WEBVTT 00:00:11.000 --> 00:00:14.000 So why is the Chinese economy in so much trouble right now? 00:00:14.000 --> 00:00:20.000 Well actually, this shouldn't come as a surprise. If you've been watching China over the last several decades, 00:00:20.000 --> 00:00:25.000 you can understand how the current problems actually fall out of a lot of their earlier successes. 00:00:25.000 --> 00:00:30.000 The story starts in 1979. And in 1979, 00:00:30.000 --> 00:00:35.000 you have Chinese reformers starting to do a good deal to put the Chinese economy on 00:00:35.000 --> 00:00:40.000 a sounder track. At that time, Chinese per capita income 00:00:40.000 --> 00:00:45.000 was only a few hundred dollars a year, almost everyone was very poor, 00:00:45.500 --> 00:00:50.000 people would ride bicycles rather than driving cars, and even starvation was still a possibility. 00:00:50.000 --> 00:00:55.000 So China introduces more private property, more capitalistic 00:00:55.000 --> 00:01:00.000 incentives, it privatizes some of its agriculture, it allows more manufacturing, 00:01:00.000 --> 00:01:05.000 more exporting. Overall, China starts moving toward being a modern 00:01:05.000 --> 00:01:10.000 economy, a normal economy. And once these reforms are underway, 00:01:10.000 --> 00:01:15.000 China is growing at really an astonishing pace. For a lot of the last 35 years, 00:01:15.000 --> 00:01:20.000 China has been growing at around 10% a year. 00:01:20.000 --> 00:01:25.000 That's amazing! The American economy typically doesn't grow at much more than 2% a year. 00:01:25.000 --> 00:01:30.000 At 10% a year growth, that means that living standards double about every 7 years. 00:01:30.000 --> 00:01:35.000 So if you go back, you keep on visiting China, it's as if every 7 years, 00:01:40.000 --> 00:01:45.000 every 10 years, you get to see an entirely new country. For me personally, China 00:01:45.000 --> 00:01:50.000 They have grown at a pace that no other place has matched. Imagine about 10% a year growth 00:01:50.000 --> 00:01:55.000 for almost 35 years. That has transformed everything. So even 00:01:55.000 --> 00:02:00.000 year to year, parts of a city or a neighborhood can simply change before your eyes. 00:02:00.000 --> 00:02:05.000 So you see human progress at work, you see what took some parts of the world 00:02:05.000 --> 00:02:10.000 centuries to achieve, happening in decades or even years. 00:02:10.000 --> 00:02:15.000 You see human hope and faith and progress, and a deep underlying optimism about what is possible. 00:02:15.000 --> 00:02:20.000 So the Chinese economy during these years of rapid growth - it had some very notable features. 00:02:20.000 --> 00:02:25.000 It had high levels of savings, it had super high levels of investment, 00:02:25.000 --> 00:02:30.000 and they build lots and lots of infrastructure. And those were all very positive. 00:02:30.000 --> 00:02:35.000 It's wonderful how good the infrastructure is in China. I would much rather ride on a Chinese 00:02:35.000 --> 00:02:40.000 high-speed rail train than take the Amtrak from Washington, D.C. to New York City. 00:02:40.000 --> 00:02:45.000 The Chinese train is quicker, nicer, and it's far more likely to be on time. 00:02:45.000 --> 00:02:50.000 But here’s the thing - for a long time China has been investing almost half of its GDP 00:02:50.000 --> 00:02:55.000 every year, half! That's astonishing. When you think about it, 00:02:55.000 --> 00:03:00.000 it is remarkably hard, every year, to invest half of your GDP and to invest it well. 00:03:00.000 --> 00:03:05.000 In the early years of China's economic growth, the required investments were pretty simple 00:03:05.000 --> 00:03:10.000 and straightforward. They needed to build more homes, they needed to put in more train lines, 00:03:10.000 --> 00:03:15.000 they needed to build more roads, they needed to equip their urban centers with 00:03:15.000 --> 00:03:20.000 all of the normal features of everyday modern life. And the Chinese government did a really good 00:03:20.000 --> 00:03:25.000 job at all of those things. It's a big reason why, actually, China's growth has been so strong. 00:03:25.000 --> 00:03:30.000 But the problem is this - the way decision making in China is set up - 00:03:30.000 --> 00:03:35.000 it's very good for achieving things with a kind of checklist - known tasks 00:03:35.000 --> 00:03:40.000 that require a lot of resources and a lot of effort, and you throw everything you have at getting it done, 00:03:40.000 --> 00:03:45.000 and you get it done pretty quickly. China has been great at that. 00:03:45.000 --> 00:03:50.000 But now, a lot of that low-hanging fruit is gone. A lot of the infrastructure which China needs 00:03:50.000 --> 00:03:55.000 already has been built, but now their economy need more complex investment. 00:03:55.000 --> 00:04:00.000 They need a better healthcare system, they need better retail services, they need more startups. 00:04:00.000 --> 00:04:05.000 And in these areas, there’s not a simple checklist way to get it done. It's 00:04:05.000 --> 00:04:10.000 not just a question of throwing resources at the problem. You need more trial and error, more experimentation, 00:04:10.000 --> 00:04:15.000 you need more of a market discovery process to figure out which 00:04:15.000 --> 00:04:20.000 are the profitable investments and which are the unprofitable ones. And it’s hard 00:04:20.000 --> 00:04:25.000 to plan and manage those the same ways that the Chinese did that with all of their infrastructure. 00:04:25.000 --> 00:04:30.000 Here is another problem with the Chinese economic model. If your economy grows 10% a year 00:04:30.000 --> 00:04:35.000 or so for so long, businessmen and also your governments, they start thinking 00:04:35.000 --> 00:04:40.000 there isn't much risk. At 10% growth, there so much forward impetus. 00:04:40.000 --> 00:04:45.000 You can have a business plan with a lot of mistakes, you can have a lot of debt, you can be very poor on execution, 00:04:45.000 --> 00:04:55.000 but a lot of those investments are still going to make money at about 10% growth. 00:04:55.000 --> 00:05:00.000 So what happens is, the underlying economy loses some of its discipline. People get sloppy, they overextend, they become too optimistic. 00:05:00.000 --> 00:05:05.000 They think they can make any investment or any decision and somehow it will pay off or be validated, 00:05:05.000 --> 00:05:10.000 just because everyone else is pushing on that 10% rate of growth. 00:05:10.000 --> 00:05:15.000 A turning point for the Chinese economy comes in 2009 when there’s a significant recession in 00:05:15.000 --> 00:05:20.000 many other parts of the world. At the time, a lot of observers thought, 00:05:20.000 --> 00:05:25.000 "Well, there’s going to be a big recession in China too." But there wasn't. 00:05:25.000 --> 00:05:30.000 The Chinese government undertook some very special steps to avoid or maybe just postpone that recession. 00:05:30.000 --> 00:05:35.000 So the Chinese government spent a lot more money on infrastructure at a time 00:05:35.000 --> 00:05:40.000 where maybe less infrastructure investment was called for. 00:05:40.000 --> 00:05:45.000 The Chinese government, the state-owned banks, the state-owned companies, acted in concert 00:05:45.000 --> 00:05:50.000 to encourage a lot more borrowing, a lot more debt. And it's true - this did spur spending, 00:05:50.000 --> 00:05:55.000 it boosted investment, kept the economy running at a higher level, 00:05:55.000 --> 00:06:00.000 but actually debt rose to the point where it was too high relative to the rates of return 00:06:00.000 --> 00:06:05.000 available on those projects. So now, we don't have very exact 00:06:05.000 --> 00:06:10.000 measures, but it seems that total Chinese debt of all kinds is well over 200% 00:06:10.000 --> 00:06:15.000 of GDP. Possibly as high as 300% of GDP. And 00:06:15.000 --> 00:06:20.000 maybe that can work when your underlying rate of growth is 10%, but as your underlying rate 00:06:20.000 --> 00:06:25.000 of economic growth falls, it's harder and harder for that debt to be sustainable. 00:06:25.000 --> 00:06:30.000 So how much is China growing today? Well it depends who you listen to. 00:06:30.000 --> 00:06:35.000 The Chinese government, circa 2015, is claiming China is still growing 00:06:35.000 --> 00:06:40.000 at about 7% a year. But not many external observers believe this, 00:06:40.000 --> 00:06:45.000 because they’re looking at other pieces of data. No one is sure what the real rate of economic growth is, 00:06:45.000 --> 00:06:50.000 but what we know is that it is probably sharply lower 00:06:50.000 --> 00:06:55.000 and China is now entering a great recession. 00:06:55.000 --> 00:07:00.000 To track this recession, we can keep in mind five issues or problem areas: 00:07:00.000 --> 00:07:05.000 the real estate bubble, the stock market bubble, the excess level of municipal debt, 00:07:05.000 --> 00:07:10.000 excess capacity among Chinese businesses, and finally, the risk of capital flight. 00:07:10.000 --> 00:07:15.000 The first of these is - the real estate bubble. 00:07:15.000 --> 00:07:20.000 Chinese property prices became too high in many Chinese cities and China overbuilt. 00:07:20.000 --> 00:07:25.000 I took a train trip from Beijing through the center of the country, a six hour train trip. 00:07:25.000 --> 00:07:30.000 And along the way, I kept on seeing city after city 00:07:30.000 --> 00:07:35.000 with dozens and dozens of apartment blocks. You would see so many buildings, but so few people, 00:07:35.000 --> 00:07:40.000 so few retail stores, so few cars. Many of those cities are 00:07:40.000 --> 00:07:45.000 grossly overbuilt, relative to what can be supported. 00:07:45.000 --> 00:07:50.000 The Chinese stock market bubble is another potential problem. For a while, Chinese stock prices 00:07:50.000 --> 00:07:55.000 were rising rapidly, but then they fell rapidly too. 00:07:55.000 --> 00:08:00.000 Too many people were encouraged to buy stocks on margin, the ratio of prices to corporate earnings 00:08:00.000 --> 00:08:05.000 has been extremely high, and probably those stock prices will continue to fall at a pretty rapid pace. 00:08:05.000 --> 00:08:10.000 That will depress consumer spending, lower confidence 00:08:10.000 --> 00:08:15.000 and it also will be a problem for some Chinese banks. The third problem is municipal debt. 00:08:15.000 --> 00:08:20.000 No one really knows exactly how big a problem this is. We do know that Chinese 00:08:20.000 --> 00:08:25.000 municipal governments were not supposed to be able to borrow money, they were supposed 00:08:25.000 --> 00:08:30.000 to run balanced budgets. But in fact, a lot of them ended up borrowing money off the books, 00:08:30.000 --> 00:08:35.000 and in fact they were encouraged by the central government to do this, to keep 00:08:35.000 --> 00:08:40.000 up that expenditure on all the infrastructure. But what’s happened is, they borrowed a lot more than right 00:08:40.000 --> 00:08:45.000 now they are able to pay back. And the central government in Beijing is feeling the need 00:08:45.000 --> 00:08:50.000 to try to bail out these municipal governments. Another big problem in the Chinese economy 00:08:50.000 --> 00:08:55.000 is what I would call "excess capacity". That is, in too many sectors you have too many firms, 00:08:55.000 --> 00:09:00.000 you have too much overconfidence, too much stimulation of investment, and a lot of those companies 00:09:00.000 --> 00:09:05.000 probably are not profitable. They're being kept afloat by cheap credit by Chinese 00:09:05.000 --> 00:09:10.000 state-owned banks, or they may be Chinese state-owned companies themselves, which 00:09:10.000 --> 00:09:15.000 have political privileges of various kinds. But a lot of those companies right now, 00:09:15.000 --> 00:09:20.000 They’re not making really productive investments in the kinds of things that Chinese consumers want. 00:09:20.000 --> 00:09:25.000 If you look at price indices, if you look at the index for producer prices in China, 00:09:25.000 --> 00:09:30.000 that's one measure of this excess capacity. 00:09:30.000 --> 00:09:35.000 That index actually has been falling now for over three years running, falling every month. That's a sign that too many 00:09:35.000 --> 00:09:40.000 producer goods have been built for what can be sustained profitably. 00:09:40.000 --> 00:09:46.000 So maybe the biggest potential problem is capital flight. There’s a risk that capital within China, 00:09:46.000 --> 00:09:55.000 foreign capital, but specially domestic capital, seeks to leave the country out of fear of China's economic problems. 00:09:55.000 --> 00:10:00.000 But if too much of this capital leaves the country, that actually makes the problems much worse. As we saw with the Asian financial 00:10:00.000 --> 00:10:05.000 crisis in the 1990's for other countries. The big danger in China is simply that 00:10:05.000 --> 00:10:10.000 capital flight accelerates. But in the meantime, think of the problems the Chinese government 00:10:10.000 --> 00:10:15.000 has trying to manage all of this. There are a lot of firms which are no longer profitable, 00:10:15.000 --> 00:10:20.000 but the government’s reluctant to let them go bankrupt because of fear of unemployment 00:10:20.000 --> 00:10:25.000 and also alienating special interest groups. There’s too much credit and too much borrowing in the economy, 00:10:25.000 --> 00:10:30.000 but if that bubble is burst, well then economic activity will fall all the more. 00:10:30.000 --> 00:10:35.000 There's been too much investment in real estate, there’s too much continuing reliance on infrastructure, 00:10:35.000 --> 00:10:40.000 and somehow the government is supposed to juggle all of these balls at once 00:10:40.000 --> 00:10:45.000 and stop the recession from getting worse. When you put all of those issues together, 00:10:45.000 --> 00:10:50.000 it is indeed a very complex picture, very difficult to understand. But what we see 00:10:50.000 --> 00:10:55.000 is that the world's number two economy really is running a very serious risk of a recession 00:10:55.000 --> 00:11:00.000 which will be deep, and also may last really quite some number of years. 00:11:00.000 --> 00:11:05.000 My personal view is that, at this point, these problems are so deeply baked into the Chinese economy, 00:11:05.000 --> 00:11:10.000 there is no way to set this all right. But still there are some major reasons 00:11:10.000 --> 00:11:15.000 to be optimistic looking forward. First, the most important source of wealth in any economy is 00:11:15.000 --> 00:11:20.000 human capital. The Chinese have done a fantastic job investing 00:11:20.000 --> 00:11:25.000 in their own human capital. So from the economist’s point of view, which values 00:11:25.000 --> 00:11:30.000 human capital above all else, as the most fundamental source of national wealth. When we look at the future 00:11:30.000 --> 00:11:35.000 of China in the medium-term prospects, we really should be optimistic 00:11:35.000 --> 00:11:40.000 or even cheery. Because China has invested very well in human capital. 00:11:40.000 --> 00:11:45.000 Those investments will survive the current recession intact, and we have 00:11:45.000 --> 00:11:50.000 every reason to believe that China will be extending the talents, energies, drives, and ambitions of its people, 00:12:22.000 --> 00:12:25.000 Subtitles by the Amara.org community