Has China Lost Its Mojo?

AWANI

For decades, China defied expectations and gravity—growing faster, building bigger, and catching up quicker than anyone thought possible. But now that break-neck pace is slowing.  In this episode of #WooSays Professor Emeritus Datuk Woo Wing Thye and Melisa Idris explore the next stage of the evolution of China’s economy.  #AWANIinternational

Transcript

00:00hello folks welcome to another episode of wu says this is where we talk about we get real about the

00:18us china and everything and everywhere in between it's two superpowers but it is one global story

00:25now for decades china has defied expectations and maybe even defied gravity a little bit because

00:32they have been growing faster building bigger and catching up quicker than anyone expected

00:39now it's uh the question is this breakneck pace seems to be slowing so has china hit a ceiling

00:48or is this just the next phase of the evolution of the chinese economy joining me on the show i'm

00:55elissa idris and joining me today is a professor wu wingtai who has been studying u.s china relations

01:01long before tariffs became headline news so profu let's look at china's economy once again this week

01:09and we know the growth story has been remarkable but it seems to be entering a different phase now

01:17of the economy and um you know critics are saying that there's a slowdown so what do you think is

01:23there um what's behind the this trend this slowdown of the chinese economy is it the end of the china

01:31miracle as some are saying well i do not think it'll be the end of the china miracle unless china

01:41makes some very serious mistakes first of all we have to remember that the chinese economy grew

01:49at over 10 percent a year from 1970 up to 2012 it is unrealistic to expect that the country

02:01could continue to grow at 10 percent a year for the next 30 years for the simple reason that a large

02:11part of the growth occurs because china started out very far from the global frontier of technology

02:22technology so china started with a very backward level of technology and it it when it uh opened up

02:30it's entered the global market of technology so it's able to buy technology look at what other people

02:37have done and they have done uh run the correct lessons and went ahead and it grew at 10 percent a year

02:46for the first uh almost 30 years that has to slow down largely because as you get closer and closer

02:55to the global technological frontier your gap is not so big anymore so everything you do is less

03:06uh have less uh have less of a bank than before yeah so which is why so which is why in 2014

03:16when xi jinping came to power he pronounced that china has entered into a new normal the new normal means

03:25a growth of roughly seven percent down from the 10 but what we have seen in recent years is much lower

03:35than seven percent uh 2023 2024 it is less than 5.5 so it is unnaturally low and the imf has predicted

03:48that 2025 will be less than four percent so i do think that china is been growing below potential

04:04from ever since around 2018 largely uh and uh it could easily grow back at six percent instead of the

04:17present fund officials in beijing are um striving for economic expansion of around five percent so

04:25that's the that's the official uh target the quest i mean still impressive but nowhere near the ten percent

04:32that we once saw before or the seven percent of the new normal as you mentioned a bit earlier prof

04:37what do you think are the biggest threats that stand in the way of china achieving at least the five

04:45percent they're aiming for this year oh i think uh the threats uh well let's look at let's use today's

04:57terminology of the internet edge so if your computer does not come on when you when you when you turn it

05:06on it could be software hardware failure hardware failure in this case would be due to flaws in the

05:15economic structure so that is uh bad economic management and as long as it continues the machine doesn't turn

05:25the software failure the software failure is when because of uh social political instability over

05:39governance such that people are fighting and so growth is not possible when there's social disorder

05:47that's what i call software failure now if you turn on your computer and it is not hardware failure

05:55not software failure what would it be most likely you forgot to plug in the electricity this is what i

06:03call the power supply failure largely because hardware and software is inside the computer which means

06:13inside china software uh a power supply failure would be the external environment prevents you from

06:23growing and there are two kinds of external environment one is the natural environment like running out of

06:31water guarantees that you cannot grow okay and uh and in the long run if there is great biodiversity

06:41uh destruction in the years before the food chain is threatened and you cannot grow that is the natural

06:50environment but then there is the international diplomatic environment which is what we are seeing the

06:59trade war that we are seeing is what i call a power supply challenge to the chinese

07:07companies because the chinese needs the external market in order to reach the economies of scale

07:17to be able to keep production costs down and allow them to continue to purchase new technology and raw

07:26resources from abroad can we delve further into the power supply challenge externally as you've put it um

07:36specifically washington's containment uh tech containment so looking at that specifically has that

07:44in any way slowed chinese innovation in a meaningful way has it um is that one of the power supply

07:53challenges that you foresee um as a threat to the growth of the chinese economy

07:58back in 2014 i had predicted that the greatest threat to china does not come from what i call the hardware or

08:12software failure because hardware and software failure involves you opening your eyes and see how other

08:19countries have doubted them and you do the same accordingly but when it comes to the external dealing with foreign

08:29uh relations that is uh not you know unilateral action can fix it unless you surrender so dealing with the external

08:43the external world i had predicted in 2014 is china's biggest challenge wow and uh and now the threat has realized

08:54and that a lot a lot has to do with the fact that when china joined wto it had agreed to a string of conditions

09:04of market opening which it has not uh met and the other thing that has disappointed the americans is that china

09:14is that china has not followed the path that they had that that of uh taiwan and korea where

09:21authoritarianism collapsed under the weight of economic development the communist party of china

09:28china shows no sign of being any weaker than in 1978 so this has certainly cost uh part of the uh reaction

09:41against china can china overcome it well the way the americans have gone about containing china

09:49and china has also been accompanied by a host of policies that is helping the diffusion of knowledge in china

10:03for example the americans have closed entry into their universities to foreigners especially from china

10:12so basically uh and china has responded with the opposite reaction which is opening up its universities

10:22to the rest of the world and increasing the amount of uh english language instructions catering to the

10:32foreigners so the americans way of isolating china technologically has been a very clumsy one

10:41and so it has not been it will not be effective until they stop this xenophobic behavior in america china

10:53as you could see has uh been able to

11:00respond very effectively to this uh attempt at technological isolation you look at deep seek you

11:08look at huawei and you look at the electrical vehicles that are coming out from china they are better than

11:17tesla in my opinion okay well so so clearly the way they've responded to some of these threats has worked

11:26in their favor they're they're clearly doing something right we talked a little bit about the secret sauce

11:31that china's got so maybe they're doing something right but i'm curious to know prof what you think

11:37they should do more of what they should double down on and what they should avoid doing so

11:44what are the kind of pitfalls that um china must avoid if it need if it's aware of the threats to its

11:52economic growth well as i said the source of china's growth in the previous uh 40 years

12:02has been the convergence to a private market economy that rate of convergence to the private market economy

12:13has slowed substantially since around 2016 based what are the things that china has done to

12:23converge to converge to a market economy you look at the products market they have all been deregulated you

12:33can buy and sell electric vehicles freely you can buy products but that is not true however for what we call

12:43the factor markets in china factor markets refer to the capital market the land market and the labor market

12:52they are very backwards let us talk about capital market cap the job of capital market is to allocate capital

13:04to places where it maximizes the productive capacity of the economy you allocate to where it is most productive

13:11in the old days what's been holding the country back has been lack of investments in physical infrastructure goods

13:21cannot move to the ports to be shipped up people cannot move around the country easily but now thanks to the

13:29a comprehensive high-speed railroad system and the air links and the seaports that is done but that was able to be done very cheaply

13:40very cheaply because china's financial sector is dominated by four state-owned banks the state-owned banks take all the savings in china and directed it to this infrastructure investment

13:55infrastructure investment but now the task is done china has enough high-speed railroads have enough airports have enough seaports

14:07to be directed to industries that will grow and that's where the state-owned banks fail the state-owned banks

14:18systematically discriminate against small and medium private enterprises

14:27braful can i just right sorry just to interrupt and i'm curious because you spend um so much time

14:34not just studying china but you were also in china getting a sense of um what it's like on the ground

14:41i'm quite curious for someone watching from the outside of china and only being able to access

14:46um china through the news or through media or even social media what's your read of how the economy is growing

14:56uh on the ground what do you sense in terms of the pace of growth are people feeling on the ground this

15:04five percent uh growth that the the officials in beijing say well two big things have happened that have

15:14made people feel much poorer one was the wealth destruction during covid19 many many small and medium

15:25businesses had to continue to pay rent while they couldn't open their shop so that certainly took a big

15:33swipe of their capital the second reason why people feel much poorer has to do with the fact that the

15:42housing bubble has just ended so everyone's inflated idea of how much their homes are worth has come crashing

15:53to the ground and because of the housing bubble there has been an over building of residences so that sense of

16:05wealth is not going to come back quickly because the price of housing is not rising

16:12but there is one very important that reform that china must do which in order to regain its uh mojo uh i think

16:23the strange part is that people are not allowed to move around freely in china in malaysia if you are living in

16:34rural carlantan and you wish to get a job in kuala lumpur you pick up your family and everybody goes and stay in kuala lumpur

16:46in china you have the household registration system which meant that many of the workers who move to work in the cities

16:58are doing so illegally which means that they they are not able to enjoy the full amenities of being

17:08rural uh a rural rural urban residents like your children cannot attend the public school

17:16so that's and you are not entitled to the hospital services of the city so that is in a sense second

17:29class citizenship now what needs to be done in china is that when when the when the urban reforms began

17:42whatever home that you happen to live in is sold to you at a very small price

17:48so that means that there's a privatization of housing in urban china that happened in the late uh early 1990s

18:001990s but in the case of rural china the land that the peasants hold cannot be freely sold among themselves

18:14it is still owned and they are not allowed to move to the urban areas and receive the same privileges as

18:23urban other urban residents i think that is a very unfortunate restriction from the period of central

18:32planning and that should be removed and if that is removed just think of the recovery in housing

18:40the people from the rural areas will move to the urban areas and not only that they'll be able to

18:49sell their land and have the capital to start businesses now the land that they have they cannot

18:56use it to get a loan to start a service to start a new business that's what's uh that's the next big uh

19:07reform in china is not just the banking system where i say you need to have small and medium banks

19:17so that to allocate capital more efficiently and more fairly to small medium enterprises you also need to

19:25have reform of rural land land to the tiller finally after the revolution in 1949 and allowing people to vote with

19:38their feet to be able to go to the urban areas which is traditionally in every society

19:47the ticket to social mobility but right now if you have children your children cannot go to an urban

19:56school and we know that in many cases the best urban school is worse than the worst urban school

20:06because it's very hard to get good teachers to go out to the rural areas so i think this uh unleashing

20:16of the productive forces from the rural area could lift china to a birth is five percent growth it is quite

20:27surprising to me that when xi jinping talks about the new normal of seven percent that he said that in 2014

20:39but today 10 years later it has come crashing down to five percent i think that crash has come a little too

20:47early early i believe but of course as you said what there's one surprising thing part you must notice about

20:56china from 1978 to 2012 every time the government gives a target for growth rate there are only two years

21:05in which growth in which growth is actually lower than the target in all the other years the growth is

21:13always above the target because it shows you what a good government you have we exceed what we tell you

21:20to be delivered exceeding expectations prof woo thank you so much for being real about china about us and

21:30everywhere and everything in between that's it for this episode of who says i'm melissa idris we'll see you

21:36again next week folks bye

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