Who's Running China's Economy Now?

war between the US and China. All in all, they will shape the world's second largest economy and in turn have a major impact on the rest of the world. Welcome to Benchmark. I'm Scott landman and economics editor at The Bloomberg News in Washington, And I'm Daniel Moss, economics writer and editor at Bloomberg View in New York. So, Dan she Jinping seems pretty firmly in control of China these days. Why should we care about some of his underlings. She may be firmly in control, but he can't be

everywhere doing everything at all times. He also knows that the party's success depends on economic stability. That means no economic blow ups. The more range of opinions you can listen to the safer you'll be all right. Well, let's find out some more about this range of opinions with our guest, Nicholas Lardie is one of the foremost scholars

on China's economy, having studied it for decades. He's been a senior fellow at the Peterson Institute for International Economics in Washington for fifteen years, and his most recent book is Markets Over Mao, The Rise of Private Business in China. Nick, welcome to Benchmark. Thank you. First of all, Nick, who is Leocha? Well, Leocha is a sort of economic technocrat who has served in a couple of administrations over the

past decade at fairly high positions. He hasn't been extremely visible, but he's been vice chairman of one of the most important committees that deals with the economies of National Economic Development and Reform Commission. He's also been head of a small leading group on sin Anton economics, which is a very important behind the scenes advisor. And now he's going to be a Vice Premier with a pretty broad economic portfolio. How did he get so close to sheet and ping

over the years to eventually get into this kind of position. Well, you're right, he has developed a good relationship with Seejing Ping, and all indications are that he will continue to be a fairly influential voice. I would caution, however, that a little bit hard to know exactly where Leucha stands on

some issues. He seems to be able to serve masters that have disparate views on economic issues, so I don't necessarily think he's going to be in the driver's seat, but he will be a very strong implementer of the policies that he wants to support. Taking a broader look at the Chinese economy, Nick, you've written that China is much more of a private sector economy than popular discourse

would seem to recognize. There's a lot of talk about how President she has semantic control of the political system, what's happening on the ground with the economy, how much day to date control does he have. Over the last few years, he has exerted a great deal more control over the economy. There has been what I think is fairly described as a bit of a resurgence of the state.

About three quarters of China's GDP is being generated by private firms, but under She, we've seen proliferation of industrial policies. State banks have been lending more money to state companies, and she aspires that the state will play a much bigger in the economy. How successful that will be ultimately,

I think remains to be seen. But when we talk about private companies in China, don't a lot of them have Communist Party cells or leaders that are installed to help direct the company business in line with objectives that the party has set. Ultimately by President she Well, China for more than two decades has required Party committees in all enterprises, whether they're state owned or privately owned. So this is not a new development, at least in a

technical sense. Now, what really remains to be seen is are these committees going to take a much stronger role than they have had in the past. Certainly, there's not much evidence that party committees in private enterprises have persuaded these companies to do things that they think are against their interests. On the other hand, if you're a big company like Ali Baba and your Jack Ma the billionaire CEO, you certainly want to be perceived as carrying out policies

that are consistent with those of the party. Talk to us about Ye Gung, the new Central Bank governor. Last month in Hong Kong, there was some chat that Leo would get both jobs vice Premier and governor of the People's Bank of China. What does it say that the deputy governor has been elevated. Well, I think it's a very important move. I think it would have been unrealistic for Leucha to be a Vice Premier and of the Central Bank governor simultaneously. This is something Drew m g

did back in the late nineties. But I think the Central Bank governor's job has become much more important, much more time consuming, and requires a lot more international travel

than Liuhu could undertake. I think the fact that he Gang has been elevated implies that we will have a substantial continuity on monetary policy, exchange rate policy, and all the things at the Central Bank has an influence on He is Western educated, he went back to China in He's worked his way up in the Central Bank over a period of several decades, and he has been the lead brains behind some of the most important reforms in the financial sector over the last twenty years, and most

notably he was the architect for the liberalization of interest rates, which started in the late nineties and was not really completed until about the middle of twenty thirteen. So it was a very long, gradual process in which they moved from a system in which all interest rates on both deposits and loans were fixed and immovable to one in which these rates are now being determined largely by market forces. Nick.

As long as we're talking about China Central Bank, can we talk about how much power central bank actually has the People's Bank of China. The independence of China Central Bank is differ from that of say, the Federal Reserve or European Central Bank. Right, yes, the Chinese Central Bank is not independent in the traditional sense of that word. It needs to get approval for any major changes in the interest rates that it tries to influence, or things

like the discount rates and so forth. Changes in exchange rate policy that it manages have to be approved at much higher level. On the other hand, the Central Bank in China, at least under the previous governor, has had an enormous influence on the economy and they have hit The bank has weighed in on a range of economic policies, fiscal policy, tax policy. So yes, it's not independent, it's not completely free to carry out the usual kinds of

monetary operations without approval. But you would not find the head of the Federal Reserve in the United States offering opinions about tax policy fiscal policy in the same way that we've seen in China. So the Central Bank governor has been a key economic policy maker weighing in on a very broad range of economic issues. In the West, nick Way used to the finance minister or the treasury secretary of a given nation being the big economic cheese.

Is that the case in China, Well, it certainly hasn't been in recent years. The Ministry of Finance in China seems to focus primarily on the tax side, the collection of taxes, changes in the tax laws, enforcement of tax laws, and so forth, and they have not been a big shaper of broad macro economical policy in the same way that we would be familiar with in the United States. So I think the Central Bank has actually been more important in that domain than most other agencies in China.

So the name that we have as the new Finance Minister as someone named Leo Kuhn, and I can as even as somebody who who spent a few years in China covering China's economy. I was not familiar with him. What do we know about him and what does his appointment say about any kind of direction of policy? Well, I think very little. The previous Ministry of Finance was a man who came out of the tax Bureau of

the Ministry and was promoted to be minister. I'm not even aware, as you aren't, about the background of Leo Clinton, but I would not expect him to be a main shaper of policy. I would expect the person that we haven't talked about who would be much more important is Gauasu Ching, who has now been named to head, who has been head of the Central Bank, the Bank Regulatory Commission, and is now going to take charge of the merged

Bank and Insurance Regulator. He's a very strong reformer. He's a much stronger personality, and I think he'll work very well together with people like Leo and e Gun. Let's switch to look at the broader economic dynamic, particularly between the world's two largest economies, China and the United States. We hear a lot about the Trump administration's desire to reduce America's trade deficit with China. We also hear a lot about tariffs and other measures that may be imposed.

Can you break this down a bit for us? In particular, I'm wondering, given the extent of global supply chains, how much of the stuff the US imports from China actually originates somewhere else from an American company. Well, a very large share of what China sells to US is actually produced by what we would call for an affiliates, that is, multinational companies based in China. Many of them, of course, are US multinationals, but there's some European and other multinationals

operating in China. It and these companies typically supply final products that are based on long production chains. As your questions suggests, they're buying inputs from all over the world, producing products in China, and then selling them back into the United States. So the Chinese content of these products is typically very low. Obviously, the best examples are the Apple products iPhones, iPads, which are made almost exclusively in China,

and the foreign content is of the value of the product. Now, what this means is if tariffs are put on those kinds of products consumer electronics in particular, we will impose some pain on China, but a great deal of the pain will be transferred to the countries and the companies that are supplying all the inputs that go in to these consumer electronic products. So this will have an adverse effect on companies in Korea, Japan, Taiwan, Singapore, Malaysia and others.

So this is where I think Mr Trump makes a mistake when he says it's easy to win a trade war. Both countries will lose if there's a trade war, and we will not just impose costs on China, but a lot of these costs will be transmitted to other countries, particularly those in East Asia. Your example of the iPhone is an interesting one. Apple an iconic American company headquartered in California. But if I hear you correctly, Nick iPhones might be subject to tariffs, well, they could be that.

The rumor is consumer electronics will be on the list. And interestingly, Apple doesn't make any of these products. The products are actually made by a time when he's company that operates in China, it's actually one of China's biggest employers, a company that is technically hun High or it sometimes

goes by its trade name of Fox Con. So it just shows the complexity you have an iconic American designed product by an American firm, Apple sold in the United States, but it's being produced in China by a Taiwanese company that is drawing parts and components from the global supply chain. Now as we record this, some of the details are still in flux, but it does seem like there will be a trade conflict between the US and China that could go on for some time. Nick, how do you

see this playing out? And also when we talk about again people like Leocha and e Gong, when they're making decisions that affect China's economy or how China approaches these issues, what objectives are they going for and what are they trying to protect as far as China's economy goes well, I think they're doing everything possible to avoid a trade conflict with the United States. Leoha made a trip to Washington several weeks ago to try to enter into serious

discussions with the US administration. Quite frankly, he was basically rebuffed. Posture of the administration seems to be, we don't want to negotiate anymore. That hasn't been sufficiently effective in the past. We want to see some results, so they're going to this more unilateral approach. I think the other person to figure in this discussion should be Wang Chi Shan. Wang

Chi Shan has been named Vice president of China. He is well known to many Americans in the financial sector, in the business sector, and I think he will play a similarly large role in trying to manage the economic relationship with the United States. So, Nick, when we see large headline numbers fifty billion, sixty billion associated with US actions against China, is that really just a negotiation? How should we be looking at this? Well, I think that

remained to be seen. The administration is probably going to announce a target of a very big number thirty six. We don't know exactly, but we will take some time to identify the exact products that they're going to impose these tariffs on. So this currently certainly could set up a window in which negotiations ensued, and it might not

just be with the Chinese. If consumer electronic products are on the list to be subject to high tariffs, then you would probably have companies like Apple and other US consumer products companies lobbying the administration to exempt their products

from such tariffs. And quite frankly, I think one of the reasons has taken a long time for this to play out is it's very difficult to identify products that we could impose tariffs on that would not have adverse effects on our own companies for other countries in Asia that supply inputs to the products that are being exported from China. So thinking about how this might play out, does China have more to lose from a trade war, does the US have more to lose from a trade war?

Or are they both likely to lose in a trade war? Well, I think in a trade war, if it comes to that, both countries would lose quite substantially. US consumers are going to pay more. We're not going to create any new jobs if pariffs are put on consumer electronic products. You know, Apple is not going to start producing iPhones in Silicon Valley tomorrow. That we simply don't have the capability to produce many of the products that we import from from China.

So what would happen is some of these electronic manufacturing services companies like con also have production facilities elsewhere in Asia, so they will simply switch the production of these products from China to Vietnam or India or other places where they have facilities already in place. They couldn't do a complete substitution in the short run because their capacity is very heavily concentrated in China, but some of the production

would move. So this is a long way of saying not likely to have any positive effect on employment in the United States. Likely to have very large negative impact on consumers because prices will go up. Nick, how much is the US to blame for its large trade deficit with China. It's pursuing a policy of fiscal expansion at a time when China is pursuing a policy of fiscal consolidation.

What's going on here? Well, I think what's going on is that the level of saving in the United States is very low, and the expansion of the fiscal deficit, which is occurring and will continue for quite a few more years, means that are saving short spot from a national perspective, will be getting bigger and bigger, which means we need to borrow money from the rest of the world. And the only way the rest of the world will have the money to lend to us is if they

sell us more products than we buy from them. So ultimately, the trade imbalances are largely a function of these macroeconomic variables much more than they are a function of tariffs or trade restrictions or protectionism. And I think you can see that very clearly. In the case of China, their current account surplus, which is a broad measure of goods and services and a couple of other things, is only one point two percent of their GDP. It's extremely small

by international standards. So globally they did not have a big surplus, but they have a big surplus with the United States. The United States has a big deficit with China, and I think it's a function of problems that originates in the US economy. In other words, the administration portrays China is being highly protectionists, and it certainly his protection is in some domains, but it is not I have a big global trader plus. It's global trade surplus is

very small relative to the size of its economy. It's much much less than the surplus of Germany, for example. Well, Nick, this story is obviously far from over, and we'll all be listening to what you have to say in the coming months on whatever happens between the US and China on trade. Thank you so much for coming on our podcast.

Thank you. Benchmark will be back next week. Until then, you can find us on the Bloomberg terminal, the Bloomberg dot com, our Bloomberg app, and podcast destinations such as Apple Podcasts, Spotify, or wherever you listen to podcasts. Please take the time to rate and review the show, and you can also find us on Twitter. You can follow me at at scott Landman Dan, You're at moss under School Echo, and Nick's employer at the Peterson Institute is at at p I I E. Benchmark is produced by

Tofu Foreheads. The head of Bloomberg Podcasts is chessca lev Thanks for listening, See you next time.