TRANSCRIPT: Breaking Down The 'China Collapse' Theory with Jeffrey Sachs

Read the full transcript of a conversation between interviewer Liu Xin and interviewee Professor Jeffrey Sachs [Dec 10, 2024] on the discussion titled “Breaking down the ‘China Collapse’ theory with Jeffrey Sachs”.

Listen to the audio version here:

TRANSCRIPT:

Introduction

LIU XIN: Hello and welcome to this special edition of Global Insights on China’s Economy, a series of high-end interviews with movers and shakers, economists and industry watchers. I’m Liu Xin in Beijing. Our guest today is distinguished American economist and professor at Columbia University Jeffrey Sachs. He explains to me how the Western media misunderstand and misinterpret China’s economy and what he thinks of China’s latest reforms and policy announcements.

Western Narratives About China’s Economy

LIU XIN: Let’s talk about the Chinese economy. China has been contributing to global growth, actually China has been contributing about 30% of global growth since at least the last two decades, but all the while some people have been predicting China’s imminent collapse, the Chinese economy at least. And this year we have been witnessing some latest waves of that narrative and some claims.

We can pick up a very long list, but let’s start with this example for instance which I find to be most prominent is that China is stifling its private sector. This is nothing new and China is stalling on reforms. This is picking up because the second half of this year there was a very important meeting, the third plenum of the 20th CPC Central Committee, which set out a five-year broad agenda for comprehensively deepening reform.

But the Atlantic Council claimed that China’s economic reforms are nearing the end of the line and that progress has stalled or backslid. Similar criticism is found on Financial Times for instance about China throttling its private sector, even with a special section dedicated to China’s economic slowdown.

So Professor Sachs, I want to get your fields, your analysis on the so-called stalling reforms or China trying to throttle its private sector, what’s your take?

China’s Technological Advancement

PROFESSOR JEFFREY SACHS: Well my take is very different and that is that China is extremely successful at innovation and increasingly in fact dominating the new technologies, especially zero-carbon energy systems, whether it’s renewables or fourth-generation nuclear, fast rail, which the United States still does not have one kilometer of fast rail. China has tens of thousands and is now sharing that technology in projects in different parts of the world. China is mastering 5.5G now, it’s not only 5G, it’s at least 10 times faster than when 5G was unveiled five years ago. In fact this is a period of rapid technological advancement despite the United States attempt to stop this.

So a lot of the rhetoric has been around for more than 30 years. We can go back to the 1990s when articles were written called the myth of the East Asian miracle and that China was on the verge of collapse and when the 1997 Asian financial crisis came, that was taken as proof that China’s growth was over and so on. So this has been the rhetoric for a very long time. It’s mostly a kind of propaganda in the United States or the Anglo-Saxon world, as you mentioned in the Financial Times as well.

But the fact of the matter is that the real complaint of the United States in the past year was that China has overcapacity. And when you dissect what that term means, it means China has enormous capacity in industry and not just in industry, but in the kinds of industry, zero carbon technology, digital sectors that are the technologies of the future.

LIU XIN: In terms of reform, that the reform is nearing the line and that progress has stalled or backslid. What exactly is going on in terms of reforms? What is your read?

Industrial Policy and Global Competition

PROFESSOR JEFFREY SACHS: Well I think that all of the major regions of the world, the United States, Europe and China are engaged in a new kind of industrial policy right now. We’re in an age of rapid technological change, the AI revolution, robotics, digital technologies more generally, the need to shift to green technologies. None of this is straightforward. All of it means a rather complicated change of an overall system, not just one particular technology.

So the United States has its industrial policies. Europe is a bit lost right now, but there was just a recent report, the so-called Draghi report, which called for a European industrial policy. And China has a very sophisticated industrial policy, certainly the most sophisticated. You can date it to 10 years ago to the Made in China 2025 program. We’ve now reached essentially 2025 and that program has been very, very successful. That’s what really scared the United States in fact. China said 10 years ago that it would master a wide swath of 21st century technologies and it has done so. So this is really a demonstration of success, not of failure.

Now we should really emphasize a basic point. The United States is trying actually to stall the Chinese economy. In other words, China is facing headwinds, not mainly internally, but deliberate attempts by the United States to slow or stop China’s growth. Of course, the most notable of these measures is the tariff increases that were put on by Donald Trump in his first term and then kept on by Joe Biden. And also the bans on exports of technology, notably advanced microchips to China.

But these are overtly so-called containment policies. They’re internationally illegal as far as I’m concerned. They violate WTO codes and they are designed to stifle China’s growth. Nonetheless, China is growing, but the United States is unfortunately, and I think illegally, doing what it can to try to slow China’s growth. And more will come with Donald Trump’s second term.

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LIU XIN: So in that context, we are talking about the kind of environment that the Chinese economy is trying to continue to move ahead. And then you read the media reports criticizing the effectiveness of the Chinese policy, the performance of the Chinese economy. That puts things in a different kind of perspective, doesn’t it? Because otherwise you feel it’s just the Chinese policymakers that are making mistakes that are not good. The Chinese model is not effective anymore, so on and so forth. Is that the broader picture we should look at?

Fundamental Strengths of China’s Economy

PROFESSOR JEFFREY SACHS: First, the most fundamental picture of an economy is, is it innovating? Are young people learning well? Are new technologies emerging? And is there a high saving rate? China checks all those boxes. In other words, the fundamentals are strong. The education system is strong. The saving rate is high. Innovation is rapid. And China is the low-cost producer of high-quality advanced technologies, not across the board, but in many, many crucial areas. So this is not a weak economy. This is a strong economy.

If I look at the United States, I have a lot different worry. The saving rate is very low. The budget deficits are enormously high. The debt is very high. And there is a lot of instability and no coherence of what America is trying to do. There’s a lot of confusion.

So I give China high marks on setting a clear path forward, investing heavily, and also designing a major program, which I strongly favor, the Belt and Road Initiative, in which China engages with a wide range of countries, especially in Southeast Asia, South Asia, Central Asia, Western Asia, Africa, and Latin America, to trade with those countries and for China to be the exporter of critical infrastructure for those countries, with China providing a lot of the financing because of the high saving rates.

China has a significant trade surplus. The United States has an enormous trade deficit. How does one come to the conclusion that therefore that China is the country in economic crisis? I don’t.

Addressing Concerns About China’s Economy

LIU XIN: Let’s talk about some of the superficial indicators that have been cited by the mainstream media. For instance, China’s foreign direct investment has nominally dropped considerably. This has been cited as some kind of result of people losing confidence in the future prospects of the Chinese economy. This is one thing. And then the real estate sector. There was this talk of China following Japan’s 1980s Japanification trajectory with a debt field property bubble. If you look at some of the demographics, the number of newborns in China are less as those who have died, who have passed away from the Chinese demographics. So how do you square these superficial indicators with what you just said about the fundamental health of the Chinese economy?

PROFESSOR JEFFREY SACHS: Well, first, when it comes to the question of comparisons with Japan, it’s important to understand that Japan’s end of high growth was actually a deliberate U.S. policy, because in the 1980s, even though Japan was ostensibly an American ally, really an American subsidiary in a lot of ways, it was too successful from the point of view of American politicians. And so it was in the 1980s that the United States forced the yen to become overvalued. This was a deliberate set of steps in the mid 1980s.

PROFESSOR JEFFREY SACHS: The United States imposed export controls, or had Japan impose so-called voluntary export restraints, which weren’t voluntary at all. It told Japan, no, you can’t export so many automobiles. You can’t export so many electronics goods. The United States stopped Japan’s rapid growth. And this is the playbook that the United States is using again vis-a-vis China. So the comparison has a certain aptness, but it wasn’t that Japan just failed. It was by design. The United States said, you’re becoming uppity. You’re becoming too successful. You’re taking away the business of American semiconductor firms, electronics firms, automotive firms. So the United States imposed the barriers.

Now when that happened, that had a secondary effect on Japan, because not only did the growth slow, but the asset prices in Japan were very high because they were based on an extrapolation of continued high growth. When the United States stopped the high growth, the asset prices fell. The so-called bubble burst. It became a bubble because the U.S. had slowed Japan’s growth, forced the yen into an overvaluation. And the U.S. was unrelenting in the 1990s. Don’t depreciate the yen. We’re not going to give that any margin. And the U.S. really did in the era of Japanese high growth.

This will not happen in China. China’s a lot larger than Japan. China has a lot more alternatives than Japan. And China’s not caving in to U.S. bullying. Well Japan was under the so-called security protection of the United States. China certainly is not. And in this sense, China doesn’t have to accept the kind of treatment that Japan accepted in the 1990s. I asked my Japanese colleagues at the time, already 30 years ago, why don’t you take other measures? Jeff, it’s very hard. We really can’t go against the United States.

What China needs to do is to expand its exports to other parts of the world. It’s doing that. It needs and should expand the Belt and Road Initiative. This is very successful. All the bad-mouthing by the United States of the Belt and Road Initiative should be a signal to Chinese leaders that it’s actually very, very successful. Because the Americans are bad-mouthing it. They’re scared of it.

Questioning the “China Model” Narrative

LIU XIN: One of the underlying themes or conclusions that I’m reading from the various media reports criticizing the health of the Chinese economy, is that the China model, which worked for the past few decades, is not working anymore. And the Chinese leadership, by sticking to that model, is stifling the Chinese economy. And what exactly is the Chinese model that they believe is not working anymore? Professor Sachs.

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PROFESSOR JEFFREY SACHS: I think, if I could interpret it, maybe the claim is that there’s too much government intervention in the economy or China stifling entrepreneurship. Again, I think that this is Western rhetoric, not reality. Let me take a very pertinent and quantitatively important example. China is now the world’s leader in electric vehicles. During the past 10 years, there were around 400 electric vehicle companies in China. They were competing like crazy. Of course, there is now a kind of a shaking out process where a few companies are becoming dominant. But the competition and the entrepreneurship has been absolutely intense.

And the result is that China is taking the leadership in worldwide sales of electric vehicles. Also, China’s domestic market now is remarkable in that more than 40%, I believe, of new car sales are electric vehicles. And when I recently visited Beijing, you see them everywhere, of course, with the green license plates. And you see a tremendous change in a short period of time. Since this is the direction that the entire world is moving towards because of the need for zero-emission vehicles, China’s in a very strong position. What is happening? The US is putting on tariffs. Europe is putting on tariffs. Is that a sign of failure of China? No, quite the contrary. It’s a sign of remarkable success.

LIU XIN: What is the obsession to criticize the model, you know, as if there is one magic or one set of correct rules how to run the economy of a country? And if you don’t follow that one, it’s wrong. It’s not going to work. Maybe it works temporarily, but eventually it’s going to fail. It seems like the Western economics theory is the only right set of theory you can adopt. Other than that, nothing will work.

Geopolitics Behind Economic Criticism

PROFESSOR JEFFREY SACHS: I think we should understand this mainly in geopolitical terms, not in theoretical or even ideological terms. This is geopolitics. China has been too successful from America’s point of view. And there was a notable article roughly 10 years ago at the Council on Foreign Relations that was written by one of my former colleagues at Harvard University, Robert Blackwell, who became a leading American diplomat. And he said that China’s rise is no longer in America’s interest because America’s grand strategy is to dominate. And now the U.S. can’t dominate if China’s becoming so large.

So already a decade ago, Blackwell and his co-author listed the measures that the United States should follow, closing the U.S. market by tariffs, stopping the export of high technologies where the U.S. did have an advantage, notably in semiconductors, trying to build trading relations that would exclude China, strengthening the military of the U.S. alliance along the rimlands of China and the South China Sea. Well, the United States has followed through on all of those. That is a foreign policy.

It also uses a kind of info war to try to cast dispersions on China. And then when the U.S. actively stops the trade with China, discourages American and other companies from investing in China, blocks high technology going to China, then it points a finger to China and says, aha, you see, your system isn’t working. Well, this is a kind of propaganda or baiting of China. This is not serious analytics.

Again, I don’t believe that it is working. I believe that China is continuing to excel in innovation. I believe that China has a worldwide market. It is the low-cost producer of so many high technologies at this point. And I believe that the advent of the BRICS and the Belt and Road Initiative show that we’re just moving to a different kind of world economy, with China playing an absolute leadership role in the part of the world economy that is not the U.S. and the EU.

Beyond GDP: The Future of China’s Economy

LIU XIN: Well, this is very interesting that you’re pointing out a different kind of economy, because China talks about a transition. Its priorities are different. In the past, it was quantity. Now it’s quality, a high quality. And China, not like in the case of Japan, China pierced its own real estate bubble, let’s put it this way, and still managing about 5% growth. So in that context, how do you look at the GDP growth target China has set, which some people are eyeing as the sole indicator of the performance of the Chinese economy?

PROFESSOR JEFFREY SACHS: These days, because of technological change, even the growth rates lose some of their meaning, because if you have a certain quantitative growth, but the quality of the goods is rising and is not captured in the GDP, you don’t really measure the change. And it’s not easy to measure the advances of technology, especially in the service economy these days, or, say, in the transformation of vehicles to electric vehicles. So I have some skepticism anyway, about the macroeconomic aggregates. No matter where they’re deployed, I don’t think that they are telling a true picture in a period of technological change.

Again, I would look to the fact that China is the low-cost, high-quality producer of a very wide range, and I think an increasing range of goods in transport, in digital technologies, in supercomputers, in zero-carbon energy, in fourth-generation nuclear. These are very important areas in electric vehicles, as I mentioned. These are the technologies that the world needs over the next 30 years.

China also, like every major economy, needs to make an energy transformation to a zero emission. China has set 2060 as the date to reach net zero, or at least before 2060. I’d like to encourage China to do that by 2050, because China is so good at all of this, and making these large transformations. That gives plenty of investments for China to make in the coming year. I hope that China would not be spooked by this kind of naive reporting by people who don’t know basically very much of anything about the actual Chinese economy.

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LIU XIN: The interesting thing is China would like to set a conservative target so that it has some space in the process in case there are ups and downs, unexpected risks, and so on and so forth.

LIU XIN: So the risk of failure is smaller, let’s put it this way. However, having said all of that, and China has expressed confidence that it’s going to meet its about 5% growth rate target set earlier this year. However, in a recent editorial, the People’s Daily did identify, and that’s one of the most authoritative national newspapers printed in Chinese for the Chinese readership and high-ranking elites, as well as grassroots. The People’s Daily identified four major challenges of the Chinese economy:

A, an increasingly complex external environment.

B, weak domestic demand.

C, business operational difficulties such as sluggish sales and diminishing profitability.

And D, risks in some areas such as local government debts, unemployment for young people, and slower income growth.

How do you look at the identification of these four main areas of challenge and to communicate it in such candid, frank way to the Chinese audience? What do you think that article is meant for?

PROFESSOR JEFFREY SACHS: Well, I think these factors are interconnected, as I’ve explained, and I do think that they start with the difficult external environment. There is a deliberate effort by the United States to slow China’s growth. It’s repulsive, by the way. I don’t think any country should be deliberately trying to harm the economy of another country, but the United States is plainly doing this. This is a US game plan that started with containment of the Soviet Union and it even extended to America’s own ally, Japan. Now it was dusted off 10 years ago and it’s being applied to China. That leads to all the other problems. So I take that as the preeminent point.

Strategic Options for China’s Economy

PROFESSOR JEFFREY SACHS: Now what should China do if it can’t export as rapidly as before or even continue to increase its exports to the US and Europe? It has two choices. One, to boost domestic demand or to export to other markets. They both can play a role. I believe that the Belt and Road Initiative should be expanded so that China is financing its exports to Africa, which desperately needs them, to the ASEAN countries, which are rapidly growing, and to other rapidly growing parts of the developing world. So this is one part.

On the domestic side, I believe that China could accelerate its energy transformation, for example, and that would be a boost of domestic investment.

LIU XIN: Do you understand why the Chinese are not giving handouts, cash handouts? Why there’s a reluctance to do that?

PROFESSOR JEFFREY SACHS: Well, I think that China does not want to run larger and larger budget deficits and get into some kind of debt difficulty. And what I would recommend, rather than handouts of cash, I would recommend financing of investments.

China is a high-saving country. The United States says, oh, don’t save so much. Consume more. Buy more from us, by the way, but consume more. Slow down and so forth. But high saving can be deployed to finance exports to other countries. You get repaid not immediately. You get repaid in 25 years, but you build out a massive global network of fast rail, 5G, renewable energy, supply chains, and so forth, in which China becomes the central player or a central player.

So I would expand the Belt and Road Initiative in that way, and I would expand the public investments, not the consumption so much, but the public investments for the green transformation, the digital transformation that China needs in any event. So these are areas where you offset the barriers to exports to the US or to Europe by increasing exports or investments in other areas.

Promising Economic Indicators

LIU XIN: So some latest indicators, I think, are telling us something. For instance, the official Manufacturing Purchasing Managers Index has been rising for two consecutive months. For instance, total retail sales of consumer goods have been rising also in the month of October, for instance, by 5% year on year. That’s a sharper rise from September’s jump. Overall manufacturing investment grew around 9% year on year so far this year, and private investment grew even faster in manufacturing, up by 11%. So I think these numbers tell some of the nuances that you have been trying to tell.

Professor Sachs, we really appreciate it, but we have to leave it there. Thank you so much for sharing your insights into the state of the Chinese economy.

PROFESSOR JEFFREY SACHS: Thank you. Thank you.

Conclusion

LIU XIN: Professor Jeffrey Sachs, a renowned economist and director at the Center for Sustainable Development at Columbia University. With that, we come to the end of this special edition of The Point with me, Liu Xin. As always, you can follow me on Facebook and X using the handle Liu Xin in Beijing. On behalf of the whole team, thank you for watching. You’ve got The Point.

TRANSCRIPT: Breaking Down The ‘China Collapse’ Theory with Jeffrey Sachs