Is China’s economy in trouble?

Hosted by Christina Ruffini and Sir Richard Dearlove

Guest

George Magnus

George Magnus is a former Chief Economist at UBS, author, and research associate at the China Centre at Oxford University and the School of Oriental and African Studies, London.

Episode Summary

China’s imports and exports jolted to a halt earlier this month - marking the first contraction since the pandemic struck in 2020. At a time of worldwide surging inflation and central banks everywhere raising interest rates to painful levels, the “miracle of growth” that powered much of the world’s prosperity these last two decades is causing growing concern.
For the second installment of our three-part series looking in depth at China at a crossroads, One Decision considers the economic crises that could be facing the country - and the world. George Magnus, former Chief Economist at UBS, now author and research associate at the China Centre, Oxford University, and the School of Oriental and African Studies, London, explores whether China can bounce back in the coming months.

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Transcript

INTRODUCTION

Lockwood: You're listening to One Decision, the podcast that looks at how certain choices made can affect us all. One day, China will go to bed one night and wake up the next morning and be the world's biggest economy. It will be a massive symbolic moment. In some ways, China will have won. Those are the words of our previous speaker, Doctor Kerry Brown, former diplomat, now author and director of the Lau Institute at King's College London. We spoke to him last week in the first episode of our three part series looking in-depth at China. We looked at its enigmatic leader, Xi Jinping, his background and some of his domestic political challenges. One we mentioned that we are doing a deep dive on today is that China's economy now at a crossroads. The government was recently forced to admit it has missed its target growth for this year, 3% of GDP. They hoped for more than 5%. The massive property sector that drove China's huge boom is on the brink of collapse. And there are reports now, previously unthinkable, that China could be on the verge of a possible recession. For a look at how China's economy is facing a multitude of challenge, we spoke to one of the best known experts on this very subject. George Magnus, former chief economist at UBS Bank and now associate at the China Centre in Oxford University, sat down with us to walk us through the huge task Xi Jinping has ahead of him, to fix the economy, the engine that has driven global growth for the last two decades. And as always, my cohost, Sir Richard Dearlove, joins us for post match analysis with a few thoughts of his own. Let's get straight into it.

INTERVIEW WITH GEORGE MAGNUS

Magnus: This is kind of an unusual kind of shifting in priorities, I think, which basically, I suppose, speaks to the times that we live in and the way that China sees it as well. The second thing is that from an economic point of view, the entire economic and financial policy elite is basically being replaced. I mean, we pretty much know the pool of personnel from which the replacements will be drawn, but we don't really know who's gonna be doing what formally until these are confirmed by the National People's Congress in March. Some of the chief regulators, the head of the central bank, the finance minister, a lot of these people are better known for their loyalty to Xi Jinping in years gone by than for their experience in central government or for their expertise in economic and financial affairs. So some people say it doesn't really make any difference because even the experts or the technocrats who are standing down or being dismissed, so to speak, I mean, nobody really stands up to Xi Jinping anyway. So what difference does it make if you just have yes men who are doing the same thing? On the other hand, it could also mean that bad decisions get implemented that much more quickly and without discussion. So we'll see. But, obviously, this is a remarkable change, and quite what the consequences will be, we will know because we feel it too that we are living in very kind of fractious, feisty times in terms of geopolitics, the world order being in flux, to coin a cliché. I think Xi Jinping along with his buddy Vladimir Putin, I mean, I think they do see a moment here of opportunity where from their point of view, rightly or wrongly, Western liberal capitalism is in terminal decline, and that this is their moment. This is Xi Jinping's moment to basically establish China's interests and bona fides in the global governance system and in the way the world works. And this is basically the most important thing, I think, as the Communist Party sees it, to realize the ambition which they have to be the dominant power by 2049, which is the centenary of the founding of the People's Republic. So in short, I mean, I don't think the economy was sort of omission. I mean, they still think it's very important. He talked a lot about common prosperity, which we may come on to talk about in this discussion. But I think it's just kind of a sign of the shift in priorities. I would have made a much bigger deal about the economy, but, you know, I'm not his speech writer.

Lockwood: So I wonder if he's doing that thing that a lot of embattled or dictators under pressure do, which is to externalize the threat and maybe try and divert attention towards threats from abroad, given that he does face a litany of issues domestically. There were clear indicators in the party congress in his speech and in the report that came out that Xi is moving away from that Deng Xiaoping era of focused growth to one on stability. And as you've pointed out, Beijing's growing assertiveness overseas and Chinese power on the international scene. And now, Deng Xiaoping, for our listeners, he's been called the architect of modern China. He was responsible for paving the way for China to become the world's second largest economy in this move away from Maoist ideology at the time. And when we talk China's huge success story at the start of the twenty first century, its entry into the World Trade Organization, the entry of its fast labor force onto the global market, all that stuff about, quote, socialism with Chinese characteristics, quote, which was essentially socialism blended with free enterprise, and there was promotion of business, and there was global engagement. How much of that do you think is now out of the door with Xi's new vision for China?

Magnus: Well, it's absolutely right, I think, to when we look back and we see the so called reform and opening up was the kind of the campaign or the slogan that actually was launched under Deng Xiaoping, and which has survived actually to this day. Although, as I'll explain in just a second, I don't think much of it actually lives. It survives as a slogan, but there's not really much substance to it anymore. But under reform and opening up, I don't think the Chinese government or the Communist Party was ever much less ideological in its approach to thinking about things than it is today. But I do think that there was a very definite difference in style and practice and in just the way in which the government wanted to do things. So there are a lot of things that we associate with China's eruption. I mean, you mentioned joining the World Trade Organization, which was really important in 2001. But, similarly, we could talk about the creation of China's housing market, which is, you know, biggest housing market in the world. And it wasn't a market before 1990. You know, it was a welfare system of housing allocation. We could talk about changes in ownership, privatization of state enterprises, substitution of, you know, rule by diktat with institutional mechanisms, laws, not necessarily what we would call the rule of law, but they have lots of laws. So rule by law, but it's kind of party law. So there were many, many things that actually explain, I think, China's eruption. And I think that what many people did not appreciate when Xi Jinping came to power in 2012 was just how different his political approach was going to be. He'd already given off lots of signals about it through his actions and through his rhetoric. But right up until 2014, 2015, I think there were still a lot of people who were stuck in a time warp, really, and didn't really appreciate exactly how much was on the block, really, to change. And we now know, I think, probably it's now a pretty consensus view, actually, that the governance system in China has changed pretty dramatically. The role of the party and the party state in China has become recalibrated not in a changing way. I mean, it's not different from what it was, but it's being emphasized even more strongly. And the pride of place given to private enterprise as the driver of jobs and innovation and employment, you know, GDP growth and so on and so forth, that pride of place still exists in rhetorical form, but actually not in practice, really, because private companies, although they're still valued, are expected to toe the party line, really, and follow political and party objectives as well as making money, if that's possible. But we know that through a kind of regulatory blitz that began in 2020 and which included the deposition really of Jack Ma as the kind of founder of Alibaba, for example, that private enterprises and private companies are having a much tougher time. Yeah. It's all become much more political and ideological. So these things have exacerbated economic problems that were brewing anyway, I would say.

Lockwood: Right. I think the issue of Chinese private enterprise, I think, is a really, really interesting one. And you've written about the issues of inefficiency before. And what I think is really interesting is that while state owned enterprises, I think on paper don't account, they account for a much bigger proportion of China's GDP than they do on paper because of how many businesses and how many Chinese private firms, if you go up the tree, you find out that there actually, there's a lot of majority state owned ownership of these firms. And of course, politics, as you say, how businesses are expected to also perform on a political level, as well as a business level. Do you think that that will hold China back economically speaking? And what does it mean for the future of China's economy that it has this difficult relationship with private businesses? And do you think that's affecting investment? And, I don't know, capital flight, is that being too histrionic?

Magnus: I mean, I think there's kind of some interesting comments that I could make hopefully here in response to your sort of challenging question, which I think is very, very important. So the state sector, in turn, if you look at the strictly defined state sector, which is, you know, state owned enterprises, which are basically central government entities and those that are basically owned and run by local and provincial governments, its share of the economy, of GDP, has basically remained pretty constant over the last twenty or thirty years. It's about 25%. The thing is of course that China's GDP now is about $17,000,000,000,000, so 25% of $17,000,000,000,000 is, you know, over 4,000,000,000,000. So in any kind of trade negotiation or any kind of economic and commercial relationship that China has with countries in the West or in the Belt and Road universe or in the new kind of global security initiative universe of countries. I mean $4,000,000,000,000, four and a half trillion dollars does a lot of talking even more than of course you know when China's GDP was like 500,000,000,000. So the first is the sheer size of the state sector relative to the size of China's economy. Second thing is that even though it's 25% of GDP, the assets owned by state enterprises are disproportionate to their size in the economy. So although state enterprises are about a quarter of the economy, if you look at total assets, corporate assets, they probably own over half of corporate assets. They account for x percent of GDP, but they're very very big in terms if you look at their you know property, cash, anything that enters into equipment and so on and so forth. The third thing is of course that the state enterprise sector can be formally described as I've suggested. But for reasons that I think you alluded to, we don't always know in China that private companies are even though they may be registered as private companies, that they're as private as they may seem to be at initial scrutiny of the registration documents. In other words, that there may be holding companies and holding companies of holding companies and so on and so forth. But even then, and this is the fourth thing, is that there are lots of kind of institutional changes have taken place recently or been emphasized more strongly. For example, the fact that every company where there are more than three party members has to have a party committee close to or involved in operational management and these committees are being urged by the party to take a bigger role in recruitment, compliance, organization and structure, you know forward planning and so on. The government is quite adamant and clear in its rhetoric to companies which is that you know it wants them to be part of or to play their role in the pursuit of party goals. A lot of companies now are being asked quote unquote to make donations to party causes. One suspects that sometimes this is a quid pro quo for avoiding you know the regulator's watch and scrutiny. To cut a long story short, I mean the state sector is being re emphasized and promoted particularly in modern advanced technologies like AI semiconductors you know electric vehicles quantum computing and so on and I think that the much more ideological approach to governance in China and to private enterprise is going to be a drag on China's ability to compete in the future. And foreign firms who have been in China a long time have put up with the idiosyncrasies of being in China and coping with the kind of governance system there are becoming quite restive about some of these changes, I think.

Lockwood: That's really interesting. And, of course, there have been I mean, anecdotally, there have been a lot of reports on the number of expats, private firms, investors leaving China. And you mentioned the issue of drag, of the impact of having these party committees in these firms. I was gonna ask you what the issue of that was. Was it just, is it another layer of bureaucracy or inefficiency for firms to deal with? Is it the issue that companies are now having to, their overarching goal is not growth or profit, but rather the adherence to CCP, Marxist, Leninist, Xi Jinping ideology and party goals, you put it.

Magnus: Pretty much. I mean, I would just say in one word, control is basically what it's all about. And in fact, there is not a sphere of life in China. I mean, economic, social, or political, where the centralization of control and power around the party and around Xi Jinping as the head of the party is not prevalent. So in terms of enterprise and commerce in China I think we have seen certainly under Xi Jinping the exercise and the initiatives to increase the amount of control which the government in its kind of broad structure seeks to secure over the activities of companies. The Chinese court talk about the orderly expansion of capital okay or rather ceasing the disorderly expansion of capital. I mean this is just a fancy term for saying that we will determine in future or the party will determine in future what companies invest in and whether it's appropriate given the party's philosophy and its goals and strategies. Also, we talk about sort of mixed blending of free enterprise remember that although output prices or prices of goods and services sold in China are largely free and determined by the market not all but largely but the prices of inputs land, labor, and capital, are definitely not market determined. They are still very much determined by the state.

Lockwood: Going back to those state owned enterprises, from time to time, we see a lot of features and articles popping up on those ghost districts, those empty skyscrapers, the zombie corporations. They're such potent symbols, I think, for some of the aspects of the problems with China's quite aggressive growth strategy in the last ten, twenty years. And I want to talk to you about property and the debt crisis, but just on those sort of those zombie corporations, those ghost airports and abandoned building projects, where are they now? And how much do they account for sort of wastage or irretrievable cost to the Chinese coffers?

Magnus: I mean, I think it's becoming clearer to people more and more that over the last twenty years, there has been quite a lot of overbuilding because the model was when GDP was faltering or in order to hit unrealistic GDP growth targets local governments and provincial governments would be incentivized just to build stuff. And the idea that you can build stuff and they will come. I mean, this is an old kind of Japanese thing that people talked about in the nineteen eighties. I mean, it doesn't really work that way.

Lockwood: You've laid the groundwork beautifully for my next question to you, which is on that spare capacity, the overbuilding, the overzealous building of infrastructure, and that is the property crisis. And you wrote a book a few years ago called Red Flags, and you warned about Xi's policies and how some of them were really ticking time bombs, not just for the Chinese economy, but also presenting Xi with an element of political risk. And one of these so called red flags that you talked about was China's cumbersome debt problem, particularly the debt to GDP ratio. And part of that is this unsustainable growth that has been powered by credit, which is now coming back to bite consumers, but another is property and mortgages. We spoke to Charlene Chu earlier this year on the Evergrande crisis and the huge danger that the property crisis represents for Beijing. The Economist reported this month that more than two thirds of urban households' wealth is tied up in property, and the property industry underpins, I think, a fifth of China's GDP. And some people have argued that China's growth has been largely powered, or maybe not solely, but largely powered by its manufacturing, not just by its manufacturing and its huge output, but by its hugely aggressive building and infrastructure spending that you mentioned. And that magic formula now is really losing steam because housing slump, as well as a number of other issues. The picture now, we have home buyers dropping out of making purchases. There are people who have mortgages, who are on mortgage strike in many places, because for some of them, they've paid for homes which haven't even been built yet, and in some cases may never be built because the developers are going bust or facing liquidity crises, or Chinese people are seeing the value of their purchases completely flatline because of the collapse in demand. I read recently that the value of new homes in China had fallen by as much as 29% compared to a year ago. So what's your assessment of the current property crisis? And given that property ownership, not stock portfolios, not savings, represents the bulk of the wealth of a majority of the Chinese middle class. And what danger does the fact that the property market is kind of going bust, what danger does that present to the Chinese economy?

Magnus: Yeah, think that, I mean, this is a really important issue. I mean, it's important economically and politically. I mean, you said its property is a fifth of the economy. I mean, there's a now kind of famous paper written by famous economist Ken Rogoff and an associate that estimated that China's property sector, if you think about the construction, the materials that go into it, the white goods and products that are furnished with new apartments and the services that the housing sector provides like renting, real estate, brokerage and so on so forth, that the entire sector basically probably accounts for they said for 29% of GDP. Maybe that's a bit high, but anyway it's a big number right? So no other sector can substitute for what the property sector on its own does for China. So that's the first point. Second point is this does look like a tipping point, right? I mean China has had a kind of property slowdowns before, for example during the financial crisis that we had in 2010, market slowdown, slowed down again, after the kind of the bounce back, so like, 10, 11, 12. Then in 2015, 2016, when there was a sort of a made in China financial crisis, the market slowed down. But this one looks different. It looks different because the developers have gone bust. It looks different because the model of selling houses in China, which is this presale model in 2021, 90% of apartments and homes sold in China were sold on this pre sale basis, which is you took out a mortgage to pay for it and didn't take delivery for several months. That model is now kaput basically, I would say. And now we know also that not only is there deleveraging, in other words the kind of de risking and rejection of debts in the property sector of utmost importance, but obviously the demographics of China's property market aren't very attractive either. So the cohort of 25 to 34 year olds who are let's say they are the kind of typical first time buyers, this cohort is due to decline by about 25 or 30% in the next ten or fifteen years. So there are a lot of headwinds in the property sector which I think are not going to come back to be very favorable. Prices are dropping pretty much across the board and especially in so called tier three cities which are administratively they rank below tier one cities and tier two. Tier one cities are places like Beijing and Shanghai, Guangzhou, Shenzhen. There are only five of them. Tier two there are probably about 20 cities. Tier three cities there are hundreds, and these tier three cities account for about 70% of the housing stock, 60% of GDP, large numbers of construction jobs, and these tier three cities are just going to get absolutely hammered through this, the real estate, unraveling and denouement, and prices are dropping there much more quickly. So it's really important, as I said, you know, politically because this is now the middle class of China, aspirant middle class we're talking about, and so the government cannot afford to alienate these people. You've already described kind of protests that have taken place are taking place. So politically it's really important, economically it's important because there isn't anything that can take its place and China doesn't really have an alternative development model articulated yet, that can do that job.

ANALYSIS WITH SIR RICHARD DEARLOVE

Lockwood: And now we turn to my cohost, Sir Richard Dearlove, for his analysis. So, Richard, we are recording this having seen the events in Indonesia as the G20 gather for their annual summit. And it was quite noteworthy because this was the first time that president Biden in his capacity as president met with Xi Jinping. They had, I think, quite an interesting meeting and their press conferences that followed. They both remarked on the fact that the last time they met face to face was in 2017 in Davos. And although they've kept in pretty regular contact with calls and video conferences, they both mentioned that there's really no substitute for face to face meetings at a time when US China tensions were at an all time high. And I wanted to get your sense, your analysis on the nature of their meetings. They both acknowledged that there was competition between their two countries, but that there was a need for that to not escalate, to not lead to conflict, that there were really important global challenges, and that the world is looking to both China and The US to show leadership and to deal with some of those crises. What did you make of their meeting?

Dearlove: Well, I was quite buoyed by the news that they were going to meet, and it looks as though the meeting in terms of the record that we've seen today was reasonably successful. It doesn't solve any problems in the bilateral relationship, but at least it shows a willingness on both sides to talk to each other and to face up to the fact that there are some quite serious divides between them on important issues, both globally and bilaterally. So I think it's just generally reasonably good news for the international community as a whole. And I think this is important, I mean, realistic about the future development of international relations, the relationship between The US and China is going to be seminal in terms of what the international security situation in the future may look like. So in a way, the two countries, if they aren't going to get into conflict, they absolutely need to be in dialogue.

Lockwood: Yeah. I mean, that was something that both of them seemed to acknowledge. And I think it's very because this meeting, the first meeting that they've had in several years and first meeting since Biden took office, it comes just a couple of weeks after Xi had that long speech at the twentieth Party Congress after he was confirmed for a third term, where he spent most of his two hour speech really concentrating on security and the need to stand up to the West some of the other challenges that China faces. And then it was quite interesting to see him smiling quite broadly and having a nice handshake with an equally smiley president Biden. And I thought it was interesting from president Xi's handout that he seemed to admit that the current US China relationship is not the situation, he said, is not in the fundamental interests of our two countries. And then Xi went on to say, the world has come to a crossroads. The world expects that China and The United States will properly handle the relationship. It was interesting because, you know, we often talk in a lot of these conversations that you and I have with these geopolitical experts. Some of them feel like The US will continue to be the dominant superpower. Others think that China is rising, and that presents a really serious threat for US liberal Western hegemony. But what Xi seemed to be saying here was that the world is actually expecting the both of us to work together, and maybe what is going to happen is that maybe neither country will sort of supersede the other. I mean, at some point, China is likely to overtake The US as the world's biggest economy, but perhaps The US, in terms of political power, will continue to be dominant over China. And I think the way the Ukraine Russia war has panned out has really shown that there really isn't any replacement yet for The US as a dominant political force.

Dearlove: Yeah. I think to an extent, that's true. I'm sure that Xi's comments are an implicit criticism of Trump and the disruption and chaos in a way that Trump caused. But I think the other aspect of this, which is fascinating, is the fact that Xi had to say that the world expects the two of us. In a way, I think that's a slight reflection of Chinese insecurity. It's Xi claiming that China, you know, has equal status on international relations. It's not Xi taking this for granted and entering straight into a strategic dialogue with Biden. Was it necessary for him to say it? Was it necessary for him to remind the world that, you know, that the world expects the two of us to sit down? So I take this a little bit as Xi trying to just climb up those last few stairs on the staircase to put him on a level with The United States. And in a way, the mere fact that he said it, I think it's a reflection that he realizes China has some distance to go before it acquires that status. And, of course, you know, we talked about this so much in the past, but you have to remember, however bad the relationship is bilaterally and however many misunderstandings have been, and there's a pile of issues that keep them apart. You know, the two economies are still massively intertwined and interdependent to an extent.

Lockwood: I think that's totally right. Let's move on to the interview that we did with George Magnus. Brilliant, brilliant expert on Chinese economics. There have been a few interesting updates recently just to pull into the mix. Some things we've seen lately, China's central bank and the top banking regulator have started issuing a series of measures, which are aimed at bolstering housing demand and supply. And basically, policies, which have been signed off by Xi Jinping after that twentieth party Congress, these policies go some way in unwinding some of the restrictions that he had put into place, which had been sort of geared towards trying to curtail the ballooning debt of property developers who were getting into this huge liquidity crisis. And we've heard in our conversations with experts like Charlene Chu that since the Evergrande crisis, 30 property developers have actually defaulted on their loans. And this was in the headlines a lot in the last year, setting off warning signs and alarms everywhere that China's economy had turned a very dangerous corner. Now these restrictions aimed at trying to force these property firms to clean up their books have done quite a lot of damage in curbing demand for property. And one of the things George Magnus rightly pointed out was when you take not just the property sector in terms of construction and home buying, but all the related sectors, you know, white goods, furniture, interior design, decorating, all these things, it actually makes up somewhere around 29% of GDP. I mean, it is a huge, huge part of China's economy. And the fact that people, primarily because of bad experience and the headlines of all of this, have really had cold feet when it comes to investing more in this sector whilst it's undergoing such troubles, that is leading to a huge problem for Chinese growth. And now it seems that the Chinese are trying to find some way of solving their growth problem. They had this estimate of growth this year of 5%. What they've actually recorded is way smaller than that. They've recorded barely over 3% growth. And so that is going to prove all sorts of problems to the Chinese coffers. So with those new updates in mind, what did you think was the most striking sort of thing that we discussed with George Magnus? Obviously, he took us through so well some of the biggest issues that the Chinese economy is facing currently.

Dearlove: I think if you go back to basics with the whole sort of leadership of China by the Chinese Communist Party, if it has any claim to legitimacy in the country as a government, it is based on China's phenomenal economic success, China's growth, and, you know, its ability to lift huge numbers of the population out of poverty, in addition, you know, to create a Chinese middle class. And I think what's striking about the interview is the current fragility that China faces. Because I would say that, you know, let's say the economy is facing some really serious problems. And I thought the most interesting thing really was this issue of the growth rate falling to somewhere around 3%, when China, since earlier than 2000, I think, has had a growth rate of close to 10% year on year. It's been phenomenally successful. And in a way, that's assured a degree of stability in Chinese society. If now you're looking at a faltering economy, and I'm not suggesting yet you have the evidence for that, but there are sectors, i.e. the property sector, which is really in a mess, then there's massive nervousness we know in Beijing about what the social and political consequences of that might be in the medium term. And I think, you know, the fact that the GDP statistics were delayed from being released during the party congress, the fact that they have to now take very seriously this loss of value in the property market when the swathes of the new Chinese middle class have their money invested in property. So I mean, I think that, you know, I very much endorse George Magnus's analysis. But I think I would give it a more immediate tie into the social and political stability of China, which he as economist I mean, he did sort of implicitly say that, but I think one has to be conscious of the fact the Chinese leadership, and I know from my sort of past involvement on things Chinese and studies, they're massively concerned and nervous. And I think this probably is the subtext of the party congress. You know, how do we gear the country up again? Because it has been, and I think it still remains. I mean, 3% in China year on year doesn't work. So although in the West, we don't, as it were, look at the economy and think about immediately think about political instability, we're more geared to the ups and downs of growth and recession in terms of social.

Lockwood: Oh, we would dream of 3% growth here in this country in The UK.

Dearlove: Well, exactly. Whereas in China, that doesn't necessarily work, and no one's quite sure politically what China would look like if, for example, it were to fall into recession. I'm not suggesting it's gonna fall into recession, but even at 3%, 3% doesn't cope with the movement of the rural population into the urban areas. It just doesn't work.

Lockwood: Yes. That was very, very interesting, wasn't it? And that is a problem that Xi is obviously aware of because he sort of obliquely referenced those challenges in his speech. I think part of the common prosperity and the redistribution of wealth is part of that issue. And all of this becomes harder for the Communist Party, because they're having to hope that the Chinese people have quite a long tether when it comes to some of these difficult issues that the average Chinese household is now having to face, a lot of these difficulties impacting them personally, whether it's their assets completely deflating because they've invested in property, or they are unable to access their funds because banks have frozen them. I mean, at what point does this become a political issue for the CCP? This is something that we touched upon with our previous podcast on our Chinese series, in our look at the domestic challenges for Xi, and that conversation with Kerry Brown. But since we're looking quite deeply at the economics, the fact that, as you say, 3% of growth in the first nine months of 2022, being so far underneath what the government officially predicted, which was 5.5%. And the fact that they had to delay the publishing of those figures until after the Congress, because those numbers say we failed.

Dearlove: The leadership of China failed. How damaging do you think that is? A lot of people, I think, believe that, you know, it's not even 3.3%, the figures being manipulated and the growth rates are even lower. But I mean, I think that the conundrum for the leadership of China at the moment, Xi in particular, is that where does he place his emphasis? How does he characterize his leadership in the country? And I mean, the general view after the party congress was that he's much more interested in security of the country and of the population, and he's much more interested in political control. And in, let's say, this idea of trying to sort of spread the benefits of growth more widely in the whole population than he is actually in growth itself. And I think this is one of the difficulties for a Chinese leader, particularly one that is apparently, you know, a born again ideological communist who is mad about control of the population. How do you balance that, you know, against allowing the sort of entrepreneurial freedom and incentives that encourage growth. So take, you know, China's leading entrepreneur, Jack Ma. You know, he's been cut badly down to size. His wealth has significantly decreased. I'm sure he's still very, very rich, but not in the way that he was. He was like a rock star businessman who had a very prominent figure across China and internationally, and the CCP cut him down to size. Well, if you take that example and then extrapolate it to many, many smaller examples, particularly the number of businesses that we know are controlled by the party, and that's a very significant proportion of the economy, you begin to understand the sort of tension between these two views of what China will be like. And it's a real conundrum because, you know, Xi wants to keep control, he's putting all the emphasis on security, but he also knows, I'm sure, you know, he knows in his skin that if the growth rate is 3% or lower, there are going to be huge security problems. There will be social tensions. I mean, one thing we do know about China, but we don't know it in great detail, is that pretty much every morning in the central controlling area where the government is located in Beijing, they sit down and review, you know, the things that went wrong in the last twenty four hours. And these are mainly things like strikes, riots, anti COVID riots, all of these local tensions, some of which are really quite serious at the local level, and we never really learn or know much about what's going on. But the leadership is completely, I was going to say neurotic, about losing control. And of course, it happened. It happened a long time ago for Tiananmen. And this is when, ultimately, what do they do? They called in the army to suppress dissent, which was probably the most extreme measure they can take. So they're sitting there worrying, you know, you can have a combination of events that could lead once again to that sort of meltdown. So I think my reading from listening to Magnus' very brilliant sort of and thorough analysis is that behind that analysis, you can see the signs of real anxiety on the part of the leadership. And in a way, the one thing I was gonna add, you know, the meeting with Biden is also somewhat of a distraction. Do you see what I mean from this domestic agenda? And interestingly, if you look at that analysis that was produced, as what words were mentioned most during the Party Congress, there is this balance between not being really truthful and open about the domestic situation, talking a lot about the international situation. I think all of this betrays a deep anxiety about what the hell is happening to the economy in China at the moment. And I think it's very, very worrying. I think they're not quite sure where, you know, which lever to push forward, which one to pull back. And balancing those levers and that there's an element of disengagement beginning to occur in terms of its relationship or integration into the international sort of economic system. And it's becoming more and more challenging and difficult for, you know, foreign firms to invest in China and to, as it were, profit from the Chinese economy and Chinese development. So, I think the answer is we're not sure what the consequence is. I would suggest that there is a sign, you know, that China is changing direction. I think this issue of the exploitation of its own market by Chinese businessmen rather than foreign companies is perhaps going to be rather crucial. And if you look at The US economy, it's very, very powerful in relation to its domestic market, okay? It exports as well, but the strength of The US economy is home based and very much dollar related. I'm not sure that China is going to be able at the moment to replicate that American strength, which it has to do if it's to contest globally The US as an alternative superpower. And I think this comes back to those statements that Xi made at the beginning of his meeting with Biden, which almost, for me, are a slight reflection of Chinese insecurity because he wouldn't have had to say it if we could take China's power for granted. He would have just been sitting there at the table as an equal. So, I think one needs to reflect very carefully. China is at the fork in the road. And, of course, we mentioned this before, it has a very brittle political system, and the political system is not well geared to handling any significant political and economic change. And of course, China's economic performance has been absolutely central and crucial to its rise and to its political success. And maybe we're in a phase where we're going to shift into a new type of territory. I mean, the only thing I would say is, you know, Xi had this pleasant exchange with Biden, but we had no indication there of how China would react if it didn't get its own way.

Lockwood: What do you mean if it didn't get its own way?

Dearlove: Well, on the issues that it thinks are ultimately its own affairs, like the Uighurs where it's being criticized, like Hong Kong where it's been criticized, where, you know Oh, I see. Yes. And, you know, China absolutely hates, you know, being told by the international community how to behave.

Lockwood: That's all for this episode of One Decision and the second of our three part series looking in-depth at China at a crossroads. We've considered Xi Jinping, his background, and his domestic challenges, now the economy, and what are the biggest challenges for one of the world's biggest markets. Next week, for our final installment, we zoom out to the bigger picture. What does China have in store for the international community and the geopolitics of the region? What will Xi's new era of unlimited power mean for Taiwan, for Asia, and for the West? Don't miss it. Coming to you next week. We hope you'll join us then. From me and the team, thanks for listening.