What Challenges Will Asian Economies Face in 2021?

Madhav Rajan:

Good evening, ladies and gentlemen. Welcome to Chicago Booth’s Virtual Economic Outlook 2021. My name is Madhav Rajan. I’m the dean and the George Shultz Professor of Accounting at the University of Chicago Booth School of Business. I hope all of you are doing well and taking care during this unusual time. And I’m truly grateful that you’ve taken the time to engage with us in this particular way.

Chicago Booth has a long tradition of informing public disclosure through platforms such as the Initiative on Global Markets and the Chicago Booth Review publication. And of course, Economic Outlook, which was started back in 1954. Economic Outlook provides a forum for our pathbreaking thought leaders to confront the future, evaluate emerging trends, and share insights that help reframe our understanding of the world to come. We have an excellent program today and a great set of panelists whom I’ll introduce in just a bit.

Madhav Rajan:

But to summarize, we have Chicago Booth faculty Chang-Tai Hsieh and Randy Kroszner and Hong Kong [University] faculty member and economist Richard Wong to share their insights on trade wars, the US election, and the economies of Asia. And we are thrilled to have Henny Sender of BlackRock Investment Institute coming back to EO to moderate today’s panel.

This is the second of three 2021 Economic Outlook events, based out of each of our three global campuses. Last week, we had more than 4,000 viewers tune in to EO in Chicago to hear Booth faculty Austan Goolsbee, Raghuram Rajan, and Randy Kroszner. And the recording of that event is available on our website at ChicagoBooth.edu. We will continue the Economic Outlook series on Tuesday, February 2, in London, again with Randy Kroszner, and with Veronica Guerrieri and Brett Neiman. A couple of small things: after today’s event in Hong Kong, our Admissions team will host a brief Q&A session. I invite you to please stay connected after EO to learn more about our Booth programs.

I want to also let you know about another great event coming up. The Booth School’s Rustandy Center for Social Sector Innovation continues to gather faculty and leaders across the business and social sectors to reflect on what it takes to achieve meaningful change. And on February 16, the center’s Innovating for Social Equity series will explore the role business plays in society, with the focus on what public companies can do to tackle economic and racial inequalities. Details are on the Rustandy Center’s website.

Today we look forward to hearing what’s on the minds of our fantastic set of panelists and discussing. Let me introduce them more fully.

Chang-Tai Hsieh is the Phyllis and Irwin Winkelried Professor of Economics and the PCL Faculty Scholar at Chicago Booth, where he conducts research on growth and development. Chang-Tai has been a visiting scholar at the Federal Reserve Banks in New York, Minneapolis, and San Francisco, as well as for the World Bank’s development economics group and the economic planning agency in Japan.

Randy Kroszner is deputy dean for Executive Programs and the Norman R. Bobins Professor of Economics at Booth. He was a governor of the Federal Reserve System from 2006 to 2009. Randy chaired the Committee on Supervision and Regulation of Banking Institutions, and the Committee on Consumer and Community Affairs, and took a leading role in developing responses to the financial crisis, as well as initiatives to improve consumer protection and disclosure.

And we also have Richard Wong, provost and deputy vice chancellor, professor of economics, and the Phillip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong. Richard has been founding director of the Hong Kong Centre for Economic Research since 1987 and the Hong Kong Institute for Economics and Business Strategy since 1999. His research focuses on the political economy of public policy and regional economic development in China.

We’re thrilled to have our moderator, Henny Sender, managing director and the senior advisor to the BlackRock Investment Institute. She advises the firm on opportunities in APAC, and engages BlackRock’s clients in the region who include sovereign wealth funds, central banks, and pension funds, and focuses on China sustainability and private markets.

Henny was with the Financial Times for the past 13 years, spending time in New York and Hong Kong. And for 15 years prior to that, she was at the Wall Street Journal as a senior special writer in the money and investing section, and the Far Eastern Economic Review.

I want to thank all of you again. And with that, let me hand it off to Henny.

Henny Sender:

Rajan, thank you so much. You forgot to mention that the best thing about the Booth School is the new Hong Kong campus, which is absolutely gorgeous. And I urge all of you to spend time in Hong Kong. I want to wish you all a Happy New Year. I don’t know whether I’m being late for Western New Year or early for Lunar New Year.

I’m going to start by giving you all a very brief roadmap. I’m going to start with Randy. And if all of you think there’s at least three Randys, I share that belief because he is everywhere. And one of the most impressive panelists that I ever get to deal with.

And because in a few hours the inauguration does get underway—and hopefully it comes off as peacefully as we all hope—I thought we would start out by talking about the US elections. And I wanted to start out by asking you, Randy, how do you see the state of the US economy during this transition, and do you have a sense of the Biden economic policies? And do you think the right policies are in place both on the fiscal and the monetary side? Over to you.

Randy Kroszner:

Great, thank you very much. I’m delighted to be back with all of you in Hong Kong and throughout Asia. I’m delighted to have the partnership with the Asia Financial Forum, and of the last few years, I think it’s been very, very fruitful.

Boy there’s a lot on President-Elect Biden’s plate, and soon-to-be President Biden. And a lot of challenges, a lot of changes, and also some continuity.

I think you mentioned monetary policy—obviously there’ll be continuity there. The Fed took leaves out of the playbook from when I was there a long time ago—or maybe not that long ago, 10, 12 years ago—in response to the global financial crisis and provided an enormous amount of liquidity to the markets and continues to do so, set up the old lending programs that we had pioneered when was there, plus a whole lot of new ones.

So I think that’s going to continue, and I think we’re going to see a commitment to low interest rates continue for a very long time. I really don’t see the Fed changing their fundamental policy unless there’s some major, major shock. It’s going to be low interest rates, effectively zero interest rates for a very long time.

On the fiscal side, back in March and April, we saw roughly 15 percent of GDP, roughly $3 trillion being spent. Just before the end of the year, we saw almost another trillion dollars being spent. So we’re up to 20 percent of GDP in terms of fiscal policy. And that is a lot. That is something that is completely unprecedented outside of wartime. And even during war, that is an enormous, enormous amount. And so the debate right now seems to be about, well, how much more do we need?

I think the focus really should be on fighting the virus, because if you want to save lives and save livelihoods, that’s where you’ve got to go. An enormous amount of money has been spent in trying to provide support for households, and for businesses, and in the midst of a crisis, of course, that seems like a reasonable response.

Rather than trying to get to a particular number of $1.9 trillion or $2 trillion, I think it would be much better to say, “Let’s try to fight what’s causing the problem right now, because we’ve already spent 20 percent of GDP in less than a year. Let’s try to get that under control, and then we can figure out where we need to do additional spending,” rather than just say, “We’ve just got to spend more now and we’ll do $1.9 billion of a so-called stimulus, and then another package of longer-term investment kinds of things in infrastructure.”

I think we need to take a step back, especially in thinking about longer-term investment. We need to understand the course of the pandemic and what that’s going to mean for the economy. And I think that’s going to mean permanent changes in the way people work, in thinking about public transportation, in thinking about private transportation, and in the hospitality sector.

And so I think it would be wise to take a little bit of step back, fight the virus first, and then move forward. But I think the administration, at least from what I can see . . . Let’s say, looking at Janet Yellen’s testimony—former Fed chair, and someone I’d worked with closely when she was at the San Francisco Fed, and I was on the Federal Reserve board, and I think soon to be the secretary of treasury—she said, “Go big.” Well, we’ve already gone big. And so we may need to go bigger, but let’s fight the disease. I think that really needs to be the priority. Public health needs to be the priority. That’ll save lives, save livelihoods, and then [we] move on to the next stages.

Henny Sender:

These policies will have enough multiplier effect. You know, it was funny. I was in the US after Obama’s $787 billion plan in the wake of the global financial crisis. And I went to Detroit for the first time and I was trying to figure out where the money went. [inaudible 00:11:01] on the highway to the airport [inaudible]. Everything went to civil service salaries. Should our policies be more focused rather than targeting households broadly? Should they be more focused, do you think?

Randy Kroszner:

I think definitely they should be much more focused. I mean, this desire to give just an additional $1,400–$2,000 to every family, or most families, I think it should be targeted on the families and households that are facing the greatest challenges rather than just sent more broadly.

I think that will have a relatively muted, a stimulus effect. We’ve already seen one round of that. The issue is getting the economy back more broadly. It is not an issue of trying to manage demand. People are scared of going out. People are scared of consuming. People are scared of going into the office.

That’s why it’s got to be the No. 1 priority to get the vaccine out, to try to deal with the public health issue, because that’s the key stimulus package as far as I’m concerned. And this doesn’t cost trillions of dollars to do this. This costs billions of dollars, for sure. So it’s not that there shouldn’t be any expenditure. But the impact of spending billions of dollars on quickly fighting the virus, is going to be much bigger than sending out the stimulus checks, and put the US in a better position. But then thinking about, what other longer-term investments do we need to make?

Henny Sender:

We’re all used to reading research reports from the investment banks. And they’re all saying there will be a V-shaped recovery, and at the same time they’re saying we need to keep zero rates for the next four or five years. Two questions: Is there a contradiction there? And second of all, have we become too dependent on these zero interest rates and will we see . . . You know, one of the risks on the horizon is: What happens when finally we exit from these policies? Or do we never see an exit from these policies?

Randy Kroszner:

(laughs) Well, I certainly want to bring my colleagues in on that. I think it is going to be a long time before there’s an exit from low interest rates. And I think we will have these this debt and deficits with us for a very, very long time. But I don’t know. Let’s . . . maybe we should turn to Richard and Chang to see what their thoughts are on that.

Henny Sender:

Yes, I’d like to ask you both. If you can talk about where the consequences of general liquidity in Asia. I’m just going to get my headphones because I’m being told my microphone is crackling. So I’ll be right back. I don’t mind whichever one of you wants to go first.

Chang-Tai Hsieh:

I can go first. There are just two points I’d like to add to what Randy said. One is that the US’s debt to GDP ratio has already exceeded 100 percent. It’s 100 percent of GDP, and that’s already 10 percentage points beyond the Reinhart-Rogoff number beyond which countries land in permanent fiscal trouble.

The other point—since we’re starting to talk about Asia—is that China never under undertook the fiscal spending that the US did. It did something else. I mean, it put . . . There were essentially no cash rebates to consumers. And I do think that if you look at what’s happened to the Chinese economy, I mean, it does speak to exactly what Randy was saying, that it does look like the best rescue package is a package that fights the pandemic and instead of shoving cash out the door.

Henny Sender:

Richard, do you have anything to add?

Richard Wong:

I don’t have anything particular to add to the pandemic because in my part of the world, the pandemic season seems to be reasonably under control. It’s still episodic changes, but then international travel is just not there.

But I’d like to skip to something different. And that is one of the consequences of the US-China trade wars, is to have forced China, I think, to rethink its economic development strategy. One would look in the last two or three decades, what has happened is that China, and also the European Union, and particularly Germany have very serious current account surpluses. And of course, the counterpart to that is the US has a huge current account deficit as a consequence. And all of those surpluses create huge demand for US assets, which has really created a rather unbalanced system.

I don’t think the US-China trade wars is really going to address this issue, but because China certainly takes this very seriously. It’s basically opening up some very important avenue and that is internal circulation. Basically to put it simply, they would like to balance the economy, encourage household consumption, discourage savings. This will then contribute to a lower rate, in the long run, a lower rate of the current account surpluses that it runs.

And it is doing this in part by encouraging financial liberalization, so that households can have better savings options than what they think they have at present. The present savings option for the household is that, after 40 years of rapid growth, they have not had as much income growth compared to the companies. Right?

Richard Wong:

And that is part of the unbalanced outcome. Now with US China trade war, China has to find another way to generate demand, because I think it’s not just the US-China trade war. It’s just that basically globalization is probably a changing course, if not going onto a slower trajectory, whatever it is. That’s one response, and that might actually create better conditions, not only for the Chinese household going forward, more sustainable long-term economic growth.

You probably have to do things like deal with social security, pensions, investment options for households. Basically you have to have a more fruitful, rewarding savings option, and that in all you can encourage consumption. So that is one good development. The other thing is—

Henny Sender:

Can I interrupt you there? Because I just want to go back for one minute, and before we get into the relationship, or the lack of a relationship between China and the US, I just wanted to talk a minute about the Chinese economy itself. We have seen China survive two crises in a row now, far better than any other country on the planet.

China emerged from the global financial crisis virtually unscathed. Although we’ve seen a minor setback in recent weeks, as far as COVID is concerned in China, if you look at their economic performance, they were the only major country in the world to have positive GDP growth for the entire year of 2020.

Henny Sender:

What are, do you think, the consequences of that? The first thing you said was China is rethinking its development strategy. Dr. Hsieh, can you pick up on that? And talk about what you see as the strengths of the Chinese economy, and the vulnerability, picking up on what Dr. Wong said about rethinking its development strategy.

Chang-Tai Hsieh:

Yeah, sure. So there are three points I wanted to make. One is that if you think about the unique strengths of the Chinese system, that it’s about the control that the Communist Party has. And it’s a system that I think is uniquely well suited to dealing with crisis. I think that’s part of, if you think about what happened in 2008 and 2009, and even look at what happened last year, in terms of the response of the Chinese government to the crisis. It was basically taking out all of their, I’m just going to call them Maoist tools of control, and it’s something that it does well. What it doesn’t do as well is when it doesn’t depend on control, but when you need to depend on the initiative of individual people, or individual companies that you may not have as much control over. So I hope that we have a chance to come back to that.  

The two additional points I wanted to make is that if I think about . . . If you look at the data, there already has been a significant amount of what I’m going to call rebalancing. China’s current account surplus has fallen steadily over the last 12 years with the exception of this past year. So by 2018, I don’t know, it’s not something that I think people have noticed, but in 2018, China’s current account was in deficit. Before the pandemic, it already was in a deficit, and household consumption had gone up. This is something that reversed itself this current year. I also want—

Henny Sender:

I think that’s a great point. If you looked at 2019, people would have thought then that China would actually have a current account deficit in a world where COVID didn’t exist. In part because there was massive spending as Chinese [inaudible] discovered the pleasures of world travel, and we were all thinking that maybe China would go from being a capital exporter to a capital importer. I think that’s a great point.

Chang-Tai Hsieh:

No, I think it was. And then Richard brought up the so-called dual circulation, and I hope it was just like . . . I think that is something different. I think that is just part of the beginning of an ideological campaign. And my sense is that they’re still trying to figure out what exactly it means. It’s an ideological campaign to try to justify what they think they may want to do going forward. And this is all coming from, I think, a big part to the US-China trade war, which I don’t think has a lot to do with the current account surplus, and partly it has to do with the struggles that US businesses have in China. But I do think that it’s mostly part of this change in US views about what the ultimate goals of the Chinese Communist Party are. Anyway, I’ll stop here. I’ll let other people chime in.

Henny Sender:

I’m going to turn to Randy and ask him a question picking up on your point, Dr. Hsieh, when you said, “In a crisis, China is well suited to deploy it’s Maoist tools of controls.” Randy, do you think that China under Xi Jinping is turning the clock back?

Randy Kroszner:

Well, I think it’s both going forward and going back, because I think exactly as Chang was talking about, they’re thinking about deploying some tools from the past, but in the context of a modern economy that has many capitalists elements in it. And so it’s a dramatically different world than under Mao, but with much more central control.

We see this with what has happened with Jack Ma, who just recently reappeared, He’s one of the most successful business people in China, but then raising some questions and concerns about the regulatory structure and about the banking structure. And so that was stopped. And I think there’s a very clear signal that comes with that no matter how successful you are in the private sector, no matter how wealthy you are in the private sector, it’s very clear who is in control, and it is not the private sector.

I think that’s an important element going forward, and we’ll have to see how that plays out. Will that have an effect on private sector, innovation, private sector growth? And because I think before this, there had been more . . . I mean, one of the things that Xi Jinping had done is unleash that private sector, that entrepreneurship, those capitalist elements within the Chinese economy and that led to just astonishing growth for the last 30 to 40 years.

Henny Sender:

Thank you so much. I was remiss, I want to remind you all that there is a chat function if you have questions. Richard, back to you. Do you think that the lesson of the Ant affair is that there’s no longer a distinction between a state-owned enterprise and a privately owned enterprise? That everything is subject to state control? Is that one of the lessons of Ant, or no?

Richard Wong:

Well, there are two elements of it. One is the rapid economic growth that took place over the last 30, 40 years in China aas also one in which there were a lot of regulatory issues. The term for it is, well, you went from a totally controlled economy to a semi-controlled economy, right? You can think of it as . . . which created a lot of social and political dissent.

And the party reacted by reimposing some of these controls. I think it is quite obvious that in the end, Ant Financial is the issue that for long periods of time, I think that China tolerated these innovations. It [Ant] was highly innovative. These were financial innovations. And I think what has happened fairly recently is that there has been increasing concern partly is about the risks of these innovations, which are very, very substantial. And second, like—

Henny Sender:

What do you see as the risks?

Richard Wong:

Systemic risks. That loans are being made by, credit loans are being made by Ant Financial on a scale that is very, very large, right?

[crosstalk 00:28:57]

Richard Wong:

And they weren’t subject to any kind of regulatory oversight, because they were considered as an IT company rather than as a financial company. These are one issues, and obviously these step on the toes of the existing incumbent banking sectors, so there is also a contest of interest.

I think what has happened very recently is that finally the political debate at the highest echelons has basically decided, we have to take control of these financial companies, right? Control, meaning, you have to . . . Exactly, we do not know exactly what is that control? What is the regulatory structure? From news reports, we only know all that they want practices to be instituted, but there’s not much details as yet.

So I would think, yes, there is more control, more regulation, perhaps . . . But I wouldn’t think in terms of whether . . . To begin with, the thing is, the development pathway for a highly controlled economy, 50, 40 years ago, toward a more open one will inevitably be quite cyclical. I don’t think we could get there in a one uni direction. So this is not unexpected, I would say, it’s just that it might not be unexpected in a specific case, like Ant Financial.

Chang-Tai Hsieh:

Can I add to that?

Henny Sender:

Please. By the way, my screen has gone. The only way I can get my screen back is to log off and on, which means I can’t see chat. If anyone can see chat, you might want to repeat that question, but please go ahead.

Chang-Tai Hsieh:

I agree with Richard’s interpretation. Let me make a few points that the crackdown was on Ant Financial. It was not a crackdown on Alibaba. There was also no crackdown on Tencent as well. And so it was specifically on Ant Financial. And I think that the way that you want to make sense of what you see in terms of Ant Financial is that, I think it’s one part of this broader campaign to deal with risks in the financial system.

And this brings us back to what China did in 2008 and 2009. That is, in terms of, I think the way that you want to make sense of it is that you want to look at what China did in order to implement it’s a fiscal stimulus. It did it in an unorthodox way. It did not spend money directly. What it did was that it basically gave license to local governments to create these off-balance-sheet companies, which, these companies that are known as us local financing vehicles, that would borrow money from the banks and then basically spend money on the direction of local governments for the purposes of the fiscal stimulus program.

And then what happened was that when the fiscal stimulus program ended in 2010, the central government tried to try to close these local financing vehicles. But basically what happened was that the local governments who now had these new companies under their control, they pushed back. This was the beginning of the wave of quasifinancial liberalization. But it was quasifinancial liberalization only for certain types of firms.

And then these types of institutions then basically grew, and grew, and grew. And then you start to see companies like the Hanyang Group emerging companies, like the Anbang Group emerging, companies having what I’m going to call very murky financial structures. And my sense of what happened is that the central government started to become very, very concerned about the financial risks. And one indication of this, the starting in 2016, it started to put in place local party secretaries with the explicit mandate to understand the underlying financial risks in their region, that they were going to be appointed in, and to try to curb these risks. And I was telling Henny when we spoke to the other day, one of these local party secretaries was this gentleman called Zhou Xianwan, who was put in place as the local party secretary. And his mandate was to curb the financial risk. And he, unfortunately, was in charge of Wuhan in 2019 until February 2020. And the COVID crisis exploded under his watch. He was promptly sacked. And going back to the question about Ant Financial. The way I make sense of the crackdown on Ant Financial is exactly what Richard said, that they were doing a tremendous amount of lending. And so it was essentially a bank, but it was being regulated like an IT company.

Henny Sender:

That’s . . . yeah. I want to segue because we’re already more than halfway through, and turn to the friction with the US. And one of the questions I want to start as we segue into that is one of the vulnerabilities of China. So on the one hand, you see this incredible innovation with companies like Alibaba and Ant. And China is way ahead of the US in digital payments, in e-commerce as opposed to traditional retail. But one of the areas that we’ve seen China is incredibly vulnerable, and the US is taking advantage of that vulnerability, is that it’s at least 10 years behind in areas like semiconductors. Why is this country, which spends so much on R&D, and is so innovative, why do you think that there are areas—whether it’s biotech or semiconductors—that they are still so far behind, and therefore the US does have so much leverage? Who wants to take that question?

Chang-Tai Hsieh:

I can say something about it. I think the simple answer is that command and control does not work well for innovation. I mean, I think a semiconductor is a great example. It’s a sector where both the central government and hundreds of local governments, they have poured billions and billions of dollars into developing the semiconductor industry. And I think with maybe a few exceptions, it hasn’t worked very well.

Richard Wong:

Let me just add on something that is similar and that is, innovation is inherently risky. And risk and reward must be carefully balanced, and you need a natural evolution of an ecological system, very market driven to allow that to happen, a lot of individual initiative company initiative.

Now, put yourself in the context of China, which has just . . . Over the last 40 years, they just reforming in bits and parts. Think of it as deregulating the economies street by street, right? There are many streets that are not [inaudible], and therefore the easiest solution for a lot of companies to turn a profit and boost sales is not to actually engage in things like doing semiconductors, which is much more difficult—it’s much easier to get people to write software, right?

Henny Sender:

It’s very great point.

Richard Wong:

Whereas the companies, because the economy is not fully deregulated, you go along pathways where there’s least resistance. You do not want to go along pathways where . . . If you want to develop a semiconductor industry, you need a lot more streets to be deregulated. You need universities. You need the financial system. You know, a lot more things have to happen. Now, they haven’t, and that is the source of vulnerability, right? They just took the semiconductor chips that they can buy on the market. That was the easier. That was the cheaper solution, simpler, faster solution to do so.

Henny Sender:

I want to ask about the geopolitics of US-China relationships. I was talking to Professor Hsieh a few days ago about CNOOC, which is one of the oil majors. The US is now saying CNOOC must not trade in New York, because it’s part of the military complex of China. Many people believe that one of Xi Jinping’s agendas is to be, “I’m the guy who brought Taiwan back into the fold.” We’ve seen China being much more aggressive in the South China Sea. Are you worried, Randy, that there could be a miscalculation, and the situation in the South China Sea and with Taiwan could escalate?

Randy Kroszner:

I think there are a lot of chances for potential friction there. And one of the challenges is that, the ideal and what I also hope the Biden administration would focus on, is that there can be benefits from the economic relationship between the US and China, and China and the rest of the world. And I think sometimes that’s lost by focusing on some of the military issues. And we start thinking about things in terms of a zero sum rather than a broadening pie. And so I think it would be very important to try to keep that in mind, to see where the benefits are of the relationship, rather than focusing on just the potential flash points. And I think that’s a challenge on both sides to be able to think in those terms. And I hope the Biden administration will think in those ways, because I think if they do, that’ll help to deescalate some of those pressures, but if they think of it just as a fixed pie, and I win you lose, I think that then gets you into a much more difficult situation.

Richard Wong:

I think Randy is absolutely correct. Big power relations, obviously, is not limited to just economics, but it can be seen as a very important element of it. And many of the conflicts that have emerged in the US-China geopolitical conflict, a very significant part of it really is economic, right? The South China Sea is, at the end, a flashpoint issue in my view.

The key would be how you could get into a situation where you could resolve a lot of economic conflicts. I think some of the TPP under Japan has made some progress, China has, and Asian countries have set up RCEP. And I think promoting, I hope the United States would see positive elements in trying to construct better free-trade arrangements in the region. That is fair to all parties, and they can open up mutually beneficial exchanges.

To a large exten,t Asia is less impacted by COVID-19, in the sense largely because it’s at the stage of development where a lot of it is still very much manufacturing. China has actually moved beyond that compared to many Southeast Asian countries. There is a lot of opportunity for manufacturing to actually move out of China into many parts of Southeast Asia, particularly Vietnam, but Vietnam is small, smaller than Indonesia. And so there’s a lot of opportunity to generate economy, and I hope that these are the areas that the US government policy could do some more sensible approach to promote a freer trade environment.

Chang-Tai Hsieh:

Can I—

Henny Sender:

Can you explain—. Please go ahead.

Chang-Tai Hsieh:

I think I slightly disagree with what both Randy and Richard said. I don’t think that at the end of the day, that the conflict is really about economics. And I do think that it’s about something broader. And the broader thing is I think that the fundamental assumption behind the last 50 years of US engagement with China is this idea of a political convergence. That if we, if the US engages with China in an economic sense, that it’s going to unleash these forces that eventually China is going to look more similar politically, socially to the US. And I think that the main thing that has changed is that I think most observers have been disabused of this notion. That in the last five, six, eight years, that it seems clear that’s not true.

And then added on top of that, I think, is then the question is if fundamentally the goal is that the people in China have a different vision of what their ideal political system is, and what are the risks that political system poses to everybody else in the world. And on top of that, what additional risks does this pose if this political system becomes much stronger economically. And I do think that is really at the root of the tension.

Henny Sender:

I have just received a lot of questions. A lot of them are asking about US-China friction. Dr. Wong, let me ask you. Someone in the audience wants to know whether, under the Biden administration, will relations with China improve or deteriorate, do you think? And then, I’m going to add to that, do you think the emphasis will shift more to human rights, to issues like [inaudible] and away from full economic war? 

Randy Kroszner:

I think you were asking about exactly how the Biden administration is going to deal with these tensions.

Henny Sender:

Will the relations improve or deteriorate. [Inaudible]

Randy Kroszner:

I think one of the key changes that has occurred over the last four years is the US discussion and actually much of the world discussion with respect to China. And so I think there’s much more nationalism around the world and much more concerned about China. I think there’s more nationalism within China also.

And so sometimes we’re not looking at the potential economic benefits and just looking at the conflicts. And so I think it’s going to be very difficult for Biden to take a dramatically different approach. They may use different tools and they may try to take a much more internationalist approach and reform international institutions and trying to build coalitions. But I still think there’s going to be a very tough relationship between the US and China. I don’t see that changing fundamentally. But I don’t know what you guys think, Richard and Chang?

Richard Wong:

Well, let me just get back to . . . I think at the end of the day, basically, each government would have to set wha its goals are. And if the goal is that you would hope that China would politically become more like the West, that will be a very, very remote and long-term goal, right? It’s not something that will happen very quickly. In fact, if you just look at Asia, there might be elections in many parts of Asia but in many, still one party dominates quite significantly.

So the political evolution is not going to be anything that will happen any time very quickly, and that’s what I would think. The goals that a country like China or the United States have to set with respect to each other, is that aiming for political change is a very, very long shot.

Henny Sender:

This question is for Richard Wong. [inaudible 00:48:56] This is for you, Richard.

Richard Wong:

I’m not sure, I can hear, but . . . I’m just looking at the Q&A and trying to see whether it’s driven from the Q&A. I think the chances of political change in China as they impact the US-China relations will be a very, very slow process, if at all judging from where from the vantage point of today.

The next question is whether there is scope for economic . . . well, whether we want to do economic decoupling or whether we want to still have partial engagement, where the terms on those engagement might be a mutually beneficial level playing field. Those are areas I think there might be some progress.

Richard Wong:

Surely, I think they’ll . . . hopefully . . . they might not resolve. One thing is to explain why there is this US-China geopolitical conflict at this point in time, which I would not disagree with Chang-Tai Hsieh, but how do you move forward from this given the situation we are in? I think in some areas on economic development, it’s still will be quite important, and every country has some leverage over the other.

Henny Sender:

I’m going to turn to Dr. Hsieh now. We were talking earlier in preparation for tonight, and you made a very interesting point contrasting Beijing’s relative restraint via all the provocations from the US and the routinely hostile [inaudible] from the US with the kind of lack of restraint Beijing has shown with the rest of the world. Can you talk to us about . . . Take for example, Beijing’s response to Australia, you know,  in its sort of looking in to the origins of COVID, and with this sort of massive retaliation from Australia. What do you make of that? To what extent, you know, is China being irrationally provocative, perhaps?

Chang-Tai Hsieh:

I do think that is one of the biggest failures of Chinese policy in terms of its stance, the way that it deals with . . . let’s just call it the smaller countries of the world. And there’s a narrative that’s now emerging that China’s policy is to engage with you economically. And once you’ve paid all the costs and your companies are paid all the costs in engaging with China, then that sets you up to be held up as a hostage to . . . And we’ve seen this occurring. It’s not just Australia, but it goes back to Norway to what happened to the poor Norwegians. It was maybe eight years ago that it happened to Norway. It happened with the South Koreans maybe four or five years ago. It happened with the Canadians starting about two years ago, and it’s now happening to the Australians.

My interpretation of this is that, I think that there are two things that I think are tragic about this. One is that, this is, I think, a very important part of what feeds the perceptions in the world that it’s not just that the Chinese want a different . . . that the goal is of a different political system, but the goal is of a different political system for everywhere else in the world.

I don’t think that’s true, but that is the one very natural conclusion that people elsewhere in the world . . . And the second thing that I think is tragic is that, I think that it does not really reflect the Chinese system, but I think that it just reflects the posturing of people in the foreign policy apparatus trying to signal their virtue to their masters in the Chinese Communist Party.

And so I don’t think that it’s an integral part of what the Chinese system is, and I think it serves them poorly. It’s not in the long run interests of China, and it’s really not what their goal is. I don’t believe that the Chinese are after regime change in Australia, or Canada, or anywhere else.

Randy Kroszner:

Why do you think there’s this mismatch then, Chang? If it’s not in their own interest, and it’s certainly not in anybody’s interest in the rest of the world, why is this happening?

Richard Wong:

Maybe I can just respond a bit based on my own understanding of Chinese history. Foreign policy was never an important part of Chinese administration and governance and policy decision-making. China was pretty self-contained, right? All the problems they had throughout their history is civil war not external war.

Foreign policy is very underdeveloped part of it, and they don’t even have a big say, right? Historically they don’t have a big say. It’s weaker. It’s not like the state department in the United States. In this sense, I would think that what Chang-Tai Hsieh has alluded to is very understandable. It’s a weak and vulnerable part of the chain of command.

Chang-Tai Hsieh:

And it’s not just that, but if you look at the incentives of the Communist Party, the best and the brightest people in the Communist Party, you’re never going to go into the foreign policy apparatus. Where are you going to go? You’re going to go into the local governments. If you look at the path that Xi Jinping took, or all of the members of the politburo standing committee, none of them had ever served in any branch of the foreign policy apparatus.

I do think that it’s a weak part, and it’s not just that, it’s that they also attract, I’m going to say, the least capable people of the Chinese bureaucracy. And so part of what they’re doing is that they are trying to signal to their bosses, that we really are virtuous and we are really are standing up for party. I think that it’s this tragic thing that is... And I think it does play a part in what we’re seeing in terms of the trade war. It’s this fear that China’s goal is regime change in the rest of the world. I just don’t think that the Communist Party has any interest in that, but that’s not what they’re signaling.

Henny Sender:

I’m going to cut you all off. We have one more minute, and I just want to squeeze in one more question from the audience, which is: How big is the risk posed by aging demographics in China?

Randy Kroszner:

I think it’s a very important issue. And I think that the Chinese have not really come to grips with that. A lot of the growth over the last 40 years was just this enormous migration of people from the inner parts of China to the coastal regions. And during that period, you could build any infrastructure project along the coast. And within a few years, it’d be useful. You could build housing anywhere there, because there was just such enormous migration. So basically an enormous increase in the number of workers who were part of the formal economy, and ultimately economic growth is the number of hours worked and the output per hour. And China really needs to pivot to thinking about that output per hour, because you’re not going to get the same kind of growth, and actually probably a contraction in the number of hours. And I don’t think there’s been enough focus on really thinking about how you develop that. And I think that’s one of the big challenges going forward.

Richard Wong:

I think it’s very serious—

Henny Sender:

I think we’re out of time. Do you want to just very briefly add to what Randy’s saying?

Richard Wong:

Yeah, I think it’s a very serious problem, aging. The demographic dividend is gone. The resolution to this is to rely on more liberalization, to many different sectors of the economy, [inaudible] code system and all that. You need to deregulate more in order to generate sufficient value added propositions to overcome what is basically the disadvantages of an aging society. You need to reform your financial sector. It needs even more flexible savings options for . . . and rewarding our savings options for the people of China.

Henny Sender:

In other words, the government should send more students to UChicago to learn how to solve these problems. Randy, I’m turning it over to you, thank you so much.

Randy Kroszner:

Thank you so much, Henny. And thanks also to my colleagues, Chang and Richard, one of our really wonderful graduates from University of Chicago. Thanks so much, and great to be with you again.