China's Economy is Broken | Logan Wright

Logan Wright (0:00)

Are you aware that the United States has outgrown China over the last five years? The rest of the world has a lot more leverage over China than they are currently using, but there is no longer really a systemic economic rivalry. China's largest firm, in its most important industry, could no longer meet its obligations to its own employees. One of my analyst friends says like, well, they're just making up new slogans, so they're not reforming. Many reporters, you know, coming back from China these days, tell me, basically, we just want to write stories about the employment crisis. We just want to write stories about jobs, and our editors just want us to write stories about tech. The path to crisis is not an external shock. The path to crisis is reform.

Jordan Schneider (0:38)

Is the Chinese economy well and truly broken? Will China be stuck in low growth for the next decade or more? What does that mean for the industries we focus so much here on ChinaTalk, China's military power, and for policymakers around the world? Today, we have on to discuss Logan Wright, a partner at the Rhodium Group, and my former boss, who, in my humble opinion, has the deepest sense of China's macroeconomic picture out of, oh my god, can I say this, anyone following the PRC in the West. We are here to discuss his new book, Broken China, How the Economic Miracle Shattered, and what it means for the world. Star-studded cast today, co-hosting the great Brad Setser of CFR. Logan, welcome back to ChinaTalk.

Logan Wright (1:22)

Thanks, Jordan. Really happy to be back. And, you know, that's far too kind of an introduction. Really appreciate it.

Jordan Schneider (1:28)

So, Logan, China's economy, broken? Are we sure?

Logan Wright (1:34)

Are we sure? Yeah. I mean, I think the what's the purpose of the title? The purpose of the title is not a prediction. It's a it's an explanation. And so it's an explanation of how we how we got here. And the basic argument of the book is that it's still underappreciated how much the financial system was central to China's growth over the past two decades and how much the financial system's problems now constrain China's growth. And this is these are the parts that are now broken. And the argument is basically that China does have choices. They still have options available. But those options involve much slower growth in the short term. So they cannot maintain the same pace of economic growth as they had seen in the past two decades. The options that they have must at a very, you know, initially involve restructuring the fiscal and financial systems and the way in which they allocate capital and provide countercyclical policy support in the fiscal system, how they raise tax and how they allocate tax revenue at the same time. So this is the argument that it's broken. It is not meant to be a, you know, a huge, you know, bearish dramatic title. It's meant to say if there's no point in asking Beijing to fix this model, because they cannot actually fix this model.

It is a question of if they are truly constrained in terms of their policy options and are not willing to fix this, then what should the rest of the world do about it? And the other key takeaway from that line of analysis is that if growth depends so much on the financial system and the financial system now constrains that growth, then fundamentally, a lot of China's external messaging that they are economically successful and that time is on their side is simply wrong. And it will become more obvious that that line of analysis is wrong. And that also raises different questions for Western governments, which I sort of raised in the Foreign Affairs article previewing the book and is discussed really extensively in a later stage of the book as well. It expands our options in some ways. And it also means that we have the capacity to use time on our side as our policy tools become more salient over time, while China has become less salient.

Jordan Schneider (3:56)

How did we get here? You know, we had China growing 10, 7, 8 percent. Things were looking great. And now we're in a world where I don't know. Well, what's our latest Rhodium forecasts, like somewhere in the one to three?

Logan Wright (4:12)

We think at the start of the year, we expected growth in the range of one to two point five percent. We would argue we're trending well below that at this stage. And we're likely seeing negative growth in Q2 and Q3, because investment in China is is contracting. The question is, by what margin? The official data points to it contracting.