Read the full transcript of Chinese economist Dr. Keyu Jin’s talk titled “China From Within: Myths And Realities In A New Era” at SKAGEN Funds New Year’s Conference 2024.
TRANSCRIPT:
China From Within: Myths And Realities In A New Era
MODERATOR: In his New Year’s speech, China’s President Xi admitted that the country has challenges both with jobs and for businesses. We have seen a slowing down of China’s amazing growth over the past year. So what’s in store for 2024? We’re going to get an inside story now from a speaker who has just published a book that has received lots of praise, the New China Playbook. She’s born in China, she’s educated in the United States, and she’s now professor at the London School of Economics. She is going to challenge some of the myths and common wisdoms about China. So please give a very warm welcome to Dr. Keyu Jin.
China From Within: Myths And Realities In A New Era
DR. KEYU JIN: Good morning, ladies and gentlemen. Thank you so much. It’s an enormous privilege to be here with you in Oslo, a place I’ve visited now my third time. I’m very happy to share with you some perspectives about China and potentially look at an inside perspective, take an alternative lens. This is a behemoth of an economy, the second largest in the world, with some debate about when or whether it will be the first largest economy in the world. It’s also an economy in a country that is very hard to read and understand.
To understand what’s actually happening, I bid you to look at what’s occurring on the ground. Separate that from the rhetoric, often very loud, and not solely rely on the Western press. I’d like to use a telescope, a microscope, and a scalpel to decipher China from the inside.
The Current Economic Situation
In the immediate future, the dismal situation and outlook of the Chinese economy is very real. But it’s primarily a demand deficit, a problem of demand fueled by the triple whammy of the scarring effects of the pandemic. Let’s not forget that Chinese households, unlike Americans and Europeans, never got support from the government during the pandemic. Coupled with the declining real estate sector and tighter regulatory controls, this has led to a sharp decline in confidence, pretty much the lowest in the last 40 years of China’s amazing growth trajectory.
Whether it’s consumers, investors, or companies, the primordial sentiment today is “let’s wait and see.” This wait-and-see attitude is causing a lot of the slowdown we’re witnessing in the Chinese economy today.
Technological Advancement
At the same time, something else very real is happening that doesn’t get enough attention around the world. For the first time in history, China as a developing country is making cutting-edge technology. A very important think tank published a report last year that out of 44 cutting-edge technology research areas, China is leading in 35 of them.
Chris mentioned Huawei’s breakthrough not long after the restrictions coming from Biden’s export controls. China’s domestic capacity has been able to overcome these restrictions, at least for now. We can quibble about the quality and reality, but this is not a small issue. It has caused such national euphoria, with people saying that it’s not only despite these Biden controls but potentially because of these controls that you’re getting this national mobilization to tackle critical technology.
The Chinese were so happy about the breakthrough that people are saying, pleading with the U.S. government, “Can you also please sanction our national men’s football team too?”
Chinese Companies Going Global
Interestingly enough, despite what is happening between the US and China, it is highly ironic that today four out of the five most downloaded apps in the US are Chinese – not only TikTok but also Shein, the fashion brand Temu owned by Pinduoduo, and one other.
That global exodus of Chinese companies is a wave that we should be watching because 90% of the people in today’s world still live in developing countries. They have a very different view and perspective on China than the more hawkish military view that we have heard in the West. They have a different view because Chinese technologies are eminently practical, cheaper, with the same amount of quality or higher quality, and they are intended to solve developing countries’ issues.
Cyclical vs. Structural Challenges
When we talk about the problems and challenges which are very real today, we need to ask the question: is this really cyclical or structural, some permanent decline as depicted by the West regarding demographics, state control, and a lost engine for growth?
Booms and busts are a natural feature of market economies, which China has never experienced until now. In the last 40 years, China has always tried to avoid a recession and smooth out GDP and inflation numbers because it cannot tolerate cyclicality and volatility. The consequence is that there’s no proper exit mechanism to weed out bad and less productive firms.
Now the real estate sector cleansing, the weeding out of the least productive firms – that’s the only positive side I see of having a bust cycle. But China never had it before, so companies never exited no matter what, and they were sucking up resources that should have gone to new entrepreneurship and better firms.
Innovation as the Path Forward
I mentioned that technology and innovation is so important because it fundamentally is the only way for a country to get out of the middle-income trap. Only 13 countries in the last 60 years or so were able to overcome the middle-income trap. Now everybody’s talking about China falling into the middle-income trap.
All these countries, including Brazil and Thailand, were actually much richer than China before experiencing a productivity loss. It was the inability to have domestic innovation capability to keep productivity levels up that trapped them. Switching from capital investment to productivity-driven growth is China’s challenge, and that only comes from innovation.
In my view, this is way more important than 2-3 quarters of bad GDP.
The ability to innovate and have some kind of domestic reliance, even though those have geopolitical consequences, is fundamentally more important even than the real estate sector.
The Real Estate Challenge
Because real estate is so large – 30% of GDP broadly accounted for – even if China has now a green revolution, a renewables revolution, all these high-tech, cutting-edge technologies going on, it is not possible to replace and displace real estate as a driving force of growth and employment. That is the problem.
The renewable sector has seen a lot of success, and I think this is really one bright spot in the Chinese economy. But is there going to be trillions of dollars in investment going forward? That’s a question.
Economic Fundamentals and Potential
From a macro perspective, I want to bring three things, the first being economic fundamentals. A few statistics will be telling:
- There are still about 900 million people in China who live under $300 per month
- There are 176 million migrant workers who, if they had proper social protection and equivalent rights to urban workers, could unleash at least an additional 1 trillion RMB of consumption every year
- China’s labor productivity level is only 20% of US levels
- Tertiary education is 58% of the labor force in China versus 80% in the US
- The service sector is 47% of employment in China, as opposed to 80% in countries like the US and Japan
All this tells you the gap between where China is today and where it should be, given the fundamental factors of education, skilled labor, savings, capital, etc. – just by the pure sheer force of convergence.
With these fundamental factors, China should have a good couple of decades to go if the right reforms are adopted. And of course, that is a big “if” – potentially not an economic issue but a political one.
A Distorted Economy
China is an incredibly distorted economy. The paradox is that on one hand, China is the second largest world economy, wielding great influence and wanting to be a great stakeholder. But it practically is a developing country on many levels.
One major distortion is in the financial system. 80% of the social aggregate credit is intermediated by the banking system – a common feature of a developing country. In the US, 80% of credit comes from direct capital markets, while only 15% does in China.
There is an implicit discrimination towards the private sector channeled through the financial system. When monetary policy or credit is channeled through that system, there are layers of financial intermediaries. Each has a white list of who they can lend to and who they can’t. This means the real private sector, which accounts for 80% of GDP, 80% of employment, and 80% of innovation, doesn’t have access to that capital.
The Migration Challenge
Another distortion is migration. There’s very little interprovincial migration – less than 5% of the population can migrate to other places. If you’re a worker who lost your job in one province, you can’t easily move to another province if you find another job there.
Even compared to India, interprovincial migration is extremely low and prohibitively costly because of the lack of urban social protection and the hukou system that prevents migration. Calculations have found that if we were able to double that flow of people across regions, productivity could increase by at least 30%.
The “Mayor Economy” Model
I want to share an anecdote from a dinner I had last week in China with a party secretary from a city in Jiangsu province. It’s not a big city by Chinese standards, but it is the size of Singapore and has reached $35,000 per capita GDP.
The city party secretary, a woman, is supercharged. They have something like 500 German multinationals there. She said that once there was an intellectual property threat, and she gathered the judiciary for a midnight conference and resolved the situation with no IP leakage whatsoever.
She’s talking to entrepreneurs everywhere, trying to bring them into her city very successfully. She’s also trained tens of thousands of students from vocational training, retrained them so they can be the appropriate labor force for the factories in her city. These students from poor families suddenly got 7,000 RMB per month right after graduation, and they were absolutely thrilled.
This is what I describe in my book as the “mayor economy.” It’s funnier in Chinese because the “mayor economy” (shi zhang jingji) sounds similar to “market economy” (shi chang jingji). China is not just a centralized system – it’s politically centralized but radically economically decentralized. Therein lies the fundamental success story of China’s economy.
It’s all these mayors running around since the 1980s. They’re entrepreneurial, they’re often risk-takers. They want to bring in the best technologies, investments, and capital, and they help private entrepreneurs. Why? Because by helping good entrepreneurs, they create an entire ecosystem of success that brings jobs and fiscal revenue.
The Spread of Innovation
If you look at the distribution of unicorn companies in China, they’re spread all over, with the exception of certain western central provinces – not just in Beijing, Shanghai, and Shenzhen. Even in second-tier cities like Wuxi, Wuhan, Suzhou, and Hefei, there are global quantum avenues running through global companies.
There are 300 EV car companies all in China, and they’re all backed by some local provincial party secretary, and they compete, so they’re spread all over. This decentralized nature, the “mayor economy,” is really important to understand – not only to explain China’s past growth but also to realize today’s challenges and look to the future.
Political Incentives
Why do these local mayors want to do the best thing for the economy? They have political ambitions to rise up the ranks. The ones that deliver the best economic results, coupled with other factors, can climb up to become provincial party secretaries and potentially reach the central government.
In the past, it was just GDP that mattered, which is why everyone was “GDP worshipping.” Now it’s not as simple as GDP. These cadres rotate every three to five years, they compete with each other, and there are monitoring systems from the central government. It’s a convoluted apparatus, but it’s certainly not just a one-man show.
The Solar Panel Example
China led the solar panel boom in the world after the mid-2000s. The Chinese government encouraged local governments to implement supportive measures for the solar industries. It’s not just financial subsidies – it’s attracting talent, helping coordinate with local banks, and overcoming business barriers.
Between 2005 and 2017, solar patents internationally recognized completely exploded, proportionate to the support policies introduced at the city levels. That model has worked in many areas in China – the mayor model coupled with central direction. And it’s the same thing now with renewables, robotics, and other sectors.
Addressing Demographics Through Technology
Regarding demographics as a threat to the Chinese economy – China exports 50% of the world’s robots. If there was a policy in place to encourage factories to adopt robots, it would spread out very quickly and lead to automation.
A recent academic study showed that after 1990, the more aging countries are actually richer, not poorer. The reason is that 1990 marked the arrival of automated technologies, and aging countries tended to adopt more robots and automated technologies, expanding output in various aspects.
Real Challenges Ahead
The political economy model that was so forceful for China’s growth is under serious challenge. Is it suitable for the new era? My book is called “The New China Playbook for the New Era” because it’s something else now – not manufacturing or investment, but critical technologies and innovation that requires openness, creativity, entrepreneurship, and IP protection.
Currently, there’s a very real threat in the debt overhang. The mayor economy is vulnerable because of the debt burdens many local governments face, which can introduce distorted behavior – maybe not extorting the private sector, but choosing to put debt resolution ahead of growth.
The second real challenge is behavioral – the lack of incentive and enthusiasm. There was a huge anti-corruption drive in the last 10 years. That was important socially – the grassroots of China loved that anti-corruption campaign and the regulatory crackdowns.
Many mayors are saying it’s no longer just the economy that matters – it’s political loyalty, social stability, and other factors. The metrics for assessing these mayors have changed, so their focus has changed. Many conclude that rather than take risks, it’s better to do nothing. It’s the opposite of the late 1970s and 80s when taking risks could make you a paragon of success.
Conclusion
There are seemingly irreconcilable paradoxes to the Western eye that might not be so in Chinese eyes. We should suspend our biases and not use our own framework to judge others. It’s important to do one’s homework on China.
Even if China grows at 3% and India at 7% until 2030, China will still contribute $17 trillion more to global GDP than India. Over the next years until 2030, China will contribute 128 additional trillion USD to the world compared to India. The size is there – you can’t simply say China is uninvestable.
The new generation, those born after the 1980s and 1990s, present a great international bridge. Their outlook is very different – they are more socially conscious and have a view to see more peace in China and the region than otherwise.
Thank you very much.
China’s Youth and Generational Shift
MODERATOR: Thank you so much. I’d like you to take a seat over here and thank you for sending in questions. If you have questions to Dr. Jin, you can send them in on the online platform. We already have a few for you here. But I’d like to pick up on something that you closed on. You talked about the youth and in your book you tell us that this is a different generation in many ways. And the lack of ability to exploit their knowledge and skills is a key problem. To what extent can that also be a problem for stability in China?
DR. KEYU JIN: First of all, I would say do watch out for the new generation. They’re radically different from my parents’ generation who went through the Cultural Revolution, some went through the great famine, they’ve seen huge vicissitudes, they’re very risk averse, they’re high savers and they’re very, very hardworking. That generation, I think that was a big part of the global problem when you got a billion more people in the labor force in the world, all taking three shifts per night. That causes a global challenge.
That’s not the new generation. They like to travel, they spend twice as much as people born after 1980s spend twice as much even compared to those born in 1970s on things like apparel, food, and entertainment. With a bit of prosperity, that’s the maturity of a country and an economy over time – a more relaxed, less ambitious, less hardworking, more socially conscious generation. Why? Because they can afford to. It’s no longer just about sustaining one’s basic needs.
If you look at the surveys of this new generation, they care about animal rights, they care about the environment, they care about social equity, they like diversity, they care about minority rights. Things that previous generations never debated about. So I think it’s the coming age of China with that new generation that is a potential source of hope.
But the challenge as you mentioned now is that many of them are not finding jobs. There’s 100 million more additional college graduates in the last 10 years because the premier from many years ago decided to expand secondary education. I think it’s primarily two things. One is the current economic situation – bad economy. The second is that there are a lot of jobs in China waiting to be filled, but they’re manufacturing. And China wants to be the smart manufacturer of the world, right? A larger, smarter Germany, if you will, powered by AI and communications.
MODERATOR: And that’s interesting, you mentioned Germany.
DR. KEYU JIN: Not the U.S. I think there’s actually very little overlap with the financialized knowledge economy of the US. China wants to be a manufacturing producer of stuff – in its mind that is real, not property, not finance and all that. I’m not saying I agree with that view at all. But Germany is a paragon of success. And so that’s where the jobs are.
There are 25 million missing jobs or jobs ready to be filled in the next three years in manufacturing. But these kids, they graduate from college, they don’t want to take up these jobs. That’s the mismatch.
MODERATOR: And is that a potential source of instability in China?
DR. KEYU JIN: Look, the government watches it very closely. But I say that because of their many challenges in China today, that’s not the first order one. The first order one is real estate because that concerns every single family in China. If they really let the real estate go or the prices drop, then look, that’s going to be the real threat to social stability. But they’re not going to do that.
Myths About China
MODERATOR: And I have to also congratulate you on your book because it has been named by Forbes as one of the 10 sort of must reads for board members. And in the book, you spend quite a lot of time busting myths. What do you see as the most harmful myth about China for investors?
DR. KEYU JIN: It’s hard to say what’s the most harmful. I think it’s all pretty bad. Mistrust feeds onto misunderstandings, feeds on mistrust. But I’d start with the Chinese people. As much as I’m an economist, I realize that a lot of this is social and cultural differences.
There’s a presumption that somehow everybody in China is utterly miserable. It’s something that I find very ironic given how bad the situation is pretty much everywhere else. But the Chinese people don’t think the same things. There’s a huge difference in preferences at the cultural level you can see by international surveys.
So the Chinese people expect their government to do a lot. Some might see that as totally intolerable what the Chinese state is doing, but they actually expect that in return they give some deference, but not blind submission because they do revolt.
And I think another thing to understand for investors is that Chinese policies or government preferences do shift much more than you think. I always joke that:
In the US parties change, but policies don’t. In China, it’s the opposite.
And you can see pendulum swings. If they think that they’ve really made a mistake, they will radically change. Now, there might be a time lag before they actually realize that or finally submit to it, but it can change from left to right, from one far end to the other.
And I think that’s the spirit with which we should think about China. A few months ago or say before the 20th party congress, it was a lot of confidence, it was a lot about ideology, it was a lot about security. Today, the economy is back. It’s now about the economy.
Questions from the Audience
MODERATOR: Let’s bring in some questions from the audience here. And one in the audience is asking what is the Chinese entrepreneurs’ view on the Nordic countries? Will the investment increase or decrease in the future?
DR. KEYU JIN: Certainly there’s a view that the entrepreneurial environment is very lively here. And from my understanding, a lot of investors are actively looking at investments here and their potential collaborations. So I think it’s a model of inspiration for a lot of these Chinese entrepreneurs.
But I would just say that as much as I’ve told you that we should watch for the exodus of Chinese companies going global, it is very difficult. It’s still very challenging. First of all, you have to face the most cutthroat competition domestically, which is why once you survive that round and become a winner there, you’re pretty much the most competitive product internationally.
That’s very possible for a lot of the products now today. But after that, you just don’t have that kind of muscle and strength and resources to devote. And there’s so many barriers outside. So right now we’re only seeing the very big ones having that kind of success. But it would be very unfortunate to cut that link between the Nordic and Chinese technological exchange.
MODERATOR: And then we have another question going to your mention of the debt problem. In what way can China solve that problem?
DR. KEYU JIN: The debt issue has real political economy complexities behind it. You know, I always thought, okay, who cares about moral hazard at a point in time when the Chinese economy is going to collapse, you guys just go and save these local governments.
And at that dinner I mentioned, he said, look, this is very real. Everybody’s talking about, we behaved so well, okay? We didn’t borrow. We were responsible. If we knew that we should be crazily borrowing like that, then everybody should be doing that.
So that sentiment is something that the central government is facing every day. It’s very real that they want to prevent moral hazard. They don’t really want to put the burden on the central government unless they really have to. They believe that the local governments should resolve their own problems to the extent they can.
And it’s a lot of that political debate and fighting that’s preventing them from coming up with a very consistent policy. But let me just say it’s a bottom line approach. Unless there’s a real collapse, they’re not going to do much. And they want to leave it to the local government to resolve themselves, except for the rare cases when they need to step in.
MODERATOR: And we’re getting lots and lots of questions for you here, Professor.
DR. KEYU JIN: One line response.
MODERATOR: One line response would be fantastic. It could be difficult though. In your brilliant book, one says you describe a large shadow economy in China. How is that reconciled with the Communist Party wanting control?
DR. KEYU JIN: Control is absolutely right. And they have to face between control and opening up. But shadow is a testing ground for liberalization. So that’s why they’re interested in allowing for that.
MODERATOR: What do you think about the future of Hong Kong?
DR. KEYU JIN: I’m actually cautiously optimistic. I think it’s trying to reposition itself as a financial center for digital currency and others. Maybe a lot of the foreigners have left, but now there are other South Indians coming in, Middle Easterns coming in, replacing the new generations. Look, let me just say that it makes China look good if Hong Kong is successful, not the other way around. So it’s in every bit of interest to position Hong Kong as a financial conduit for global capital flows going in and out of China.
MODERATOR: And then you mentioned anti-corruption campaigns and there has been a crackdown also on Western consultancy firms there. What does that mean to China if the foreign companies leave or the investors leave?
DR. KEYU JIN: Let me answer this in three sentences because it is very important. First of all, there are many departments in China. They don’t have one view. You have the propaganda department, you have the Security department, you have the economics and Finance department. They all have their own interests.
Do the economics and finance want to see this? Absolutely not. They have to clean up the mess. They are the ones that push for openness and welcoming foreign capital. And you’ve seen this very dramatic turn in sentiment towards foreign capital trying to lure them back in.
Now, of course, the Chinese government is not good at understanding what it means to sustain confidence and expectations. It hasn’t had the experience that you guys have had here. But the Security department simply does its own thing and it clashes. And unless there’s a major clash, the top level is not going to come and resolve these things. So I wouldn’t read that message as China being unfriendly towards foreign. Actually quite the opposite. But it’s in conflict with a lot of these technocratic errors that we’re seeing across the board.
MODERATOR: And in one sentence, what question do you think will define China for investors this year?
DR. KEYU JIN: Watch for a slow rebound in confidence and, you know, potential restoration of normalcy, but a slow and gradual one.
MODERATOR: Thank you so much for coming, Dr. Keyu Jin.
DR. KEYU JIN: Thank you.
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