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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:02.50,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:11.23,0:00:13.12,Default,,0000,0000,0000,,- [Prof. Tyler Cowen]\NSo why is the Chinese economy
Dialogue: 0,0:00:13.12,0:00:14.81,Default,,0000,0000,0000,,in so much trouble right now?
Dialogue: 0,0:00:14.81,0:00:17.35,Default,,0000,0000,0000,,Well, actually,\Nthis shouldn't come as a surprise.
Dialogue: 0,0:00:17.35,0:00:20.64,Default,,0000,0000,0000,,If you've been watching China\Nover the last several decades,
Dialogue: 0,0:00:20.64,0:00:22.82,Default,,0000,0000,0000,,you can understand\Nhow the current problems
Dialogue: 0,0:00:22.82,0:00:26.15,Default,,0000,0000,0000,,actually fall out of a lot\Nof their earlier successes.
Dialogue: 0,0:00:26.15,0:00:28.73,Default,,0000,0000,0000,,The story starts in 1979.
Dialogue: 0,0:00:28.73,0:00:32.17,Default,,0000,0000,0000,,And in 1979,\Nyou have Chinese reformers
Dialogue: 0,0:00:32.17,0:00:35.41,Default,,0000,0000,0000,,starting to do a good deal\Nto put the Chinese economy
Dialogue: 0,0:00:35.41,0:00:36.87,Default,,0000,0000,0000,,on a sounder track.
Dialogue: 0,0:00:36.87,0:00:39.76,Default,,0000,0000,0000,,At that time,\NChinese per capita income
Dialogue: 0,0:00:39.76,0:00:42.11,Default,,0000,0000,0000,,was only a few hundred\Ndollars a year,
Dialogue: 0,0:00:42.11,0:00:44.61,Default,,0000,0000,0000,,almost everyone was very poor,
Dialogue: 0,0:00:44.61,0:00:48.41,Default,,0000,0000,0000,,people would ride bicycles\Nrather than driving cars,
Dialogue: 0,0:00:48.41,0:00:51.33,Default,,0000,0000,0000,,and even starvation\Nwas still a possibility.
Dialogue: 0,0:00:51.84,0:00:54.57,Default,,0000,0000,0000,,So China introduces\Nmore private property,
Dialogue: 0,0:00:54.57,0:00:56.56,Default,,0000,0000,0000,,more capitalistic incentives,
Dialogue: 0,0:00:56.56,0:00:59.13,Default,,0000,0000,0000,,it privatizes\Nsome of its agriculture,
Dialogue: 0,0:00:59.13,0:01:02.27,Default,,0000,0000,0000,,it allows more manufacturing,\Nmore exporting.
Dialogue: 0,0:01:02.27,0:01:06.50,Default,,0000,0000,0000,,Overall, China starts moving\Ntoward being a modern economy,
Dialogue: 0,0:01:06.50,0:01:07.72,Default,,0000,0000,0000,,a normal economy.
Dialogue: 0,0:01:08.11,0:01:10.40,Default,,0000,0000,0000,,And once these reforms are underway,
Dialogue: 0,0:01:10.40,0:01:13.36,Default,,0000,0000,0000,,China is growing\Nat really an astonishing pace.
Dialogue: 0,0:01:13.36,0:01:15.78,Default,,0000,0000,0000,,For a lot of the last 35 years,
Dialogue: 0,0:01:15.78,0:01:19.44,Default,,0000,0000,0000,,China has been growing\Nat around 10% a year.
Dialogue: 0,0:01:19.44,0:01:20.60,Default,,0000,0000,0000,,That's amazing!
Dialogue: 0,0:01:20.60,0:01:22.36,Default,,0000,0000,0000,,The American economy typically
Dialogue: 0,0:01:22.36,0:01:25.00,Default,,0000,0000,0000,,doesn't grow\Nat much more than 2% a year.
Dialogue: 0,0:01:25.00,0:01:27.00,Default,,0000,0000,0000,,At 10% a year growth,
Dialogue: 0,0:01:27.00,0:01:31.10,Default,,0000,0000,0000,,that means that living standards\Ndouble about every 7 years.
Dialogue: 0,0:01:31.10,0:01:33.65,Default,,0000,0000,0000,,So if you go back,\Nyou keep on visiting China,
Dialogue: 0,0:01:33.65,0:01:36.46,Default,,0000,0000,0000,,it's as if every 7 years,\Nevery 10 years,
Dialogue: 0,0:01:36.46,0:01:38.90,Default,,0000,0000,0000,,you get to see\Nan entirely new country.
Dialogue: 0,0:01:38.90,0:01:42.00,Default,,0000,0000,0000,,For me personally, China is the most\Ninteresting country in the world
Dialogue: 0,0:01:42.00,0:01:45.00,Default,,0000,0000,0000,,to visit as an economist.
Dialogue: 0,0:01:45.00,0:01:50.00,Default,,0000,0000,0000,,They have grown at a pace that no other place \Nhas matched. Imagine about 10% a year growth
Dialogue: 0,0:01:50.00,0:01:55.00,Default,,0000,0000,0000,,for almost 35 years. That has \Ntransformed everything. So even
Dialogue: 0,0:01:55.00,0:02:00.00,Default,,0000,0000,0000,,year to year, parts of a city or a neighborhood \Ncan simply change before your eyes.
Dialogue: 0,0:02:00.00,0:02:05.00,Default,,0000,0000,0000,,So you see human progress at work, you \Nsee what took some parts of the world
Dialogue: 0,0:02:05.00,0:02:10.00,Default,,0000,0000,0000,,centuries to achieve, happening \Nin decades or even years.
Dialogue: 0,0:02:10.00,0:02:15.00,Default,,0000,0000,0000,,You see human hope and faith and progress, and \Na deep underlying optimism about what is possible.
Dialogue: 0,0:02:15.00,0:02:20.00,Default,,0000,0000,0000,,So the Chinese economy during these years\Nof rapid growth - it had some very notable features.
Dialogue: 0,0:02:20.00,0:02:25.00,Default,,0000,0000,0000,,It had high levels of savings, it \Nhad super high levels of investment,
Dialogue: 0,0:02:25.00,0:02:30.00,Default,,0000,0000,0000,,and they build lots and lots of infrastructure. \NAnd those were all very positive.
Dialogue: 0,0:02:30.00,0:02:35.00,Default,,0000,0000,0000,,It's wonderful how good the infrastructure is \Nin China. I would much rather ride on a Chinese
Dialogue: 0,0:02:35.00,0:02:40.00,Default,,0000,0000,0000,,high-speed rail train than take the \NAmtrak from Washington, D.C. to New York City.
Dialogue: 0,0:02:40.00,0:02:45.00,Default,,0000,0000,0000,,The Chinese train is quicker, nicer, \Nand it's far more likely to be on time.
Dialogue: 0,0:02:45.00,0:02:50.00,Default,,0000,0000,0000,,But here’s the thing - for a long time China \Nhas been investing almost half of its GDP
Dialogue: 0,0:02:50.00,0:02:55.00,Default,,0000,0000,0000,,every year, half! That's astonishing. \NWhen you think about it,
Dialogue: 0,0:02:55.00,0:03:00.00,Default,,0000,0000,0000,,it is remarkably hard, every year, to \Ninvest half of your GDP and to invest it well.
Dialogue: 0,0:03:00.00,0:03:05.00,Default,,0000,0000,0000,,In the early years of China's economic \Ngrowth, the required investments were pretty simple
Dialogue: 0,0:03:05.00,0:03:10.00,Default,,0000,0000,0000,,and straightforward. They needed to build more \Nhomes, they needed to put in more train lines,
Dialogue: 0,0:03:10.00,0:03:15.00,Default,,0000,0000,0000,,they needed to build more roads, they \Nneeded to equip their urban centers with
Dialogue: 0,0:03:15.00,0:03:20.00,Default,,0000,0000,0000,,all of the normal features of everyday modern \Nlife. And the Chinese government did a really good
Dialogue: 0,0:03:20.00,0:03:25.00,Default,,0000,0000,0000,,job at all of those things. It's a big reason \Nwhy, actually, China's growth has been so strong.
Dialogue: 0,0:03:25.00,0:03:30.00,Default,,0000,0000,0000,,But the problem is this - the way \Ndecision making in China is set up -
Dialogue: 0,0:03:30.00,0:03:35.00,Default,,0000,0000,0000,,it's very good for achieving things \Nwith a kind of checklist - known tasks
Dialogue: 0,0:03:35.00,0:03:40.00,Default,,0000,0000,0000,,that require a lot of resources and a lot of effort, \Nand you throw everything you have at getting it done,
Dialogue: 0,0:03:40.00,0:03:45.00,Default,,0000,0000,0000,,and you get it done pretty quickly. \NChina has been great at that.
Dialogue: 0,0:03:45.00,0:03:50.00,Default,,0000,0000,0000,,But now, a lot of that low-hanging fruit is gone. \NA lot of the infrastructure which China needs
Dialogue: 0,0:03:50.00,0:03:55.00,Default,,0000,0000,0000,,already has been built, but now their \Neconomy need more complex investment.
Dialogue: 0,0:03:55.00,0:04:00.00,Default,,0000,0000,0000,,They need a better healthcare system, they need \Nbetter retail services, they need more startups.
Dialogue: 0,0:04:00.00,0:04:05.00,Default,,0000,0000,0000,,And in these areas, there’s not a simple \Nchecklist way to get it done. It's
Dialogue: 0,0:04:05.00,0:04:10.00,Default,,0000,0000,0000,,not just a question of throwing resources at the \Nproblem. You need more trial and error, more experimentation,
Dialogue: 0,0:04:10.00,0:04:15.00,Default,,0000,0000,0000,,you need more of a market discovery \Nprocess to figure out which
Dialogue: 0,0:04:15.00,0:04:20.00,Default,,0000,0000,0000,,are the profitable investments and which \Nare the unprofitable ones. And it’s hard
Dialogue: 0,0:04:20.00,0:04:25.00,Default,,0000,0000,0000,,to plan and manage those the same ways that the \NChinese did that with all of their infrastructure.
Dialogue: 0,0:04:25.00,0:04:30.00,Default,,0000,0000,0000,,Here is another problem with the Chinese \Neconomic model. If your economy grows 10% a year
Dialogue: 0,0:04:30.00,0:04:35.00,Default,,0000,0000,0000,,or so for so long, businessmen and also \Nyour governments, they start thinking
Dialogue: 0,0:04:35.00,0:04:40.00,Default,,0000,0000,0000,,there isn't much risk. At 10% growth, \Nthere so much forward impetus.
Dialogue: 0,0:04:40.00,0:04:45.00,Default,,0000,0000,0000,,You can have a business plan with a lot of mistakes, \Nyou can have a lot of debt, you can be very poor on execution,
Dialogue: 0,0:04:45.00,0:04:55.00,Default,,0000,0000,0000,,but a lot of those investments are still \Ngoing to make money at about 10% growth.
Dialogue: 0,0:04:55.00,0:05:00.00,Default,,0000,0000,0000,,So what happens is, the underlying economy loses some of its discipline. People get sloppy, they overextend, they become too optimistic.
Dialogue: 0,0:05:00.00,0:05:05.00,Default,,0000,0000,0000,,They think they can make any investment or any \Ndecision and somehow it will pay off or be validated,
Dialogue: 0,0:05:05.00,0:05:10.00,Default,,0000,0000,0000,,just because everyone else is \Npushing on that 10% rate of growth.
Dialogue: 0,0:05:10.00,0:05:15.00,Default,,0000,0000,0000,,A turning point for the Chinese economy comes \Nin 2009 when there’s a significant recession in
Dialogue: 0,0:05:15.00,0:05:20.00,Default,,0000,0000,0000,,many other parts of the world. At the \Ntime, a lot of observers thought,
Dialogue: 0,0:05:20.00,0:05:25.00,Default,,0000,0000,0000,,"Well, there’s going to be a big recession \Nin China too." But there wasn't.
Dialogue: 0,0:05:25.00,0:05:30.00,Default,,0000,0000,0000,,The Chinese government undertook some very special steps \Nto avoid or maybe just postpone that recession.
Dialogue: 0,0:05:30.00,0:05:35.00,Default,,0000,0000,0000,,So the Chinese government spent a lot \Nmore money on infrastructure at a time
Dialogue: 0,0:05:35.00,0:05:40.00,Default,,0000,0000,0000,,where maybe less infrastructure \Ninvestment was called for.
Dialogue: 0,0:05:40.00,0:05:45.00,Default,,0000,0000,0000,,The Chinese government, the state-owned banks, \Nthe state-owned companies, acted in concert
Dialogue: 0,0:05:45.00,0:05:50.00,Default,,0000,0000,0000,,to encourage a lot more borrowing, a lot more \Ndebt. And it's true - this did spur spending,
Dialogue: 0,0:05:50.00,0:05:55.00,Default,,0000,0000,0000,,it boosted investment, kept the \Neconomy running at a higher level,
Dialogue: 0,0:05:55.00,0:06:00.00,Default,,0000,0000,0000,,but actually debt rose to the point where \Nit was too high relative to the rates of return
Dialogue: 0,0:06:00.00,0:06:05.00,Default,,0000,0000,0000,,available on those projects. \NSo now, we don't have very exact
Dialogue: 0,0:06:05.00,0:06:10.00,Default,,0000,0000,0000,,measures, but it seems that total Chinese \Ndebt of all kinds is well over 200%
Dialogue: 0,0:06:10.00,0:06:15.00,Default,,0000,0000,0000,,of GDP. Possibly as high as 300% of GDP. And
Dialogue: 0,0:06:15.00,0:06:20.00,Default,,0000,0000,0000,,maybe that can work when your underlying rate \Nof growth is 10%, but as your underlying rate
Dialogue: 0,0:06:20.00,0:06:25.00,Default,,0000,0000,0000,,of economic growth falls, it's harder and \Nharder for that debt to be sustainable.
Dialogue: 0,0:06:25.00,0:06:30.00,Default,,0000,0000,0000,,So how much is China growing today? \NWell it depends who you listen to.
Dialogue: 0,0:06:30.00,0:06:35.00,Default,,0000,0000,0000,,The Chinese government, circa 2015, is \Nclaiming China is still growing
Dialogue: 0,0:06:35.00,0:06:40.00,Default,,0000,0000,0000,,at about 7% a year. But not many \Nexternal observers believe this,
Dialogue: 0,0:06:40.00,0:06:45.00,Default,,0000,0000,0000,,because they’re looking at other pieces of data. \NNo one is sure what the real rate of economic growth is,
Dialogue: 0,0:06:45.00,0:06:50.00,Default,,0000,0000,0000,,but what we know is that \Nit is probably sharply lower
Dialogue: 0,0:06:50.00,0:06:55.00,Default,,0000,0000,0000,,and China is now entering \Na great recession.
Dialogue: 0,0:06:55.00,0:07:00.00,Default,,0000,0000,0000,,To track this recession, we can keep \Nin mind five issues or problem areas:
Dialogue: 0,0:07:00.00,0:07:05.00,Default,,0000,0000,0000,,the real estate bubble, the stock market \Nbubble, the excess level of municipal debt,
Dialogue: 0,0:07:05.00,0:07:10.00,Default,,0000,0000,0000,,excess capacity among Chinese businesses, \Nand finally, the risk of capital flight.
Dialogue: 0,0:07:10.00,0:07:15.00,Default,,0000,0000,0000,,The first of these is - the real estate bubble.
Dialogue: 0,0:07:15.00,0:07:20.00,Default,,0000,0000,0000,,Chinese property prices became too high in \Nmany Chinese cities and China overbuilt.
Dialogue: 0,0:07:20.00,0:07:25.00,Default,,0000,0000,0000,,I took a train trip from Beijing through the \Ncenter of the country, a six hour train trip.
Dialogue: 0,0:07:25.00,0:07:30.00,Default,,0000,0000,0000,,And along the way, I kept on \Nseeing city after city
Dialogue: 0,0:07:30.00,0:07:35.00,Default,,0000,0000,0000,,with dozens and dozens of apartment blocks. \NYou would see so many buildings, but so few people,
Dialogue: 0,0:07:35.00,0:07:40.00,Default,,0000,0000,0000,,so few retail stores, so few cars. \NMany of those cities are
Dialogue: 0,0:07:40.00,0:07:45.00,Default,,0000,0000,0000,,grossly overbuilt, relative \Nto what can be supported.
Dialogue: 0,0:07:45.00,0:07:50.00,Default,,0000,0000,0000,,The Chinese stock market bubble is another \Npotential problem. For a while, Chinese stock prices
Dialogue: 0,0:07:50.00,0:07:55.00,Default,,0000,0000,0000,,were rising rapidly, but \Nthen they fell rapidly too.
Dialogue: 0,0:07:55.00,0:08:00.00,Default,,0000,0000,0000,,Too many people were encouraged to buy stocks \Non margin, the ratio of prices to corporate earnings
Dialogue: 0,0:08:00.00,0:08:05.00,Default,,0000,0000,0000,,has been extremely high, and probably those stock \Nprices will continue to fall at a pretty rapid pace.
Dialogue: 0,0:08:05.00,0:08:10.00,Default,,0000,0000,0000,,That will depress consumer \Nspending, lower confidence
Dialogue: 0,0:08:10.00,0:08:15.00,Default,,0000,0000,0000,,and it also will be a problem for some Chinese \Nbanks. The third problem is municipal debt.
Dialogue: 0,0:08:15.00,0:08:20.00,Default,,0000,0000,0000,,No one really knows exactly how big a \Nproblem this is. We do know that Chinese
Dialogue: 0,0:08:20.00,0:08:25.00,Default,,0000,0000,0000,,municipal governments were not supposed to \Nbe able to borrow money, they were supposed
Dialogue: 0,0:08:25.00,0:08:30.00,Default,,0000,0000,0000,,to run balanced budgets. But in fact, a lot \Nof them ended up borrowing money off the books,
Dialogue: 0,0:08:30.00,0:08:35.00,Default,,0000,0000,0000,,and in fact they were encouraged by the \Ncentral government to do this, to keep
Dialogue: 0,0:08:35.00,0:08:40.00,Default,,0000,0000,0000,,up that expenditure on all the infrastructure. But \Nwhat’s happened is, they borrowed a lot more than right
Dialogue: 0,0:08:40.00,0:08:45.00,Default,,0000,0000,0000,,now they are able to pay back. And the central \Ngovernment in Beijing is feeling the need
Dialogue: 0,0:08:45.00,0:08:50.00,Default,,0000,0000,0000,,to try to bail out these municipal governments. \NAnother big problem in the Chinese economy
Dialogue: 0,0:08:50.00,0:08:55.00,Default,,0000,0000,0000,,is what I would call "excess capacity". That is, \Nin too many sectors you have too many firms,
Dialogue: 0,0:08:55.00,0:09:00.00,Default,,0000,0000,0000,,you have too much overconfidence, too much \Nstimulation of investment, and a lot of those companies
Dialogue: 0,0:09:00.00,0:09:05.00,Default,,0000,0000,0000,,probably are not profitable. They're being kept \Nafloat by cheap credit by Chinese
Dialogue: 0,0:09:05.00,0:09:10.00,Default,,0000,0000,0000,,state-owned banks, or they may be Chinese \Nstate-owned companies themselves, which
Dialogue: 0,0:09:10.00,0:09:15.00,Default,,0000,0000,0000,,have political privileges of various kinds. \NBut a lot of those companies right now,
Dialogue: 0,0:09:15.00,0:09:20.00,Default,,0000,0000,0000,,They’re not making really productive investments \Nin the kinds of things that Chinese consumers want.
Dialogue: 0,0:09:20.00,0:09:25.00,Default,,0000,0000,0000,,If you look at price indices, if you look at \Nthe index for producer prices in China,
Dialogue: 0,0:09:25.00,0:09:30.00,Default,,0000,0000,0000,,that's one measure of this excess capacity.
Dialogue: 0,0:09:30.00,0:09:35.00,Default,,0000,0000,0000,,That index actually has been falling now for over three years \Nrunning, falling every month. That's a sign that too many
Dialogue: 0,0:09:35.00,0:09:40.00,Default,,0000,0000,0000,,producer goods have been built \Nfor what can be sustained profitably.
Dialogue: 0,0:09:40.00,0:09:46.00,Default,,0000,0000,0000,,So maybe the biggest potential problem is capital \Nflight. There’s a risk that capital within China,
Dialogue: 0,0:09:46.00,0:09:55.00,Default,,0000,0000,0000,,foreign capital, but specially domestic capital, seeks to \Nleave the country out of fear of China's economic problems.
Dialogue: 0,0:09:55.00,0:10:00.00,Default,,0000,0000,0000,,But if too much of this capital leaves the country, that actually makes the problems much worse. As we saw with the Asian financial
Dialogue: 0,0:10:00.00,0:10:05.00,Default,,0000,0000,0000,,crisis in the 1990's for other countries. \NThe big danger in China is simply that
Dialogue: 0,0:10:05.00,0:10:10.00,Default,,0000,0000,0000,,capital flight accelerates. But in the meantime, \Nthink of the problems the Chinese government
Dialogue: 0,0:10:10.00,0:10:15.00,Default,,0000,0000,0000,,has trying to manage all of this. There are \Na lot of firms which are no longer profitable,
Dialogue: 0,0:10:15.00,0:10:20.00,Default,,0000,0000,0000,,but the government’s reluctant to let them \Ngo bankrupt because of fear of unemployment
Dialogue: 0,0:10:20.00,0:10:25.00,Default,,0000,0000,0000,,and also alienating special interest groups. There’s \Ntoo much credit and too much borrowing in the economy,
Dialogue: 0,0:10:25.00,0:10:30.00,Default,,0000,0000,0000,,but if that bubble is burst, well then \Neconomic activity will fall all the more.
Dialogue: 0,0:10:30.00,0:10:35.00,Default,,0000,0000,0000,,There's been too much investment in real estate, \Nthere’s too much continuing reliance on infrastructure,
Dialogue: 0,0:10:35.00,0:10:40.00,Default,,0000,0000,0000,,and somehow the government is supposed \Nto juggle all of these balls at once
Dialogue: 0,0:10:40.00,0:10:45.00,Default,,0000,0000,0000,,and stop the recession from getting worse. \NWhen you put all of those issues together,
Dialogue: 0,0:10:45.00,0:10:50.00,Default,,0000,0000,0000,,it is indeed a very complex picture, \Nvery difficult to understand. But what we see
Dialogue: 0,0:10:50.00,0:10:55.00,Default,,0000,0000,0000,,is that the world's number two economy really \Nis running a very serious risk of a recession
Dialogue: 0,0:10:55.00,0:11:00.00,Default,,0000,0000,0000,,which will be deep, and also may last \Nreally quite some number of years.
Dialogue: 0,0:11:00.00,0:11:05.00,Default,,0000,0000,0000,,My personal view is that, at this point, these \Nproblems are so deeply baked into the Chinese economy,
Dialogue: 0,0:11:05.00,0:11:10.00,Default,,0000,0000,0000,,there is no way to set this all right. \NBut still there are some major reasons
Dialogue: 0,0:11:10.00,0:11:15.00,Default,,0000,0000,0000,,to be optimistic looking forward. First, \Nthe most important source of wealth in any economy is
Dialogue: 0,0:11:15.00,0:11:20.00,Default,,0000,0000,0000,,human capital. The Chinese have \Ndone a fantastic job investing
Dialogue: 0,0:11:20.00,0:11:25.00,Default,,0000,0000,0000,,in their own human capital. So from \Nthe economist’s point of view, which values
Dialogue: 0,0:11:25.00,0:11:30.00,Default,,0000,0000,0000,,human capital above all else, as the most fundamental \Nsource of national wealth. When we look at the future
Dialogue: 0,0:11:30.00,0:11:35.00,Default,,0000,0000,0000,,of China in the medium-term prospects, \Nwe really should be optimistic
Dialogue: 0,0:11:35.00,0:11:40.00,Default,,0000,0000,0000,,or even cheery. Because China has \Ninvested very well in human capital.
Dialogue: 0,0:11:40.00,0:11:45.00,Default,,0000,0000,0000,,Those investments will survive the \Ncurrent recession intact, and we have
Dialogue: 0,0:11:45.00,0:11:50.00,Default,,0000,0000,0000,,every reason to believe that China will be extending the \Ntalents, energies, drives, and ambitions of its people,
Dialogue: 0,0:12:22.00,0:12:25.00,Default,,0000,0000,0000,,Subtitles by the Amara.org community