Policy advocates Tom Dusterberg and Leonard Miller argue China's export-driven model, reliant on currency manipulation and state subsidies, is fundamentally flawed with domestic consumption at only 40% of GDP. They highlight a "two-speed" economy where collapsing real estate contrasts with advanced tech growth under Made in China 2025, noting the government prints money six times faster than the U.S. to prop up failing firms. While predicting sudden collapse is unlikely due to state control over liquidity, they urge Western nations to counter mercantilism via targeted tariffs and SWIFT sanctions, suggesting higher Chinese tariffs are essential to incentivize supply chain shifts away from overcapacity. [Automatically generated summary]
Said when we see Oriental, human eyes have never seen that.
Never seen that.
We've seen it in satellite photos, but humans have never, ever seen that before.
That's cool.
unidentified
Our next question is from TJ Mascaro with The Epoch Times.
Good morning.
Thank you so much for taking the time.
Going back to preparations and expectations, the International Space Station has its entire life been about preparing humanity to go back to the moon and onto Mars and beyond.
But it was always someday.
Now it seems that that someday is finally going to come.
And so I was just wondering if you guys have felt any sense, any greater sense of immediate correlation between the work you did on station and now.
You can continue watching this program online at c-span.org.
Live now to hear from policy advocates discussing the current state of China's economy.
It's hosted by the Hudson Institute here in Washington.
And many of them actually recognize the importance of China issue in America's presence and also the future.
But it's very difficult to be correct on China all along before China threat becomes apparent.
And Tom is one of the few.
Way back to the debate about China's membership in the global free trade system, the PNTR debate and also China's membership in WTO.
Mr. Dustberg has always been consistent.
And he said then and still saying very loudly today, China's membership in the global free trade system is questionable.
It's going to be causing a lot of harm to not only to the global economy, but also to the Chinese people themselves.
So today it's very fitting for us to remind everyone that how this issue has been consistently a major problem in the global system.
Mr. Dustberg held from Indiana, there are two things coming from Indiana that was very great.
One is Tom Dusterberg, another one is Gutsenberg.
Many people confuse the whole thing.
Both are excellent.
I think, you know, Tom has been a director of manufacturing and society in the 21st century program at Aspen Institute.
And he also used, formerly, served as director of the Washington office of Hudson Institute when Hudson Institute was headquartered somewhere else.
And he was the assistant secretary for international economic policy at the U.S. Department of Commerce.
And I can say without any reservation that Tom is probably the greatest living macroeconomist on China today.
Joining us today is another very distinguished macroeconomics, Mr. Leonard Miller.
Leonard Miller has been a very familiar name to many of those who are interested in China because he is the co-founder and CEO of the very influential China Beige book in the period when all economic critical data was very rare because Chinese government's intransigence in providing real economic statistics.
And this publication has been very, very important for many of us who try to understand the nature and the projection of China's economy.
Mr. Leon Miller is also a member of the highly reputable commission, one of the few U.S. government commissions that actually does very important things.
That is the U.S. China Economic and Security Review Commission.
And so what we'll do today is that I'm going to basically introduce our colleagues here and the author of this phenomenal publication, Tom, come here, to make a few remarks, summarize his research and findings, and then follow by Leland's remarks briefly.
And after that, we're going to have a panel-like discussions here on this front row.
After that, and if you have time, we'll have some questions and answers.
So, ladies and gentlemen, it's my honor to introduce to you Tom Glisterberg.
unidentified
Thank you, Miles, and welcome to those in the audience and those watching us on C-SPAN.
I want to first start by saying that a lot of what I know about China, I learned from Miles and Leland over the course of the last two or three, four decades.
And I want to thank them for their work.
And I want to also thank the Review Commission for doing excellent work, especially in the last decade, on China.
So, I'm going to give a brief summary of what my paper says.
It's somewhat out of the ordinary, but it's more and more reflective, I think, of the consensus, at least on the current state of the Chinese economy.
What to do about it?
I have some ideas that are perhaps not in the consensus.
So, at a time when many think that China has the upper hand in controlling important choke points that prevent Trump from taking counteractions against Chinese mercantilism, I argue that because of the way China's economy is structured, the U.S. and its allies, if they muster the political will, can upset the Chinese model and eventually weaken and undermine that model.
Following the near collapse of the real estate bubble in China and the saturation of the infrastructure build out to support its modern economy, China now relies on exports, exporting its enormous production capacity to maintain some level of growth.
Slowing Productivity and Profitability00:05:51
unidentified
In 2024, net exports added over 3% and in 2025, over 4% to total reported growth of about 5% in China.
A realistic expectation for growth is much lower than the near 5% number set as the current goal.
Xi Jinping's China dream relies on building out modern production dominance in traditional industries such as steel and chemicals and new industries such as EVs, robotics, and pharmaceuticals.
The IMF, the World Bank, and surprisingly, even the Federal Reserve Board have all published papers noting the role of various forms of subsidies to drive China's dominance of global trade in manufacturing.
And most importantly, China maintains a somewhat closed market to protect its NASA industries, including the financial sector, which is one key to the overall model.
Directing available investment resources to favored industrial and technology sectors comes at the expense of building out a modern social safety net in China, especially for the still impoverished rural sector.
Xi Jinping is famously averse to welfarism, and because of the persistent favoring of subsidized state-owned enterprises and advanced technology investments, little is left to invest in human resources and social welfare.
Individuals and families saw much of their savings disappear with the real estate bust, as this sort of investment once accounted for 60 to 70 percent of total wealth of Chinese households.
The Shanghai Composite Index, an indicator of the stock mark, is still one-third below what it was in 2007, another losing factor in Chinese household wealth growth.
Wage growth too has also been weak in China, and unemployment among young people remains in high single digits.
Forced to save to take care of the elderly, pay for decent health care, and build their own pensions, there's little left to increase consumption that in most developed economies is a pillar of growth.
Household consumption remains mired at about 40% of GDP, far behind that of Japan, the U.S., and even developing countries like Mexico, where it's 70%, Peru, 60%.
Seriously compounding the problem of shifting growth away from exports is the weak profit and productivity performance of Chinese industry.
Despite heavy subsidization, some 30% of Chinese firms operate at a loss.
And we do have a few figures that we'd like to show.
Annabelle, can we go to the figure one?
So this is the growth of firms that operate at a loss in China.
The capital efficiency ratio, that is how much investment is required to produce additional growth, has plummeted in China both absolutely and compared to leading competitors, especially the U.S. Can we go to the next slide, which shows comparisons of the capital efficiency ratio.
Whereas the United States has been growing for a number of years, China's just been plummeting since they reached a high several decades ago.
Finally, a measure of bank loans to GDP shows that nearly twice as much in loans, and we'll go to the next slide, Annabelle, this shows that nearly twice as much in loans is now required to support growth as compared to 2008, and this is a work from the Chinese Beijing book.
Xi's shift against the private sector about 10 years ago and toward SOEs, state-owned enterprises, in the last decade is one cause of this decline in capital efficiency, which is also reflected in slowing productivity growth.
To a large extent, new financing in China often supports money-losing enterprises whose only outlet is external markets where their products are dumped.
The need for increasing amounts of capital and loans, along with slowing of productivity and profitability, has led to weakness in both public finances and the state-dominated banking sector, which is the instrument used by Beijing to support growth.
Banks are forced to lend at sub-market rates and prop up falling enterprises and overextended local governments.
The International Monetary Fund characterizes local government finances as, quote, combustible, and I've seen much worse from reputable analysts.
The IMF also calculates the total budget deficit of all government finances to be around 13% of GDP in 2025 and extended over the next few years, forcing the banking sector to struggle to meet the needs of the economy for stability, let alone growth.
Beijing has met the need for increasing financing and avoiding serious deterioration of the economy in part by simply printing money.
Monetary stock, and let's go to the next slide, monetary stock has grown six times faster than in the United States since the year 2000, and the ratio of debt to GDP since the great financial crisis of 2007-8 has grown by 153%, as this chart shows, and it's much larger in terms of the growth of debt than other countries.
The Undervalued Yuan Strategy00:04:55
unidentified
In 2025 alone, the People's Republic of China printed $4.5 trillion in their equivalent of M2 money, while the U.S. only increased its stocks by $700 billion.
Now, China, with an economy smaller by one-third than the United States, has more money in circulation than the United States and the EU combined.
And that's our final slide.
Let's go to this indicates the explosive growth of money in China.
China avoids the inflationary impact of such a level of debt and money supply profligacy by tightly controlling bank interest rates, contributing to their loss of profitability, discouraging consumption, and limiting foreign competition for the financial services industry.
It tightly controls access to foreign currency trading and manipulates exchange rates through its control of the currency.
It also maintains a closed capital account.
In principle, most foreign currency, and let's recall that last year China had a trade surplus of $1.2 trillion to add to its ability to hold foreign currency.
Most foreign currency must be turned over to the state, facilitating its ability to control exchange rates.
Beijing, in essence, maintains an undervalued currency, although it keeps the dollar exchange rate just strong enough to permit the purchase of dollar-denominated commodities and high-technology products, an increasingly important point as we have inflation in energy rate, energy prices, for instance, in this moment of crisis.
The undervalued yuan is a special problem for the EU as the Euro has appreciated by 40% against the yuan this decade alone and led to a huge turnaround and growing trade surplus of China vis-a-vis Europe, which is totally undermining the European industrial sector.
Other exporting nations in East and Southeast Asia also suffer from the undervalued yuan.
The undervalued yuan is, of course, one key to supporting China's export-oriented mercantilist economy.
Expansion of the money supply at a level as persistently done in China also allows a real economy that destroys capital through subsidization and financial repression to avoid reckoning with the growth of debt and money, money-losing companies or zombie companies as some call them.
In a more market-oriented system with an open capital account, the yuan would appreciate and lead to a more balanced trade outcome.
A more open capital account would undoubtedly work against the ability of China to print money without inflationary impacts.
The U.S., hopefully in conjunction with other market economies damaged by Chinese mercantilism and currency manipulation, does have agency to weaken or undermine the existing economic model of China.
The U.S., Europe, and other countries are now pushing back against the relentless growth of the Chinese export machine.
Based on the principle of reciprocity and grounded in existing and domestic and WTO rules, tariffs targeting China and access to market economies, especially in the financial sector, can be and are effective in combating mercantilism.
Malign Chinese activity, such as IP theft, money laundering, and sanctions evasion for illicit drug trade and support for adversaries such as Russia and Iran are additional reasons justifying anti-mercantilist actions.
Chinese money laundering as well as currency manipulation and failure to open the Chinese financial markets as promised when China joined the WTO 26 years ago also ought to be sanctioned by cutting off access of Chinese banks to the SWIFT and CHIPS system.
The U.S. could start perhaps with a few selected banks or partial measures such as pressing for the ability to trade in China's foreign currency market, again as authorized by the terms of admission to China's entry to the World Trade Organization.
Weakness Versus Strengthening Sectors00:15:23
unidentified
Finally, sanctioning Chinese banks, the more draconian freezing of access to the U.S.-dominated financial clearance system, closing off Chinese access to Western stock and bond markets, and gaining real access to trading in Chinese currency exchange markets would all have a quick and substantial impact on the entire Chinese economic model, which has been perfected by Xi Jinping.
The existing Chinese economic model could not survive such measures.
So let me stop there and invite my friend Leland to comment.
Thank you, Tom.
Thank you, Miles.
I appreciate the invitation to come here to Hudson Institute to join the discussion on something that I think we should all be focused on, which is China's economy.
Tom is the star of the show.
He wrote what I think is a truly excellent report on what's going on underneath the hood of the Chinese economy.
It's a subject that we don't talk about enough these days.
So I want to make just very brief remarks up front to give us a framework for the discussion we're about to have.
I think the question here, 30,000 feet, is how should we view China's economy?
And I think back a few years ago to when I was speaking to a group of senators and they had asked me, I prepared a presentation and was getting ready to speak, and one of them stood up and said, before you start, we've had a lot of people come through here and some of us are telling us, some people are coming in and telling us that China's strengthening.
And some people are telling us that China's weakening.
Before you start, what's the answer?
Is China strengthening or weakening right now?
And I said, yes.
And they're like, no, no, you didn't hear the question.
Is China strengthening or is it weakening right now?
And I said, yes.
And I'm not trying to be cute.
And the point I went on to make, and I think this is a point very well encapsulated by the report that Tom really laid out the evidence for, is that China has a two-speed economy right now.
You know, back in the old days, we used to talk about 8% forever.
We didn't talk about it.
Chinese talked about 8% forever, how they could keep GDP up, growing forever.
They were magicians on the economic side, and high growth was an integral part of policymaking and the growth and the governance model.
We're far away from that right now.
I think when Xi Jinping got into office, it took him a few years, but there was a move away from growth for growth's sake.
And I think what we have right now is a two-speed economy.
On the one hand, you've got a macroeconomy that is weak and weakening.
It's got a lot of problems.
These are problems that Tom laid out.
You've got very weak domestic demand.
You've got a property sector which has been deflating for years, you could say bursting in some ways.
All kinds of repression, household repression, repression of the consumer in order to boost the prospects of the state.
A lot of structural weaknesses in this macroeconomy.
So on the one hand, China is weakening very dramatically right now.
On the other hand, there's a part of China's economy that's strengthening quite a great deal.
And what is this subsector of China's economy?
It's the subsector, it's the part of the economy that Xi Jinping really cares about.
It's technology.
It's advanced technology.
It's advanced manufacturing.
Now, if you want to know where to look in order to find this strength, just look.
Xi Jinping gave us the playbook.
It's the Made in China 2025 program from over a decade ago.
What are the sectors of the economy that Xi Jinping really cares about?
It's AI.
It's quantum.
It's biotech.
It's hypersonics.
It's space.
It's these areas of advanced technology which will allow, if done right, for China to dominate the fourth industrial revolution.
So you have this weird dichotomy between what's going on on the one hand, the macroeconomy weakening and parts of the economy, the parts of the economy that Xi Jinping really cares about, strengthening quite dramatically.
And I think this is part of the discussion that we should be starting with because it's a very different growth model than the one that we were all as China watchers raised to watch.
It's not something that's focused on GDP numbers.
As a matter of fact, I would go so far to say the GDP number is almost irrelevant right now.
But it's something that is extremely important because on the one hand, as economists, we see weakness, but as national security policymakers, we see building strength.
And so I think this paradox, this disjuxtures, I should say, is really something that we should be focusing on as we dig down into Tom's examination of China's economy.
Let me stop there and looking forward to discussion.
And I think the big picture is very important for us to understand that.
So let me start by asking both of you, Tom's paper talking about some of the vulnerability of Chinese economy on a macro level, talking about the collapse of property sector, which is pretty big and huge, and also rising debt levels and the declining revenue on investments.
How does the vulnerability add to the whole picture?
Do the parts add up to the whole?
Let's start with Tom.
unidentified
Well, that's a $60,000 question, in addition to the point that Leland raised about the strength of the high technology economy.
My argument is basically that China is destroying capital.
Their big firms aren't profitable.
He's gone after and undermined the more dynamic private sector.
He's forced the banks to pump money into money-losing ventures, local finances, total government finances are close to a disaster.
How are they paying for that?
I think they're paying for it by printing money.
And they're able to print money because they have a closed financial system.
And it's a closed economy in many ways.
There's little competition when it comes right down to it in the goods-oriented economy and the services-oriented economy.
So if you opened the financial system, allowed trading in foreign currency, for instance, and if the Chinese were not allowed to manipulate currency, then the consequences of their financial engineering, I think, would be undermined.
If they continue to print money, which they need to do to prop up the banks, then you would face a question of either totally cutting back on the support for the money-losing sectors of the economy, which are pretty broad, or going into hyperinflation.
And I think that's a tough choice for the Chinese, but we would have to press the issue.
We would have to try to force them by taking measures like sanctioning their banks, like calling them on their currency manipulation.
And we would have to muster the political will to do that both domestically and internationally, because we couldn't do it successfully unless our major erstwhile allies, Western Europe, the Pacific Rim, Southeast Asia to a certain extent, would go along with us.
So let me take Tom's point and just build on it.
You've got this weak system, and you have a lot of Xi Jinping's attention focused on other parts of the economy and not this macroeconomy that is using up debt and is focusing more and more capital going to non-productive uses.
So you have this weak economy.
But let me say something that irritates the heck out of a lot of people, which is China's economy is not going to collapse.
You do have a weakening economy over time.
But China's economy is not collapsing.
It's not about to collapse.
It's not going to collapse in the future.
And I think this is one of the points that a lot of people get wrong.
Back during the financial crisis, great financial crisis, you saw the United States go through some terrible things, Europe go through some terrible things.
And there are a lot of people who were betting that China was next.
But China was never next because the great financial crisis was taking down continents, countries, systems that were commercial financial systems.
It's a very important point to recognize that China has a non-commercial financial system.
Now, what does that mean?
That means that China controls the counterparties of the economy.
It can order lenders to lend, it can order suppliers to supply, it can order borrowers to borrow.
You're not going to have a liquidity freeze-up.
You're also able to order tidal waves of capital from one side of the system to the other.
So if you have a failing enterprise here, you have a bunch of zombie companies here, you just order capital from one side of the system to wash over to the other side.
Now, this is a beautiful recipe for not having an acute crisis.
But there's a downside.
The downside is as you have this weakness, instead of allowing bankruptcies and companies to go out of business and products to blow up and other things, you're maintaining stability throughout the entire time.
What you're doing along the way is weakening growth.
And you're weakening growth because this capital that's whooshing all over the economy can be used to plug up holes like on a ship.
You have a hole in a ship, you plug it up.
I have another hole, plug it up.
But what you're doing is you're taking capital that should be going to productive uses in the economy to innovation.
And you're taking it and you're using it to just save some of these companies that should be going down, save parts of the economy that should be going down.
And what's happening is good money is chasing after bad.
Capital is going to non-productive uses instead of productive uses, bad debt.
And so what's the consequence of this?
You don't have an acute crisis, but you have a growth rate that slows down more and more and more and more and more over time.
And it goes, it's a trajectory that's sort of laid in stone right now because China's unwilling to allow the dislocations necessary in order to clear the system.
So as a result, bad debt is one way that it makes sure that stability is forever maintained.
So I think this is just an important point, I think, to bring up along the way.
We can talk all day about how China's economy is weak, and I think Tom and I are lockstep on that.
At the end of the day, I think people who are predicting China's economy will one day find the point to crash and collapse.
I think that's some very wishful thinking by some people.
Okay, that's a comment.
Comment just a little bit more.
It's sort of a fool's errand to predict the collapse of a strong, big economy.
I think we're learning that currently in the current unrest in Iran.
It's harder than we might have thought for things to fall apart there, even though they're in incredibly bad economic shape.
But with China, part of the argument I've tried to make over the course of time is that this system punishes the people of China.
And I adduce all kinds of statistics about the weakness of the social security system, which is really third world at best in terms of its reach.
I mean, the pension system, the health care system is terrible.
The life of rural people in rural China is really bad.
A few years ago, I used, in the first long article I wrote about called the cracks in the great economic wall of China or something like that,
I closed with a quote from a famous Chinese scholar who said, why should we not assume that the Chinese people themselves have agency and desires for a better life than most of them lead now?
I mean, it's not only the social welfare system that's in bad shape, but local governments are in such bad condition that lots of them aren't paying their workers.
They're not paying their suppliers.
There are six months delays or more in the suppliers to the healthcare system.
Banks are, there are lots of Chinese who have money tied up in banks, mortgages.
They're not getting the apartments that they bought, the apartments that are not completed.
So they're losing money on the loans that they've taken out, and the banks are trying to collect on them.
So you see all kinds of Movement in the streets that we can't deny, but we don't know how strong they are and how long the Chinese people are going to allow the sort of pain that they're undergoing to continue.
So I would just say we need to watch this closely.
And again, we have agency to inflict pain on China.
I mean, they have to import food.
They're, you know, in current circumstances, their agricultural system is weak and inefficient.
They've got to import food.
The price of food's going to go up for an additional problem for them.
There are other ways that we can harm even the high technology sectors of the economy by closing off access to American universities, for instance.
So I can't predict collapse, but I think it's worth watching over the course of time how much the system can actually keep going on with the structure that they put in place.
It's a self-reinforcing structure.
Missing Growth Drivers in China00:15:19
unidentified
It's hard, it's going to be almost impossible for Xi Jinping to change it.
Following that, both of you brings up the question of whether it's futile to predict the future.
And I think Carl Popper said it very famously over centuries ago, it's impossible.
However, let me just be the devil's advocate to sort of ask a question that Lin put up forth.
That is, both of you actually said this, precisely because the inner logic of the Chinese economic system is fundamentally flawed.
Precisely this preponderant dependency of Chinese economy on international trading system, export-orientated technology from China is also dependent on the West.
So is it possible if the West finally decoupled from China, would not economy be naturally moribund and or collapse?
The model I'm saying.
If you're a China watcher in the West, in Washington in particular, many of us basically live in a kind of surreal dual world.
On one hand, you hear those globalists from Silicon Valley of the technocrats in Silicon Valley or from some Wall Street hedge fund people saying China is doing this right, doing that right, and they are the future of the world.
If you believe in some professor from Columbia or Harvard talk about this kind of stuff.
On the other hand, if we're in the Chinese language world, you hear nothing but Jeremiah complaining and disenchantment against the regime.
People are fed up with the high rate of unemployment, mostly because of the reduced, diminished exports.
A lot of factories were closed.
So what I'm trying to say here is if you follow the logic, the trend of decoupling, some of the countries are doing great, like Taiwan.
Now, people often forget Taiwan is one of the most successful models of decoupling from China.
15 years ago, Taiwan's investment in mainland accounts for about 84, 85%.
Today, it's less than 4% because Taiwan is decoupling from China very fast.
The United States is Taiwan's number one export destination.
So they increased trade with the United States by about 80%.
So that's a really dramatic model.
So what I'm saying is, if the Chinese economy is so dependent on international market, why is that inevitable that Chinese system will sustain?
unidentified
So I think the answer to that is that it can get weaker and weaker and weaker, but it could also maintain indefinitely at 0% growth or something slightly above it.
Look, if the world writ large wanted to push back against the Chinese economic model, it would set up more and more walls against the idea of China's overcapacity flooding outwards.
Now, there are a million reasons why countries in Southeast Asia and Africa, Central Asia don't have the political willpower to do that.
They are dealing with a much bigger country next to them or selling to them that is oftentimes a bull.
But I think it would put enormous stress on the Chinese growth model.
Because look, if you look at what China-based book data have shown over manufacturing and production exports, you know, back manufacturing was strong going into COVID, and then it just went like gangbusters.
And we said, wow, this can't possibly last.
These numbers, you know, month after month, quarter after quarter, were just amazing.
Then we got out of COVID, and the Chinese doubled down again on manufacturing and exports.
We're like, oh my goodness, these data are just amazing right now.
And so we said, well, it's got to stop at some point, right?
And then, you know, they got into deal with circulation, which is a new theory, which is focused on even more exports.
And then they moved to new quality productive forces, which was basically Xi Jinping's idea that the whole of government should be focused on more production and more exports.
So you've seen a double down and a double down and a double down and a double down for the past almost 10 years on the strength of manufacturing sector and the focus on exports.
Is there an end to this?
At some point, there will be.
At some point, it'll become so radioactive that more countries will put up tariffs, more countries will put up quotas, more countries will put up walls so that China cannot keep growing its manufacturing sector as a growth driver.
I think this is where the real weakness of China is.
There is not an obvious growth driver after you get past manufacturing and exports.
Now, everyone talks about, at least they used to talk about, the idea that consumption was risk going to occur, usually magically.
The idea was, you know, there's a shift from investment, it was shifted to consumption, and we're going to wake up one day and the Chinese consumer was going to dominate the world.
Now, this was always flawed because what China did here is they did gear down investment.
You can see all the investment data slowing down, but they never shifted to consumption because it's not about just saying, you know, ordering by fiat, consumers consume.
You have to create structural incentives in the system which are not there in order to shift to consumption.
Now, there's a bunch of different ways to do that.
You could appreciate the currency.
You could build out the social safety net dramatically.
You can actually shift assets from the state sector to the household sector.
You can empower consumers if you want to, but Xi Jinping doesn't want to.
It's very clear that that has not been happening.
It's very unlikely to happen.
If you see what's been happening, actually, there have been tickups in retail, the retail sector and retail sales.
We've seen them in our data.
But a lot of this is consumer good trade-in programs that are, you know, here, trade in your toaster, get a new toaster.
There's only so many times you can trade in your toaster, you know, in a couple year period to keep growth going.
So the stuff that's been happening on the consumption side should not lead anyone to believe that you've got a consumption revolution or shift to consumption as a growth driver coming down the pipe.
So what does that leave?
Well, if manufacturing and exports sort of peters out and you're not going to get consumption, where's the strength?
You know, you can get these super strong sub-sectors and technology.
That's not enough to drive the economy as a whole.
A very good possibility is they're going to go backstep and fall back into juicing property again.
That's something that we've been talking about a lot internally over the last six months or so, whether that's what's next when they run out of this growth driver.
So, I take the point.
I think that there are a lot of reasons to believe that China's growth, even though it is slowing down, may be slowing down even more dramatically in the future because there is not an obvious replacement growth driver for these exports, which have been going so gangbusters they can't possibly keep up this pace forever.
So, what's next?
We don't know.
It's not an obvious, there's not an obvious answer to this.
But I think even as China slows down, slows down, slows down, the base of the system can keep things from collapsing because you're just going to be swooshing money around the system.
Good companies that are healthy are going to buy stakes of bad companies or take them over.
You're going to have big funds and big asset management companies come in to buy out smaller asset management companies.
When that fails, you create a bigger asset management company, you gobble up the liabilities.
It's a concept that we've referred to on Twitter as the blob.
We have a lot of fun with this on our Twitter feed at China Basebook, which is basically the idea that all the liabilities in the system are controlled and dependent on China's system maintaining stability.
You can't let parts of the system fail, or it'll be a threat to the party.
So, they have to keep absorbing liabilities in.
What is that?
That is a non-productive use of the capital you have.
It slows down growth, it builds up debt, and it's a real problem for the future.
But I do think that China can maintain at very, very low levels of growth without collapsing.
But also, that's not exactly an optimal scenario for China people.
One of the most amazing phenomena is the almost entirely collapsed Chinese consumers' confidence in Chinese economy.
That's one reason.
If you have money, you don't want to spend because you don't know the future and it's not very safe.
Most of them lost money anyway.
So, a collapsed consumer confidence in China is very hard to force the state to change to a consumption-driven economy.
Having said that, why is it politically not feasible under the current system to make that switch?
We keep thinking, we keep hearing our American officials, particularly Secretary of the Treasury Besen, to basically try to convince the Chinese to build an economy that is consumption-driven rather than export-driven, right?
So, why is that the political risky for them to do?
unidentified
Well, I think Leland went through the reasons why it seems to be, I mean, it appears to be pretty much impossible given the structure that they have imposed on the system, especially under Xi Jinping.
But there are no good alternatives.
Just a couple of anecdotes that are worth bringing up.
This idea of trading in appliances and cars reminds me of there's a kind of obscure French economist named Bastiat who made the observation that you could grow the contemporary economy by breaking windows all over the place, and you would have to replace them.
But as Leland said, for China, that is not a productive activity.
That is a replacement activity, and it doesn't add to growth.
And China's doing that to a certain extent.
I mean, Miles, you sent me some videos of these huge empty apartment buildings being dynamited and destroyed.
If we go back to real estate as a growth factor, which apparently the Chinese are somewhat thinking about, I mean, that's just replacing stuff that you destroyed instead of doing research on quantum physics, for instance.
There's another factor in consumption that kind of has appeared recently, which baffles me.
China's the leader in robotics, right?
And they're producing millions of robots every year.
They have unemployment in the youth sector of 17, 18%.
I mean, they're working against the employment problem, the unemployment problem that they have by building out their robotic sector.
I mean, they're going to be able to export robots because they are good at it.
It's a high technology area that the Chinese are very good at.
But it's not going to fix their employment problem.
And in terms of consumption, I mean, robots don't consume very much.
They're not buying Gucci bags or Mercedes-Benz cars.
So it under, well, to a certain extent, undermines the putative turn towards a consumption-oriented economy.
So the final thing I'll say is somewhat repetitive.
My observation in the global economy in the last few years is that more and more countries are understanding that China's export-oriented economy is destructive to their own economies.
I mean, especially the Europeans have been hammered.
They're the central growth engine and employment engine in much of Europe is their excellent manufacturing economy.
But the combination of Chinese subsidies, but also currency manipulation, which has really hurt Europe much harder than it's hurt us, is leading them to question whether or not they're going to buy EVs or let EVs do anything enter their economy,
unless they build factories in Hungary or someplace else.
You can see in Southeast Asia, a lot of the products that were previously sold directly to the United States are now sort of funneled through Southeast Asia.
There are efforts to place domestic content requirements on the imports from Southeast Asia, which would harm the transshipment game that China's been playing for the last decade or so.
So there's a lot of pushback against the export, mercantilous export-driven economy that in the long run, unless China does something to fix it, is going to be a problem that's going to be hard for them to fix.
The Chinese, so-called Chinese economic miracle, to a large extent, is built upon this switch-up philosophy of 996.
That is, if you're a worker, you work from 9 a.m. to 9 p.m. and six days a week.
Now, with robots all over China, and that 996 formula is going to change to 24-7.
So that's the dilemma that most industrial countries would have to face.
Anyway, so it's WHS work with the automation and the technology advances order.
Before I turn to the audience, I have one last question for both of you.
What do you consider will be the biggest misconception about Chinese economy today in the West?
unidentified
I'll start.
You hear all the time that China's driving global growth, or that China is the biggest driver of global growth.
Misconceptions About Global Growth00:05:35
unidentified
Beijing loves this.
They tweet it out.
They say it all the time.
It's total nonsense.
You don't drive global growth through high GDP prints.
You drive global growth through imports and consumption.
So essentially, what China's been doing through a very subsidized state-centric subsidized system is it's been hoovering up demand around the world.
You know, you have very strong exports, very weak imports.
You see high GDP numbers.
That doesn't mean China's driving global growth.
It means it's actually hoovering up demand from the rest of the world.
So I think we need to be very clear.
The defense that Beijing often uses against the idea that they have an imbalanced economic model is: look at our large levels of growth, which are driving global growth, and we're making the world stronger.
That's not how it works.
It's not how it works at all.
What you're actually seeing is a system that is focused on exports, production, manufacturing, very subsidized through the foundational stages of key sectors.
You export that overcapacity to the world.
You essentially create an export juggernaut.
You create a system that offers very weak domestic demand.
And so you are not doing the world a favor.
Beijing is not doing the world a favor by running this model.
They're actually screwing most of the planet.
Tom?
In addition to the stuff we've already talked about, including this idea that China's economy is a beanstalk growing to the sky, which was never realistic.
I'm skeptical about the idea that China is a total technological juggernaut and that they can overtake the West writ large.
It's undoubtedly true that China has made extremely big and good advances in technology, but at the cutting edge, they don't seem to be the innovator that the West has traditionally been for the last two, three hundred years.
I've questioned their ability to be a leader in artificial intelligence.
I mean, they have all kinds of advantages, cheap electricity, big data, but they don't have the advanced semiconductors that they need, and we can deny them to them.
But they're not able to deep seek, I think, succeeded by grafting on Western developed software and technology onto a cheap energy system.
And whereas they made advances, they're still not at the top of the world rankings in as much as they're accurate.
A pet peeve of mine or pet idea of mine is looking at the pure manufacturing sector.
China has never been able to make a commercial airliner without reliance on all kinds of Western technology.
Avionics, tires, brakes, but jet engines especially and avionics are the main thing.
But complicated pieces of equipment like that require expertise in systems integration that the Chinese have never, to my knowledge, mastered as much as we have.
The Europeans have.
I mean, they make the greatest machine ever invented in the world, which is the EUV production system for semiconductors.
The Japanese are good at certain things, but the Chinese, they haven't overcome this deficit in inventing some specific technologies, but then integrating those technologies into commercially effective systems, much less money-making products.
I'm not a huge fan of across-the-board tariffs that the President has imposed, partly because we've alienated a lot of our erstwhile friends.
And for the big effort to push back on China, Chinese mercantilism, we need some help.
And the Trump across-the-board kind of arbitrary policy undermines that.
It's kind of hard to predict what Trump may ask for, but I think there is consciousness here in the United States and the idea of China building such massive overcapacity, cars.
steel, robots, I think it's recognized as a severe undermining of the Western market economy.
And I think he's almost undoubtedly going to try to raise that.
And now that there's a little bit of wind behind his back in that other countries have made finally come around to understanding that that's a problem for them too,
you can see even in Africa and South America some growing recognition that, for instance, investments in mineral extraction is exploitative and they're asking China to work with them on allowing processing, you know, making money off of their natural resources.
So that's all part of the mercantilist system is exploiting resources as well.
So there's all kinds of pushback and I think the president, if he pursues that, has a lot more support behind him than many might think.
Let me jump in here.
So I was going to wait for Tom to answer, then I was going to argue the opposite, because I think there's a bunch of different ways to argue this.
But if we just take the tariffs issue, I think one of the problems with the administration's approach is that every problem is assumed to have a tariff solution.
And that is not the case.
So I think that there is something to be said about not unilaterally disarming yourself when you're talking about a broader China policy, one that has sensible investment restrictions, sensible export policies, et cetera.
But to support the idea of some of what the administration has done on tariffs, I'd say this.
China is an export juggernaut.
One of the only ways in which you're going to be able to de-risk U.S. supply chains, which means create more supply chain resiliency by getting China out of key high-value added supply chains, is to create a mechanism that involves tariffs as well as other things.
Now, if you don't have higher tariffs on China than you do Mexico or India or Southeast Asia, then you're allowing the production to be, you're allowing an even playing field where China's state-subsidized production at the base will end up creating massive advantages for it.
That's how we got to the position where China's exporting over a trillion dollars, the surplus over a trillion dollars a year.
So I think that one of the sensible things was an understanding the U.S. Trade Representative and others had from the very beginning, which is you have to have tariffs on China higher than rival producers in order to incentivize a shift to those rival producers away from China.
So if you have Chada tariffs, it doesn't even really matter the number.
The absolute number matters less than the divergence between China and the rival producers.
So if you have Vietnam at 29 and you have China at 30, you're not doing anything.
If you have Vietnam down here and Mexico down here and India down here and China up here, you over time are going to incentivize these supply chain shifts that we have, I think, ended in a bipartisan fashion.
And we'll leave this here and take you live now to the U.S. Capitol, where the House of Representatives is about to gavel in for what we expect will be a brief session today.