that it’s hoping to link those two things.

And so I just wondered, you know, in the context of a slowing Chinese economy and the context of, you know, spikier relations across a wide range of areas, where you might see Chinese climate policy and U.S.-China bilateral cooperation on climate going. Thank you.

BUSSEY: Yeah, a huge economic issue, and it gets back to Ted Truman’s question about is there any zone for cooperation.

Who would like to field that question? Zoe, I’m going to call on you.

ZONGYUAN: Sure. I think—I actually do think climate change is going to be a very—I would even go ahead and describe it as a low-hanging fruit to get U.S.-China relationship—at least put a floor under it. So I’m very optimistic about prospect of cooperation along the lines of climate change.

But that said, it’s not that there are not potential, you know, points of tensions, especially with regard to subsidies of solar panels and so on so forth. So on the one hand, yes, it is—in terms of policy-wide, in terms of

the so-called, you know, global governance for climate change, I think China is very much on board. And that is—from the Chinese policymakers perspective that is a talking point where, even before, you know, Nancy Pelosi’s visit to Taiwan, that’s one of the very few limited channels that keeps the two countries and the leaders talk. So I think that is going to be an area of cooperation.

BUSSEY: This is also an economic—there’s also an economic incentive for China. This is a—this is an industry China wants to dominate and has articulated that.

ZONGYUAN: Absolutely, yes.

BUSSEY: Can we get our next question?

OPERATOR: We do not have any questions in the queue at the moment. A reminder to CFR members: to join the conversation, please click the raised hand icon.

John, I’ll turn it back over to you for the moment.

BUSSEY: OK. And a reminder also to everybody that this is on the record. It will be posted on the website—CFR’s website later on.

David, let me come back to you on this financial question that we got earlier. How would you rate Xi Jinping on the restructuring front? There’s been pickups and momentum, and then decline and momentum over the years on financial sector restructuring and other industrial sector restructuring.

What’s his grade at this point, and what’s the prospect for additional opening up?

DOLLAR: So I would give him a B-minus, and I would make a distinction between the kind of macro side and micro side. And what I mean by the macro side is, you know, China for a long time had very rapid growth of credit overall, a lot of it directed to real estate, building up leverage in the economy.

You know, in the last few years, despite a bumpy road, you know, they have really brought the leverage of the whole economy under control to some extent. So I have to give them, you know, a positive mark on the macro side of recognizing the risks there.

On the—what I mean by the micro side is I think, you know, there are a lot of inefficiencies in the allocation of capital in China, and a lot of it comes back to poor functioning of capital markets. You know, if you are a successful private firm in China—domestic Chinese private firm, you can’t just meet standards and then issue stocks and bonds the way it happens in the United States. You need all kinds of chops—approvals basically—and the state, you know, tries to use access to the stock and bond market as a kind of tool of industrial policy. And I would say the evidence is they’re not very good at that, you know, because the efficiency in the use of capital has gone down very dramatically over the last twenty years or so. So they’re not—you know, they’re not doing a good job.

I think this was already alluded to—I forget by whom—that, you know, you’ve got a lot of successful firms that can’t get access to capital, and it’s definitely in China’s interest to be reforming those capital markets. They have really good technocrats who know what to do, so it’s basically a political decision of are you willing to give up a certain amount of micromanagement from the state in order to have more efficient economic growth, and so far I would say they’ve shown a lack of willingness to do that.

BUSSEY: Zoe, David’s B-minus for Xi Jinping—is that a shared view?

ZONGYUAN: I think so. I would probably do the same grade, but I would—but the reason I would not make a A or A-minus is because he does put a lot of emphasis on state control, and more specifically, he not only—his emphasis is not just the state emphasis on personnel management of SOEs but also putting a lot of emphasis on state management of the capital managed by SOEs. In other words, there is a shift in terms of what the state has to control.

BUSSEY: Emily, let me ask also you about this question on entrepreneurism and structural change that might encourage it or not encourage it. Jack Ma is now living in Japan. He was a figure that maybe got a little bit too powerful—a power center that the party felt was potentially a threat. That’s a great example of one of China’s foremost entrepreneurs getting defenestrated.

Is the mood that you are seeing in China, well, that happens if you get outside the guardrails? But there’s still plenty of room to operate as an entrepreneur within the guardrails where you are not going to get in trouble with the Party.

Which is it? Where is the mood headed on this?

FENG: It’s a good question, and I get a sense of a different mood like every single week that I was in China, so it just really depended on what four or five people you talked to that week.

I think in general, though, overall, this is where public communication and signaling is really important because, as you mentioned, if—for the most part, if you colored within the lines, and you knew where industrial policy was going, and what the priorities were in the next five-year plan, then you could be quite smart, and work within that, and do pretty well for yourself.

Some of the biggest high flyers might get cut off but, you know, by definition that’s .01 percent of the entrepreneurial community. Everyone else still flourishes.

And so this is where the Communist Party has to be pretty clear about where its priorities are and then stick with them for the five years that it lays out, and not change the way that we’ve seen over the last five years with the real estate sector, with consumer technology basically, private education, things like that. That’s where you start to see things get messy because people thought they were reading the signals, and then this came out of nowhere.

But for the most part, I think people feel like if they can read the political tea leaves well, they’re OK.

BUSSEY: Zoe, you raised the—

FENG: I think we have two questions in the—sorry.

BUSSEY: Ah. Operator, do we have a question from the member?

OPERATOR: We do. We’ll take our next question from Joseph Nye.

Q: Thank you. I found this an excellent panel.

I was puzzled, though, when David Dollar referred to 3 percent growth. What should we believe about economic—(audio break)—familiar with the Li Keqiang Index, and many people think that the official number of 3 percent is closer to zero or 1 percent. What do you think is the value of Chinese economic statistics?

DOLLAR: So I think Chinese economic statistics have a lot of weaknesses similar to other developing countries. You know, they are just different in being, you know, so enormously big that we care about that.

I generally think that in good times Chinese statistics tend to, you know, overstate how things are doing and then during down terms they tend to understate the degree of that. So I think there is some systematic bias.

But they give you the trend, you know, so, you know, last year was pretty good in terms of rebound. This year is very, very poor, and the expectation, as I said, is next year might be slightly better.

I personally look at a lot of different micro statistics like automobile sales, airline travel, et cetera. You know, if you want to try to create an alternative index, you have to look at a lot of different things. That Li Keqiang Index, that’s the old China basically where the movement of coal and a few specific things—electricity use would tell you a lot. But it is definitely more of a service economy now, so you’d have to look at a lot of things like some of the ones I just mentioned. Movie ticket sales would be another good example.

So where you have associations that publish data, you know—like the Automobile Association—you know, I think those are generally reliable, and you can kind of aggregate that up to get a pretty good picture of the macro economy, and it’s just not quite as good as their official statistics say.

BUSSEY: Good. Do we have another question?

OPERATOR: We’ll take our last question from Edward Cox.

Q: Yes, Edward Cox, Committee for Economic Development.

Larry Summers, whose views at least I have learned to take seriously, has said that years from now we’ll look back at China the way we look back at Japan in the early ’90s being number one, or the Soviet Union back in the mid-’60s—that they were going to overtake our economy.

What are the views of the panel on that?

DOLLAR: Well, I tend to agree with Larry Summers’ sentiment on that. I think China is likely to emerge as the largest economy in the world, you know, sometime in the next 20 years or so, but probably only, you know, modestly bigger than the United States. And then later this century, the United States may very well come back as the biggest economy in the world.

So I do think there is this tendency in Washington to think China is ten feet tall. I don’t think it’s ten feet tall; I think it’s got a lot of domestic weaknesses, and we’ve gone into some of these during the panel. And they’ll probably do OK in managing some of these, but they’ll come out with a—you know, a somewhat moderate result, and it’s just they have 1.4 billion people, so they only have to get to one quarter of our per capita GDP to be about the same size. They will probably make it to that.

BUSSEY: Zoe, we have thirty seconds left. I’m going to give you the last word on answering that same question.

ZONGYUAN: I think China is—in terms of the size, the Chinese economy will grow, and probably become number one, but it is a matter of the quality and the composition of the economy.

BUSSEY: So Zoe Liu, Emily Feng, David Dollar, all of the members who tuned in today, thank you so much for joining.

A word that the transcript for this will be on the CFR website shortly. You can review the comments there.

Thanks, everybody, for joining.


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