Transcription
In his New Year's speech, China's President Xi admitted that the country has challenges, both with jobs and for businesses. We have seen a slowing down of China's amazing growth of the past year. So, what's in store for 2024? We're going to get an inside story now from a speaker who has just published a book that has received lots of praise: "The New China Playbook." She was born in China, educated in the United States, and is now a professor at the London School of Economics. She is going to challenge some of the myths and common wisdoms about China. So please give a very warm welcome to Ku Jin.
[Music]
Good morning, ladies and gentlemen. Thank you so much. It's an enormous privilege to be here with you in Oslo, a place I've visited now, my third time. I'm very happy to share with you some perspectives about China. And as Sua has mentioned, potentially look at an inside perspective, take an alternative lens, because this is a behemoth of an economy, second largest in the world. You know, there's some debate about when, when, or whether it will be the first largest economy in the world. But also an economy in a country that is very hard to read, very hard to understand. So, to understand what's actually happening, I bid you to look at what's actually happening on the ground, separate that from the rhetoric, often very loud. Not solely rely on the Western press. And here with you, I'd like to use a telescope, a microscope, and a scalpel to decipher China from the inside.
First of all, with the context that you have brought, let me first of all say that in the immediate future, the dismal situation and outlook of the Chinese economy is very real. But it's primarily a demand deficit, a problem of demand. And that is fueled by the triple whammy of the scarring effects of the pandemic. Let's not forget that the Chinese households, unlike the Americans and the Europeans, never got support from the government during the pandemic. And coupled with, you know, the kind of declining real estate sector and regulatory controls, tighter regulatory controls that have really hampered investor confidence, that has led to a sharp decline in confidence, pretty much the lowest in the last 40 years of China's amazing growth trajectory. And whether it's consumers, investors, or companies, the primordial sentiment today is "let's wait and see." And I think that's also causing a lot of the slowdown. But I'll talk about the real challenges I perceive as opposed to the myths later on in my speech.
At the same time, something else very real is also happening, and I don't really think that gets enough attention around the world and not really enough understanding. So, for the first time in history, really, China, as a developing country, is making cutting-edge technology. I'll have some comments about, you know, how it, how our views potentially connect or differ from the previous views. But a very important think tank published a survey, sorry, a report last year, that out of the 44 cutting-edge technology research, China is leading in 35 of them. It has mentioned Huawei's breakthrough, not long after the restrictions coming from Biden's export controls. China's domestic capacity is able to overcome these restrictions, at least for now. We can quibble about the quality and the reality and all that, but this is not a small issue. It has caused such national euphoria, saying that it's not only despite of these Biden controls, but potentially because of these control tools that you're getting this national mobilization to tackle critical technology, that you have created these unlikely alliances of big techs and whole nation systems to go after these so-called strategic vulnerabilities. The Chinese were so happy about these breakthroughs. And because of these controls, the people are saying, pleading, "The US government, can you also please sanction our national men's football team too?" So that is a different kind of sentiment and a different kind of reaction you're getting from China.
So I want to try to bring in a different perspective here. Interestingly enough, despite what is happening between us and China, I'll come back to that later. It is highly ironic, I think, that today, four out of the five most downloaded apps in the US are Chinese. Not only TikTok, Shein, the fashion brand, Temu, owned by Pinduoduo, and one other. But that global exodus of Chinese companies, I think, is a wave that we should be watching. Because don't forget, 90% of the people in today's world still live in developing countries. And they have a very different view, different perspective on China than the more hawkish military kind of view that we have heard in the West and so forth. They have a very different view because Chinese technologies are eminently practical, cheaper, with the same amount of quality or higher quality, and they are intended to solve developing countries' issues. And so that exodus of Chinese companies going global is something that we should also watch.
So I guess when we talk about the problems and the challenges, which are real, very real today, I mean, it's, you know, it's a total flat kind of phenomenon in China today. We've got to ask the question: Is this really cyclical or structural? Some permanent decline, all-west depiction of demographics, state controls, this lost engine for growth. We want to ask that question because booms and busts are a natural feature of market economies. Which happens to be that China never experienced that bust cycle, and I don't think it's healthy. The last 40 years, China has always tried to avoid a recession and smooth out wherever there was that GDP and inflation numbers because it cannot tolerate cyclicality and volatility. And the consequence of that is that there's no proper exit mechanisms to weed out the bad and less productive firms. So they all stayed around until now. Now, the real estate sector, the cleansing out of the system, the weeding out of all the least productive firms are all happening. That's the only positive side I see of having a bust cycle. But China never had it. And so companies never exit it, no matter, and they were sucking up resources where it should have gone to new entrepreneurship and better firms. But that cycle is a natural feature. And it's also surprising that for an economy of that size and an economy that has grown at that speed, has never really had one fundamental financial collapse in the last 40 years. I think the financial system is relatively stable right now. Can come back to the debt issues and the Q&A. But that has also meant that these boom-bust cycles are probably going to be a new feature, more volatility, a new feature of the Chinese economy.
Now, I mentioned that technology and innovation is so important because it fundamentally is the only way for a country to get out of the middle-income trap. Only 13 countries in the last 60 years or so have been able to overcome the middle-income trap. And now everybody's talking about China falling into the middle-income trap. But all of these countries, including the likes of Brazil and Thailand and all those, actually was much richer than China before. It was a productivity loss. It was the inability to have domestic innovation capability to keep productivity levels up, productivity growth up. So switching from capital investment to productivity-driven investment-driven growth is a trying challenge, and that only comes from innovation. So, in my view, this is way more important than two quarters or three quarters of bad GDP. The ability to innovate and the ability to have some kind of domestic reliance, even though those have geopolitical consequences, is fundamentally more important even than the real estate. But let me try to, let me try to also say that because the real estate is so large, 30% of GDP broadly accounted for, even if China has now a green revolution, renewables revolution, all these high-tech edge technologies going on, it is not possible to replace and displace real estate as a driving force of growth and employment. And that is the problem. The renewable sector has seen, you know, a lot of success, and I think this is really one bright spot in the Chinese economy. But again, and lots of the model and the unique model that China has pushed and fostered to make these accomplishments, which I'll talk about next, is now introduced to the renewable sector. But, you know, is it going to be trillions of dollars of investment going forward? That's a question. So that is the problem of replacing real estate.
So, in this respect, in terms of a macro perspective, a different perspective, I want to bring two, three things. And the first is really principally coming back to first principles in economics. A few statistics I think will be telling. There are still about 900 million people in China who live under $300 per month. That is not middle income, even by international standards. Okay? There are 176 million migrant workers who, if they had the proper social protection and equivalent rights of the urban worker, can unleash at least an additional 1 trillion RMB of consumption every year, at the very least. And when economies like South Korea and Taiwan and Japan stagnate or their growth leveled off as a share of GDP, sorry, as a share of US productivity levels, they were about 80 to 85% already. China today's productivity or labor productivity level is only 20% of US levels. Tertiary education, a measure of human capital in the skilled labor force, is 80% of the labor force in the US, and in China, it is 58%. The service sector, 47% of employment in China, as opposed to 80% in the likes of the US and Japan. And only 52% of GDP. All of this, I can go on and on, but these are just to tell you the gap. The gap between where China is today and where China should be, given the fundamental factors of education, skilled labor, saving capital, etc., of where it should be, just by the pure sheer force of convergence. And that's what I mean by economic principles. We do see convergence in the data. If we look at the last 80 years of growth and a trajectory, we do see economic convergence, conditional on a few things, the things that I mentioned, things like education and saving. So, with that fundamental factors in China, China should have a good couple of decades to go if the right reforms are adopted. And of course, that is a big if, and that's potentially not an economic issue, it's potentially a political issue.
The second is that China is an incredibly distorted economy. The kind of paradox or the contradiction is, on the one hand, China is the second largest world economy, wields great influence on the world, and wants to be a great stakeholder and wants to have great global influence. But it practically is a developing country on many levels. One big major distortion is still in the financial system. 80% of the social aggregate credit is intermediated by the banking system. That is one very common feature of a developing country market, developing market. In the US, 80% of credit comes from direct capital markets, right? Only 15% of that is in China. Now, I mentioned that as being fundamentally important because somehow we have the view, as we read Western press, that the state suppresses the private, the state wants to extort the private. I want to bust that myth a little bit later. But I will agree that there's an implicit discrimination that is very important towards the private sector, and that is channeled from the financial system. So when monetary policy or credit is channeled through that financial, sorry, that system, there are layers and layers and layers of financial intermediaries. The top layer being 50-something institutions, and the second layer being 2,000-something financial institutions. And each of them has a whitelist of who they can lend to and who they can't lend to. So that means the real economy, the real private sector, by the way, which is the driving force of the economy because they account for 80% of GDP, 80% of employment, and 80% of innovation, they don't have access to that kind of capital. It's always channeled to state firms or very connected, politically connected private companies. And so that institutional flaw is the reason why there's a lot of crowding out of the private sector. There's, you know, the private entrepreneurs feel that there's a big challenge and difficulty, and especially in bad times, they are the ones that suffer. But it's an institutional flaw that has created that implicit discrimination that is very hard to fix in the short run for a variety of reasons.
Another distortion: migration. There's very little interprovincial migration. Less than 5% of the population can migrate to other places. Now, if you're a worker who lost your job in Massachusetts and Boston, you can move to Texas and Florida if you find another job. That's not the case in China. Even compared to India, interprovincial migration is extremely low, and it's prohibitively costly because of the social urban protection, lack of urban protection, also the hukou system that prevents the migration. So calculations have found that if we were able to double that flow of people across regions, you're also able to increase productivity by at least 30%. And these are significant numbers. I want to mention that because if we just take a few provinces on the eastern coast, or just take the entire eastern coast of China, it's already a rich economy. Many of them have reached South Korean standards of living. What does that tell you? It tells you that China can do it. China can be a middle-high income economy. But what's dragging it is the central western provinces that haven't really found its source of economic well-being. But all technologies and employment and skilled labor and education, all that, and I'll come back to a very interesting anecdote which I think is very telling that can already be done and accomplished in China.
So this anecdote I told you, I'm going to tell you, is a dinner I had last week in China with a party secretary from a very interesting city in the province of Jiangsu. It's not a big city in Chinese standards, but it is the size of Singapore. And it has, they're very modest. They said, you know, maybe you can write about my story, but there are so many of them. That's the whole point. They have reached $35,000 of per capita GDP. The party secretary, the provincial party secretary, sorry, the city party secretary, a woman, is supercharged. They have something like 500 German multinationals there. She said that once there was an intellectual property threat, and she gathered the judiciary and everybody around for a midnight conference and just was able to handle the situation and resolve it, no IP leakage whatsoever. She said, you know, we want to open it up to all the foreign companies and all the private companies. She's talking to entrepreneurs everywhere, trying to bring them into their city, very successfully. She's also trained tens of thousands of students graduated from vocational training, retrained them so they can be the appropriate labor force for the factories that are in her city. And these students from poor families suddenly got 7,000 RMB, you know, right after graduation per month, and they were just absolutely thrilled. That reminds me that governments can really do a lot, you know, retraining and retooling. And the lack of that in the US was one of the reasons why the China shock was felt so strongly. My understanding of this part of the world is that there is significant effort. But I want to bring that anecdote because it's what I describe in my book as the mayor economy. It's funnier in Chinese because the mayor economy is very similar to market economy, that's why we make the joke. It's not as funny, but I think the mayor economy is a good enough captive title because China is not just a centralized system, that's what we all think. It's politically centralized, but it's radically economically decentralized. And that lies in there lies the fundamental success story of China's economy. It's all these mayors running around. The lady that I mentioned, since the 1980s, they're entrepreneurial, they're often risk-takers. They want to bring in the best technologies and investments and capital, and they help the private entrepreneurs. Why do they help the private entrepreneurs? Because they are the best. They want to help the best, not the worst or the most politically connected, because by helping the good entrepreneurs, you're creating an entire ecosystem of success. They bring jobs, they bring fiscal revenue. And by the way, this city, more than half of the fiscal revenues comes from taxes, not from real estate. They have very low debt-to-GDP ratio. So again, I'll come back to what we should take out from this story. They want to help these private entrepreneurs because then they create the retail sector, then even the real estate that they own is worth more. They are building mini Silicon Valleys all around China. And it's only useful if you help the good ones, the productive ones. And so they do that. They don't just help one or two, they help thousands. And so if you look at a picture of the distribution of unicorn companies in China, they're spread all over, with the exception of the western certain central provinces, but really not just in Beijing, Shanghai, and Shenzhen, as you all know. Even in second-tier cities, whether it's Wuhan, Suzhou, Hangzhou, many places you've not heard of, there are global quantum avenues running through, global companies. There are 300 EV cars all in China, and they're all backed by some local provincial party secretary, and they compete. So they're spread all over. And I think that decentralized nature, what I call the mayor economy, is really important to understand not only to explain China's past growth, also to realize today's challenges, but also to look forward in the future. Why? Because it's the same model, same platform they're using to develop renewables, undertake the green transition, and all of that. It's the same. All because the central government needs the local governments to implement. And what do the local mayors get out of this? Why do they want to do the best thing for the economy? Obviously, they're not elected, they don't face reelection pressure because they have political ambitions to rise up the ranks. The ones that deliver the best economic results, coupled with a bunch of other things. Now, it's not as simple as GDP. In the past, it was just GDP, and that's why everyone was what we call GDP-worshipping. Those days, and that's how you climbed up the ranks because then you can become the provincial city party secretary, and the provincial party secretary, you become at the very top rank of the central government. Actually, President Xi's father was one of those successful political leaders that implemented reforms, made an economic success, and went straight to the top ranks of the leadership. And they're all competing with each other. So if you think about corruption and the lack of democratic mechanisms, there are much more nuanced mechanisms of competition and checks and balances in China that we may not see from the outside. And so these cadres rotate three to five years, they compete with each other, right? And there's a lot of monitoring systems involved from the central top down. It's a convoluted apparatus, but it's certainly not just a one-man show. That would be a very, very naive understanding reading of what's actually going on in China. And certainly for the economy, it is absolutely critical.
So, the mayor model. Now, let me tell you one another example: solar panels, right? Look, China led the solar panel boom in the world, and that really happened after the mid-2000s. And something that happened then was that the Chinese government encouraged the local governments to implement a series of supportive measures for the solar industries. I want to caveat the support by critically emphasizing that it's not just financial subsidies. They are now far and few between because, first of all, the local governments are pretty much bankrupt because of three years of PCR testing that cost you know, 4 trillion RMB. So they don't have that financial muscle. It's not just the financial subsidy, it's everything else. It's attracting talent. You know, this provincial party secretary told me that she subsidizes 10% of the down payment of real estate, your first purchase of a house, if you're a talented worker. It is coming back to what I was saying about the implicit discrimination in the financial system, helping them coordinate with local banks, local state banks, helping them coordinate financing. It is other kinds of overcoming business barriers, which for any developing country amounts to insurmountable barriers if you don't have their support. So it's not just the financial subsidy. But the solar panel was very interesting because ever since the 2005 government introduction of these government policies, support policies were introduced, they were implemented in different cities at different periods of time, different times in different geographical spaces and times. And I don't have this picture with me, but it is a phenomenal, remarkable scene. Between 2005 and 2017, you saw the solar patents, internationally recognized patents, first of all, just completely exploding. And exactly in the way that is proportionate to the policies, support policies that were introduced at the city levels. So before we want to hesitate about what state can do or should not do, and I also have my own ambiguous feelings about that, it's important to recognize that that model has worked in many areas, in many aspects in China, and that's the mayor model, but coupled with that central direction. And it's the same thing now with the renewables, again, the same model. Robotics, okay, same thing. Demographics. We talk about demographics as one of the potentially leading causes of or potential threats to the Chinese economy. Well, first of all, China exports 50% of the world's robots. If there was a policy in place to encourage factories to adopt robots, it would just be spread out very, very quickly, and that would lead to automation. Very interesting recent broader study, academically a very important study, show that after 1990, the more aging countries are actually richer, not poorer. They're richer. That was not the case before 1990. If you take the sample of these countries, they were poor. And the reason, 1990 being so important, because that's the rival of automotive technologies. And these countries tended to adopt more robots and automotive technologies, and that tended to expand output in lots of various aspects. I'm not going to deliberate on this issue, but just trying to emphasize that huge mayor economy model can be very important in enacting systemic wide changes very shortly. That's what happened to the EVs. Within 10 years, China became the largest producer and consumers of EVs. And it does help that the government can roll out 4 million EV charging stations around the country, as opposed to 160,000 in the US. It critically does make that kind of difference.
But now, the real challenges. First of all, that political economy model that I told you about, which was so forceful and important for China's growth, especially in a very short period of time, is under serious challenge. Is it suitable for the new era? My book is called "The New China Playbook," right? For the new era, it's something else. It's not manufacturing, it's not investment, it's not just making stuff. It's critical technology innovation that requires openness, creativity, entrepreneurial IP, all of that, right? Is that suitable for that? Well, currently, there's a very real threat, which is the debt overhang. That mayor economy, which was so effective, the double-edged sword is that when it's so vulnerable right now because of the debt burdens many of these local governments face, that can introduce some very distorted behavior on the government level. Maybe not to the extent of extorting the private sector, but, you know, choosing to put its own agenda of resolving debt ahead of the growth and others, crowding out the private sector, and not really having enough financial muscle to implement a lot of these strategic goals.
The second real challenge is a political economy behavioral challenge. It's that lack of incentive and lack of enthusiasm. And why is that? Well, you know, there was a huge anti-corruption drive in the last 10 years or so. Look, that was very important socially. The grassroots of China, we hear a lot about what the elites about China are saying, complaining about. We don't necessarily hear a lot about what the grassroots are saying. You know, they love that anti-corruption campaign. They love these regulatory crackdowns. Education system. I understand the enormous capital markets, financial consequences, not a good thing for the Chinese economy, not a good thing for the Chinese financial system. But that was the single biggest source of angst for Chinese families: the overcrowded, competitive education system where, you know, ordinary families had to spend more than a quarter of their annual income on educating one child. These are some of the real social issues that China is going to have to grapple with in the coming years that's going to be, not necessarily, but potentially inimical to growth. And so the government, a lot of these mayors, a lot of these party secretaries are the ones I described, those in Shenzhen and southern China. But many of them are saying, look, it's no longer the economy that matters, just the economy that matters. It's other things like political loyalty, like social stability. For a few years, it was the pandemic. So the metric on assessing these mayors have changed, and so their focus have changed. And many of them come to the conclusion, rather than do nothing, rather than do something and take the risk, it's exactly the opposite of the late 1970s and 80s, where by spearheading and taking risk, you had potentially the chance of being the paragon of success and everybody following you. Now, very few people want to take these kinds of risks. It's not politically a good safe bet. I think that's underlying the problem. Apart from the short-term confidence issues, if you have that local government sentiment that now is a time to do things, to push forward the economy, and everybody has to get their act together, I think the situation would be very changed. And very briefly, a skill mismatch for the youth, high youth unemployment, 25%. A lot of these people have really, you know, they've emptied their bank accounts, their parents to educate these kids, and they found themselves without jobs. That poses a social problem.
So let me conclude to say that look, there are seemingly irreconcilable paradoxes to the Western eye. Might not be so in China, to the Chinese people. I would suspend our biases. We tend to use our own framework and lens and perspective, especially a cultural and social perspective, to judge others. I think that would be a mistake because there are a lot of people in China thinking potentially differently about their government and their economy. I think it's important to do one's homework in China. Let me tell you that even if China grows 3% and India grows at 7% until 2030, in the year 2030, China will still be contributing $17 trillion more to global GDP than India. And over the next few years until 2030, China is still going to contribute $128 additional trillion USD to the world than India is. So the size is there. So you just can't just simply, you know, kind of say China is uninvestable, China is thrust aside. But doing one's homework, identifying these opportunities, and really make serious and rigorous risk-return analysis. Of course, sometimes it's hard. We just talked about Taiwan. These are really very important for an economy which has the engineers, the talents, the money, and all of that to potentially still succeed. But in any case, let me conclude that by saying that the new generation, those born after the 1980s, 1990s, they present a really great international bridge. Their outlook is very, very different. They have a very more socially conscious and they have a view to see more peace in China, in the region, than otherwise. Thank you very much.
Thank you so much. I'd like you to take a seat over here. And thank you for sending in questions. If you have questions for Ku Jin, you can send them in on the online platform. And we have already a few for you here. But I'd like to pick up on something that you closed on, Ku Jin. You talked about the youth, and in your book, you tell us that this is a different generation in many ways. And the lack of ability to exploit their knowledge and skills is a key problem. To what extent can that also be a problem for stability in China?
First of all, I would say, do watch out for the new generation. They're radically different from my parents' generation, who went through the Cultural Revolution, some went through the Great Famine. They've seen huge vicissitudes. They're very risk-averse, they're high savers, and they're very, very hardworking. That generation, I think, was a big part of the global problem when you had a billion more people in the labor force in the world, all taking three shifts per night. That causes a global challenge. That's not the new generation. They like to travel, they like to, they spend twice as much as people born after the 1980s spend twice as much, even compared to those born in the 1970s, on things like apparel and food, entertainment. So with a bit of prosperity, and that's the maturity of a country and economy over time, is a more relaxed, less ambitious, less hardworking, more socially conscious, why? Because they can afford to. It's no longer just about sustaining one's basic needs. It's about, if you look at the surveys of this new generation, they care about animal rights, they care about the environment, they care about social equity, they like diversity, they care about minority rights, things that previous generations never debated about. So I think it's the coming age of China with that new generation that is a potential source of hope. But the challenge, as you mentioned, now is that many of them are not finding jobs. There's 100 million more additional college graduates in the last 10 years because the premier from many years ago decided to expand secondary education. The first thing is, I think it's primarily still, there are two things. One is an economic situation right now, bad economy. The second is that, look, there are a lot of jobs in China waiting to be filled, but they're in manufacturing. And China wants to be the smart manufacturer of the world, a larger, smarter Germany, if you will, based on powered by AI and communication. And that's interesting. You mentioned Germany, not the US, not the US. I think there's actually very overlap, a very little overlap with the financialized knowledge economy of the US, service-oriented. China wants Chinese government officials want China to be a manufacturing producer of stuff. In its mind, that is real, not property, not finance, and all that. I'm not saying I agree with that view at all. But Germany is a paragon of success. And so that's where the jobs are. There are 25 million missing jobs or jobs to be ready to be filled in the next three years in manufacturing. But these kids, they've graduated from college, they don't want to take up these jobs. That's the mismatch. And is that a potential source of instability in China? Look, the government watches it very closely. But I say that because of there are many challenges in China today, that's not the first order one. The first order one is real estate because that concerns every single family in China. If they really let the real estate go or the prices drop, then look, that's going to be the real threat to social stability. But they're not going to do that.
And I have to also congratulate you on your book because it has been named by Forbes as one of the 10 sort of must-reads for board members. And in the book, you spend quite a lot of time busting myths. What do you see as the most harmful myth about China for investors?
It's hard to say what's the most harmful. I think it's all pretty bad. Mistrust leads to misunderstanding, feeds on mistrust. But I'd start with the Chinese people. As much as I'm an economist, I realize a lot of this is social, social and cultural differences. There's a presumption that somehow everybody in China is utterly miserable, is something that I just find very hard to, you know, I find it very ironic given how bad the situation is pretty much everywhere else. But the Chinese people don't think the same things. There's a huge difference, a huge difference in preferences at the cultural level. You can see by international surveys. So the Chinese people expect their government to do a lot. Some might see that as totally intolerable, what the Chinese state is doing, but they actually expect that. In return, they give some deference, but not blind submission, because they do revolt. And I think another thing to understand for investors is that Chinese policies or sentiment or government preferences do shift much more than you think. I always joke that in the US, parties change, but policies don't. In China, it's the opposite. And you can see pendulum swings. If they think that they've really made a mistake, they will radically change that. Now, there might be a time lag before they actually realize that or finally submit to it, but they can change from left to right, from one far end to the other. And I think that's the spirit with which we should think about China. To a few months ago, or say, before the 20th Party Congress, it was a lot of confidence, it was a lot about ideology, it was a lot about security. Today, it's now the economy is back. It's now about the economy. Let's bring in some questions from the audience here.
And one in the audience is asking, what is the Chinese entrepreneurs' view on the Nordic countries? Will the investment increase or decrease in the future?
Certainly, there's a view that the entrepreneurial environment is very, very lively here. And I, from my understanding, a lot of investors are actively looking at investments here and their potential collaborations. So I think it's a model of inspiration for a lot of these Chinese entrepreneurs. But I would just say that as much as I've told you that we should watch for the exodus of Chinese companies going global, it is very difficult. It's still very challenging. First of all, you have to face the most cutthroat competition domestically, which is why once you survive that round and become a winner there, you're pretty much the most competitive product internationally. That's very, very possible for a lot of the products now today. But after that, you just don't have that kind of muscle and strength and resources to devote, and there are so many barriers outside. So right now, we're only seeing the very big ones having that kind of success. But it would be very unfortunate to cut that link between the Nordic and Chinese technological exchange.
And then we have another question going to your mention of the debt problem. In what way can China solve that problem?
The debt issue has real political economy complexities behind it. You know, I always thought, okay, who cares about moral hazard at a point in time when the Chinese economy is going to collapse? You guys just go and save these local governments. And that dinner I mentioned, she said, look, you know, this is very real. Everybody's talking about, we behave so well, we didn't borrow, we were responsible. If we knew that we should be crazily borrowing like them, then everybody should be doing that. So that sentiment is something that the central government is facing every day. It's very real that they want to prevent moral hazard. They don't really want to put the burden on the central government unless they really have to. They believe that the local governments should resolve their own problems to the extent they can. And it's a lot of that political debate and fighting that's preventing them from coming up with a very consistent policy. But let's just say it's a bottom-line approach. Unless there's a real collapse, they're not going to do much. And they want to leave it to the local governments to resolve themselves, except for the rare cases when they need to step in.
And we're getting lots and lots of questions for you here, Professor. So, one-line response, one-line response would be fantastic. It could be difficult, though. In your brilliant book, one says you describe a large shadow economy in China. How is that reconciled with the Communist Party wanting control?
Control is absolutely right, and they have to face between control and opening up. But shadow is a testing ground for liberalization. So that's why they're interested in allowing for that, as good as I can in one sentence to answer your question.
Fantastic. What do you think about the future of Hong Kong?
I'm actually cautiously optimistic. I think it's trying to reposition itself as a financial center for digital currency and others. Maybe a lot of the foreigners have left, but now there are others, South Indians coming in, Middle Easterns coming in, replacing the new generations. Look, let me just say that it makes China look good if Hong Kong is successful, not the other way around. So it's in China's best interest to position China at Hong Kong as a financial conduit for global capital flows going in and out of China.
And then you mentioned anti-corruption campaigns, and there has been a crackdown also on Western consultancy firms. What does that mean to China if the foreign companies leave or the investors leave?
Let me answer this in three sentences because it is very, very important. First of all, there are many departments in China, they don't have one view. You have the propaganda department, you have the security department, you have the economics and finance department. They all have their own interests. Do the economics and finance want to see this? Absolutely not. They have to clean up the mess. They are the ones that push for openness and welcoming foreign capital. And you've seen this very dramatic turn in sentiment towards foreign capital, trying to lure them back in. Now, of course, the Chinese government is not good at understanding what it means to sustain confidence and expectations. It hasn't had the experience that you guys have had here. But the security department simply does its own thing, and it clashes. And unless there's a major clash, the top level is not going to come and resolve these things. So I wouldn't read that message as China being unfriendly towards foreign capital. Actually, quite the opposite. But it's in conflict with a lot of these technocratic errors that we're seeing across the board.
And in one sentence, what question do you think will define China for investors this year?
Watch for a slow, slow rebound in confidence and, you know, potential restoration of normalcy, but a slow and gradual one.
Thank you so much for coming, Ku Jin. Thank you.