They Called The Trade Wars & China's Housing Crash | Nikhil Kamath | WTF is Finance Ep 4

WTF is Finance

Economists Matthew Klein and Ning Zhu join Nikhil Kamath to analyze the structural shifts in the global economy, specifically focusing on China's

Key takeaways

• Ning Zhu notes that China's trade surplus has expanded significantly, reaching approximately $1.1 trillion annually following the pandemic.
• Matthew Klein highlights South Korea's transition from a persistent trade deficit to a large surplus as a result of the 1997 Asian financial crisis.

Main topics

• China's housing market collapse
• Global trade imbalances

Notable quotes

Embrace whatever comes.

Conclusion

The episode offers a profound look at how historical precedents and st

Transcript preview

Speaker 3 (0:06) Matthew, as someone living in California, is the world turning left again? Are we going back to socialism? Speaker 2 (0:12) Not in California. No, actually, California, San Francisco is, you know. If I Speaker 3 (0:16) take San Francisco out of it. No, well, no, I mean. Couldn't debt be priced by the ability of the borrower to Speaker 1 (0:45) pay back? Right, but that's the thing. They can. They can always print the money. The U.S. cannot always print its way out of any kind of trouble. Speaker 1 (0:55) Question here. Speaker 3 (0:56) Is de-dollarization real? Do you think crypto has future? Can you wager a guess as to what will happen again in the next 10 years? Well, this is the interesting question, right? Speaker 2 (1:06) I'm talking about in theory, right? In practice, it doesn't work this way. That's where it gets tricky. Speaker 1 (1:11) Probably just one thing that is to embrace whatever comes. That sounds scary. Speaker 3 (1:34) Thank you both for doing this. Matthew, would you like to go first and tell us a bit about yourself? Speaker 2 (1:40) Sure. I write about economics and finance. I have a publication called The Overshoot, and I co-wrote the book Trade Wars Are Class Wars. And Speaker 1 (1:48) Ning? I'm a professor at Shanghai Jiao Ling University and Tsinghua University. And also I wrote a few books on investment in China's macroeconomy. One of them is titled China's Guaranteed Bubble, predicting the collapse of China's housing bubble. And then I've been advising policymakers in China and many other parts of the world on macroeconomics and monetary policies. Since Speaker 3 (2:09) we are in China today, maybe we can begin by you telling us how the Chinese economy is doing now. Speaker 1 (2:17) I think the economy is stabilizing. I think we have been having some corrections in the housing market over the past five years. That's taking a drag on the macro economy. That being said, I think the new growth engine, being the so-called new quality productive forces, higher-end manufacturing, new technology, AI, and high-end semiconductors are coming up pretty strongly. There are a couple of issues that are bothering the economy right now. One is, of course, consumption, which is not growing as strongly as people are hoping for. The other is, of course, increasing frictions on the export or the trade side of the economy. But both sides are doing okay. Relatively speaking, in the global context, people are just wishing for the better. Speaker 3 (3:04) Can you bucket China into 10-year periods? Because I don't have that much context. I've read a few books in China, but I don't see... I want to know what changed between 2000 to 2010, 2010 to 20, and what is the last six years like? Speaker 1 (3:22) I think probably one... Speaker 1 (3:27) I think one benchmark people commonly use is the general growth speed. I think for the first 10 years of this century, it was growing over 9%. And for the past decade or so, it was around seven. And over the past five years, it's more around five. So I think that's a numerical summary. But then I think if I have to use major milestones in history, 2000 marked China's entrance into the WTO, which is really helpful to China's economy. And then, of course, we have the four trillion stimulus packages coming out in 2009, which is a big boost for both infrastructures and the housing bubble. And I think, of course, COVID is like a shock to the economy. economy and then the correction or the crackdown on the housing sector is having a lot of influence over the economy over the past five years. Speaker 3 (4:16) Matthew, this is like a Speaker 2 (4:17) conversation, so feel free to button wherever you like. Sure. I think one thing, you know, as Ning was saying, I think it's worth emphasizing the extent to which COVID was really a break, not obviously uniquely for China, but for a lot of the economies in the world. And, you know, one of the big... points of contention that we've seen in China's relationship with other countries. And it's come up recently in the past few weeks at the G7 meeting is this idea of China's rising trade surplus and the idea that the new productive forces that are beneficial on the one hand for Chinese producers are considered very threatening for competing companies in Europe in particular with motor vehicles. And I think one piece of context that's helpful here is that if we look at China's external balance with the rest of the world in the years immediately leading up to the pandemic. The trade surplus, depending on how you measure it, was around $100 to $200 billion a year, which is, on one hand, it's a big number, but it's the global economy. We're talking about tens of trillions. Now it's more like... $1.1 trillion a year. So a big shift between 2019 and now. That's really a function, I think, of several things, but I think very much the response to COVID. And one thing I think that's striking is the productive side of the economy in terms of the factories being able to produce more and sell things recovered from COVID faster and better than the domestic demand consuming side. Part of that reflects, as Neng was saying, the consequences of the housing bust. Part of it reflects other factors as well, but that divergence has been significant and persistent. So even as sort of the overall economy, as I'm saying, stabilized, that sort of composition and unbalanced nature seems to be, I'm not sure if it's necessarily continuing to get worse, but it's very large. And as I said, the size of the surplus now relative to the global economy is quite large, in particular relative to the size of China's trading partners. Speaker 1 (6:09) I'd like to chime in about, I was in a session yesterday called the two-speed economy. It's actually what I call a K-shaped economy. I think that's not just a China phenomenon. This is becoming a global phenomenon across countries or within the same country, across different social stratas. There are very different or diverging trends going on. And I agree with Matt. I think China's export has been increasing very rapidly over the past five, six years. But then I think there's a multitude of reasons for that happening. I have a Speaker 3 (6:37) question here. Some countries have a trade surplus. Some have a deficit. Fewer have a surplus, more have a deficit. What happens if this continues 10 years, 20 years down the line? Speaker 2 (6:52) One answer potentially is nothing. It depends. There's nothing inherently sustainable or unsustainable about deficit and surpluses. There are reasons why certain places might want to be spending more than they're producing. The canonical example you'd have is a society where you say you have a lot of younger people, it's relatively underinvested infrastructure, a lot of growth potential, maybe it's poor or less technologically developed. That's a kind of place where you would expect that the needs of the people to invest and grow rapidly and their future productive potential are such that it makes sense for people in the rest of the world to invest there, lend them money, export advanced machinery, things like that. And they could have persistent trade deficits for a while and grow rapidly, and that would be beneficial for everyone. The flip side is you can imagine a society sort of in the opposite situation. Maybe it's older, already at the technological frontier, there's less growth potential, they have already advanced. goods and maybe they would be exported. Speaker 3 (7:46) Speaking Speaker 2 (7:46) about the Speaker 3 (7:46) U.S.? Well, Speaker 1 (7:47) this is the interesting question, right? I'm talking about in theory, right? In practice, it doesn't work this way. That's where it gets tricky. And also on the theoretical side, I think that is the case when we still have gold standard and in Bretton Woods. But now that that is gone, I was just trying to add on, well, trade is no longer necessarily the only determinator in this equilibrium. Now you can have, I mean, one side is the trade imbalance and the other is the capital kind of imbalance that people have different preferences. for putting their money into different countries, or by design, certain countries have the ability to produce more capital or monetary supply than other countries. So that's somehow balancing off of the imbalances in the trade area. Right, I think particularly in the U.S. case, and it's not unique to the U.S., I think it's true for basically... We're not talking about a theory anymore. Speaker 2 (8:33) The rich English-speaking countries in general, the thing that they have as an asset is a legal system that people find... very investor-friendly. It's a language that people who are... Used to be. Speaker 3 (8:46) Well, okay. I Speaker 2 (8:47) said the English-speaking democracy. So this is a broader universe than just the U.S. And a language that basically any rich person in the rest of the world knows. So those are going to attract... savings from the rest of the world relative to other countries, regardless of whether it makes sense. So you have the strange phenomenon, we've seen this for decades, of places that in theory ought to be, in sort of standard theory, should be having trade deficits because of their investment needs, actually having surpluses and buying financial assets rather than borrowing their net lending to places that are rich like the US, the UK, Australia, Canada, New Zealand, because... their financial systems are accommodating and sort of meet that need, which is very strange. Not what the sort of standard theory would say is optimal, but it's what we've been observing for the past several decades. And Speaker 1 (9:39) just to place the devil's advocate, I think, I mean, in the old regime, I think when there is really prolonged and serious imbalance in trade, I think, I mean, if we use history as a benchmark, war is unfortunately the war that we would have to... visit or revisit what that is when the two countries or country one country with other countries cannot resolve their disputes or cannot address the imbalances for a very long period of time i think the one which normally is on the uh the deficit side but sometimes because the the the surplus side cannot claim the money they are owed there will be a war or some kind of military conflicts yeah there's unfortunately a history of colonialism and imperialism Speaker 2 (10:20) tied up with that older model Speaker 3 (10:22) Is there an unsaid understanding, say China has a tariff, say China has a trade surplus with America over the long term? Is there an unsaid understanding that China will buy, say, American Treasury, for example, or invest a part of the money back into America? Speaker 1 (10:40) I think for now, I would say largely yes. because I think it's both push and pull. One is, I think Chinese do find the U.S. dollar to be still a safe asset and it's deep enough that we can deploy our capital into. But at the same time, it's also because there's a lack of alternative. I mean, in a way, this is related to what we discussed in a different session about RMB internationalization. Because by that time, even though we're not happy enough with the U.S. dollar as a... restoration of value, there's really no other alternative we can put the money into. Of course, gold is one possibility, but the market is not deep or large enough for China's Speaker 3 (11:18) reserve. Speaker 1 (11:18) Why can't you Speaker 3 (11:19) reinvest the money back into China to maybe improve the infra or manufacture more? Speaker 1 (11:24) One is I think China's manufacturing has already received considerable investment. I don't think we're really looking for capital in that regard. The other is, I think that happens in trading balance. So it happens in foreign currency. And of course, it is in the country's interest to keep certain amount of currency in order to, or foreign currency in order to stabilize its own exchange rate or for the security of the unspeakable. Speaker 3 (11:48) So what matters when I'm looking at economics and I'm seeing how well a country is doing or what it should do? I look at the trade balance. I look at inflation. Speaker 1 (12:00) Fuller employment, I guess, domestically. Employment. What else? Speaker 3 (12:07) I Speaker 2 (12:07) mean, you look at production of what it is people want. I'm not even sure the trade balance is necessarily the metric by way of success, because there are a lot of things that can affect the trade balance. If one guaranteed way to either reduce a trade deficit or to generate trade surplus is you just crush your domestic economy. If people can't afford to eat anymore, but they still can sell things to people in the rest of the world, then you're going to have a shift in the trade balance. That's not a benign outcome. I mean, I think one thing that's useful to remember is a lot of the big shifts you see from surplus. So Korea, right? very great developmental success story. People talk about export-led growth. But up until the Asian financial crisis, South Korea actually ran trade deficits consistently from 1953 until 1997. I think it was one year maybe in 89, but basically until then, deficits. Then you have the Asian financial crisis. It was a very traumatic experience. And then ever since then, they've had large and persistent surpluses. And I think it's fair to say that even though Korea is doing much better now than it was, say, in 1997, The circumstances that led to that shift in the trade balance were not benign. They were not good for Koreans. I don't think it was good for the world. I think that's an important context for us. Is Speaker 3 (13:11) that what worked for China? I saw some data that China only consumes 40 % of GDP. In India, that number is 55%. In the US, it's 68%. Did China domestically consume lesser and hence they could export more? Speaker 1 (13:26) Proportionally, yes. I think there are several reasons for that. One is, clearly just culture. I think in East Asian countries have this tendency, whereas I think India does not have that historical tendency. Part of that is the shock from COVID, both in terms of people's balance sheet and in terms of people's confidence or their feeling of safety with consumption. Another is, of course, what Matthew mentioned about what there is some imbalances, there's certain suppression of certain factor prices and there's some inflation of certain other factor prices. I think in the interest of the country, maybe not necessarily. particular sector of the economy or the employees in those sectors. So I think that is slowly adjusting slowly but steadily. But I understand and I think I can see that certain other countries have issues with this. model of growth. But then going back to what Matthew has said, I think whatever happened to South Korea or some other Southeast Asian countries during the financial crisis has taught China a lesson about running deficit, maybe even a brief and concentrated period of time could open your country to vulnerability, which is a reason for China want to continue its leadership in Speaker 1 (14:38) I would Speaker 2 (14:39) also say that that's not the only time that's happened. So if you look at the euro crisis, I think we've seen, in retrospect, a similar phenomenon where a lot of countries were not concerned about, effectively, a balance of payments crisis of the kind that hit these Asian countries 15 years earlier, and then they were. And then you look at the past 10 years, and those countries have adjusted very dramatically. And even the countries that didn't necessarily get... IMF bailouts or other things, the ECB, they have shifted. And so Europe as a whole has had this massive structural shift in its behavior in terms of spending less relative to what they earn. Which, again, at the individual country level, it's understandable why you have that traumatic experience and want to avoid it. But from the perspective of the world as a whole, it makes everyone worse off. This is a really unfortunate phenomenon that keeps happening. But that's sort of the structure of the way the financial system as it is, having these periods of severe stress. And then if you're in trouble, I mean, in theory, the IMF is there to help you. In practice, it hasn't really worked the way I think it was intended to. And that's why we kind of keep ending up in this situation. Speaker 1 (15:44) I think there's a little distinction to be drawn about how much