So COVID nineteen is um is a kind of stress test for for how economic systems function, and if you look at how China and the US have performed in the last six months, China is actually doing rather better. Hello, and welcome to Stephanomics, the podcast that brings the COVID
global economy to you. We're all about China this week, and that was Tom Aulick, Bloomberg's chief economist and old China hand, who has just published a book that helps explain why China's economy has not had the big crisis that so many experts have confidently predicted over the years, and why it also appears to be winning the fight against COVID nineteen. But first, you'll remember we spoke to
Sharon Chen, Bloomberg's Beijing bureau chief, back in April. She was in quarantine then in her apartment after a reporting trip to Wuhan. That city was just coming out of lockdown. Then first into the COVID crisis and first out. We spoke to her then about the early signs of recovery there and what it might tell us about the road ahead for the rest of us. Well three months on, I was interested to find out what life has been like in China since then, and whether the authorities still
feel good about the way they've handled the pandemic. Sharon, it's great to talk to you again. I know that you're planning another trip to Wuhan, but you've been talking to businesses there about what's what's happening. When we spoke at the beginning, it seemed to show something that we have seen in other places, that it's a twin track economy, that production side coming back but not so much the
consumer side. Is that's still true? Yes, so um you know, bought the data and the anecdotes kind of indicate that that's what's happening. Unfortunately, obviously the data is a bit of a lagging indicator, but we have factory production and retail sales, exports, fixed st investment up till me UM and you know, the economy reopened in April, and even in May, we saw that local manufacturers had basically almost recovered.
You know, industrial production was only zero point four percent UM, not lower than the year before in growth, but consumptions obviously still lagging UM and exports as well. I mean some more recent data, you know, we look at subway data and a lot of the cities, and in Buhan it shows that traffic passenger traffic has recovered to about
half the level, which is you know, decent. And also it could be one of the reasons which we talked about earlier, that people are buying cars and just driving themselves instead of taking public transport, so it's not entirely reflective of how you know, how much people are out again. And we should mention that Wuhan had a flare up in May, so it reopened um in early April, and then in May and new cluster of cases was discovered,
and you know, the city reacted very strongly. Obviously, they put in place a lot of strict restrictions and then they tested the entire population of level million people in the span of two weeks and since then they haven't reported a single case. So, you know, just based on the anecdotes as well, we do see that factories are back up a full capacity UM, a lot of the exporters are benefiting. Trade did search as soon as the city reopened, but of course it depends on what kind
of product you're making. You know. We spoke to one factory manager who they make plastic cups for airlines and for hotels, and you know, business has just evaporated because the travel industry just collapsed, like they just don't have any demand. But then we talked to another factory that was making helmets and then pivoted to making more face shields and protective gear, and they've seen, you know, demand from South America double because the virus cases there keep increasing.
And then it's the same on the consumption front as well. You know, restaurant owners they are struggling because people don't really feel safe and also some of the habits like eating at home, they've just persisted. Um. But on the other hand, you know, we spoke to a factory owner. He produces hot dry noodles, but the instant kind like instant raman where you add hot water, and you know,
business is just going through the roof. He's even expanded, he's now delivering to the next city because people just want to stay at home, but they want to eat your favorite food still, so you know, it's just definitely a mixed bag. So if you're if you're involved in the COVID business or you're providing, you're able to provide food that people don't need to be sitting in a
restaurant to eat. You're doing You're doing all right. That was interesting what you said about the exports, because one of the concerns looking at China was that we saw the sort of early signs of a V shaped recovery, at least when it came to production, and then the fear was that the terrible things that were going on in the rest of the world would then bring China down again because of it's dependent on exports. But it's so what you're saying is there is that's a twin
track as well. If you're on the consumption side, you're doing badly, but actually some of the core products are exporting. Well yeah, I mean, like the supply chain is so global and so integrated now as well, right, I mean, they also feel the impact on the raw material side, but I think you know, the trade story. What's interesting has is that it's also kind of shown the limits
of government intervention on government support. You know, the government has rolled out a lot of support for these businesses and especially the smaller ones, but until global demand recovers, there is a limit to what the government can do. And you know, some of the companies that we spoke to said that they can apply for loans and they can apply for grants, but until their own clients overseas are really able to um bring those orders back, you know,
there's there's really not much they can do. And then another option for them is to try to get new clients. But then with travel basically understand still, these these trade fairs and everything, I mean, those things aren't happening as well. You mentioned that they had tried in Wuhan to have various measures to stimulate consumption, and of course that's something
we've had this week. The British government has been trying to throw a lot of the economy to to get consumers out and about now that the lockdown is easy, we've seen lots of consideration of that in the US as well. Does it work to be putting more money into consumers pockets or is it really all about confidence in the virus? I mean, I think it does work.
They've given out about five hundred million grand or shopping vultures, that's about seventy three million U S dollars and you know, people that we spoke to said that they regularly use those vultures, and I think it does get people spending, although it's unclear how much of that spending happens in person and how much of it is happening online because you know, a lot of transactions in China shop online
very easily. Um So I don't know how much that is really helping encourage people to go outside and to do things that they used to do. Interestingly, one of the restaurant owners we spoke to said that it was the mass testing campaign that Juhan executed that was the big confidence booster. You know, he saw the most number of customers come in the day after they finished their campaign and announced that they had tested every single person
in the city. And you know, if the city is able to pull that off, like, I think that that does kind of really reap dividends in terms of making people feel confident and making them feel safe. Of course, we're also looking ahead wondering how long we're going to feel like we're in uh what you described it when you came back from Wuhan last time, a sort of dystopian post lockdown world where everyone's getting temperature tests or
where you're being socially distanced. How far when you're in your day to laid life and when you go out with friends in Beijing. I mean, how far do you still feel you are from normal life? Does it feel when you have these outbreaks that it's still one step forward one step back? Or is it are you starting to see the light at the end of the tunnel? I mean, personally, I do you like life is pretty
much back to normal? So we had an outbreak in Beijing a couple of weeks ago, and you know, they they didn't employ the same kind of city wide lockdown that they've used in China and other places, in part because you know, the states are just higher in Beijing. They can't really bring the city to a stand still because there's just so much commerce going on, and then also the halls of government are here as well. So what they did was that they really took this very
targeted approach. They broke up the entire city, you know, by district by street, and they determined whether each place was low risk, high risk, a medium risk, and they lockdown areas very specifically, and then they also did huge mass mass testing and they restricted people from leaving the city depending on you know, how risk of their areas were. But they did manage to maintain a large part of normal activity. You know, shops and restaurants all remained open.
The main difference was that UM a lot of housing compounds didn't allow visitors in and out, although some did continue to do that. UM And also you know, by now China's developed a lot of the tools that it needs for contact tracing, so everyone has the ability to check on their phone whether they've been in contact with anyone who's a risk, or they've been to any risky areas, or they've traveled. So as long as you're able to show that you have that green call, you can basically
go anywhere. So I do think it's like much less dramatic now when there are flare ups, like the government has developed the ability to board test and contact trace and be more targeted in its restrictions. Do you feel I mean we should perhaps say that we were we were hoping to play some clips from some of the people you spoke to Wan who then said they didn't feel comfortable and actually they've been discouraged from talking to foreign media after the last time that you went there.
There's a lot of scrutiny on China at the moment in terms of not just what's happened in Hong Kong. But how how it's handled the pandemic. Do you feel as a reporter that the restrictions are tighter or the more limits on what you can do, or is this more or less business as usual? I mean, you know, for Bloomberg, we focus a lot on economic and financial news, and you know, most of the time that's fine, but yeah,
I mean, the environment is changing. I mean, you look at what's happening in Hong Kong obviously, and you know, the Chinese government has also taken steps that seemed to be moves towards silencing more criticism and being more focused
on making sure that social unrest doesn't take hold. Um. You know, the President Jumping himself has said that social stability is a concern in the wake of the virus, and I think they are hyper aware of anything that may kind of, you know, foment the same amount of unhappiness that happened when the virus was really bad. And you know about the whistleblowers who are silenced and all that, and you know, simultaneously we're seeing this increasing tension between
China and the US word the media. So China kicked out several reporters and the US has also been cracking down on American news organizations. Then now we have this spat between the UK and c GTN statement media about airing force confessions and so, you know, I think as China becomes more assertive, yeah, I mean, it definitely is narrowing the scope from for us to act freely. Not that it was free before, but yeah, well you still
do you still produce a lot of stories. Will you have to do the same quarantine if you go to Wuhan or is that now you just you just have to show people your at your foot apple and your phone. Yeah. And in fact, um, you know, Wuhan is considered a low risk area. Now there's no cases and they've tested everybody. So actually do you have you were saying they do have floods they just can't break. They've now got people dying from floods. Yeah, I mean there's floods. There's flooding
now in southern China. I mean it's a problem every year, but this year it's one of it's it's really becoming more severe. Um, so it's been tough for people in Well, Sharon, I'm sure we might we might check in on you again in in a few months, I mean time, Thank you very much. Yeah, no problem. M Well, that was the view this week from Beijing and Mouhan. Now, as I mentioned at the start, we have the long view
on China from our chief economists, Tom Worlick. He's based in Washington now, but he spent eleven years in Beijing, and he's just published a book based on his time there, at least in part, called China The Bubble That Never Pops. Tom. Nice to have you back on the podcast. In your recent piece for Business Week about your book, you started with this line, don't tell Trump, but China's winning. Is China winning everything or just the fight against COVID nineteen.
So COVID nineteen is is a kind of stress test for for how economic systems function. And if you look at how China and the US have performed in the last six months, China is actually doing rather better. China's got the virus under control. The US doesn't have the virus under control. China managed to control unemployment, the U saw unemployment rise to levels not seen since the Great Depression.
China's poised to get back to growth. Factories are already in a better place than they were a year ago. The US is still a long way underwater, so there's a broader point there as well. I think the way we look at the Chinese model is flawed. We only see the downsides and the stresses. We don't see the strengths and the sources of resilience well, and the general, as you say, the general thesis of your book is
that China is stronger than it looks economically. Certainly. I know when I was working in the investment world and people would say, what are your top three or top five risks for the year, And when you hear the sort of strategist talk about it, if they had sort of run out of one, they would just throw in China blowing up, because it was sort of a standard thing that you would expect China's debt issues and financial problems to finally all come home to roost. You're saying
that we could carry on waiting quite a long time. Yeah, so I was in I was in China for eleven years, and for that entire time, there was this sort of thread of pessimism, thread of doom, almost running through the Western commentary on China. Yes, the story went tem percent growth looks impressive, but if you pope beneath the surface, it's all financed by debt. All the debt is being misallocated. It's a bubble and it's going to blow up, and
of course it doesn't ever blow up. So my motivation in putting pen to paper for this book was, of course mainly fame and wealth beyond my wildest dreams, but beyond that, I also wanted to explain why the bubble never pops, and I think an important reason is we look at the negatives, we don't consider the positives. And on the financial system, what that means is we look
at the massive build up of debt. We look at how the debt has been allocated to zombie firms and real estate developers building ghost towns in the desert, and those are big problems. But what we forget is for bad loans to turn into a financial crisis, you also need to have a funding problem for the banks. And because China's saving rate is so high, and because it's hard to take money out of the country, the funding
base for the banks is actually really solid. And as you say, there's all the things that people identify that a weaknesses. You know that debt exists um, But you're saying that there is also that there is a corresponding strength there which the government has room to support the
banks in a way they don't in other countries. I think you know some one of a couple of your other strengths that you point out is that state intervention that you have there is actually effective and strength, not just a question of of meddling in the economy and getting in the way of markets. And you have the sheer scale of the economy. That's also an advantage, isn't it. Yeah.
When we look at the state system in China from our perspective here in the West, where we, you know, firmly believe that free markets of the answer, we just see corruption and we see inefficiency, and those are real problems. If you look at return on assets for China's state firms, they're much lower than return on assets for private firms.
But what we miss is that for countries that are big and that have somewhat effective industrial planners and which are still at an early stage in their development, state
ownership can be a powerful instrument of development. The state banks can finance acquisitions of new technologies, the state and enterprises can deploy those technologies at a massive scale, and that becomes an instrument which can take China's on me as a whole closer to the technology frontier and make it more productive, even as the state sector itself is inefficient when looked at from a sort of narrow balance
sheet accounting perspective. No, and obviously that's something we're being reminded of in many countries of the important In some areas, the government really is the only one that can intervene, and boy if they've done so in response to COVID nineteen. Now,
obviously you've achieved one important thing. You've managed to get this book out before the bubble pops, which I'm sure was a concern for your publisher, But you probably weren't expecting to have it come out in the middle of a pandemic, which clearly has meant that you weren't able to have any lavish book party. So I'm sorry, not that Bloomberg would have thrown you any but has the last few months changed your view on any of the arguments you've made in your book or put them in
a different perspective. Perhaps it's it's an emotional roller coaster being on this podcast. Stephanitiely, I thought you were offering me a lavish book party, and then in the very next sentence it was yanked away from me. Um. Fortunately, I'm going to be working from home for the foreseeable future, so no one will be able to see the disappointment on my face. So so so covid' is a stress test for the Chinese economy. And let's think about what
happened in the first six months of the year. So real estate developers didn't sell any houses, state owned enterprises saw their profits turn into losses. Local governments didn't sell any land, and they saw their tax revenue collapse. And who are the biggest borrowers in China's economy, Well, it's the real estate developers, the state owned enterprises, and the local governments. So if there was going to be a financial crisis in China, presumably it would have just happened.
All of the biggest borrowers saw their income collapse, they couldn't service their loans. This was the moment when we should have seen a financial crisis, and clearly that didn't happen. Um. And I think that's a reminder of some of the sort of hiding in plain site sources of strength in China as economy. In China's financial system, the banks have a very strong funding base, and so they don't actually
need loans to be repaid on time. They can say to the borrowers, you know what, we know this is a really difficult quarter, maybe even a very difficult year. You pay us back in the second half, or even you pay us back in one Private businesses are going to be letting go of workers and canceling investment projects.
But China has a massive state sector inefficient, but the government can use the state sector as a kind of a counter cyclical instrument and say to the state sector, you know what, don't let any workers go, and accelerate that investment project. And what that means is the economy can climb out of the COVID hole a bit quicker
than it otherwise would. So we have obviously had the events in Hong Kong, the passing of the legislation in Hong Kong in the last few weeks, and and one thing that has been very striking is the way that along with the economic success and apparent resilience, the Chinese government is sort of doubling down on some of the
more uncompromising aspects of its economic models. Shall we say, you look at China and you know the major change it has to have over the next few years, and then the government is trying to achieve is to move from being an export driven economy to a consumer driven economy.
And I guess the fond belief of many economists and certainly many outside policymakers has always been that it's quite hard to be a really successful kind of individualistic, consumer driven economy when you're not giving those consumers rights as citizens and moving towards a democracy. Is that being proved wrong in China? So I don't want to come across as um. I don't want to come across as as like a Pollyanna on China's social system. Clearly there are
absolutely enormous costs to China's social system. The question is is that going to be Is that going to translate into economic costs? And the answer so far has been no. And I think there's two reasons for that. Um. So the first reason we sort of alluded to Stephanie is China's position in the development process. Right, so, when do you need freethinking innovators, Well, you really need freethinking innovators when you get to the technology frontier and you need
to innovate, and that's not where China is. China's GDP per capita is the third of the level in the United States. There are a long way from the technology frontier, and that means that for the next foreseeable future, growth is going to be a process of catching up and copying, not necessarily a process of pushing act and developing innovative
technologies themselves. The second reason I think is that actually we have a somewhat we have a settled view of the relationship between social systems and economic progress, which actually China is challenging. Right. Um, we think that democracy, markets and growth go together, right, And if you have markets, then you will grow, and also also if you have markets,
that will be a driver of democracy. And actually what we're seeing in China is that these relationships which seems so settled in the West don't actually necessarily hold well. These relationships kind of reassert themselves over the long term. I think as we get closer to the technology front frontier, the chances are that they will Is that going to matter for China in the next three for five years when g d P per capita is still a third
of the level in the United States. I think the answer is probably no. But isn't the mess lesson of the Huawei controversy and some of these others involving China technology is that they are closer to that frontier than we like to think. And indeed, in that sector that they seem to be, they have one company that is pretty much dominant. Yeah. I think there's two things there.
So the first thing is UM, technological progress is unevenly distributed, right, So, Yeah, if you look at five G or AI or sustainable energy for example, China is at or near or pushing back the technology frontier. UM. If you look at other areas, China still lags by a considerable margin. China can't make
competitive semiconductors, China can't make competitive airplanes for example. UM. And then the second point I would make is that sort of the success of Huawei UM and sort of the advances they've made in five G I think goes to UM the sort of confused approach that we have
to thinking about China in the West. Right, on the one hand, we say state and enterprise is a huge and inefficient and corrupt, and they are an impediment to China's growth um And we also say Huawei is pretending to be a private company, but secretly it's state and enterprise. And then in the same breath we say Huawei is dominating the next generation of the most critical technology for the future of the world economy. So which is it
the state and enterprises? These kind of like corrupt, inefficient dinosaurs who are dragging China down, or are they technology innovators who are going to dominate the future of communication? Can't be both right? Either argument stems from fear, and I think that's probably the uniting force in in quite a lot of the commentary around China these days. But we have certainly done the long term view, and I'm
sure we'll talk about this again. I'm interested, just as a final question, if the bubble had popped before you've got this book out, had you and your publisher had any conversation about changing the title or what what would plan b So the bubble that took a long time
to hop with a quick with a new forward. So clearly by publishing a book with this title, Stephanie, I have tempted fate and increase the chances that the bubble will pop. So what's absolutely critical is that list listeners to the Stephonomics podcast go out immediately and buy a copy of the book so I can enjoy some royalties before my arguments and conclusions are falsified by events. To all, thank you very much, Thanks Stephanie, thanks for listening to Stephanomics.
We'll be back next week with more on how COVID nineteen is transforming the global economy. In the meantime, you can find us on the Bloomberg Terminal, webs app or wherever you get your podcasts, and for more news and analysis from Bloomberg Economics, you just have to follow at Economics on Twitter. This episode was produced by Magnets Hendrickson
special thanks to Sharon Chen and Tom Orlick. Lucy Meekin is the acting executive producer of Stephonomics and the head of Bloomberg Podcast is Francesca Levy.