How do you see it between the United States and China, given what you're thinking about in terms of their economies?

Sure.

Thanks, Clay.

I really appreciate the invitation.

I echo a lot of what Paul said about the sort of inherent instability in the relationship and how this is probably going to be tested in the next period of stress.

But that is the argument of the book, that in the current environment, China cannot generate domestic demand with its fiscal and financial systems so we traditionally think about you know pairing sources of leverage between the united states and china is that the g7 collectively runs a trade deficit china and commodity exporters run a trade surplus in that environment the g7 collectively will be able to leverage demand in this sort of competition with china can threaten to deny demand to Chinese exporters, and China can threaten to withhold supply, such as of rare earths and other critical choke points.

That's just sort of inherent to the structure of the economy.

So how do you see this relationship developing? It goes back a little bit to the question I posed to Paul at the beginning, which is, is this durable? I'll let you try to answer all what I just said.

What's wrong with that?

Well, I mean, I think it's fair to say, Mr.

General Secretary, that we're not talking about the same things, so to speak.

And the simplest response, I think, is that if the underlying economy is not growing, your ambitions to develop those industries are going to face pretty fundamental limits.

They are already facing limits from your own capacity to fund and finance them with the domestic fiscal and financial system.

The limit that will be faced is essentially the fact that everything that is being developed in China, the marginal source of demand is outside of China rather than inside of China.

And if China remains an investment-led economy as the largest source of investment in the world, it can only grow and your national rejuvenation can only occur relative to the rest of the world by displacing others' export market share.

Like how much operating room will that person have?

What's wrong with that?

Well, I mean, I think it's fair to say, Mr.

General Secretary, that we're not talking about the same things, so to speak.

And the simplest response, I think, is that if the underlying economy is not growing, your ambitions to develop those industries are going to face pretty fundamental limits.

They are already facing limits from your own capacity to fund and finance them with the domestic fiscal and financial system.

The limit that will be faced is essentially the fact that everything that is being developed in China, the marginal source of demand is outside of China rather than inside of China.

And if China remains an investment-led economy as the largest source of investment in the world, it can only grow and your national rejuvenation can only occur relative to the rest of the world by displacing others' export market share.

Like how much operating room will that person have?

So to what degree is it functioning as a signal? And to what degree is this actually about the larger narrative that you mentioned? And who is the audience for that narrative? Is it the United States? Is it Europe? Is it the rest of the world? How much of it is the Chinese people themselves who are primarily the audience? Why is this, in other words, this narrative so important, if we take your argument and accept it, why is it so important that the Chinese Communist Party and China have people believe this story?

Absolutely.

And you stated it very well.

This is sort of an internal signaling mechanism and statistics are often communication devices between central and local governments and between officials in terms of how they're projecting.

So one Chinese official once told me, yeah, the GDP growth target is necessary, but it's really more of a fiscal and financial stability target.

And his point was that we do think that 8% at this time is too high, but if we adjusted it down to 5%, then it would send the signal that growth isn't as important and actually fiscal and financial stability isn't as important because you wouldn't generate as much tax revenue.

So you have to make these very incremental adjustments or else people would panic because this is what they're used to sort of within the system itself.

So is it comparable in any way to that or is it just on a much bigger scale?

So kind of what can you tell us about kind of where Chinese growth is today, and what's the kind of midterm outlook for it? When will we ever get back to those high numbers that we were at before?

Sure.

I mean, there's a much longer conversation about how far you want to go back in terms of questioning, uh, where the growth data are, um, and, you know, and how we have...

I think there's a, a very reasonable, uh, statistically based argument that the growth rates from 2014 to 2019 are far too stable to be predictable.

But I think there was a reasonable argument back then that errors were being made on both sides.

Um, so in other words, there was sort of a smoothing going on, uh, with growth much weaker than, uh, reported in 2014, '15, maybe stronger than reported in '17, um, before slowing more, uh, dramatically in '18 or '19, which is part of my story.

Um, but since 2022, there's really no debate about, uh, the direction of the errors.

Are there inconsistencies there or can that kind of continue? And then to what extent does China's kind of leading technologies give it a carrot that it can extend, you know, certainly to kind of the developing world, but frankly also to some G7 countries as well?

What role do you see him playing in this sort of slow, dragged down, dragging economy?

So I think there's three important impacts that Xi has had on this debate.

The first is Xi has created new financial risks in China, new policy-related risks from the centralization of power that did not We're not present before Xi Jinping's consolidation of power.

That's one.

Second, he has changed the perception of financial risk among individual investors in China, which dramatically changes how sell-offs play out and where financial risk can materialize.

And I'll walk into that as well.

And third, I think his centralization of power is demonstrated under the zero COVID example.

So what's going on with demographics and the employment? And are there changes that need to be made in that space? Or does all of that just hinge on what we've already talked about?

Talk to me about that as well.

Yeah.

Everything people, when people think of digestion, they think, okay, it's, this is just isolated to what's happening in the stomach.

But of course, anything for anything to get into your stomach first, it must pass through your mouth and digestion begins.

The second you begin that chewing process.

And so, like I mentioned earlier, you, Once you start chewing, your body will start producing the saliva that's creating the signals to the rest of your digestive system that food is coming.

It's going to start sending up these enzymes and food starches to help maximize the amount of nutrition that is extracted from the mastication.

Um, is there anything else that we didn't cover? I know we have our earlier podcast we did with you before that we went into a lot of this before, so people can refer to that as well, which is pretty cool.

So first of all, is this the assessment that you make in the book or did I read it wrong? And secondly, how did we get here? How did China get into this economic position?

You read it correctly, and that is the assessment.

But I think there's a sort of unified theory around China's slowdown within the book, which I think is really missed around most of the discussion of China's economy.

And it's why we focus on following the money within China's financial system so intensely in our work at Rhodium, but in the book as well.

And the key point I would make is that The story of China's slowdown is essentially a story of a credit bubble, of a credit boom and bust.

And basically, credit ends up covering up a lot of inefficiencies when it's growing very rapidly.

But when it starts slowing down and as I describe this in the book is the rise and stall of China's financial system, policymakers look a lot less capable.

And therefore, with our sort of democratic turnover and with our more short-term decisions, what's even the point to engage with something like that?

And, you know, you could also say, is GDP even the right metric to look at the power of the economy? How do you answer these? Sure.

There's a very legitimate debate about whether GDP is the right metric to look at economic power.

This is a system that was designed in the World War II era between the U.S. and Britain about measuring wartime capacity.

I mean, there's reasons to be skeptical about what you're measuring overall.

But the PPP argument doesn't really make any sense.

I mean, essentially, you'd be rewarding China for creating deflation.

If you were scoring this based on PPP, you'd be saying that the lower the domestic prices are, the more powerful The economy is when deflation is actually the problem that China is countering.

TFP is hard

So how should we think about the growth?

Yeah.

Growth has collapsed since 2022.

China's property sector was around anywhere you want to measure it, 20% to 30% of the economy.

I think 20% to 25% is a reasonable expectation.

New housing starts are down 77% from their peak.

New sales are down over 50%.

I mean, how should we think about how his leadership has changed their trajectory?

Do you have a way to say how much of a drag is the property sector on the economy right now? And also, when do you see or how do you see this deadweight kind of thing resolving.

Yeah, I mean, these are all sort of estimates that are out there.

But if you take sort of the value added approach of looking at sort of the using input output tables to figure out the upstream and downstream implications of property construction, plus the value added in China's reported property GDP figures, that's the approach that Kenneth Rogoff and one of his co-authors used back in 2016.

You get levels that are in the range, and there's many different estimates.

You get levels in the range of property was 20% to 30% of GDP at its peak, and that peak was likely in 2021.

And since then, new housing starts are down 77%.

Overall sales are down 55%, 57%.

Do you see those policy efforts succeeding?

Mm-hmm.

To sort of look at...

Analysts tend to look at the Chinese system and say, "You know, this is a different political system.

It produces outputs that are long-term plans, and so therefore we fit, filter incoming data in terms of how China is doing based on its long-term plans and its declared goals." From a financial system perspective, it looks entirely different.

This is a country that has had an enormous credit boom and bust, and you don't expect countries on the end of a credit bust, in the midst of a credit bust, to have the same policy capacity that they did at the start of it.

Credit has, you know...

Credit growth hel- helps to make everyone look very, very, very competent and very, very farsighted when credit is expanding, and everyone looks very, very different in terms of their policy capacity when credit is contracting.

Uh, do you have like a way to say how much of a drag is the property sector on the economy right now? And also, when do you see or how do you see this dead rate kind of thing re- resolving?