before john goes any further with his uh economics lecture is the key that it's not only that china's
demographic trends are very uh steeply downward the working population is already shrinking
uh it's a population that is therefore pre-programmed to age faster than the us
population to be catching up actually with japan when it comes to aging but this is happening at
a time when the economic growth rate is coming down and very sharply down into low single digits
i would guess in the years ahead uh and so not only is china in in a middle-income uh trap it's
likely to stay there uh and this i think is the really the really critical point i i mean john i
i'm i'm not about to argue that uh demography or demographics is destiny in fact my piece begins
by saying it's not yes uh and population growth in the world is going to keep going it's nearly
all in africa amazingly something like 93 of the projected population growth in the world to the
end of the century will be in africa now the u.n population prospects has been pretty accurate
since it began which is back in the early 90s just to be fair to the demographers there this
revision of the chinese statistics is a huge deal because it's the most drastic revision i think
they've ever done and interestingly the chinese government now admits this which previously
it denied so i think if you think about this not just in terms of economics but let's think about
it in hr's terms in terms of the strategic rivalry between the u.s and china it's hard to think it's
hard to see this as as good news from a chinese perspective they would have to achieve really
quite remarkable productivity growth from here on to compensate for this aging and this decline in
the in the size of the workforce and i don't see that happening certainly not in the data that i
see no it doesn't i mean like 10 plus years ago i wrote a book called civilization and i asked the
question is this where western civilization steps aside and eastern civilization takes over i think
if you look at the situation today it's far less convincing that we're heading for a chinese or an
asian century than it seemed to me a decade ago and i think hr is right as to what's gone wrong
that the the regime xi jinping established has reasserted uh the primacy of the power of the
chinese communist party over the priority of of maximizing growth and hr has already given
some great examples of of how this has played out the the the pressure on the tech sector
the way zero covert has been instrumentalized to impose uh the power of the party over society and
so you look at the chinese economic model and you see all kinds of problems which is i think
why the growth rate is likely to be much lower in the next 10 years than in the past 10. and we
haven't even got into real estate because rather in the way that the japanese economy in the 1980s
fell victim to a great real estate bubble which when it burst left the economy essentially
flatlining china's in a similar predicament 29 of economic activity is real estate and that means
building tower blocks basically on on land that has been acquired uh at uh at rock bottom prices
if your population is forecast to halve it's not quite clear why you would be building tower blocks
i mean this is the the equivalent of the old bridges to nowhere it's tower blocks for nobody
and as you look at china's financial situation i'd be interested to hear john's thoughts on this
there is a real pile of trouble there debt all kinds of uh underperforming
uh loans property developers uh on the edge of bankruptcy and it's clear that the authorities
are really pretty uneasy about the situation that they're in i don't think they have a
japanese style bust but i certainly think that the the burdens of debt that are accumulating
are going to slow down china's growth at the same time as the demographic problems kick in
one i mean i spent a lot of time in china over the last uh decade or so i was a visiting professor at
uh tsinghua got to know people uh in the in the government and their goal at least those that
thought about the economic questions was to try to grow the consumption part of the economy and make
the economy less reliant on on exports uh and on fixed asset investment uh michael petters has been
a long-standing critic of china's economic policy mix arguing i think rightly that it involved
actually suppressing the returns to labor uh in in ways that ultimately would be self-defeating
and i think much of his analysis being is being borne out by recent events they haven't succeeded
in making this a consumption-led economy it still relies for growth very heavily on the
export channel and when things go wrong the playbook is always well let's invest some
more in infrastructure uh and let's build some more coal burning power stations and
this is where the model is fundamentally uh broken and it turns out to be really hard to repair
covert which it seemed as if the chinese had got right in 2020 has now made the problem much worse
because by pursuing a zero covert policy based on restrictions because they don't have vaccines
that work and they haven't vaccinated the people that really need them they're actually depressing
consumption even further and i'm not sure how that gets fixed uh in addition to which people
whose savings are under threat because they put the money into real estate are not likely to go
spending so i think part one of the answer to the question is that the economic model
which became very heavily reliant on exports and fixed asset investment not on consumption
looks broken and maybe unfixable the second question about investment in our own demise
i suspect will answer itself in that a the returns to investing in china are going to suck
and there's nothing quite like investments that suck to change the minds of american investors and
maybe trapped capital too neil don't you think the chances of that are pretty high i mean just losing
it all right well capital controls mean it's very hard to get your money out once you've put it in
uh and that's going to turn out to be a major problem uh and at the same time i think the
process of decoupling is only going to accelerate the more conflict we have of the sort we've
discussed in in a previous episode over taiwan and other strategic issues so my sense is that that if
you kind of look ahead uh five years there's going to be a significant and sustained decline in u.s
investment in china i think i think that's highly likely i mean just look at the currency which has
weakened quite significantly uh this year relative to the dollar that that doesn't look good if
you're a u.s investor and it's in itself and it's a point that i've made myself more than once uh a
regime like this an authoritarian one party state which suddenly finds that the economic miracle it
was presiding over has ended and therefore can no longer rely on economic growth for its legitimacy
is highly likely from a historian's vantage point to become more aggressive in its foreign
policy because it knows that it can count on a pretty strong nationalism not only from the
masses but from educated chinese too and that's why the taiwan situation is so dangerous i think
we may underestimate just how much pressure xi jinping is under domestically and therefore we
may underestimate his readiness to take risk on the taiwan question my sense when nancy
pelosi did her visit and she's been succeeded by other congressional leaders in going to taiwan
she was in a sense pouring some kerosene on on that barbecue when we don't have a particularly
good strategy for defending taiwan if the chinese do take the risky move now our colleague misha
austin just wrote a piece in the financial times observing that there's a real nuclear risk here
that we shouldn't underestimate hr uh i'm sure would agree that there's been a big build-up in
in chinese conventional and nuclear forces uh in the last 20 years so this is not the 1950 1995
taiwan straight crisis that we could end up in we could end up in something much more like the
cuban missile crisis uh with two nuclear armed superpowers going to the brink over an island
that happens to be very near to one of them so i i think this is a really serious concern i was
asked earlier by some visitors to whoever what my recommendation would be and my recommendation
would be let's not go down the cuban missile crisis crisis road of of brinkmanship let's
go straight to dayton in this cold war rather than risk confrontation that the chinese may be
much more ready to take on than we currently assume well i think that's certainly part of
it i mean taiwan has not gone in the direction the the ccp assumed back in the 1970s where
they essentially expected uh reunification as they call it to happen quite naturally if anything the
trends are entirely in the other direction where the taiwanese population feels more taiwanese less
connected to the mainland and although they like the status quo a significant proportion think of
it as the status quo tending towards independence so this is certainly a part of the concern
in beijing but i think it's a mistake to say oh there are lots of authoritarian regimes that have
stagnated without engaging in in international aggression because i think you're confusing
trivial countries with important countries and venezuela is a trivial country uh china is one
of the world's great empires russia one of the world's great empires and when authoritarian
regimes in great powers get into trouble i think hr uh would be inclined to agree with
me on this they're quite likely to resort uh to an aggressive foreign policy if if there is a pattern
in the history of the last 150 years that's part of it in my view and i i don't think there would
be such a risk if china could confidently look ahead and say things are going our way the trends
are our friend it will be an asian century the more they feel that their window of opportunity
is closing because their economy is slowing their population is shrinking and the u.s has woken up
to some of the threats that china poses then i think the greater the likelihood that the chinese
leadership decides to take a risk that kind of gamble has all kinds of precedence in history
think of the japanese gamble which george will mentions uh that led to pearl harbor think of the
german gamble and it was a gamble in 1939 and in 1914 great powers when their authoritarian regimes
are very very different from tin pot dictatorships but when you actually ask the question would we
want there to be a war over taiwan only a crazy person would say yes because as numerous experts
have pointed out such a war would be a very much larger affair than the war in ukraine right now
a the u.s would almost certainly be a combatant and not just supplying taiwan because taiwan on
its own couldn't possibly hold out for long and b because it would almost certainly escalate uh
very quickly and potentially to the nuclear level as as misha ocelon and jim stavridis and
others have pointed out to say nothing john of the economic consequences disaster it would be
an absolute meltdown uh for world markets if this is all asian trade stops instantly i mean a little
bit of gas through the north stream pipeline is nothing compared to what happens when there's
even a blockade of taiwan yes so please and no microprocessors you know right and then you know
uh you know computers start costing you know eight thousand dollars a piece and and you're
looking at maybe even a depression i think if you think covert caused supply chain problems yeah
you would really be dealing with a complete breakdown in international trade and manufacturing
uh so we should really not want this to happen and we shouldn't uh be pursuing policies that raise
the probability of such a war particularly when we know that we don't have a great uh
war plan at this point in fact most of the war gaming that goes on goes on behind closed doors
but there was recently by one of the washington think tanks a public war game and that made it
clear just how incredibly costly such a war would be and this brings me to dayton my argument for
a while has been look uh detail got a bad name back in the 1970s but we shouldn't underestimate
what was achieved in the 70s if only to buy time for the united states to recover from the debacle
of the vietnam war and i think if you look at what happened under ronald reagan none of that
would really have been possible in 1969 or 1970 it took a long time for the united states to be able
to ramp up uh the first cold war and force the the soviet union into an arms race that it couldn't
possibly sustain those weren't options open to the united states at the beginning of the 1970s
so my argument for the taunt today would be let's let's play for some time here time is
not on china's side as we already have established the demographic and debt dynamics are against them
we need about a decade i think to sort out the issues we've been talking about on this show
for what feels like and must be two plus years we have a lot of work to do uh to rebuild the kind
of domestic consensus that we seem to have lost to reform immigration to reform social security
we've got a lot of work to do to sort america out and i think the smart thing rather than look
for a showdown with china over taiwan that would only bolster the regime in beijing is to say you
know what we should we should talk rather than engage in our current saber rattling
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