 China faces the kiss of debt. I must tell you that wasn't my idea. That was very much Richie's idea. It's a fantastic, fantastic title. I'm Vikram Nehru. I'm a senior associate here. And I am the Bakri Chair in Southeast Asian Studies. And I'll be moderating this afternoon's discussion. China, as you know, the Chinese economy had grown for 30 years at an average of about 10% right up till 2008. And since then, since 2010, its growth rate has been declining. And the Chinese authorities have been arguing that this is something that they want to see, because they're after a rebalancing of the Chinese economy, trying to wean it off dependence on external forces of external demand and towards domestic demand. But in this rebalancing, there are many potential challenges which could slip the economy up, basically, which could create instability. And that has been the focus, for example, of the third plenum document that came out at the end of 2013, which laid out a long and very elaborate plan for the next 10 years for structural reforms in the economy. So that's the backdrop to today's discussion. And the challenge has been that during the period of the global financial crisis, of course, there was a large expansion of debt. This China introduced one of the boldest and most dramatic stimulus packages of all countries. And that debt has resulted in a huge debt accumulation in the economy, which now poses a possible threat to continued growth. And that's what Ruchir is going to talk about. We're going to have Ruchir speak first, and then we will have Yukon Huang of Carnegie speak second. But let me first introduce Ruchir to you. Ruchir, as you know, is a gifted writer. And you'll find out he's also a gifted speaker. But he's the writer of a bestselling book called Breakout Nations. And he's also been a contributing editor to Newsweek. He's frequently penned essays for publications such as the Wall Street Journal, Financial Times, New York Times, Foreign Affairs, and Time Magazine. In his spare time, he heads the emerging markets and global macro group at Morgan Stanley Investment Management. And if you look at him, you wouldn't guess that he's had 21 years of investment management experience. And he has handled and continues to manage not just tens of billions, but hundreds of billions of dollars of investment funds. So it's great to have him here today. Welcome, Ruchir. I invited him here after hearing him speak, actually, at an FT conference in New York, where I was very impressed by his insights. And I thought that he really should share them with the Washington audience. And then after that, we'll have Yukon act as a discussant. Yukon is a colleague of mine here at Carnegie, where his research focuses on China. And he was also a colleague of mine when we were both at the World Bank. And he was a country director of, first of all, the Central Asian states, then Russia. And then finally, he was the country director for China. And he's also worked at a number of other places, including, of course, the US Treasury. And he's taught at various universities in the United States, Tanzania, and Malaysia. He doesn't advertise this, but he is an A-list commentator of the Financial Times in the op-ed section. So keep an eye out for all the sort of A-list commentators. And he is the A-list commentator for China in the Financial Times. And he also writes, of course, for the Wall Street Journal, Bloomberg, Foreign Affairs, CNN, and a bunch of other major outlets. So without further ado, let me hand it over to Ruchir. He'll speak for 30 minutes. I've asked Yukon then to discuss the issue for another 10 minutes. We'll have a conversation for a few minutes after that, where I may ask a few questions. And then we'll open it up for a Q&A. And hopefully, we'll close promptly at 3.30. Ruchir, the floor is yours. All right, great. Thanks so much, Vikram, for having me here, very kind of you, and looking forward to speaking to this informed audience out here. So as you know, I've been sort of investing in emerging markets now for over two decades. And obviously, the most fascinating story in this time span has been China. There's been nothing like it in the emerging world. And it's a country on which I've spent most of my years being in complete awe, sort of in terms of how good the execution has been there, in terms of what they have been able to achieve. But really, I mean, our view, at least my view on China, began to change at the turn of this decade. And that really is what sort of informs my presentation today and tells you as to why I'm much more worried about China than I have been in the last 25 years of looking at this country. So now, if I can get this going, I will get my presentation going. So I think that as you know that over the decades and centuries, everyone's sort of been sort of looking for the answers as to what causes an economic crisis. What's the one factor which causes? Typically, we get a lot of post-factor rationalization, which is after the crisis happens, we are told this is the factor to look out for. So in terms of, and then we sort of are told that this is the factor for next time, but then when a crisis happens again, after that, there's some new factor which we are told to look out for. So we've seen this, I've seen this in my history of investing in emerging markets. In 1994, when you had the Tequila crisis in Mexico, it was all about short-term foreign debt going up too much. Then you have the East Asian crisis and we came up with terms such as the sudden stop of capital. But again, people spoke about some sort of banking debt going up too much. So there's always some new reason which comes up. But really, if you sort of zero in on the various factors over the years, and this goes back centuries, there's one common word you will find in each crisis and that is credit. That typically when you end up getting too much credit gross, you can go back to all the way to the 17th century, you'll find this is the one common factor that has been behind every crisis. Not in terms of, this has to be there, but this is the most common factor, I would say, which we have seen out there. And since 2008, there's been a lot of focus again, right? In terms of what really led to the 2008 credit meltdown, what really happened in the world and why did we get such a severe shock back in 2008? And even then, you ended up getting the same kind of answers which is that this is that credit growth. Now, how exactly took it credit growth is the problem because it's not enough to say that if a country has too much credit, it's gonna have a crisis. Because, and there are a lot of misconceptions about credit growth. Like one thing, especially in the emerging world, we often hear about a country is that, listen, it may have seen a lot of credit growth of late, but if you look at the absolute level of debt or credit in the economy, it's still quite low. And what our research shows is that the level really does not matter, which is that if a country has very high debt to start with or very low debt to start with, it really does not matter. What matters is the pace of increase in debt. So we looked at some of the past crises, such as Chile, that Chile had a crisis in the early 1980s as part of the Latin American crisis, when many Latin American countries then did not have too much debt as a share of their economy, but they had a massive increase in debt over a short span of time. So starting from an extremely low base, they went to a low base, but that pace of increase was incredible. So what matters is the pace of growth in debt more than the level of debt. I think it's very important to get these concepts clear, because even today I see so many sort of informed discussions about this and people tell me that why worry about China's debt? China's debt is still lower than the debt of countries in Europe or something like that. And I say, listen, it really does not matter what your level of debt is, it's the pace of increase of debt is what matters and that's what we saw in Latin America and countries such as Chile. The other thing is that the richer the country, the more debt it can typically afford, which there's a linear relationship between the total amount of debt in a country and the wealth of a country. So therefore it's very important to know what the per capita income of the country is and to compare it to the total debt in that country. And so what this sort of graph shows us, in fact, Germany and the US today, relative to their per capita income do not have too much debt compared to the rest of the world, whereas China and Japan are really outliers in terms of the amount of debt they have today as a share of their economy is very large relative to their per capita income. So these two concepts I think are very important. Why does the pace of debt matter so much? Because if you take too much debt over a short span of time, you're bound to pick up bad loans and fund bad projects. That's why the pace of debt matters much more than the level. And similarly, why does wealth matter? Because the more wealth a country has, the more it's able to sort of repay or be able to fund its debt and also that it has assets to offset its liabilities on its balance sheet. So that's the reason why, in fact, countries like Italy, et cetera, have not really had much of a problem despite their high levels of debt because the wealth that they have in the country is very large. So it's very important to look at. Now, debt is not necessarily a four-letter word as we have come to know it post a global financial crisis. That there's an upside to debt as well, which is that credit growth can be quite healthy because that's what sort of feel like you do to borrow from the future to grow. So credit growth can be quite healthy until it is too fast. That's when you end up getting real problems. So what is too fast? How do we define too fast? And this is where we did a lot of work in terms of that the most important time period that we looked at or we found to be most relevant is that when debt as a share of the economy increases very rapidly over a five-year time horizon, that's when you really end up getting troubles. So we looked at many filters here, 10, 20, 30 years. No, the most important filter we found was five years. That typically it's over a five-year time horizon when you end up getting a sharp increase in debt. That's what sort of foretells or doesn't bode well for the future. So what we did was to look at these various stages and this is a bit technical, but the one standard deviation increase in debt to GDP we defined as 14 percentage points, two standard deviation as 28 percentage points and three standard deviation as 42 percentage points. These are three different levels of increases in debt as a share of GDP that we defined in terms of what really sort of is an increase in debt. And what we found was a pretty good linear relationship which is that if you just look at this one factor, what we found was that if you end up having a pretty sharp increase in debt, the bigger the slow down and the less the increase in debt, the less the slow down. So if you just apply this formula, there's a country in this average sample was growing at 3.8 percentage points over a five-year time horizon and it's dead to GDP increase by one standard deviation over that five-year time horizon that the following five years growth slowed from 3.8 to 3.1. But if it grew at two standard deviations, it's dead to GDP, then growth slowed to 2.5 percent. And if GDP growth sort of was as much as 3.8 percent, but you had a three standard deviation increase in debt to GDP, then GDP growth more than half. That's very rare in the field of economics that you end up getting these kind of relationships which are quite tight between what happens in one variable leading to something else in another variable and yet with debt, that's what we found. Now look at the recent example. The entire European crisis in some ways or what's happened in Europe can be explained by this graphic. So if you look at what this graphic tells you, what this graphic tells you is that on the left-hand side of the countries which increased or how much these countries increased debt to GDP between 2003 and 2007, the five years. And the right-hand scale tells you what happened to GDP growth rates in the following five years in terms of what was the slowdown. What you can see here is that all the countries which increased their debt to GDP very rapidly saw a much sharper slowdown. Then the countries which did not see a very rapid expansion in the debt to GDP. So all the periphery countries on Spain, Ireland, Greece, Portugal, these are the countries which saw a sharp debt to GDP increase between 2003 to 2007 or between 2002 to 2007. And these are the countries which saw the sharpest slowdown in the subsequent five years. So this really is that old economic line that there is no free lunch, that's what this tells you. That if you borrowed too much, you're really borrowing from the future and there will be a payback time in the subsequent five years. Now there's an upside to this rule also I said, which is that if countries do not borrow too much and then what happens to their growth in the subsequent five years, you end up getting the reverse. That if GDP growth has been quite low and so has your debt to GDP increase in the subsequent five years, economic growth rate is in a good position to accelerate quite rapidly. So there's an upside to this rule but also a downside to this rule. So before I move to where China stands on this and what this means for China, it's important to have a look at this one snapshot that today if you look at the world where our debt to GDP ratios or the increases where they haven't been that large and the other metric we look at is this banking term called loan to deposit ratios which is that if a country has very high loans relative to its deposit base, it means it's really relying a lot on outside wholesale funding to be able to grow. So the countries in that green sort of circle which looked the best here are the countries where the debt to GDP increase in the last five years has been relatively low and their loan to deposit ratios are relatively good. Now there are other ways of cutting this but this is a very simple way of showing it. The red circle shows you countries where the debt to GDP ratios have increased quite considerably over the last five years and where the loan to deposit ratios are also above 100% or so meaning that the banking system is quite stretched and you have to obviously adjust this for any reserve requirements or something that the government may have out there but this is the picture that we end up getting today as to which countries are in a good position to grow based on the debt rule and which countries seem quite extended today. So of course China here really does appear to be off the charts because it's had a massive increase in its debt to GDP ratio over the last six to seven years. So let's have a look in terms of what all this really means for China because it's a country that has said I've been in awe for much of my last 25 years of investing but in the last five years this is the one fault line that has begun to really trouble us about China and what's gonna happen in the future. So as you can see here, China's debt to GDP before the global financial crisis in 2008 was relatively stable. So if you look at China's debt to GDP before that it was relatively stable in the 10 years before that. It was about this is private sector debt as a share of GDP, right? It was very stable. Look at what's happened after 2009 and look at what's happened to the rest of the world after that. Now this is one more very interesting finding we looked at which is that it's not really the central government's debt which leads to most financial crises. It's a rapid increase in the debt of the private sector which leads to financial crisis. Why is that? Because the government's debt typically never increases that rapidly. It increases slowly over time and the few instances where you get a rapid increase there is trouble. But we looked at about 300 or so banking crisis historically and we found that by six to one it's the private sector or the non-central government sector which is responsible for financial crises compared to the government. The government's debt often increases after the crisis because the government then comes in to bail out the private sector. So that's a sequence which is a bit counterintuitive and very different from the Latin American experiences of the early 1980s but it's very often the private sector where you end up getting the fault line. So interestingly, look at the line for the US. The US, the debt to GDP ratio on the private sector side has come down quite a bit. Even Europe has begun to deliver but in China's case after holding steady we have gone parabolic after 2008. In fact, if you look at the increases in private sector debt to GDP what China has seen at the peak over the last five years is the largest credit binge on record in the history of emerging markets. In terms of its debt to GDP has increased by 82 percentage points at the peak five year period post the global financial crisis and the other countries are Malaysia, Thailand, Zimbabwe, Chile, all of them as you know suffered a financial crisis after this massive increase in debt to GDP that took place out there. And what we find is that this increase in debt to GDP is not really leading to anywhere close to the economic growth rate that China had before 2008 which is that the debt levels are going up very sharply but the GDP growth rate levels are falling. So a very simple way of putting it before 2007 where as I told you that the debt profile was quite stable in China it took just over a dollar of debt to create a dollar of GDP growth in China. As I said that often debt and GDP growth are two sort of sides of the same coin. Of late it's been taking four dollars of debt to generate a dollar of GDP growth in China. And before the financial crisis in the US in 2007, 2008 it was taking as much as nearly five dollars of debt to create a dollar of GDP growth in the US. So that profile is where China really sticks out. Now of course what we did here was to see that okay let's zero in on those countries which saw a three standard deviation increase in their debt to GDP over a five year time horizon. And we found just over 30 cases since post World War II history of countries where debt to GDP had increased by 40 percentage points or more or three standard deviations over a five year time horizon. And then we had a look at what were the economic consequences of that specifically. What we saw there was that in all of those 30 cases there's not one exception. And in the rule of economics that's so difficult to find such a rule of finding something without exception because we're all used to saying on one hand this happens but if this happens this may happen but no conditionality out here. What we found was that all of these 30 countries saw a major economic slow down in the subsequent five years and 70% of those countries saw a financial crisis in the subsequent five years following a rapid increase in debt as a share of GDP. There was not one exception to this rule but the thing 70%. So the probability based on this and I think that I mean as we know that when you have more than 30 data points that's a pretty robust sort of series to have that 70% of these countries saw an economic crisis and every single country saw a major economic slow down. So how big was the economic slow down? Well, typically growth more than half in those countries on average which is that if those countries were growing at nearly 5% when the debt to GDP was expanding very rapidly in the next five years growth fell to 1.7% on average but each one of them had a major economic slow down the exact profile varied the average was 1.7% or so. So now if I take the case for China for me the base case for China becomes is that the likely growth rate over the next five years is going to be somewhere in the 4% to 5% corridor. China was growing at 8% to 9% before just before the turn of this decade and what we see now is the fact that economic growth rate is likely to slip to 4% to 5% and in fact if you really look at the real economic data in China today, right? If you look at electricity consumption you look at what's happened to freight traffic or like any independent numbers as to what's happening even to consumption at the largest to 100 consumer brands China's growth rate today is possibly already down to something close to 5% or so. Even if you look at the official data that they reported in the first quarter China's official, I mean China reports its data on a Euro year basis but the US reports its data on something called quarter over quarter annualized. That growth rate for China even using the official numbers in the first quarter and I'm surprised this number hasn't found greater mention was down to 5.3% based on official data. There are many people who think that the official data may not be fully reflecting the extent of the slowdown in China. The other side of this is investment as you know, that a lot of this debt has gone to fund investment in China. Now what we found here was a similar type of finding as on the debt rule on the investment side which is that typically when a country's investment peaks as a share of its GDP economic growth rate in the next five years tends to slow down. It slows down on average from a growth rate of let's say 5.6% to 3.6% in the subsequent five years or 3.4 rather in the subsequent five years. But in those countries where investment to GDP has exceeded 40% as a share of its economy and there have only been about 10 such cases in recent history. In those countries economic growth rate in fact more than halved in the five years that investment peaked out here. So this is another sort of side rule to the main debt rule telling us the same thing as to why we think that China is in the midst of a major economic slowdown and that slowdown is likely to persist for the foreseeable future. Now when you give these arguments the most common refrain I hear as far as China's concerned is that China's different. What applies to the rest of the world doesn't apply to China. Now that's an argument very hard for me to counter. Because I'm like an empiricist I look at past data I look at past experiences and I try my best to come up with what's gonna happen in the future based on that keeping in mind what the ground reality is. Still you keep hearing that or you hear these sort of example like in China that listen it has a very large current account surplus because it has a large current account surplus like it has a lot of buffer. Yes it does but what we found was that there is no relationship between financial crises and economic slowdown and current account surpluses. So if you look at Taiwan, Japan they all had current account surpluses before there was a major economic slowdown in China and they all had banking crises at some point during that economic slowdown despite the current account surpluses. So yes a current account surplus can prevent a run on the currency. That's absolutely true. But a banking crisis can still be internal in nature without foreigners sort of pulling the plug on that country. That I think is an important point. Then we hear about China's large foreign exchange reserve that foreign exchange reserves are very large as a share of its GDP. True but as we saw in the case of Taiwan back in the early 1990s when they suffered their major economic slowdown and their banking crisis even their FX reserves are very large as a share of GDP but that did not prevent Taiwan from having a major economic slowdown either. So that's what really thing is. So the issue is that what is the parts to deleveraging? A country has once, has taken on a lot of debt. How does it get out of this situation out there? As I said, a lot of it is about time that you have to sort of amortize the pain over time that it often involves defaults, debt forgiveness. I mean, some data I read was fascinating that about 20% of debt of a country is typically just written off when it's about to, as part of deleveraging or you have these technical terms like financial repression where interest rates are kept extremely low. Then you have these other things about devaluing your way to prosperity that typically for a small open economy you do a major devaluation and let exports sort of take yourself up. Or there's the very old technique of inflating your way out of the situation which is more difficult to do in today's world. But historically some countries have tried to do that although the consequences have been quite ruinous for the economy. But China's trying something very different also just now I find. Which is that China basically is what it's been doing over the past few months has been sort of quite interesting. Which is that it has really been using to try and boost its equity market as a way of trying to sort of ease the pain in the financial system. And this is a new experiment. I can't remember the last time a country has explicitly used its stock market to try and ease the pain in the system. That showed, I mean like the Fed and the other sort of central banks have argued sort of rely on the wealth effect. They rely on stocks to go up and houses to go up to try and relieve the pain on the economy. But never before has something been done this explicitly where you have sort of official editorials, other sort of press going out there and telling Chinese people that you must buy stocks. Stocks are the best place to be. And you've actually seen language like that out there in the last few weeks and months as far as China is concerned. So what's really happening there is that this is the one place where there was not too much debt and this is one asset class in China with no bubbly characteristics until a year ago. But now in the last one year what's happened in China as it's typical is that you've gone from zero to 60 in no time, right? I mean like in terms of racing it. The issue is that are the authorities losing control of the game? So here's the A-Share market. This is the turnover. And this is a fascinating chart for me. I mean just look at the spike in the turnover in the A-Share market. So on certain days this year the total amount of trading in the Chinese stock market has been more than the rest of the world combined. And by that I mean the US, I mean Europe, everything combined, right? So in terms of taking cash plus futures on certain days the trading in this market has been more than the rest of the world combined. Now I can't remember the last time that something like this happened that for a market which does not even account for 10% of global market capitalization the trading volume is more than the rest of the world combined. And what's happened is a massive increase in margin lending. As you can see in China in fact until about 2010 you weren't even allowed to do margin lending. Since then it started to increase and now it's been a complete rocket over the last year or so. In fact today by some estimates the amount of margin debt in the Chinese stock market is greater than in the US today or anytime in the history of the US. So which is at the peak of the stock market bubble in the US in 2000, 2007 there was less margin debt. But in China today you've gone from having virtually no margin debt to having record levels of margin debt in the stock market. Record a number of retail investors opening accounts in there. So all these people as you can see again the blue line. I mean basically I can put a series of blue lines which all look parabolic in the stock market and it's all in the last one year. This market was dead in the water because profits were contracting or margins were getting squeezed due to slower growth but all of a sudden now we are seeing this massive increase take place out here. And a lot of these people are not qualified investors as you can see that. I mean if you look at the education level in terms of the kind of people who are buying these kind of stocks, this is not the CFA's and stuff like that, this is a very different category of people who are buying stocks in China. And as you can see here that it's completely unrelated to what's happening in the underlying economy. The blue line shows what's happening to the stock market and the darker blue line there basically shows what is economic momentum in China. So as you can see they sort of followed the same pattern in terms of at the margin they moved together but look at what's happened over the last one year which is that you have the stock market basically shooting up whereas economic activity continues to decelerate from an already low level. So this gap which has opened up is unprecedented in terms of what's happened between economic activity and as far as the stock market is concerned. So that's my point here which is that China basically sort of is trying this experiment now of using the stock market as a way to ease stress in the system because that works at many levels. One, that if you get the stock market to go up a lot then you have more and more companies which can issue equity and which can try and cut their debt by sort of doing that, that's one part of the plan. The second part is that the debt markets in China today are quite stressed because of the massive amounts of debt out there the average borrowing costs in China and the real borrowing costs in inflation adjusted terms is very high. So that some markets of those are frozen and China has been concerned about the growth of the shadow banking system. So this gives a new avenue for funding for these companies and then the fact that there's such a large stock of financial savings in China and that savings has to find its way somewhere and with the property market sort of bubble bursting and with the crackdown on the shadow banking system the equity market seemed like a decent place to go. So that's what's really been happening in China. The message really being it's easy to party hard to clean up, right? So which is that you can end up having a massive boom out there but it's very hard to clean up, right? After this boom happens and then you're trying various experiments various things to happen but to me the most telling part of a research is the fact that it has all led to the same consequences which is that you can amortize the pain you can even try and prevent an outright financial crisis because the entire debt is internally held but to prevent an economic slowdown seems almost impossible and the extent of the economic slowdown tends to be quite severe. So that's really based on all the historical evidence that we're seeing and that's also based on all on all the ground reports we get from my portfolio managers there on China they all tell me there's a real margin squeeze on for companies, profit growth is under pressure earnings growth is under pressure. So yeah, I'm not willing to go out on a limb and say that China's gonna have a financial crisis over the next five years. It's possible China is different and they can avoid a financial crisis but I think that an economic slowdown with China's growth rate slows to four to 5% to me seems like a relatively base case scenario based on all the research that we have done and the precedents that we have seen in other countries. So as I said that when you look at a country we look at many factors, right? I mean that's basically my rules of the road framework but I find the debt rule to have the most powerful value in terms of what's gonna try and tell you whether a country is gonna have a crisis or not or how a growth rate of a country is gonna be. So that's really the gist of my presentation out here and why I'm concerned about the actual growth rate in China and think that we're already in the midst of this rule playing out according to the historical template. Thanks. Is there a control here? We got this. Can we get some help? I'm gonna speak up here. I'm a great fan of Roushia's book. And what I liked about it was he reviewed so many countries and he caught the different aspects of each country and he made some wise statements. Be careful about trying to generalize. Just because you're a brick or emerging market economy doesn't mean you're gonna do well. Just because you've been doing well before doesn't mean you're gonna do well now. Where I will differ from him today is that he's using the same principle. He's actually generalizing from a set of principles China's been doing very well but not going to. And it's very convincing actually in terms of all these indicators. So the struggle, and to me it is a struggle. The struggle I have is to then say is China really different? Is it an outlier? Or is it going to succumb to the same pressures that other countries have basically fallen into? And let me make the argument again. What Roushia has started off by saying is countries where there's been a rapid expansion of credit in a very short period of time that practically always collapsed. And China's been rising even faster. The chances of it collapsing are 100% or very close or very strong growth decline. Now is that true? And the case is certainly true that the more rapid and more concentrated you're increased the more vulnerable you are. Now there was a fun study done about three years ago. They looked at 170 cases of credit binges. One third of the cases countries collapsed. One third of the cases afterwards nothing much happened. One third of the cases growth actually increased. So it's not actually true that always collapsed. But he's right in the sense that if it's very, very large or very, very concentrated your chances of collapse are much greater. So this is obviously a vulnerability. Now where is China today after such a sudden increase in credit as to share a GDP? And the interesting thing is it's right here in the middle. Lower than developed, higher than developing. Before the sudden surge it was way down here. The sudden surge moved them to here. So the question is, is this where it should be? Or is it vulnerable because its debt number is actually too large? Or is it that China did what it's always been doing? It's leapfrogging. Everything it does it makes, it goes way out. It jumps faster than we've ever seen. And that one argument I want to make actually is this is exactly where it should be. It's neither developing country nor is it developed. It's debt ratio is probably about right. It's just got there faster than we ever would have expected. Then the question is, how did it get there so quick? And did it do something really bad in the process? And that's what I want to turn to. But before I do that, let's look at the components of the debt. The problem is not in the blue section, government debt, pretty small. The problem is not in the red section which is households. Despite all the property and housing and everything else, household debt as a share of GDP is really quite small. The problem if there is one is here. Corporate debt surged from something relatively modest to something really large. So if there's a vulnerability in the system, we should try and look at some of the components. And in the corporate sector, here's a very strange graph. This is a graph of the 60% of the industrial enterprises. Despite this debt surge, debt servicing problems for the corporates haven't changed. So what happened to all this debt? It's all out there. How come corporates don't feel it? The answer is the debt burden in China is extraordinarily concentrated. It's not a general phenomenon. It's largely concentrated in large SOEs, property developers, heavy industries, and local governments. It's unlike the debt crisis we see in other countries, which are much more widespread. And what they have in common in China is that this debt burden is largely, ultimately, a burden for the state. Because they're all directly, indirectly going to have to be picked up by state banks or the government. So unlike the other collapses, where the private sector triggers something and it goes through the system and you have to recapitalize these private banks, the basic problem at the end is how big is the burden for the government and can they handle it? And fortunately, in China, the government debt is not such a big problem. China's government debt as a share of GDP 2010 was here. If you add the local governments, this other line, and that's where the big borrowings occurred, in 2013 it's here, there's another audit that just came out and it's going to show that the local government debt is also surged, so it's probably about here. So China's government state debt has increased, but it's not the kind of huge problem that you see elsewhere. So they have their resources. So ultimately when you see these refinancing the bond defaults or the non-performing loans of the banks surging, it's going to have to be handled by the government and how big is that burden? And then if you flashback 15 years ago during the Asian financial crisis, 30 to 40% of the banks' loans were non-performing, 30 to 40% of the government had to take it off their books. Right now officially they're 1%. My guess is it's going to go up to about 10 or 15. So you're going to see government debt as a share of GDP rocketing up by maybe another 10% points of GDP. Significant, a problem, difficult, but not a catastrophe. Other people worry about shadow banks. Shadow bank lending is in the headlines. This is loans which do not go through the banks in the normal way. They go through trust funds, wealth management products, bond markets, other aspects. But shadow lending in China is really relatively small and most of it actually is fairly low risk. So although a lot of people worry about shadow banking, the government actually doesn't because it really sees it as an opportunity to get funding to the private sector. So shadow banking is out there. Now the interesting thing about shadow banking is that it accounted for the bulk of the credit expansion the last seven, eight years. It wasn't the banks. It wasn't the normal bank lending or credit lines, but shadow banking through these kinds of funny sources. And then the interesting question is prior to the global financial crisis, there's practically no shadow banking activities. So the interesting question is, why is shadow banking not exist before in China but exists everywhere else in the world? And then today frankly, shadow banking is disappearing again. So how come the shadow banking was never there, surged and is disappearing and the government has some control but not a lot of control on it? So the credit expansion of the last seven, eight, nine years, a large chunk of it actually wasn't within the government's control. It was being done by non bank kinds of activities in ways which are harder to fathom. And what I like to get into is what exactly was happening during this period? How do we explain this credit surge and is it a big vulnerability? It is a problem of course because the growth impact of credit has declined. So we sure showed you that you put out so much renminbi, in the past you'd get so much growth, pretty robust, pretty strong. Now the government puts out a lot of credit, growth does not increase. So you got a problem, debt increases, but GDP doesn't increase. So you got a debt problem. So the very simple question is why is credit or debt growing so rapidly but GDP is not. And where is that credit going? Because there isn't a lot of inflation in China. You don't hear about inflation. Normally you would hear about is inflation and that's not happening. Inflation in China is running at one and a one half percent. So where is this money going and where does it go? And then the last seven, eight, nine, 10 years, the pushing out of the credit, these huge, this is the global financial crisis, the big stimulus that did not lead to GDP growth. So the growth stimulus to GDP basically collapsed opposed to financial crisis. So our real question is explaining this. How and what did this debt go to? How do you explain this in the GDP accounts? Now we're going to do a very technical question. The GDP is composed of consumption, government expenditures and investment. And then the balance of trade net. So the big question is consumption went up normally, government expenditures went up normally, investment went up a lot. And what is the definition of investment? In a GDP account, it's gross fixed capital formation. That's the definition of investment in GDP accounts. Fixed asset investment is what markets and everybody else focuses on. Now what is fixed asset investment? Fixed asset investment is investment which includes the price of land, the increase in the price of land. Any land-based or asset-based transfer of an existing asset and its price. Now, the interesting thing is that these two concepts of investment, fixed asset investment and gross fixed capital formation, it didn't matter before. They moved at exactly the same pace until 2003 and four. And all of a sudden they started diverge. And then during the global financial crisis they diverged enormous amount. So essentially what we have here is credit flow and it pushed up fixed asset investment but did not push up gross fixed capital formation. So that tells us something. It tells us that all that money went out there essentially went into land and property and asset transfers and the sale of land. And then the question because more simple, is that good or bad? And this is where I have, I call it the Mona Lisa effect. The Mona Lisa, the attic effect. Suppose you have a Mona Lisa in your attic. The real one. You discover it one day. You pull it out and you sell it. And somebody sees it and a dealer looks at it and says, this is very valuable. And he gets a loan. He gets a loan for a herd million dollars and he buys your Mona Lisa. What happens to the GDP counts? Credit goes up by herd million. What about GDP? Doesn't change. The Mona Lisa is not a real thing. It's the price of existing asset. So what asset in China has been soaring in the last seven or eight years? And why only in the last seven or eight years? Land. Land values have gone up 500% in the last seven or eight years and that translates into property prices. So in the United States, when property prices go up by 30, 40, 50, 60, we think we got a problem and we've had that problem. So how come one, land goes up by 500% and two, why isn't that a problem? Surely that's a bubble. It's a bubble in other countries where it's 100%. And then secondly, how come it only starts here? And it actually started even before the global financial crisis, before the spigot of credit was expanding. Something happened here. And what happened here was a private property market in China emerged. And the first authorized land auctions took place in 2003 and four. You could buy land instead of starting selling land. Private property was formally established in the late 90s, but a secondary market for resale only started here and people started buying, selling, tearing down, building, developing new property and property is soared. Now, 500% soaring, isn't that excessive? So the first thing I want to point out is, it's not continuously up. There are cycles. Bubbles don't have that. Bubbles, when they collapse, they go, boom. They don't go like this and go up. And they've had repeated corrections in the past. So this price pattern is not actually the same pattern of a normal bubble that we see or normal collapse. It has this kind of cyclical effect. And this is very, very strange. Now, why is this so unusual? One, this is not the case in a career, United States, Spain, Thailand, Malaysia. They've had private property around for generations. The value of land is known. In China, it's not known. You don't know the value of land. You don't know the value of property. This is financial deepening. The markets are trying to establish the value of an asset whose value is hidden and no one really knows that value. So they're bidding it up. Now, having bid it up 500%, surely they've gone overboard and this is gonna be a collapse, eh? Well, the first thing I wanna show you is it doesn't show up in the construction data, by the way. This is China's construction as a shared GDP line, which relates to property development. These are bubbles. Construction as a shared GDP in bubble countries. They go up suddenly and they collapse. And the same is true in Europe and elsewhere. China does not follow the same kind of property construction bubble line. It has an excess supply. It's overbuilt. There's gonna be a correction, but it's not gonna be the kind of collapse you've seen. And now that's gone up 500, 600%, how do property prices compare in China with other countries? Here is the price of property in Shanghai. $6,900 per square meter. How many of you are familiar with India? What are the property prices in Delhi, in Bombay? They're twice as high. Even going up 500%, property prices in China are half of what they are in India. And they're actually quite comparable to other countries. So here's what I think is going on. Private property did not exist. Now it exists. The market discovers it. The government hasn't actually directly financed it. Shadow banking is because it's extraordinarily profitable and extraordinarily worth it. And it's churning it around and reselling and selling it and boom, you've got a surge in debt. And that's why China's debt to GDP ratio is surged. The whole question then becomes, is this sustainable? Is this surge overboard? Because if it's not sustainable, if that Mona Lisa was a fake, that guy borrowed a hundred million dollars and he's gonna lose his shirt. If the Mona Lisa is real, he's fine. And the issue is, it is sustainable. In terms of relative prices, who knows? But it's not way out of line. In terms of affordability, the price of property in relation to income in China, affordability in China is actually improving. People actually can afford to buy things better than they used to, despite a 500% increase in property prices. So I'm not too worried. And nor do I see this debt thing as a big problem. Goldman Sachs, when they looked at this, they found that three quarters of the increase in the debt to GDP ratio was explained by the property bubble. And the issue is, is it a bubble's gonna pop or is it in fact that China's discovered the Mona Lisa and now credit is expanded to finance it? We'll only be able to tell this a couple years down the line. But I basically think that China's debt to GDP ratio, the sudden surge, they've done what they've done before. They've taken the great leap forward and they are about where they are, right in the middle of the pack. This is the real problem in China. Its growth is slowing. It's slowing not because of the debt problem, it's slowing because they've now hit that middle income gap issue. And if you compare China with Japan, Taiwan, South Korea and Singapore, here is China's growth, growing at 10% coming down to about 7% today. In terms of the cycle where they are, it's basically hitting the same issue that Japan, Taiwan, South Korea and Singapore are hitting. It's going to moderate. So the debate we really have is, is it going to basically level off, stay at this level? Or is it gonna go sharply down? And the answer, of course, it varies. It depends upon the country. And is it going to vary and come down from what I would say an average of 10 by the normal three to four or five percentage points? If it does, then basically it's gonna grow at six to seven. Over the next five years. Or is it, what we sure says, going to go down to four to six? And the answer is, I don't know the answer to that question. But there are many different reasons why it could actually be not such a bad deal. And some China doesn't have a debt problem. It's going to be serious, but it has to be manageable. It's real problem is can it realize productivity gains? And how significant are those productivity gains if it does it right? Now here's the interesting question. If you go back to Japan, Taiwan, South Korea, when they were having the same issue, there's actually a struggle to find productivity enhancing reforms because those economies are pretty strong. They're pretty efficient. They don't have the same distortions China has. If you go to China today, there are tons of distortions. There are all sorts of things going wrong. They're investing in all sorts of bad projects. The great irony is, if they can just cut that out and do it properly, if they have urbanization program which is more efficient, if they can start dealing with the SOE problem, if they can address all these disorder prices, it's actually quite easy to increase growth by one or two percentage points to the coming years. It doesn't mean they'll do it. It just means that you can find things that could increase growth significantly. And other countries is actually quite hard to find that. So I think the question is out. Can they grow at six to seven or are they going to grow at four to five? Well, thanks, Yukon. Rishi, you've heard Yukon's points. Do you have a reaction to what he had to say? Yeah, firstly, I'm not quite sure at the end of it if the answer is we don't know that how much I can differ with what you had to say, but just a few points in terms of some of the points you raised out there. Firstly, my base case is not for a China collapse. That's not what, I mean, at all my projections. There are enough people out there who thinks this is a collapse. This is all a sham. They've been saying that for 20, 30 years. It never comes true. I'm not part of that camp. So in terms of the fact, because we have to put our money where our mouth is, so we can't afford to be like wrong for more than maybe three years, I say. Because if I'm wrong about that, I mean, I have a price to pay for it. This is not an academic discussion for me. So I think that's a very important point for me. So we were, and I think that some of the points that, I mean, you've raised here, I mean, just a few points here. One as I, like you showed China's absolute debt level that I've told you it's the pace of debt which matters not the absolute level. So comparing China's debt levels to let's say US or other developed countries really sort of doesn't sort of matter to me either from the fact that it's per capita income is much lower or the fact that it's the growth which matters not the level which is what matters. I completely agree with you that I'm not for making generalizations but for sort of looking what's happened in the past and then trying to sort of see as to what may happen in the future based on that. I mean, like, so there's no generalization I'm making here but the fact that just like you look at past stuff that what happened to Korea, Taiwan, Japan when they hit a particular per capita income level. So we try and have a look at debt in terms of what happens to countries when they increase debt very rapidly. What does that tell you about it? But the parts can be very different as I said. The parts can be that you can have an outright financial crisis. You can have a complete collapse or you can have a major economic slowdown. And in China's case, what I'm looking for is a major economic slowdown which I think is already underway. You spoke about that data regarding, I mean, we have a different data regarding the extent of the property sector boom because our data sort of shows that the extent of the property sector boom in terms of the level of construction and other associated activities in China today is as much as was the case in Spain or US at the peak of the bubble. That's what our data shows. So, I mean, like we have a difference of view on that. Secondly, this land sales argument, the fact that is very important because, I mean, as you know that a lot of the local Chinese governments finance their budgets by these land sales. So the fact that this, that if this avenue is tapped out, when it plateaus or the land sales aren't that aggressive, that is going to lead to a big financial problem for the local Chinese governments. Now the fact that China has the resources because of low central government debt to bail out some of these entities, I agree with. So that's the reason why I think a collapse is not coming, that they have the wherewithal and the financial reserves to try and do that. But what I find fascinating is the anchoring bias, which is the fact that three years ago, if you would tell people that China's gonna grow, that you're sitting today in 2015 in the first quarter and China's growth rate has slowed down to a level of, whether you take official data or you take the actual data somewhere between like 5% to 6.5% or something like that. At that point in time, people would have thought that's a really bearish forecast because at that point in time, China was growing at 9, 10%. And so there's an anchoring bias that we are very slow to adjust to these intercept shifts which happen in growth and we always extrapolate from what's just happened in the last few years. So I think that's as far as China's case is concerned. So that's really my entire point here, which is the fact that we are looking at what's happening today on the ground in China. Are companies being able to lend and borrow easily or is there a credit crunch which is taking place? Are we sort of seeing signs of the classic sort of debt many are leading to a slowdown in China? I think we are because the real interest rate in China keeps going up because of deflation pressures in China. This question which is asked, that you print all this money and how come you end up getting no inflation? I think that's a question for the entire world, right? Because what happens today, which is something which I've written about just this morning for the Wall Street Journal is that you will now end up getting asset price inflation, not consumer price inflation across the world. And that's what's happened in China too. You've had massive asset price inflation even though you've had no consumer price inflation. So that's, I think, to me a very important point which has to be sort of kept into account out there. So I think these are some of my comebacks, but happy to sort of open this up to what happens. Yeah, but isn't the essence of what Yukon was saying is not asset price inflation is taking place, but asset price discovery is taking place, right? So what makes China different in Japan, Taiwan, et cetera, is the fact that there wasn't a land market 10 years ago or 12 years ago, right? And now there is a land market and there is incidentally a huge demand also for property and so forth for various reasons. And this is a price discovery. So there's no change in GDP, but there's a huge change in credit. In a sense, do you find that that is a potential explanatory factor for this divergence between credit and GDP? No, but I mean, yeah, but as you know that the market opened up in 1998. That's when China allowed the privatization of its market. And it showed on that graph till 2008 there was no such thing going on. So the price discovery was on since 98, but till 2008 there was no real increase in debt as a share of GDP in China. It's really post the stimulus that they launched in 2008 that you got this massive ramp up in debt. So I don't agree with that, Anas, because I'm saying until then it didn't, I mean the price discovered the first 10 years there was, as my chart showed, the debt to GDP didn't increase that much. And also, I mean as like you know that you have to break it down in terms of where this is going on. So look at what's happened in China. It's the entire overbuilt has happened in second tier, third tier cities, not in Shanghai or Beijing. That's where the overbuilt of the empty homes are there, the so-called ghost cities people keep focusing on. But in the big cities like Shanghai, Beijing, there is not a problem, I think, too much. But the real problem is the overbuilt has happened in the second and third tier cities which are very hard for people to fill. I want to ask you a sort of very technical question. One of the most surprising facts that you just came up with was these 5.3% quarter on quarter annualized growth, I presume for the first quarter of this year. I presume that seasonally adjusted. Yes, yes. Of course in China, I mean people get all problems with seasonal adjustment, but yeah, this is the official data, this is the adjusted. Fourth quarter, first quarter versus the fourth quarter or first quarter versus the first quarter? No, I mean quarter over quarter. Yeah, so first quarter, fourth quarter of the year. Exactly, yeah. And that is very surprising. Yeah, and this data, by the way, is officially accepted. This is not something, you know, as I said, there are people who think based on electricity consumption, freight traffic, all the sort of real indicators, the fact that the sales of the top 200 stores in China with zero, et cetera, they look at that to say it's even lower, but I'm saying if you take the official data, this is officially accepted. Because one of the unusual features of Chinese economy is the fact that you have Chinese New Year coming in the first quarter and they're always sort of but this is some seasonal adjustment to do, whether it's perfect or not is obviously hard to say. The other point that I want to raise is that the fact that we've had in China significant amounts of bad debt in the past and there have been these corrections that have taken place. And China seems to have found this method of recapitalizing banks initially through the China Investment Corporation and then through the Ba Jin Corporation, whatever it's called, the domestic arm of the China Investment Corporation. And they've been recapitalizing banks on a regular basis and they've been continuing to lend quite often at the instance of the government. So suppose they are able to do that again and if they have say 10, 15% bad debts, potentially they could do that because they have this very efficient system now of providing funds to the CIC. Therefore, the issue becomes not whether China can withstand any potential collapse as a result of high debt. Question becomes, does China have good investment opportunities in the future? Will fresh credit finance good investment opportunities? And that depends on the reform program. So in a sense doesn't it boil down to what Yukon ended at the end where he said if you have a good reform program and others if they do what they said they do in the third plan of document, you could potentially continue to have rapid growth while there is this recapitalization of the banking system, which is simply a transfer of assets by the way from the government to the banks. Yeah, this has happened before in like 2005 I remember last time in large scale this was done but here's the difference. The problem today is mega times bigger, right? So I mean the issue that in like 2005 as my chart showed that the debt to GDP ratios in China were relatively low and the debt to increase was relatively low. Today it is a much bigger problem compared to then. So let's say that the Chinese banking system or the entire banking system has bad debt to GDP of even 10% or so. China's debt to GDP today is like depending which metric you wanna take but it's about 250%, right? A decade ago it was 150%. So there's a huge increase. Now you write off 10% of 250%, you're looking at a 50% write down on GDP. So these are very different proportions that you're talking about today compared to what was going on out there. Now, I don't dispute the fact that China's already arrived. It's a big economy. It's like $10 trillion economy. There'll always be investment opportunities in China. They're like the e-commerce sector has been a fantastic opportunity in China, something we've engaged in and stuff like that. But I think what's happening in the last few months is very strange that the companies which are doing, it's the government trying to pump up and the stock market have been going up have been exactly the companies where the profits are declining, the margins are declining, are the all so-called old economy companies. So this divergence between the new China which is emerging based on e-commerce, healthcare. The services sector. Yeah, I mean like that was all doing very, that was doing relatively well, possibly financed by new debt, coming from different sources. But in the last few months, I think that the desperation has gotten so much because the growth rates are so slow that now you're going back to the old model of trying to resuscitate these companies which were failing and which probably need to fail just because the impact I think today is incredible to face this extent of a slowdown. And there have been recent interest rate reductions in order to try and once again put the pressure on the accelerators. Yeah, interest rate reductions, talk off which they like to downplay about QE, et cetera. So the game is changing because the magnitude of the slowdown has been so big, I think in the last few quarters. Great, so let's open it up to questions from the audience. And when you want to ask a question, please raise your hand, identify yourself, give us your institutional affiliation and wait for the microphone before you speak. Yes, please. Thank you for both of your excellent speeches and one my question is for you. Your name, your... Sorry, my name is Di Dong Sen, veteran scholar in Georgetown University. And my question is, if we compel the approach of deleveraging, managing the process of deleveraging between the United States and China, after the, I mean, the U.S. deleveraging after 2007, 2008, the crisis, and the Chinese government's deleveraging approach, I mean, since 2013 or 14, there are similarities. But one case that you mentioned just now is the surging price of the stock market since late last year. Actually, that's what people has, like in my community, has discussed and suggested to the government. Because that's the case that we learned from United States. After 2008, the U.S. stock market has been stably growing up and what supports that kind of growing up of the stock market, based on the growth of the earnings of the companies. But how those earnings growth, is based on the stock that the companies is not really expanding their market, their market shelves, but buying back their stocks based on artificial low interest rate, which is financial depression that you mentioned in among the five lists of deleveraging. So my question is, could you please compare and contrast to the different approaches of how the artificially bumping up the stock market to mitigate the shock of deleveraging pain? Thank you. Sure, great question. Two points here, that if you look at the U.S. case of deleveraging, one thing which helped it delever a lot was that you got a lot of defaults, foreclosures and stuff which happened, so a lot of debt was written off. So you got foreclosures. But your point is correct, that even in the U.S. case, the stock market sort of has played a, played a role and a lot of liquidity has gone to boost the stock market in the U.S. as well, as something I'll argue, but there are two points that I will distinguish out here, that when the U.S. stock market started to rise, it was based on earnings growth, really. I mean like earnings growth was very strong in the U.S. stock market and a lot of it was genuine earnings growth because today one third of U.S. earnings growth comes from international, not from what's happening in the U.S., but what's happening international. So earnings growth went up quite sharply as far as U.S. is concerned and yes, you're right, that share buybacks have helped to boost prices, but it's not, I mean, you've done the work on this, it wasn't the main driver of stock prices. It's something which added to it. In China's case, as I've mentioned to you, that if I were to plot that chart for the U.S., you will still see that there's a relationship between economic indicators, right, because the U.S. stock market started to surge just when the economy started to recover in mid-2009, but in China's case, the exact opposite has happened, which is that over the last six to nine months, economic activity has further decelerated while the stock market has really surged, completely not in sync with what's happening and the profits and margins of companies is still contracting. So I think that there's a much sharper disconnect in terms of what's happened in China today than what happened in the U.S., even though in the U.S. I do agree that zero interest rates have clearly played a role in artificially boosting stock prices, but here it's not boosting stock prices, it's the entire creation of a bull market based on that. So I think that to me is the critical difference out here. You can't, do you want to add something? No, to that question. Yes, please. Just wait for the microphone. Thank you. That was a very interesting presentation. Your name? My name is Dev Kar. I'm Chief Economist at Global Financial Integrity. It's a think tank here, small think tank. We look specifically at unrecorded flows. And I think this would have been even more interesting if you would have considered the impact of unrecorded flows on your conclusions. For instance, we found that since about the same time that you mentioned in the early 2000s, unrecorded outflows and inflows from China into China has skyrocketed. Now the illicit assets, we call it illicit assets because it is unrecorded for, unrecorded. Held in tax havens and banks abroad is very large and whereas the debt is held publicly. So the assets are held privately, the debt is held publicly. So there is some tension over there, some risks arising from that. Unrecorded flows we found had a very big impact also on Greece and to the extent that even the IMF missed it. By the way, I had a 32 year career in the fund and in the fund we never considered unrecorded flows. So unrecorded flows have a risk of its own and what those risks are for this analysis is very important. That's a really quite interesting question. So sure, I mean like in terms of I think that one thing which I've always mentioned is having a look at the errors in omissions columns of the balance of payments is always a very sort of instructive sort of thing in terms of what's going on. I think that's what you're referring to. I mean, a lot of it should show. Yes, yes, absolutely. So in China's case what's going on, I mean like in that regard, I can just update you because there's only that much I can cover out here but I can say that till about 2012, the typical thing would be that the unrecorded flows in China would often be inward, that you'd had more capital coming back to China by overseas people or Chinese residents bringing that money back or doing round, you know, whatever. 2012 we saw the first instance where we saw some capital outflows on a net basis take place from China on that account. And very interestingly last year as you know was the record year for capital outflows. I think about $300 billion is the number of capital outflows which left China last year. So yes, I mean that sort of corroborates what I'm saying that often you have to talk, I always say one of my rules is they have to speak to the locals as to what they're doing with their capital and what we do find is that many people are taking money out of China rather than bringing money back into China and that's usually a sign of confidence in an economy in terms of what's going on. That's how I look at those flows in terms of what's going on. And China's case for much of the last decade you got sort of, you know, capital coming back. But in the last year in particular capital outflows from China have picked up very noticeably. Yeah, it's a very interesting point that you make just a couple of days ago we had a discussion about Chinese investment in Africa and it's very difficult to come up with a number because a lot of those investments are actually sourced from the Cayman Islands and the Netherlands and the Thales and so forth and you simply cannot officially tell whether that investment is from China or not but all the companies that are being put up but not all, many of those companies are happened to be Chinese. Yes, any other thoughts, yes please? My name is Kunio Kikuchi and I'm with a small company called Washington Research and Analysis and thank you for a very interesting presentation. Whenever I see economic data and especially debt levels of Japan and Korea, Taiwan, China, I think in terms of stages of development and I see China's seven, eight percent as what happened in Japan say 30 years ago and then naturally, unlike what Mr. Abe says there is such a thing as limit to growth. There's a limit to affluence where people don't want to just keep on spending money. You may not agree with me but that I think is what's happening in Japan. Eventually that would happen to China. And another thing that matters is size and China, there's no other country other than India which is perhaps at the lower level of GNP but there is no historical, let's say, data about a huge country such as China. In fact, it is 10 times bigger than Japan and I'm wondering, here's my question. My question is if you look at groups of provinces or provinces with more than 100 people say each of them the size of Japan and did an analysis of what you just did within China, what kind of results would you find? Are they uniformly following what you said or can you break China into a possible Germany, France, Italy, Japan-sized economies and do an analysis and then find out what the real story is? Thank you. In other words, there's much regional disparity within China for these indicators that you mentioned. On the debt indicators. Yeah, for any of these. Yeah, no, in terms of, I mean, there's a lot of disparity in China. I think that you're better positioned to answer that but you know China inside out but I think that, yeah, in terms of, we all know that the difference in per capita income is so much greater and I think that's one of those things which is that as typically happens in economic development that the fast growth typically happens along the coastal areas and that growth is very hard to replicate inland. So this Go-West policy I know was in place but the same sort of growth rates that you achieved on the Eastern coast that is very difficult to achieve inland because of the productivity can just not be as high inland as it can be on the coast. Some people have argued that this shift in the rate of return on capital, this point about four dollars leading to one dollar, four dollars leading to one dollar output is because of the fact that investment has shifted westwards where investment is just more costly since population is more dissipated, so to speak. And so the cost of infrastructure, et cetera, is much higher and the rates of return are much lower but this is part of a conscious policy. This is not because of a deterioration in the efficiency of investment in some sense because investment opportunities have been, have been no longer there but Yukon, do you want to add to that? A couple of things. Until about three years ago, coastal provinces were going faster than the interior that reversed. Western provinces are going faster than the central, central going faster than the coast. Partly coinciding with raw material commodity booms which are largely the interior. Partly resolved deliberate government policies increasing investment in the interior. That's moderated. They're actually growing closer together but if you project the future, coastal provinces are maturing so their growth is going to slow down. So the question is whether or not the interior have inherent comparative advantages that can be tapped and I think it's still a little bit uncertain. My own view is that the future of China lies in the central provinces because it's a country where if the central provinces there are just as many people living to the left as to the right. The high speed rail networks are going to change the dynamics of consumption and activity in this country a lot. The easiest place to distribute, particularly if you're not going to be so export oriented, might be in the center. So my own forecast is that the center will start to grow relatively speaking, do better in the future than either the west or the coastal in the future but this is somewhat of a speculation. In terms of debt levels, major commercial city areas are in pretty good shape but as we sure as mentioned, you have this kind of overbuilding, you have these ghost towns, you have these local governments who are bankrupt, many of them. So some of these poor inner provinces, unless the government steps in, they're going to have a financial fiscal problem keeping up expenditures and it's going to have to be restructuring in those places. Yes, please, Marvin. You're welcome to, so I guess. Thank you, Marvin. Marvin Ott, Johns Hopkins. Just a very sort of specific question. Is there any data on the ethnic Chinese communities in Thailand, in Malaysia, in Indonesia, in the Vancouver area? You know, ethnic Chinese communities outside of China investing in China, how they are reading these issues that you're talking about. Are there, is the weather vane shifting amongst these communities, these people who are on the ground a lot? What do they think is happening? Well, as I said, the people on the ground that I speak to, you know, but I'm not talking to the ethnic, so to a very specific thing, I don't have an answer. If you have an answer, I'd love to know. But the people that I speak to are the Chinese business people. Let's say the Chinese billionaires who sort of show up in terms of what they're doing with their wealth. And there it's pretty clear in terms of that they are moving a lot of their money out of the country. They have been doing that for much of the last two or three years. A lot of that money is moving out of the country. Now, there are these surveys which people ask about, for example. I mean, I find that fascinating that in terms of the billionaires of the survey done to ask across the world that in which country are you most likely to emigrate over the next five years? And China was way, I mean, the number one of the billionaires. I think 40% of the billionaires say we want to leave China in the next five years. The next country I think after that was Singapore at 20% or something. So if you are looking at that sort of tea leaf, it's not that because all the billionaires, I'm not sure how much you trust this response, but the response was this, that about 40% of the billionaires said they want to leave China in the next five years. Swami, up here in the front, we'll come to you in the back, yes. Hi, I'm Swami Aayir of the Times of India and the Keto Institute. Two issues. China has invested a huge amount on the infrastructure and on this bullet train network. Now apparently going to go all the way into Europe to carry goods, although I'm told by the seafaring fellows that this is stupid, that the sea is infinitely cheaper than going over land. Are these just strategic things which are going to lose money? Or are they actually economic? Because our Akesh Mohan committee in India says that bullet trains are a mad, stupid, expensive idea. Don't do it. And China has done it on a massive scale and been praised for it. So are the Chinese wasting all their money just on strategic things? Secondly, when I hear that China is now going to invest $46 billion in Pakistan, I have to say, are they out of their minds? And it's going to go into this so-called infrastructure and strategic. I mean, all this, I mean, is the word strategic just another way of wasting money for kickbacks and various other things? You know, in terms of, I think that we had to look at this, I think a lot's been written about, that a lot was written about in the last decade about the Chinese buying overseas, mining, commodity companies, et cetera. That, you know, so that's one answer that hasn't worked out well. In terms of, in terms of what the returns on that capital have been, what that's been, generally we know that when, you know, like the Japanese tried to buy too much real estate in the US, what happened in the 1980s, these very mad rush international headlong expansions don't work out that well, is my general experience. That's what happened. I mean, a lot's been written about what's happened to the Chinese sort of strategic investments and commodities and stuff like that so far across, just hasn't worked out that well. So I haven't studied this latest bit because I have no idea what's gonna happen with this and these numbers are hard to know, like the Pakistan people tell me that this 46 billion is numbers, a lot of it is really loans also being given in terms of to grow, right? So it's not just like, you know, freebies, et cetera out there and all that sort of stuff. So these numbers, what to make out of this, I can never know what the true external numbers is, but the last decade is instructive, certainly a lot of these commodity investments which were made really haven't worked out well for many of these Chinese companies. Because bullet trains in all the... Do you think bullet trains are... I think bullet trains in China are very worthwhile and they're changing the whole complexion of the country and I think they're gonna create linkages and things we haven't seen. So I think the return, not measurable and direct financial returns, but overall returns are fairly high. The major point I have is infrastructure investments tend to be lower than predicted. They tend to be lower because they always take a lot longer than many more complications. So the critical issue in many of these projects is, can they actually be done relatively efficiently and quickly? Because they can, they turn out to be better than one predicts most of the time they never are. The second thing from a Chinese perspective, a lot of this money flowing out of the silk road and other aspects, they're not giving it away. It's up to the countries to decide whether they wanna borrow it, the risks are gonna be shared. So that's the question. Will these countries like Pakistan or even Central Asia, do they wanna pay for this? In some cases they will, some cases they won't. I'm not sure whether it's because of the bullet trains or not, but there's a clear change in the spatial concentration now of industry and manufacturing in China. There's this movement inwards, which is taking place, which is very, very clear and comes up in all the statistics. And that's largely because land costs are rising and of course wage costs are rising in the coast and it's more efficient to move in, but they can move in because of solid infrastructural links. It's not just rail, it's also roads and so forth, which has lowered the unit cost of transport enormously. Yes, please, at the back, we have the gentleman right there. Sean Minor from the Peterson Institute. Richard, you really focused on the pace of the growth of debt. It's showing that few or no countries had been able to maintain the pace of GDP growth after that. What kind of policy measures should China take or can they take moving forward to try to maintain the pace of GDP growth? Without incurring a collapse. Exactly, I think the single biggest problem in China, if you ask me, is the GDP growth target, that how you come up with a random target to me and try and stick with it to me is just sort of baffling because people speak about the GDP target, but historically the GDP target didn't mean anything because they would be growing so much faster than the target, right? So you could say it's 8%, it didn't matter because they were growing at 12, 13, 14% in 2007, so the target didn't matter. Now the sort of religious focus on target I think has been the real problem in the last three to four years because had they not focused on a target and accepted a GDP growth rate of a point or two lower, right? I think that the problems would have been much less severe today and the employment intensity of growth has changed in China, which is that the employment intensity of growth is not what it used to be, that you can get much more employment at lower GDP growth than in what was the case. So I think the GDP growth is at the heart of it. Shanghai I think has taken a lead by being the first province to sort of not adopt a GDP growth target anymore and I think that really to me is the key thing. They're gonna just drop the GDP growth target because the 7% number is like random. I mean, the origin of this I'm told like for 7% for this decade was this ambition that we have to double our GDP by the end of this decade but that's like a back of the envelope calculation which has nothing to do with the laws of economics. So I think that to me is the central problem. But Ruchi, that might prevent the next crisis but how do you deal with the current challenge? I think that was the question. How do you deal with the current challenge? Yeah, I mean the current challenge, I mean as I said is to accept a lower GDP growth rate rather than do, I mean throw more money. More bad money, after good. But there's a lot of bad money that's already been thrown in. So how do you deal with that bad money and still allow for a graduate, not a hard landing but a soft landing? How do you, what advice would you have for the government to deal with that? Yeah, I mean I think that the Chinese economy can grow at 4 to 5%. So I mean if you accept that lower growth rate and stop doing more monetary stimulus to try and sort of keep companies alive which basically should go dead, should go bankrupt, I'd say would be the first thing to do in terms of how you try and sustain a growth rate of 4 to 5% but I think that's a relatively okay growth rate, I mean you're a middle-income country can grow at 5% and still be a great economic power. I think that's the way to sort of do that. The last question, there was a hand up there to the corner. No? Yes, please. Steve Winters, independent consultant. I just wonder, I understand that the American business community but in China is basically retreated into sort of a holding pattern. In other words some people have just moved to other countries but other people have said well we don't want to give up what we've built up but they actually, there's so much uncertainty about how things are going to shake out, about who's serious about the reform programs. In your whole analysis you didn't really touch on this element of uncertainty and risk and what's going to shake out and for example Chris Johnson has said we might need a whole complete new paradigm for understanding what's going on in China just because of the new government, the new leader and so forth and so on. So since you are on the practical investment side you must consider that sort of feedback from the people you talk to. How does that fit into your thinking? No we do, I just find it that understanding local politics is the most difficult part of our game because it just sort of involves so much complexity but I think what you're referring to and which I still don't know how it's going to play out is this whole anti-corruption campaign, right? I mean that's really what's creating a lot of uncertainty because if you speak to the people on the ground, a lot of the bureaucrats, et cetera, I mean as somebody was giving like this nice anecdote in fact that I'm told about 20 years ago or something like that a very normal way of speaking in China would be have you eaten? And that really meant are you well because that was based on the experience of the 1960s and 70s and now I'm told one bureaucrat basically asked the other have you gone in as yet or not? Which is that have you been jailed as yet or not because of the anti-corruption campaign? So that's the kind of thing that fear does pervade in the Chinese system there is an anti-corruption campaign on but none of us know whether this is I mean I think it's a good thing because cronyism was out of control in China as well but I'm just not sure whether that is something which is like being done in an organized methodical way or it's being done in a targeted way for someone to consolidate power. I think there is just no way for us to say but the fact that there is a lot of what in India became known as policy paralysis but in here it's a case of fear about taking decisions because of this corruption crackdown and showing up in the bureaucracy is something we do hear from the ground quite a bit in China. I think it would be too big a fail when that began. When the merry-go-round stops, right? Yeah, but just as a small point of information there's now more Chinese foreign investment in the United States than there is US investment in China as a flow. This is a sort of new phenomenon. That's right. Yukon, you want to add something? Oh, this window's okay. All right, I promise that we close at 3.30 It is 3.30. I want to thank you very much. Thank you all for your question, your participation but please join me in thanking Ruchir and Yukon for an absolutely outstanding afternoon. Thank you. Thank you so much. Thanks, so congratulations. Thanks. It's good. We've stayed in time. So I'd love to, I mean you're absolutely brilliant but I would love to be in touch if you come to New York. I enjoy your stuff. I read your stuff all the time. You do? Yeah, but you should be the one today also. I need a cross check sometimes on, you know. Here we go. Okay, we'll do so. Thanks a lot. See you. How are you? Oh, I see you're dressed down there. Yeah. Were you at yours down there? No, I just told you.