The Rise and Fall of Great Powers? America, China, and the Global Order

Panelists discuss the rise and fall of great powers and the competing grand strategies of the United States and China.

The C.V. Starr & Co. Annual Lecture on China was established in 2018 to honor the trailblazing career of C.V. Starr and the Chairman and Chief Executive Officer of C.V. Starr & Co., Maurice R. Greenberg.

KURTZ-PHELAN: Thanks so much. Welcome, everyone, to today's Council on Foreign Relations C.V. Starr & Co. Annual Lecture on China. I'm Dan Kurtz-Phelan, I'm the editor of Foreign Affairs. Today's lecture is, in fact, a discussion with the not exactly modest title, "The Rise and Fall of Great Powers: America, China, and the Global Order." That's quite the question to grapple with over the course of the next hour.

Fortunately, we've got three panelists who are not only each incredibly accomplished and distinguished in his or her own right, but also bring really a kind of fascinating mix of perspectives to the questions at hand and, say, from the perspective of someone in the foreign policy world, a mix of perspectives that are too rarely brought together in one conversation. So that gives me hope that we can make some progress here.

We have Ray Dalio, who has long been well known as the founder and co-chair of Bridgewater, the world's largest hedge fund, but he's also increasingly well known for bringing the insights and experience of Bridgewater to analysis of global economic and political currents which he does in his forthcoming book, The Changing World Order: Why Nations Succeed and Fail.

Liz Economy is well known to everyone at the Council has one of the foremost American scholars of China. She is the author of The Third Revolution: Xi Jinping and the New Chinese State. She also sent off a manuscript of a new book over the weekend that will be out later this year. After a couple of decades leading the Asia program at the Council, she has recently decamped for Hoover on the West Coast, but she is still senior fellow for China studies at the Council. So she will be with us going forward.

And then we have Paul Kennedy, one of the foremost historians of international relations. He is a professor at Yale and has written a slew of important books on everything from naval history to the United Nations and beyond. But he is probably best known for The Rise and Fall of the Great Powers, which is, of course, most pertinent to the discussion today.

I just want to note that Hank Greenberg, the chairman and CEO of C.V. Starr, is, I believe, with us today. I'm sorry not to be able to peer out into the audience to confirm that. But, if so, glad he could join us.

Paul, since the title of your book was borrowed for this session today, it's only fair that we start with you. If you were doing the preface to the 2021 edition of Rise and Fall, but as, say, a three-minute YouTube video, how would you apply the lessons of that five-hundred-year span that you analyze in the book and the dynamics you illuminated in that work to the U.S. and China today?

KENNEDY: Thank you, Dan. Nice to be here. Dan, I would say candidly that the story rose on. Rise and Fall of the Great Powers book came out some thirty odd years ago. It did not suggested history had come to a full stop when the book came out. It rather suggested that history was moving on, and has it not moved on since the late 1980s? The big factor, the one we're discussing chiefly today, the focus of so many other considerations and panels, etc. is how are we—in the United States here, but across the global commons—how are we to understand another chapter in the rise and fall of the great powers? Namely, the substantive, and I stressed substantive, rise of China as a world power.

Well, by whatever means we measure it, and we have some great panelists with us to help us measure it, whatever way we measure it, economic, military, strategic political influence. There is a significant larger player and a larger presence on the world scene for the United States and the other powers around: China, Russia, European Union, India to respond to. So it's China at the center of our debate, I think.

KURTZ-PHELAN: Liz, how does that question look from Beijing today, and particularly from the vantage of the CCP. We've heard increasingly brash statements about the course of history from senior Chinese leaders over the last few years. Xi Jinping himself has said something like time and momentum are on our side. Does that reflect warranted competence about their own position via-a-vis United States? How do they see American prospects right now?

ECONOMY: Thanks, Dan. It's great to be here with you and with Paul and Ray. And let me also just add my thanks to the Starr Foundation, and to Hank Greenberg and Florence Davis for all of their support of the Council and, frankly, their incredible support of the Asia studies program over the past few decades.

So, to your point, yes. You know, I think it's important to recognize this is a big year for China. It's the hundredth anniversary of the founding of the Chinese Communist Party. They're at the beginning of their fourteenth five-year plan, and they're on the cusp of 2022, where they're going to have leadership transition for the Communist Party. Of course, not any real mystery about who's going to come out on top.

But the messaging, you know, in this kind of year is naturally going to be very positive, very optimistic. And I'd say at this point, it's, you know, veering on triumphal. Basically, the message is that the wind is at China's back. Coming out of the pandemic, you know, China did fare the best economically of all the large economies. Xi Jinping, as you suggest, you know, says that China is both, you know, riding and driving the wave of globalization and technological innovation. You know, there's a sense, I think, that, you know, China is on the rise. It has Xi Jinping at the helm.

The United States, in contrast, is viewed as, you know, politically polarized, weak economically. And the message is that it has no chance of reclaiming its position as the world's superpower.

You know, we've had three speeches by senior foreign policy officials, senior Chinese foreign policy officials over the past two months. They have said that they want to work with the United States, they want to find areas of cooperation, climate change, the pandemic, cyber terrorism, but that they expect the United States is going to redress all of the problems of the Trump administration, right? Going to sort of take care of the distorted view of China as a strategic competitor, you know, take care of the fact that the United States does not respect China's core interests in Xinjiang, Hong Kong, and Taiwan, and take care of all the restrictions that it's placed on Chinese companies and media outlets and Confucius Institutes. So I think what we hear from the Chinese leadership right now is a sense of, as I said, triumphalism, with some lecturing, thrown in a little bit of openness, and a faint undercurrent of concern.

I do think it's important, though, to recognize that if you go one level down, right? So, if you move sort of beyond the level of the topmost Chinese elite, that you do hear more openly expressed concern about the potential of the Biden administration to cause more problems for China than even the Trump administration did. I think there's worry that the Biden administration promises in some respects the worst of two worlds: that it will be just as tough on China as the Trump administration was, but it's also going to be more effective at reasserting leadership on the global stage, more effective at building coalitions, and pushing back against China in places like the United Nations.

I would just note that, you know, Cui Tiankai, who's the Chinese ambassador to the United States, in his speech last month, he talked about, you know, he said, any U.S. effort to build a coalition in Asia to balance against China would fail, that it was basically like putting old wine in a new bottle. But I think anytime someone tells you that something's going to fail, you know that they're worried about it. So I do think it's important to recognize that there is concern about the Biden administration, that it will take what the Chinese had thought was really just an economic and technological competition and add a layer of values on to it.

And finally, I think there's also just a little more humility among Chinese scholars and analysts, in the sense that they recognize that China has caused some of its own problems, that it's alienated a lot of countries with its wolf warrior diplomacy, that there are problems in the Belt and Road Initiative, and that these may offer opportunities for the United States, you know, to capitalize on. So, I think that there's a difference, probably in the two levels, in terms of how they're thinking about their own position on the global stage relative to the United States in the sense that, in the scholarly and analytical community, there's more of a sense that, you know, acknowledgement of China's own missteps and extent to which they believe the United States can recover, both reputationally and economically.

KURTZ-PHELAN: We'll come back to some of those concerns and the policy questions a bit later in this conversation. But first, I want to go to Ray. Ray, you bring a pretty unique lens to this discussion. As a macro investor, what should we be paying attention to? If you look at the indicators that are perhaps more familiar to your team at Bridgewater than to the typical foreign policymaker or analyst? What do you see about dynamics today that the rest of us might be missing?

DALIO: Well, there are three big things that happened starting a few years ago that are— and it's the confluence of these three things that led me to go back and study it through history. And those three things are: there's a financial economic piece in which there's— you hit zero interest rates. You— there's the printing of money, the creation of debt, and that has an impact and threatens a world reserve currency. So, in that piece, you describe the changing world order, which anyone—

[Phone dings.] Excuse me, I didn't silence my phone. So let me just shut that. Sorry.

The changing world order, you can see this going back. It's on LinkedIn, if anybody wants to read it. But you hit zero interest rates, you can't stimulate in the normal way, the production of a lot of debt. And that has an effect on the reserve currency status, and so on.

And so I studied over the last three— the five hundred years, these three cycles of the rise of the Dutch and the Dutch guilder, which is the world reserve currency, the British pound, and so on. Those patterns that are existing today, the production of debt necessary to stimulate the economy, and the value of money is number one.

The second, which is related, is the size of the wealth gap. And with that, the size of the opportunity gap and the values gap and the political gaps. So that's the second factor, and it's very related.

And the third is the rise of a great power to challenge an existing great power: China.

The three things, they're very interrelated. And so when we're looking at the picture, I think we have to look at all three of those related and they've repeated through history. Each one of those, I just use statistics to measure like a health index. Each one of those is most analogous to the 1930s period. We can talk about what historical periods. But it goes back to prior to that. So there is an economic and capitalist cycle in which the boom creates debt and an overextension that reaches a limit. And that, in turn, if you have this mix, if you have a lot of debt, and you have bad balances, and you have a lot of— a big wealth gap, and a big values gap, and you have an economic downturn, and you have a rise of a power challenging an existing power, you have internal conflicts and wars. So it's that confluence that I'm seeing.

KURTZ-PHELAN: Before we get to some of the U.S. dynamics that you alluded to, right, let's talk a bit more about China and where its strengths and weaknesses lie. Liz, let's go to you first. And you alluded to some concerns that Chinese leadership may have underlying that triumphalist narrative. When you look at China today, what are the weaknesses, you know, whether political or economic or social that you think are concealed by that narrative of success? And that might end up coming to the surface in the years ahead?

ECONOMY: Sure. I mean, I think, of course, the Chinese system is always a little opaque. And so, you know, you have to— you're looking for clues, I think, more than anything else. But I think there are really three potential risks.

And the first is political in that political discontent will somehow coalesce to challenge Xi Jinping. You know, where might that come from? I think, you know, entrepreneurs who feel as though their ability to be creative at home and to access foreign markets is increasingly constrained by Xi Jinping's demands that they serve the party.

I think a middle class that's interested in having a greater say in their political future. And we saw evidence of that certainly in the aftermath of Dr. Lee Wen Yang's death last February, when you had this, you know, sort of burst of, you know, calls for freedom of speech on the Chinese internet, when we had that period of openness. There's also been a really interesting uptick in articles by young Chinese, talking about their desire for greater freedom of speech. I think there's a debate over privacy that is ready to explode again among the Chinese middle class that could have ramifications for Xi's surveillance state.

And then I just point to a letter that was circulated last spring that called on Li Keqiang and Wang Yang and Wang Qishan, who are three other senior leaders in the standing committee of the Politburo, calling on them to challenge Xi Jinping. Now, this may mean nothing. But it also may be an important signal that there are real differences within the topmost leadership. I think, if nothing else, it reminds us that while Xi Jinping has, you know, really an extraordinary degree of institutional control, that does differ from legitimacy.

I'll just quickly say, I think, you know, the challenges, you know, another possibility is that the challenges in the Chinese economy are more severe and systemic than we appreciate. And I'm sure Ray has some thoughts on this. But, you know, Lou Weiji, the former minister of finance, just came out with an article that raised a lot of concerns about the, again, the rising level of Chinese debt. You know, we know that there's a mismatch in terms of Chinese labor, demand, and supply with the shortage of high skilled workers, but no jobs for migrant workers. Individual entrepreneurs who haven't recovered from the pandemic.

Despite Xi's claims, Xi Jinping's claims, of you know, eradicating absolute poverty, you still have six hundred million people in the country who are living on $140 per month or less. And, you know, college education rate, you know, high school graduation rate of about thirty percent. So that's a long term drag, I think, on the Chinese economy.

Divorce is skyrocketing, birth rates are plummeting. You know, these are things that tend to track with economic optimism. So what is that telling us about the way that the Chinese people themselves are looking at the Chinese economy?

So again, I just think it's an important reminder that, you know, there can be underlying problems that we can't really see that could come to a head in surprising ways.

And then the last one, I won't go into detail, I kind of already alluded to it, and that is that, you know, there's international pushback against China. And that's not just from the United States, but that countries, you know, Belt and Road countries, there are protests in all of them. China's sort of trust in Xi Jinping and desire for China to be either a regional or global leader. If you look at polls across the world, you're looking at rates of, you know, ten, fifteen, twenty percent. So China's global image is quite weak. So I think that's another area of potential concern for the Chinese leadership.

KURTZ-PHELAN: Ray, let me get you to expand on the economic piece of that. When you look at the risks of the Chinese economy, how significant are those? You know, what should be keeping economic policymakers in China up at night?

DALIO: Not significant if you put them in the big picture. I've been going there since 1984 and I go through the statistics. I know it. I'm just measuring things, and I know the economic leaders and the— so you look at its track record. I won't summarize its track record. I think the track record speaks for itself.

And then you look at the balances. When you're comparing a country, you have to look like individuals or a company, or even a state and local government, is the income greater than the expenditures? And are they building— and what does the balance sheet look like? Income and balance sheet. Their income and balance sheet positions are excellent, and their debt is denominated in their local currency. And its debt to GDP ratio is about two hundred fifty percent. The United States is about three hundred fifty percent. And so their balance sheet and their income statements are stronger. And they can manage those things.

The real things to pay attention to is the rate at which they are opening up and evolving. So through history, every major reserve currency, great empire, was the largest trading country in the world, and developed the financial center and then developed great financial power. So if you— just the facts, you know, the Dutch largest trading country, reserve currency, financial center. The British, same, the U.S., same. What you've seen in terms of the opening up of the financial center, and the being able to offer companies that are world class companies, world class competitors, in technology, in so many different ways that are attractive to invest in.

I could only— in 2015, a foreigner could only invest two percent of the financial markets. Now it's sixty percent. So what's happening now is a balance of payments shift. The world is invested, international investors are very overweighted. The dollar and dollar denominated bonds because the U.S. has been a world reserve currency and they're underweighted. China is now underweighted. They view that as competitors, and a form of diversification. And the opening of the capital markets is letting money come in. I see no significant vulnerabilities. That doesn't mean there's perfection. I'm sure— there is internal issues of all sorts of things. But when I watched the skill and the lay of the land, it really— the flows, the development, and all— really the growth, the innovation is on their side.

KURTZ-PHELAN: Paul, when you look at this mix of attributes and risks and everything else, to what extent do you see China following the typical path of a rising power? If you look at the last five hundred years? And to the extent that Chinese policymakers have studied your book, which I'm sure many of them have, what do you think they've taken from it?

KENNEDY: I go along with Ray, it looks very close to a larger macro pattern of economic and military growth of a rising great power, which is about to have an ever-bigger impact upon the world. Distribution of power and the distribution of influence.

And as I was listening to Ray listing the economic attributes of strength there, I thought I might introduce just one other piece in the jigsaw puzzle, which is— and I know every one of us has a different set of professional journals we read, background information we collect. I've just been perusing this past weekend the sort of end 2020 issue of Naval War College Review. And the lead article in the Naval War College Review is something called China's global navy. It's a substantive, thirty-page piece, with a lot of additional data, which makes me think, at least, and I'm sure will make many others think, it looks as if every year, over the past twenty, thirty years, China has just been launching another ten, eleven, twelve, or more modern ships to replace the older frigates and the older submarines and stuff in its navy. Every year, it launches about three times more ships, warships, than we do. Every year, the size of its navy and the capacity and destructive strength of its navy for asymmetric warfare against the biggest navy of all rises and rises and rises.

So when we have rather warmer relations with China, they keep on building. When we have rather soured relations with China, they keep on building. And then when we have a summit meeting in Hawaii or whatever, they keep on buildings. So there is something just eerily substantive and, you know, I wouldn't say ominous, well, you may think the word is ominous. It is attempting to shift the overall naval strategic balances of the world, by my money, and by the sort of authorship of so many pieces on the Chinese military expansion today, following on the economic expansion that Ray's describing, we are pretty close to talking about a rising content contender for the number one position in world affairs.

KURTZ-PHELAN: Paul, you know, I think we in the United States always find a way to take comfort in in declinism of spheres by noting as Sam Huntington famously did in Foreign Affairs a few decades ago that the fears of decline will somehow spur our renewal, will kind of force us to get our act together at home. And we see the latest version of this call with the China challenge, the specifics of what getting our act together means obviously varies quite a lot according to policy or ideological preference. It could mean, you know, we should invest more in the military or have Medicare for all or, you know, renew our national purpose or something else. But let me start with you on the premise of that basic analysis: is the Huntington version of the American way of declinism correct? Do you think that there is hope that the challenge from this new contender will spur needed change in the United States? Is that something that tends to happen in these cycles?

KENNEDY: Yes. And I would say, also, that a well-known phrase in diplomatic history is that great number one powers take a long, long time to move away from their position at the top because they have a fantastic amount of received strengths, diplomatic strengths, positional strengths, probably geostrategic strengths as well. And large parts— even say the Ottoman Empire had bursts and bursts of reformism to try and get this act right, to try and preserve itself.

So I see nothing unusual about having yet another debate about what the United States, which has been number one since at least the Second World War and in economic terms since the First World War, what it will do to keep its position at the top and to stave off elements within its own society and relative across the globe of relative decline. But nonetheless, if I and Ray are measuring the relative economic and the relative military indicators now steadily moving towards Beijing.

KURTZ-PHELAN: Ray, what to your mind would American renewal look like? What are the key changes that we need to make at home, especially on the economic front, to address some of the fears that you derive from your analysis?

DALIO:  Well, I'm very mechanistic in terms of we have deficits. So we're spending more than we're earning. And so there's that financial piece. And that's not an easy one to solve. Because by spending— well, what do you do? Do you cut your spending? No, you can't do that. You become more productive? I mean, we'd all like to be more productive. That's not easy to do.

We're in a situation where there are a lot of bonds, and we're going to have to sell a lot of bonds to the rest of the world that already has too much of those bonds and is moving. So it's not an easy situation with the wealth gap and the internal. So as we look at, let's say, the internal conflict, can we agree even on how money is spent productively, as well as there's a redistribution. We have to worry about whether we have enough money, or whether we're just going to print the money.

And so when we look at this, there's so many expenses, the guns and butter. If we look at, let's say, the military, we can go down the programs that are being listed now. And then there's the question of maintaining a military comparison. So when we look at history, the capacity to invest and spend when it's limited is a real issue. I think the biggest issue that we're dealing with is we are not able ourselves to work well with ourselves.

So the two big ingredients, I think, that are necessary, but they're very improbable, is that you have bipartisan, skilled engineering of the economy and the circumstances, so we don't hurt each other. And that we re— but you're going to need a revolution of sorts, because the existing system, how it's structured, does not provide the opportunity, equal opportunity, or does not provide the things that are needed to be productive. In other words, there's a reason for example, that the wealth gap is being produced. And through history, those reasons are when you have a capitalist period, and it creates a large wealth gap for a variety of reasons, you include technology, replacing people and the such, you have to re-engineer for that. And there's not much in the way of agreement on what should be done.

So I can't imagine that the cores of the political parties, which are almost wanting to kill each other— actually, polls show quite a bit of that. How do you bring it together? How do you reengineer it with the circumstances that we now have, where we're spending too much, productivity— our education programs are deteriorating. Those types of things. It's not easy.

KURTZ-PHELAN: Liz, maybe we can end this portion of the conversation on what I think will be a slightly more optimistic note, which is the state of our kind of China policy in the United States. You suggested that you see the Biden administration starting to embrace a policy that you think will be effective. To what extent do you think we are we are getting there? And what would that strategy look like to your mind?

ECONOMY:  Sure, I do think it's interesting, though, if I could just comment on Ray's point about sort of the wealth gap and productivity levels, etc. that these are also issues that China confronts. And so it's interesting to consider, you know, why they would play out quite so— in addition to the demographic challenge that China faces, why they would play out quite so differently in China than they would in the United States. But in any case, it just struck me as I was listening to how well your descriptor also applied to China.

DALIO: Would you like me to answer? I'll pause. I thought— if you want me to answer, I could do that, but—

KURTZ-PHELAN: We'll get back to you quickly, after Liz's answer, Ray, if that's okay?

DALIO: Sure.

ECONOMY: So I think, yes, I am very optimistic about the U.S.-China policy, I think the Trump administration actually left the Biden administration in a reasonably good position. You know, they identified, I think, all of the really important challenges that China presented from, as we've heard, China's growing military capabilities, its activities in South China Sea, Belt and Road, the digital authoritarianism, what's going on in Xinjiang. So, and they started to put in place a lot of defensive strategies.

I think what the Biden administration is going to bring is, first an incredibly deep bench in terms of China expertise, which they've put in not only all of the sort of key positions where you would expect to see people, but also in secondary positions. So you know, the number two person at the U.S. Mission to the UN is a China expert. I think that's going to have an important impact in terms of our ability to rally countries together within the United Nations, when we see China pushing forward on things, on human rights and Internet governance that are moving in the wrong direction.

I think that this administration, the threat perception, their understanding of the challenge that China presents is not really very different from that of the Trump administration. But already, you know, we're seeing the United States sort of reassert itself, you know, in international institutions and organizations. We're back in the Paris Climate Agreement, the World Health Organization, the UN Human Rights Commission. You know, we can't, you know, win at anything that we're playing at any game if we just take our marbles and go home, which is essentially what the Trump administration did when it pulled out of all of these organizations. So I think having the U.S. back is incredibly important. You know, working again, with our allies and partners.

You know, look, the Trump administration actually had a really great working relationship with our allies in Asia. I think there's been an extraordinary new partnership that's developed with India, in addition to sort of affirmation of our relations with Australia and Japan, through the Quad, and the free and open Indo-Pacific.

I think the Biden administration is going to focus on repairing relations with our European allies. And I think one of the interesting things now is sort of the new interest that Europe is taking in security in the Asia-Pacific. So I see a lot of, the head of NATO talking about the need for NATO to be more involved in Asia-Pacific security. So I think there's going to be an interesting potential to knit together a new kind of alliance between our partners in Europe and our partners in Asia.

You know, also, I think that the administration is taking its time to unwind Trump administration policies, which I think is smart. It gives us leverage, all of those tariffs. So look to see whether any of them actually do benefit the United States. My guess is not many of them. I think it's pretty clear that the tariffs have hurt the U.S. economy more than they've hurt the Chinese economy. But I think this administration is being smart in not simply jettisoning all of the Trump administration policies.

You know, we've talked about the focus on renewing America. I actually am a little more optimistic than I think, Ray, perhaps is about American capacity for innovation and to stay ahead of China. So I take some hope there. But I think that getting back in Paris Climate Accord, thinking about sustainability, innovation are important elements of this.

And then, I guess, last, this is an administration that is reopening the door to cooperation with China. It was a door that the Trump administration pretty firmly shut. But I think it's also an administration that is not going to cooperate for cooperation's sake. And so as the president said, when it's in Americans' interest for us to cooperate with China, then we'll do so. And I just think that's smart policy.

KURTZ-PHELAN: Ray, let's go to you for thirty seconds on inequality and some other points that were made about China's economy before we go to questions.

DALIO: You know, through history, there are three main things that is a confluence that this has. If you have a bad financial situation, and you have a lot of debt, so income is less than your expenditures, and you have a bad balance sheet, and you have a lot of debt. And you have an economic downturn with a large wealth gap. That is the combustible combination that produces the problems.

In the case of— I'm just trying to make the comparison with China. In China there, besides their income statement and balance sheet being better, their living standards are rising since I've been going there. So there's contentment, there's excitement, there's happiness there. There's a large wealth gap. But that's when the living standards are rising. When I— per capita income when I started going there since 1984 has risen twenty-two times. The poverty rate has declined by eighty-eight, the life expectancies increased by ten years. So there is not discontent. There is a wealth gap that's analogous to us. It's top of mind, but the boat is rising. And so it's an environment in which there's enthusiasm in China more than there is the feeling here when you're having that decline, and you have the debt to deal with it. So that's a big difference.

KURTZ-PHELAN: I'm going to resist the temptation to keep asking all three of you questions, though I have a long list, and we will go to Q&A from members. A reminder that this meeting is on the record and that includes your questions. The operator will remind you how to join the question queue. And just note there are eight hundred something people on the call. So we'll get to as many questions as possible, but certainly not all.

STAFF: [Gives queuing instructions.] We will take our first question from Daniel Runde.

Q: Hi, it's Dan Runde, thanks so much. This is a fabulous panel. I wanted to just flag two issues of demography and education for China that I just think that if I look at sort of the One Child Policy has been very destructive, and that they may get old before they get rich, but also I would just— so that's kind of point one.

And point two is there's a book that was flagged in Foreign Policy magazine or foreignpolicy.com earlier this year, last month about invisible China, the urban-rural divide threatens China's rise. That something like only like thirty or so percent of Chinese citizens have graduated high school. That's rapidly changing. But supposedly something like sixty percent of a society has to graduate high school for a country to escape middle income country status.

So I would posit that issues of demography, which they're not going to be able to escape, and education, which will take a long time, are going to be such that they may experience Brazil levels of development, and that we may actually be okay. I'll stop there. Thank you.

KURTZ-PHELAN: Liz, do you want to start with them?

ECONOMY: No, I honestly, Dan, thank you for that. I actually hosted the author of that book for a roundtable, Invisible China, so completely agree. And actually, I also mentioned both those facts in my very quick run through of potential concerns. So I agree with you.

I think the demographic issues, pension system is another problem that they haven't addressed. And again, the falling birth rates, they, you know, they move to a Two Child Policy, they're talking about moving to having no restrictions on birth, but it doesn't matter. The birth rates have fallen every year since 2016. They had one bump up when they announced the Two Child Policy. And they've continued to decline. They, I think, last year hit the lowest rate since 1952. So I think it is a serious issue. It has to do with their future consumption levels, it has to do with their ability to innovate, fewer young people who are at the front end of innovation. So that's why I suggested I think they have some issues that are a long term drag on the economy. May not be front and center, like the ones that Ray identified. But I think there are issues that the Chinese leadership is actually quite concerned about.

KURTZ-PHELAN: Paul or Ray, anything you want to add on those?

KENNEDY: Yes, Dan, thank you for that question. And the demographics of China really are daunting. And as Elizabeth says that indicators are not going in a favorable direction for a balanced demographic for China.

On the other hand, Dan, I'm struck, and I think Ray would also be struck at how often over the past twenty or thirty years, when we in the West, especially we in the United States, point to a certain weakness in China, they listen and try to think of ways of dealing with it. If we point to their environmental stress or their sort of coal emissions, they scratch their heads and say, well, we're going to deal with it in two or three years' time. They deal with it. If we point their having old aircraft carriers, they scratch their head and five years later, they start building new aircraft carriers. So I suspect that they know every one of the list of weaknesses, which we fasten on, Dan, to console ourselves that they have such a lot of problems that surely, surely we'll never be able to push us away as number one, and that makes me uneasy, but we do discuss their weaknesses, because I get the sense that they're going to try and improve on those weaknesses and make sure they aren't so weak.

KURTZ-PHELAN: Ray?

DALIO: Should I?

KURTZ-PHELAN: Go ahead, yeah.

DALIO: You know, the demographics, of course it's an issue. But I don't know to what extent it's an advantage or a disadvantage in some sense, in that when we're now dealing with, let's say, the big issue is how technology is replacing people, and how that's changing income levels around the world and so on. That's a problem that actually nobody's figured out yet. And it has to be figured out.

And if you look at our stated obligations in the form of either healthcare obligations, or pension obligations, which are now committed to, which they don't have as much of, but they still have to take care of the population, but we have— they're much greater than our debts. So we have a lot of obligations. I don't know that— but if you look at history all through these times, China— I studied the dynasties in China going back to the Tang Dynasty, just after the year 600. And I watched that and so when you see— and I compared them to power around the world. And China, since then, has normally been number one, or number two, or number three in the world. They have a long history of great, great, great success and the period from around 1840 to 1949, which made them bottom essentially, was an abnormal period. So if you look at the history, the culture, and what's also happening, it's a great power.

KURTZ-PHELAN: Let's go to the next question.

STAFF: Our next question is from Ellen Chesler. Please accept the unmute now button.

KURTZ-PHELAN: Ellen, you're still muted. There you go.

Q: That was my mistake, so go on to the next one. Sorry, sorry about that. Sorry.

STAFF: No problem. We'll move on and take our next question from Fred Hochberg. Please accept the unmute now button.

Q: Hi, there. Hi, everybody. China's model, I've heard others say, is going to be hard to replicate. In other words, Indonesia, Malaysia, other countries with smaller populations could not enforce tech transfer, IPR theft, and things like that. So it seems that their economic model is much harder to replicate than perhaps some of the Western models, and then you read today about the cyberattack in India and potential and the power grid. So how does that talk about their ability to really expand their global reach and global power? So if a system that's hard to replicate, and they often, I think, Liz, they have that sort of lone wolf, or wolf warrior approach that seems to be pushed back against their sort of ability to really replicate and expand their power.

KURTZ-PHELAN: Ray, do you want to start with this one? Then we can go to Paul and Liz.

DALIO: I think that I would describe their power, their system, as state capitalism. That's the closest to it. It's, and I think we will be paying more attention to that even ourselves, as we need to probably have an industrial policy to be dealing with the technology, artificial intelligence in certain types of developments.

I think the question is how you can have— and I mean, their model is, you know, top-down, autocratic, political control, information control, and at the same time, being able to create a capitalist model that a free market and having innovation, entrepreneurship. It's not an easy model to follow.

However, all countries do toggle between how much should be controlled. And also, like, are we getting a little out of control is one of those issues. And then there's the question of also does capitalism work in achieving the goals? Or how do you achieve that wealth distribution? So it's a question that we both balance. We both have to— all countries have to deal with on that sort of continuum. How do you get the balance right?

And so I think that— and also, I would say, their way of controlling historically has been through the tribute system, never— in other words, letting other countries largely pursue their systems, their religions, their whatever their preferences are, and to have arrangements with them just as long as those countries know their places out through a tribute system. And that might be trade or other ways because they don't want to fight a war. So I don't think their objective is to conquer, take over, or even evangelize their particular system. It's simply to interact in sort of that way that I'm describing, be strong domestically, be strong economically, and then interact and power— whatever power you have, that is your influence because the best way to fight a war is never to fight a war because you're going to kill each other. The best way to fight a war is to have a great power show the opposition what the power is and they will not be motivated to fight and then through evolution. That's not— control is the model.

KURTZ-PHELAN: Paul, could I ask you to— can I just add a historical gloss to Fred's question for you? Does it historically matter if a power is able to— if its system is transferable and attractive to others? Is that part of the equation here in a meaningful way?

KENNEDY: It has been a supposition, Dan, from the preachers of early British liberalism across the world like Cobden, and others, we have a model, just imitate us and then we will all be part of a similar sorts of models. The American liberals all from Wilson onwards thought that we have a model and if you just imitate us, we'll live in this world where we're all the same.

I would ask members of the Council, Dan, to think about whether this language is a bit outdated, especially because we've used it too much, as you well know, during the Cold War. Is there a Soviet model which an African state might imitate and worry us about? Is there a good American model, a democratic liberal model too? I suspect that across the globe, and I'd be interested in Elizabeth's view here, across the globe, there's probably a large number of rather smart African countries or Malaysia or Singapore, which is saying I'm going to take as much of this American Western model as I need for my economic interest. And I'm going to borrow some of the Chinese aspects when I think it suits. Models are just not a single sort of construct works for all.

KURTZ-PHELAN: Liz?

ECONOMY: So let me just make a couple quick points. I think, first, certainly, we've had other, you know, state capitalist models come in and, you know, look at Taiwan, Japan, South Korea. The interesting thing about all of them, of course, is that eventually they transformed into democracies. And I think that's what many people have been waiting to see, whether those same kinds of pressures, you know, emerge in China. Arguably, they have in the past, but they've been quashed.

Second, in terms of China's export of its model, you know, this is a big debate in the China field. And I would say, look, the Belt and Road to some extent is, in effect, an export of China's model, is China's development model. It's, you know, large scale infrastructure, you know, debt driven, with all the externalities that come along with it, which is, you know, lack of transparency in the deal making, weak environmental practices, and weak labor practices. And that's why in virtually every single Belt and Road country, you're having protests against many of these projects, and a lot of leaders are actually renegotiating the terms and doing other things.

I also think, look, China may not want to fight wars, but it just had a border, sort of confrontation with India in which people were killed. I think when it comes to sovereignty issues, China's got fourteen, at least, territorial disputes. Reunification is at the heart of Xi Jinping's rejuvenation narrative. And sooner or later, you know, if somehow the magnetism of China is not enough to persuade those twenty-one million people living in freedom in Taiwan that, yes, it's just easier to succumb rather than to fight, I think China will be willing to go to war over Taiwan. And I think that's something that the United States and other major democracies are going to have to be prepared to address.

And in terms of the attraction of the China model, sure, I think there are a few states that are attracted to it. But you know, it's really hard to be attracted to a model that represses its people, that, you know, basically imprisons a million and a half Uyghur Muslims in labor and reeducation camps and does things like forced sterilization. So I think, when we're thinking about the rise of China and everything that that's going to bring, I think it brings with it a lot of other challenges that we haven't actually touched on.

KURTZ-PHELAN: Let's go to another question. Hopefully we can get maybe two more in.

STAFF: We'll take our next question from Ed Cox.

Q: My question is one of the general American view that Deng and his successors were good. They were taking China down the path of free market capitalism and towards a democratic kind of— more democratic kind of government, and Xi is bad, and that he's taking China in other direction. But from the Chinese leadership point of view, continuity of policy is very important to their legitimacy. And when you think back upon it, Deng's statement was more or less bide our time. Let's not show our strength and what he did in Tiananmen. And generally, his statements at the time about these evil old men in China, while we're all optimistic about him. Is it just, especially as the Chinese leadership would see it, just the logical extension of what Deng wanted all along? And that is the Chinese to really, at some time they'd have to come out from under covers and show their strength and impose their natural order of being a leader, certainly in East Asia, and perhaps in the world.

ECONOMY: I guess I'll—

KURTZ-PHELAN: I'm so sorry. My internet is freezing so I missed it.

ECONOMY: All right. Okay. So then, I thought, look—I think Xi Jinping is not the first leader to talk about the rejuvenation of the Chinese nation and Deng talked about the invigoration. And I think, Ed, you're right, in the sense that short Deng Xiaoping did say if China ever emerges as this great power, and we're oppressive, etc. then come back and push back against us. So given that, I think that's exactly what Xi Jinping is doing. So maybe Deng would exhort all of the rest of the world now to push back against China. But sure, I think that every Chinese leader has wanted to reclaim a degree of centrality for China on the global stage.

You know, do I think that Xi's way of governance would necessarily have been Deng's? Probably not. I mean, I think Deng was much more willing to experiment, was much more open to the input from the outside, both in terms of external ideas and foreign capital, although as Ray has raised pointed out, that's changing. But also, he was about removing the party in many respects from everyday political and economic life, and Xi Jinping has been all about reasserting the power of the Chinese Communist Party in the extensive surveillance system.

You know Tiananmen Square was something that moved off track from Deng's perspective, but up until that time, they were talking about moving elections up through the political system, beginning with local elections and moving up. And periodically, we've seen much greater periods of openness in the Chinese political system. Look throughout the 2000s, for example. The mid 1990s, the explosion in terms of Chinese civil society, environmental activism, the internet. You had a virtual political space by the end of the 2000s. What we've seen under Xi Jinping is quite different. So I don't think he's a natural extension of Deng Xiaoping. Maybe on the global stage a little bit, but not domestically.

DALIO: I would again disagree with that. I would say the way that they view it, and I think the way that we should view it, is that there's an arc that takes place, and that produces rising and rising levels of power. And so when, in 1978, Deng Xiaoping opened, you know, reform and opened the economy and, like you say, made sure it was not appearing threatening, that was a natural evolution to acquire certain amounts of strength that they have. And with those amounts of strength, I think Xi views himself within a historical arc that is about, you know— look at dynasties, they're about two hundred fifty years for a dynasty. And as you gain different levels of power, you become more assertive.

There's no change more, in fact, more the development of the economic policies of opening up the innovation, capital markets, that market economy. That arc has developed and is continuing in that way. The assertiveness is a natural consequence of the going along with the associated power. And I think that if we take a larger look, that that basic trajectory from— Chinese study history. History is their religion. And if you follow that arc of a dynasty, you see essentially that what would it look like in another twenty-five years? What would it look like in fifty years? And they paint the picture as well.

And so if we're dealing with the control issue, it is correct, and history has shown that there are ebbs and flows in control. So they have what they call the core leadership, you know, the seven upstanding members of the Politburo. And they move toward a more core picture, which doesn't mean there's an absence of dialogue, but it is more core control. And with that core control, that's a normal movement during periods of greater challenge, historically, that seemed to be the pattern. So I think that if you're looking at the arc of development, and you're not connecting it to the power, there is a natural consequence. As you said, Ed, you can't, you know, you can hide the power anymore. So there we are.

KURTZ-PHELAN: Paul?

KENNEDY: Ed, you used, at the very beginning of your question, you used that wonderful phrase bide your time. I actually think that when the Chinese are smart, sometimes they fumble, sometimes they have Tiananmen Square, Elizabeth, sometimes they have an internal crisis that they worry about. But on the whole, if they're looking at the arc of history, as Ray says, and their advisors, their long-term planners will say, are we likely to be rather bigger in world affairs in the measure and share of the world economy by the year 2030 than we are now? Well, why not just wait a bit more? Are we likely to be even bigger by 2035 and have six aircraft carriers rather than three aircraft carriers? Now, why not wait.

So this is a long-standing story. And we spend our time wondering about the weaknesses of China. If they are thinking we can get through those weaknesses and just wait another ten years, another twenty years, will the U.S. be able to be around in East Asia and the western Pacific in twenty years' time? Probably not. We can do a gentle move against them, Elizabeth, by then. Let's just not rush it or antagonize them now. And if Mr. Biden wants a more harmonious diplomacy, that's good for us, we can bide our time.

ECONOMY: Can I just say, I don't disagree with what you just described as Chinese strategic thinking and sort of the biding time and how Xi Jinping is looking at this period moving forward. But what I am saying is that internally, there are differences of opinion and different strategies. And when you know, Premier Wen Jiabao talked about the need for political reform, that's very different from what Xi Jinping is doing domestically. They're not monolithic, right? It's not a monolith.

And so the arc of history can show you one thing, and it's very sort of easy to you know, connect those dots. And, you know, in hindsight, but look inside the country, and it reveals, I think, something quite different. And you have to be attuned to those things.

So yes, we should be paying attention to the strategic challenge that China poses to its innovation, to its economic growth. Absolutely. But at the same time, we can't miss the story about what's going on inside China. Otherwise, we end up like we did with the Soviet Union, right? And all of a sudden, everybody knew that the Soviet Union was actually weak, and that there would be a Gorbachev when actually nobody was really talking about that.

KURTZ-PHELAN: Let's go to one last very quick question.

STAFF: We’ll take our last question from Seema Mody.

Q: Thank you so much, a fantastic conversation today. My name is Seema Mody, global markets correspondent at CNBC Business News.

My question is to Ray Dalio. There are these powerful forces underway right now in China, as you've alluded to in this conversation, and the leadership changes, wealth gap, to other societal changes. I'm wondering how this all impacts financial markets? How do you think this sort of lends itself to the stock market here in the U.S. or in China?

DALIO: It's opening the flows into Chinese markets. So there's a weakening of the dollar, which is partially due to our monetary and fiscal policies, but simultaneously, when they open their capital markets, and they have relatively attractive capital markets, their bond market is more attractive because it offers a higher yield and appreciation, currency. And so there's a shift in capital, more increasing flows into those capital markets. And so you're seeing the development of those capital markets.

And so with time, we will start to see that we'll be looking at China and its offerings to the world market and its financial center. And it'll rise in much the same way as New York rose to increasingly compete with and eventually replaced London in terms of that, and so watch the total return of investments, which includes the currency return, and the asset return because that reflects the relative shift in wealth.

And so you see not only their markets performing well in their currency, but you've seen a rise in their currency by about ten percent in an orderly way, as there's the movement of capital that is supporting their currency as well as their capital markets.

It makes— there's a need in the world to diversify. And there's two great powers. And even if you were to think about technology, who do you want to bet on, or most things, Europe is not a competitor. No place else in the world is a competitor. And so from a capital markets point of view, China is a competitor, a viable competitor, that's opening up and the net flows are net beneficial to them to make their performance good.

KURTZ-PHELAN: We will have to end on that note, but huge thanks to Ray Dalio, Liz Economy, and Paul Kennedy. Wonderful panel. I could keep going all afternoon, personally, but the Council will not allow us to, so we'll stop there. Thanks so much to all three of you and hope everyone has a good afternoon.