Transcription
Great to have you both on, so let's begin. I've asked both of our guests to explain their respective cases in about 90 seconds each, and then we'll dive into specific issue areas. Michael, I'm going to start with you. Uh, you argue that China is peaking. Your time starts now.
Thanks, Robbie. Thanks for having us, and congratulations to Professor Jin on her excellent new book. I think of China sort of like a balloon. Um, China, for decades, has been rising up the ranks of the great powers. A lot of people thought it's going to soar past the United States. But for some of the reasons you articulated, Robbie, China's rise has started to stall. It's not going to plummet back to Earth. I don't expect the balloon to pop, but it is struggling increasingly to gain more altitude because, as you mentioned, those tailwinds that have really lifted China up over the past three to four decades, some of them are becoming headwinds that are dragging it down. The economy is slowing, productivity is declining, so you have Chinese companies having to spend more and more to produce less and less. Debt has exploded, so China's pile of debt is now roughly three times the size of its economy and rising fast, and somehow has managed to make America's debt problem look fiscally responsible by comparison. Um, China's population is aging and shrinking. Every year, millions more senior citizens, millions fewer working-age adults. And yet, somehow, China also also has a youth unemployment problem, which is currently at around 20%. So you have this double whammy of fewer workers and fewer jobs. And I think that just reflects the general lack of demand and dynamism in parts of the economy. Uh, China also faces geopolitical headwinds. So, in many countries, anti-China sentiment has surged in recent years. You have the United States and its allies building up their militaries, they're forming anti-China alliances, imposing economic restrictions on Beijing. China's main ally, Russia, is imploding. Um, and the loans that China has doled out across the global South are starting to mature, and many are not being paid back. So none of this looks very good. And just given how the CCP handled COVID, the fact that Xi Jinping has started telling young people to "eat bitterness," um, I just, I don't have a lot of faith that the CCP has a great plan to handle these headwinds and rekindle its rise. But I worry that Xi Jinping will definitely try to do that. And, you know, these past powers took drastic actions to reorder the world, and China seems to be giving off all the classic signs it intends to do the same.
All right, Michael, thank you for that. Um, that's your opening statement. Ku, you have a different argument to make. Your time starts now.
Uh, to put things into perspective, China's growth is contributing to 35% of global growth this year. And just starting from the question of what does "peak" mean? By any basic economic theory, you're never going to grow as fast as you did before starting from developing countries. So growth rates have to inevitably slow down over time as you get richer, which is what China is doing. And 4 or 5% growth in today's world is not really a bad thing. But really, the basic gist of my argument is about potential economic potential. The basic precept of conditional convergence is very much alive. China's GDP is only about 16% of US levels currently. There are 600 million and more people in China who are living under 2,000 RMB, $300 per month of income. Can you imagine the amount of growth that would, uh, transpire with these people moving to real middle income by international standards? 25% of the labor force is tied to agriculture, as opposed to 3% in industrialized countries. And even if we have the argument, or believe the argument, that China has totally exhausted physical capital and labor force economics, there is still one big opportunity, which is productivity and human capital accumulation. China's human capital level is only a third of US standards. Um, and measured by higher education share of population, its productivity, labor productivity is only 12% of US. And we do see convergence, uh, across countries and over time, especially when these countries have high saving rates, huge amounts of physical infrastructure, not to mention digital infrastructure, and high skills of labor. In addition, China plans to have a $6 trillion digital economy. The service sector moving from 50% currently of GDP to 80% of GDP amounts to $3 trillion, in addition to $35 trillion of renewable investment in the next few decades. That does not mean that China necessarily will reach its potential, but the potential economic growth is still there.
All right, thank you, Ku. That was very succinctly laid out. Both of you have made a set of points that I think we now need to sort of grapple with, uh, at a more granular level, um, taking on individual issues. So I thought I'd just start with demographics because I think, you know, to observers outside of China, this is the one that seems, you know, the one thing that is absolutely indisputable, that, you know, every year, partly because of the one-child policy, China's, you know, fertility replacement rate is pretty much at Western levels, and we know that there will be fewer workers, uh, in the future, because of where demographics are. So let's just argue that a little bit. Michael, I'll come to you first. You mentioned it. Give us a sense of, you know, why China's demographics will sort of push China into slowing growth, and what other ripple effects will come from that.
Yeah, I'm glad you mentioned it, just because I think it's such a tectonic force that even if China implements a number of smart reforms, it just seems like they're going to be swamped by the massive tide of this aging, which is the worst, I think, in human history. So China used to have anywhere between 10 to 15 workers to support every retiree in its population. That's going to collapse to two to one just over the next 15 years or so. So it's this amazing contraction where China's going to lose basically an entire France of workers while gaining an entire Japan of elderly senior citizens. And, you know, that's going to cause obviously fiscal problems because now you have to pay for all that. It's going to reduce the productivity of the workforce. It's going to erode the core institution of Chinese life, the family. I mean, people are literally just going to have far fewer kinship relatives, which means they're less likely to migrate and try a new job because you don't have your cousin's couch to crash on. It means fewer cousins to help take care of grandma when she gets older. And so it just compounds a whole number of problems. I know China, we can talk about the productivity potential, um, or whether China can replace workers with robots, but even if they do, you know, workers don't buy things. And so there's at least going to be a contraction in demand in the Chinese economy. And the lack of that demand pull is going to make it really hard to grow, uh, sustainably over the years ahead.
Hey, Ku, how does one argue against that?
Well, first of all, I, I want to say that, um, the challenges that Michael has laid out in the beginning, I very much agree with some of them. I believe are more short-term rather than structural challenges, but this is for open debate, of course. Um, on the, uh, aspect of, uh, demographics, yes, uh, China is aging, accelerating aging because of one policy in part. But there's still 400 million Millennials in the population. I know it's the share that matters, but this is a very large group. This is, um, compared to, uh, you know, it's more than the US Millennials and Europe Millennials added together. And I want to make a generational argument. I totally agree that if you look at a standard steady-state economy, every generation very similar, then yes, if you have a shrinking, um, younger group, that does spell problems. But the Chinese new generation is something else. They're completely radically different from the elder generations. They borrow like crazy, turning China from a saving country into a borrowing economy, eventually. Um, they consume. They have, they, you know, they have, you know, lifestyle consumption tastes of, that are wholly different from the saving for a rainy day of the older generation. They earn something like six times the income of their parents' generation, which is more than to replace or cover, um, the, the 1.1% decline in labor force potentially. Again, and this will happen over the very long term. So it's not the number of labor, number of people in the workforce that really matters. And as Michael has alluded to, it's the efficient, effective number of labor. So it really depends on Chinese productivity. And I fundamentally believe that technology adoption and population structure is an endogenous thing. It's a self, you know, it's a co-evolving, uh, process. And we're in the midst of debating about AI displacing jobs, etc. Um, so I think that, uh, I agree with the family fabric, but, you know, China has experienced, um, for a long time, a country with too many people, some would say. And we also systematically over time, across countries, we have not identified any systematic economic empirical patterns that demographics is the sole cause or the main cause of many macroeconomic woes. And I truly believe that if demographics didn't help China on the way up, it's not going to explain China on the way down.
Hey Ku, just a follow-up question there, because, you know, China, if you make the sort of cultural generational argument, it's also fair then to say that China was once a country of savers. And if, uh, China's Millennials today, the 400 million that you're describing, um, they are more likely to spend and borrow, doesn't that lead to its own set of complications, uh, in terms of a debt bubble?
Oh, yes, I agree. But, you know, there's there's an issue about how much is there really weak demand and consumption, weak consumption in China explaining the present woes? If that's the case, and getting the young people to consume rather than save is probably a good thing. I think the downside is, is there going to be enough fiscal capacity to make more investments and invest for the future, including high-tech renewables and all that? And I think it's really about a balance. I think at the current stage, um, in particular, these few years, the lack of demand is really explaining China's economic problems. So having them wanting to consume, I think by and large, is a good thing and benefit outweighs the cost.
Michael, how do you think about, uh, these 400 million Millennials, um, who could be an engine of growth for China?
So I think there's both demand and supply. The demand problem is, I mean, who after zero COVID is going to spend a bunch of money? Or after the housing, the mortgage crisis, you know, where people couldn't get their money back for half-built apartments? Or with youth unemployment at 20-plus percent, who is going to spend a lot of money? I think it's notable that Chinese consumption actually went down recently, even after Xi Jinping announced his new consumption-led growth, um, initiative. But on the supply factor, Professor Jin is right that there are these people that are underemployed, and if you could somehow get them into the workforce, uh, you'd have a big productivity boom. But the problem is China has systematically underinvested in basic education. And so today, only roughly 30% of China's workforce has even a high school degree. That's dead last among middle-income countries. And so effectively, you have this huge workforce where a lot of these people, you know, 70% are either high school or middle school dropouts. And, you know, in addition to Professor Jin's book, I would recommend people read Scott Rozelle and Natalie Hell's book, "Invisible China," which goes into rural China, where most of China's young people are coming from. And they find they're severely undernourished, uh, they have very low levels of education, and they estimate there's roughly 200 million essentially unemployable workers in a modern service sector economy. And so it's just, you're just going to have this big group that it's going to be very hard for them to work in any modern, um, job. And then you also have to factor in the politics. That there are vested interests in the Chinese Communist Party that profit from the infrastructure-heavy, state-connected firm model, and they have typically blocked reforms that try to transfer wealth back to households to stimulate consumption. This happened in 2013, where China partnered with the World Bank, they came up with all of these reform proposals that were supposed to infuse market mechanisms back in, and then they basically didn't implement the vast majority of those. And Xi Jinping himself, I think, has clearly shown he prioritizes his own power and security. And so a liberalized economy with a bunch of charismatic entrepreneurs like Jack Ma running around is not in his interest. An open flow of information to create ecosystems of different industries is just not in his interest. And that's why he's prioritizing these, what he calls the "real economy," you know, heavy investment in industrials. That's something the state controls. That's something Lenin said you should do if you're a dictator: you control the commanding heights. I fully expect Xi Jinping to continue to do that. So even if there is this potential, I see, I don't see it being realized just given the politics and the lack of education in the country.
Hey, I have to let you come back on that, because this is a debate for many other countries as well, I think. You know, India, for example, has even more young people in terms of raw numbers than China does, and often debates whether they could be a demographic dividend or if something worse will emerge from that if the state can't create enough jobs. What does China need to do to ensure that these 400 million Millennials, um, and people younger than them, Gen Z, that they can get jobs, that they can rise up the ladder, that they are more optimistic? And why do you think the state is well-placed to do those things?
Actually, um, I disagree with one of the previous arguments made, which is actually getting educated in China is easy. That's the easy part. The hard part is to get the right skills to adapt to the economy. And so right now, there's a current, not a demographic challenge, there's a big education and skill mismatch. And in fact, education has raced ahead of the econ, uh, in China, too many being educated, highly educated than the economy needs. And it's not like there are no jobs. There are 25 million workers, uh, uh, manufacturing worker job gap by 2025, 300,000 talent gap in semiconductors alone, and many, many other examples. The real question is not to get educated per se, but can you be equipped with the right kind of skills to deal with a modern society that China is right now? And right now, China is doing as fast a place as any government can imagine expanding vocational schools, vocational trainings. And because of the levers that the government has, it can actually encourage and entice people to move into vocational training, uh, very rapidly. So it's about reducing that skill education gap that I think is, uh, more important. And I don't also agree with entrepreneurs. Yes, we hear anecdotes, one anecdote, two anecdotes. There were regulations, technology, education. I totally agree that the ways that it was brought about, um, is less than optimal, potentially erratic and dramatic, and had its bad consequences on the economy. I fully agree with that. But if you're asking the Chinese people, Chinese entrepreneurs, young ones on the street, are you not inclined to do entrepreneurship because of Jack Ma's story? The answer is resoundingly no. They think they can be millionaires, billionaires because of China's large market. They have just, you know, so many ideas of innovation. And, um, China is a big country. It's not like the other countries which just relying on domestic economy won't be sufficient to overcome the middle-income trap. I think China's challenge is too much reliance on exports, etcetera, is going to not be, you know, a driver of growth, and it has to redirect the demand back to the domestic economy. And for all the arguments that have been made about Xi Jinping's politics, I'd argue, look, China is a totally decentralized economic model. Forget about the political centralization, yes, we all know about that. But on the ground, local officials are enabling entrepreneurs, helping entrepreneurs at a daily level. The reason being, their incentives are totally aligned. It's the good, productive, promising entrepreneurs that bring the jobs, fill the local government coffers, make the unicorns that the local government needs to climb the higher rung of the political ascension. And they are knocking on the doors of entrepreneurs every day, asking what they can do to help. So it's not about just the rhetoric on the macro level, what Xi Jinping himself says, but actually what's happening on the ground. And it's still vibrant, um, with its challenges because of the debt issues and the financial issues, but the spirit is not yet lost.
All right, now that you've watched the debate between Professor Ku Jin from the London School of Economics and Michael Beckley from Tufts University, what's your take? Do you think China's economy has already peaked and will never overtake the United States of America, or do you side with Professor Ku Jin, who argues that despite the challenges, China still has massive growth potential? Drop your thoughts in the comments below. We'd love to hear your perspective. And if you enjoyed the debate, don't forget to hit that like button and subscribe to our channel for more insightful content.