0:00:00.000,0:00:02.500
♪ [music] ♪

0:00:11.230,0:00:13.120
- [Prof. Tyler Cowen][br]So why is the Chinese economy

0:00:13.120,0:00:14.810
in so much trouble right now?

0:00:14.810,0:00:17.350
Well, actually,[br]this shouldn't come as a surprise.

0:00:17.350,0:00:20.640
If you've been watching China[br]over the last several decades,

0:00:20.640,0:00:22.820
you can understand[br]how the current problems

0:00:22.820,0:00:26.150
actually fall out of a lot[br]of their earlier successes.

0:00:26.150,0:00:28.730
The story starts in 1979.

0:00:28.730,0:00:32.170
And in 1979,[br]you have Chinese reformers

0:00:32.170,0:00:35.410
starting to do a good deal[br]to put the Chinese economy

0:00:35.410,0:00:36.870
on a sounder track.

0:00:36.870,0:00:39.760
At that time,[br]Chinese per capita income

0:00:39.760,0:00:42.110
was only a few hundred[br]dollars a year,

0:00:42.110,0:00:44.610
almost everyone was very poor,

0:00:44.610,0:00:48.410
people would ride bicycles[br]rather than driving cars,

0:00:48.410,0:00:51.330
and even starvation[br]was still a possibility.

0:00:51.840,0:00:54.570
So China introduces[br]more private property,

0:00:54.570,0:00:56.560
more capitalistic incentives,

0:00:56.560,0:00:59.130
it privatizes[br]some of its agriculture,

0:00:59.130,0:01:02.270
it allows more manufacturing,[br]more exporting.

0:01:02.270,0:01:06.500
Overall, China starts moving[br]toward being a modern economy,

0:01:06.500,0:01:07.720
a normal economy.

0:01:08.110,0:01:10.400
And once these reforms are underway,

0:01:10.400,0:01:13.360
China is growing[br]at really an astonishing pace.

0:01:13.360,0:01:15.780
For a lot of the last 35 years,

0:01:15.780,0:01:19.440
China has been growing[br]at around 10% a year.

0:01:19.440,0:01:20.600
That's amazing!

0:01:20.600,0:01:22.360
The American economy typically

0:01:22.360,0:01:25.000
doesn't grow[br]at much more than 2% a year.

0:01:25.000,0:01:27.000
At 10% a year growth,

0:01:27.000,0:01:31.100
that means that living standards[br]double about every 7 years.

0:01:31.100,0:01:33.650
So if you go back,[br]you keep on visiting China,

0:01:33.650,0:01:36.460
it's as if every 7 years,[br]every 10 years,

0:01:36.460,0:01:38.900
you get to see[br]an entirely new country.

0:01:38.900,0:01:42.000
For me personally, China is the most[br]interesting country in the world

0:01:42.000,0:01:44.220
to visit as an economist.

0:01:44.220,0:01:45.830
They have grown at a pace

0:01:45.830,0:01:47.770
that no other place has matched.

0:01:47.770,0:01:52.540
Imagine about 10% a year growth[br]for almost 35 years.

0:01:52.540,0:01:54.780
That has transformed everything.

0:01:54.780,0:01:56.200
So even year to year,

0:01:56.200,0:02:00.630
parts of a city or a neighborhood[br]can simply change before your eyes.

0:02:01.020,0:02:03.220
So you see human progress at work,

0:02:03.220,0:02:06.930
you see what took some parts[br]of the world centuries to achieve,

0:02:06.930,0:02:10.000
happening in decades or even years.

0:02:10.000,0:02:13.020
You see human hope[br]and faith and progress,

0:02:13.020,0:02:16.240
and a deep underlying optimism[br]about what is possible.

0:02:16.240,0:02:19.490
So the Chinese economy[br]during these years of rapid growth --

0:02:19.490,0:02:21.440
it had some very notable features.

0:02:21.440,0:02:23.370
It had high levels of savings,

0:02:23.370,0:02:25.890
it had super high[br]levels of investment,

0:02:25.890,0:02:28.320
and they built lots[br]and lots of infrastructure.

0:02:28.320,0:02:30.360
And those were all very positive.

0:02:30.360,0:02:33.110
It's wonderful how good[br]the infrastructure is in China.

0:02:33.110,0:02:37.000
I would much rather ride[br]on a Chinese high-speed rail train

0:02:37.000,0:02:39.560
than take the Amtrak[br]from Washington, D.C.

0:02:39.560,0:02:40.580
to New York City.

0:02:40.580,0:02:43.140
The Chinese train[br]is quicker, nicer,

0:02:43.140,0:02:45.230
and it's far more likely[br]to be on time.

0:02:45.700,0:02:47.000
But here’s the thing --

0:02:47.000,0:02:49.040
for a long time[br]China has been investing

0:02:49.040,0:02:51.870
almost half of its GDP every year.

0:02:51.870,0:02:53.510
Half![br]That's astonishing.

0:02:53.510,0:02:55.000
When you think about it,

0:02:55.000,0:02:57.000
it is remarkably hard, every year,

0:02:57.000,0:03:00.690
to invest half of your GDP[br]and to invest it well.

0:03:00.920,0:03:03.540
In the early years[br]of China's economic growth,

0:03:03.540,0:03:06.610
the required investments were[br]pretty simple and straightforward.

0:03:06.610,0:03:08.600
They needed to build more homes,

0:03:08.600,0:03:10.700
they needed[br]to put in more train lines,

0:03:10.700,0:03:12.690
they needed to build more roads,

0:03:12.690,0:03:15.000
they needed to equip[br]their urban centers

0:03:15.000,0:03:17.970
with all of the normal features[br]of everyday modern life.

0:03:17.970,0:03:20.940
And the Chinese government[br]did a really good job

0:03:20.940,0:03:22.490
at all of those things.

0:03:22.490,0:03:26.270
It's a big reason why, actually,[br]China's growth has been so strong.

0:03:26.270,0:03:27.910
But the problem is this --

0:03:27.910,0:03:30.660
the way decision-making[br]in China is set up --

0:03:30.660,0:03:34.260
it's very good for achieving things [br]with a kind of checklist --

0:03:34.260,0:03:38.060
known tasks that require a lot[br]of resources and a lot of effort,

0:03:38.060,0:03:40.890
and you throw everything[br]you have at getting it done,

0:03:40.890,0:03:42.680
and you get it done pretty quickly.

0:03:42.680,0:03:44.550
China has been great at that.

0:03:44.550,0:03:47.530
But now, a lot of that[br]low-hanging fruit is gone.

0:03:47.530,0:03:50.000
A lot of the infrastructure[br]which China needs

0:03:50.000,0:03:51.620
already has been built,

0:03:51.620,0:03:55.000
but now their economy[br]needs more complex investments.

0:03:55.000,0:03:57.000
They need a better[br]healthcare system,

0:03:57.000,0:04:01.000
they need better retail services,[br]they need more startups.

0:04:01.000,0:04:02.000
And in these areas,

0:04:02.000,0:04:05.000
there’s not a simple [br]checklist way to get it done.

0:04:05.000,0:04:08.180
It's not just a question[br]of throwing resources at the problem.

0:04:08.180,0:04:11.520
You need more trial and error,[br]more experimentation,

0:04:11.520,0:04:14.040
you need more[br]of a market discovery process

0:04:14.040,0:04:16.740
to figure out which[br]are the profitable investments

0:04:16.740,0:04:18.880
and which[br]are the unprofitable ones.

0:04:19.060,0:04:21.280
And it’s hard to plan[br]and manage those

0:04:21.280,0:04:23.460
the same ways[br]that the Chinese did that

0:04:23.460,0:04:25.300
with all of their infrastructure.

0:04:25.970,0:04:28.810
Here is another problem[br]with the Chinese economic model.

0:04:28.810,0:04:32.680
If your economy grows[br]10% a year or so for so long,

0:04:32.680,0:04:35.000
businessmen[br]and also your governments --

0:04:35.000,0:04:37.000
they start thinking[br]there isn't much risk.

0:04:37.000,0:04:40.750
At 10% growth, [br]there's so much forward impetus.

0:04:40.750,0:04:43.190
You can have a business plan[br]with a lot of mistakes,

0:04:43.190,0:04:46.960
you can have a lot of debt,[br]you can be very poor on execution,

0:04:46.960,0:04:49.940
but a lot of those investments[br]are still going to make money

0:04:49.940,0:04:51.730
at about 10% growth.

0:04:51.730,0:04:54.355
So what happens is,[br]the underlying economy

0:04:54.355,0:04:56.375
loses some of its discipline.

0:04:56.375,0:04:58.865
People get sloppy,[br]they overextend,

0:04:58.865,0:05:00.780
they become too optimistic.

0:05:00.780,0:05:03.530
They think they can make[br]any investment or any decision

0:05:03.530,0:05:05.910
and somehow[br]it will pay off or be validated,

0:05:05.910,0:05:07.430
just because everyone else

0:05:07.430,0:05:10.000
is pushing[br]on that 10% rate of growth.

0:05:10.000,0:05:12.190
A turning point[br]for the Chinese economy

0:05:12.190,0:05:13.840
comes in 2009

0:05:13.840,0:05:18.030
when there’s a significant recession[br]in many other parts of the world.

0:05:18.030,0:05:20.000
At the time,[br]a lot of observers thought,

0:05:20.000,0:05:22.960
"Well, there’s going to be[br]a big recession in China too."

0:05:22.960,0:05:24.400
But there wasn't.

0:05:24.400,0:05:27.460
The Chinese government[br]undertook some very special steps

0:05:27.460,0:05:30.900
to avoid or maybe[br]just postpone that recession.

0:05:30.900,0:05:32.370
So the Chinese government

0:05:32.370,0:05:34.420
spent a lot more money[br]on infrastructure

0:05:34.420,0:05:36.330
at a time where maybe

0:05:36.330,0:05:39.230
less infrastructure investment[br]was called for.

0:05:39.640,0:05:41.900
The Chinese government,[br]the state-owned banks,

0:05:41.900,0:05:43.420
the state-owned companies,

0:05:43.420,0:05:46.660
acted in concert to encourage[br]a lot more borrowing,

0:05:46.660,0:05:48.000
a lot more debt.

0:05:48.000,0:05:50.710
And it's true --[br]this did spur spending,

0:05:50.710,0:05:52.490
it boosted investment,

0:05:52.490,0:05:55.000
kept the economy[br]running at a higher level,

0:05:55.000,0:05:57.000
but actually debt rose to the point

0:05:57.000,0:05:58.710
where it was too high

0:05:58.710,0:06:02.280
relative to the rates of return[br]available on those projects.

0:06:02.660,0:06:05.440
So now, we don't have[br]very exact measures,

0:06:05.440,0:06:08.620
but it seems that[br]total Chinese debt of all kinds

0:06:08.620,0:06:11.520
is well over 200% of GDP --

0:06:11.520,0:06:15.000
possibly as high as 300% of GDP.

0:06:15.000,0:06:17.000
And maybe that can work

0:06:17.000,0:06:18.930
when your underlying[br]rate of growth is 10%,

0:06:18.930,0:06:21.940
but as your underlying[br]rate of economic growth falls,

0:06:21.940,0:06:25.650
it's harder and harder[br]for that debt to be sustainable.

0:06:26.120,0:06:28.270
So how much is China growing today?

0:06:28.270,0:06:30.000
Well, it depends who you listen to.

0:06:30.000,0:06:32.860
The Chinese government, circa 2015,

0:06:32.860,0:06:37.000
is claiming China[br]is still growing at about 7% a year.

0:06:37.670,0:06:40.000
But not many external[br]observers believe this,

0:06:40.000,0:06:42.600
because they’re looking[br]at other pieces of data.

0:06:42.600,0:06:46.140
No one is sure what the real rate[br]of economic growth is,

0:06:46.140,0:06:49.460
but what we know is that [br]it is probably sharply lower

0:06:49.460,0:06:52.880
and China is now entering [br]a great recession.

0:06:53.960,0:06:55.600
To track this recession,

0:06:55.600,0:06:59.670
we can keep in mind[br]five issues or problem areas --

0:06:59.670,0:07:02.690
the real estate bubble,[br]the stock market bubble,

0:07:02.690,0:07:05.490
the excess level of municipal debt,

0:07:05.490,0:07:08.320
excess capacity[br]among Chinese businesses,

0:07:08.320,0:07:10.440
and finally,[br]the risk of capital flight.

0:07:10.810,0:07:14.080
The first of these[br]is the real estate bubble.

0:07:14.500,0:07:16.080
Chinese property prices

0:07:16.080,0:07:18.540
became too high[br]in many Chinese cities

0:07:18.540,0:07:20.000
and China overbuilt.

0:07:20.890,0:07:24.370
I took a train trip from Beijing[br]through the center of the country --

0:07:24.370,0:07:25.830
a six hour train trip.

0:07:25.830,0:07:29.390
And along the way,[br]I kept on seeing city after city

0:07:29.390,0:07:32.700
with dozens and dozens[br]of apartment blocks.

0:07:32.700,0:07:36.020
You would see so many buildings,[br]but so few people,

0:07:36.020,0:07:39.150
so few retail stores, so few cars.

0:07:39.150,0:07:42.000
Many of those cities[br]are grossly overbuilt,

0:07:42.000,0:07:44.440
relative to what can be supported.

0:07:44.970,0:07:48.730
The Chinese stock market bubble[br]is another potential problem.

0:07:48.730,0:07:51.990
For a while, Chinese[br]stock prices were rising rapidly,

0:07:52.000,0:07:54.210
but then they fell rapidly too.

0:07:54.210,0:07:57.800
Too many people were encouraged[br]to buy stocks on margin,

0:07:57.800,0:08:00.490
the ratio of prices[br]to corporate earnings

0:08:00.490,0:08:02.000
has been extremely high,

0:08:02.000,0:08:05.290
and probably those stock prices[br]will continue to fall

0:08:05.290,0:08:06.910
at a pretty rapid pace.

0:08:06.910,0:08:10.000
That will depress consumer [br]spending, lower confidence

0:08:10.000,0:08:12.680
and it also will be a problem[br]for some Chinese banks.

0:08:13.170,0:08:15.400
The third problem is municipal debt.

0:08:15.820,0:08:18.930
No one really knows exactly[br]how big a problem this is.

0:08:18.930,0:08:21.850
We do know that[br]Chinese municipal governments

0:08:21.850,0:08:24.260
were not supposed[br]to be able to borrow money --

0:08:24.260,0:08:26.660
they were supposed[br]to run balanced budgets.

0:08:26.660,0:08:30.430
But in fact, a lot of them ended up[br]borrowing money off the books,

0:08:30.430,0:08:33.640
and in fact they were encouraged[br]by the central government to do this,

0:08:33.640,0:08:37.000
to keep up that expenditure[br]on all the infrastructure.

0:08:37.000,0:08:38.200
But what’s happened is,

0:08:38.200,0:08:41.590
they borrowed a lot more than[br]right now they are able to pay back.

0:08:42.400,0:08:45.420
And the central government[br]in Beijing is feeling the need

0:08:45.420,0:08:48.050
to try to bail out[br]these municipal governments.

0:08:48.050,0:08:50.580
Another big problem[br]in the Chinese economy

0:08:50.580,0:08:52.740
is what I would call[br]"excess capacity".

0:08:52.740,0:08:55.640
That is, in too many sectors[br]you have too many firms,

0:08:55.640,0:08:57.370
you have too much overconfidence,

0:08:57.370,0:08:59.650
too much stimulation of investment,

0:08:59.650,0:09:02.310
and a lot of those companies[br]probably are not profitable --

0:09:02.310,0:09:05.006
they're being kept afloat[br]by cheap credit

0:09:05.006,0:09:06.783
from Chinese state-owned banks,

0:09:06.783,0:09:09.640
or they may be Chinese [br]state-owned companies themselves,

0:09:09.640,0:09:12.350
which have political privileges[br]of various kinds.

0:09:12.350,0:09:15.000
But a lot of those[br]companies right now --

0:09:15.000,0:09:17.670
they’re not making[br]really productive investments

0:09:17.670,0:09:20.480
in the kinds of things[br]that Chinese consumers want.

0:09:21.210,0:09:23.170
If you look at price indices,

0:09:23.170,0:09:26.320
if you look at the index[br]for producer prices in China --

0:09:26.320,0:09:28.750
that's one measure[br]of this excess capacity.

0:09:28.750,0:09:31.310
That index actually[br]has been falling now

0:09:31.310,0:09:34.150
for over three years running,[br]falling every month.

0:09:34.150,0:09:37.550
That's a sign that too many[br]producer goods have been built

0:09:37.550,0:09:39.720
for what can be sustained profitably.

0:09:40.000,0:09:46.000
So maybe the biggest potential problem is capital [br]flight. There’s a risk that capital within China,

0:09:46.000,0:09:55.000
foreign capital, but specially domestic capital, seeks to [br]leave the country out of fear of China's economic problems.

0:09:55.000,0:10:00.000
But if too much of this capital leaves the country, that actually makes the problems much worse. As we saw with the Asian financial

0:10:00.000,0:10:05.000
crisis in the 1990's for other countries. [br]The big danger in China is simply that

0:10:05.000,0:10:10.000
capital flight accelerates. But in the meantime, [br]think of the problems the Chinese government

0:10:10.000,0:10:15.000
has trying to manage all of this. There are [br]a lot of firms which are no longer profitable,

0:10:15.000,0:10:20.000
but the government’s reluctant to let them [br]go bankrupt because of fear of unemployment

0:10:20.000,0:10:25.000
and also alienating special interest groups. There’s [br]too much credit and too much borrowing in the economy,

0:10:25.000,0:10:30.000
but if that bubble is burst, well then [br]economic activity will fall all the more.

0:10:30.000,0:10:35.000
There's been too much investment in real estate, [br]there’s too much continuing reliance on infrastructure,

0:10:35.000,0:10:40.000
and somehow the government is supposed [br]to juggle all of these balls at once

0:10:40.000,0:10:45.000
and stop the recession from getting worse. [br]When you put all of those issues together,

0:10:45.000,0:10:50.000
it is indeed a very complex picture, [br]very difficult to understand. But what we see

0:10:50.000,0:10:55.000
is that the world's number two economy really [br]is running a very serious risk of a recession

0:10:55.000,0:11:00.000
which will be deep, and also may last [br]really quite some number of years.

0:11:00.000,0:11:05.000
My personal view is that, at this point, these [br]problems are so deeply baked into the Chinese economy,

0:11:05.000,0:11:10.000
there is no way to set this all right. [br]But still there are some major reasons

0:11:10.000,0:11:15.000
to be optimistic looking forward. First, [br]the most important source of wealth in any economy is

0:11:15.000,0:11:20.000
human capital. The Chinese have [br]done a fantastic job investing

0:11:20.000,0:11:25.000
in their own human capital. So from [br]the economist’s point of view, which values

0:11:25.000,0:11:30.000
human capital above all else, as the most fundamental [br]source of national wealth. When we look at the future

0:11:30.000,0:11:35.000
of China in the medium-term prospects, [br]we really should be optimistic

0:11:35.000,0:11:40.000
or even cheery. Because China has [br]invested very well in human capital.

0:11:40.000,0:11:45.000
Those investments will survive the [br]current recession intact, and we have

0:11:45.000,0:11:50.000
every reason to believe that China will be extending the [br]talents, energies, drives, and ambitions of its people,

0:12:22.000,0:12:25.000
Subtitles by the Amara.org community