 Well, good morning all my name is Kevin Neeler. I'm delighted to be here and introduce this terrific panel. You've already met The founder of our get together here Matt Goodman who holds the William East Simon chair in political economy, but many of you know that Matt was White House coordinator for Asia Pacific Economic Cooperation and Coordinator on the East Asia Summit on my far left How do you feel about that far? David dollar is currently senior director at the Brookings institution But was formerly at the Treasury Department as their representative in Beijing. Were you the first? No, no, Dave Levin Dave Levin. So that's right. You were the But the best so far but the best and Was also World Bank representative dates made that magic Washington transition from being a policymaker to being a resource To everybody for which we're all most grateful on my far right and and I know how you feel about that Chris Johnson is a senior advisor here and one of the co-authors of the study and in Freeman chair of China Studies at CSIS Chris has spent nearly two decades in the intelligence and foreign policy community on behalf of the US government And on my immediate left Olin Wellington former assistant secretary of the Treasury for international affairs special envoy to China and leader of our financial Negotiations with him and founder and head of the Weddington of Weddington International right now where you work on M&A work and An outbound investment of all kinds Yeah, maybe it's the cold rain, but on the way over I Was reminded and kind of chastened by the idea that it's been exactly 40 years ago that I was Probably making in the same weather about the same time a year the the transit of the University of Michigan Diag to go to Mike oxenberg's class on Political Chinese political thought Mike didn't waste all his time with ungrateful undergraduates, but as many of you know he went on to be Carter's senior director for Asia study Asia and to Spearhead the China normalization effort Mike among the many things that he taught us He emphasized the need in looking at China for intellectual rigor and honesty And also for unnecessary modesty in appreciating what we don't and can't know In trying to understand China's instincts and motives. I think he would look at the study As a durable contribution to the literature in this area and it would meet Mike's high standards and for that I commend you all I think this is an important contribution to the literature Matt. Let me start with you I In your listening to your your overview Most all of us appreciate that China is not a place where the internal incentive structure permits people to walk around and And have free and unfettered views of who's in charge here anyway, and how does this really work? Those are dangerous conversations in Washington, and they they certainly are not without risk In in the Chinese political environment. Can you say more about how you guys went about? this analysis and and some of the both the problems and and the surprises that occurred in the course of what Over a year's worth of discussion. Sure. Well, thanks Kevin. First of all Let me say that Mike oxenberg was also an inspiration to us He and Ken Lieberthal did a lot of the original work that we first read to get a foundation for this and a terrific guy And tragically died way too young So I was one of the surprises in this project was that it was actually pretty easy to talk to people I found very little resistance to talking about this stuff Of course, you know we were in this first year trying to map the whole elephant as it were and I think one thing one explanation is that There are a lot of blind people who know the tail or the trunk or the tusk in China But they kind of had an interest themselves in understanding sort of how the big the big picture works And so I think that was part of the explanation partly You know these are not as controversial issues of some other things that one could ask about and we certainly weren't asking The sort of deep difficult questions that others might So I think actually and I think that the Chinese authorities Want us all of us in this room to really understand how China works better Because they want, you know, they want a better dialogue better exchange with us And so I think I think it was it was no more difficult than I think it would have been here in Washington to To get access and to get information and and insight Indeed indeed. No, well the end product speak for itself, and I think it's useful Certainly does and probably to them as well David look you've been involved with many of the people that that Matt Described as being key to this process, but both in your treasury job and the World Bank But I thought many times and when we were sitting together in Beijing that that You know your bank colleagues even those with successes like equatorial Guinea Look at China and say this isn't the development model that any of us understand and indeed Perhaps a decade ago. We would have said things should go in a very different way to produce this this heroic result this this kind of growth What factor do you think best explains why China doesn't fit the conventional development model that we all Have thought of when we look at successful transitions, right? So I think Paradoxically, you know while we think of China as an authoritarian country with the powerful central government the thing that always struck me working There was the power of local government, you know I had a chance to work with a lot of different local governments around China That's really the core World Bank work is with local governments and and my strategy was to find local governments They were interested in reform usually they conceived it as they were interested in a particular problem You know, you know air some governments are worried about air pollution Some were worried about wastewater treatment, you know So our strategy was to find governments that had a problem and we're interested in thinking about You know innovative ways of solving it and our model in our mind always was that you know This is a country where if something is piloted at the local level and as successful it tends to spread pretty quickly So I was both impressed by the the independence and the competition among local governments But then having said that also they had a very single-minded focus on economic growth We were able sometimes to interest them in environmental issues But it was always because the particular environmental problem had risen to a level where it was threatening economic growth So it was easier to deal with wastewater for example than with air pollution so that the Incentives for local government were very very strong to pursue economic growth that and that's covered in in Matt's presentation This is coming down from the center how you evaluate local officials But then I also think we have to appreciate that the growth model in China created a lot of corruption opportunities for local officials So their private incentives were aligned with official ones and I worry as we move ahead I worry about two things you know one how do you change the incentive for local government? So they're interested in a broader range of things, you know cleaning up air pollution food safety I think that's very tough nut to crack and then secondly this this model That's relied a lot on experimentation has served China very well during this growth phase But now they're moving into a set of issues, you know for example opening up the service sectors or financial reform It's very hard to do that as a geographic Pilot you know this the Shanghai free trade zone I think is inherently Contradictory because the kind of things they want to reform you can't just do it in one little location So I think some of the some of the strength that's worked very well for them Is going to be a problem going forward so you see us testing the limits in this next This next phase of development of local initiative And that kind of growth. I appreciate your comment about humility So I I'm going to observe this over the next period. I'm skeptical They're going to be able to change the incentive for local government officials, but but I have an open mind Yeah, indeed. Can I just jump in there real quick because I think this is an important what? David's just talked about it so important Xi Jinping's philosophy about how to pursue this reform program And I think if you look at in particular some recent speeches. He's been making There's a heavy emphasis on what some Chinese media now are referring to as the so-called fifth modernization as opposed to the four modernizations and this is this idea of improving and Sort of restructuring China's government structure But also its capacity and I think this is designed to create a lot of the infrastructure That is to manage these problems that David was just highlighting. It was interesting She has talked about how when Doug Shaoping in 1992 launched the Reboot of the reform program He remembers Deng saying that it would take China approximately 30 years to achieve this, you know He didn't call the fifth modernization but to receive this process. So Xi Jinping I think again psychologically feels that that's to occur during his term and he feels he's the one who's got to grab that Bull by the horns and do it Chris say more about what you think if you're sitting in Zhongnan high pictured up there What's the biggest difference most immediately the biggest difference between the previous regime of the last the government of the last 10 years and Xi Jinping's agenda now. I mean we've seen the third plenum documents. We've seen The March party documents, but oh and I were talking beforehand about how little Compared to the last three decades for a little specificity is there. I mean, what's what's your compare and contrast with Sure, sure. I mean I would argue that the biggest difference frankly is activism You know where it's active. These guys are much more active than their predecessors pursuing a much more bold process of reform and But by choice or necessity both, but I think that's that's the rub because on the one hand It's encouraging that Xi Jinping shows that boldness to do the things that he knows need to be done Even though there are serious Obstacles invested interest problems and all this to overcome on the other hand it also shows I think that on many of these reform proposals He has leaned very far forward so far in fact that I think he's out in front of the general consensus among Key constituencies in the regime and so if you look at it that way He's coming to a fork in the road He has two choices. He's going to either slow down the pace of what he's trying to do to allow a new center to form Or he's going to grab the resistors by the scruff of the neck and drag them along with him And so far from what we're seeing I think it's the latter case that he's doing he's using the tools of anti-corruption The mass line even ideological retrenchment to signal to these resistors get on board or it's not going to be pleasant for you All and this is sort of beyond our writ today, but I can't resist having you here having spent so much time in negotiations with Chinese colleagues and Continue to do so in the private sector, but as you look at what these guys have described What what particular challenge or opportunity do you see for US policy against this backdrop of Dynamism even of And this is not new to you, you know changes in government structure Heaven forbid we should have significant changes in the way our Our government is organizing. We all do this. We convulse every couple of years with with different models and move the boxes around But in listening to what to what Chris just said I'm trying to think of what consequences you feel this has for the US and for policy going forward I think it does have some significant process Consequences as well as substantive Just let me say I'm surprised you didn't put me center-right I'm happy to be here on your left and you're always there for me I'd like to associate with the oxenberg former student fan club as well having been one of his Students who he wasted a lot of time on I don't think he regarded it as a waste I think I think from a US perspective as we view China's A leader's current Articulation of policy they have said that the current economic model is not sustainable there have even been some including the deputy to the Leading group on finance and economics who have gone so far as to say it's a dead end Maybe not today, but at some point and that that new model of economic development The leadership is saying will necessitate slower growth a more balanced and sustainable a growth trajectory Well from a US perspective When we see China having generated over the last number of years About 30% of global growth Maybe we should also ask the question to what extent is a Engineered at least for short medium-term purposes slow down in growth In our interest well, we may not have much control over that But I would say that from a US perspective a model of growth that does have a slower more sustainable Trajectory is in US interest And I say that for several reasons one is I do agree with the with the fundamental assessment that The current strategy has has played itself out that has implications for social and political stability and stability in that domestic context is certainly in our interest I think also They are projecting the vision includes a more integrated China with the world economy, and I think certainly that is in America's long-term interest so I think bottom line is we we have a national interest in Affirming because it is our in our interest The leadership's assessment that they need to change that economic model now I Chris had referenced some new considerations with respect to a Xi Jinping and the current leadership. I think one very significant Change Structurally in the decision-making process has been the reemergence Not that it was ever dormant, but the party under Xi As he projects it will play a much larger role than it has in the past and in a more consolidated and disciplined form and As he envisions it at this point. He must at least initially in political terms take the party left So he is to some extent resorting to the tactics of previous era leftist kind of approaches Ideological orthodoxy And I think information management and some information management And I think he views it as a means of bypassing What has been a state apparatus? That has been gridlocked now in terms of policymaking for well over a decade so one one should I'll look to a stronger. I think at least in the near-term role for party apparatus I think to go back to your question that does have some implications For how we interact with China We do need our current mechanisms that we've got we needed for ongoing reasons But there are a new set of players. I think they are to some extent more difficult to access than government officials in the past and I think because of Xi's Institutional dominance now leave aside what the power base might actually be We have to elevate in our own government the point of contact the the senior point of interaction Because it has elevated on the Chinese side for institutional purposes. I Couldn't agree more with that Kevin, and I think it's it's it's quite important to Grasp the full implications of that I mean for example one of the things on the one hand It is good that you know she is doing what he thinks is necessary in terms of this accretion of power to be able to justify What they hope they need to achieve there is the risk that if they're then successful The message is that only that totalitarian highly centralized form of government will work in the country So that's very important. Let me say separately I think as the presentation highlighted the whole issue of TPP and probably more importantly is the first step the bilateral investment treaty I would argue that this is you know You mentioned humility earlier. It's important for us to understand. We're not going to fundamentally Effect the trajectory of this internal reform program But I would argue that the bilateral investment treaty may gave us our best shot to at least Angle the direction of that program because my sense is that there's a view inside the system of what the Endpoint of this process looks like which may be very different than what ourselves or other Western or even regional Countries would like to see and this process combined with TPP may give us our best opportunity To kind of arc the trajectory We may want to talk on your last sentence there more about this later, but their definition of reform Yeah, very different is very different than ours despite The the the single most probably significant statement in the third plenum document that the market shall play a decisive role In resource allocation that does not capture The real essence of either their current certainly or their envisioned economic model Well, you guys recall in some of the conversations we had in the lead up to the study someone I wish I could remember who so I could properly credit it said as we were talking about the relative growth level said You know would be historic if they didn't announce the growth level if they believe that growth was that which happened when good policies or any fact let me tease out at this point, but also go back to Something David said I know you're working at Brookings on China outbound investment, but I I can't resist Asking all of you about the role of foreign investment in this model. It's been so key To China's development, but it's it's clear to me just in our own client dealings that The old formula where you go in as a foreign investor and trade Market access For for technology and and for capital that that deal is as dead as Julius Caesar I'm not sure what's replaced it and as I look at the platinum documents again I don't know where to take my coaching, but David in particular I mean As you have these discussions with Chinese officials. Do you get a sense for how they value foreign participation at this turning point? I think the whole Attitude toward foreign participation has changed somewhat in the last few years and become more negative or cold toward foreign investment You know foreign investment played a very important role in building up China's export machine at one point more than half of all the exports were coming from foreign invested firms But exports are going to be playing a less important role going forward what you're seeing in the recent data is not just the cyclical phenomenon it's China's share of global trade is going to be peaking and So exports are not going to play the same kind of role What they need now they need a you know interrelated set of reforms that they reference in their various documents I think one of the important ones is opening up the service sectors in China You know the some of the manufacturing sectors are pretty open to foreign investment not all but some but the service sectors are Extremely closed they stand out among G20 countries is having the most closed regime in general And it's very specifically closed in areas like financial services telecom Logistics media so so this is going to be usually kind of controversial I mean, I you know my technical assessment is it would help them a lot to open up these sectors get competition get new technology But it's going to be usually Controversial and then I think what was implicit in your question You know China is also moving into a stage where we most of us agree they're over investing and they need to bring investment down Hopefully their consumption will be rising but it may not rise proportionally So they could very well become a larger supplier net supplier of capital to the rest of the world So their firms want to go out so as you mentioned the bilateral investment treaty There's a good potential to negotiate a deal Because Chinese firms are interested in coming into the US But then this would require them to really open up those service sectors in China This is going to be very controversial there and as we get into the negotiations I think many Chinese stakeholders will realize the US in fact is extremely open You know the US is now the number one destination for Chinese outward investment So the US actually doesn't have much to give up in a negotiation because we're already open So I think it'll be very interesting to see how this plays out. Well, you know, will China be willing to open up their sectors? Some way it's locked in a better investment relationship with the US But as I said the US is already pretty open So it's going to be hard to point to a lot of specific benefits they get Matt highlighted at the outset that Some of the tensions in these reforms been listening what you just said it occurs that you know in the need for job creation Where does most of the job creation in this economy occur? I see Mike Wessel sitting there You know you listen to Mike on MPR you understand David That a lot of the job creation is happening in the service sector you've written about this So too you've got six out of ten American jobs being created in small and mid-cap companies Those are the parts of the Chinese economy that have less access to capital which which is You know is it seems to me they've they've avoided that that that moment of tough choice For about as long as they can yeah, I think China China does not need US capital as it seeks to move up the value-added chain in Manufacturing its greatest need in my view is for collaborative research and development collaborative R&D and They are at the point now they mean they they understand the significance of Manufacturing industries Technologies that are innovative they can no longer simply copy they have to create and From that perspective as a long-term driver They know they've got to enter into collaborative research and development relationship with outside Industry and I think they are intent on doing that and I think in part because today They bring to the table in those collaborative research and development areas not only capital but genuine human capital and Scientific contribution This is no longer a one-way street. It's collaborative in nature. I agree and that I think that's absolutely right But one one consideration. I think is how those collaborative Enterprises are shaped right and and so I think kind of along the lines of what David has said We are seeing an emergence of what you might sort of call Indigenous innovation 2.0, you know coming out of the Chinese which is is when Chinese told me They're pursuing a Nike strategy. Don't talk about it. Just do it, you know And the tools that we see them employing anti-monopoly anti-pricing These sort of things all turn back on this wheel of the issue of the development of first domestic and then ultimately global champions And the role that foreign investment and foreign participation plays in that process is fundamentally different Can I just pick up on that because Definitely in the course of this although we were not specifically looking at these issues of foreign investment and foreign investors Positions and views we we heard constantly about the the challenges the increasing challenges that foreign investors are facing Whether it's this anti-monopoly act where they are pulling companies in and sort of in a way threatening them Or using these sorry for the general audience indigenous innovation, you know the idea of developing through whatever means Begging borrowing or stealing Technological capability to develop a China's own innovative capabilities And it's just becoming a lot more difficult between that and the overall two big Structural factors that growth has slowed and that caught labor has become a lot more expensive in China I think it's just a much less friendly place for foreign investors And so that that has been something that that I think is just a reality of what's going on there But I wanted to pick up on that and just on something that was said earlier about about the bit by Chris We spent a fair amount of time in Shanghai because this Foreign of free trade zone was was unfolding and and it was very interesting. I mean Shanghai is not a obviously it So fact though it's its own sort of place It's not exactly a reflection of the center local But we learned a lot about central local dynamics down there and you get a very different perspective on all these issues From from Shanghai where where I think they have their own ideas about what works and doesn't work and and and and more or less Listen to Beijing when they have to now the difference there is that many of the people who are in the Shanghai And Chris can speak much more to this but Xi Jinping himself You know used to be in Shanghai and that's it's a stepping stone to promotion in Beijing So there's a little bit of a constraint there on on the independence of action and thought But but you picked up that you know There's a very different approach to these things in the in a place like Shanghai and the other two things that we learned down there that I Thought were that sort of stood out for me are that That they definitely are on whatever level and whatever lasting significance I'm not sure but they definitely are picking up on these external Forces because if you look for example at the just the glossy brochure about the Shanghai free trade zone It uses terms like pre-establishment national treatment and negative list approach to regulation, which is I mean straight out of the American playbook and in the in the bit negotiations about our investment treaty and So they're clearly for whatever reason using those terms and they've adopted a negative list long as it is and therefore in other words a negative list meaning that you you You can do anything you want Except the things that are listed on a list, which is an open approach basically Their list is very long But it's hugely significant if they do move in that direction because it implies a whole different approach to To regulation where instead of going through a huge difficult pre-approval process You can essentially set up shop with a very low barrier to entry The problem is and we heard this a lot is that first of all It's not clear that they're going to really lower the barrier that much in practice It still may be hard to get in but if they do the question is post Establishment once there's a company up and running, you know, there are a huge number of Risks and things that are going to require structures of supervision and monitoring and disclosure and and things that don't really exist in Fully robust forms yet. I mean you guys correct me if I'm wrong But and if that stuff's missing then there's a real risk that they're going to get something wrong They're going to be mistakes. They're going to be abuses and Potentially ultimately a backlash against reform. So so that was one thing we picked up the other big thing I think was the gap between The political ambition which is clearly there. There's no question that they're politically committed to this stuff and the And and the technical capability, which is quite strong I mean, I think I think the Bureaucrats and the and the officials working on these issues know what needs to be done to get from here to there And so as Barry Norton another inspiring I alluded to San Diego Barry Norton has also been a very much a someone who we we've based a lot of our research on Explained the third plenum document as a vision statement and a to-do list and not as a roadmap or a blueprint and to me that was I think a very good way of Characterizing what I just said, which is that there is clearly the the political Vision and the ambition and I think there is a good long list of things that need to be done And they're good appropriate things, but the missing middle is there Which is you know, how do you kind of put together a coordinated sequence program and have Somebody Driving that and making sure that all those things are moving in the right order and in theory I guess this new reform leading group is going to do that But that's like ten people who are going to try to manage this across the country You know, I think that's one of the key structural difficulties frankly that we're going to see going forward is that they do appear to be Having some difficulties you only do with such processes from transitioning from a very small kitchen cabinet around Xi Jinping that participated in the drafting of the Document the decision document to the much larger clunkier Vehicle of the leading group, which is quite substantial But even there the leading group is not that big and I think implementation is going to come Think about the implementation challenges in all these areas I think it's going to come back to the line ministry Oh, I was just in Beijing last week and what I heard from some of the people you pictured up there was that You know the line ministries are going to play critical roles and implementation and one way to look at What's happening is that some of these agencies like the central bank has a very clear vision of how it wants to proceed with financial reform So you actually see some progress Still not sure I would call it all that rapid But you definitely you see some progress what they did last week in opening this this channel between Hong Kong and the mainland To invest in each other's stock markets That's actually quite significant and what they did to widen the exchange rate ban Well, I'm not sure I want to call it significant because they're obviously you know They're still managing it But then in other areas the line ministries seem extremely Loop warm about reform and so you leave the negotiation of the bilateral investment treaty to some of the line ministries that normally Negotiate their trade relations and I could easily see this dragging out for years So I I predict we'll see more rapid movement in some areas and in others and it won't be Central design it'll just you know reflect the the deep entrenched interest in these line ministers As this process moves down if it's to be successful as it has in the past Implemented by people at the at the grassroots level it say more about the tension that you observe all of you in The incentive structure for these people At when they're dealing with in particular state enterprises I mean the kind of choices that you're talking about David are extremely wrenching for and dislocate him That's a word is now, right? It for for the folks at the at the township provincial level when they're sitting across the table From the locally owned state-run enterprise. How is that gonna work? Yeah, man? I think in a general issue is all these state enterprises whether they're central or local You know they used to be more or less owned by some line agency So at the center they've collected them while under sassick, right? but I perceive there to still be very strong ties between the line ministries and These these enterprises so for example, but the relevant line agency for the big commercial banks is the Banking Regulatory Commission They seem extremely reluctant to open up to competition from foreign firms They're very protective of their big firms and then of course you see senior officials move back and forth from being the head of a Commercial bank, you know to being one of the banking regulators So, you know, I just one little quick anecdote when we were trying to negotiate with them around electronic payments Where with the United States actually took China to the WTO, you know We were told to talk to a particular vice governor of the central bank who was charged in charge of the policy But as we were pursuing this we then read in the newspaper that he had become the president of the monopoly credit card company That was the problem. So, you know, so that I still think the line agencies in general are very protective And then when you go down to the local level, it's even worse the local level You know owns a lot of state enterprises in a variety of sectors And and you know, they own those and they feel ownership. Can I say one thing we were on it's tragically unable to find a good shot of in the in the Creative Commons was the red phones that the SOE Chairman have on their desks that connect them to officials and party members in Beijing and these literally exist, right? Sort of bat phones that connect people so it shows we really wanted a picture that had to bring home that there is This very tight connection. I mean, I think before we leave that leave the point though of this issue of the tension between The line ministries that have to implement this stuff in the design, you know body I think it's it's very interesting because in the discussions I have with a lot of the line ministries two themes have come through Strongly one is that they're being asked to design these implementation plans as David has suggested But they're not entirely sure that the little group around she and Lika Chong is in fact not actually moving in a very different direction You know, there's not always a good conversation between the two of them there and secondly I get much more Honesty and concern among those folks that even though the particular reform may fall within their ministry They have doubts about their own human capital their own bandwidth to be able to manage very technical reforms I want to drag the old back into this but I That that issue there's this mythic view in the u.s. Whether it's you know capability and training on engineering or you know In the government one point three five billion people that the top point zero zero one percent are extremely talented folks Let's allow But having taught in the Chinese system. This is a wildly uneven educational structure is there Look at look at what the u.s. China Business Council tells us about the number one need of u.s. Companies in China It's it's not intellectual property any of this other stuff It's being able to get and retain qualified local people surely the Chinese government faces that same talent constraint Do you is there that bandwidth? I mean is there the human capital to manage this this kind of intricate change that we're talking about Down to the grassroots level My my instinct is to say yes As I already said, I've just been very impressed by my experience with local government officials compared to you know The rest of the developing world. It's just a you know, really striking thing about China at the central level You know as you say, you know the top, you know the top one percent is extraordinarily good and There's advantages in being a big country. You don't need that many outstanding central bankers. You really just need one China and the u.s. Are lucky each to have one So I think they have enough that I do think they have enough talent, you know at the very top to design these reforms You know, it's in terms of implementation and projecting Requirements down to the local level the big design and putting it in place. It's certainly the case that behavior is affected by incentives and So it's not simply a question of the technical capabilities of officials. It's a question of What they perceive the rewards to be for change and I think in that regard in the context of reform And looking at how you design a set of incentives two things at least are no referencing one is that The softer stuff is harder to quantify Yeah Growth numbers of jobs is relatively easy and So more nuanced more balanced set of incentives doesn't lend itself to the kind of certainty that may be required to motivate and to transmit instructions clearly The second thing is that even in the context of reform The old system if you will as they transition will persist for some period of time It's not only it will persist from their perspective from the perspective of leadership They need that continuity and they're very clear reasons for that one is Urbanization is a high priority. That's perhaps the one area Where post their plenum they have laid out the most detailed set of measures for reform Urbanization necessitates capital investment fixed asset investment it necessitates Infrastructure all the elements of the system that You know they are saying they want to modify so There's there's tension in this transition process that complicates the process of articulating and enforcing clear incentives that could change behavior Down the line. I think if you layer on to to that structure as well to the Antigrapped environment that these officials are facing and how that affects their incentive structure or their willingness to lean forward As Owen just said in areas where it's unclear What the winning strategy is and then secondarily just the broad sort of feel of the of the reform program and mention of top-level design and so on She is using a political mobilization strategy, you know the leading groups that will Run down the hierarchy are all led by the local, you know senior party official support And that's great in terms of mobilizing the party apparatus But when the crunch really comes in implementation of some of these reforms Do you want that top political guy to be in charge the guy who's seeking promotion and so on or would you rather have a Sort of committee of committed technocrats who understand the situation well that's attention also We should not assume that the tactics of the left are appreciated down the line Because they were associated with the past right that was problematic And so there is I think there has been a Generated some cynicism What especially as to the nature of the political Direction and when you go down and meet with these guys, too You'll notice that they're 30 and 40 years old which I find extremely frightening Because there's so much younger so much sharper that they they don't really care what our generation of Chinese officials in a lot of they see a real disconnect with the life experience of some of the people who are offering up these lessons And I think I think there's also a sense that this too shall pass Indeed we will ride this out that the that the requirements the mandates of the old system will reemerge that the interests in special privilege in The crony nature of business transactions that that must survive in order to facilitate Business in order to facilitate growth so to which I would reply. What do you think this is Wall Street? That cultural that cultural challenge is it's not just a cultural challenge, but we're interested really Let's hang on one say we have mirrored the small Leading group phenomenon in that we're now in complete and violent agreement among ourselves I want to provoke you because on the on the wild notion that you might have different ideas and questions To to inform our panel and and invite those questions. We've got folks coming around with microphones And you can pick up on some of the threads here or take us in a new direction as you will and please identify Yes, I'm sorry do identify yourself the outset. Yeah, my question Maybe while people are thinking Chris you want to make that point Well, I just my sense is that this is so critical in terms of the risk that we're seeing in the development of The anti-corruption campaign because so many people feel that it won't last She finds himself having to go higher and higher and broader and broader inside the system to demonstrate that it's real and That risks the potential of provoking an immune response, you know from across the system I had a Chinese colleague tell me he was presenting the customary red on envelopes and $300 bottles of liquor at the Chinese New Year and The would-be recipients said no no no You know, this isn't the right time hang on to that It's got one right here Thank you, and thank you for a terrific battle Alan Romberg Stimson Center Something you've really sort of talked around a little bit when you talk about incentives and so on It's sort of been a an article of faith I think a lot of people who think about economic reform in this town that it won't succeed in China without fundamental political reform And I wonder if you could comment on that and what that political reform might be and what the chances Whether that article of faith is in fact justified Can I put David on the spot because as I mentioned all of these gentlemen were very helpful in giving us Perspective and insight one of the things David that you said to me was that when when as Olan was saying these new metrics For success at the local level Not GDP growth or in addition to GDP growth, you know environmental protection or Improving fairness and equality of and so forth Outcomes are are much harder to measure and the really the only way to measure those things is through some sort of democratic process of Evaluate subjective evaluation of whether an official is actually doing their job or not. Is that yeah a fair characterization? Yes, I think people may not want to accept this But when you start out at a very low level of development Economic growth is not a bad summary of what's the national welfare So when you start out poor and they have a system that generates economic growth with lots of bad things around the side You know my perception still is Chinese people have been pretty happy with this performance and local government officials You know as I mentioned you've been able to align their private incentives with the growth agenda now as the economy gets in the middle You know middle income people have a broader set of wants they want clean air They want food safety the leadership has obviously picked up on that and and I am skeptical that you can achieve this in authoritarian system Because it's easy to say you're going to be evaluated based on economic growth And by the way you can put a little bit in your pocket And then I think it's much harder to have an authoritarian system where you say we're going to evaluate you on 15 things And you know here's the measurement and here the weights of those 15 things I'm just I'm skeptical that they will actually reward officials on a broad scorecard I think they're going to continue to reward officials primarily on economic growth and you know plus social stability But but we're seeing increasingly. I think the fact that you can't divorce the two because You know what what in the rest not on our metternicky and model, but just as a practical matter The the the polity the the political economy Requires this different polity. I was in a meeting a while ago where We had a rich conversation like this with some Chinese friends and it got on to the political subject and one said yeah forget the politics This lack of transparency in this lack of dialogue also doesn't allow us to see price signaling You know which I you know I hadn't thought about Alan in the in those kind of terms But the same inhibitions in the political context Do inhibit what's possible in the political economy? I think a big big point not to miss there though because it's so important on that on political restructuring is is the point that Ohlin referred to earlier, which is this idea that For the last 20 years and under 30 and a lot of it has to do with the long shadow cast by Tianaman You know in the Hu Jintao administration the things they talked about with regard to political reform It really was the manifesto from the 13th Party Congress in 1987 political structural reform And that is you know kind of continued along I think Xi Jinping is basically saying that long-standing debate over separation of party and government functions is over And the party will be paramount Good go ahead. I just say quickly. I think on this question of political reform There is at the top varies there are very significant differences in view I Was in Beijing a couple weeks ago in a in a session with the executive vice-premier John Gow Lee He gave a very I mean it was a closed session, but he gave a very strong presentation on rule of law on the independence of the of the judiciary And in large public participation And I know there Other parts of the government that do not share that kind of what that kind of outlook So there was a policy directive late last year not to use the term rule of law I understand so he literally didn't get the memo. He didn't get the message I mean he very clearly used that terminology repeatedly Yeah, this is one of this bruise. You know this whole these comments that Xi Jinping himself have made about Putting power in the cage of regulation right is a discussion of rule by law I think often is the term they prefer rather rule of law But watch the upcoming fourth plenum this fall in that space traditionally fourth plenums are about so-called party building And if they are interested in making a move in this space, that's the place to watch for it. Yeah, please David Brown from SICE. I Entirely agree. This is a fascinating panel. I'd like to probe a little bit more into this incentive structure that we've been talking about You've said the difficult you've described the difficulty of defining a different set of criteria But I wonder if someone could give us a thumbnail sketch of whatever it is We know about the criteria that the organization department is sending down to local officials now and To what extent that has changed from say five years ago when there was also a debate about the need to change those internal incentives and then linked to that a second question is I Think there's you talked about the many new players That affect decision-making and one of those at the local level in any place where there is air pollution to the extent That there is now must be The role of local environmental groups and they provide a set of incentives on some of these Non-economic factors, which hopefully will reinforce what the organization Department's trying to do. I wonder if you could talk a little bit about how those things play together Thank you. That's most helpful. I mean five years ago. You're the evaluation as a Communist Party member was weighted about 60% how did you promote stability? Still there Wow, but what did you what did you folks see as you as you undertook the state? What did you hear the environmental environmental protection as has risen up the list particularly in the in the eastern You know provinces that are that are causing a lot of the the industrial pollution around Beijing in particular Hubei province Has been subjected to you know very specific guidelines on how much particular matter they can they can Release and this is required, you know shutting down of factories and so forth and and that causes economic pain And so these provinces are wanting, you know some payback for that or payoff to to you know to compensate for the loss of economic activity and and Jobs so that's certainly one I would just add that I do think is it important to underscore what the organization department is changing and what it is not And you know obviously social stability is still going to be huge one thing that's interesting in the previous evaluation criteria Obviously had GDP growth yet social stability, and then you also had strict enforcement of the one-child policy as a critical You know sort of criteria. How does that change with the recent changes in that policy? I do think it's clear I mean it's been publicly announced that the organization department is sending down new requirements And a lot of them have to do with balance growth, so it's going to be interesting to see how they try to implement that See we have time for a couple more. Yeah, the back Thank you very much Bob Vashti and Georgetown Center for Businesses Public Policy The Chinese have announced that they will join the TISA negotiations the trade-in services agreement negotiations, but not all of the 22 member countries in that negotiation are willing to accept them The United States has made it clear that in order for China to join that negotiation China has to indicates its good intentions By offering confidence building measures by for example implementing some of its WTO cases judgments rather and Other measures there are many How how serious is what is driving China's interest in joining a negotiation like the international trade-in services agreement? and will they be sincere enough to anti ahead of joining that is anti in terms of Offering changes in their current commercial policy Yeah, so I think that I think there's a you know multiple of reasons why China's interested in the service agreements and also bilateral Investment Treaty with the US and recently, you know Premier Lee was talking about being open to TPP You know China not opposed to TPP and thinking about maybe joining in the future So I think among some of these technocrats for talking about there's a good awareness that these external agreements can be a way of Locking in reforms that China really needs, you know and China has gotten a lot of mileage out of world trade out of WTO So I think there's a general sense that this can be a good strategy You know looking for some kind of down payment seems like a realistic or reasonable approach There there hasn't been a lot of movement in China's trade and investment policy over the last decade or so So it seems to me very reasonable to ask for some kind of down payment It would be a smart move on the part of the leadership It would be consistent with their approach of experimentation experimentation to pick one sector and really seriously liberalize it But I think that you know they've got opposition in all of those key sectors, so But you said before to services are a lot more porous by their nature than Manufacturing so the implications for the economy you can't you can't secularize it even though they're trying to in the Shanghai free You can't put it in one geographic area indeed Yeah, yeah, but you know if they're serious about this next wave of reform getting more dynamism in the service sectors is quite critical You mentioned employment. It's already the case that most job creation in China's in the service sectors But it's not they're not creating enough jobs for college graduates and that that's where liberalization of those service sectors could really help them There's a Urbanization movement from agriculture to the cities that population will probably if it happens go into services not manufacture And that's that's the assumption. It's a planet assumption of the government Stephen Roche up at Yale has followed this area. I saw a presentation. He did recently. He is now based on his analysis He says that the service sector nationwide employs more people now in China than manufacturer He is bullish on this on the speed of this transact on this transition But that may impart account for their for their interest Hopefully they can avoid the wage compression that we've seen as we have services are more labor-intensive The manufacturer indeed Yes, please. Yes, I'm Stephen can I used to work for olden and the US council for international business I see we have three treasury people. Yeah, I was gonna say lack of diverse. I want to take you out of the weeds for a moment and talk about the young people and They're accessed in the power of the internet and if you look at the Recent history of the last 50 years The ability of the young people in China to push change more rapidly and in directions that the Chinese officials yet to contemplate I Think it's a very useful question. I want to link it to my earlier snarky comment about How those expectations in in the younger age cohorts are so very different from people of the cultural revolution generation Yeah, you've looked at this in terms of stability with yeah I mean, I think look this is the biggest challenge that you face is The tension between the need to move in this direction to break out of the middle income trap and their pervasive desire for control And you know, right-sizing that is really the chief challenge All these economic issues and so on the side perhaps the the chief threat to their continued stay in power is the proliferation of cheap smartphone technology across China, you know, so so now You have the capability of some person far out West snapping a photograph of something bad happening and putting it up on one Of these sites and then people in Shanghai can see that that's happening. I mean, this is what scares the leadership, right? They always worry about two types of mobilization Cross-sectorals so students and workers things like that and things that cross provincial boundaries and this technology makes it problematic for both of those areas Yes Thank you jump home from ecco. I have a question about the human capital In the government Chinese government Administration few people know that even in the central government ministries The medium and or even higher level official their salary is very low maybe just $900 per month or just one thousand dollars per month and over the past few Years and there is no for example if you want to buy a house Actually the government officials cannot get more privileged. My question is that here in the United States There is kind of revolving door between administration public sector and the private sectors But in China is kind of one way if you as a civil or public servant If you jump up the government you can never come back and there is just one way I asked you the panelista. Could you please show us? What's your comments about this kind of? Human or human capital policy in China because this is very important from central government to the local government The human capital actually is quite lack and people cannot work You know within the government with such a not a decent salary and actually in over the past few months They are very very heated debate on Internet and the public sector servants say we need to raise the salary and the people the grassroots say no So it was a common We can never have that conversation here We've seen successful management of this issue and thank you for that question. It's it's it's an important one In places like Singapore where you know civil servant salaries are Equivalent to sometimes better than that than the private sector. Do you do you have any instinct about? Where in the context of the reforms you're looking at in the study, I mean, is there any element about professionalization Of the civil service and let me add to that or the military Yeah, that that that gives you confidence and would let you think they can avoid this problem Well, it's going to be a challenge And this is where I think the realignment of the incentive structure that I want to talk about earlier Important because if you take things like the crackdown on not only the crackdown on graph But more importantly the crackdown and so-called extravagance, right? so many officials rely on the you know the red envelope at that Chinese New Year and so on as a supplement to their salary and so if this Environment remains pervasive and I don't see any sign that Xi Jinping is keen on letting up on it any time soon Do you have a brain-during problem? You know that that comes out of it I think the counter to that is this idea Seeking to you know, they always look at Singapore as a model But the Singaporeans would be the first to tell the Chinese we're a tiny little island And if you look at what's happening in Singapore that pay packet is coming under tremendous pressure You know there as well So I think the Chinese realize that's not viable for them. They just have too many officials So that retooling that incentive structure. How do you? Incentivize somebody who has who gets paid nothing but has signature authority over anything, you know at what? 10 10 million whatever the limit is That's a very difficult situation. So how do you change that dynamic? I think it's very hard it but it's corrosive isn't it because we know that the officials Above middle management have to purchase their position I mean you've got to come up with a lump sum in many cases to buy the job I mean that kind of embedded corruption that's tied right back to the party's personnel system I mean is it remediable through Through right-sizing pay packages with the private sector. I mean is it it does a conversation even permitted that do you think I would point out You know you had the same problems of the United States before the Progressive era And you know what it took was a lot of you know free media Took a certain amount of federal intervention in some of the most corrupt local governments concerned on the part of people But you know basically democratic institutions largely writ right or how we brought corruption under control I don't think there are too many other historical examples except in tiny little places like Singapore But everybody else's burden under control has basically used democratic institutions. Yeah, I don't see it I don't see a quick remedy. I mean the the private sector is favored over government now among young people in China There's been a big reversal I think one way in which that the human capital the talent pieces is dealt with is is There is heavy reliance on outside think tanks universities the the dividing line between Being in government to influence government being outside is not Is not sharp And those that have policy interest can still have impact From the private sector and they can supplement, you know They can earn incomes far in excess of what government officials do and in many cases that outside advice is the driver For policy formulation. It's not the it's not the bureaucrats There's another component of this too and that is on the on the back end the retirement side Where a senior officials consistent with what you're saying are hemmed in When they leave the government and are constrained in the kind of private sector activity They can engage them You don't find a senior officials going from senior posts in government to senior positions in Finance or industry generally speaking they go into honorary positions Association's or think tanks associated with their government institutions My question will tie in with let me ask you to identify yourself certainly Jess Wilhelm. I was formerly with USDA in Beijing Currently unemployed seeking employment Human capital My question is a little bit of it contains a little bit of meta commentary I see a panel very informed about China good contacts within China Why is it that? The decision was made not to include someone who was part of the Chinese system or a scholar from China Studying the Chinese system in a more rooted perspective Domestically rather than an international policy perspective. Thank you. No fair enough. We talked about that. Sure. I mean, that's a fair comment. It's it's just Little Empathy I hope you'll have it's very difficult to put these panels together in these events And we try to find the best people and we did certainly explore the possibility of bringing some Chinese Experts of the kind you described and we're unable to get the right person for this particular panel, but but I think we would like to do More of this this as I said only a halfway point in our in our study And we certainly expect to have more and we by the way along the way We've had events including Chris has done a couple of events with with some officials involved in some of these decisions So we certainly encourage that and want to have want to have more of that well an idea I being involved right now with with a Putting together a panel overseas I've been I've been trying to do this and and what's frustrating too is yet and still the polity in China hasn't Reached a stage where and you know this from your time in China where those officials and and retired officials even felt the confidence of being able to do the kind of irresponsible thing we're doing up to right now by sharing sharing our personal views Without any baggage, so we're I think that's devoutly to be looked for in a second second edition We have time I think for a couple more. Yeah Thank you. I'm from Georgetown University One of the interesting things brought up in the panel discussion is the disconnect or the lack of harmony If you will between the central government and the local government administrations And it's fairly well known at this point that There are a range of issues that the central and local governments, especially local governments of the more developed areas in China Places like Shanghai places like Beijing There's a range of issues that these Government officials disagree on can you maybe possibly just to elaborate a bit about the outlook of this issue? going forward for example, can you kind of foresee is it more likely that the this trend is just going to go develop on itself and people are going to be fine with it and the The disconnection between the local and central government In the long run will not be a huge problem. It won't really adversely affect the at least the economic development of China Or do you rather foresee that is more likely the central government of China is more likely to? Raying back its power under its own hands and play hardball Against us local governments. Thank you. It's a great question. I'm going to field it to my colleagues here, but with this With this introduction if you want an indicator in my mind of How that issue is progressing look at tax reform again? I'm not talking about the US. I'm talking about China If you get authentic deep revenue share sophisticated revenue sharing that works Between the center and the provinces instead of the kind of asymmetry that we see now if you see a tax bill That's that consequential emerge in the next year or so. I think that would be a really good indication The government is serious about the rebalancing that what do you guys think? Can I use this to make what's probably my last thought on this panel? The You know it strikes me that we've talked a lot about this local central I think some of the reforms Require the participation of local governments and implementation, you know more than others So as things move ahead, I'm going to be looking at you know Is there more rapid progress and things that are really more of a stroke of the pen character? So for example the central government clearly could introduce more flexibility to the exchange rate They could get rid of the caps on interest rates, you know They they are the ones negotiating these international trade agreements like bilateral investment treaty So if the central leadership is really united around the reform I would like to see relatively quick movement in those areas But I'm remain a little bit skeptical because I think at the central level there are some very powerful officials who are not really that Enthusiastic within the Politburo. I'm not convinced But if they are then we should see clear movement on those other things like hook-o reform We haven't talked about hook-o reform, but a lot of local government resistance to hook-o reform You know you mentioned the tax issues There's just a lot of things that will clearly require local government involvement in a very deep way So it'll be interesting to look at whether there's you know relative progress in one of these areas versus the other and It'll be very fascinating to watch it play out over the next few years hook-o for those who don't know is the is the sort of urban passport that entitles People to get the full range of subsidized benefits Education and health care and so forth that national ID card. It's sort of an ID card, right? That is denied to temporary market workers for the most part, but they're trying to change that And and give more migrant workers these rights Well just real quick I think there's some areas that lend themselves to national design But if you had to make a statement this power move to the center or does it move local over the next Five to ten years. I would bet that it moves local Decentralization I think we have one more question We have time for one more Right here No one said anything about the gender imbalance on either the panel or among the questioners Thank you for at least helping on this front Thank you. My name is Leah from Voice of America. We talk about Xi Jinping's anti-corruption campaign in China There's a perception in China that all government officials are corrupt in terms of the party in Terms of the government's control over the party officials. They heavily rely on the system called Shang Gui As we know, it's totally above the law We've recently seen some reports and those of videos of people how that was like For people who went through that system. I'm just wondering if I mean wonder if any US side has ever expressed its concerns about this to the Chinese top officials I think it's actually a human rights issue. Of course, it's also a judicial Issue as well and also I'm wondering if you can talk about Xi Jinping's anti-corruption Purpose, I mean, it's widely seen as you know been using this as a tool to Get rid of the people you don't like especially at the local level by the top level. It's more about a power struggle if we look at the Bo Xilai case the Zhou Yongkang case and also the other even the Xu Zhaihou the military Vice chairman of the CMC who's also very closely connected to Bo Xilai and all these people so I mean he's really serious about Get rid of corruption or this is just a tool for a power struggle Chris, you know, yeah, there's a lot of questions in there I'll do my best. I think on Shuangui which for people who don't know it's an extra judicial form of detention by which somebody can be held indeterminately basically without charge and what's been interesting central to the sort of judicial and Social and legal reforms proposed at the plenum is this whole issue so even Meng Jianjiu the current head of the Public Security Ministry or excuse me the head of the Political Science and Law Commission which oversees these issues has talked about, you know The need to make this more legalistic in the way that they do it and follow procedure and so on So there are a long way from getting there in terms of truly reforming the system But it does suggest that there's pressure inside the system to you know make this system more transparent on She's motives for anti-corruption. I think you know, I like to call it his multi layered cake of motivation I think there's a lot of things going on Inside this one of them is clearly power consolidation and the ability to be able to Let key constituencies know that he's in charge I think though there is a base a basic element though of trying to improve governance trying to Frankly keep the party get the party's reputation rehabilitated and you know to us in the West You know these things like four dishes in a soup at for officials and so on it sounds ridiculous But but it's actually a very smart strategy in terms of the people He's targeting the corruption that the people see every day right that rapacious local official and so on and so that's very important And then I think another key component of it, which hasn't gotten much public attention is he's also trying to focus on corruption In the guardians of the regime and that's the military and the security services, you know, he has concerns Just like all Chinese leaders do they study the fate of the Soviet Union over and over and over again And one of their key conclusions is that those key guardians of the state have become corrupt and lax And therefore didn't stop as Xi Jinping said they weren't man enough to prevent the collapse of the Communist Party of the Soviet Union And so I think all of these factors are informing Xi Jinping's emphasis on anti-corruption But we started with one of my University of Michigan stories. I'll close with one. There was a Professor of Ethics who had a colleague at a famous East Coast University Who was undoubtedly one of the greatest moral and ethical writers of his time? But who led an exerable personal life. I mean the guy was a famous Lothario and At one point the faculty member confronted him in the lounge and said how can you be one of the greatest moral and ethical thinkers of our time and lead such a morally bankrupt life and He was so morally unaware that he actually thought that was a question He answered it but but his answer offers my closing here, which is he said look it's like this You know that big highway sign on the road into Boston near Wellesley where it says 20 miles to Boston I'm like that sign. I provide reliable direction to others. I don't actually make the journey myself and I I close with that story because a lot of times we discuss what's in it What is it or shouldn't be in a bit and the other elements of Chinese decision-making? But I want to command Matt and his colleagues on Forcing us to actually and giving us a tool to make the journey so that we actually look at the elements of decision-making in a More useful way and maybe in a way that that might guide American policy in a way that's helpful to be continued Let me invite you to break briefly for coffee Out you know as Matt said indoors and then we'll turn here at 11 o'clock. Please promptly to meet with Secretary Paulson and David Wessel Thank you so much