 Good morning, everyone. Thank you for braving the snow or the cold to join us today. My name's Chris Johnson. I'm the Freeman Chair in China Studies here. And we're really glad to have you all here for what we hope will be a very interesting and engaging discussion on how to think about China's economy and what's happening just back from China myself. And certainly my impression was that a lot more pessimism with regard to where the economy is and its prospects, people becoming concerned at the traditional tools that the regime uses to keep the economy going, aren't having the intended effects, and so on, and then just some real concerns that a lot of the numbers are looking very negative and not looking to turn around anytime soon. So we have a very distinguished panel with us today, Anne Stevenson Young, who co-founded J Capital Research in late 2007 and is the firm's research director. Her cover airages include solar, internet, medical devices, property, some consumer and direct sales, and China's macroeconomy. Anne was formerly co-founder of a group of online media businesses called Blue Band Blue Ventures and also founded and operated a CRM software company. Clarity Data Systems and a publishing company whose flagship magazine is City Weekend. Over 25 years in China, Anne has also worked as an industry analyst and trade advocate heading the US Information Technology Office. And 1993 to 97, the China Operations of the US China Business Council. So obviously, deep, deep expertise. Bob Davis is a senior editor of The Wall Street Journal, who economic and other issues in the 2016 presidential campaign. From 2011 to 2014, he covered the Chinese economy from Beijing and still misses China despite the pollution. He and his wife, Deborah Bruno, are writing a book on their experiences in the country. Which will be published by the journal. Until October 2011, he was international economics correspondent in Washington DC. And from 2004 to 2011, he was the journal's Latin America bureau chief. And then from 2002 to 2004, he was the Washington DC news editor responsible for coverage of economic policy making. And then Scott Kennedy, deputy director here in the Freeman chair and the head of our new program on Chinese business and political economy at CSIS. Scott is a leading authority on China's economic policy and its global economic relations. Specific areas of focus for Scott include industrial policy, business lobbying, multinational business challenges, and Chinese participation in global economic regimes and philanthropy. And for over 14 years before joining us here at CSIS, Scott was a professor at Indiana University and prior to was director of the research center for Chinese politics and business. And he was founding academic director of IU's China office. So with that, I think, Ann, we're going to turn it over to you for your presentation. Ann, we'll be on first. Yep. And we'll go. I'm ready for that. Well, thank you. I'll just sit here if that's OK. Yes, please. I would really like to make this a discussion and exchange rather than a presentation, but let me try to set some of the, oh, can I change? Can I, like, move you? We're going to bring the mobile. That's the mobile. You can just bring that over to your lap, if you'd like. Does that come over? I don't know what that is. Oh, a keyboard. Yeah, they still have these for some reason. OK, well, I mean, it would be boring to go through anyway, but probably I will forget otherwise what I'm going to talk about, so we'll see whether this kind of works one way or the other. Anyway, we'll figure that out. What do you think? Enter, would you like to ask? Enter. Did that not work? Done yet? There we go. Oh, look at that. Oh, and I must have gotten some flash going there. I didn't realize that. OK, so here's the way that I'd like to set the sort of framework of discussion. I find in my work that the attitude toward China internationally has shifted very dramatically over the last two years, and now the people I talk to, mostly the people I talk to, are in money management. So they're in money management in the US and Europe, but also in politics and other areas. And I find that now the scope or the spectrum of discussion is, is China going to have a financial crisis soon? Or do we have two years of muddling through, and is China sort of turning into Japan? That's the range of discussion. Now the discussion doesn't even include, oh, well, is China expanding, and whatever problems it's getting through, and the consumer is becoming more important, and it's economically important. That stuff is gone. Also, the number of times I was asked in the pre-2012 period to be on panels about innovation and Chinese technology was really, I honestly would rather have a root canal than go talk about that again. It was just a huge topic of discussion disappeared. Now it may be that people are sick of me, but which is also probably the case, but I think also the topic has dwindled in importance because it's become clear that Chinese technology is not projecting into the international world anymore as the financing for technology and other industries falls. So what I'd like to start with is why does debt really matter? So debt in China we can all agree is enormous. There's a range of estimates for the size of debt compared with GDP. There's discussion about the size of debt. How much is double counting? There's discussion about the size of GDP. But I think we can pretty much all agree that it's in the range of 200% to 300% of GDP, outstanding loans from the banks, outstanding loans from the shadow banks, and other elements of debt. So why does this matter? Because the economic, let's say that the average interest rate on debt is about 7%. Right now the long-term benchmark rate is 6.15. The shadow banks charge upwards of 10%. So if you average it out, it might be 6% or 7%. So if you triple that, that means you have to get 18% to 20% GDP real growth every year just to cover the debt. And clearly that's not happening. And so if that doesn't happen, then either you have to write off debt or you have to come to some sort of, it's kind of odd how it's flashing. Is it going out of there? I guess it doesn't matter. So you have to come to some resolution of that. You have to write off debt or you have to do something about it. So what the authorities have been doing, I think the fundamental problem for the authorities is that obviously there's a lot of debt being written off and being moved over to asset management companies or being quietly negotiated down. But it's nowhere near enough. And right now servicing debt is consuming virtually all the credit resources in the economy. So this makes it very difficult for anybody else, people to get credit or get capital in order to build new capacity. There's also the problem that new capacity is not really in demand. But right now you have a situation, I would say, going on now for about two years, where you have almost a zombie economy effect, where you have virtually all the credit in the economy being issued to rollover old debt, very, very low credit demand in the rest of the economy, declining prices, particularly from manufacturers, and excess of commodities, excess of production, and very low demand. So that's a situation we're in right now. Growth in the economy, I would put, we don't do independent macroeconomic forecasting because the data set is too difficult to work with. So we use all the different data sets out of China all the time, and we do primary research to triangulate. And on a kind of anecdotal basis, growth in the economy would be a little bit sub-zero this quarter. You don't want to call it a recession because you don't necessarily have several quarters in a row that are sub-zero, but there's no way the economy is growing much right now. If you look at the simplest metrics, even for last year, leaving aside this quarter, and you always sort of drop into a data hole in the first quarter because of Spring Festival, but even looking at last year, we had domestic steel demand down by about 5%. We had, depending on how you read the statistics, but our point of view is that cement demand dropped by about 1% to 2%. It went negative last August. Freight and electric power appeared to go negative in May and not really recover. There were basically all the industrial economy started to gear down and go tip negative around about May last year. It's very hard to come out to, the financial services industry grew. I would argue that the consumer industry did not grow, but that's a very controversial point of view. Whichever way you calculate, you come to a very low level of growth, definitely negative in the current quarter. So, oops, that seemed to have lost. There we go. So we have a situation now where we have a very kind of depressed economy, not in the technical sense, but a kind of low depressed economy. And we have massive overcapacity in industry. So, for example, petrochemicals is an industry that I looked at pretty carefully a couple of years ago. Two years ago, it was already running at about 65% capacity. Construction machinery is one that I know fairly well. That was running at 50% production capacity about a year ago. Steel, is it around? It's gone from 85 to about 65, 70. So in major, major portions of the economy, cement also is certainly under 80%. Major portions of the economy, you have massive, massive overcapacity. Clearly, it will take years of growth to fill up that capacity. So you have on one hand, and these are just exemplars of those issues. You have massive overcapacity, declining and probably negative growth. And so more and more difficulty filling up that capacity, adding to this phenomenon of very low loan demand and very sort of low demand in the economy. Aluminum is a case that I just thought I'd lay out for you, because you have this contrast between the need of the governments to create growth through production targets and the actual demand in the economy. So one sort of aside comment that I might make, because I'm sure to some of you, the idea that China is growing negatively is very shocking. You don't agree with that. But I would submit that the GDP number out of China is not a calculated result of data, but instead a production target. And I think that most in the central government would agree with that point of view. The production target is provided because the principal owner of state industry, SASAC, is the approver of all budgets for state enterprises. And budgets are made according to a very rigid formula, which is essentially GDP growth times this particular industry's historical proportion of GDP growth or growth against GDP, x times y equals z, that's your target for the year. So if the government were to say, actually, GDP grew at 3% last year, and I think it'll grow at 1.8% this year, that sends a signal throughout state industry that your production target is now, if you're steel and you've traditionally grown at one point above GDP, then it would be 2.8. And then it becomes a self-fulfilling prophecy so that you can't do that. So the consumer sector I can spend time on if anybody cares about it, but I believe that the consumer sector actually is tracking close to zero as well. The number out of the NBS is the worst number that we have. What we do more commonly is just look at all the results on the A-share exchange. You have about, I don't know, 160 or so companies in consumer industries that are listed there. If you simply aggregate all of their revenue, you clear out the companies that didn't exist last quarter or do exist this quarter or disappear this quarter, whatever, you come to negative growth in gross revenue of 2% at mid-year, last year of 6% in the third quarter. And that's not even clearing out investment-driven growth in acquisitions and mergers. So I think it's pretty clear that if the strongest consumer companies in China are seeing a decline in gross revenue, then the consumer industry is not in good shape. Am I going too slow? No. Okay. I think you're on target. All right. So as we all know, property is somewhere on the order of 20% of the economy, depending on which portions of property you count. And property has been tracking negative for some time, sales of property are negative. Prices of property, hard to say right now, the indices that are provided are negative on pricing. And construction, completion's last year went up and the amount of property in the chain went up because there's a huge, huge sort of, there's a python effect or there's a pig in a python effect. But starts last year were regularly declined and declined quite sharply. And I think we'll see construction down this year. If steel dropped about 4.8% last year, this is not netting out the exports, but domestic steel demand dropped about 4.8%. This year it will be down at least 10%. So that's good for the environment, but bad for materials. These are just a few tourist shots from my cell phone about overcapacity in housing to try to drive, I think to this audience we don't really need to dwell on it, but to a less sophisticated audience exposed to China, you really need to bring home the point that the overcapacity in housing is absolutely ubiquitous. It's actually obscene. And I've done things like drive down the highway and randomly get off at exits and go talking to the local districts and ask them how much housing they have on sale. I've been to cities, the city of Yinchuan and Ningxia, where 60% of the population works for the state and has allocated housing. They had the last time I visited about 18 months ago, they had 1.2 million units on the market ready for sale. That's not counting sold but idle housing. And the population of the city is something on the order of 1.2 million. And that's at the peak of the US market, I believe we sold 1.2 million new homes nationally. So this is the degree of excess right now in China. As I point out here, there are roughly 70 million units of new housing in the construction chain right now. Clearly, you can't bring all of those to completion. That's going to be very serious for the construction companies. So many might say, OK, this has happened before, so why is it serious now? And I think that the simple answer is that we've reached our debt limit now. And there are various ways of showing that. And the reason that I think that we've reached the one critical reason that we've reached our debt limit in China is that you no longer have the free lunch of QE3 and sort of free or interest free money circulating internationally that's attracted into China for the carry rates that are being offered in the property industry there. You don't have the same inflow of money. And therefore, it's much more difficult to finance these things without simply printing fake money. So I probably should have put this elsewhere. But this is simply to support my point about retail. And the consumer, you do get, I don't know how to go backwards on this, but you do get statistics out of the NBS that consistently show 12 to sort of 11 to 13% growth every year, every month, every year over the last 20 or so in retail. But you need to take out of those statistics unsold inventories and government procurement, which includes construction materials, which is double counting. You do have series out of the government that are more, I believe, more reflective of reality. There's a unit under which used to be part of the old Ministry of Internal Trade, which gives you a series. It's pretty. It shows much more fluctuation and volatility, but it certainly is very different from that provided by the NBS. And that shows you the comparison of the two only through the first half of last year. So this is the part about consumer companies on Shanghai Exchange. This is another thing that's important for the finance world, probably not so important for you, but it's the e-commerce world. We've got a lot of information from Alibaba, JD.com, VIP shop, and so forth, because they've recently listed in the United States and have become, you know, are issuing a lot of information about the surging growth of these industries. My brief point of view on this industry is that it's actually it's banking. It's not sale of goods. There is sale of goods going over these networks. The sale of goods is rising. It's generally occurring at a negative gross margin. It will decline again, and it's investment driven, but the key motivation of these companies tends and net ease to the extent that it has it. Alibaba, JD.com, and so forth, is their ability to aggregate capital through the payment systems that they control and the ability to move that capital into investment vehicles, and that's what's the core value of those companies, both to those companies and to the regulators, but it doesn't reflect an underlying growth in consumption. So what's going to happen? I think that it's worth pausing for a moment to think about some of the social ramifications of this, of the property explosion and the property bust that's really been underway for the last year or so since the Hangzhou decline of last February. You have a situation, you know, there's a great misunderstanding, I think, in the international world of what urbanization means. People here, you know, because we use this term to apply to developing countries around the world, we think of it as rural people moving to urban areas and becoming urban people. It's not at all what it is in China. Urbanization in China is urbanization in situ. It's a local government that owns rural land that has incentives to change the bureaucratic designation of that land to urban through, you know, making the population denser through a certain level of investment through, you know, a number of other things. The local people have strong interest in becoming urban people because they get better access to schools, hospitals, and so forth. So there's a great confluence of interest in over-investing in rural land and building what essentially tend to be useless. I made it bigger again. You know, here are a couple of things for my cell phone. Again, an LED park that used to be an orange grove in Guangdong, totally deserted now, but absorbed well over a billion US dollars in capital investment. A logistics port in Taizhou, that's Zhejiang Taizhou or Jiangsu Taizhou, I forget. Jiangsu, Zhejiang has one too, right? Anyway, I like this one because I was actually chased by a mob. I had a meeting with the local LGFE official who was in charge of developing this, and he was the one who cleared the people who had been growing citrus in this area and built this logistics port. It turns out there's absolutely no need for inland coal logistics. And they even built the docks to the wrong standards so they couldn't get deep draft ships, and it was just a disaster. So the people had been paid, but because of the particular type of bureaucratic designation, they had to buy houses in the new district if they were to have houses. They were incensed. When I arrived to meet the guy, there were all these people running around yelling, but it was into like Minnanhua, not Minnanhua, but some kind of Zhejiang dialect, and I couldn't follow it, so I wasn't paying attention. So I call the official I'm supposed to meet, and he says, I'm downstairs. Come beat me by the elevator. So I go downstairs. The mob runs down the stairs, and I'm taking the elevator. I get down, and he's here. Come over here. So I jog, and the mob follows us. We get in his car, slam the doors, and they throw themselves on the floor, and he drives off because they're looking for compensation. And this is a situation that you find all over the country. So you have a country filled with these model cities, model shopping centers, and logistics parts and things like that, which are really totally unutilized and changing the complexion of Chinese society. Let me just move on quickly to less of the disaster stuff. So why is it building to a crisis right now? I think that the simple reason is just because we've gotten to a point where so much credit is going to keep everything rolling over. Because of the concern of what will happen politically if this debt is recognized following sort of the daisy chain of relatedness and of obligation because there's so much, because of the importance of the shadow sector, which until mid last year was about 55% of funding, nobody really has a good grip on who owns all that debt. And so allowing debt instruments to go belly up can create this chain of consequences that any government would be terrified to identify or to be confronted with. And therefore you keep everything rolling over. Right now the amount of capital that's required to keep it rolling over has reached a dangerous level. We're putting about 1.2 trillion renminbi into the system every day just to keep the banks liquid. And that creates all sorts of opportunities for failure. As I think you know the central government has faced capital flight now for the first time in a long time. We had a net reduction of 91 billion US dollars in reserves last year. There was a capital flight of about $150 billion in the second half. And this is you would think with 3.8 trillion. But as I say it would be not of such great concern. I think there are a couple of issues there. One issue is that many of those reserves are not so liquid. They're out in things like debt to Venezuela. And so it's a great concern to them. And also it's accelerating as you see from the pressure on the exchange rate. So this is a key break point. And I think that the change is something that we need to consider as part of this whole complex of economic issues. I think that the political system fundamentally any political systems ultimate need is to provide its own network of critical supporters with resources. And when resources in society the Jiang Zemin era created network capital level and higher and higher expectations of how much network capital would be available to the elite. So it became like Silicon Valley you know well Chen Yi's grandson made a billion dollars I'm way better than he is why shouldn't I? So when you start growing at a lower rate and not having so many resources to provide to the network what you need to do is aggregate their capital to your network. And I think that's the simple way we should understand the anti-corruption event. So what's next? Is it going to be a sharp decline inter-bank defaults as we saw in 2013? And a quick devaluation I expect there will be a devaluation I don't know about the defaults I think there will be further corruption attacks on the banks and brokerages and particularly casinos and other channels Chen Hai district and Chen Zhen for exiting money. And I think we'll see a continued closing of the country to foreign influences. So this is basically the range of the debate now. Does it go out with a bang or with a whimper? Do we see continued long deflationary bust with no growth or negative growth until slowly slowly slowly you start to fill up that capacity and write it off or do we see a bust? So that's about it. Okay. Great. Thank you very much. That's good. Bob, I think we're going to give you China. Okay. Given that I'd like to say something optimistic. So I'll sort of try. And his work is always really interesting and provocative. When I was in China I was always really impressed by her and her colleagues ability to go out into the field and see things because China is so difficult to understand and if you get around at least you have a better shot at it, but it's such a diverse place. But okay, so here's some critiques of what Anne said. So to start off, Anne was talking about GDP to debt ratio between 200 and 300%. That's a hell of a range. 200% which is I think basically the generally accepted view of what the GDP to debt ratio is to get another 100% just to throw it on there. I mean it added 9 percentage points last year. So that's 10 more years before you get to 300%. I also think that Anne's presentation was heavily dependent on the sort of SOE view of the economy. That's a portion of the economy, an incredibly important portion, but we have Nick Laudy in the front row who has written extensively on sort of the diminishing importance of the SOE. A lot of the presentation also is a critique which everybody who's in China looks at China criticizes the government's stats. I mean I don't believe they're growing at 7.4% either, but it's so easy to cherry pick. Okay, so we don't believe 7.4%. But how come we do believe the cement stats or we believe the steel stats or whatever you know most all of the stats that we depend on are produced by the government. So how come we depend on some but we don't depend on others and how come the ones that we depend on are the ones that things look really bad. I think the chances that China is growing negative are astonishingly slow, small. I mean I think if China was really not growing at 7.4% but it negative I think you'd have huge unemployment that would be impossible to hide. The only time that we the unemployment evolved the stats the unemployment stats are the worst. I mean 4.1% unemployment every quarter even during the global recession. But during the global recession you saw millions of people going back from Shenzhen. You could go to, I mean I wasn't there, but people who were there tell me you can go to train stations and see people lining up. You don't see that. There are people going back, it's certainly true, there are people going back to their home provinces and that's I think probably mostly because there's a little more opportunity there. But if you're in Shenzhen or Guangzhou the problem is not that they have too many workers, it's the opposite still. So how does that square? So I think I do agree I mean the way I look at it is 7.4%, whatever the number is this is China as it is. I totally agree with Ann's way of looking at things of looking at corporations whose stats that you, who's reporting you believe to be more accurate because they're under SEC mandates or whatever and so this is China as it is. Things are clearly slowing. There's no reason to think that McDonald's or P&G have all of a sudden lost out in a fight with whatever the local the Chinese company is and you know their sales are flat. So I mean something clearly is slowing substantially. And I think also the usual answer for all of this, I think the government's usual answer for all of this is, you know we recognize there's problems, we're going to reform we're going to change the sort of basis of the way the society the way the economy operates I think there's precious little evidence that that has occurred so far. I think slower growth, slower official growth is not evidence of reform it's just evidence of things slowing and what was I thinking of? Oh and that the I think one thing that Anne pointed to a little bit I think has actually a bigger negative effect I think the anti-corruption drive is vastly underrated in terms of how much it's slowing the economy I think what's happening I don't know how to show it in the stats is some story I never got to but the idea I mean the positive way of looking at the anti-corruption drive is that you know she's taking on very powerful interests and many of them are the SOEs and so when they finally turn to SOE reform who in the world is ever going to oppose them? Possible, it'll happen. But the negative which I think is the case is that he's scared people to death and that bureaucrats are just afraid to approve projects because they either might be on the take or could be accused of being on the take and that it's added to a sort of general ennui among sort of the government and business class and it's hard to see how they ended and I assume that it surprised them too being the depth of the corruption has surprised the officials that got into it but I don't think they thought it would be this deep and take that much time so let me just sort of end by the way I agree also that there is certainly a debt squeeze of some proportion here and that the numbers don't work out they just don't work out. The way I don't see why this year or next year it should be any different than three years ago because they have vast resources I don't see why they can keep the system operating pretty much the way it's been operating in terms of keeping companies from going bankrupt and printing money or however they need to get the money to keep the system operating but I think what we're seeing is sort of the way I think about it is sort of sand in the gears the things are slowing and they're slowing more and they're slowing faster with the new technologies or the specs so I'll leave it at that. Great. Thank you. Got another keyboard? Yeah, sure. Super. Thank you. Terrific. I've really enjoyed the discussion so far and I was kind of an instigator to try and put this because there's just been this long-term debate about China's economic and political trajectory. And the debate doesn't only occur when China's growing fast. It also occurs when it's growing slow. And there's the long-term discussion, you know, is this sustainable? And instead of having greater consensus, we get a hardening positions over the years, even though in some ways, over the very short term, about, you know, what's going to happen this year, the range of predictions has been relatively narrow. I've just put up some of the estimates that these various organizations have made, either in December or January. And they're not hugely far apart. But of course, Anne is one of the people I respect most, who follows China. I've known her for 20-plus years now. And when she was at the U.S.-China Business Council, she was actually the editor of the first article I ever published, which was on the Stone Group, which has declined precipitously and will never recover. It's a great article. Yeah, so it's been all downhill since, for me and Stone, I guess. But, you know, I've always, and in talking to Anne over the years, you know, she's one of the most keen observers. She is the one who goes out to the provinces, to the towns, who stays in the horrible hotels, who gets chased by mobs. And so you have to take that seriously, extremely seriously. And she's been very successful in her career. And so there's a good record there. And so, but a lot of times I find when I talk to folks who have a different take, it seems like there's some type of people talking past each other every so often. And so, to some extent, it's like Chinese crosstalk, where you never get a debate resolved. But I wanted it to be more like pro-wrestling. I wanted to, I was thinking, I would love to have an event which is sort of an Optimus pessimus China smackdown. And, you know, Anne's probably not a great wrestler. And Bob, I wouldn't want to force him to wrestle either. But I do want to wrestle over the issues. And, you know, I don't have a specific point of view on this. But how are we in the midst of a hard landing? Is the economy going to crash and burn? But what I thought I would do is say a little bit about what I think the sources of the disagreement are. And to some extent, it's posing a question to both Anne and Bob. But it's also highlighting that there is this big debate that still exists. And here I've listed what I think are the key differences of opinion or sources of the debate. And the first, you know, I don't want to go into scholarly exercise based on my experience at Indiana University for 14-plus years. You all don't need that. But there is differences of opinion about the role of the state and development. And those who tend to be more pessimistic about China tend to think that the state's role needs to be quite limited and narrow and that government intervention usually leads to misappropriation of resources. And they tend to look down on IP theft, pollution, a closed media, a lack of democracy. And, you know, there's another school of thought that looks at development that says states in the development process need to intervene. And they're not so concerned about corruption and IP theft and pollution that these are all things which are part of actually fostering development in many countries and that once you develop these are things which aren't that you don't want to continue. The other area where there's a big intellectual divide is the type of data. And this is a more important point and we heard about this from the presentation. You know, those who take a more negative or dour look at the economy and its future possibilities are very skeptical of any of most macro data and they take a micro view look of China. They travel and look for what tangible things they can put their hands around and particularly focus on those physical measures. These are the things which Tom Rowski in the late 90s pointed out in 1998 that he thought China was in a recession because he looked at these things, made the Chinese government very unhappy with him. But these are the things which are now part of the Li Keqiang index as well. So I guess they apologized without apologizing or appropriated. There's another IP theft that, you know, I don't know if Tom is going to file a suit on that, but he might. On the other hand, there are those who prefer a macro view because looking at these specific measures or going to specific towns seems too anecdotal. And so turning off the highway randomly may provide you some insight, but those who take a macro view would want them more systematic. You use ten highways to turn off and maybe you've done that. But the folks that look at the macro data view think that you need some systematic way to look at data and you're trying to look at trends over time and that the incentive for the government, if it is to be biased, ought to be consistently biased rather than randomly biased. And therefore, these trends are more important than the absolute numbers. So these intellectual differences translate into substantive disagreements. In terms of the size of the economy, you know, Anne has talked about how overstated it is due to the inventory buildup and deals which are based on patronage networks and the overstatement of consumption. On the other side, the folks who are more optimistic or at least cautiously optimistic have been pointing to the efforts by the National Bureau of Statistics who have gone back and redone the numbers and think the economy is actually larger than they originally estimated and put forth a whole new range of data. I know Dan Rosen at the Rhodium Group has also done his own looking and is coming out with figures that aren't as large a change from the NBS numbers. I think actually he's going to be presenting here some of those findings in a few weeks. In terms of the questions about debt, you know, I guess the most negative view is that essentially what we have is a pyramid scheme economy that debt is just being rolled over and pushed out the door or in growing just to keep the whole system on life support. And Bob talked about the other perspective. It does depend on how high you say it is and that one person's pyramid scheme is another person's financial deepening. Essentially, that you develop new types of products and China doesn't have a very deep financial system now. So developing more products, I guess it all turns on, do you think that these debts will eventually go bad or they will have some productive use in the future and China's economic model has been, build it and they will come? And then the question is, will they build it and eventually come? And they may eventually come but it will be too late for them to come and to use these things. The debt numbers, I've got a couple things here on debt that come from, I think they're partly the study that Ann cites. They round off, this is from McKinsey Global Institute. Their report that just came out puts debt to GDP at 282%. She just rounded up 2.8 to 300 or so. And you can see that, yes, China's debt is very high but there are other countries that are not in crisis who also have quite high debt. I'll go to another table that they have in the report. China ranks 22nd in this report in terms of total debt to GDP ratio, a slightly different type of calculation that they made. But 300% could be manageable if the United States and others can continue to grow. I think the calculation that you would need 18 to 20% annual growth to deal with the debt must assume that the economy actually isn't growing because as long as the economy grows that denominator is going to expand so that absolute debt number, as long as the debt doesn't grow as fast as the economy should shrink as a proportion of the economy and therefore make it serviceable. And then if you have financial deepening, you can spread it out, you can roll over the loans or turn them into bonds, recapitalize banks. There's a lot of ways, there's still a lot of places to put these funds. In 1990, in the late 1990s, they were worried about the banks and they recapitalized the banks, created the asset management companies and that dealt with that. So I'm not trying to say that this isn't my view I don't think that these folks who have this position are necessarily Pollyannish. Let me just go back here. I think another issue that hasn't been discussed as much is to what extent is the Bob-Bob hinted at it a little bit but to what extent is the slowdown now simply a structural slowdown where we're heading in one direction because of these real structural problems that are holding the economy back and pushing it in one direction and to what extent is this cyclical? And I think to some extent those who take a more sanguine view would say that there's some cyclical elements to this maybe Chinese style austerity the anti-corruption measures in some ways are a austerity measure that if you relax them or have people adapt their behavior to them you will then see a revival of growth and they will then be able to make the investments and choices with less danger. In addition you've got global slowdown global commodity prices dropping which for some aren't a product of China's slowdown but just a glut of the producers in iron ore you've got the iron ore providers trying to run the Chinese iron ore providers out of business so they're just producing to try and bring the price down to put the Chinese out of business the Chinese haven't been out of business so that's part of the slowdown we have slow growth now in terms of growth potential that wasn't I think the pessimists don't see a lot of chance for future growth because of the debt overhang the lack of innovation amongst Chinese companies those who have a slightly more who have a more positive view see lots of places where China can grow and the idea that China has already picked all the low-hanging fruit on growth for growth these people would say there's still a lot of things you still have urbanization the movement of people off farms into cities irrespective of whether it's to fulfill some government priorities or but there's still a lot of folks in agriculture who could work and your productivity labor productivity immediately goes up when you do that as well as when you move into services who co-reform which the Chinese are in the midst of implementing ought to lead to also greater improvement in allocation of labor resources China's retirement age is now still relatively low 60 for men 55 or 50 for women depending on where they work you can just simply up the retirement ages and you got more people in the labor pool reforms in to the energy prices competition allowing more private companies into sectors dominated by SOEs these are all relatively straightforward policies or trends that could be adopted which could still generate growth for a pretty significant amount of time and then the last issue has to do with the seriousness of the reform efforts and it seems to me that there's still this debate and it's partly because China's politics is so opaque and hard to read that is Xi Jinping and Li Keqiang are they doing this just to protect their patronage network and keep themselves in power or do they have serious policy goals and that the lack of the limits of implementation so far are a result of those vested interests that they haven't been able to overcome yet and so they're trying to do so many things at one time that really what we need to look at as a 10 year reform program instead of measuring it after just the first three years so I think those are the areas where there's debate and differences that divide these camps and it's not really again it's not clear to determine who's right pro wrestlers aren't aeronautical engineers and when you build a plane and you put it up in the sky if it doesn't work it's gonna crash economists or people that write about the economy we don't have that problem we don't usually say we're go long on China, go short on China usually our analysis and particularly with the people that we deal directly with are about a specific sector specific part of the country a very narrow range of time or the currency and there you can apply a whole variety of different types of analyses and come up with very smart and wise investment choices that say there's gonna be problems here that's how you should invest or there's gonna be growth in this area and people offering those different advice at the same time are both right, the evidence shows both their planes all fly even though they're flying according to different approaches and engineering so I think it's a hard debate I think my job has been to say that we don't know at least there's not consensus and maybe the question is and I guess if I was going to leave with one question it would be what would it take what type of evidence would you need to see and so that your picture of the economy and the trajectory would change and then what would be the most negative type of things would you have to see a financial crisis Bob before you would admit that there isn't potential in the economy so I think trying to the best social science or best analysis always tries to identify under what situation would I be proven wrong and so why don't I stop there and we can have more discussion thanks guy I'd like to give Ann a chance to respond to both sets of comments maybe answer that question maybe Bob you can answer that one let me give a quick response before we start talking with everybody one thing I'm really a stranger or a guest in the world of finance but it's that's my clientele so that's something that I study and try to get better at all the time and there is one thing that I really like about finance which is your right or your wrong it's not a moral issue whether Tencent is a growing company its share price is going to rise and Baidu's is going to fall it's not an ethical issue whether you like this model or that you're right or you're wrong and there are issues on which I've been right and issues on which I've been wrong in that world and I think that we've progressed in China beyond the point where analysis of the economy is a matter of whether you have an intellectual framework that says I'm for the government or against it or I'm a china lover or china hater I don't feel that I fit into a camp there at all of course I have my own prejudices but you know I kind of push them this way or that way and I think that the characterization of our economic in my company the processes that we go through is perhaps a little bit a little bit too abstract so let me stop at that let me pause at that issue for a moment for example as to Bob's point you know how do you decide which statistics to accept and which not to make than pessimistic ones you don't take not at all I take the statistics that are most important to driving the economy so steel is incredibly important cement is very important property is very important certain small things like the production of routers is not so important so I don't pay so much attention to that on steel we have our own survey our own proprietary survey that covers that of the production in the country we conduct it every month we pay the respondents and we aggregate the results we triangulate that against the CESA data we purchase my steel data which provides you with a mill by mill output number and we interview mills of course all the time we check inventory at port we look at important export data we have a very very extensive dataset on steel and when I say that domestic demand fell by 4.8% that's not because I'm just quoting a negative statistic it happens that this last year CESA came around finally and started to report a negative number they came out at zero for the year because exports tripled but domestically they reported it down number now that wasn't true through most of the year but the way that they were doing it by the way was to change the base so they give a month by month total of steel production and then they give a year to date total and the month by month total and the year to date totals didn't add so I can explain how that happens but that was basically how they did it NBS steel is higher for reasons that I could explain if you really want to be bored with the topic but these are not casual judgments now I don't claim to be able to recreate China's GDP set but it's not like I'm just cherry picking statistics perhaps I overstressed that point as for the 300 versus 200% I revised the presentation to give you the more conservative number that is simply calculated from the NBS data or actually the PBOC data I have my own number which is around 300% and that's based on a calculation of debt held by different institutions but that's a more difficult thing to use if you want to clear out the double counting but I'm not simply adding 100% because I want to so and it's informed by constantly talking to banks so the distress that I'm discussing reflects the distress that I hear from the economy all the time so when I was talking around in 2010 and 2009 I would be sort of irritated and frustrated maybe by hearing all the banks talk about what a fantastic investment this new zone was when clearly there was no real demand for it but that was the case of the situation that was the situation and I reported it and it was a positive point of view in 2011 things changed very dramatically and I don't think you can find a bank a developer an e-commerce vendor a private company or a public company in China that is positive about its future except in banking, not in banking but in shadow banking which is an important asterisk and it doesn't reflect something very positive about the long-term economy so and as for the final point about private versus public I would like to have that discussion with you but the Chinese reforms of the 1990s discovered one of the very important events or you know emanations from those events was a way to to make equity ownership unimportant in the economy in order to create institutions that would be able to operate in a more independent way to create more value and yet create beneficial cash flows for the state I would submit to you that no organization gets above ten million dollars in gross revenues in China without having very important and ultimately very limiting backward links into the state and I don't really care who technically owns what I could tell you in some detail who's going to get cash out of the maturation of shares in Alibaba in March and it doesn't have much to do with who actually owns it so perhaps I'm being too vehement I was like what you don't understand I'm not just driving off roads so anyway maybe we should go to the audience Bob did you want to I think the question to me was what would it take for me to think things are really really bad is that basically it unemployment basically people out of work people going home you know wages going down that sort of thing I mean I think ultimately I think even in this country we tend to focus too much on the numbers and not on the sort of standard of living which is after all the point of economic point of the economy and so I guess that's what I'd be looking for I think by the way driving off the road is a great idea I mean the when I was trying to do a story before the numbers made it clear that the housing was heading downward so all the numbers were basically positive and then you say to yourself well you know the numbers are positive whether you believe the numbers and some of those numbers were from private sources and then you say to yourself well if I'm a Chinese reporter and I go to Detroit and I'm you know I say well I'm writing about America it's part of America but I mean you wouldn't get a representative view and China is so much more complicated and so much more diverse and but for me I mean this is Ann and I are in the same ballpark basically it was to me it was that every single city I went to for whatever reason every single one was surrounded by empty apartment buildings it was astonishing and then at some point you say to yourself you know the anecdotal is more important than the statistical and so it's a problem in reporting in China great thanks all right well you've all been very patient so I think we'll open it up to the audience for standard CSIS procedure please identify yourself and you can find your question to a question rather than a soliloquy and wait for the microphone to arrive right over here thanks I'm Rickford with the foreign policy discussion group I'd like to have the panelists explore some of more of the political ramifications of what clearly is a slowdown there's been a suggestion that unemployment is the key thing to watch for many many years the conventional wisdom has been that the political legitimacy of the communist leadership depends on two things nationalism and rapid economic growth clearly we're not getting rapid economic growth anymore when does this change begin to affect the government's ability to keep control politically I mean it's not my specialty it's much more yours but my view is that the idea that social instability is an issue in Chinese politics is much overstated I think that if ultimately that there's a political event in China and even the collapse of the communist party it comes from the bureaucracy it comes from within from the people who have the ability to organize and the incentive to do so and the ability to create a structure to replace what they displace I think that the idea of the legitimacy resting on economic I think that's a little too filmy for people to to really I do think that what's going on now does not have clearly doesn't have anything to do it has something to do it has very little to do with corruption if the focus were on eradicating corruption clearly the response would be legal reform and structural reform that's never been on the table it's never been of interest I think the fact the attacks on Haitong securities Beijing bank founder securities now possibly unicom and so on and so forth these indicate that that it's become so important to capture resources that's my view of the core core value this is capturing resources I know that's controversial but if that's become so important that the political system is willing to jettison a lot of international faith that provides portfolio capital and that's a warning sign and I do think that things are getting much worse I would simply add that I think some years ago there was an iron rule that if growth fell below 8% there would be massive chaos didn't happen and now below 7% most likely and hasn't happened I mean one thing that is interesting is the government's own emphasis on employment and when you think about the demographic and structural changes that are happening you would think they would be less concerned about this over time in fact if they were so worried about it why aren't they building more shoe factories things like that to employ a lot of people so my sense is this is part and parcel of the broader debate Xi Jinping has announced that there is a new normal in the economy I think consistent with some of the things Ann's been saying my perception is that now the real fight among those that matter in the system is how do we define what the new normal is because that will help separate the winners and losers out of what comes next next right here in the front thank you my name is Haibing now I'm visiting scholars in the CSIS I have two questions the first is about risk I do agree with the panelist analysis on the China's economy performance no matter it's negative positive this is the reality of the China's economy so from your observations what looks likely the biggest risk for the China's economy in the 2015 my second question is about the new measures of the reform and opening as we know that in the 2015 China is planning for our 35 years plan so it is a very critical year now the presidency mentioned put forward the idea of the new circular strategy and also Shanghai pilot free trade reform so from your observations if like you give suggestions to the China's government what do you think China should do must do in the following five years in the opening and reforming measures thank you okay alright I think as much as there is a difference of opinion from the different observers I think most would agree that the debt problem is the most risky problem and that if there are enough defaults or folks want their money out of multiple banks all at the same time or there's problems using the foreign exchange reserves to deal with problems or print money and since crises are as much psychological as material there's not 100% guarantee that the government could keep it in the box and that there is a possibility of a crisis I think given the government's toolbox toolkit the relatively very small percentage of debt that is foreign the low fiscal deficit that the government has its ability simply to shut the banks doors that I think that's a very low probability but it's still possible and it's the one that probably keeps folks in the PBOC and elsewhere in Zhongnan High most concerned I have a couple so the way I sort of think about this is things that are beyond the ability of the government to control so one is housing problems have they gotten to the point where people think housing is a really terrible investment and that they aren't going to buy housing I mean you saw that it's what happened here and it sort of ricocheted through the economy it's a different economy it's a different structure but once people's attitudes change it's really hard to get them to change back and it can take quite some time another thing is at some point presumably they're going to let something significant go broke they will try that as a test case to see to try to warn people that not everything's guaranteed and that can go really quite badly it's kind of the equivalent of the fed raising interest rates when they should be lowering it and sort of creating a recession and then third this is kind of overreaction so the capital outflows do the leaders basically freak out let's say they do have 3.8 trillion and they lose 200 billion or whatever it is not that much but they really get nervous because the reserves are viewed as a national it's silly but it's sort of a national treasure as opposed to something you use so if that were to happen will they pull back enormously on any sort of efforts to open the economy or further open the economy or reform look I'm a structure person not a person person I believe that what the Chinese government does or doesn't do is not very relevant and I think the idea that spending money to drive exports to Central Asia and by the way getting all these strategic benefits out of it I think that's it just is irrelevant essentially it's irrelevant to the economy you can think of lots of relevance for particular companies and for particular strategic goals but fundamentally we have many years of training in thinking that there's a concurrence between what the Chinese government says and what happens and this is largely because of the control of the information which has been very very very successful I think we need to recognize that the Chinese government it's actually quite an antiquated ruling structure or political system their ability to achieve goals is very limited and one of the the principal goal that the Chinese government is able to achieve economically is the best that's it there are no other goals if you can think through balancing or environment whatever other goals have been articulated the internationalization of the renminbi the other goals that have been articulated over the decades that's not accomplished with capital investment has ever been achieved because those are the measures that they have to have and the problem with the economy right now is that capital investment is not the answer so I believe that the central government there are political things that can go very wrong there are ways to manage the monetary system that can be mistakes but I think the idea that they pull this lever to try to slow things down and pull that lever to speed things up is simply the wrong option I think actually their hands are more and more tied and there's not very much that they can do as for the key risk to the economy it's bank failure right here Bob Vastine Georgetown Center for Business and Public Policy Dr. Kennedy you mentioned services and I'm aware having spent some time in the services sector that Chinese leadership has over this past several years very grandly announced that they were going to shift the proportion of the economy from about 40% services to something a good deal higher the Chinese have underperformed the rest of the world on creating services jobs and building their services sector and Dr. Yang you just said governments can't do anything about it there has been any progress over the last year or two since major announcements were made on increasing the economic economic activity in the services sector jobs and thus bringing more stability I guess one of the first points I was when I brought up services and this gets to a point that Ann raised and the type of data is a lot of the physical measures are the ones that she works very hard to measure and that others look at apply to the industrial economy and over a longer period of time services has become a growing share of the economy and so we'll need other types of measures to see whether there's slowdowns in that that are equal to the industry side and services have continued to grow private sector has continued to grow and I would expect to see continued gradual improvement I would agree with Ann that you can't in one policy swap change the radical course but there have been they've talked about liberalizing education to allow more private schools care to have more private hospitals and other types of liberalization and financial services and those are policy measures which they have taken small steps on which they could take much larger steps on so I would my own expectation is to continue to see that the services are a proportion of the overall economy continue to grow and as long as there isn't the financial crisis that's generated by bank failure to not see to continue to see that as progress in the economy whether you know it's comparing the structure of the Chinese economy to the structure of the American economy or most European economies really doesn't make sense given that their per capita GDP is 6,000 per year and ours is 40 to 50,000 per year and of course we're going to have much greater services as a proportion of our economy but the trend that's been is relatively clear so I don't see anything which should suggest that we're going to move back towards greater industry or agriculture as a part of the economy Dan? No, you're good? Okay, Matthew Goodman Matthew Goodman here at CSS, I can trump Scott because I've actually known Anne Stevenson for 40 years since we were in high school and this is the first time we've seen each other in 40 years so good to see you Anne That's right so it seems to me a lot of people have gone broke predicting that China was going to collapse over the last 35 years so it seems to me the burden of proof is on people who say to show who think it's declining or there's a problem to show what's changed and what's different and one thing is that by their own assertion they have to move just suggested again and they have to move from an investment led model of growth to one based more on consumption and other forms of domestic demand and that seems to me means that they have to have better resource allocation and a financial system that is more geared towards that model which means they have to have financial liberalization including interest rate deregulation and all the other things that come along with deeper liquid capital markets more open capital accounts and all of that seems to me is likely to raise the interest rate structure in the economy and that seems to me poses a huge risk so I wondered if people could comment on that and how they manage that transition. The other thing is more of a political economy question which is that the system to date and the old model was all based on one objective growth and everybody was lined up behind that objective and all the incentives were directed towards that objective and now you have multiple objectives because people want some growth and rising incomes but they also want clean air they want clean government, they want their trash taken out they want all kinds of things that people want in a more pluralized system. So the question is how do you provide the people, the actors the local officials the local state owned enterprise officials to pursue these multiple objectives in a way that keeps growth moving forward but addresses all these other concerns. Fantastic questions I'm going to take the first hit there because there's a lot to say about them but I would say as to the first question you're absolutely right. Everybody talked about the exciting new bank liberalization that would ensue back when Xi Jinping's government took over in early 2012 and late 2012 it was clear as many of us so-called pessimists were saying it was clear that there was only one direction for interest rates which is down and that has occurred and until you deal with the elephant in the room which is the debt you can't have bank liberalization because the banks are I mean there's a fiction that the banks are actually solvent because you have this massive massive load of stuff that has to be constantly rolled over so that's the problem and there's a lot of debate over what could happen if they went through a 2002 event in a 98 to 2002 event again whether that's possible I would be pessimistic about that but at any rate that has to happen before the banks can liberalize as to what was the second part I forgot how do you realign incentives away from growth I mean that's there are a lot of answers to that I think the simplest is the political because as you all are aware here the key structural event post 1989 was a restructuring of the relationship among the five levels of government very specifically and deliberately undertaken in order to strengthen the central government's ability to hold the country together knowing that there was a significant cost and there was a significant cost to the economy and to the culture and to the future of China but that was a cost that was willingly undertaken because of the concern that China would fragment now we're in a situation where local governments are responsible for the great majority of costs and for social services and have no ability to raise their own budgets and taxes so that's why we have the land issue it's one of the three key reasons why we had the housing expansion in 2006 and you can't get away from that unless you give local unless you collapse the five levels of government to maybe three and you give the local governments the ability to raise capital that weakens the center and that's clearly not on the table Humber Scott To me on the second issue so the multiple objectives I think there are sort of two ways around it one which they're trying telling officials that they'll be judged on multiple objectives and it's not just growth that will get you a promotion doesn't seem to be doing very much at the moment but that's what they're trying to do to give them a scale of things to be judged on but GDP whether you believe the numbers are not GDP at least is a number if you're in Hubei surrounding Beijing how do you legitimately say to them your pollution readings have to go down it's not exactly under your control very much the other one is step back privatize these are the state owned companies they have two masters they have a political master and then they have a corporate master well remove the political master as much as you possibly can they do talk about that but again that's quite a leap I agree focusing on growth is obviously a much more simpler goal when you just have that one growth one target you know I'm not a big believer in modernization theory per se but I do think in the time that I've been going to China and interacting with Chinese since the 80s that I have seen value changes in Chinese and what they think is important overall making incomes and originally wanting to have a refrigerator and a bicycle an apartment and wanting to have more material wealth but Chinese are also interested in a lot of other things a cleaner environment quality education for their families and I think that these things gradually work their way up and through the system parts of the discussions in the media you know China doesn't have a powerful civil society but does have a civil society and nonprofit groups many of which are genuine grassroots organizations that promote these type of values and that you see that in the surveys that are done by groups in China like horizon and others and although this isn't a government which is directly accountable through votes to people they do pay attention to these polls and the Communist Party itself does a lot of surveys and I was really struck by the greater attention over the last couple years to air pollution and that was not something that the Chinese central government wanted there to be a focus on that was a product of popular views individually and through groups and partly the US Embassy using its control of its sovereign territory on the Asian continent to have this measure which everyone could read but that has now become a high priority for the Chinese government and you know I don't like to see China as a snapshot in time I like to see it as a moving picture and we are in the midst of this movie and so obviously the air quality index looks horrible now Pittsburgh's air quality used to look horrible and if you go to Pittsburgh now I wouldn't because it's too cold but if I did the air is much better and you know so I think as we watch this movie unfold it is more complicated to have more diverse targets to some extent and that will be hard for this political system to implement but you also have other sources of ideas and activity which I think is gradually turning this ship okay well we're just about at time so I appreciate everyone joining me in thinking the panel and thank you all for coming I appreciate it