 Ladies and gentlemen, good afternoon and welcome to 31 Bly Street. I'm Hervé Lemieux, the director of research at the Lowy Institute. And I want to dedicate the next hour to a fascinating discussion on China's changing economic fortunes and its implications for its global power and ambitions. But first, let me begin by acknowledging the traditional custodians of the land on which the Institute stands, the Gadigal of the Euro Nation. I pay my respects to the elders past and present. Now, the rise of China has been a defining feature of the world for the past four decades. Since the country began to open up and reform its economy in 1978, its GDP has grown by close to 10% a year on average. Today, China accounts for almost a fifth of global output. The sheer size of its market and manufacturing base has reshaped the global economy. But China's economic transformation has also reshaped the global distribution of power with profound implications for war and peace in the 21st century. President Xi Jinping, who has ruled China for the past decade and many more to come, probably, hopes to use his countries increasing heft to reshape the geopolitical order. There is, though, just one catch. And that is that China's rapid rise is slowing down. At the Lowy Institute, this trend and its implications has animated a great deal of pioneering research and thought. In fact, a recent edition of The Economist on Peak China references two pieces of original Lowy research. The first, revising Down the Rise of China, which was a paper authored by Roland Raja to my left, makes clear that China will struggle to avoid a future of significantly slower, longer-term growth. The second, the Asia Power Index, which is our comprehensive annual assessment of the distribution of power. We launched in 2018, looks at China's military gap and how that's narrowing with the United States. So it's an opportune moment to unpack some of this research and analysis, the kinds of lunchtime conversations we would normally have amongst ourselves and bring it out in the public. And I have with me to discuss this important topic. Two of Australia's preeminent economic brains, as well as one of the world's most respected sinologists. All of them I'm proud to call my colleagues. Roland Raja is lead economist at Lowy Institute and director of the Indo-Pacific Development Center. He's also the co-author of Revising Down the Rise of China. Dr. Jenny Gordon here to my immediate left is non-resident fellow at the Lowy Institute, former chief economist at DFAT, the Department of Foreign Affairs and Trade, as well as a member of the Asian Development Bank's Institute's Advisory Committee. She's also an honorary professor at ANU. And finally, in the middle here, we've got Richard McGregor, senior fellow for East Asia and China at the Lowy Institute, former FT correspondent in Beijing and Washington. Also the author of numerous books, including Xi Jinping, The Backlash, Asia's Reckoning, and perhaps his most famous The Party on the Inner Workings of the Chinese Communist Party. So let's begin with the economists and let's go to Roland. It does seem clear the meteoric rise of China's economy is ending. Some have called us peak China. Or have we reached, or are we reaching peak China? What does this mean in terms of the heights at which China's economy is expected to peak? Thanks, Herve. Yeah, I mean, this term peak China has sort of been thrown around, including through the Economist magazine. I think, you know, hopefully what we can do in this session is really unpacking what exactly does that mean. I don't think people are necessarily, some might, but I don't think most are necessarily saying that China's economic rise has peaked yet at this point. And I do think there's still some way to go. But the sense is that China's sort of rise was more likely, seems more likely now to peak at a much earlier point than people probably thought just say a few years ago, right? So, you know, partly what motivated the paper that you mentioned that co-authored with our former colleague here, Alyssa Lange. Was that, you know, if you went back a few years and you look at the range of kind of projections and what people were talking about, people were talking amongst economists of China being able to sustain in their sort of baseline expectations, China being able to sustain growth of say four to five percent a year over the coming decades. And then if you talk, you know, in terms of geopolitical analysts, which are very important to this conversation, the kinds of expectations that they had in mind amongst the leading thinkers was often in the range of five to six percent growth, right? In terms of thinking, what's the future of the world going to look like? Now, if China was actually able to achieve those kinds of growth rates, something, you know, the four to five or even more kind of range, then, you know, the results are really quite striking in terms of what it means for the way the world would actually look. I mean, by the time you get out to the future decades, China would, you know, on its own basically be an economic block unto itself, right? It would be twice the size, you know, of the U.S. economy, possibly larger. That's on market exchange rates. It would be as big or bigger than the G7 economies combined, as big as, you know, the United States and the entire, you know, Western economies combined in that sort of world. That's a, you know, that's a very stark picture when you talk, and you're just talking about growth rates in the four to five percent range, which is what people were thinking just a few years ago. And it certainly means that when we start trying to think about what the geopolitical implications of that might be, well then, of course, that provides them a strong basis to make a play for some kind of global hegemony, right? In terms of their ability to spend a lot on their military, in terms of their ability of their currency to challenge the U.S. dollar. I don't think it would be a cakewalk even in that scenario, but nonetheless, an ability to challenge it. Their ability to invest in technology and be dominant in a wide range of technologies, their ability to invest in things like the Belt and Road Initiative and supporting infrastructure investment overseas and generally just having this economic gravity that would pull more and more countries closer into some kind of alignment. You know, I think, you know, the argument now in talking about peak China is that that doesn't seem like the most likely trajectory anymore. That's the argument that we made in that paper. And I think, you know, a key thing to remember here is, you know, we're talking about an economy that was really experiencing some sort of hypergrowth, right? The only countries that had experienced and demonstrated that kind of growth in the past were the previous Asian miracle economies, Japan, Korea, Taiwan, and then the city-state, Singapore and Hong Kong. So it's a very rare experience. China was doing something that looked to emulate that in the past, but that's, you know, that's a very significant and difficult thing to achieve. And I think when you compare sort of China's fundamentals and its ability to continue along that kind of path, they've got a very different situation to what those economies faced in the past. You know, starting with demographics, everyone knows China faces significant demographic challenges in terms of rapid population aging, you know, reflecting the previous one-child policy. And I've entered a period of demographic decline with its workforce essentially shrinking. Contrast that to, say, Korea and Taiwan at a similar stage of development, they were in the midst of the demographic dividend, right? Immediately there, you can find about two percentage points and differences in potential growth rate. The other big element is that China has really relied very heavily on investment in order to drive its growth. Now, all the Asian miracle economies did the same thing. It's just that China has done so to a much greater extent, right? China's investing over 40% of its GDP in capital investment. The original miracle economies were doing something closer to around 30%. You added up over a long period of time. Now, suddenly, China has got, you know, some of the world's best infrastructure, but it's still a developing country, right, on average, right? So its productivity levels are still way lower. That shows a high degree of inefficiency, but also that they've just really exhausted the ability to use that in order to drive their growth. And we also know housing. You know, there's always a lot of speculative speculation going on in terms of the housing market in China. You hear about the ghost cities and all that sort of thing and empty lots. But one way or another, the housing market is entering into structural decline because, you know, the urban population is basically, that urban population growth is tailing off very, very rapidly. So they can't rely on that anymore either. That basically leaves them with trying to drive things through what economists would call productivity, right? Which is almost everything else. The quality of your policies, the qualities of your institutions, technology, these kinds of things. And, you know, I think the reality is that when you look carefully at this, there are strict limits as to what can be achieved. China has never done that well on that pure productivity front, especially compared to the original East Asian miracle economies. And so you add all of this up and, you know, what we tried to do in that paper was do that, bring together all of this in a very careful way. And I think that's why it's had influence. We conclude that China's economy is likely to decelerate to around 3% growth later this decade. It could come even earlier, given the troubles that they're experiencing now. And would, you know, basically reach roughly parity with the United States sometime, probably at this point in the early 2030s. Now the key thing I'd like to say here though is that, you know, what does that mean in terms of peak China? And what are we saying here? I mean, one China is still gonna be either the second largest or the largest economy in the world, right? So there's not a China collapse type story. It's also not a China collapse story where you consider that what we're talking about is actually quite impressive rates of per capita economic growth, right? If China is doing about 3% per capita growth, according to our, you know, in terms of around 2030, in terms of our view, well, that's actually quite fast. You know, that's not too far off what quite successful economies like Indonesia or even India are able to achieve, right? So they're actually doing quite well. They're just not in that hyper growth sort of path that the original miracle economies were able to achieve and what people thought China was gonna be able to deliver as well. So I think, you know, that's the kind of shift I think that's going on and it's a very sort of different world, but, you know, it's not a China collapse story. It's, you know, it's a different story. So unpacking what this means, I mean, I think that's the rest of our conversation here, but I think that's, you know, where they're going. You know, there's a particular short run situation, but I'll leave that off for now. Yeah, that's right. So this is, so that's the baseline assessment. You heard it from Roland, read his paper, you know, and you're sort of saying, we don't think China's gonna overtake the US until well into the 2030s. And once it does, it will never sort of peel ahead in a way that was once conventionally assumed, even as, you know, as recently as five years ago. Now, Jenny, just turning to you, I mean, there is also a need here to sort of disaggregate the story a little bit. We've heard a lot about the economic troubles and the short-term outlook in China following or during COVID and then now sort of a short-term recovery versus some of these long-term fundamentals that Roland is focused on. Roland's argument is almost that, irrespective of what China does, even a fairly successful economic stewardship of the economy going forward, these structural factors, these tailwinds are not gonna go away. Demographics, productivity, and so forth. Do you agree with Roland's assessment and how do you disaggregate the short-term from the long-term picture? I think, thank you for the question. I agree overall with the assessment that Roland is making, but I just would push it out a bit further. But I think his prognosis that they are, you know, not going to sort of have that, recapture that massive growth is absolutely right on, but for different reasons, right? So they actually still have an awful lot of surplus labor. So they've got a whole bunch of, you know, 500 million people sitting there in rural areas on average incomes of around 260, you know, 2,600 US dollars per year. So, you know, that's sort of almost a quarter of what it is in the major cities. So you could imagine you've got a lot of labor sitting there, but they're not educating them well and they're not, you know, using them well. They've got the Hoku system, which means they can't move to those urban areas. So you've got sort of rules in place that are still strangling their own growth. The other thing, of course, is the move for greater state control over the private sector. So China's history's been fascinating. They've done experiments and whenever they experimented on really sort of letting the market allocate resources, they boomed, very entrepreneurial society, right? But what they're doing now and what Xi Jinping has been doing is saying, you know, we're going to put more resources into the state-owned enterprises. We're going to put, you know, people on the boards in the private companies and so, and we're going to sort of guide your innovation. And we know guiding innovation, Australia's been trying to do that for a yonk's hopeless, right, so you're going to kind of let the market do that. So for those reasons, China's not doing, Japan grew like topsy till it was the richest per capita income in the world, right? China potentially could have done that, but it needed a whole bunch of different policies, including more inclusive policies to bring all its population along so it didn't leave so many behind. So I think, you know, they've got to hit this demographic problem period that's inevitable. Their source of growth has been so much focused on infrastructure that eventually runs out of puff. And so they were in this situation where it was going to have to be the sort of productivity growth. And you look at Japan and how it struggled to do that innovation, you know, and then it's also hit its declining population problems. So from that perspective, I feel a bit like they could have actually, the prognosis were actually not inherently flawed saying China was going to do better, but China's own policy settings have been holding it back and may in fact hold it back more and more. And I'm not quite so convinced that this guy, I mean, once you're big, you're big, and if you have a government that can allocate resources where it wants to allocate resources, then it can commandeer and grow its military if it wants to, it's got less constraints on it than other countries have that might face more of a kind of, you know, a popular backlash against those kinds of allocation decisions. So I think the debate about, you know, the relative size of the US economy versus the Chinese economy is not actually what's important. It's about the extent to which those economies are engaging with the global economy and hence the influence they get, not just through military might, but the influence they get through economic engagement and power. Did the connectivity aspects of things, and let me shamelessly plug another piece of low-e research that we've launched in recent weeks, the Southeast Asia aid map, which actually shows and demonstrates that China's development financing to the region has diminished in the last few years, and so there does seem to be something afoot here. But let me turn to Richard now, and we'll come back to the implications for Australia. Oh, yeah, I missed that one, that's all right. No, no, that's all right. In the later sections of the discussion, but let me turn to Richard here because this is also, you know, this change in economic trajectory has really, or is the subject of fierce debate among China watchers in Australia and abroad. Firstly, I mean, do you think that everyone has cottoned on to how quickly predictions have been revised? Secondly, there's a second set of analysts that appear to suggest that essentially China's running out of time, and that makes China more dangerous rather than less of a threat. In fact, more dangerous, more prone to making miscalculations or to acting on longstanding ambitions such as reunification with Taiwan because it realizes it's running out of time, it's an hour-never-type moment. So give us a sense of what's happening in the debate among China watchers where you stand on that debate, and then we'll go to how perhaps the Chinese themselves see this. Yeah, well, Jenny's right that the mere size of relative size of the US and China is not entirely determinative, but it matters a lot. And it has profound, I think, implications for US-China. It also does for Australia as well. And getting ready for this panel and this question actually dragged out an old article from that August website, Pearls and Irritations, that many of us might have a bookmark. And this is Hugh White in 2017. Now, Hugh has been a very influential figure in the strategic bait in Australia. And I'm not here today to either praise or bury him, but the truth is that Hugh's theory is based on economic strength. And to go back to this article in 2017 in which he quotes the foreign policy white paper using Australian Treasury figures based on PPP purchasing price parity estimates of economic size, I don't want to get into that debate. But Hugh writes in 2017, he says, only 13 years from now, the Australian government is telling us China's economy will have left America's far behind in the rear view mirror. In other words, on this measure, China by 2030, this is the prediction made in 2017, China by 2030 will be double the size of America's economy. And what's changed I think these days is that nobody really thinks that anymore. Or very few people think that anymore. It's not, there's no consensus, but if you're looking for an emerging consensus, is that China will grow more slowly. So if you look at the span of debate about China, and I'm slightly parroting it here, but on the one hand you've got, we'll fight them in the trenches, and all the way the other side to resistance is futile. So the resistance is futile camp is really based on Chinese economic strength. And you see this particularly internalized in Southeast Asia. So if China is going to be growing much more slowly, then that has a big impact, I think on the psychology of US-China great power competition. Of course, it depends on what happens in the US as well. It has a great deal of impact on China. One of China's biggest problems, it's not just growth, it's a fiscal problem, it's an undertaxed country. They've got all sorts of debts, things they have to pay for, and less and less income coming in. So they face much more difficult choices than they've had to face for decades really on how they allocate state resources, and that includes on military spending. Now, I think the final point is, and I think Roland is, I agree with Roland here, we're not talking about China collapse. China will be big enough to be a peer competitor to the United States. China's political system, if it sticks together, also allows the leadership to leverage its strengths in perhaps ways that America struggles to do. So China will be big enough, it will be powerful enough, but I think the notion that they will overwhelm the US and its allies collectively by its size, I think that's what's disappearing into the rear view mirror now, not old notions about the US and China. Yeah, absolutely, and how do you think the Chinese themselves are looking on to this, policy makers in Beijing, you think how worried are they? Is this keeping them up at night? Is this along the lines of what's in the book authored by Hal Brands and Michael Beckley? I mean, basically they argue that China faces decay, has reached a point where it's strong enough to aggressively disrupt the existing order, but is losing confidence that time is on its side. Is it losing confidence that time is on its side? Well, I don't know, it's very hard to say that with any certainty. Of course, the whole sort of public projection of China is the opposite, you know, the phrase in China, the east is rising, the west is declining. In theory, they're much more confident in their political system relative to democracies than ever. So I think that's, you know, but it's hard, you know, but it's definitely true right now, China's coming out of COVID, there's a bit of a bounce back this year in GDP terms, they're struggling to work out what the new settling point and what the model is that produces that is in coming years. There's lots of, you know, short-term, long-term, but there's a bit of short-term worry. Look at the talk of stimulus. If you look at the Chinese economists debating this issue, you know, debates on the Chinese economy, on economics in China have obviously always been much more open than debates on politics, but under Xi Jinping, all debates are more subterranean or suppressed, but certainly the old prevailing camp, led by Justin Lin of Peking University, who used to be an alumni of the ANU, was that China could grow 7% annually well into the 30s. And I've met some of his colleagues who used to write papers, we both did, a while back on this, and they say, forget it. So I think the eye, you know, it's very hard for Chinese economists to publicly, in a very clear fashion admit this, but I think you see a lot more concern coming through. I don't mean to say there's a consensus amongst them, but I think the old optimistic projections are pretty well gone. Can I just add something here? I mean, I think, you know, I agree a lot with the different aspects of what Jenny and Richard have said here, and I think, you know, putting it in my framework, I think particularly going to what Jenny said, you know, a lot of these things are really important downside risks for China that we should also be conscious of. I think the baseline outlook is one along the lines that I've sketched out, which sees them sort of slowing down significantly and then but able to reach some sort of parity with the United States. But that's assuming they get a lot of things right, actually, so I think in order to deliver that, they do need to undertake a range of reforms. You know, they need to deal with inequality, they need to boost household spending, they do need to plug a range of the technological disruptions that they're now facing, such as on semiconductors, they need to deal with excessive amounts of debt, which is extremely hard to do when your economy is slowing down rapidly. And so I think actually the most likely scenario is that they potentially undershoot that, even the baseline that we're talking about here. Now, the other element is in the short run, right now, they are really struggling to get out of the COVID lockdown and to have that rebound back. I think everyone thought they were gonna have a much stronger rebound when you look back at the rebound from the 2020 lockdowns, they came back quite strongly. They made up for the lost growth. This time, they don't seem to be doing that. And part of that, I think, is got to do with the confidence, right? Now you're facing an outlook. If you're a business or a household, you're facing a much darker economic outlook, a much more constrained outlook, then stimulus can start to lose its effect. It's also true that they need to look at a different kind of stimulus this time, supporting households much more rather than the nutritional infrastructure or the housing sector. But this is a problem. I think it starts paving to where do we go from here as well in terms of the broader economic implications. One thing we have seen is that China is as a result of all of this, leaned very heavily on exports again, right? Chinese exports are something like a trillion dollars higher than they were pre-pandemic. It's a very normal economic adjustment. You would expect that your economy is weakening and you're having struggling to find new sources of demand. The exchange rate will weaken and you will end up using exports to get yourself out of that hole. Normally that's what economists suggest would be a good idea. It just means something very different when you're talking about an economy as large as China's. And so I think that's also going to be something that we're going to have to watch. That's a good pickup for where we go with Australia and what this means in Australia. But also the issue around Chinese sort of economic power in the region. And one of the big differences though between China and the US is that China trades a lot. It's got supply chain linkages all through Asia. And so at that very high rate of, and it is a problem for them, so it's their due circulation economy is not going to work as well as they were hoping. But that actually gives them a lot of economic power. So you've got those economic relationships. And that's quite different because the US share of trade is much smaller as a share of the US economy. So it's much easier for the US economy and there are some downside risks that they could close even more particularly if they get a change in president. It's been the investment that's been the key thing for the US. It's been the capital flows and that outward investment that has given you and inward investment that has given them that outreach and power. So it's a very different structure. So one is an investment based relationship and the other is much more a partnership and in both receiving and supplying inputs as part of a supply chain. And for Australia, it's been wonderful for us because it's been this massive growing market. I mean, Japan's boom got us out of the doldrums in the 70s and into the 80s. Korea's boom helped us further and China's boom rescued us from the GFC and it's continuing, you know, the commodity prices at the moment aren't high because China's strong, they're high for a whole bunch of alternative reasons, one of which is the war in Ukraine. But when we're looking out that China's shift in, if they take the policy option to try and expand domestic demand, it won't be in commodity intensive. And then so the big question for us will be, will it be in the sorts of things we also export on the agricultural side? So do we have opportunities in terms of our agricultural exports if they're particularly at the higher value end, if we could restore wine exports and beef exports and things like that, then the opportunities for Australia are more about this lot and not that lot, but the big opportunities for Australia are all around what's China's investment in the green economy going to look like, the extent to which they're going to be doing that structural transformation and hence needing the inputs for that, that we can also supply. So it's also, are we going to be capable of responding and supplying those? So for Australia, it's kind of like- And whether we'll be allowed to. And whether we'll be allowed to, yeah. It's the other thing, but it actually brings to mind, you said earlier in the piece, you said, look, the US-China GDP comparison is not the most relevant one. And there is a frame of reference here. So performance is all relative and relative to the US as a global benchmark for global power, but relative to the rest of the region for Australia's trade as well, because if you find that other Southeast Asian economies are facing similar problems as China, that is to say their populations may also start to age, their productivity growth rates may also start to flatline. Who knows about India? So the possibility of opening up alternative markets really is dependent not just on China's performance, but on the relative performance of everyone else that we trade with. So China's shares overall, there's a, the overall pie of Australia's trade is dependent on the fortunes of ages. So how much of China's problems here that we've identified correctly, I think, afflict China uniquely versus our original problem that you could say may apply to other countries as well. Is everyone facing slower growth rates? Well, I think that the challenge is that, in my mind, some of China's slower growth rates is because of its policies. And so those are uniquely China, but there are definitely the other headwinds. And it's also depends where you're at in that sort of development cycle. So China's still, you know, even Shanghai is, you know, 11,000 US per capita on average. And Shanghai is kind of like this massive, modern city, you know, you would think that it would be much higher than that. And yet you look at other, you know, you look at Korea or Japan and they're already very high income per capita. So they're at a different place. And then you've got Cambodia and Laos that are also in a very different place, right? And then really most problems, you've got the demographic issue, but Indonesia has this demographic dividend potential that it could, you know, and it's big, right? As does India. And as does India. But again, it's going to be the domestic policies. So it's a bit like we're all a bit problematic in our own ways. But so I wouldn't really take the sort of, the China model and say, I can just apply that everywhere else. I think there's different policy issues in different places. But the China tentacles, economic tentacles, we need to understand. And when you start talking about technology, those tentacles could be very strong if they're linked into technology and they're not just about building widgets that don't have a lot of technology embedded in them. And so that's going to be where the competition is really going to heat up. Yeah, and I think the other, you know, that China is already very well established. It's not going anywhere. It's this economic behemoth in our region. And that under no assessment does that fundamentally change. Now, the other, if I'm looking at the world from Beijing's perspective, the other thing that gives me optimism is that economics alone or GDP alone is not just the universal proxy for my power. I mean, power is derived from many other sources, part of which is the economic connectivity piece, but part of which is, of course, military capability. And we know that there's still a lot of catch-up growth for China on this front. China's military budgets forecast to rise by over 7% this year. It's more or less been tracking with GDP growth rates. It's still much lower than America's, the overall defense spending totals. But its navy could be 50% bigger than America's by 2030. And it's not just conventional. It's nuclear arsenal will almost quadruple by 2035. And the point that the Asia Power Index makes is that catch-up growth hasn't finished. In some sense, the economics comes first, but everything, the flow-on effects in other ways of conceiving of power are delayed by some time. And the parity that China can reach on military capabilities with the US, certainly in our own region, that opportunity has not gone out the window, even with slowing growth rates, which brings us back, I think, to the geopolitics of this all, Richard. I suppose what we're saying in talking about peak China is not necessarily that China is about to fall off a cliff. It's not about to collapse. It may well start to plateau. So perhaps the better way of conceiving of this is not peak China, but more great power parity. And we're still adjusting to that. I think we've probably got a dangerous decade ahead in terms of the growth in China's military capability, the potential for miscalculation, hubris, fear, et cetera, et cetera. But could I not optimistically put to you a case wherein, because we are closer to reaching a settling point in the global balance of power between US and China, at least 10 years hence, and the economic factors, the China's growth rate, will start to level down. That created a lot of instability, unpredictability, was the source of China's rise. That greater degree of stability within the global economic balance of power could also create a window of opportunity for potential stability, settling point between US and China insofar as they coexist as great powers, more or less evenly sized. Yeah, I don't think so, frankly. That would be nice. China catches up economically to the US, but that's not what they want. They want to be the regional hegemon that's utterly unsurprising fact. Of course, that's the case. They're the biggest country in the region. There's all sorts of historical antecedents and baggage that goes with that. The core of the core Chinese interest, as they often tell us, is Taiwan. And I think they have to be believed on that. So they're not, and the South China Sea, the East China Sea. So it's not just about catching up with America. It's doing all sorts of other things with that power. And so that's why we face a dangerous decade, not just because of superpower competition. The other point about military spending, you know, it's often stated that America spends four times as much as China on the military. I think that's an extremely misleading figure. I'm not saying they're not the biggest military in the world, but there's many things that the Chinese budget doesn't count, procurement for one. And the budget itself is much more opaque than the Pentagon's budget. You cannot compare the sorts of salaries paid in both systems. You can't count the legacy effects, you know, all the sort of cost of military pensions and hospitalization because of the previous wars they've been involved in. Plus, and I know we had this discussion before, there's a PPP adjustment for the economy and for military spending. But broadly speaking, you know, China can build an aluminium plant, you know, three times as fast and at half the cost of capital than America, and the same broadly applies if they're building frigates. So that's how we come to the fact that China has a bigger Navy, just in numbers of ships, it might not be as capable than the US has. So merely quoting the budget, so I think is not a good comparison. Now, Chinese military is untested, et cetera, et cetera, all of that, but just like their economy, they're big enough. So they're a real challenger to the United States. Now, I mean, turning back to what this means for the global economy, you know, this is somewhat related to the fact that the United States, I think, wants in some way to hobble China's capabilities in some foundational technologies, and those technologies have military applications, but broader applications economically as well, and will hurt Chinese productivity to an extent. So I'm thinking here about the export bands on certain semiconductors and machines to Chinese firms. That's expected to cut into Chinese GDP to a degree. So, Roland, I mean, you've done some thinking about what decoupling or what's now referred to as de-risking might mean for the ability of China's economy to continue to grow, what it means for their ability to continue to innovate in frontier technologies. What's your assessment in terms of, how will this actually impact China's fortunes? Is it very marginal or is it somewhat more substantive? Yeah, but before I get to that, I wanted to just very quickly say, I mean, following up on what Richard said, I do think there's a couple of different ways to think of this peak China thing, which is one that China can be the regional hedging one. It's got the economic heft it needs to do a lot of things in the region, and so those sorts of the issues related to that, and China's rising power in the region, that's one thing, and that hasn't really changed dramatically. The other one is in the global south. China can also do a lot of things and be a lot of things, compete very effectively in the global south through things like Belt and Road, through trying to spread the use of its currency as well, which provides a way to evade sanctions as another thing through its technology. And I do think the final point on this is simply that the slowing Chinese economy, the likelihood that they rely on exports, the fact is they're going to your point, can there be a nice settling point? Well, the transition might involve increased economic tensions as a result with the western countries. We're seeing the story play out now with EVs and car exports say into Europe, and so I think these are difficult, very difficult political economy issues, and in the transition from, we might think where China is now to where we think it is going, these things could really heat up. So I think actually, unfortunately, there's quite a lot of, there are quite a lot of barbs rather than the benign kind of scenario that one might otherwise hope for. Now, partly why I did that little D to her base because I think you oversold how much thinking and insight I can provide on decoupling because I do think that it's very, very hard to say, John Edwards has tried to write on this as well, and I think a lot of the questions on this goes to, if it is the sort of as Jake Sullivan puts it, America is a national security advisor, the small yard, high fence, in other words, if it's very, very targeted specifically to China and to specific areas where there's a clear national security related risk, then you could sort of think of that well then the broader economic ramifications of this are not necessarily going to be so large, conditional on China's ability to plug those, ultimately plug those gaps, which is still a point of uncertainty. I think a key point to always remember with China and its growth prospects is that it is, while they're extremely advanced components of China and people in China and companies in China operating at the frontier, on average it is still a developing country and therefore a lot of what it needs in order to generate economic growth and to improve its living standards but also increases economic power are things like increased household spending, improved social safety nets and social security at home, reform, state-owned enterprises, deal with the intergovernmental fiscal transfer system. All of these things are internal sort of reforms for China and they're not necessarily driven by technology, right? Technology is not going to be the driving force and that's still where the majority of Chinese growth needs to come from. So that makes me think that, you know, the small and targeted, the small yard high fence stuff, if it was genuinely implemented like that, may not ultimately crimp China's overall economic performance that much and it's the overall trajectory of its living standards but it will hit some parts hard and it could obviously, as intended, have security implications and benefits from the American perspective. The question is, how far does it go? Where do you draw the line on AI and internet of things? All of these sorts of things, the digitalization which is permeating, depending on who you listen to, permeating more and more of the economy. So then the question is really, where does it end and how far does it go and that's how things can easily escalate. I think it's also worth mentioning again the difference that we have to draw between comparative performance in Asia versus the global economy. So, you know, a lot of these things may well be beneficial for the G7 economies but if China's already very entrenched in Asia, I think Richard and I were a few years ago, we wrote a piece about how decoupling, as it was termed then, the risk for America here is that you actually contribute to America's decoupling from the rest of Asia, given how closely tethered Asia is to China. So, I mean, have your views on this changed in the intervening years? Yeah, I mean, I think decoupling is obviously overrated. You know, it was a buzzword. That's why people now talk about de-risking because decoupling's impossible. The term invented by the Europeans and not often the Europeans can actually create a buzzword that permeates globally. Hard of, Europe's regulatory influence. I think some of you might have seen in recent days an interview with the head of the US defense company, Raytheon, and he said decoupling's impossible. They source literally thousands of parts from China. So if Raytheon, I think they're gonna build Australia's new missiles or something, if they can't decouple from China, then I think very few countries can. And of course, it's not about US and China decoupling from each other. The East Asian supply chain goes through Japan, South Korea, Taiwan, some Southeast Asian countries as well. So you have to unhook China not just from the US, but from multiple countries and that's impossible. So it's going to be very limited. Some people say the small yard, high fence thing, the yard keeps getting bigger. But I don't think that's really going to be possible. And China itself is obviously going to miss out on some particularly semiconductors, the most advanced semiconductors and they're going to struggle to catch up because they won't have the lithographic equipment to make them, et cetera, et cetera. That's from the Netherlands. So, yes, it will hurt them. That's obvious, but the idea that we'll hold them back, I don't think anybody thinks that. I think the aim of the US is just to delay China's capabilities. I don't think people in the US think it's going to sort of destroy them forever and a day. There is another risk though that comes in with this, which is that if they're not getting access to those same platform technologies, they'll develop their own platform technologies and have been putting huge amounts of effort into doing that. And then the extent to which they're asking their trading partners to choose, to the extent to which those platforms are required to, I mean, everybody knows your Tesla car gets updated, the software gets updated, and if you can't have a motor vehicle that's not talking to the software provider. So you're going to have to sort of, we need to decide how do we get this interoperability between the platforms, and that's going to be, China would, I think in this case, because this is what Southeast Asia want, is they want interoperability. They want platforms that they can choose to, whether it comes from China, whether it comes from the US. And so it's really going to be that US decision about where it's sticking that yard and walls as to how much interoperability you're going to be. There's another thing that the US is doing, which is the Europeans, and we quite frankly should be worried about, is things like the Inflation Reduction Act. And so what that is saying is, for their green technologies, they want all of it to be built in the United States. And first of all, that raises the cost, even though their companies are getting subsidies, other companies aren't getting subsidies who are trying to compete with those. And so you're just raising the cost to other countries of going green and trying to block China out, which has been a source of solar, cheap solar panels. The reason the cost of solar has come down is because China, we didn't want to develop the technology that was developed, I think it was University of New South Wales. They went to China and China developed that technology and built this enormous solar panel industry. And so, but that brought the cost down. So for a global economy that's trying to have massive investment to deal with climate emission reduction, these are not good things. And then for productivity and whether we're going to use digital to actually boost productivity across a whole bunch of things, that's about embedding digital technology in a lots of stuff, as well as services and technology to enable quality service delivery. And if our platforms can't talk to each other because they're not interoperable and you've got to pick one or the other, then for the Australian economy, we're a bit like most of Southeast Asia, we don't want to have to pick one or the other. We'd like to be able to have the smorgasbord to choose so that we don't get abuse of market power because we're locked into one particular set of providers. And we know that they've abused market power and I've said this a few times, but older people will remember on VHS, the geo blockers on VHS and how we paid so much more for our VHS tapes because we could, they could, right? So we don't want to get ourselves in that. So we want a competitive market for technology out there based on interoperable platforms and that's what we should be pushing for if we want Australia to be able to thrive in this circumstance. Yeah, no, it's really interesting. In the Inflation Reduction Act, the RRA, I mean, it's clearly motivated by more than just the green transition. That's very clear. And I would just plug John Edwards' paper. It's called Chips, Subsidies, Security and Great Power Competition, in which he argues, it's not clear what rules, if any, will apply in this new era of industry competition. This is not just a U.S. story, it's not just a China story, it's also the Europeans. But he's also looking at this from the perspective of Australia and smaller countries, the cognitive dissonance somewhat between us as a sort of proudly free-trading nation and then the rise of this new era of export controls and industry subsidies. I mean, some of which he argues may actually be beneficial for us in terms of spurring technological innovation but in other ways also harmful, detrimental insofar as it splits the global economy into competing blocks. So it's well worth reading that paper. Now, I'm realizing the time, so I wanna, we've got about 14 minutes left in the hour and I wanna open it up to audience questions at this point. I'm sure there are plenty of questions and many ways we could take the discussion. So, I saw a hand at the back there. Yes, if you can just identify yourself. Yeah, hi, John Harvey from DMTC. Thanks for the presentation. It's a double barrel question. I didn't hear any real reference to rural materials or resources to allow that almost continuing 3% a year growth you seem to settle on for the future. Are the resources out there and can China get access to them? And the second part of it, with its military spending, is that a net drag on the economy or is it spur growth and stimulate the economy? Thanks. Do you wanna go for that one? Yeah, I'll go quickly. I mean, I think in terms of, you know, expecting this transition in their economy to a new normal and a slower growth path that is predicated on the idea that there would be, it would be less ultimately commodity intensive at the end of the day. That's partly because they do need to shift away from investment-driven growth and it's also just that, you know, when the growth rate is lower then the demand is gonna be ultimately lower as well. Having said that, I mean, I don't think that the, you know, China is just like China's economy, it's still gonna be second or top largest economy in the world. I think the demand is not going to tail off necessarily. I mean, fossil fuel is yes, of course, right? We hope to see that. But in terms of other raw commodities, it should still, I would expect it to still stay very elevated. And as Jenny mentioned earlier, of course there is all the green minerals that are gonna be enabled and it's gonna require a huge amount of its own investment to enable that as well. So I think the story is that there's still gonna be a huge commodity, a consumer, an importer. So I'll give two, sorry, you go. Oh, I was just gonna say, they've also been investing very heavily in Africa, Brazil and other places to, you know, ensure those supplies of raw materials and that's something for Australia is sort of going to, you know, we've been the great supplier and a very, you know, low cost based supplier as well. But as those countries' production comes online, we'll face more competition and the question will be around, they do actually currently do most of the processing of critical minerals relative to the amount. So that's going to be for the rest of the world to catch up to some degree rather than the other way around. Yeah, so lots of big answers to those questions. I'll just give you some brief ones. The, you know, the Chinese version of the military industrial complex is called Civil Military Fusion. That's a policy about as old as Xi Jinping coming to power. So if it adds to US GDP, I'm sure the same is the case in China. It's not just about growth, of course. It's about, you know, technology, incubators for military purposes. That's always been a driver of technology in the States. And I think the same is the case in China. Secondly, a rather, might sound tangential on raw materials. If you look at a Taiwan scenario, contingency, as one says, and, you know, leaving aside war, I think that's a low possibility. But, you know, the way that China would bring Taiwan to heal is a blockade, for example. And they practice this often. They most recently practice this when Nancy Pelosi travelled to Taiwan. So China cuts off Taiwan, and then overnight declares Taiwan as part of China's custom zone and sort of, you know, brings it into the fold. So if you have a Taiwan blockade, what about a counter blockade? And you cut off Chinese oil, you know? Most of Chinese oil comes from Saudi these days, not Russia. They're building up from Russia. They've got iron ore from Australia, which they still depend on. You have soybeans and all manner of foodstuffs coming from Brazil, Argentina and the like. LNG tankers from Australia and Qatar that makes up the bulk of their LNG exports. So they are highly vulnerable, I think, on the issue of raw materials. They can't produce it all themselves. And in the event, you know, of a potential conflict or a blockade of Taiwan, China can be blockaded as well in an extremely damaging way. So I think that is something that they really worry about. So question up front, yeah. Thank you for the discussion. So I want to ask about the cause of peak China. So I wonder to what extent is this peak China intentionally engineered to preserve the political security of the Communist Party rule? And if that's an important reason, is it possible it is reversible if a reform-minded leader will come to power for whatever reason? That's certainly what I think. I think that it's more the policies. I think the fundamental factors of demographics, the shift towards more service economy, you know, those sorts of things will inevitably slow growth. But as you get richer, you slow growth anyway. You know, Japan is not growing it. You know, 7% per annum and hasn't done since, you know, I think the whatever was mid 80s. Yeah. So I think if they actually did reverse policies, they would actually improve growth again. It's still got enormous potential for growth, both in the domestic market. Henry Ford learnt that. If you, you know, if you want to sell stuff, you need to pay your workers enough and you're paying your workers more. They buy stuff and, you know, they can get scale. They can get productivity through scale and specialisation simply because it's such an enormous market, which is why Western firms wanted to be in there. But it is the policy change, even though it ultimately fell slow. Can I, I mean, I do think, yes, that there are policy changes they could make that would enable quite rapid growth. So even say back up to 5%, that can theoretically, I think, be sustained. The question is, you know, around the politics of whether or not they will actually make those choices. But to give it a sort of more international perspective, I mean, there's a sort of term you invariably have heard of the middle income trap. And this is an over abused kind of term, right? But I think one key nugget from this is that, you know, as countries sort of transition through various stages and, you know, from being, you know, starting off at a relatively poor country, trying to get to high income status, you know, the economic model they need to use, the policy settings that they need, the overall sort of economic regime needs to change, and that's actually really hard. And so that's basically what happens when countries get trapped, right? Is that they had that success with a particular model, then the vested interests start to arise, the technical difficulties are there, and the growth strategies that you thought were working really well just don't work so well anymore and shifting to something new is really hard. A lot of people look at China and economists like me would wonder, why don't they improve social safety nets? Why don't they support households more? That's the obvious thing to do. You could do some stimulus right now that would immediately start rebalancing that right there. No one thinks Hukou is a good system, and it's definitely, you know, has bad social and definitely economic consequences, right? But there are obviously sensitivities around this of a wide variety, but that's one way to think about it, shifting the economic regime is really hard, and the nature of growth that even the current political regime might want, you know, they want to prioritize national security, yes, but they also want a higher quality growth, right? But less environmentally damaging, less common prosperity, some more equal, you know, these sorts of things. But then how do you achieve that? Actually, that involves regulating the economy more, which is actually really hard again. You risk killing the goose that lays a golden egg as well as you go down these sorts of paths. So there's a lot of risks, even if you decided you wanted to go down, you know, a more sort of reformist kind of path. But very briefly, I mean, they make choices. Everybody's critical of the Hukou system, you know, like a past law system. China probably thinks it's worked well because, you know, Beijing doesn't look like Manila. You know, that's the whole point of it, to stop urban slums. So we might think it's a drag on productivity over time. They might think it's managed stability. Secondly, have we reached peak China? I don't think Xi Jinping thinks that. The question is what economic policies he wants, and I think that's in flux at the moment. There's a lot of conflicting signals coming out. In theory, peak China is 2049, right? You know that, it's when we reach the China dream and the big way station on the way to that is in 2035. So what does Xi Jinping believe the policy setting should be to get there? And that's, I think, a very open question. But growing risks, diminishing returns, there is scope for improving performance, but there are also inherent structural limitations on that. I think that seems to be the consensus. And that some of these tailwinds are becoming headwinds. I mean, irrespective of who's in power or what their motivations are in terms of their economic management of the economy, you know, you're facing a lot of these impediments which will naturally start to slow any economy as it goes from developing rapidly emerging to something more in the middle income bracket, which is the interesting thing here. Now, further questions? Yes, I see just a gentleman at the front here and then I saw a couple of other hands to try to get two or three more questions in for wrapping up. What impact do you think? Yeah, we'll do them at the same time. Sorry, go ahead. What impact do you think AI technology is going to have? Thanks very much. We'll go to, yes, two seats, two rows back. Yeah, if the dead weight in China seems to me to be the educational system. If you compare it with Taiwan, South Korea, Singapore, and Japan, all of them had a very, from early on had very extensive and all embracing educational systems. Something like 60% of Chinese kids are woefully maleducated because they live in the middle of the country. Trying to drag that along seems to be, until that's cured, and I doubt if it ever will be, then that's an almost intolerable burden for that place to survive. Particularly given also, you can't really develop a consumer economy when 60% of your population is incapable of really being part of it. Okay, so we're AI education and the final question here. Thank you. There's roughly three billion people between us and China, including India. I've met Filipinos who are very pro-Chinese versus America. Singaporeans who are very proud of Chinese heritage, and I was recently in Japan, and this is covered in Huawei material and products and so on. So just wondering what your view is across the rest of that three billion people, they pro-Chinese or pro-American? Big questions, all three of them. So don't feel obliged to answer all of them. Why don't we cherry pick? We've got about a minute to go, so. Oh, okay. Can I jump in on? That would be your concluding statement as well. On AI and education. And it's really interesting because, one of the challenges for China is youth unemployment, and they've got this college system producing huge numbers of graduates who are struggling to find employment and AI is gonna make that more challenging because it's reducing the number of entry level jobs. And so one of the challenges for AI is actually what that job structure looks like. It's not that you won't find employment, but you've got this, and you're absolutely right about the education system, and I think that is a major challenge for them because they've left so many behind, is that how are you going to get this highly educated group take jobs lower level because AI is doing the normal entry level jobs and that is a big challenge policy wise, not just for China, but for everywhere. Yeah, so we need to chat GTP to answer that question. But look, I mean, John, on education system, I'm just trying to Google the name of the book and I've forgotten the name of the book, you're right, up to a point. Sorry? Invisible China. Invisible China, yeah. But the book also acknowledges that that's changing. I mean, just, you know, the world does get dazzled by a few schools in Shanghai, which are the best in the world, but it doesn't reflect the entire country, and there's been a remarkable lack of spending in education in rural China, which is dominant China and health for decades, and that's a really amazing book to read about that. But I think the book also says that's changing, maybe it's too late, maybe not. Also, the question about the three billion people, Singaporeans are proud of their Chinese heritage, they're also proud to be Singaporean. In fact, one of the slogans in Singapore is we are not Chinese, you know, so they are pro-Singapore, I think, as much as they are, you know, pro-China in that contest, but it's definitely, it's certainly true, though, that Chinese heritage right through the region, not in India, obviously. India, I think, is not pro-China. Chinese heritage in all of those Southeast Asian countries is extremely influential in ways we don't always visibly see in making them a lot. What's the right way of putting it? More likely to be sympathetic towards China itself, but Chinese policies in some respects are turning many people in those countries against China or making it more wary. But yes, I think there's an interesting thread to be done there. Ron? Yeah, I mean, I'll be very brief. I mean, I agree with what Jenny has said about the issues with AI and youth unemployment is a real, I think, a real sort of tinderbox, potentially. And the only other point to add, though, I think on education, while there is a, you know, swath of undereducated and underutilized people in China, I think actually, you know, the numbers that I look at, you've got to always, you know, there's always backward parts of every country and it can look, China is a place of extremes, but on average, actually, on schooling, they're not doing too badly if you compare them to some of the career in Taiwan 30, 40 years ago, right? And so that's often the more accurate comparison to understand things. I think it's the sum of the gaps and the nuances where problems start to emerge. And on Richard's point, I mean, I think there's a, you know, there's a reality that the rest of Asia is, you know, we're sort of in Asia, but we're on one sort of extremity of it. We're much further away, basically, from China. And, you know, we think we're very closely integrated economically with China in many ways. We'll, you know, talk to those economies that you mentioned, right? And it's much more all-encompassing and much more deeply ingrained, as Richard liked to say, we do business with China, but not necessarily in China and it's vice versa. And the rest of Asia, it's very different, right? And so, you know, I think that invariably creates some difference in how people are gonna see. Right, okay. Well, if we wanna sum up some of the basic conclusions, I think it's China and America will approach economic parity under these revised models, including our own in the next decade or so, but, and they'll remain locked in that position for decades to come, but that does not necessarily mean or economic parity does not necessarily mean power parity, certainly not in Asia. I think that's an important differentiation. And in terms of military capability, China still has a lot of headway in terms of narrowing that gap. Even a weaker Chinese economy will be among the world's largest, in fact, the second largest, if not the largest, and the state can continue to mobilize vast resources in strategic areas, such as producing its own semiconductors as well as weapons. So, lots of different ways in which this discussion could have evolved, but I'm very proud of all my colleagues and very pleased with this discussion. Please thank them, and thank you for your time. Thank you.