In China, Five More Years of Xi Means Security Above All Else

China ramps up its rhetoric on Taiwan. So far, Europe has tried to stay above the fray, but there's a creeping worry that Europe's leaders might be misjudging President shi Jing Bing, just as they misjudged Vladimir Putin. Europe's not dependent on Chinese gas, it's true, but of its solar panel imports come from there, and a lot of other things that might turn out to be hard to source elsewhere.

We have a fascinating report on all of that from Carol and Look in Frankfurt and James Mega in Beijing. In a little while. We also have a chilling historians take on the relationship between war and inflation and the true lessons of the nineteen seventies from Professor Neil Ferguson. We know one big difference from that other Cold War with the Soviet Union, that China's economy is much more integrated with the global economy than the Soviet Unions ever was.

Yet our real time understanding of what's happening at the government level is, if anything, worse than it was in Criminologist days, or at least seems to be going in that direction. This has been especially evident during the twice a decade Communist Party Congress. As we heard last week

from our reporter on the ground, Callum Murphy. It is not an easy gig to cover, but Bloomberg's chief economist Tom Morlick has a better handle on what's been happening than most, having lived eleven years in Beijing and written two books on the Chinese economy. So Tom, thanks for being with us again. I guess you should start by just reminding us briefly of the significance of this event. So the Party Congress takes place once every five years,

and it brings together all of China's top leaders. Two thousand, three hundred delegates, and they do a few important things. They look back on the successes and failures, They look ahead to the years to come and set the big

policy directions, and crucially, they make decisions about personnel. Who's going to be the General Secretary of the Communist Party and so also normally the President of China and the head of the military, and who are going to be the Standing Committee, the group of seven flanking the General Secretary that make all the big decisions. Now we've been told that the two big things to look for come right at the beginning and at the end. We have now had the first the President's speech to the Party

Faithful on Sunday. Did we learn anything from that? So when I first moved to China back in two thousand and seven, there was this public safety campaign underway, campaign to sort of get rid of accidents and make Chinese people safer. And the catchphrase of that campaign was and choin d safety first, or perhaps security first. And in shijiin Ping's report to the Party Congress, that word and choin security took on a new significance. And I think what that tells us is that priorities at the top

levels of China's government have changed. Twenty years ago, the biggest word would have been far Jan development, and there had been excitement about opening and policy experimentation and collaboration with the rest of the world. This time around, the most important word is and Chwan security, and what that speaks to is a China that sees itself in a more hostile world, fighting with the United States, fighting against pandemics, trying to secure what it has rather than open up

and explore your opportunities. As you mentioned at the start, we've been encouraged to think about this as a as a matter of personnel as well as policy. And at some point, probably at the weekend, we are going to see who this this new standing committee are the new senior people in China, and it seems a pretty fair bet that President Shi jing Ping and people close to him are going to still be in charge after this congress.

Now there's been a lot of concern about Si Jingping getting a closer and closer hold on on power and staying in for so long, But maybe it's because I've been a bit focused on the incredible dynamics underway in the UK. It sort of feels like to me stability in China might be no bad things short term when you think about the rest of the world being in

such flux and seeming rather scary. Soudan Shao Ping is remembered as China's great economic reformer Stephanie, but he was also a reformer of China's governance system, and in particular he introduced the two term limit for top leaders. Jangs are men who followed Dong observed the two term limit. Hujin Tao, who followed Jang observed the two term limit. Shijim Ping very likely is set to breach the two term limit and stay as General Secretary for three terms,

and who knows, perhaps even beyond that. Now. Short term, as you mentioned, China's got a bunch of challenges with COVID zero, with property, with fracturing ties with the United States, maybe a bit of stability isn't a bad thing. Thinking longer term, the well, there was a reason why Dong Shaoping didn't want leaders to stay in power for too long. He vividly remembered the trauma which China went through in the late years under Mao Zadong. He didn't want to

repeat of that. So it was is China immediately going to slide into the kind of chaos and dysfunction that we saw in Mao's Cultural Revolution. Absolutely not. Could we over time see a deterioration in governance standards just because the same people have been at the top for too long. I think that's something we're going to have to keep an eye out for. And I know this is something

that you've you've focused on. I mean, even though there's no changing of the guard at the top lower down, has there been a shift of skill set or focus on the sort of more junior officials or people in key economic jobs that we should worry about. So I think it's a really interesting question, Stephanie. If we think about history of China's reform, there are these kind of characters who played a kind of really important role in the opening up of the economy and the modernization of

the economic policy apparatus. Joe Cha Chwan, the former head of the People's Bank of China, springs to mind. He played a crucial role in reform of the exchange rate, reform of the interest rate, reform of the banking system, opening up of the capital account. And he could do that because he was enormously smart, Because he had a sort of a reform orientation and because he had political muscle. Well, Josh Chwan is long gone now and we have some of his disciples in charge e Gang the new head

of the Central Bank, for example. The big question is who follows them, Who are going to be the new visionary reformers and are they going to have the political muscle to get things done. I don't see who's coming through in that next generation. And if we have some gray, faceless bureaucrats, some Communist Party apparachics moving into some of the top jobs at the Central Bank and the Ministry of Finance, well I think there's going to be consequences

of that for China's outlook. It's funny you should say that I have a vivid memory. My first experience of Beijing was in the middle of a rather different crisis than the Asia financial crisis, when I was a bad carrier for Larry Summers and at the end of a tour of Asia and all these countries that were going

through various stages of financial meltdown. He had an audience that we were all witnessed to with Unji, who later became that the premiere but had been the economic supremo in the in the nineties, and his description and explanation of what had been happening across the region in terms of the economic and the financial dynamics was more eloquent and incisive than anything I'd heard from any commentator sitting

in sitting in the US or in the Okay. So that was definitely brought home to me that that quality at the center at that time. And he was obviously another important figure, the giant of Chinese reform, the man who took China into the World Trade Organization, the man who grasped the large and let go the small on the state sector of the economy, building national champions out of the biggest state firms, and allowing dynamic private sector firms to play a larger role in the economy. He's

now in his nineties. Where's the next generation? We've got used to thinking that smart technocrats were in charge at the center of the Chinese strategy, and that they would continually managed to pull it off despite the ups and downs and the economy. They would defy the skeptics and not have the kind of massive bust, the massive bursting of the bubble that so many people are predicted, and indeed your own recent book talks about how they've managed

to avoid a real bursting of the bubble. From what you're saying, it sounds like maybe longer term, you might be less confident of their ability to to dodge all the bullets that come their way. So I'm not sure we're seeing a deterioration in governance standards right now. People look at COVID zero and they say this is a policy failure, this is a dysfunction of China's authoritarian system.

But I think you can equally make the case that COVID zero is doing a really good job of saving Chinese lives, a much better job perhaps than we've done over here in the United States or in Europe. People look at the property slump and saying this is the

consequence of mismanagement, and that's right. China's policymakers did allow the property bubble to swell to nearly unmanageable proportions, but to their credit, they moved ahead of a crisis and put policies in place to try and deflate the bubble in a controlled way. Um So I think as Hi Jinping, perhaps for a third term, as we wonder about who the next generation of top economic technocrats are going to be.

We're right to be concerned about the possibility of a decline in government standards and all that would mean for China's capacity to handle some really pretty formidable challenges. But I'm not sure we're actually able to say that that decline is already underway. And going back to to where I began, I mean, even experts like you are doing a bit of guess work when it comes to who's in charge or who might be in charge down the road,

what the what the strategy might be in future. Just that sheer lack of information and the flow of information between China and the rest of the world. I mean, long term, does that trouble you as it troubles me?

It is troubling Stephanie. I mean, I think there's there's a kind of a natural barrier there, especially on the U S side, simply from the fact that almost everything happening in China takes place in Chinese, and there's not many people in the US who have the mastery of the language to engage with it, either in the writing or in the speaking. But I think what we've seen in the last few years, first under Donald Trump and now continuing under Joe Biden, is a fracturing of ties

on diplomacy, on business, on finance, even amongst academics. And what that means is the sort of the rich interchange of ideas and information just isn't there anymore. And if you couple that with the kind of the natural secrecy of China's single party state and their suspicion of sharing information, well I think you've got a bit of an information vacuum there. And that's the sort of environment where it's really easy for relations to deteriorate further and for mistakes

to be made. And as has been discussed on this program before, and even at the academic level, you now have you know one would you and I both talked to eminent sinologists, people who are very expert on on every nuance of what happens in China or were and they have to admit that they have not been for several years because of COVID. So of course that has also presented quite a big barrier. Tom Warnick, thank you

so much. As I mentioned at the start, the EU has not yet had the kind of fracturing in its relations with China that we've been talking about with reference to the US, but many would say it's just a matter of time and that the continents leaders are not

doing nearly enough to prepare our China. Economy editor in Beijing, James Mega and Eurozone economy reporter carrodin look in Frankfurt have been taking a closer look at Europe's approach to China, and here's their report, voiced by Carolyn the Globe Alyson En folks had fatiding on decap links default and though Germany's Chancellor you just heard is making plans for his first trip to China as German leader in early November, according to reports by Bloomberg News, it comes at a

sort of awkward time, with his country on the verge of a recession that, in the worst case, risks replicating the scale of the Great Financial Crisis, in large part things to Germany's outsized reliance on Russian gas. In the recording, which is from a conference he spoke out last week in Berlin, Shouts defends globalization despite the havoc that was caused by his country's economic interlinkages with Russia, arguing that

so called decoupling is the wrong answer. Germany shouldn't break off ties with other countries, he says, and in particular China, Germany's top trade partner, is a country it should keep doing business with. From dinding London shift ein Germany and the wider continents, difficulties of dealing with the energy crisis sparked by Russia's war have drawn its relationship with China

into sharp focus. While former US President Donald Trump started a trade war with China in an attempt to rebalance it, European nations have seen much more sanguine even as their own trade deficit with China has soared, growing by over

a third last year to two hundred forty nine billion euros. Well, I mean over the last years, of course, trade relations were very, very deep and very extensive, but at the same time it was a bit lopsided if you just look at the That's York Vodka, president of the EU Chamber of Commerce in China and also the Chinese representative of German chemical maker B A. S F. He makes the point that the actual market for Europeans and China

is very small. Overall, the EU exports only a little more to China each year than it does to Switzerland, and about off of what they sent to the US just to container movement China to Europe in the first half was three point five million fort containers, whereas Europe was selling into China containers. So that's the ratio of

three point five to one. But for Germany and the rest of Europe, the question of what to do with China relations doesn't exactly feel like a priority compared with other priorities like the war in Ukraine and keeping European homes heated throughout the winter. Here's Jacob Gunter, an analyst

at China Focused Marks think tank in Berlin. There's definitely a rethink happening um in terms of the used relationship with China, but it's it's happening at a much slower rate than I think a lot of people might have anticipated. And I think most of that is driven by the fact that you know, you have a today problem, you know on your border, whereas China is a you know, next week problem or next month or next year problem clear on the other side of But others such as

that you used. Top diplomat Joseph Barrel do not think Europe can afford to keep this on the back burner. He recently called for Europe to wake up to the reality that the world it once knew, where it could rely on the US for security and on Russia and

China for prosperity, is no longer there. I think that due to be in were faking a situation in which you suffered the gun sequences of a process that has been last thing for years, in which we have the couple the sources of our prosperity from the sources of our security. Increasingly, Europe's trade with China is not just

lopsided but unstable. Last year, the country blocked Lithuanian exports because of a dispute over Taiwan and the Torpedoed and Investment Treaty by sanctioning European officials after Europe sanctioned Chinese officials over allegations of human rights abuses in Sinjian. The question lurking in the background is whether Europe has missed judged China and siege in Ping the same way it

has missed judge Putin. What could happen with Taiwan? What would a war in the straight mean for business with investments on both sides, or investments in Japan, Korea or elsewhere in the region, who would inevitably be dragged into a conflict. How painful would it be to cut off the supply chains from China or East Asia as quickly as European firms pulled out of Russia. Is it even possible? The evidence so far is that European companies aren't being

deterred too much by these questions. Definitely, the market is so vacan and the technologies are wanted. They have to be here. In chemicals, China stands for of global markets, so if you're not at the table, you're going to be on the menu. That was vodka from the EU Chamber of Commerce. Again, foreign investment has continued to rise in two thousand twenty two. Those has grown increasingly concentrated

among big, mostly German players. According to data by research from Rhodium Group, for any foreign business active in China, two and a half years of COVID zero policies have

taken their toll on their bottom line. Profits at foreign industrial firms in China were down twelve percent in the first nine months of the year, and foreign firms from the US and other places that are in China are talking more and more about cutting or slowing investments but according to Agatha Kratz, a director at Rhodium Group, very little of that reluctance to invest is related to the

experience in Russia. But at the end of the day, we see very few companies that publicly come out and say I am uncomfortable investing in China and comfortable engaging with China given the nature of the regime um boast in terms of just it being a one month rule and second it being human rights abusing the country. So we're not seeing the way that companies when the war with Russia, well between Russia and Ukraine broke out, the way that companies said I'm pulling out, I can't be

sustaining activity dairy Fressia is going to attack Ukraine. And we're not seeing companies speak as clearly and openly about the fact that they could just very well also be uncomfortable with the regime that has a lot of similarities of course in terms of its political management. Still, Cratz says that Europe's main vulnerability base of each China isn't

the capital they've invested there. European companies, which are mainly German firms, have invested less in China over the last twenty years than they do in the US and a single year. I think that if tomorrow Germany had to just cut all of its ties to China in terms of outbound investment, in terms of the four companies basis and the three car makers that are in China for China at the moment um, I think this would be a very manageable blue to the German economy would be

a blue. It would because it would be problematic. There's a lot of profit profits that wouldn't come Back's potentially much more dangerous as Europe's reliance on imports from China for specific products such as rare earths and industrial metals. Put it another way, when it comes to securing its energy supply in a post carbon world, Europe appears to have swapped one dependency for another. Of europe solar panel

imports come from China. The biggest area of concern is if something similar to the Russia conflict in Russia you go in conflicte. Where to happen is our dependency on China and trade and on certain critical goods, critical industries, certainly in green technologies, because at the moment if we want to have a self sufficient green transition we called which is caught in Frankfurt. I'm Caroline Luck for Bloomberg News. Now to round off this episode, we have what is

known in the trade as bonus material. It's part of a striking contribution that historian Neil Ferguson made to a seminar on central banking, which happened a few days ago in Washington. Unusually for Stephanomics, I wasn't involved in the event at all, International Banking Seminar hosted by the Group of thirty. I was just listening in the audience, but I thought the main message of Professor Ferguson's talk deserved a wider hearing that I should warn you right now

it is a little chilling. Well, Tom, and you you promised something completely different. May I remind you that Monty Python, which made those words famous, aired between nineteen sixty nine, four significant dates. I must say I wish Paul Vulca were here. I suspect I'm not the only person in this room who misses him now more than ever. I really hope he would have approved of what I'm going

to say. During the inter war era, in other words, the period between Cold War One and Cold War two, many economists and policymakers lost sight of the role of war in the global economy because the wars of the inter war era were quite small Bosnia, Afghanistan, Iraq, more closely resembling colonial policing operations. We forgot that war is history's most consistent driver of inflation, debt defaults, even famines.

And that's because large scale war is similty, neously destructive of productive capacity, disruptive of trade, and destabilizing of fiscal and monetary policies. If you plot global battle deaths from interstate conflict against inflation, you'll see the behind the so called Great moderation. There was a period of declining global conflict that lasted from the mid seventies actually until the outbreak of the War in Ukraine. The coming of peace,

like monetary policy acted with a lag. The events of this year have reminded us what's at stake in cases of great power conflict. The War in Ukraine qualifies as such a conflict because Russia is still clearly a great enough power that it would by now likely have achieved its annexations aims had it not been for large scale financial and military not to mention technological assistance to Ukraine from the United States, the European Union, the United Kingdom

and other associated states. This is a big war, measured by both casualties and costs. Now, economists like to treat, or tend to treat wars as exogenous shocks because they kind of hard to model. But from the historian standpoint, war isn't exogenous. It's the indogenous prime mover of the historical process, the father of all things, as Harrod Clytus famously said. So two general points are really important to notice. First, wars have played a very noticeable role in the history

of inflation expectations. Thanks to the excellent historical work of the Bank of England, we can trace the history of UK inflation expectations all the way back to the late seventeenth century. The peaks in short run expectation nearly all aligned with wars, and generally years when the war wasn't going well seen O Nine War Spanish Succession seventeen fifty seven. The Seven Years War eight d Napoleonic Wars nineteen seventeen,

nineteen forty nineteen seventy five is the exception. But you could link that to the consequences of the nineteen seventy three Arab Israeli War. The second point is that wars have often been responsible for discontinuities in the history of interest rates. As Paul Schpeltsing has argued work that the Bank of England first published, there has been a long term downward trend in nominal and real long term rates dating back to the period after the Black Death, which was,

of course almost certainly the biggest pandemic in history. The major breaks in that long downward trend were nearly all associated with wars, particularly big wars that destroyed capital stock and generated monetary financing of debt. Now, an unusual feature of the recent past is that in twenty twenty, a pandemic had the fiscal and monetary consequences of a world war.

This was unprecedented. No previous pandemic, including the much more devastating nineteen Spanish influenza, had comparable responses from finance ministries

and central banks. Because most not all, but most countries followed the United States in offsetting the supply shock caused by lockdowns and spontaneous behavioral changes, with both large scale deficit finance transfers and significant monetary expansion like those who thought the pandemic would last forever, Those who argued that inflation would be transitory, like at the end of World War two, turned out to be wrong. It's not just

about nineteen seventy three. It's also about Vietnam and other conflicts of the nineteen seventies. In twenty two, a war played an analogous rule to the war of nineteen seventy three in pouring kerosene on an inflationary far that was already burning. Both food and energy prices were driven up by the outbreak of the war and the sanctions imposed

on Russia by the US and others. It goes without saying I think that the return of great power conflict has made the life of policy makers difficult, just as it did in nineteen seventy three. I recently heard it said at are gathering rather like this one that the twenties are unlikely to be as inflationary as the nineteen seventies, on the ground that labor is less organized and so

the risk of a wage price spirals lower. But I want to draw your attention to ten important differences between our contemporary situation and the situation in the nineteen seventies one, Monetary growth rates were significantly higher between Q two twenty and Q two one than at any point in the nineteen seventies, and they remained in double digits even after velocity had recovered. That was the policy mistake, in my view.

To productivity. Growth is lower today, much lower actually in all O E C D countries than it was in the seventies. Three. Demographic trends are worse today, with significantly higher dependency ratios for the Fiscal positions are much worse today, with much larger stocks of debt and projected deficits, not least in the United States. Five. Financial markets are more complex today and therefore more fragile. Lots of schadenfreuder are

directed at the UK in the last few days. But let's be careful and not assume that this really is all a consequence of Britain's Monty Python politics. I don't think it is. Six. Then we had pollution, now we have climate change. Seven are political stability looks a lot worse than it seemed even at the time of Watergate. Example, in a recent poll, Americans were asked, do you think

the nation's democracy is in danger of collapse? Sixtent of Republicans and the same percentage of Democrats said that they did think so. Eight. The current war in Ukraine is lasting much longer than the war of nineteen seventy three,

approaching eight months compared with nineteen days so far. Number nine, there's no sign of detant remember deton in the nineteen seventies in Cold War two, Quite the opposite in fact, So there's a non trivial risk that we could soon witness a confrontation between the United States and the People's

Republic of China over Taiwan. Ten. And Finally, although media attention currently focuses on the women's protests sweeping Iranian cities, it's worth recalling that these coincide with the failure of the attempt to revive the around Nuclear Deal, meaning that the Iranian regime will likely speed up its effort to acquire a nuclear weapon, increasing the probability of a war in that region, because no Israeli government, whoever as Prime minister,

is going to count a nuclear armed Iran. So in conclusion, we may get lucky. We may just rerun the nineteen seventies they're judging by recent events in the UK. We may do it at a rather higher speed, from the Barber Budget to the Winter of Discontent in a matter

of weeks rather than years. But and this I mean very seriously, there is a scenario in which we get something closer to the nineteen forties, in which regional great park conflicts coalesced into something like World War three, albeit with smaller armies, many unarmed weapons systems, unmanned weapons systems, and far more powerful and accurate bombs. And we'll look back.

I suspect on the phrase contitative tightening as an eccentric idea that almost no one was able to execute the monetary policy equivalent of Monty Python's Ministry of Silly Walks. Thank you very much. M M. That's it for Stephonomics. Next week a US focus as we look ahead to the mid term elections and consider the state of the US economy in the meantime. Do please rate the show if you like it, and check out the Bloomberg News website for more economic news and views on the global economy.

You should also follow at Economics on Twitter if you haven't already. This episode was produced by Summer Sadi Young Young and Magnus Henryson. As I mentioned, before Caroline Look and James Mega worked on that report about Europe and China, and special thanks also to the Group of thirty, Tom Marlick and Professor Neil Ferguson. Mike Sasso is the executive producer of Stephanomics