In the past, you have expressed at least some skepticism about those who said
that this is just going to keep going, the juggernaut that is the Chinese
economy. It may have some problems.
What we're seeing, what you predicted or is even worse than what you thought.
I try to avoid making near-term predictions, but I thought for a number
of years that the Chinese juggernaut was going to slow.
Juggernauts usually do. In economics, classic examples were
Russia in 1960, when it was seen as going to surpass us in 1980, or Japan in
1990 when people expected that it was going to surpass us.
So it's a pretty good rule that when American high school kids rush to study
a foreign language, that's about when the country's economy
is peaking. So you've got that.
Then you have a variety of near-term challenges of the kind you just referred
to. Financial strains in China coming from
excessive reliance on real estate and the drying up of export markets.
Then you've got some fairly profound adverse fundamentals for China.
The fact that Chinese parents had only half as many kids last year as they did
six years ago. The fact that there's large amounts of
people with money in China who are very, very eager to get it out, which is
always a sign of impending difficulty in emerging markets.
So I would not be confident at all that China will be a faster than average
growing major economy over the next decade.
And that's obviously a big difference from the world we've been living with
for the last 40 years. So just a personal note, Steve.
Let the record reflect the Blair is right and his rule of thumb.
I studied Russian in high school in 1960, so.
So certainly, here's one anecdote that supports you, Larry.
So. So you've got an investor in China.
You've spent a lot of time there. Were there fairly recently, actually.
What do you make of what we're seeing right now?
Well, first of all, look, I have been more optimistic about China in the past.
And I will say that I have recalibrated my views.
I mean, it is definitely going through a tough period.
I don't think I'm as pessimistic as Larry is.
I would just mention, for example, that they may not make their 5% GDP growth
number this year. Maybe it'll be four.
Maybe it'll be four and a half. It'll still be probably twice what ours
is. So I don't think we can yet sort of wipe
China off the blackboard. But look, they have a lot of problems
and I would put them in a couple of buckets.
One, it was clear in my trip there that the sanctions that we've imposed and the
whole globalization phenomenon and the fact that business feels that they have
to be more careful about their supply lines has taken a toll and it's
definitely affected their exports and their general mentality and their
business. The second big problem they have is,
gee, who has who has reasserted control over the economy?
Who many of our investors that we talked to there feel doesn't really even
understand economics. And you can buy their policy action so
far. I think you probably agree with that.
And so you've got really bad government policy on top of a bunch of
difficulties, whether it's the property sector, whether it's export exports,
whether it's whatever. But I would I would say I'm not
completely going to write China off because I think you have to recognize
that you do have a lot of tools, for example.
Everybody talks about their debt. Nobody talks about their assets.
The IMF just came out with a paper in the last few days that basically tried
to look at the balance sheet assets and liabilities of the Chinese government.
And while their net assets have been coming down, they're still substantially
positive. I think if we went through the same
exercise for the US, you'd find a different result there.
Central government debt to GDP is only about 30%.
They have plenty of scope to do something on the fiscal side to both
stimulate the economy as well as solve some of the problems that the provincial
governments do have with debt, which are which are very meaningful.
So, Larry, to pick up on one thing that Steve said there, if President Xi is
part of the problem, could he be part of the solution?
And I guess that's a way of asking, are there things he could do?
We saw some actions even this week where he tried to put some more money into the
economy, although it's not clear that consumers are having enough confidence
to start spending it. But are there things that President Xi
could do or what were you seeing sort of larger structural factors that you
suggested that are outside of his control?
I think it's a combination of both. I think, by the way, there are a lot of
questions about Chinese economic statistics.
We talk about smooth earnings of U.S. corporations.
I would politely suggest that that is has nothing compared to a fair amount of
what goes on in Chinese statistical reporting.
I thought it was interesting this week when the Chinese authorities who had
been facing really very grave youth unemployment figures, announced that
youth unemployment figures weren't going to be published anymore going going
forward. So I think there are a lot of questions
about what the real growth rate is. Beyond that,
there are obviously things that China could do that would substantially
stimulate demand. But here's the core problem or a core
problem. There's a basic tension between the
politics and the economics in Chinese political economy.
Is control going to crash with 100 million people who are members of the
party or the 1.2 billion Chinese citizens who are not members of the
party? Now, expansionary fiscal policy
consumption, leg growth agenda is basically an agenda of spreading money
all over the place and shifting it from the control of the Communist Party to
the control of regular people who aren't part of the Communist Party.
Steve Leung makes an important point that I've always wondered about as an
investor in China. How do you trust the numbers?
I mean, Larry points out that David decided not to report the U.S.
because it's over 20%. It's not a good number.
So how do you have confidence in the numbers as an investor?
Well, remember, this is definitely not reporting a number and making up a
number. And I don't disagree with Larry about
the statistics that they may be managed, but I would just make that distinction.
They were reporting youth unemployment numbers.
They were huge numbers. So they decided not to report them
anymore. But the macro statistics are just a
piece of what we think about when we invest there, where we're investing in
companies or in managers who are investing in companies.
And the question is, what are the prospects of the companies?
And obviously, obviously, the fundamentals of the country do relate to
that. But that's not the only piece of how
they go about investing. But I would say just a couple of things
about a Larry said, and I don't disagree again with while we might disagree a
little bit about this. Look, I think fundamentally the deal
between the Chinese government and the people has always been, we're going to
make you rich and let us control. And, you know, you're not going to have
free speech, You're not going to have this.
You're not going to have that, but you're going to get into the middle
class and so forth. And I think fundamentally does believe
that. I think that the on the other side, the
tension he faces is that he doesn't want to lose control of things.
And when the tech companies and the tech billionaires and Jack Ma and all that
were sort of asserting themselves when if you remember, he started to pull pull
the reins in. So I think I think the fundamental deal
there may well still be intact. We have to see how it goes.
There is plenty of scope for the Chinese consumers to increase their consumption.
The savings rate is enormous there and has only gone up because of the of COVID
and the uncertainties that they all feel around it.
And they are all everybody. We are.
The Chinese people are everybody is waiting for us to do something and to
basically signal, am I going, is he going to try to use the tools he has,
which, as I said, I think are substantial to get the ship righted?
Or is he going to just stay hunkered down the way he's been, frankly, with
the small things like interest rate cuts that don't really make much of a
difference? Larry, if China continues to struggle
economically the way they have and Steve points out, they're still growing more
than we are, but still struggle compared to where they were.
Is that good for the United States in the rest of world or is it bad?
Do we need a strong China economically or a weak one?
It's it's two edged. It's good when your customer prospers
and it's bad when your competitor gets hyper efficient.
So it's a two edged thing. I am concerned that we will become the
object of China's frustration and that will tempt them to lash out.
I think we need to be very careful in our approach to China at a moment of
this kind of difficulty, and we need to be more attentive than I think some of
the policy advocates in Washington are to avoiding a situation where we terrify
China with the potential economic damage that we're going to do to them.