Why the China Threat Is Overblown | Logan Wright

Demetri Kofinas (0:00)

What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Logan Wright, Director of China Macro and Financial Sector Research at the Rhodium Group, and author of the provocative new book, Broken China, which argues that the world's largest economy by purchasing power parity is in structural decline, its currency is overvalued, and its party leadership, contrary to conventional wisdom, is not imbued with the long-term strategic foresight that many are convinced it possesses. By the end of today's conversation, you will have been exposed to a compelling argument for why China's economic troubles are structural rather than cyclical, the product of arguably the largest single-country credit expansion in history. How to look past Beijing's official GDP figures to see what is actually happening to Chinese households, local governments, the property market, and capital investment, why the Redmond B is overvalued, and why capital flight will persist out of China, and what it means for the West to treat the PRC not as a rising power to be managed, but as a declining one with enormous implications for the global economy, the technological arms race, its Asian neighbors, Western policymakers, and Beijing's military competition with Washington. Logan and I spent the first hour of our conversation today exploring his central argument that China's economy is in structural decline, not because its leaders chose austerity or because of an unwavering commitment to running chronic trade surpluses, but because of an unprecedented credit expansion that has exhausted its financial system's capacity to generate growth and has left the country incapable of igniting the domestic demand needed to rebalance the global economy and China's relationship with the rest of the world. We discussed why optimism about China's reforms was once rational, how Beijing's GDP data obscures what is happening on the ground in China, and why the prevailing narrative that Chinese policymakers retain the capacity to engineer a recovery is, in Logan's view, fundamentally wrong.

The second hour is devoted to a conversation about the consequences of China's credit bubble and property market collapse for ordinary Chinese households and local governments. The similarities and critical differences between China's predicament and that of Japan's in the 1990s and early 2000s. The striking historical parallel between the CCP's policy choices and those made by Soviet leaders during the USSR's era of stagnation. The structural demographic headwinds that risk compounding the collapse in Chinese demand. Why Logan believes the Redmond B is overvalued and poses no credible threat to the dollar's role internationally. The implications for America's strategic competition with the People's Republic when viewed through the lens of China being a declining rather than a rising power. And why Wright argues that the threats China poses are deterrable and require coordinated allied action to address.

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Logan Wright, welcome to Hidden Forces.

Logan Wright (4:07)

Thanks Demetri, really nice to be here.

Demetri Kofinas (4:08)

It's my pleasure having you on, Logan. This book that you've written is phenomenal.

You know this because, well, you know it because you probably know it anyway, because lots of people have told you. But it is, I think, the best book on China's political economy that I have read, and I've read a lot of books. So I'm very excited to get into it. What is the origin of your interest in China, and where did that interest begin?

Logan Wright (4:29)

Yeah, I think back to high school, it was part of a high school debate topic back when I was doing debate as an extracurricular activity. So I started being interested in China related issues there, but really it was out of college. China was basically the first country I ever left the United States to spend any significant time in. Did that during the summer when I was in college, and basically tried to figure out a plan to go back and move there after graduation. So I moved immediately in 2001, right after I finished university. Ended up working in a bunch of different companies that were helping small businesses get started in China, but I was interested in from an academic perspective in the financial system. And particularly this idea that the problems in the financial system were sort of perennial and they never really changed, but the actual mechanics of how the financial system operated changed so rapidly.