Deep Dive
Shownotes Transcript
Okay, today we take a deep dive into why the West doesn't understand China's economy and some of what they are missing with special guest, Dr. Warwick Powell. Welcome to The Bridge, enlightening conversations on world cultures, life and everything in between.
Hey everyone, this is Jason Smith, host of The Bridge Podcast from sunny California. If you like the show, don't forget to subscribe. We love The Bridge. Hey everyone, my name is Jason Smith. I'm originally from sunny California, now living in beautiful Beijing.
Professor Warwick Powell is an adjunct professor at Queensland University of Technology and a senior fellow at the Taihe Institute. He's a frequent media commentator on numerous platforms, including Bloomberg, China Daily, China US Focus, The Global Times, and CGTN. Welcome back to the Bridge to China, Dr. Powell. How are you? Good to be back. I'm good. We just got through, like we were talking about, a very heavy windstorm in Beijing, which is an annual thing. And it's
seem to have been less dusty. So I'm happy about that. How are you, Dr. Powell? Got a little bit of a head cold. So if I have a little cough now and then, I hope that you'll forgive me. You know, I think I might have the same thing. We are in the midst of a U.S. trade war against the world. So I just want to talk about the U.S. for a moment. What are some of the possible consequences for the U.S. if the trade war takes a long time to be resolved? Well, the main implication is going to be
the growing risk of shortages. The issue with this trade war question really goes to a pivotal issue, which is the role of relative prices, which is what tariffs is all about. And we've got to understand that relative pricing is really a system by which we keep score.
versus, on the other hand, a recognition that the world is fundamentally a material world. So the materiality of the real world and of real supply chains where people mobilize energy and resources to create things. And when you've got what is essentially a contradiction between these two worlds, the materiality of the world will at some point win out. You can't eat money. You
You can't turn money into energy without access to physical resources. You can't transform the resources of the natural world into things that people find useful if you can't have access to those things. And so...
The challenge for the United States is that not only does it have a significant dependency on Chinese-made products and consumer products, importantly, many businesses in the United States also rely upon Chinese-supplied intermediate goods that the businesses in America then transform into things for American consumers. And...
problems in the supply chains for intermediate goods have long-term reverberation effects. I think there's one other interesting possibility, Jason, of the tariff war should it continue into the future. And that is that businesses, particularly foreign-owned brands,
You know, well-known brands that manufacture offshore, such as in China, will begin to look seriously at the structure of their supply chains and the entire structure of the linkages that take their products from factory to consumers with the view to identify opportunities to remove sections of that supply chain that are consuming or making claims on value.
And the biggest area that is actually vulnerable to this supply chain reconfiguration is the retail sector. The retail sector makes claims on anywhere up to about 50% of the total value of a supply chain as part of its costs and margins. And if a well-known brand is able to create a direct-to-consumer model, direct from factory, in fact, with
the ability to fulfil those orders quickly and efficiently without an expensive network of retail stores.
then those retail stores will go as part of the ways in which the major brands overcome the problems of tariffs and the additional cost that this causes on their businesses and their consumers. So they're the two big implications, I think. The hope for effect, which is a relocation of manufacturing capacity into the United States is huge.
far less clear and in truth, I think far less likely in most categories of things. Well, you know, I wanted to talk to you because we've talked about de-dollarization before about what effect this trade war is going to have on confidence globally in the dollar. Do you see investors seeing U.S. Treasuries as...
That's still a viable place to invest money. Look, I think as a financialized product, it certainly still has a place in the world of investor portfolios. I mean, it hasn't reached a point where it's certainly not junk status. But what this recent episode has shown is two things. Firstly...
It's shown that there is a significant disconnect between the monetary world and the world of real economic value. So this, again, goes to my first point, which is the relationship between the materiality of economic systems versus the ways in which we keep score and we keep score through the monetary system. The second thing that it also shows is the
ultimately the limitations of the American IOU system. So the American trade deficit is financed through the ability of the US Congress and American banks to create new money, which then enters into the circulation system.
And that's an IOU. And sellers to American consumers will take those IOUs because they believe that those IOUs are useful for other things sometime into the future. The bonds market is where IOUs, namely US dollars, is parked from time to time. But ultimately, when you see the sort of explosion of this marketplace where IOUs
or exchange for IOU derivatives such as bonds and then exchange back to IOUs. The question is, is when do you cash that in? And the only place you cash that in is back in the real economy of things, goods and services. And if the United States produces fewer goods and services that the rest of the world needs or wants,
then the fundamental underpinnings of the utility of the United States dollar as a medium of global exchange diminishes. And what we've seen, I think, in the last week or so is a realisation across the world that this IOU system, the US dollar-backed system of
of financialized products is incredibly fragile and frankly quite detached from the real world of economic value creation. - No, I thought of a metaphor in terms of bringing back some manufacturing to the United States and that is of a carpenter. A carpenter needs to go to the lumber yard and buy lumber. The lumber yard doesn't buy anything from the carpenter. Carpenter uses the lumber to add value to make a product like a table or tables, chairs, and sells those.
My question is, in moving things like the inputs that U.S. manufacturers need, because the U.S. is still a major manufacturer in the world, from China to the United States, does it make those inputs so expensive that U.S. products will no longer be competitive? Because essentially, by moving the lumberyard to the United States...
in this metaphor, then the carpenter is paying a lot more for lumber. Who wants to buy chairs that are that expensive? Well, look, it'll change the sort of structure and behavior of the economy downstream. And this is what I mean when I say that the adjustments that will necessarily be made by the American economic system will see the United States move to what is in effect a higher cost structure or a higher cost plateau. It will be a more expensive economy.
And once that happens, the consumption behaviors of your downstream enterprises and consumers will change as well, where discretionary expenditure begins to be pushed aside and people on tight budgets. And we know that American households heavily indebted will really start to focus on what are in effect household essentials. So it will have a very significant effect distributionally on the composition of consumption, what people buy.
which then feeds back into the economic system. So the feedback loop effects can be quite destructive because as the upstream supply side becomes more expensive, the downstream consumer side is less able to afford as many things. And ultimately that feeds back into the capacity of the enterprises to expand and
So rather than being a virtuous cycle being kicked off, the risk of kicking off through relocation of manufacturing and going to a higher cost plateau is the opposite of a virtuous cycle. And that's a very significant risk because we'll end up with stagflation. You're listening to The Bridge.
I want to talk about China and the US and their roles, because it seems like a lot of people who are economists based in China or around China are saying, well, China is actually in a very strong position. And then there are economists in the US who are saying, oh, no, no, the US has all of the cards. So in your opinion, how will China's economy fare if the tariffs remain in place for a long time? Look, again, it will require adaptation and adjustment. And so you've just got to put it into some context.
The argument basically is that the American marketplace is fundamentally necessary because that's where all the buyers are. And now that might have been the caricature that was applicable 20 years ago, but it's certainly not applicable today. The U.S. market makes up less than 15% of global imports these days, and that proportion is declining.
In terms of China's own exports, the US market is somewhere around 13% as well for manufactured goods and declining. So the United States market is no longer the dominant single market that it might well have been a generation or so ago. Chinese manufacturers, for those who do export, have already been diversifying over the last 15 years.
The other thing to bear in mind is that about 80%, or a little bit more than 80% of Chinese manufactured outputs are consumed domestically anyway. And what that means is that Chinese manufacturing is nowhere near as export-oriented or dependent as perhaps the caricature would suggest.
So again, in the broader context of the Chinese economic system, there are two responses. One is to continue developing and growing its other markets outside of China and outside of the United States and build on the work that it has been doing over the course of the last 15 years. So the Belt and Road Initiative is one of the signature programs that has led to the expansion of global markets and
ASEAN, the Association of Southeast Asian Nation Markets, and there are 10 countries in ASEAN. ASEAN as a whole is now China's largest trading partner, having superseded the EU about three and a half years ago. So there is a discernible shift and diversification of Chinese exports to the global south in any case. And that process will continue to unfold.
unfold, creating a new horizon of demand for Chinese products. Chinese products, of course, high quality and low cost, relatively speaking. And that means that they are able to, in effect, price people in through relative abundance as opposed to pricing people out through confected scarcity. So that's one response. The second response is
will be some fiscal measures, predominantly with some monetary measures to accompany them to boost the levels of aggregate demand in China as well. So through a combination of domestic aggregate demand boosting coupled with ongoing development of external markets, the Chinese economy will, by and large, replace China
the loss of the US market, I would suggest inside three years. Now, that makes it sound like it's a smooth process, but of course, it won't be smooth for everybody. Some enterprises will find it easier than others to adjust their market orientations. But in the end, the Chinese economic system has demonstrated over the course of the last 15 years or more that it is incredibly flexible and adaptive and therefore resilient to significant external shocks.
So I would expect that over the course of two to three years, that the Chinese economic system as a whole will adjust to the loss of the consumer market in the United States through ongoing work to develop its other external markets, as well as the ongoing expansion of domestic demand.
The difference here, and I'll just sort of ram this point home if I can, when people talk about who has the cards, he who holds the cards is the one who produces things. The United States has been able to benefit from the willingness of the rest of the world to accept its IOUs on the basis that those IOUs are good for things down the track. But if the IOUs, namely the United States dollar, is weaponised,
And if it's derivatives subject to significant volatility and demonstrable fragility, then you begin to wonder to what extent will the rest of the world continue to accept the American IOU as a means of payment, particularly for things that don't involve the United States.
So as far as who holds the cards is concerned, I would go with the materiality of the world as to who ultimately holds the cards. And that's why I think China is in a position to absorb and adapt to these external shocks. I want to talk about the dollar again really quickly. I guess I don't fully understand how international trading works, but it looks like that the
The digital RMB is a settlement system of some kind between ASEAN countries and China. Is that a form of de-dollarization? Yeah. So when businesses in different countries engage in trade with each other, what happens is that the buy side will use its own domestic currency to purchase some of another currency.
which is then used to settle the bill with the seller. And what has historically happened is, in more cases than not, is that the buy side will purchase US dollars and US dollars will be used to settle an account. And then the sell side will use those US dollars and purchase their local currency and convert back into their, say, RMB.
So what we've got is a system historically where the United States dollar has been an intermediary instrument. Where we're moving to is one in which counterparties will bypass the intermediary instrument and transact directly using their own national currency. So when a Southeast Asian nation purchases or a company in a Southeast Asian nation purchases something manufactured by a company in China...
They will do so using their own national currency, which they would then use to purchase RMB. And RMB would then be used to settle the accounts with the seller. And increasingly, that is a process that will play a greater role in international trade. Already, about 54% of China's trade is settled in RMB now.
So more than half of China's overall trade is settled using China's national currency. China's not the only country, of course, that's moving down this path. India has been increasingly using the rupee as part of its own trade settlements. And of course, Russia has over the last three years been forced to
to move to a non-US dollar-based settlement system. And so over 90% of Russian trade now is settled in ruble, RMB, rupee and a few other national currencies. So the processes of currency multipolarity
the introduction of many national currencies as part of cross-border trade settlements is something that has grown significantly and will continue to grow. I really wanted this interview to be about China's economy and what the West gets wrong. I think that you know a lot more about China's economy than basically anyone writing in the United States. So I wanted to get into this. You wrote a paper about China's economy recently on your Substack.
And you argue therein that mainstream economics presuppositions mislead people into wrongly analyzing China's economy. So let's start with some of the ones that I hear often and see if we can break those down. How important is China's stock market, which is always pointed to by Western analysts and Western media? How important is China's stock market as a metric of the performance of China's economy? Not very is the short answer.
The stock market in China does have quite a bit of volatility to it, but that's largely driven by the trading undertaken by retail investors.
But retail investors don't hold a large proportion of the stock itself. So a small, relatively shallow marketplace of many speculators buying and selling drives price volatility. The second thing about the stock market in China is that historically, it hasn't played a very important role in so far as enabling companies to raise finance is concerned.
The overwhelming majority of development capital that companies in China access to expand their operations is actually through bank finance. So off memory, 80 plus percent
of funds raised by Chinese companies to expand actually comes through borrowings from banks and the vast majority of the remaining 20% comes off their own balance sheet and through non-bank lending mechanisms. So the stock exchange really doesn't play that important a role in so far as China's overall capital development system is concerned.
It's just not the kind of symbol, if you will, of overall economic health that the stock market plays in the Western economic system. Hey, everyone, this is Jason Smith, host of The Bridge podcast from sunny California. If you like the show, don't forget to subscribe. We love The Bridge.
You're listening to The Bridge.
You wrote that, quote, China's continued economic development and growth is often met with incredulity, disdain and disbelief. So what are the suppositions about China's economy which are confounding Western economists when they are attempting to analyze China? There's been a view that China's economic development has involved the suppression of household consumption in favor of investment by enterprises.
and therefore we have suppressed local demand, which then spills over into a need to export to compensate for the lack of domestic demand. That's the basic argument. What also comes with that is the idea that
China's investment-oriented or driven focus is unsustainable because most of the investment, so the argument goes, is wasteful. So we get arguments about why the investments made in the fast train network is wasteful, why we have significant waste in the investments made historically into the EV sector.
So they're the sorts of arguments that basically are run. And I think this fundamentally misunderstands the economic model. And in part, it's because of the theoretical framework that these mainstream views bring to the table. There are alternative ways of understanding economic growth. And that Substack article that you mentioned tries to, in a sense, describe an alternative narrative that is grounded in substantial economic theory, but without the jargon of
And the economic theory that I draw upon to develop an alternative way of thinking about and talking about Chinese economic development, in a sense, you could say comes from a post-Keynesian environment. I'm not particularly doctrinaire, but there will be theoretical purists out there who will find all sorts of things that are probably objectionable.
But my aim is to mobilise some of the core ideas to help people develop a new way of talking about China's economic development and also a new way of thinking about China's economic development so as to understand what's going on and ultimately to be able to
in many ways, realize when they're being sold apart by some of the nonsense that's being peddled around. You know, you discussed the role of publicly owned financial institutions. I guess some of those are called state-owned enterprises. How do these facilitate growth in China? How is that misunderstood by Western orthodox economists? The main ones that I think are actually fundamentally misunderstood is the role of the public banking system.
So there's quite a lot of literature about state-owned enterprises in terms of, you know, whether they're steelworks or the rail lines or whatever they are. We can touch on those in a moment. But the missing piece often in much of the discussion concerning the Chinese economic model is the pivotal role played by public banks. So public banks, and particularly the four large policy banks, have capital mobilisation mandates and lending mandates that are
driven by broader policy objectives as much as they are also driven by the credit worthiness of the borrowing entities and the proposed projects for which the borrowings will be used to resource. And understanding the central role of public banking as part of an economic development institutional setup is actually critical.
What it means, and we contrast this with the way finance capital works in Western capitalism,
And when you do that, you'll see that in Chinese capital, there will be substantial long-term debt finance provided for a range of activities that on the face of it, a mainstream analyst might view as wasteful because it doesn't deliver a quick return on investment. It seems to have very long tails. It involves substantial risk, et cetera, et cetera.
And yet these activities over time become foundational to the next plateau of Chinese economic development. So investments in energy capabilities, investments in IT, investments in material sciences, all of these areas have delivered new foundations upon which the Chinese economic system can launch itself into new areas of development.
value creation based largely on the ability to transform the material world using less energy inputs. So we're talking about commitments to building the necessarily infrastructure that will enable a higher energy return on energy committed. And that seems to be the sort of golden thread.
that winds its way through the Chinese economic development model. The other one, of course, is public finance directly from government, through central government and to a greater extent through provincial and local governments. And these investments have created the public goods infrastructure that enables the political economy to function efficiently.
And that includes things like transport systems, new energy systems and communications networks. So all of the infrastructure of flow, whether it's for electricity, people, goods and services or information, have been delivered as fundamental public goods. And in doing so, it enables and catalyzes subsequent rounds of enterprise development and ultimately also
creates income growth for households. So that's the economic model. It's spurred by this idea that investment is an autonomous driver of demand, which then catalyzes enterprise growth and income growth in households. And the evidence in China clearly shows this.
It shows that over the course of the last 20, 30, 40 years that household incomes have consistently risen in real terms. It shows that capital accumulation in the economy as a whole has grown in real terms, whether it's urbanisation, whether it's energy infrastructure, telecommunications infrastructure, 5G networks, transportation infrastructure.
Railroads, fast trains, new road networks, light rail, airports, you name it. New canals that are being developed to facilitate domestic movement of goods and people. So that's the kind of economic model that we're talking about. It's not one of...
suppressed consumption. It's one fundamentally driven by public investment as the catalyst that drives enterprise growth and household income growth. Can we talk about the role of state-owned enterprises and how they function to stabilize
during potential downturns? Because I did read your paper a couple of times and I still didn't quite understand because I'm not an economist. Look, economic systems are really circulation systems, right? So they're networks where value flows from one node to another. And it's a
complex series of networks. So state-owned enterprises are able to, in a sense, boost the amount of demand within an economic system when there is a shortage of demand in the circuits of private households or private enterprises. And in doing so, creates a foundation of aggregate demand for the economy as a whole. So if you think of
state-owned enterprises really as a series of governors, you know, taps and spigots that can be opened up for more liquidity to be released or to commit to a longer-term project such as a new fast rail network or new bridges or whatever. By being able to mobilise state-owned enterprises in the context of longer-term strategic development that at the same time
adds liquidity today into the system, you're able to modulate the levels of aggregate demand and economic activity within a particular geography to maintain high levels of resource employment, including, of course,
high levels of employment of people. You pointed out something fascinating in your paper that I did understand, and I think everyone should know, understand this. So Chinese are typically super savers, saving an enormous amount of money compared to their global peers, especially compared to people from my country, the United States. But
But at the same time, domestic consumption is growing. So how can super savers still contribute to growing domestic consumption in China? Yeah, this is fundamental math, right? So the critics of China will often talk about China's high savings rates as being somehow a constraint on consumption. But of course, that assumes that the consumption pie doesn't grow.
But if the available resources for household expenditure is actually growing in real terms, namely that household incomes are rising in real terms, you can actually have rising expenditure without fundamentally changing the proportions of that growing household income that's committed to consumption expenditure versus committed to savings. So as the pie gets bigger,
there is more money available to be spent even if the proportion of total household incomes being saved and spent remains largely unchanged. And that's actually a fundamental element of the empirical response actually to the kinds of critiques that are often levelled at China, which of course, as I've mentioned, talks about, you know, excessive levels of household savings, suppressed demand, et cetera, et cetera. Those critiques become obsessed with proportions. What
What they don't understand or they refuse to acknowledge is that in actual nominal terms, household incomes across the country has actually increased substantially. So over the course of the last 12 years or so, household incomes in real terms have increased 700%, sevenfold. So as households increase their incomes, they're able to spend a proportion of that
to satisfy their various material requirements, whilst at the same time saving. The other thing to bear in mind is low inflation in China. So again, often the critique is that China has deflation, prices are falling as opposed to increasing. And
The classical argument basically says prices fall when there is a collapse in aggregate demand and companies with inventory need to slash their prices to be able to move their products. And therefore, we're talking about a contraction taking place. So that's the typical standard framework that says deflation is bad. Chinese deflation, however, which is actually quite consistent with the majority of deflationary episodes globally over the course of the last couple of hundred years, is
driven not by collapse in aggregate demand, but it's driven by supply growing faster than demand growth, but both are growing, coupled with intense competition. So the level of competition on the supply side of the Chinese economy, all the way up the supply chain for input goods, all the way down through to consumer goods is incredibly intense. Price wars,
Legion, the need for specials and all sorts of marketing campaigns to get consumers to part with their money are also well recognised. And so in that environment, what you've got are incredible pressures on enterprises to bring the prices as close to their cost of production as possible.
And ultimately, there are some consequences of that. One of those, of course, is that consumers have access to very, very low prices. So as their real incomes rise, they're able to actually satisfy more of their material requirements without eating into the proportion of savings that they can do. So that's one. On the downside, the pressure on prices obviously creates pressure on profit margins and
And that leads to a few things in enterprises. On the upside, it leads to enterprises continually looking for efficiencies.
And sometimes I'll also look to undertake innovations to either bring new products to market or innovate new work processes that will reduce costs. On the downside, this intense competition and the squeeze of profit margins ultimately leads to some enterprises not being able to survive the intensity of this competition. And what you'll see typically after episodes of intense competition is a shakeout in industries with some acquisitions and mergers.
And I would expect that in some of these new technology frontiers in China, where there are a lot of new players, such as in the EV space, that over the next few years, we'll start to see some industry consolidation and some mergers and acquisitions take place.
Other thing that can happen, of course, in an environment of intense competition is the Chinese describe the word gem, involution, so knee gem. And that's the idea, of course, that earning a buck is very, very hard. The pressure is incredibly heavy and there's incredible pressure on a business and on an individual. And that can create, I think, some very difficult experiences for people. Now, the balancing act in all economic systems is to have sufficient levels of competition so that
enterprises can't abuse their market power, but at the same time ensure that the pressure isn't so great that they basically feel that they can't move forward. So these are the balancing acts that are continually being adjusted in economic systems.
And China's not alone in trying to do that.
And I go to these malls and they're just packed with people buying things constantly. The data supports what some of these Western economists are saying. People are saving a lot of money and then you go out and people are spending a lot of money. And for someone who doesn't understand economics, it looks like what Western economists are saying is accurate.
And what has happening in China in my real daily experience is accurate. And yet the two didn't make a lot of sense until I read your paper. And then I was like, OK, OK, this actually makes a lot of sense that both of these things can be simultaneously true.
So think of it like this, Ryan. Let's say 12 years ago, my household earned 100 units of income. And today, my household earns 700 units of income because that's basically what's happened. Now, I saved 50% back then. So I saved 50 units of income and spent 50. Today, I still save 50% of the income, but I spent 350 and 350 being spent.
in an environment with negligible price increases is basically new net expenditure, economic growth into the economic system. It is...
entirely autonomous of the rate of savings. Now, the rate of savings, incidentally, is a function of the rate of investment. So the mainstream will often say that investment is constrained by savings. That's actually not the case. Savings is a residual. And that's the other point to remember about the Chinese economic development system. Savings is what you have after everything else. The investment is autonomously generated through public investment,
as well as commercial credit issued by policy banks and other financial institutions. That then spurs the activity in the economic system through enterprise development and growth, real household incomes, which then creates cycles of consumption, expenditure and investment. And what's left after that is what we call savings. But everything else has been happening already.
So the idea that savings somehow is a constraint on the way that the economic system works fundamentally misunderstands the dynamics of China's economic development. Hey, everyone, this is Jason Smith, host of The Bridge podcast from sunny California. If you like the show, don't forget to subscribe. We love The Bridge. You're listening to The Bridge.
You know, urbanization is continuing and it is actually a goal of the central government of China. So what is the process or the impact on China's overall economy as second, third and fourth tier cities continue to develop? People move from rural areas into these centers. Look, it will continue to drive growth. Much of the growth in the 2000s was on the back of urbanization, which really got a kick along after the global financial crisis in 2008, when
the central government and the central bank in China responded as part of a global response by injecting substantial amounts of liquidity into the Chinese market, much of which went into fast-tracking urbanisation. So we had urban infrastructure being developed all through the 2010s, fast rail, electrical systems, road networks, as well as, of course, the myriad of apartment developments, etc., etc.,
So that process catalyzed the influx of residents from the rural areas. And that brings with it another level of demand for all sorts of things, from building materials, of course, all the way through to the various mod cons, you know, the modern consumables that people populate their houses with, you know, kitchen appliances, beds, furniture, electronic goods, et cetera, et cetera.
So urbanisation is a tremendous catalyst for these new kinds of demand activities. And as you say, there is likely to be ongoing urbanisation, particularly in the so-called lower tier cities, the third and fourth tier cities. Interestingly, I think that that's also part of what I have described as a series of major rotations in the Chinese economic model. So one of the rotations is actually from massive cities
leverage of the urban development world, you know, real estate, and having that social capital being redirected now into high-tech and manufacturing areas of activity. But as part of that, that's also driving a demographic rotation and a geographic rotation.
And that is manifest in the fact that we're starting to see the beginnings of a trend where younger workers, well-schooled workers, relocating to the lower tier cities where buying a property is a bit cheaper. And there's a few reasons for that. But also where the new high-tech industrial developments are starting to take place. So if you look at the map and looked at where BYD, which is China's largest company,
probably most recognisable EV brand today. Its productive facilities, its factories are dotted all across China. You know, they're not just in the big first tier cities that Western audiences would typically associate with China. So as industries find opportunities to establish their production systems in the third and fourth tier cities, we're also seeing the
the kinds of workers that these enterprises attract moves there as well. And the kinds of workers, of course, is a combination of highly educated people coming from universities with degrees in mathematics and engineering and
other sciences, as well as workers coming from the rural townships and the villages who will continue to fill some of the lower skilled requirements within these production systems. So we're starting to see, I think, Jason, a deepening of the processes of even development as opposed to uneven development. And that dovetails in with the national government's policy focus on
common prosperity. Actually, I wanted to talk about common prosperity. So everyone, I think, in the world who knows anything about China knows that China erased extreme poverty as defined by the World Bank in 2020. We also have something called the Gini Index or coefficient where we measure the degree of inequality. And clearly, China calls itself
with Chinese characteristics. So can we talk about what is the state of inequality in China versus 20 years ago and why has it changed? Well, it's dropped. So China's Gini coefficient has been dropping consistently now for the past 12, 13 years. And
and peaked right around 2011, 2012, somewhere like that, where the income inequality both within major cities was quite steep and income inequality between urban people and rural residents was substantial as well. So that was a function of the patterns of uneven development that was taking place during the course of particularly the 1990s and then into the first decade of the 21st century.
But once those processes sort of began working their way through and we started to see a public policy driving these other forms of rotations, the commitment towards high-tech industry, the developments in third-tier and fourth-tier cities, et cetera, et cetera, we are now starting to see the spreading of the economic largesse. So as real incomes have risen,
the proportion of people who are benefiting from rising real incomes is also expanding.
And they are being found, of course, in your top tier cities, your first and second tiers. But as I mentioned, increasingly also are finding their way into your third and fourth tier cities where the cost of living is lower, where there are significant employment opportunities growing in areas that suit their new skills, the high tech, the engineering, the mathematics skills.
And so we can see that the measures of inequality, you know, the Gini coefficient generally and also basically the gap between urban incomes and rural incomes is compressing. So for a dozen years or so now, there has been a concerted and so far a successful effort to...
achieve a reduction in social inequality whilst at the same time maintaining robust economic growth and high levels of employment.
You know, I have to say that I'm also drawn to these second, third and fourth tier cities because they're basically as modern as first tier cities. Nice hospitals, excellent roads, excellent public infrastructure. But the cost of housing is ridiculously lower. So Beijing, of course, Shanghai, of course, really expensive. But you look at a second tier city in China, you can get an amazing apartment that's really affordable. And I have to say, it's very, very tempting.
I want to talk about the next decade. I mean, obviously, no one can know the future, but I guess economists probably get closest. Is stable growth possible for the next decade in China? Why or why not? Look, my view is that China is going to be able to achieve relatively stable growth.
It's going to be able to do that in large part because of the continued centrality of public finance institutions, as we discussed earlier, together with an economic model where state-owned enterprises play that sort of role of modulating aggregate demand. But importantly, it's not just about playing around with system aggregates. It's also about the quality of all the qualitative dimensions of what's happening,
Underpinning the processes of economic development with 2020 characteristics and perhaps even 2030 characteristics is a commitment to focusing on investments in areas that deliver greater energy returns on energy investments.
So we're looking at next 10 years where Chinese economic development will be underpinned by efforts across the board to develop technologies and infrastructures and processes and business models that can get a lot more bang for buck out of every unit of energy committed. So we're, of course, seeing China playing a leading role in that.
all sorts of renewable energy development projects because there is a recognition that whilst there is substantial upfront capital costs, that the long run unit costs of energy are very, very low and that in fact there is tremendous energy conversion efficiencies in some of these technologies.
So these are the things that I think are going to propel the next decade of China's economic development. There are some other aspects which I think will also come into the picture a little bit more, which is to round out the sort of social settlement, if you will, and that's to do with the ongoing development of the social safety net, particularly around retirement incomes and also the growth of
I guess what in the West people would call the wealth management industry. So we started the conversation today with questions about the stock market.
And perhaps to sort of bring it back to that, the reforms that are unfolding now in China's wealth management sector around regulations concerning new product development and its relationship with the stock exchange is likely to feature quite prominently in how Chinese household savings will be mobilised into financial products that are listed on stock exchanges that will ultimately feed
capital into enterprise and industry development. So we're starting to see, I guess, a level of or the next phases of social policy reform that dovetails with the imperatives of the next 10 years of social and economic development.
I'm going to have to keep my eye on the Chinese stock market then for personal reasons. But you recently wrote an opinion piece for the Global Times about BRICS. I wanted to talk about multipolarity. How does BRICS expansion facilitate multipolarity? Because they just took on quite a few new members. Yeah, so BRICS took on another group of permanent members as well as observer or partner members.
And they particularly matter in the Southeast Asian context because we now have Indonesia joining BRICS as a full member. Indonesia is, well, it's 300-odd million people in Southeast Asia. So it is clearly a substantial nation with a growing economy, which will play an increasingly important role in Southeast Asian and East Asian economic development generally.
Indonesia also has historically played a very important role in the, let's call it the geopolitics and the institutions of the region, particularly through its leadership role in bodies such as ASEAN.
So Indonesia joining BRICS is a very important move because it demonstrates that the ability of countries in the region, significant countries in the region, to participate in regional multipolar institutions such as ASEAN, whilst at the same time also interacting with and joining more global institutions such as BRICS, the
The other participants from our region here in Asia is Malaysia, Thailand and Vietnam. And those countries are also important parts of the global south, particularly in this part of the world. And by those countries getting involved in BRICS, they will add ballast to BRICS in terms of its representativeness,
So BRICS will bring a stronger Asian voice to the table. It will also underpin the economic diversity of BRICS, particularly in areas of agriculture and manufacturing capacity. You know, Vietnam is a rapidly growing manufacturing nation and Vietnam coming into the fold is going to play an important role, just as Malaysia will as well. And Thailand also has ambitions too. So the
Diversifying the geography and the economic foundations of BRICS is what's going on at the moment. And I think BRICS will continue to play a growing and an important role in principally the economics of the world, but through...
through its ability to mobilise networks of economic resources of substantial and growing global South nations, will be able to, I think, contribute meaningfully to the broader discussions around global development and global governance institutions that have
for the best part of the last few hundred years largely ignored the voices of of the developing world last question although i could probably ask you 50 more and this is more of a political question than an economic question on the topic of multi-polarity
John Mearsheimer often comes out as someone who thinks that the behavior of any nation is going to be identical to other nations, and that a global empire seeking unipolarity or hegemony will emerge from a powerful nation. So many in Washington, D.C., they think like this, and their thinking is based on the conception that China is an ascendancy. But it doesn't seem like
China has, in my opinion, this desire for hegemony. So in your opinion, do you think Chinese policymakers and politicians want Chinese global hegemony in the ways that Western empires have over the last few hundred years? Well, the short answer is no, but it's worth unpacking just a little bit in the
hopefully in the next couple of minutes. Look, the idea that all countries behave the same is, of course, a sort of a Western rationalist presupposition. It ignores the fact that different countries do frame their interests differently.
differently based on their own cultural and historical perspectives and experiences. And in fact, the Mishima mantra that all countries behave in a very particular sense of rationality is undermined by his own work in relation to the dominance of the Jewish lobby as a way in which he explains why the United States acts in ways that are not in America's national interest. So once we actually understand that countries will frame the world in different ways and
and as a result of that have very different means-end conceptualisations, then the idea that there is a universal rationality starts to fade away. That's the first point. The second point is that once you understand that a country may have a very different means-end relationship or conceptualisation of a means-end relationship,
they may actually have a similar view about what their objective is, such as national security, but they'll have a very different view about how best to achieve that. So just because two countries have a view that they both want to have national security doesn't mean that they'll both adopt the same tactics or strategies. So China's history, and particularly its contemporary articulation of its view of the world, its place in the world, and how security and questions like that are best to be achieved,
strongly points in the direction where China sees its own national security as being fundamentally intertwined with the security of the rest of the world. In other words, it has a sense of security as indivisible, where its own security cannot come at the expense of others and vice versa. That is very different to the sort of rationalist philosophy that underpins a lot of the realist mantras.
Now, if you adopt China's view that security of one comes with the security of others, then it begins to focus a lot more on how does it cultivate that. And interestingly, it's been achieving that with its relationship with Russia, for example, which also shares a similar kind of approach, which is the idea that Russia's security is best enhanced through a framework of indivisible security. So Russia's security can't come at the expense of others and other security can't come at the expense of Russia's.
that fundamentally drives, I guess, what you'd call a collaborative framework.
Now, a collaborative framework, as more people become accustomed to it or as more nations become accustomed to the benefits of a collaborative framework, the stronger that that collaborative network gets. So collaboration becomes self-reinforcing. Now, countries that historically have been able to benefit from dividing and conquering will, of course, have a strong vested interest in undermining the collaborative efforts of others. And so you will get countries that will seek to be spoilers. They will seek to...
sow seeds of division, exacerbate tensions that may exist between different countries because those countries see the world in zero-sum terms whereas the others don't. So as much as I think the Mearsheimer view does bring quite a lot of insight to understanding international political arrangements, it probably could do with a little bit more roundedness
that draws a lot more from the specific experiences and cultures of individual nations. Wow, incredibly insightful views into geopolitics and especially China's economy. Thank you so much for your time, Dr. Warwick Powell.