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Good evening, and welcome to the Marian Miner Cook Athenaeum My name is Isabel Lilles, and I’m one of your Ath Fellows this year It seems that the way we talk about China and its role on the global stage, especially today, is within the context of whether or not it will be the world’s next superpower This discussion is often characterized by its formidable economy, and its complicated, multi-faceted relationship with the United States There is no doubt that China’s rise is altering international power dynamics, reshaping economic debates, and commanding tremendous public attention However, putting China and the United States in the same race may lead to the assumption that the factors attributed to China’s rise, and therefore its economic, political, and social norms and mechanisms are comparable, or at least can be measured in the same manner as those of the United States, and that assumption holds a lot of weight and consequence Our speaker tonight will draw on his book, Cracking the China Conundrum: Why Conventional Economic Wisdom is Wrong, and discuss the reform challenges facing China’s new leadership, and how mainstream assumptions for addressing these challenges often lead to flawed policy prescriptions Yukon Huang is currently a Senior Fellow at the Carnegie Endowment in Washington, DC He was formally the World Bank’s Country Director for China, he earned his PhD in economics from Princeton University, and holds a BA from Yale University Dr. Huang’s research focuses on China’s economy, and its regional and global impact He has published widely on development issues in professional journals and public media Dr. Huang is a featured commentator for the Financial Times on China, and his articles are frequently in the Wall Street Journal, Bloomberg, Foreign Affairs, National Interest, and Caixin His recent books include East Asia Visions, Reshaping Economic Geography in East Asia, and International Migration and Development in East Asian and the Pacific His latest book, Cracking the China Conundrum, which is right outside on sale for purchase, if you would like a copy, was published by Oxford University Press in 2017 Dr. Huang’s Athenaeum presentation is co-sponsored by the Keck Center for International and Strategic Studies at Claremont McKenna College As always, I must remind you that audio and visual recording are strictly prohibited Please silence and put away your mobile devices at this time, and please join me in welcoming Dr. Huang to the Athenaeum (audience applauds) Thank you So, a real pleasure to be back in an academic community, because I really enjoy talking to a community where we can explore a lot of ideas When I was writing this book for Oxford, and we were choosing the title, and Cracking the China Conundrum, well, I didn’t understand what conundrum meant actually, at the time, but now I do Why Conventional Economic Wisdom is Wrong, so the Oxford editors say that should be the title But I actually had suggested Why Conventional Economic Wisdom is Often Wrong, I wanted to be a bit humble about this, okay? And they said, “Well, that’s too wordy.” Now when I give this talk, I say the title should have been, Why Conventional Economic Wisdom is Always Wrong, okay? And let me try to illustrate this for you here We just had the two party discussions in Beijing, so Xi Jinping is now seen as China’s most powerful leader since Deng and Mao, he has a full authority, he has his people in place, he faces a world which seems to be divided, here in the US, we’re in chaos, so he’s saying, (mumbles), I can really handle this, but can he? And what I wanted to do, from an American perspective, is to look at what’s going on in China, in terms of the key challenges it is facing, and the questions are what should be the right policies? Right policies for the United States, where we live, the right policies for China, and the point of my book is the analysis of most of these issues is wrong, and the analysis is wrong, the policy recommendations are wrong, and no wonder we have such tensions between America and China, and let us try to understand the nature of these tensions So I call it the reformed contradictions facing China, because some of these misperceptions are also misperceptions

in Beijing, they’re not restricted just to Washington From a China perspective, they face negative global perceptions about their country, trade, investment tensions with the West, and they can read it daily, in terms of what the White House is coming out with, punitive tariffs, and huge proposals coming out about intellectual property right theft, and technology transfer, huge penalties coming At home, people talk about a debt situation, potential financial crisis, a growth slow down, double digits, now 6.8, how much lower can it go? Corruption, huge issue in China, recognized by the government, pressures for political liberalization, and term limits China just abolished the term limits, extraordinarily controversial I’m gonna touch upon all these things, but in all these issues, these are the major issues, there are pressure points between America and China, we have views on what the issue is, and the problem is that wisdom is practically always wrong, and the solutions, therefore, we never get to them So let’s talk about, what are these perceptions, what is conventional wisdom? It could be the public, it could be people in education institutions, it could be China’s scholars, it could be the market, at the broadest level, let’s talk about America public So the question here is, Gallup Pole asks the American public every year, who is the world’s leading economic power? A simple question, and Americans, in the late ’90s, overwhelmingly, they said, “We are, America’s the leading economic power.” China only gets 10% vote back in the late ’90s, then look at how the pattern changes More and more Americans start saying that China is the world’s leading economic power, and today, the majority, the majority of Americans say China is the world’s leading economic power, and a minority will say the US is, okay? Are Americans right or wrong? Now, turn the situation around, ask the question, and the ask the question of the Chinese, who is the world’s leading economic power? And the Chinese overwhelmingly will say, “America is.” So this is odd, Chinese think America’s the leading power, American’s think China’s the leading power, usually you think more highly of yourself than you think of others, but this is the reverse Who’s right and who’s wrong, okay? Now, let’s ask the same question to the rest of the world, Europeans, Latin Americans, Africans, East Asians, and the Middle East, and we’re asking regions and countries, and we’re not talking about China, and we’re not talking about the US anymore, we’re talking about other parts of the world Same question, who is the world’s leading economic power, and the question is, of the five or six regions of the world, everyone says America is the world’s leading economic power, except for one region, one region will say China is the world’s leading economic power So my first question to you in the audience is, which region, which region says China’s the world’s leading economic power, and you didn’t read my book, okay? So let’s take a guess, you sir? Probably Asia Probably Asia, they’re right next door, looming giant, right, another person, take a guess, Africa, because China gives so much more foreign investment, and it’s such a big trading relationship, Africa might be logical, what about you? Latin America Latin America, correct, Latin America, only thing, you’re all wrong (audience laughs) We only have five regions, you named three of them, and you’re wrong, that’s my point, you are all experts, you’re informed, you read, you’re wrong Europe, Europe says China’s the world’s leading economic power, and the other regions all say America is, Asia’s the most in saying America is, even those right next door Now, this is the exact opposite of what most people, particularly the professionals would say Now, in my chapter, I talk about public perceptions, these are simple questions, they’re fundamental questions, there’s a question about do you like or dislike China, that shapes the opinions of our foreign policy experts So you ask the Europeans, if you ask Americans, here’s what’s happening, unfavorable ratings of China, unfavorable dislike, favorable like So up is bad, down is good, and you can see what American’s views of China are over time, they’ve become highly unfavorable today But it is really strange, that as recently as 2010,

seven years ago, the majority of Americans had favorable impressions of China, today it’s quite unfavorable So in my book, I explain it in terms of politics, but in economics, because it’s not a smooth pattern, there are cycles in this, it’s largely shaped by economic issues, which people do not recognize, because my book is written by an economist, and I want to show how public policy, foreign policy is shaped by economic issues Now, the same question, let’s ask the Europeans Germans, French, Spanish, Brits, Italians, major European countries, same question, do you like or dislike China, it’s a personal question, undefined, so I go next door to the Council on Foreign Relations, Brookings, all the policy experts, which European country do you think dislikes China the most? Which European country do you think likes China the most? Now, you’re gonna get a lot of views, and we’re not Europeans, so we don’t necessarily have a personal view, but I’m struck by the fact that 70% of the time, they get the wrong answer So which country do you think dislikes China the most? Let’s take a guess, excuse me, Italy? Take a guess, Germany dislikes, why? But Germany’s the only one that has a trade surplus with China, everybody else has a trade deficit, right? Let’s take another guess, you, you have a guess? Who wants to venture a guess? Dislikes, dislikes, well, that’s, Norway was not one of the big five, Britain, Spain, France, Germany, England France, the answer is Germany, actually, okay? Who likes China the most? France, why would Britain? Well, after all, you have Hong Kong, right? Hong Kong generates a lot of dissension, but it turns out that Britain does like China the most, okay, and what about Russians? Great power rivalries, right, animosity at the top? Actually, it turns out the Russian people like China the most of any country, that is strange, because the Russian political leaders actually are quite nervous and sensitive So I have a chapter, and I ask, very simply, we policy makers are influenced by our personal views of a country, a lot But when I ask the policy specialists, “What do you think those views are,” the majority of them get it wrong Okay, so how do we get the right policy recommendations? If we, as professionals, begin with biases, which turn out to be wrong, because we’re not actually reflecting the views of our people And then the question is, are those views driven sensibly? So why is it, Europeans and Americans think China’s the world’s leading economic power, but everybody else thinks America is, and the answer is trade Trade balances, this is China’s trade balances with various country groupings, I’ve only presented three, America, the EU, Asia China generates tremendous trade surpluses with America, and with Europe, but Europe is moderating, it generates deficits with the rest of the world, the rest of the world doesn’t feel as threatened as America and the EU does So here we are, and we know that, the White House is fixated on trade balances, the bilateral deficit, China accounts for 60% of America’s trade deficit, and China’s there for taking away jobs, they’re losing competition, et cetera, et cetera So I have a chapter on trade, everyone thinks that America’s trade deficit is largely due to America’s huge trade surpluses, and even the Chinese think that, they won’t admit it, but they think that, okay? And the answer, of course, is, there is no relationship at all between China’s trade surpluses, and America’s trade deficits, none at all, but we all think there is Now, how do I explain that to an audience which are not economists, because I have a huge chapter, and I go into theory and everything else, but most people can’t reason, or understand it, so I do it in a very simple way This is America’s trade deficit, measures as a share of global production, so I can compare countries across regions America starts generating huge trade deficits in the late ’90s, it becomes really big, it starts to moderate, and now it’s here, but it’s still large, but it’s getting a little bit worse So America’s trade deficits became a big issue in the late ’90s and early 2000s for a variety of reasons, there is China’s trade surpluses,

they don’t even emerge until around 2004 and ’05, five or six, seven years after America becomes a big trade deficit country There is actually no relationship between China’s surpluses and America’s deficits, they actually move in the opposite way, when America’s trade deficit starts to get smaller, China’s trade surpluses get bigger, they actually move in the opposite way So last year, America generates the largest bilateral trade deficit with China ever, China generates the smallest trade surplus as a share of GDP in the last 20 years They move in completely opposite ways, there is no link, but we think there’s a link, so how do you explain this to people, when there is no link, but they think there’s a link? This is a graph of America’s imports of manufactured goods from Asia, all the countries in Asia over the last 20 or 30 years In 1990, 45% of America’s imports of manufactured goods came from Asia, only a couple percent shipped from Beijing or China, the rest is largely Japan, Hong Kong, Singapore, South Korea, Taiwan, boom, boom, boom Interestingly, over the last 20 years, the share of America’s imports of manufactured good has not changed much, but the value that comes from China has surged until it’s become large, why? It’s the production sharing network Parts and components produced everywhere in Asia ship to China, assembled in its huge factories, sent to America, it’s all originally here But most of it is not produced in China, the high value components, but it looks like it’s coming from China So you have an iPhone, the iPhone costs $800.00, it’s assembled in China, all of Apple’s products are assembled in China, so all that’s shipped here, it shows up as a trade deficit, but how much of that iPhone actually goes to China, Chinese people, Chinese companies, Chinese firms, Chinese owners? 5%, 45% goes to Japan, South Korea, Taiwan, 50% goes to Apple for the products It shows up as an $800.00 deficit, $40.00 actually really stays in China, the rest goes everywhere else So everybody else is exporting through China, it looks like a bilateral trade problem with China, but there isn’t, it’s a general issue There is no link at all, but people think there is, and then we have these huge punitive tariffs and problems coming, it’s all based upon a faulty assumption Now, here’s another issue, foreign investment, America is the largest foreign investor overseas, American companies pour out hundreds of billions of dollars annually, investing it all over the world So the question in my chapter is, what is conventional wisdom? Conventional wisdom is that a significant percentage of America’s foreign investment goes to China, we lose jobs, they gain competitiveness, we lose out, it’s bad, fact, what percent of America’s foreign investment actually goes to China, out of the total? The answer is 1.5%, less than 2% of America’s foreign investment goes to China, the other 98% goes elsewhere, yet Americans think that most of its foreign investment is going to China, and therefore, they see this as a big problem, in terms of competition So the question then in my chapter is why? Why is it so little? Because the amount from Europe that goes to China has been surging, whereas the amount from America to China has been declining You would think that there is a problem, it would be a European problem, not an American problem, America isn’t really investing in China So the question in my chapter is, it’s actually economics, and here is a very startling proposal It does not make sense for American companies, economically speaking, to invest in China, it makes sense for European companies, so why is that? Because we worry too much that our companies are motivated to invest in China, and we somehow have to stop this, but in reality, they neither do it, and they’re neither motivated to do it And the answer is, what determines foreign investment? It’s the composition of what you export, if you export certain things that makes sense to invest overseas to support it, you will do that, but if you export things

which do not require foreign investment, you won’t do it So let’s look at the composition of what we produce here in America, and export to China So these are American exports to China over the last 15 years in billions, these are the five largest categories of America’s exports to China And then I’m gonna ask the question, does this encourage foreign investment or not, is there a link? So you don’t have to be a PhD economist, you just have to be knowledgeable about what’s going on in the US What is the largest category of a grouping of commodities of exports to China? Somebody help me America’s largest category of exports to China, agricultural, oil, seeds, grain, soybeans Does that lead to foreign investment, no, you’re not gonna have farmers trying to grow stuff over there, or (mumbles), so you don’t have much foreign investment The second largest category of America’s exports to China, what is it? What? You haven’t read my book, by the way, you can’t cheat on this. (laughs) It’s Boeing aircraft Now, where is Boeing different from Airbus, Airbus manufactures in China, it has plants there, Boeing does not, until recently So Europeans invest in manufacturing planes, but so far, Americans do not Two largest category, so far no foreign investment, third largest category of America’s exports to China? Now, here’s the point, if I go to the Department of Commerce, special trade representative, I’m talking about policies, I ask him this question, not a single official gives me the right answer Yet they’re in charge of this, they’re formulating all sorts of policies, but none of them know what this commodity is, guess what it is Guess How did you know? Must have read my article, it’s recycled cardboard and tin cans, what you put out in your front yard every day, that’s the third largest category of America’s exports to China, it does not lead to foreign investments Now, fourth category, semiconductors and other components, so Apple, Dell, Hew Packard, Intel, those semiconductors manufactured here, exported to China to be put in those computers and Apple phones, how much, for example, however, does Apple invest in China? Apple produces everything that it makes in China, how much foreign investment does Apple have in China? Significant? None, Apple does not produce in China, Foxconn, a Taiwan company, owns all those factories and plants Apple’s figured out, the most profitable production model around, don’t manufacture, it’s a big headache, you gotta pay these people, they go on strike, I got labor standards, environmental standards, it’s a mess, I don’t want to do that I will just control the design, the operation distributions, and let other people do this Same for all the other product groups, this leads to practically no foreign investment in China And here is the last category, a really significant category, and this is relatively new, it’s only cropped up in the last seven to eight years, and again, when I ask the Department of Commerce people, “What do you think this product is,” not a single person gets it Now, you may get it, what is this category of exports to China from America? Petroleum, no, somebody else, anybody, you don’t have to, I don’t know your name, so you don’t have to be embarrassed, metal, no, what? Now, what cars? What kind of luxury cars, what, Buicks? You see a lot of Buicks in China, right? But Buicks are made in China, they’re not exported to China So what American cars made here are exported to China? Now, actually, if you go to China a lot, this is not an easy question to answer, it’s not obvious, what? What kind of Lincolns and Fords? No, that’s not the answer, though, yes? Tesla not yet, maybe in the future, maybe in the future, but not yet Now, here’s the interesting question, though, because some of you know this, but you still haven’t gotten the answer But I never have gotten the right answer It’s BMWs, Jaguars, Mercedes SUVs Produced in America, exported to China, who does the foreign investment? European companies, not Americans, and you go through the product list of what we in the United States make and trade, the first thing you realize is there’s no need

for foreign investment, yet Americans are really phobic about, too much of my money is going to China Yet it doesn’t make any sense, and in actual reality, too little, why is it Europeans invest a ton? Because they export manufactured goods, you go to a shopping mall in China, you walk around, what’s the first thing you realize? 90% of the products are European, Ferragamo, Gucci, right? Appliances, Bosch, Siemens, then you have these cars out there, it all requires foreign investment That’s the difference, now, in my book, I basically show nothing wrong with this, Americans make a fortune because they control the services, the financing, the distribution So those companies handling the making and marketing of products, many of those companies handling that are American, but they don’t have to invest in China, they just control the distribution system, and you generate huge production, huge profits in the process Think about it, 84% of Americans are employed in services, only 7% are employed in manufacturing, and the numbers for manufacturing have been going down steadily for 40 years, long before China became a country, in an economic, sensible sense The services have been surging, and the service category that’s surging the most is high value services So the US has actually hit upon an issue, you do not get rich or make money by manufacturing, you do it from services, yet what is the White House worried about? Manufacturing, tariffs against products, it should be focusing on services, so I have a chapter about services There is a real problem with services, there is a policy issue that America needs to address with China, but it’s not at all the issue that the policy makers in Washington are debating about This is the current headlines, China’s trying to become more innovative, it’s launched the Made in China 2025 with strategic tasks, key sectors Is innovation the key to rapid growth, because that’s what they’re trying to do, and here in the US, we’re really worried about this So I have conventional wisdom, the conventional wisdom is, the more innovative you are as a country, the faster you’ll grow, that’s the assumption It’s an assumption here, it’s an assumption in China But by now you know the routine, conventional wisdom is always wrong What if the more innovative you are as a country, the slower you grow? Now, I have a hint on this in my book, but my next book has that title, the more innovative you are as a country, the slower you grow, why is that? And that, I’ll save that for a little bit But nevertheless, this is what’s worrying people, China wants to be more innovative, people think it’s going to be more economically powerful, actually, in fact, they don’t have to worry too much about it, but here, let’s try the argument How do I measure effort? This is a line, GDP per capita, how wealthy a country is, and the vertical line is their effort to become innovative, we have indices that measure this, they’re produced by consortiums of universities that measure how hard a country tries to be more innovative, and the indicators, like research, subsidies to enterprises, patents, education, whatever, you aggregate it, you come out with an index of how innovative, or how much effort you’re trying to become innovative, and the first thing you realize is, countries are very much on this line The correlation, the explanatory power of just being wealthy and how hard you try is really almost perfect If you are way above the line, you’re trying harder, if you’re below the line, you’re not trying hard enough, comparison with other countries So here is the issue about China, it’s way above the line, it tries harder than any country we’ve seen, historically, it spends more for these kind of innovative activities, and here’s the rest of the world, they tend to more (mumbles) near the line, but China’s way off the line But trying isn’t the objective, achievement is the objective, what is your results from trying to be innovative? This is very difficult to measure, no one has done this, and I’m writing a book now on the subject, so I have about 70 diagrams, I’m just gonna show you two, okay? I’m gonna show you the one that makes people nervous, okay? So how about effort, how do I measure effort? So I measured it in two ways, services, high quality, knowledge intensive services, finance, education, health, (mumbles), professional things, how much of these high value services are you generating and exporting in your system, and the second category is manufactured goods,

technologically sophisticated manufactured goods So how does China rank against services, and in manufacturing? This is the change over the last 15 years, the movement, KI is knowledge intensive services as a share of their GDP, and this is China, it’s actually below normal It’s really not making much progress, in terms of high value services, and the rest of the world, some are doing better, some are doing worse, rich countries are doing better, they’re spending more efforts on the services, as you would expect But here’s something, the vertical line shows you success in terms of being more innovative, or getting more innovative products, the horizontal distance tells you whether you’re growing So rich countries are being more innovative, but they don’t grow, okay? China’s not becoming more innovative in services, but it’s growing a lot, that’s the horizontal distance, and this is a very difficult thing to explain, but it’s part of the argument that becoming more innovative doesn’t necessarily mean that you grow very rapidly But let’s look at manufacturing, manufactured products, this is China, okay? This is the norm line, it’s way above normal for its income level, but here’s something interesting Everybody else in the world is getting worse, okay? This is a real difficult issue, it’s a delicate tension issue to resolve, but while it appears that China’s making enormous progress, and everyone else is receding, the issue, whether or not this translates into growth benefits, is a different kind of a story I don’t have time to get into it here, but I’m basically making the point, we don’t realize or understand the implications of this Now, what else is part of the argument that’s worrying America, how good is China in transferring adopted technology developed elsewhere, and then using it internally in China? The transfer of skills So this is a comparison of the ability to adopt technology produced elsewhere in your country, and making money out of it That is actually the key to growth, countries which do this well grow very rapidly, countries which do not stagnate, and you can see that China is in a class by itself, compared to, say, Korea, Russia, Brazil, and India It is able to find technologies overseas, to bring it back home, and to use it, it is not easy You can find a technology which is really sophisticated, but you may not have the capacity to actually make it work in your country, China’s figured out how to do this So I discuss how do you do this, how do you measure this thing, okay? Now, trade, you trade and get the technology, you buy the technology, foreign investment brings the technology, these are all ways that you can transfer technology You can also force companies to transfer technology, and this is what Trump is accusing China of, forced transfer of technology So you’re gonna see, coming out in the next few days, a 60 billion dollar tariff penalty, because China forces companies to transfer technology So here’s the interesting question, what do we mean by forced, and do they really do it? So here’s a chart that I have, if you ask American businesses, are they forced to transfer technology, 81% no, never comes up as an issue, 19% says yes, it is an issue, my American company is being asked to transfer technology to a Chinese company as a condition for entry, or for to operate Now, of that 19%, what happens in the end? 2%, they can’t come to an agreement, the company was not willing to transfer the technology, it doesn’t want to come, the deal is canceled 17 percentage points of the 19, some agreement, some transfer, now, this is difficult to determine whether this is bad or good or whatever, because any commercial transaction is a give and take, in terms of what do you want, what do I want, can we strike a deal? And the reality, in my view, is, this is not unusual, that’s what every commercial deal is, do you want this, do you not want this, can we strike it, can we both benefit? And the issue is, however, size, China is so big, this is a big issue, and this is a complicated issue to understand China’s also accused of stealing it, okay? So I have a discussion about theft, now, this is also extremely difficult issue, how do I know whether this is unusual or not unusual, so I start off, I give a lecture at Harvard Business School the other week

on the question of theft, and Harvard Business School just had a case study on this Francis Cabot Lowell, if you Google him in the Wikipedia, he will come up as America’s first great innovator Now, Francis Cabot Lowell was a brilliant graduate of Harvard, and 100 years ago or so, when he graduated from Harvard at 19 as a math major, he went to England, because England was economically so powerful and so advanced, why? It had the power loom, nobody else had the power loom, and if you worked in the power loom industry in England, you couldn’t even travel, because it was so sensitive that you might lose this technology So what did Francis Cabot Lowell do? In six months, he visited all these factories, and he memorized them, the blueprints and the style, and he went back to America, he established Lowell Massachusetts, the power loom factories replicated, and he launches the industrial revolution So that same Wikipedia article concludes at the end, he was also America’s first technology thief, okay? So let’s look at other countries, Japan, South Korea, and Taiwan, and what do I show here? There is a report that America publishes called Section 301 Violations, technology theft And if you’re stealing, they certify you as a stealer, and if you’re not, you’re classified as not stealing, so red, and variants of red, is stealing, green is not stealing, okay? So Japan, Taiwan, South Korea, they all stole at a certain stage of their growth process, and they all stopped stealing at essentially the same point GDP per capita reaches about 25,000 Now, the second thing that’s interesting is, who steals, and the answer is only fast growing developed countries steal Slow to performing developing countries don’t steal, theft is actually an underrated policy instrument, okay? It’s used, but only by a select group, and that group is rapidly growing countries So the interesting issue for China is, you’re not going to be able to curb theft, it will only disappear, now, I have a chart, another book I’m writing, when does theft stop? And the answer is, it stops at certain income levels, and it stops, also, when you start accusing the stealer, and it turns out the stealer is your same nationality, so Chinese accuses Chinese, rather than, or American accusing Chinese, it turns out Chinese accuse themselves, that will occur, but it cannot be stopped very soon Now, let me jump quickly, how much time do I have here? We’re stopping here at about eight o’clock, and I want to leave questions, so I want to jump to, let me just say that when you get to the growth issue, the biggest issue that the West focuses on is China’s debt problem, they say China has a huge debt to GDP ratio, and that’s the horizontal axis down here, and the question I then plot is, what is China’s debt to GDP ratio compared to other countries, so I have about 80 major countries, and it’s right in the middle, 250% debt to GDP ratio Higher than most developing, which are these blank circles, lower than most developed, the dark squares So the question is, is China a developing country, or is China a developed, the answer is, it’s neither, it’s not really developing, it’s not really a developed, if I had a guess, I would say it should be in the middle, it is in the middle So the problem is not its debt to GDP ratio, the problem is, on the vertical axis, how fast it rose over the last 10 years, and it rose very rapidly, so China’s debt problem is about why did China’s debt ratio surge so much in the last 10 years? And why is this different than other countries? And the answer is, if it’s not a problem, it must be due to something which is unique to China, and did not occur in South Korea, or England, the United States, or Brazil, the countries which had debt crises, and the answer is because China did not have private property 20 years ago So land and property values were unknown, and when a privatized property and allowed a private property market to be established, property values in China have increased 600% in the last 10 years, so here we are, sitting in California, we worry if the prices double What happens if it goes up six times, you really would think you’re gonna collapse So you question then says, the issue is then, is this price too high, and some of you are Chinese,

you come from Beijing and Shanghai, you know your condos are surged in value How do I know if that surge is going to collapse, or it’s sustainable? So I say, in my book, what is the right comparator? Should I compare China with Hong Kong, Singapore, Taiwan, London, Tokyo, no, that’s wrong, the right comparator, I’ll choose one, India, poor country, developing, a lot of people, limited land How do land prices compare in New Delhi with Beijing, and Bombay with Shanghai? After all, India’s income, per capita income is one third of China, it doesn’t grow as rapidly Conventional wisdom would say, India’s property prices, well, seemingly should be lower than China’s, after the 600% increase, the answer is that property prices in India are twice as high as China’s, but you never read about that, you never hear about property collapse, but you hear about property collapse in China So, to me, there isn’t a debt problem, it’s actually a good thing, and I write a chapter on this issue, about why the debt issue is a good issue, rather than a bad issue Urbanization, China’s becoming rapidly more urban, because it has a policy of restricting movement to the cities, so if it didn’t have this restriction, its urbanization growth rate might have been the blue line, but it’s the red line, because it’s been repressed, it’s been repressed because of the Hukou system The Hukou system says, you come into my city, and you don’t get residency rights, you can’t buy housing, you can’t send your kids to local schools, you can’t get a car insurance, et cetera, et cetera, and it’s severe for the big cities, and less severe for the small cities, so I want you to go to the small cities, and not the big cities So I have a lot of discussion in my book on this, because urbanization is the growth driver for China in the coming years, if they do it right, it’ll grow very rapidly, if they do it wrong, it’ll be a big problem, and so what is conventional wisdom in China on this issue? The conventional wisdom is, Beijing, Shanghai, Shenzhen, I got 20, 24 million people in these cities, it’s crowded, it’s polluted, it’s congested, China’s biggest city’s policy makers say are too big, I want Chinese to go to the smaller cities So they’re saying the mega-cities of China, these are the mega-cities, stop people from coming, and this is totally wrong, why is it totally wrong? Because productivity of labor is 50% higher in big cities compared to small cities in China So if you tell them only to go to the small cities, you’re losing a tremendous efficiency So how do I know, how do I know that Beijing, at 24 million, is actually too small, rather than too big? And here’s another graph, China’s really strange, it’s big cities are actually too small, they need to be bigger, rather than smaller This is China’s largest cities, and the density of people in these cities, how many people per square kilometer China is really strange because its big cities are less dense than big cities globally, its small cities have more people per square kilometer than small cities globally, and it’s the only country that has this phenomenon, because of the Hukou policies So Beijing and Shanghai should have 35 million people, not 25, and then people will say to me, “Yukon, traffic, congestion, this is terrible.” And I say to them, “No,” because I show them my chapter, and it’d actually have less pollution, less traffic problem, the problem in Beijing and Shanghai is a management issue, not a population issue There are 20% fewer people in the core centers of Shanghai and Beijing today, compared to seven years ago, even though the city’s doubled in size, the number of people in the core shrunk, because they pushed them out, no other country does this, because they don’t force people to move Now, if you look at planning, here’s a simple example of why planning is the issue, if you go to New York, you go to Washington, go to San Francisco, and you look at the traffic and street flows, go to Beijing, stand at these intersections and corners, and look, and if you look carefully enough, you’ll suddenly realize, there’s something completely different in the traffic flow of Beijing, compared to New York, or Washington, or San Francisco, and here’s my point, no one gets it But it’s so obvious, there are no one-way streets, big congested (mumbles) must have one-way streets, China does not, because traffic management in China is done by the security people, not by urban planners, and Beijing has all these ring roads, ring roads are terrible for congestion So China’s big cities, for a variety of reasons, are terribly managed, if they were properly managed,

they’d be much bigger, so let me go to the last big issue, corruption and growth, big issue My friend, Minxin Pei, has just written a path-breaking book on this, showing how corruption could lead to the destruction of China’s political system, and I think it’s probably on the mark But as an economist, I’m going to look at it slightly differently Conventional wisdom is, the more corrupt a country, the slower it grows, all right, corruption in India, Indonesia, Middle East, Ukraine, (mumbles), they’re very corrupt, they don’t grow Second, as a country gets richer, the less corrupt it becomes, so European countries, rich countries, less corrupt than poor countries, the richer you get, the less corrupt Why is China different, why is China so corrupt, yet it grows so rapidly, and why is it, the richer it gets, the more corrupt it gets? It’s the only country, in my view, that exhibits this rule, so how do I explain this? Now, remember, for me to explain this, because economics and finance are the same for every country, I have to show that there’s an assumption true only for China, but not for anybody else, and that factor explains China, compared to everyone else So what is this, why is corruption in China different from India, different from Indonesia, different from Egypt, okay? Some people would say Confucian values, or something like this, well, I say, there’s always been Confucian values Well, they say, Chinese know how to grease the wheel better, and I say, why do they know better in China than they know in, you know, Korea or (mumbles), it doesn’t work Why is corruption generate more rapid growth in China, and it’s bad for other countries? It’s because this is a centrally mixed economy, the state owns all the resources, land, finance, access to key needs, the right to operate, but the private sector generates higher returns So if you want to maintain a socialist, mixed economy, the state owns the resources, but you want the operation of the resources to be done by the private sector, you have to figure out a means of transferring the use rights of those resources to the private sector, and you have to do it quickly and efficiently, and not spend a lot of time on it, that’s corruption You strike a deal with a local official, he gives you the right to use the land, in exchange, you give him a cut, that official then has an incentive for you to grow or develop, and move quickly, because his share of the spoils will increase the more you develop and grow, that’s different from India The official in India, he’s sitting there giving permits, and an entrepreneur comes in and says, “I have my factory, I have everything, “I just need to turn on the switch,” and the official says, “Well, you have to pay me something.” And the guy says, “Well, I don’t know, “how much should I pay?” They have a lot of haggling, because the longer he holds off granting the permit, the more this guy will pay a bribe, corruption (mumbles) or it discourages growth That official does not have the same incentive as the official in China, so this is what Xi Jinping is dealing with, because corruption is, as Minxin Pei writes about, is also destroying the sense of justice, and the functioning of the institution, it cannot continue But if you get rid of it, will growth tumble in China, and what do you substitute for it? And that is not an easy issue, and I have a chapter that talks about this And this is what I call the great predicament in China, China’s got this problem, it’s got a growth model that’s worked really well in the past, and it’s what I call a Chinese dining table, you’re sitting on a Chinese dining table, except it’s not the right one, is it, does it have one pillar, yes So a Chinese dining table, the top is GDP, it gets bigger and bigger, and there’s one pillar, the party, the government, SOEs, state banks, all fused together, well coordinated, power collective action, the party controls everything, it runs very smoothly, you grow very rapidly, but the big debate is, here in the west, a Chinese dining table, when it gets too big, falls over, one pillar doesn’t work, you need a western table You split the party, the government, banks, private and state, corporations, private and state It’s firm, because it’s got four legs, GDP can get bigger and bigger forever This is the predicament that Xi Jinping faces, is he or does he want to move from that to this, and of course, right now, his incentive is to say, “I want to keep the party dominant.” But then, maybe, he doesn’t need to move to this, maybe there’s a variant of this that’ll work that deals with corruption, maintains growth I don’t know the answer to that, and I’ve been writing articles about this, but I’m been avoiding the conclusion, because it’s so darn difficult, that’s my book, thank you very much (audience applauds) Thank you, Dr. Huang, we’ll now have time

for Q&A, please raise your hand if you have a question, and Isabel or I will come to you with the microphone As always, priority goes to students Hello, professor, thank you so much for coming You had a slide I think midway through your presentation, a little bit before talking about stealing technology, where China just took off after 1982, I think the one right ahead of that, yes, or, yeah, what happened then? This is a diagram based upon information that the World Bank produces, what it does, it surveys technology developed in the West, the US and Europe, as determined as that’s the highest technology Then it seeks to find out, at what point does that technology being thoroughly used in a profitable way in a developing country? So it takes a lag, it has to be transferred, trade, investment, theft, forced transfer, whatever As China became more open, reformed and whatever, it established the institutions and the means for that transfer to occur very quickly I gave a lecture to the class this morning on some elements of that, special export processing zones along the coast, asking foreign enterprises to manufacture there, channeling all the resources of those activities, tremendous amount of technology transfer Tremendous amount of imports and exports, globalized trade brings it in, it became the major destination for foreign direct investment, transfer occurs, and then, more recently, this issue of forcing or encouraging or pressure on companies to transfer, and you get into the question of whether that’s good or bad or fair, and you get into the question of theft, are they stealing it, cybersecurity, other forms of theft, is this normal or abnormal? This is what you’re reading about in the newspapers, now, some of it is garbage, some of it is legitimate, but much of it is based upon analysis, which, in my view, is not analytically grounded, it doesn’t have any basis for its discussion, it’s emotional reaction But China is extraordinarily good at this, and in the bank, actually, this is the factor that determines whether emerging market economies do well of not, because what is the difference between an emerging market economy and a rich country? It’s their technology, their ability to produce something very well, quickly, but transferring it is not easy, and it’s not even easy in a rich country Japan, Japan floundered because although it was able to develop the most sophisticated technologies, at some point over the last decade and a half, it lost the skill of making them profitable So it’s not just getting the technology, it’s being able to use it, and this is where China is really effective, but exactly why is a much more complicated story than I can deal with right now But this, to me, is a big source of the tension between America and China, do I want to facilitate it, is good, bad, what is a good solution? And my point in my book is, the debate is grounded on just misperceptions, if they understood it properly, we could have a much more productive discussion I actually think that there are policies that could move forward where both sides could win, but they’re never discussed, okay, more questions? Hi, thank you so much for coming out to CMC today, and giving your presentation, really enjoyed your presentation, and you brought up some very important points I had two different questions on your opinion, so from what I’ve read, one of the biggest things that China makes its competitive advantage, as one could see it, is not allowing foreign enterprises to do business in China, and I’m wondering how that has affected its growth, as well as its technological adoption, and I was also wondering how the low birth rate in China could have policy, negative policy impacts for Chinese government, if that’s something that’s likely to occur? The perception that foreign enterprise is not allowed to operate, or are limited, it’s not a straight black and white, the bulk of China’s exports, particularly in manufacturing and industries, is more or less managed and controlled by foreign companies, not by the Chinese, okay, take Apple, Hewlett Packard, Dell, IBM products, they’re all manufactured in China, but the control and linkage of that is American So it’s not correct to say that foreign companies are not allowed to operate, okay? Now, and manufacturing is not actually the issue, because most of them are able to, the area

where foreigners have a problem is actually services, and China’s extremely restrictive, now, Asia is actually restrictive in services If you go to a very open country, Singapore, Singapore is the most restrictive of any Asian country in services, lawyers, doctors, nurses, architects, if they want to operate in services and they’re a foreigner, they are limited China also limits it, so in my book, I basically say, here’s the issue, America’s great economic strength is its services, but America does not actually reap all the benefits from the export of the services that it could, and this is where it should emphasize, then the question is why, why is it that America has the best health services in the world, but exports very little of it? And the answer is quite simple, because the medical profession in the US makes enough at home, because of distortions, it doesn’t need to go overseas, but if it were liberalized and reformed, you would see that the American medical profession would suddenly realize that I could also export my medical services overseas, and earn a fortune, okay? The US education system’s the same, everyone comes here, and we earn a lot, but we could also earn a lot more if educational services, mastered or accredited, run by Americans, who were operating overseas, including China, okay? Now, here’s the point, 84% of the Americans, the jobs are in services, 7% are in manufacturing Why is it that we don’t have a dialogue with China on the export of American services in openness, that’s the issue, and that’s a win-win It’s good for America, it’s good for China, why is it good for China? Opening up services in China does not lead to job loss for Chinese, they gain the skills, they’ll enter, it will lead to a tremendous explosion of productivity in services in China, and that’s why I showed you this chart about high value services in China being repressed This restriction on services actually hurts the Chinese as much as it hurts America, but what is the debate in the paper, manufacturing products, tariffs on manufacturing goods, it’s the totally wrong focus, thanks for the question, yes? Hi, thank you for your talk Earlier you had touched on kind of, like, China’s general push to become a more innovative country and lead globally, and so I was wondering if you could speak to how the Asian space race has played into that, and also, what kinds of foreign investment– Excuse me? The Asian space race Asian space race? Right, and then how, what kind of foreign investment the Chinese are receiving in getting to space Well, most of the space development program in China has been developed by itself, they’re not getting much expertise in there, except from the Soviets, and others The China has a what I call a problem, not a problem, when they look at America, and they see, America is so innovative, and so advanced in many areas, they have a big issue in the terms of, how do I support innovation, because it’s not relatively easy to recognize, but 70% of US technological advancement is because of defense expenditures, okay? Those defense expenditures are funded for military security issues, but the technology and skills which are developed in the process eventually, if they can find commercial applications, they’ll share it So Europe accuses America’s Boeing of gaining advantages because it benefits from financial support for defense and military and space programs, and it gives it a commercial advantage, and that’s unique to US, because no other country spends as much Now, China realizes, it can never fund technological development through its military program, it’s so rudimentary, their defense, so they fund it directly themselves, and this leads to the charge, unfair competition, state enterprises are getting support, this leads to commercial advantage in China I’m sort of like, as an economist, this doesn’t bother me, if someone wants to sell me something below cost, I’ll just take it, why should I, if somebody came to you and said, “Here’s something free,” what are you going to do, just say, “No, you know, that’s not fair”? No, you’ll just take it, right, okay? The question, then, is does this destroy jobs? No, because if you take it free, you release resources for America to then concentrate on something else, so the problem in America is how do we release the resources saved by cheaper products coming from overseas, so that we could be more competitive in other areas? And here I go back to my point, it’s not gonna be in manufacturing, it’s going to be in services, but we don’t export services that much

Now, the interesting thing for me here is, if you look at global trade, global trade, everyone thinks it’s manufacturing only, they only think of hard equipment and cars Merchandise trade accounts for 60% of the global trade, services counts for 40 That’s large, actually, yet our diagrams and graphs only focus on the merchandise side Now, here I find kind of interesting, on the service side, America’s cut of that 40% globally is abnormally low, and why is it abnormally low? Because it concentrates so much, the service sector, on the profits that can be reaped in the domestic economy, it doesn’t feel the need to actually push out in the global economy, but other companies, their local markets are not big enough So for their services sectors to make it, they have to be exporting it, so we have an innate bias in the US, I’m not seeing services as the major export opportunity, whereas other companies are forced to, because they don’t have the options of their domestic market being so large There was a question here, ma’am? Thank you So when China stops benefiting from its technological backwardness, will innovation then be necessary for it to sustain the development? It’s a very good question, and often misunderstood Why is that rich countries, if they do well, grow at only 2.5%, and poor countries, if they do well, could grow six, or seven, or eight, think about that, all right? We’re used to it here, if we grow at one, we have a problem in the US, if we grow two and a half, we’ve got full employment, well, how come we can’t grow at five or six or seven, but poor countries can? And here’s something that we also don’t realize, productivity increases generate growth, here’s growth, as an economist, growth comes from only two factors, very simple Your growth rate in your economy is driven by one, your investment rate, how much you invest, as a share of your GDP, two, productivity increases, you produce more from what you have, labor or capital, only these two So there’s no such thing as consumption driven growth, or services driven growth, investment, productivity, only two factors, in terms of long term So why is it that America grows at 2%, China grows at six? China invests 45% of its GDP, US invests 16, one third, if you don’t invest much higher, you can’t grow, so why is it that rich countries don’t invest 30%, 40%, they’re only stuck at 16? Because the returns to investment, when you become rich, have fallen so dramatically that it’s no longer profitable, okay? Then you’re stuck with services, because your economy here, what is services as a share of GDP in America, it’s 70% So here’s the American economy, consumption, excuse me, consumption service is 70% of GDP here, in China, it’s 35%, okay? So here’s the problem, productivity growth in services is very difficult, productivity growth in manufacturing is much easier, so if you can exploit the manufacturing, you can grow very rapidly, and poor, middle income countries do that But once they’ve exploited that, they’ve got into the same trap as rich countries, they become a services oriented economy, and productivity services is very hard to achieve What do I mean by services? You’re here in education, your tuition’s 50,000, right? How come it’s the only thing that’s gone up, the prices of cars, TVs, everything else is much lower? Because productivity in education has not increased Why is it that the barber charges you 35, $40.00 for a haircut, because the barber has to cut your hair, it takes 15 minutes, so what’s the value of 15 minutes? 25, $30.00, when I was young, it was two or $3.00, but productivity of a barber hasn’t changed, services, very hard to increase productivity So rich countries have a problem, they become more services, they become more consumption, the productivity’s declined, they don’t invest a lot, they can’t grow, now, can they grow faster than they do? Only two things can do this, if they increase investment in different ways than they have been doing, or they can somehow spike up productivity increases, and both of those have been a real challenge in the United States, and part of the reason it’s been a real challenge is because most American companies have not found a need to actually pour in those investments, because their profits have been very strong without it So you got what I would call, people talk about the middle income trap, how many of you heard about the middle income trap? Developing countries are stuck, they don’t innovate, they can’t, there’s no such thing as the middle income trap,

there’s a high income trap High income countries cannot get out of this one or 2%, so I have been reading something about Japan, Japan cannot grow faster than 1% a year in the future, it doesn’t matter what it does, it’s exhausted all of its productivity increases, it’s a highly efficient economy, it’s very well-organized, so you can talk about aging, you can talk about dependency, but those things don’t play themselves out, except for 10 or 15 years But it goes back to your question, what about the aging society, does China have a problem because it’s aging, its labor force is shrinking? Conventional wisdom tells you that an aging population will grow slower, and the answer to that is, that’s not true, India has a huge young population, Latin America has a huge young population, it doesn’t grow It’s what you do with that, now, it turns out that if you have an aging society with slowing labor force, half the countries end up growing faster, half the countries end up growing slower, because does it spur productivity increase in innovation? And the question is, half the countries it does, and half the countries it doesn’t, so China could grow faster because it’s aging, China could also grow slower because of its aging, it really depends upon whether its policies deal with this fact that it’s an aging population, not the fact that it’s aging, per se, okay? Yes? Hello, thank you so much for coming to speak with us today I was wondering about one of your earlier visualizations, showing China’s portion of imports, or exports to the United States, relative to the rest of Asia increasing over time, and you attributed that largely to this multilateral shift, but also, what role do you see Chinese ascension into the WTO playing in that trend? Here’s WTO, it really takes off So this has generated enormous commentary, criticism that WTO is unfair, it’s bad, so the White House will say, “WTO is the reason we have a problem.” It’s allowed China to take advantage of the global system, generate all these trade deficits for Americans, and here’s what I basically show WTO triggered this, but the total’s unchanged, it’s just the source Suppose you buy everything from Amazon, and you didn’t, you used to go to different stores, is Amazon producing that, no, Amazon gets it from somebody else, but Amazon has captured the marketing margin, right? But not the huge value, so it’s not WTO that caused the problem, WTO makes the problem look like a China problem, but it isn’t a China problem Think about the following, why is it that America has had a trade deficit every year for 40 years running, every year? Before China became a great power, whatever Very simple issue, one of them, it’s not because of trade policies, it’s not because of tariffs, it’s because the dollar is the global currency Now, when I say that to people who are not economists, they can’t understand that issue, what does this have to do with this? Now, let me give you a simple education The dollar is a global currency, right? So you go overseas, everybody holds it, companies, when they buy something, will want dollars, or pay in dollars Corporations will put dollars in the bank as a reserve, and dollar accounts for 90% of those reserves in those transactions, the Euro, the Yen a little bit, but it’s the dollar, dollar’s the global currency And there’s no alternative, really, so they talk about RNB, or the IMF, or something else, it’s minor, why does this mean that America has trade deficits? Because how does the dollar get out there, how does it get held by people out there? And the answer is, trade deficits, America runs a trade deficit, and it pays others with dollars, and those other people are very happy to hold those dollars, and they don’t change the dollar, they want to keep it in their pocket, or in their bank They don’t come back and exchange it for something, or buy American goods, they just want to hold it, because that’s the global currency, so the only way that the world can have the dollar as the global currency is if America runs trade deficits, and that’s why America’s had trade deficits for 40 straight years So what happens if you got rid of the dollar as a global currency, you used a Bitcoin, or used a SDR? Two things would happen, immediately, America would no longer be able to run trade deficits, because people won’t take the dollar, that would force interest rates to go up

It would force Trump to balance the budget, because a trade deficit is the sum total of your government deficit and the borrowing of households, so if you take all your households, and they earn income, and they spend, and if they run into debt, that is, they over-borrow, so they spend more than they earn, that’s the deficit of households You add to that the deficit of the budget, the federal budget, local budget, and they run a deficit, that number is your trade deficit So when the Budget Reform Act occurred, and the deficit got larger, because of a 1.5 billion tax cut, your trade deficit will increase by 1.5 trillion It plays through the system, in terms of prices, and goods, and countries, but ultimately, your trade deficit gets larger So you cannot be arguing, I want to curb this trade deficit, I want to penalize China, or Mexico and Canada, and at the same time, you run a larger budget deficit, because you’re guaranteeing that your trade deficit will get larger, and it has nothing to do with what these countries are doing, or anything else, it’s an accounting identity, it has to add up So you have two issues, the dollar’s the global currency, government budget deficits guarantees that America essentially runs trade deficits, that has nothing to do with China So in my book, I say, we think it’s a China issue, it’s not a China issue at all, it actually is an American issue, because we have total control over whether we want to run a trade deficit or not with our own policies, but we always think it’s their problem And this, I think, is so hard to make people understand, and I’ve been to lectures where economists say, “How do I get this point across,” and as a profession, I would say, we don’t do a good job on this, we cannot explain this properly When someone says to me, “Yukon, free trade’s not good, “there are winners, and losers, and people lose their jobs, “how can you say you’re in favor of free trade?” So I turn the question around, how do you justify free trade, what’s my argument for free trade? The argument is the same as technological innovation, we all believe in technological innovation, new discoveries, better products, greater choice, you grow faster, we’ll all be better off, we all believe that, you won’t find anyone who says, “I’m against technological innovation, “I’m against progress on whatever (mumbles).” Now, in the process, we also know that technological innovation generates losers, some people’s jobs will be lost, some people’s skills won’t be any good, they have to retool, well, we accept that cost, because we believe that technological innovation is fundamentally overall worth it, the same argument is for trade Trade leads to transfer of technology, more innovative, competitive pressures, lower prices goods, more resources generated, you grow faster, trade does not lead to more jobs, because some people say, “Aha, I have free trade, “but my unemployment or job increase did not change,” and the answer is, it won’t So economists who’ve said that free trade leads to higher jobs or more jobs, that’s just wrong, free trade leads to better jobs over time, but not more jobs, so we have not been able to basically deal with this issue, it’s too politically sensitive, and too complicated, and so it’s no wonder that Washington is totally confused, and then, when you ask the people, it’s not easy for anyone to understand this issue And it’s simply like this, it looks like WTO created a problem, China, not exporting much there, all of a sudden it’s exporting this much, why? Because South Korea, Taiwan, and Japan are basically shipping the stuff to China, and then it shows up as coming from China, it’s like Amazon Amazon is not producing anymore, Amazon is just becoming the source of selling you everything more, but Amazon itself is not producing anything more Do we have any time more left, or? Unfortunately, that is all the time that we have this evening, please join me in one more time thanking Professor Huang (audience applauds)

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