 This is Think Tech Hawaii. Immunity matters here. Welcome to Asian Review. I'm your host, Bill Sharp. Our show today, How Deep are China's Pockets? And our guest is Gordon Chang, a well-known commentator on Asian Affairs. And Gordon, where are you? There you are. Great. It's great to have you with us. Thank you for joining us. We know it's kind of late on the East Coast, so we really appreciate you staying out maybe a little bit later than you normally would. Well, let's kind of get right into it here. Just how solvent is China? I mean, China, you know, every day we read in the paper where China is putting up billions of dollars for some aspect of its one belt, one road project. It's making a huge loan to whatever country around the world. We know that there is debt problems internally in China, that the provinces and cities are like a lot of cities and states in this country strapped for funds. We know that China is running an increasingly higher budget deficit. So just how solvent is China? I don't think China is very solid at all. What we're seeing is, of course, impressive growth, 6.9 percent. You know, we're seeing China make these investments around the world. It's got large foreign exchange reserves. The problem is, it's not a shaky foundation, because China's growth right now is driven, and that has a number of implications. First of all, as they are starting to accumulate more and more debt, people are worrying about a systemic crisis. Also, China is not able to make the leap from investment growth to consumption growth. Yes, there's a lot of consumption, a lot of retail sales, but that's really a function of investment. And we know that because for the last three or four years, whenever China has taken its foot off the pedal of debt, we have seen consumption slow almost immediately. So that means that China still is very much beholden to government spending. You know, this might sound just a little bit harsh, but I think you probably have heard it before. Perhaps you've even had the thought yourself. As it seems in Asian countries, be it South Korea, China, Japan, they're so shall we say, help bent for leather in one upping the United States that in their economic development, they often take a lot of shortcuts, which come back to burn them ultimately. And Japan is probably the best example of that. And I think there's some of that phenomena in South Korea as well. And I just wonder if this is going to be the case with China, additionally. I mean, things are so secretive in China. It's so hard to find out information, statistics are so shaky. Who knows really what's going on? Well, the one thing that China has been able to do because it controls the banks, it controls large state enterprises, you know, it has a very interventionist bureaucracy is that it's able to postpone the laws of economics. So therefore, it decided it was not going to have a 2008 downturn along with the rest of the world. They used debt creation on an unprecedented scale. And so they were able to have growth while the rest of the world adjusted downwards. But the problem is that they had created these underlying imbalances that have gotten larger and larger. And at some point, there's got to be a reconciliation. So when China does have its 2008 crisis, and that could very well be 2017, 2018, we don't know. But when it does have that crisis, I don't think Chinese leaders will have the ability to deal with it and it will be the biggest crash in history. Now that's unfortunate for the Chinese. And of course, it's going to be unfortunate for the rest of the world. But this is the way the Chinese have been approaching their economy. And they decided that they are going to use all the tools that are at their disposal to prevent the operation of a normal business cycle. You know, I've heard it said, I wonder what your particular view is on this, that China can avert a lot of economic problems, at least maybe not avert, put them off, because it can simply print money without much of a problem. And of course, the United States has been accused of that too, or at least it was in 2008. But what's your take on that? China, like any other government, and we did have quantitative easing in the United States. And China has been doing the same thing too. They have an M2 money supply, which is about twice as large or so than ours, even though their economy is only 1.6 times the size of the American one. And that means that they have gotten the printing presses to run full speed. Now, yeah, they can do that. They can do it for a little while. But, you know, this is a tactic that always ends up in tears. And the fact that they have been doing it on a much more relentless scale indicates that they are going to have an adjustment that will be historic. When you say tears, can I substitute bubble for that? Well, yes, of course, they got a bubble right now. It's one of the biggest bubbles in history. And right now, the only way they're able to sustain that bubble is through government spending. And so we see the infrastructure projects, which really are magnificent. But nonetheless, we are seeing projects which are uneconomic. We sort of symbolize this with the ghost cities, but we also got the high speed rail lines to nowhere. And we have a lot of one belt, one road projects that sound good on paper, but really are not economically justifiable. You know, I practice law in Hong Kong, and I know that the infrastructure that the private sector wanted to build has all been built. What China is building now is the projects that nobody would have touched because they just did not have a return. China can build them. It has the capacity to do that, but it doesn't have the capacity to sustain them in the long run. Well, speaking about one belt, one road, what's your take on it? Is this China's answer to the now somewhat defunct TPP? Is this really going to boost China's standing in the world? Is it really going to pump up its influence? What's your take? Yeah, there are a couple of things that are at work here. One of them is that China wants to develop the infrastructure so it can sell its manufactured products around the world. It's got too much manufacturing capacity, not enough consumers at home, so it needs to sell this stuff. And of course, if they've got the infrastructure to transport this to Africa, to Central Asia, to Europe, that helps. But also, it's a political purpose here. Xi Jinping, the Chinese ruler, wants to extend Chinese influence, and he thinks the way they can do that is spending a lot of money in places where maybe they have not had the attention of Western companies. So I think what he's trying to do here is to create a sort of a system where China is at the center. And it sounds nice, but the costs that are involved, the economics, they don't work out. Which really means that what China is going to do is spend a lot of its money, a lot of its cash, on projects in other countries that will one way or another will not end up benefiting China. It seems to me that its ideas for incorporating Central Asia into its one-belt-one-row could incur trouble and possible opposition from the Russians. The Russians, I think, are still very sensitive about Central Asia. They see that as part of their turf. They really don't like China messing around there. And Central Asian countries don't strike me as the most financially responsible countries going. But what's your view on that? Yeah, Russia and China still have this competition, even though they are cooperating across the board on their diplomatic and military initiatives. And yes, Moscow and Beijing do compete for influence in Central Asia. But you don't see very much pushback from the Russians, or at least not as much as you think, largely because the Russians know that they need Chinese money. And so you don't see real resistance there. Where you do see resistance, of course, is India. Indian Prime Minister Narendra Modi did not go to the one-belt-one-rowed forum this spring. And clearly India does not want to be incorporated in one-belt-one-rowed projects. New Delhi is very concerned about this $46 to $50 billion that China is spending on its economic corridor through Pakistan because it has strategic initiatives. And I think the Indians see basically China surrounding the Indian state, not only with one-belt, but also one road, one way going through land routes around India, the other through the Indian Ocean. And if the Chinese were able to sustain one-belt-one-rowed, I think India would be deeply concerned. But I think that they're probably coming to the same conclusion that everybody else is and that this isn't going to work out in the long run. China will have extended a lot of cash that will never get back, like the $40 or so billion in Venezuela, that China is not going to get back. So those people who want to see China overextend itself, I think they're probably rooting for one-belt-one-rowed. You know, another venture of China is BRICS, right? And the BRICS I think is kind of... It's not as successful as China had hoped it would be. So there are definite flaws in it. There are definite shortcomings in one-belt-one-rowed as well. So I guess we just have to wait and see how it all pans out or when the bubble bursts. Looking down the road, say, five to ten years, what kind of financial forecast do you have for China? Well, I may be the wrong person to say that because I wrote a book in 2001 called The Coming Collapse of China, and I thought that the Chinese state would fail within a decade. So I'm out of time. Of course, I didn't see the intervention of the global financial crisis and China's extraordinary response to it. Which is given, I think, the Communist Party a new lease on life. But nonetheless, I can't see what they're doing right now is sustainable. You know, they have a debt-to-GDP ratio, which is perhaps as much as 350 to 400%, depending on who you talk to, especially when you start to deflate GDP because the numbers that Beijing is reporting, I think that they are overstated. So you put all this together. It means that the debt loads are unsustainable. They will have their Minsky moment, especially if we see interest rates start to rise around the world. So I don't think that this has a good ending for the Communist Party and indeed for the rest of the world because China's failure is going to affect us. But I think that we will get around it because, you know, China, people say China is an engine of global growth because China has a lot of growth. Well, yeah, China has a lot of growth, but they're not an engine of global growth. To be an engine of global growth, you've got to buy the goods and services of other countries to create growth elsewhere. And China, through its predatory trade practices, is taking growth from other countries. So China's failure will be a shocker for most people, but, you know, I think we'll get through it pretty fast because China is less important to the global economy than the Chinese tell us it is. That's a very good point. And on that note, let's take a break here. You're watching Asian Review. I'm your host, Bill Sharp. We're talking to Gordon Chang, a well-known commentator on Asian Affairs. We've been talking about China's financial future. And we're going to pick the topic up again when we come back in one minute. And then we're going to move on to the 19th Party Congress. So don't go away and we'll be back. This is Think Tech Hawaii, raising public awareness. Aloha. I'm Richard Concepcion, the host of Hispanic Hawaii. You can watch my show every other Tuesday at 2 p.m. We will bring you entertainment, educational, and also we'll tell you what is happening right here within our community. Think Tech Hawaii, Aloha. Ted Rawson here, folks. You're a host on Where the Drone Leads our weekly show at noon on Thursdays here on Think Deck. Where we talk about drones, anything to do about drones, drones, remotely piloted aircraft, unmanned aircrafts, whatever you want to call them, emerging into Hawaii's economy, educational framework, and our public life. We talk about things associated with the use, the misuse, technology, engineering, legislation with local experts as well as people from across the country. Please join us noon on Thursdays and catch the latest on what's taking place in the world of drones that might affect you. Welcome back to Asian Review. I'm your host, Bill Sharp. My guest today is Mr. Gordon Chung, well-known commentator on Asian Affairs. And our topic has been, the point of our discussion so far has been just how deep are China's pockets. We pretty well talked about the financial aspects of China. We want to move on to the 19th Party Congress, which should probably be taking place in October. It's never quite known exactly when until the last minute. Well, 19th Party Congress, the conjecture is that Xi is going to use it to get around the two-term limit. He's going to try to use the 19th Party Congress to extend his stay at the helm of the Chinese ship of state. Do you buy into that? Yeah, I think so. And we're going to see whether a successor is named. Because according to the institutional mechanisms that the Communist Party has put in place and the understandings, at this Congress there should be a person who is designated as Xi Jinping's successor who will take over at the 20th Party Congress. But if we don't see anybody, then I think that that's an indication that Xi Jinping intends to stay for more than his two five-year terms. Also, it'd be fascinating to look at the composition of the Politburo Standing Committee. For instance, whether Wang Qishang, who is the head of the Party's Central Commission on Discipline Inspection, whether he remains despite being at least too old for the norms and guidelines. So this is going to be absolutely fascinating. Unfortunately right now, we don't have a good sense of how all of this is going because it is an opaque system. But nonetheless, the hints that are coming out is that Xi Jinping will make a play for at least three terms and perhaps more. Some people conjecture that the whole structure of the Politburo Standing Committee and the Politburo will be greatly redesigned and that the Politburo Standing Committee will be one person, Xi Jinping. Everybody else will be Politburo. Li Keqiang is going to, I won't say disappear from the scene, but his presence will be greatly reduced. What's your take? I think Li Keqiang will to a certain extent be sidelined. I think he'll still remain as Premier and I think he'll remain on the Standing Committee, but he's been marginalized up to now and I don't see that changing. The thing about this though, I think it's very dangerous for Xi Jinping because as he marginalizes rivals for power, he becomes responsible for everything and as responsible for everything, he's going to be blamed for things going wrong and things could very well go wrong for China in the years coming ahead. So as the quote unquote chairman of everything as his adversaries call him, there's real danger for him. Interesting, interesting. Recently I've been reading this book that's been sitting on my shelf for some time about the Cultural Revolution written by Roderick McFarwicker and another scholar and some of the things that Xi Jinping is doing now sound very similar to the things that Mao was doing during the Cultural Revolution, maneuvering people around, consolidating his positions. This is so reminiscent of some of Xi Jinping's behavior. Yeah, China is always exciting especially when you come up to things like the 19th party congress or party congresses in general and so it's going to be really interesting to see how this all pans out. Well, let's move on to Korea which is on everybody's mind these days especially here sitting in Hawaii when the assumption is that Hawaii is within increasingly easy missile range of North Korean missiles. How do you feel that the administration is treating the North Korean problem? How do you assess the administration's approach? Well, President Trump has put North Korea at the top of his list of priorities at least in the foreign policy area and that's important because it has what hasn't been there at least since 1994. So that's at least a precondition for success. Now of course it's not sufficient but at least we're on the road. I think that essentially the administration has realized that it has little room for maneuver and so therefore it's willing to take more risky adopt more risky tactics. That's a good thing too because I think that that's a correct assessment of the situation. Now of course there are times when the president inflames rhetoric. I'd like to see him tone it down a little bit but also I'd like to see him to amp up the pressure and not only the pressure on North Korea but also the pressure on China because over the course of the last three decades we have relentlessly pursued ineffective policies and the one thing that we haven't tried is opposing costs on China. Imposing costs that are so high that China realizes it has no choice but to help us disarm North Korea. I'm not saying this will work but I am saying it has a possibility of succeeding and in any event Bill the president took the oath of office to uphold the Constitution which means he needs to enforce U.S. law which means he needs to go after Chinese banks that have been laundering money for North Korea. He started to do that with severing the Bank of Dundong a small fry institution from the global banking system but he needs to go after the largest Chinese institutions which have also been laundering money for North Korea. Do they just completely unacceptable and I think the president will go after those larger Chinese banks because we cannot allow them to abuse our financial system. The accusation has been made that this administration is not speaking with one voice but not with a unified policy. The president says one thing tweets one thing. The other folks in his administration have responsibility for security affairs as Secretary of Defense and National Security Advisor also to seem to have a little bit different pitch on North Korea and I just wonder how dysfunctional that is. Well if you go back two weeks ago it was extremely dysfunctional where you had for instance Mike Pompeo the director of central intelligence talking about regime change where you had Rex Tillerson the secretary of state saying no regime change but I think the last three or four days we have seen the beginnings of message discipline being imposed. We saw that extraordinary op-ed in the Wall Street Journal today of Secretary of Defense Mattis and Secretary of State Tillerson and I think you can say that that op-ed really is Trump policy on North Korea. So I disagree with a lot in that op-ed but at least it's an attempt to annunciate a clear policy on North Korea and of course a clear policy would be a good thing because our allies and the American people need to know where we're going. Should the United States recognize the DPRK? Not now. I think that eventually at some point we want to have regular contact with the North Koreans beyond what's called the New York Channel which is the discussions in New York at the UN. Arthur Waldron of the University of Pennsylvania talks about how what we should do is force the North Koreans to open up an intro section in Washington and we would have one in Pyongyang and the head of our intro section would keep the door open with a bottle of scotch on the table and talk to any North Korean who walks through the door. That's not a bad idea actually. I think that that would actually make the Chinese extremely nervous because it would start to cut them out of the loop. So there is some advantage to that but actually recognizing them that is a very difficult proposition because we recognize South Korea as a legitimate government of all the Koreas so it would be very difficult for us to then say oh yeah but we'll recognize North Korea too. Okay we're coming down to our last two minutes here so let me get in this probably our last question here. There's so much North Korean I guess you would say pressure and China shares that for the U.S. to scale back some of its military training exercises with South Korea. Should we do that? Do we have too many? Absolutely not. I mean what keeps the U.S. South Korea lying strong is the high state of readiness. You cannot have a high state of readiness unless you drill and exercise excuse me all the time and that's what we got to do. The North Koreans may not like it the Chinese may not like it but we need to do this and matter of fact we wouldn't have to do this to this extent were it not for the Chinese and the North Koreans. So yeah they may huff and puff but we got to continue to make sure that we are ready to fight tonight as U.S. forces Korea says. Great well I think we'll leave it there I think we've covered a pretty lot of territory and the time that we had and I want to thank you very very much for joining us especially since it's about 11 30 at night in the New York area. I want to thank you for watching today and I hope to see you again next week when my guest will be noted British Taiwan expert Professor David Phil see you then