tv U.S.- China Economic Security Review Commission Panel 1 CSPAN September 12, 2019 3:55pm-5:40pm EDT
explore our nation's past on american history tv every weekend on c-span3. next, a hearing on current relations between the united states and china. in this panel, asian studies scholars and economists consider a report on the national security implications of the economic relationship. the u.s./china economic and security review commission hosted this hour and 40 minute event. >> good morning, and welcome to the last hearing of the u.s. economic and security review commission's 2019 annual report cycle. thank you, all, for joining us today. our hearing today will review and assess key developments in the economic and security
dimensions of the u.s./china relationship in 2019. and examine china's relations with taiwan and hong kong. commission began its hearing this year which marks the 40th anniversary of the establishment of u.s./china diplomatic relations. by examining china's internal and external challenges and their effects of china's ability to sustain economic growth, project power, and spread its influence around the globe. this year has been one of extreme volatility in the relationship between the u.s. and china. change and unpredictability have been so significant since we began our hearings this year that commissioners thought it would be valuable to revisit and explore some key topics in the economic and security realms. there is an increasing amount of commentary in foreign policy -- in the foreign policy community, conjecturing about the
likelihood that the relationship between the u.s. and china is undergoing permanent change. this commentary further characterizes china as a rival, having upgraded it from a competitor. the word, enemy, is less frequently used but is not absent. the previous assumptions underlying u.s. policies such as the current international order benefits china and capitalism brings with it democracy, have been shattered and abandoned even by those who fervently advocated them. seems to me these false assumptions have yet to be replaced by more realistic ones. our goal today is to catch up on the facts about important developments and hopefully gain some insights about how to craft and navigate what will clearly be a new and different relationship between the united states and china. i look forward to today's expert
witnesses and thank them for coming. in addition, i would like to thank the senate foreign relations committee for securing this room for us today. i'll now turn the floor over to vice chairman robin cleveland. thank you. >> good morning. my statement is a little longer than commissioner fiedler's in part because it's about hong kong and i have very strong views. so, when the hong kong special administrative region was established in law under the principle of one country/two systems, beijing authorities explicitly guaranteed a high degree of political, economic, legal, and financial autonomy. the basic law which has governed hong kong since 1997 unequivocally protected freedom of movement, conscience, communications and privacy. indeed, the term was applied to assurances that no citizen would be subject to unlawful arrests, detention or imprisonment.
most importantly, beijing pledged hong kong citizens would enjoy universal suffrage in the election of their political leadership. hong kong citizens trusted the democratic elections would be the ultimate guardian of their human and political rights. beijing has reversed, denied and delayed each of these legal commitments bringing millions of hong kong citizens into the street. in the past few months over 1,100 people have been arrested for exercising their legal rights. now beijing and its appointed leaders are falsely blaming and attracting the victim of its surveillance and strangulation policy. chief executive carrie lam acknowledges her government decisions have created havoc, it claim she's not free to resign further demonstrating beijing's controlling role. while i am pleased that she has acknowledged the extradition bills should be and will be withdrawn, four key demands have still remain unaddressed. there needs to be an independent police investigation. not one run by the police. there needs to be the removal of
the designation of riot for people who are legally protesting. universal suffrage. and then freeing the detainees. when hong kong -- when congress passed the hong kong policy act, it memorialized china's possible ga obligations with every hope hong kong would establish a model. under the act, hong kong enjoys special standing with trade, investment, economic and political benefit. hong kong is a critical trade gateway, investors and mainland bonds, lending to mainland businesses and serving as the largest offshore clearing center for the . hong kong has become the destination of choice for ipos surpassing new york. raising $36 billion in 2018. over 1,000 mainland companies with market capitalization of $2.6 trillion are listed on the
hong kong exchange. they choose hong kong because there is no rule of law on the mainland to protect their interests. because of long history of good governance, ease of doing business and sound judicial institutions, nearly 4,000 companies with regional headquarters in hong kong include 1,400 u.s. enterprises. beijing's actions not only threaten the freedom, safety and wellbeing of hong kong citizens, the autonomy and viability of hong kong's active and important role in global banking, finance, and investment, is in peril. as tension escalates the congress and administration will face a difficult challenge in assessing the threshold for revoking hong kong's social status. help define the conditions which might warrant changes in u.s. policy and what options are available to support the protection of hong ckong's autonomy and civil liberties. for example, the basic law gives citizens the right to -- legal proceedings against a chief executive if their freedoms are violated. legal and technical assistance we should make available to support such an effort.
perhaps, none have watched the recent developments in hong kong with as much concern of the people of taiwan. concept of one country/two systems was intended to serve as a framework for future unification agreement between taiwiaiwan and the chinese main. politicians from both taiwan's major parties as well as the vast majority of taiwan's citizens rejected this formula for unification. most people in taiwan today view themselves as taiwanese instead of chinese and younger generations are becoming more concerned. the taiwan relations acted passed with overwhelming bipartisan support 40 years ago providing the legal foundation for strong ties with taiwan. the act established any effort to determine the future of taiwan by other than peaceful means including through coercion, would constitute a threat to regional security and be a matter of grave concern to the united states. over the past four decades, these provisions along with u.s. arm sales have contributed to peace and stability in the taiwan strait and in the broader indopacific region.
this year, we have seen china carry out a serious of provocative military moves in the airspace near taiwan which potentially threaten the stability. in july, china conducted simultaneous military exercises in multiple locations near taiwan for the first time since 1995. a new chinese defense white paper issued this year reiterated beijing's refusal to renounce its right to use force to resolve its disputes with taipei and indicated that chinese naval operations and flights encircling taiwan would become an official tool of national policy. beijing has also tried to interfere with taiwan's upcoming 2020 presidential elections by swaying media coverage in a pro-china direction. in the economic sphere, beijing leverages the fact that taiwan remains deeply dependent on the mainland for its economic prosperi prosperity. taiwan's leaders seek to diversify the island's economy
and expand international links but are constrained by chinese bullying. china weaponized cross-strait flows in an effort to damage taiwan's economy. we're at a critical crossroads with our friends and allies particularly in east asia with difficult choices ahead. to be clear, this is not a choice between the united states and china, rather, we must join friends and allies to support nations which respect civil liber liberties, human rights and the rules of free, fair, reciprocal trading systems or we default to authoritarian political systems with self-serving imperial economic ambitions. i'd like to take this opportunity to highlight the commission's work this year on monitoring u.s./china relations and note that in november, we will publish our annual 2019 report. and with that, i will turn to introducing the fabulous first panel who i hope are not shellshocked by the comments. carolyn, would you like to say anything on hong kong? >> no. >> okay. we'll start with dr. victor shih who is the chair on china and
pacific relations and associate professor of political science at the university of california san diego school of global policy and strategy. a scholar of china's political economy, dr. shih has published widely on the politics of chinese banking policies, fiscal policies and exchange rates. next we will hear from mr. andrew polk, co-founder of a china focused macroeconomic advisory firm. previously the director of china research at global adviser and resident china economist at the conference board's china center her, co-authored the report, "the long soft fall on chinese growth." finally we'll hear from dr. elizabeth, a frequent witness and always terrific, cb star senior fellow and director for asia studies on the council on foreign relations. dr. economy is a claimed author, chinese domestic and foreign policy, most recently published the excellent book, "the third revolution: xi jinping and the new chinese state."
i ask the witnesses to keep your remarks to seven minutes and dr. shih, we'll start with you. >> great. so, thank you, commissioner cleveland and commissioner fiedler for inviting me here. so i'm going to talk first about the economic impact of the trade conflict in china. and then i'm going to talk about continuing state intervention in china's economy and then finally i have some thoughts on policy recommendations. so first of all, the trade conflict that china has engaged with the u.s. has had an impact on china's economy across a broad spectrum. according to the latest data, which would come from july of this year. it has lowered the growth of china's exports overall to close to zero and has depressed its exports to the united states to negative in absolute terms. so this is pretty striking,
considering that china has grown as export to the u.s. pretty much nonstop since the 1980s. investors, more importantly, i think investors are slowed their investment in trade-intensive sectors, especially in the behemoth electrical machinery sector which includes anything from washing machines to i.t. equipment. and investment in that sector saw a declinely clo lby close t year to date from january to july, relative to january to july of last year. finally, the latest data shows that chinese firms now are facing drastically lower pricing power than was the case before. in both consumer durables and in the i.t. equipment sectors, we have seen negative growth in wholesale prices and this is seen in the latest report on ppi, the producer manager index, price index, compared to a year ago. meanwhile, of course, the debt level of chinese companies continue to rise pretty rapidly
which means that many firms are now trapped in a scissors between declining per-unit revenue and high debt and all the interest payments that you have to pay when you high debt. so i would say the impact of trade war on chinese economy is worsening over time. and so that this provides some incentives, at least, for the chinese government to come to the negotiations table. in terms of additional headwinds, of course, continue to be highly indebted, the banking sector has to provide a lot of credit to roll over all this, most of which sort of bad debt, i can get into that in the q&a. despite these economic challenges, however, the increase iingly draconian -- an the extensive internal party purnl purges that xi jinping has
carricarry ed out, most of the signs continue a tight reign by xi jinping. there are some slight changes, very, very recently, with him sort of seemingly backing down on at least a little bit on the issue of hong cokong. by in large, all the signs suggest he's pretty strictly in control. okay. so in terms of continual intervention in the economy, there are no signs that the chinese government is withdrawing from the economy, if anything, they're intensifying their intervention in the economy. the three major changes i've seen is through bankruptcy, through overseas investment and through lending, domestic lending. bankruptcies, a lot of chinese firms in trouble as i indicated before, but the chinese government basically are telling banks to keep lending to them so they don't go bankrupt. a lot of chinese households and companies would like to invest
overseas but the chinese government has ordered many of these companies to liquidate their assets and bring the money back to china because the foreign exchange reserve have been drained in recent years. banks in china would like to lend more money to the real estate sector, the chinese government has forbade them from doing that. and instead, are channeling lending to industrial policies. so industrial policies looms very large still. finally, i think china weap weaponized the country as we have seen. weakened past $7 to $1 in the last couple weeks. the past couple months, weakened by 4%, vis-a-vis the dollar, one of the recent moves we've seen in recent years. but this actually not only is it a problem for china, of course, china, the problem there is that investors in china may lose
confidence and move money out of china drastically which will wipe out its foreign exchange reserve, but this is potentially a problem for the united states because u.s. banks, u.s. financial institutions, have exposures to china to the tune of hundreds of billions of dollars directly and indirectly. banks in the united states have lend close to $100 billion to chinese institutions. institutions in the u.s. have bought -- i don't know the exact number, but i would guess, you know, $50 billion to $100 billion in debt issued by chinese corporations and if the currency were to devalue very drastically, then the stature of a lot of these loans become unclear. chinese companies whose cash flows are denominated, some of them may be forced into defaulting on their obligations. so i think a thorough edit of
the direct and indirect exposures of major u.s. instituti institutions, i think, would be a very timely thing. just to headacmake sure if it w crash suddenly that major u.s. institutions would not get into trouble. finally, to combat chinese industrial policies and technology, u.s. will need to increase multilateral efforts to increase transparency on china's financial subsidies to the technology sector. as i indicated previously, it's still very substantial. here, perhaps, imf can help and then finally, it should coordinate with close allies to police technology acquisitions by authoritarian countries and set best practices for interpne and cyber security with our allies. thank you very much and i welcome any questions. >> mr. polk? >> thank you very much to the
commission for having me. i'm going to talk mostly about short-term economic growth, the chinese policy response and what it tells us about what they're thinking in terms of the relationship with the u.s. i have a little bit of a different perspective for victor so i think it will be good for us to see different sides of this. china's economy is currently growing at the slowest pace since 1990 and it has been decelerating rapidly since mid 2018. given the growing tensions in the bilateral relationship between the united states and china, it is highly important for u.s. policymakers to understand the sources of china's current economic weakness, the policy response the chinese officials have laid out to address these challenges and likely impact on china's stance in trade negotiations with the united states as well as the country's broader policy toward the u.s. china's current economic slump is overwhelmingly, indeed, almost entirely due to domestic economic challenges in policy choices. while trade tensions over the past year have had a significant effect on financial markets, individual companies and specific geographies,
inaggregate, the direct effect on the chinese economy has been minimal. however, the negative effects of trade tensions are likely to grow over time. especially given the latest broadening of tariffs that took place on september 1st. the most important factors driving china's current cyclical slowdown with policy choices that chinese leaders made in early 2017. in april of that year, financial regulators introduced a policy program to slow the growth of credit, seeking to contain the overly fast accumulation of debt that the country had seen from 2010 to 2016 and to derisk the financial system which experienced significant bounce of volatility in 2013 and 2015. in addition at the same time that central officials were seeking to derisk the banking system, they also sought to harden budget constraints for local governments. specifically, regulators increased scrutiny over local government financing vehicles which have been conduits for off ambulance sheet spending in recent years. officials also gave lifetime
responsibility for the debt profile of the jurisdictions that they oversee. the combination of significant financial tightening and regulatory tightening over local government spending are the two key drivers behind china's current growth challenges. notably, both of these drivers were intentional, domestic policy-induced measures. and even more notably, chinese policymakers have largely kept these policies in place despite the toll on economic growth and the additional economic uncertainty that has arisen from trade tensions with the u.s. while there was a significant element of intentionality behind the policy mix that led to china's current slowdown, policymakers have been caught off guard by three unforeseen developments. first, the intensity with which the financial derisking campaign and associated economic slowdown have disproportionately affected china's private sector. secondly, the speed and intensity with which the global narrative has turned against china, both on political and economic fronts.
and thirdly, the longevity and intensity of u.s./china trade tensions. each of these factors has worked to unnerve chinese policymakers and largely defined china's evolving policy stance since growth began slowing in mid 2016. however, despite the fact that the prevailing media martinarra around china focused mostly on u.s./china tension, the global shift against china have arguably been more critical in shaping china's policy actions. the u.s. tariffs have appeared to have little direct macroeconomic impact on the growth for chinese economy, especially in comparison to the domestic slowdown in infrastructure investment and tightening of financial conditions. in fact, for most of 2018 given the tiered nature of tariff and position by the united states, chinese exports saw strong growth as u.s. importers sought to front run -- as u.s. importers sought to front run each new ruound of impending tariffs. in 2019, it has gone into
reverse and the value of exports to the u.s. has fallen, taking 2 percentage points off overall chinese growth. that slowdown has been almost entirely offset in local currency terms thanks to the weakening exchange rate. that is not to say the tariffs have had no impact whatsoever, rather the immediateimarily psy working to undermine private sector sentiment in chin tha at time when it was already ailing. importantly, despite the slowing economy and uncertainty from u.s./china trade tensions, chinese officials are taking a largely unproven approach to economic policy support. during previous bounce of growth acceleration, authorities responded by quickly ramping up monetary and credit growth to boost investment primarily in infrastructure and real estate. in 2019, however, authorities have taken a different tack. they have focused economic support measures on attempts to improve the overall business environment and incentivize banks to prioritize lending to small private sector businesses.
finally, they have boosted efforts to obtain inbound capital flows via market opening in some key areas. chinese authorities increasingly see foreign capital inflows both through fdi and portfolio investment as key to improving the domestic market. and that reality combined with the increased pressure from the u.s. and other foreign governments is underpinning a pragmatic market streak. this pragmatism of chinese policymakers is largely overlooked due to the broadening tensions between the u.s. and china. however, it's important that u.s. policymakers that china is increasingly looking to widen market access for foreign companies both thanks to this increased pressure from the u.s. and other governments as well as the own domestic needs. the fact that chinese poll makers are understanding this unproven poll approach focused on improving the business environment, opening wider to foreign investment as opposed to the crude stimulus efforts of the past underscores chinese
policymakers' confidence in their ability to shepard the economy through this downturn. chinese officials' confidence in their economic management ability may well be misplaced. however, the fact that this confidence exists shoud e s sho indicate to u.s. policymakers that chikmichina's economic pol growth isn't a point of leverage to acquiesce to u.s. demands and trade negotiations. the domestic focus among chinese policymakers underscores directly influencing ccp behavior and policy decisions toward the economy or otherwise, via u.s. policy actions, is highly difficult. in my view, the most reliable way to adjust to china's economic rise will, therefore, be to invest in american competitiveness. this means prioritizing investment in the american education system especially in science and technology. while such investments should always be a priority, in my view, making these investments now is even more critical than the past because of the heavy emphasis that china is placing on improving its own education system, especially in the sciences.
thank you. >> thank you, mr. polk. thank you very much, vice chair cleveland, commissioner fiedler, members of the commission. this really important issue of how the trade war is affecting china. in the time allotted to me, i'd like to focus on three, four, trends that i see emerging, but let me preface my remarks by putting forth one caveat which i think speaks to the point that mr. polk just made is it's difficult to disaggregate the effects of the trade war, right, trade frictions, from what's taking place domestically, what was already a slowing chinese economy. so in my remarks, please understand what i'm talking about is an added layer of pressure i believe comes from the trade war, not necessarily the direct impacts of the trade war on the chinese economy. so, first, i think as in the united states, the trade war has contributed to volatility in the stock market. greater uncertainty and declining levels of consumer
confidence. i think this is manifested in a number of ways. all provinces except two have lowered their growth targets this year. slowing growth or even absolute decline in household consumption in areas like appliances, electronics, and autos. and there's been a very sharp contraction in venture capital deals both in terms of the scale, the value, and the number. for example, there's decline of 75% in the value of deals from the second quarter of 2018 to the second quarter of 2019. a decline of 62% in value from the third quarter of 2018 to 2019. second, the trade war i think has forced chinese policymakers to focus more on putting out fires as opposed what they really wanted to work on which was structural economic reform. look at the rhodium group's most recent report, it finds there's only been progress two out of ten areas of economic reform.
trade, as mr. polk mentioned, the chinese lowered tariffs in a number of areas, and in the financial sector. overall, however, i think the chinese have, in fact, to some extent reverted to traditional mechanisms, like encouraging local governments again to borrow and to develop infrastructure through issuance of special bonds. providing subsidies for consumer goods. cutting the sales tax, for example, for rural residents in half. they have resisted -- they were going to eliminate the subsidy that they were providing for purchases of new energy vehicles. they have not done that. they're looking for many different ways to try to ensure chinese economic growth continues. many of these, again, are short-term measures that they have traditionally relied upon. third, i think the trade war undermines the ability of the chinese leadership to tackle other socioeconomic priorities. for example, in the environment, the minister of ecology and
environment in late 2018 explicitly stated that the trade war was going to force the chinese government to take a step back from their most ambitious targets for reducing pollution and, indeed, we saw them through -- we saw pollution soar between sort of december through march of this year. as they allowed heavy industry to go and took a step back from enforcement and from more ambitious targets. we've also seen co2 emissions increase each of the past two years in china and they're undergoing a very significant debate, once again, about climate change and how committed the chinese leadership needs to be in the face of this slowing economy. de g demographic, economic optimism correlates directly with birth rate. we've seen just from 2017 to 2018 despite the fact that the chinesebirthrate. we've seen just from 2017 to 2018 despite the fact that the chinese have a two-child policy,
a decline of births of 2 million, lowest rate since 1961. marriage rate is the lowest it's been in 11 years. labor issues, so i think the reorientation of the supply chain is having some impact, estimated somewhere, the numbers that i've seen, between 1.2 million and 2 million jobs have been lost as a direct effect of the trade war. the premier has talked about employment as his number-one concern. and they are now establishing a new central leading group on employment. so even if we're not sure of the exact impact, we do know that the concerns are significant. right? we can look behind the scenes to try to see what they're doing politically to address these problems even if we don't know whether the unemployment rate is really 4% as they say or 20% as you can find some chinese scholars asserting. then last, i think the trade war, at this point in time, is now strengthening the hand of the hardliners.
i think if you look back nine months to a year, you would find a period of time when chinese economic reformers, and certainly privately, but also to some extent publicly, would talk about president trump and the trade war as an opportunity. right? an opportunity to push forward on structural economic reform, much in the same way that the pressure was used from the wto to work on state-owned enterprise reform back in the late 1990s. now, however, that type of talk is not -- at least i don't hear it anymore. instead, what you hear is that the united states is trying to contain china. our own narrative has moved from one of holding china accountable, right, to rules-based order, to talking about china as an existential threat. i think that shift in narrative has allowed the hardliners to come up with their own narrative that basically says the united states is trying to contain chi china.
this isn't simply about intellectual property theft or what we're doing wrong on the -- you know, lack of market access. this is about the fact that we are now -- i was in july -- in beijing in july, somebody said, we are now technologically superior to the united states and the united states doesn't know what to do. so this is their response. so i think this is emboldening hardliners and giving them sort of greater strength and weakening the hand of economic reformers. i think the fact that we don't distinguish now between national security and economic security is also problematic. right? are we talking about 5g b a, ar talking about subway cars, i think is an issue we have to address and i think it also very clearly enhances xi jinping's efforts to decouple the two economies and push forward more aggressively on made-in-china 2525. what should we do? first we have to change our narrative back to one that talks about china's adherence to the rules of the game. and that is a good way to bring in our allies because they all
do support what we're trying to do with china on the trade front and allows us to bring more pressure to bear on them. i think second, we do have to distinguish between economic and national security more clearly. and then third, i think as mr. polk mentioned,st it abo it's a resilien resilience, investment, education and immigration. stop there. >> thank you. commissioner fiedler? >> i want to delve into a little of the behind-the-scenes sort of politics and the impact of what i characterized earlier as unpredictability in the relationship and what that has meant in normal diplomatic relations. going on -- i mean, we -- trade -- the trade war has captured most of the public
attention, but there are lots of other things that have to be going on behind the scenes. in other words, do we have as much access to people in positions, whether in the private sector or the government sector, as we had before? how are the chinese viewing the unpredictability of the relationship now? liz, if you would start. >> sure. i think in the beginning, the chin these felt as though they had president trump pretty much figured out. they believed that by buying more goods, they would address what was his primary concern and that the whole thing would go away. i think over time, they have become less certain of their ability to understand the direction in which the administration is moving.
and i think at this point in time, there's also a certain amount of exhaustion. so i think if you look at sort of the various stages of chinese statements, i think they begin with, you know, there was some laughter and some jockularity in the expert community. i think that led to greater concern and, again, a desire to strike a deal and to move forward, to have a good relationship with china. victor, i think, sort of began to talk a little bit about some challenges that president xi might have faced. this would be last summer. where it looked as though the fact that he couldn't make the u.s./china relationship work was cause -- bringing some pressure to bear on him within the top echelon as well as pushback on the belt and road initiative. i think that has now ended because the more unpredictable the united states s the more that they can't understand what it is we're really after, what
is a good deal, i think the less patience they have and more they believe xi jiping is the right person to stand up and lead china forward. there was a moment in time when economic reformers were empowered. there was a sweet spot. i think we moved past that sweet spot at this point in time. >> thank you. either of you want to comment? >> yeah, i would agree that the change in perspective in beijing has been quite swift. just a year ago, june 2018 before the first tariffs came into effect, there was still a feeling we can figure out the u.s. president and the chinese were just absolutely stunned by how quickly the narrative -- the sentiment in washington, d.c., on both sides of the aisle shifted against them and now they very much viewed the relationship as one of containment and in terms of the
volatility, i think they're stealing themselves essentially for short-term volatility and long-term competition. just yesterday, xi jinping gave a speech to the central party school talking about how we have to get ready for struggle on economic fronts, on societal fronts, on political fronts, and the political narrative in china internally is very dire right now and sort of, you know, talks about the long march and self-sufficiency and all these things. and so i think they view the world as having fundamentally changed in this past year. in terms of the relationship with the u.s. >> victor? >> very quickly, i think just to echo a couple points that have been raised already, but i agree completely that the fact that one one/one road has turned into this big waste of money, the fact that china does not seem to be managing its, certainly economic relationship with the
united states very well, and then, of course, what's happening in hong kong. really is diminishing xi j jinping's reputation. i think when he first took power, at least he saw himself and, therefore, of course, the rest of the party also had to agree with the perspective that he would be the savior of the chinese communist party. and now we've seen not sort ofb fairly costly blunders and him having to sort of change course. so i think going forward, this is going to be interesting. it, perhaps, will change the way in which he makes decisions to make it a bit more democratic instead of just him making all the decisions. we don't know. that's an open question. there's some signs to suggest that maybe this is the case. in terms of the reform, a lot of it is -- as the blunders accumulate, the party
increasingly shifts from, you know, wanting to sort of try new things to speed up growth, or to make the market more market oriented, to just risk management. this is something that andrew pointed out already. and, again, i was very -- also struck by this speech in the central party school where, was this the -- one of the party schools, in any event, where it seems like he's preparing senior-level cadres, these are very -- the audience is pretty senior-level cadres for disasters to come, basically telling them that even if really hard times were tole to, you should remain loyal to the chinese communist party, that's very dire language, you know, at a time when we're not even, you know, i agree with andrew that even though, i mean, trade, itself, has had some impact, but, you know, the chinese economy is a massive economy. the trade war certainly has not,
you know, crashed the economy by any stretch of the imagination. it has just hit sectors that have been main beneficiaries of china's previous industrial policies. >> thank you. commissioner wessel? >> thank you, all, for being he here, for the time you've put into your testimony both written and oral, so, thank you. i have to say, i'm sort of confused and stymied by all of this because, you know, we're still having discussions about engagement and theoretical rebalancing, et cetera. and we're in the middle of a real challenge period about how do we address what has been taking place in china. dr. economy, you talked about the issue of compliance with the rules, et cetera.
i think after 18 years in, we should agree that china has not complied with many of the rules. and certainly with the -- the vision that the western nations had when china joined. so, we're at a point, in my opinion, where it was time to confront china on its policies. we saw little engagement by a multilateral partners. some of that was our own fault by not engaging them, and still is, but the multilateral system doesn't seem to be willing or capable of addressing the china challenge, and we're also at a point where we are looking at different metrics about what success is. and we've talked a bit about investment this morning.
to me, opening china up for more u.s. investment will probably only continue our current path. as 60% of china's exports emanate from foreign-invested enterprises, we're not reaching the chinese market of its consumers like we'd like. still being used in that as an export platform. more investment will probably lead to more technology sharing, et cetera. so, whether you believe the problems in china have been -- were of their own making, and the trade war, trade policies, are big or just a small contributing factor, what do we do now? do you believe multilateral partners are really going to engage? do you believe that the wto is capable of, with its rules and with its decisionmaking process, of addressing the china
challenge or, and i believe it was lbj many years ago, said when you have somebody by the ear, don't let go to try and get a better grip. i'm paraphrasing. and -- >> i was going to say, i don't think those are the exact words. >> we're on c-span, so those are the ones i'll stick with. so, you know, whether you like the policy the president has engaged in or not, isn't it time that we confronted china, and what would you do differently now to try and make sure that we actually get to a better, let us say, western concept of adherence to the rules? and i'll go down each of the panelists. dr. economy, since i used your name first, why don't you start. >> okay. thank you, so i don't disagree that it's time for reassessment
of the u.s. approach to china. i think actually the trump administration has done a good job of understanding china under xi jinping, coming to the conclusion that china is not moving in the direction we had h hoped for across the economy, political, domestic, and in term of its foreign policy. so i think that has happened and that was important. at this point, however, i think it would be useful to draw back in our allies because, in fact, they do agree with us, you know, across the board. right? whether it's on huawei, we have support from a number of countries, whether it's on sort of the belt and road initiative in concerns, the eu has stood up on that. whether it's human rights, we find partners in the united nations. they're out there. but we are not , in fact, engaging with them. the advantage of bringing in the allies, i think, is twofold. first, it reduces that sense of the united states simply trying to contain china and we're
afraid of china. right? i do think it's important that we shift the narrative because the truth is we look weak when we're in china now. we look as though with are operating from a defensive position as opposed to a position of strength. so bringing in our allies defuses that sense that this is all just about the united states and china. it also helps us to bring pressure to bear. right? the european/china chamber of commerce and american/china chamber of commerce say the exact same thing. i think that's important. we can still use reciprocity, but i think asserting a more positive vision of u.s. economic leadership globally is equally important. free and open indopacific, right? filling that in. as i think a number of our ag t agencies have been doing i think is absolutely essential. so from my perspective, the best defense is a good offense. i don't think at this point that is what we are undertaking. >> mr. polk? >> microphone. >> sorry. i'd echo a lot of what dr.
economy said. i think the relationship has to change, and everyone is trying to figure out what a sustainable equilibrium looks like. we're in an unsustainable equilibrium with china right now. and we -- it -- the relationship needs to undergo change. i don't have the answer for you today on what a stable equilibrium looks like, but i do think there are a few things. one is bringing along friends and allies. absolutely, all -- i interact with, you know, embassies in beijing every single day and every european country, new zealand, australia, japan, korea, they all agree with the idea that china needs to play by the rules. and things need to change. so engaging those allies and bringing them along is hugely important. secondly, dr. economy talked about national -- the national security issue. on both sides of the pacific,
the idea of national security is getting bigger and bigger and bigger. in terms of economic national security. so finding some limits of that that we can live with i think is hugely important. otherwise, if everybody in both economies is national security, there's not even a start iing point for discussions. and then i think also understanding the nuance of china, the tougher stance from the u.s. and others, i think has produced change in china both positively and negatively. i actually see more opening than i think a lot of other people do, specifically in the financial sector. i also see marketization in areas of the economy. yes, the state is growing, but also there is more room for markets. and the chinese leaders' mind, that's not a total paradox. things are both happening at the same time. so in a sense recognizing when
china is moving in the direction we want. there's multiple things happening at the same time. so recognizing that, i think, also gives a basis for discussion. but, you know, i would say those three issues are top of mind. bringing along our allies, defining national security, especially what's not national security, and then recognizing actually where there's some progress. absolutely, the pressure needs to continue because in my view, it's produced some good results and if we can continue that pressure with a positive vision of what the outcome might look like, then we're moving in the right direction. >> hi. so i also agree that things have to change, the trading relationship has to change between the u.s. and china. i think it's helpful here to segment between nonstrategic sectors and streakic seategic s. there are a lot of nonstrategic
things like farm goods, energy, you can say, strategic or not, and textiles and, you know, furnitures and stuff like that. where american consumers have benefited enormously by buying these things at a relatively low cost from china, from the rest of asia, and also american businesses have benefited enormously by selling a lot of farm goods, soybeans, et cetera, to china. now, of course, there are strategic sectors like i.t. equipments to be -- as one of the prime examples where china's stated objective has always been since 15 years ago to relocate the entire global supply chain from other countries to china. they have largely succeeded in this quest with the exception of, you know, several very high-end components like chips, et cetera, et cetera. there are, of course, that needs
to be restructured. the way we're doing right now, what we're doing now is to force some of our allies to move the production out of china. i don't think that's especially helpful because that's basically like a club where the only benefits that you get things. it's a club for bad things. instead, i think the u.s. should try and -- and its allies sould t should try to think of a way to form a club where there are positive incentives. right? so what's in it for them if they're willing to relocate some of the supply chains out of china to other countries. there has to be some kind of benefits. whether it is, you know, if they meet certain standards, then they're qualified to get certain kinds of contracts for critical infrastructure or security-related contracts. so i think i would urge policymakers to really think about ways to create positive incenti incentives. >> thank you.
>> chairman bartholomew? >> thank you. excellent testimony from all of you. thank you for the continuing analytical work that you do. i really want to associate myself with a comment about the importance of working with our allies. i think that it's a china issue, it's a global issue for us. and i think we need to rebuild those relationships and do what we need to maintain them. i would say, though, that certainly the problems in the relationship, i mean, i've been doing this for 30 years now. i think some of you are probably doing it just about as long. these are not new. people seem to forget that we have been struggling with some of these issues which were exacerbating by the world trade organization. right? it was supposed to solve the problems and it hasn't. dr. shih, i would -- i'm going to be like wessel and end up talking instead of asking questions and i have questions, but i do want to say that the
consequences of losing textiles and shoes and furniture for the american workers and american communities has been quite significant. it has not been cost-free, right? it has not been cost-free to regions of this country. it has not been cost-free to the tax base, communities, their ability to educate their children and provide health care and all these things. to me, it's not quite as simple. another question or issue i have is wasn't some of this moving of production out of china happening already because of increased labor costs? so it's a continuation of a trend. it might be speeding up. okay. that said, what evidence, again, for 30 years, we've been hearing about economic reformers inside of china and how important it is to support them. and i would argue that the mfn debate that we had back in the 1990s, some of what we were trying to do was to support the economic reformers. but what evidence exists that xi jinping, himself, actually is an economic reformer or wanted economic reform?
is there any? no. an easy question to answer. i can move on to another one. >> i'll quickly say, i don't think xi jinping cares all that much about the economy. i thing he cak he cares about p and his project to is rejuvenate the communist party of china. and he has largely delegated the economic decisionmaking now to the vice premier liu ha. so i don't -- i think the derisking campaign i talked about was all about liu ha grabbing xi jinping's ear, if the economy blows up on your watch, it doesn't matter if you rejuvenate the economy. he cares about military, politics, society, chinese cu cultu culture, and the economy is just a tool to get those things done. >> dr. economy or dr. shih? >> i would say maybe not that he doesn't care about the economy because he does have, you know,
built into his great rejuvenation of the chinese nation having china be a modern, innovative economy on par with the united states, japan, germany, doubling chinese incomes by 2020. he definitely has economic objectives but you asked about xi jinping as an economic reformer. if we take reform to mean opening up, reform in opening up, not just reform as change, he clearly is not an economic reformer. everything about xi jinping from day one has been about reasserting the rule of the party and state into the chinese economy and into chinese society, right? whether you're talking about enhancing the role of party committees, whether in chinese enterprises or joint ventures, even ensuring multinationals have party committees or you're talking about continuing to strengthen the role of state-owned enterprises or applying the social credit system, right, to companies including to multinationals, all of that is about enhancing the
role of the ability of xi jinping and the chinese party to use companies as tools of the state. so economic actors as political actors. >> thanks. dr. shih, anything? >> i think that one of the key points that people should realize is that xi jinping, i think, despite the fact, everybody said, oh, he was a governor. i think his understanding of how the market economy actually operates is very superficial and minimal because he's lived his entire life under a planned economy. even after the reform he was already a senior government official where all of his food, his housing, everything is arranged by the chinese government. so he -- i don't think he actually knows how the real market operates, how -- and especially not the financial market, which is, you know, another level of difficulty. so i think a lot of high-level policymakers in china struggle with this limitation.
>> thank you. dr. economy, what you've said, the phrase of using companies as tools of the state, is a very important thing, and if i have a second-round opportunity, i want to delve into that. thanks. into that. thanks. >> thank you. as always, when we're talking about the economy i spent a lot of time learning as opposed to questioning, but i do have a couple of things that came to mind listening to your excellent testimonies. dr. economy, you dwelled on the issue of hard liners. i guess i'd been perhaps -- in fact, i'm quite certain i've been dealing with chinese hard liners for the last decade that i can think of, if i'm talking to chinese either pla or security people, and they've been talking about the u.s. trying to contain china since the pivot was announced, and
that's 2010. so i don't -- there isn't anything new, i would suggest, that there's a lot of people in china talking about the u.s. trying to contain them. what i'm interested in is today's hard liners versus the ones that ten years ago were full min nating. has a hard liner view expanded? are there more people who would sign up to being hard liners in china because of the trade wars and what have you? the other question i have -- and i'd like any or all of you to chime in on this -- is this the connection between the downturn, the slowing of the chinese economy and the willingness of xi and whoever else advises him on belton road to, as we heard
in the -- this past summer's global bri conference the new approach, high quality projects, we're going to get a handle on corruption, et cetera, et cetera. is this all related to the downturn in economy or is it related to the narrative, i think washington started by calling the bri a debt trap, et cetera, et cetera, and raising all of the potential problems associated with bri? >> okay. so let me say one word on the belton road question and go to your first question. i think absolutely the trump administration, secretary tillerson in particular was out there very early on calling the belton road debt trap diplomacy. we didn't have an alternative. now we kind of do, plus the
japanese are out there with a lot of higher quality offerings than the chinese. in terms of whether -- so i do think that that played -- had a lot of impact in terms of focusing the attention of many countries, right, on what was going on, and then they're realizing that some of what they were doing with china and the belton road was not necessarily in terms of -- serving their long-term interest. and there was a lot of pushback, and that certainly contributed to the april 4 quieter tone. do i think that china's going to make a significant turnaround in turns of actually addressing the corruption, improving transparency, higher quality, et cetera? i think probably not. this is not -- the belton road just built upon more than two decades since the going out stream of the late 1990s, which was china going out for natural resource quest. they already have in place many rules and regulations within china development bank, within the shanghai stock exchange that are all devoted to trying to ensure transparency, rule of law
and accountability in their overseas strategy and has yet to come to fruition. in terms of whether or not there have always been hard liners and what's different now, i think what i'm really talking about is that we are closing down the space for the reformers and the economic reformers. it wasn't even just the economic reformers who were quite vocal last october, et cetera, about, you know, trying to push ahead with structural economic reform, but you could talk to many people in the political sphere, and also entrepreneurs who would say what donald trump is doing right now with this trade war is great because it's the last bulwark against xi jinping overreach and his great am bigsz and the fact that he's clamping down politically, so they were encouraged by what the united states was doing. at this point we've pushed too affluenz far. i'm saying we've crowded out a lot of the space for the those reformers and we've given with our narrative and what of our
craziness, we've given xi jinping an escape goat for what's going on and the challenges he's faced and the ability to stir up nationalism. >> just quickly on the hard liners issue, i would just encourage you to think, yes, there have always been hard liners in china, but i don't conceptualize it as hard liners dragging xi to a more conservative position or a more ideological position. i don't think he is outflanked by anyone. maybe there are more reformist voices that are cowed because of current dynamics but, you know, so just xi -- xi is a hard liner is what i'm trying to say, so there's no one outflanking him there, no one trying to pull him in any direction on that side. on the bri stuff, i would just say also xi jinping has
characterized the bri as a 100-year project, so you know, we see these news stories on a day-to-day basis. the bri is felled. we won't know for 100 years, so we don't know if it's failing or being successful, so i think that is -- you know, i think it's a misconception that china's policymakers always take this long-term view or whatever. but on that front, i think they are, and i would also just say, you know, they learn. as i said, they are pragmatists, and i think frankly they got sick of throwing good money after bad. they've got burned. so have decided to recalibrate for the time being. they also had a capital outflow issue, which was fundamentally important for them reining in that spending. you know, dr. economy has been doing this longer than i have so maybe, you know, i agree with her that i'll believe it when i see it in terms of really trying to root out corruption, but at least they seem to be wanting to
do these projects on a more straightforward -- not a fully transparent basis but maybe a more transparent basis because there's an understanding in my view that corruption is, you know, one of the key issues that is an existential issue to the party domestically, and if they start to export that it may become an existential issue abroad. >> hi, very quickly. so on the soft liner or hard liner question, i think the only serious debate that i have seen internally, just reading chinese sources, is one of, you know -- so the entirety agrees that china should one day replace the united states as the dominant power in the world, either, you know, as a sort of due opoly ov the world or china being completely dominant. there is a serious debate about when china should behave as if
it is a dominant power. so some people, i think, generally believe that china should behave today as if it is a dominant power and others say, well, let's just wait another five, ten, maybe even longer for the united states to shoot itself in the foot and then, you know, if the technological progress continues in china, then we can assert our power, you know, our dominant power. so i think that is a debate that is ongoing, especially given some of the recent development. on bri, i think one thing -- i think the internal desire to change how bri is done is genuine, and the reason is because china no longer has as much money as it did say fooive years ago with which to throw billions and billions of dollars around the world. when the foreign exchange reserve was $4 trillion, china would use money directly from the foreign exchange reserve to finance many of the bri projects, but there were a
couple of problems. one is that the foreign exchange reserve is now a lot smaller because of capital fluight in 2015, and so a lot of the new bri projects has to be financed by borrowing money from western banks to finance bri, and there of course, you don't want to get trapped in a situation where you borrow money but then to finance a complete dud that ends up, you know, like venezuela or angola where china lost tens of billions of dollars. these huge losses and the dwindling foreign exchange reserves have certainly really alarmed the technicrats and i think they have over time been able to persuade xi jinping that continuing to throw billions and billions of dollars around the world is not really viable, so they have switched to only doing it when it's strategically absolutely necessary and also have a set of procedures to do it a lot more carefully. >> commissioner lee?
>> thank you. thanks to the panel for excellent presentations and testimony. so my question is following up on some of the conversation we've been having about i think you all agree in different ways that the chinese economy and leadership are coming under stress from various causes from the trade war, from cyclical and domestic reasons. so what are the biggest dangers for the u.s. from china being under stress in terms of the economy, and are there steps that congress in particular could take to inoculate or to prepare for some of the likely impacts? and i guess one thing i would mention in particular is the currency devaluation. dr. shih i think you mentioned in in terms of financial exposure, there's also another risk in terms of the trade impact on domestic business and workers and so i guess i was just curious whether you think
there are particular things we ought to be doing now in preparation for sort of predictab predictable? >> i guess -- okay. since i opened that door. so i agree with you that it is a potential risk because certainly there are economists in china who have publicly, you know, add v advocated for a one step devaluation. devalue by 20, 30% in one shot as not only as a counter measure against u.s. tariffs but also generally speaking economists have believed they have been over valued anyway for quite some time and to really sort of fulfill the markets' expectation that it should be lower and just do a one shot evaluation of 20,
30%. this will have a huge impact on u.s. businesses that compete with chinese exporters. by and large, especially in the manufactured goods industry, the impact will be bigger for japanese, korean and german firms because these are the firms that say in heavy machinery, autos et cetera, that are now today directly competing with china. they will be hit more. for the u.s., i think the impact is one that we're seeing already, which is that chinese consumers will not buy as much u.s. farm goods as before, but because of chinese import restrictions, we're seeing that already. so i think the biggest kind of trade shock for that kind of stuff for devaluation is already in evident because of some other reason which is chinese import restrictions. the bigger problem, i think, is
the financial risks. so banks, especially european banks, especially united kingdom-based banks, also korean, japanese banks but also u.s. banks have lent trillions of dollars to china, and to companies and banks in china whose cash flows are denominated so these financial institutions would have a much, much harder time to come up with the cash flows to pay the u.s. dollar denominated debt, and that will force a large proportion of them to declare bankruptcy, to default on their debt causing stress on u.s. financial institutions including banks but including even mutual funds. a lot of pension funds have invested in debt issued by chinese companies and banks, so there has -- i really think
there should be some auditing. you know, it could be voluntary or not, of both direct and indirect exposure to rumen b denominated assets. >> i wholeheartedly agree with victor. >> a slowdown, a disaster hurts global growth. the u.s. is largely insulated from volatility out of china on a real economic growth standpoint. i generally take a pretty positive view on china's ability to manage its currency. and what i mean by that is i don't -- they have learned a lot over these past two and a half years because of currency volatility, and they're actually quite adept at managing it, so i don't worry too much about the currency channel, but a
financial crisis in china that hobbles chinese banks, i think china has what, the four largest ba banks in the world, that's something that's going to be a problem for the global financial system, and we don't have much view into how interconnected that is. we know china's external debt picture, about 2 trillion usd, which is large but small obviously in comparison to our economy, their economy, but ordering a -- commissioning a study to figure that out is something that it would be hugely productive and of value to every financial system and economy in the world. >> many american companies as was raised early have gun the china plus one strategy beginning to diversify their supply chains, right, even before the trade frictions
began. this was already underway as was noted. i guess from my perspective one of the things i'm interested in is that distinction between a multinational chinese company is becoming almost nonexistent and that i think american companies are going to have to become -- they're going to have to make a decision each -- for itself about where to draw a line, so whether you're having a party committee in a multinational or, you know, adapting to the cyber security law where you have to, you know, basically give over information to the chinese government or you're going to be subjected to the social credit system or you're going to be living in a situation where your employees can be detained without any rule of law at whim, i think what i've noticed over the past few years is just the eating away of private and public that's broadly happening in china is also now being applied to multinationals, and i
think that is a big challenge that american companies are going to have to confront moving forward. >> i think you both raise issues or they've come up also earlier sort of about the vulnerability of the u.s., or some of the judgment. the u.s. companies are now so deeply embedded in china they don't really have any choices in terms of having to deal with their employees being arrested and so on. i think earlier maybe mr. polk you made the choice about supply chains. these are investment decisions that have been made in the past that we're now reckoning with. one question for us for the commission going forward is just to think a little bit more about, you know, should we have foreseen some of this? has there been a failure of policy in terms of allowing such concentration and a lack of foresight in terms of investment patterns? thanks.
>> thank you. i have three areas of question, i wanted to follow up on commissioner lee's interest in debt. i want to talk about debt, banking and bonds. my understanding is that the debt to gdp ratio is precarious in china. it's 245%, which is worrying given the fact that it's an emerging economy, not a developed economy. dr. shih, you noted that -- in your testimony that chinese debtors have presented 3 trillion in exposure to u.s. pension funds, mutual funds, and banks. can you speak more specifically as to what -- what banks, what pension funds what mutual funds you think are at risk and what the nature of that debt is? is it equity in alibaba or is it bonds issued by a local government? that's my first question. my second question has to do
with banking and whether the market -- well, let's do the first question, then we'll do banking second. we'll get lost otherwise. thank you. >> yes, so very quickly so the 3 trillion figure that i put in the testimony is china's total -- my estimate of china ochina's total external debt to the whole world, not just to the u.s. to the just is roughly $180 billion in direct exposure. so that means that u.s.-based banks and investors have lent approximately $180 billion to chinese banks and chinese companies. by the way, a large portion of that was through hong kong, so this is why -- so of the 3 trillion that china has borrowed from the rest of the world, china has borrowed a trillion of that through hong kong. and you asked, well, why would china do that, and why doesn't
china just borrow directly from beijing or from shanghai? and the reason is because if you ask people within the financial institutions around the world, because imf and the u.s. legally treats hong kong as a separate entity as china, then the banks can say, oh, well, if the whole world's going to treat hong kong as a separate as china, then we're going to do that also. so when we lend money to chinese companies, we're going to lend both to their hong kong based subsidiaries and to the headquarters in beijing. that way we can lend them even more money than internal rules would allow us to do so. you ask why would they want to do that? it's because chinese companies will pay higher interest. this is why they want to do it. this is why if hong kong were to be treated as the same as mainland china, actually the credit limit of all the chinese debtors will automatically get
compressed by 20 to 30%, so it is a big deal for china, you know, when you're in debt to the tunes of $3 trillion, you don't want your creditors to suddenly compress your credit limit by a trillion dollars. that would be a big problem for china, and i think that that may be one of the reasons why china thus far has chosen i would call it very moderate and soft line approach in hong kong, even though of course most people would disagree with me. to me the spectrum is what's happening in shin jung had the hard line approach and hong kong is the moderate soft line approach. >> the chairman had a -- >> just a clarifying question, which is we keep referring to bankers here, and i want to understand, are you talking about investment bankers or are you talking about our fdic insured bank ergers? what are you referring to? >> the main data source is the
bank for international settlement. they report two series. one is for bank lending and the other one is for bond issuance. i think u.s. banks has exposure like 80 to 90 billion, so u.s. banks, commercial banks, right, no the investment bank. commercial banks have lent 80 to $90 billion to chinese entities, but then u.s. investors have purchased, again, both through hong kong and mainland china an additional $100 billion until bonds issued by chinese entities, and -- but the buyer of these bonds can be both commercial banks and also mutual funds, pension funds, et cetera. >> sure. i do want to turn to banking and bonds. i'm reading a rhodium paper that talks about peobock essential little trying to decide whether or not it's going to bring to
bear stabilizing influences in the potential bank failures or allow the market to price risk, and they point out there's an inherent tension between reform and financial stability. stability requires peabock guarantees increasingly risky asset markets, reform requires pearing them back. as guarantees because there's no history of doing it, so i'm curious about your perspective on what will happen when it comes to each of you, what's likely to happen in terms of peabach intervention to manage counter party solvency issues and then the second part of my question is it seems to me that we've seen when we talk about this opening of the financial market, we have seen a shift in local governments from issuing financing vehicles, which were off books to issuing bonds, and
i am concerned about, as i know i recently read a report that the world bank has indicated they are concerned about the fact that there is an increasing emphasis on the issue of sub sovereign and local bonds to finance projects, so if you could speak to the bond market, how risky it is, and does it simply reflect a shift from a different way of raising money that is comparably risky? >> sure. so starting with the pboc, this part of what's going on is kind of what i started out my testimony with is there's been a very active program to derisk the financial system, specifically the banking system, and the way the banking system works, most of the most speculative stuff happens in the interbank market, which is a little bit different than the interbank markets in other countries.
there's more than just banks in there, and it's not just about closing books in between banks. you can use vehicles in the interbank market to then lend onto trust companies and other parts of the real economy. because of that insanity, frankly, the pboc started with derisking the interbank market and from 2017 to 2018 because all of those financial structures weren't really financing real economic growth, unwinding them didn't really have an impact on real economic growth either, but that started to have an impact on growth starting in mid-2018, so now the financial regulators are in a situation where they're trying to deal with basically the effects of the derisking campaign. they call it the risks of addressing risks, and so the derisking campaign has slowed growth at a time when you're trying to slow growth of financial assets, and what that does is basically it's the tide
going out, we're seeing who's swimming naked, right? bow sham bank was definitely swimming naked, hung fung bank, those are the three that have really blown up. and there is an effort to try to push these banks to price risk more on a market driven basis. this is, you know, just annuity past few weeks pboc has int introduced a new monetary policy mechanism called the lone prime ra loan prime rate so they can build an interest rate curve so banks understand where risk lies both in time and space. i view all of these as quite positively. you've got to remember that the pboc was created in the '90s i believe, right, so they're building this all from scratch. there then has been the moral hazard issue on top of it.
they're trying to slowly address moral hazard without blowing up the system. in my view that's the most positive thing that's happening in china, financial reform in terms of trying to do this on a marketized basis. i'll just quickly touch on the two other things. your question about which pension funds getting exposure to china, the answer is every single one of them, and the reason is because of msci inclusion, bond inclusion, all of those things. the exposure is relatively small now, but it's only going to grow over time. you know, when we signed up to a new job and you pick a random pension fund from blackrock and fidelity they have an emerging market index. and those industries are increasingly including china. so our financial system has become the pensions of our teachers and other employees in our country are increasingly intertwined with china's financial system. so we should be aware of that at the very least. the final part on the lgfe
bonds, i also view this as a positive development. i mean, for years economists have said you need to harden local government budget con stran constraints. that's effectively what they've done. they said we want this on book rather than doing it in shadows. it's a little bit more transparent. i think, again, this is an area that should be encouraged. it's okay for local government bonds to be used. in terms of the riskiness we don't really know because we haven't had an lgfe bond, you know, default. but in general, we should view it as high quality government paper because it's effectively going to be backed by the central government. so i think the developments in this space are actually -- there's so many risks that they have to address, that the
problem is very big, but i'm quite sanguine in this area in terms of the proactiveness with which they've gone after the issues. >> so i just want to really echo one of the points that andrew brought up, which is the size of the domestic chinese bond market. it is enormous. there's probably $6 trillion in bonds outstanding, and so that means that, you know, a lot of the bonds mature every month, and then so you have to replace the maturing bonds, and then also you issue new bonds to finance new debt, so that means every month there is 100 to 150 billion u.s. dollars in new issuance, and you know, this is what keeps china going is, you know, it's like a big ponzi scheme. i'm not the first one to have said that. a lot of people say that. even the chinese government says it is a ponzi scheme, but we
support it. but the chinese government would like foreign investors to help them finance this. i mean, right now foreign investors are buying anywhere from less than 1% to at most 3% of monthly issuance. they would like that ratio to increase to 10, 20, 30% because obviously, you know, if the whole world is involved, let's say, with their debt issuance, then it's not in the world's interest to blow it up and the whole world can help financing, and of course the fact that interest rates are negative in europe and japan is helping china's cause because, you know, german and japanese investors facing negative yields in their home country, they have an interest in increasing their yields and besides the u.s., the only other major option that they have is china. so this is, you know, just to give you guys a big picture
view. >> the bond terms are how can? the average? >> they have everything. >> i think on average probably fiv five to ten years. >> at what percentage? >> so sovereign bonds, so chinese government bonds and all the local government bonds now is less than 3% yield because the fed has cut rates, and that actually affects corporate bonds, 4 or 5%ish, something like that. >> okay. that you think. commissioner lewis. >> thank you very much for your educating us today. i've been reading recently a lot about decoupling these two economies. could you tell us is that possible, how would it occur, and what would be the impact on the two countries? >> i'll give you some numbers, i guess.
i don't know. so to some extent decoupling has happened already, especially surprisingly, i think, on china's side, so china bought a lot of farm goods, bought a lot of energy products from the united states, you know, hundreds of billions. that has gone down by a lot, you know, 50-plus percent. so interestingly, despite there's all this talk about, you know, the u.s. is guilty of imposing tariffs and all this kind of stuff, you look at the dollar amount that's being traded between two countries, china has shrunken that trade a lot more so than the u.s. the u.s. despite the tariffs and everything is still importing a lot of stuff from china, because even with the tariffs, china is still better. >> is that one of the reasons why our deficit with china is increasing? >> yeah, it's because the extent to which china as decreased imports from the u.s. is even more so than the impact of the
tariffs on u.s. imports from china. you're absolutely right. so if there's true decoupling, it will be because u.s. stopped buying goods and services from china, but i think costs for a lot of consumers will go up by a lot, actually. >> what will be the impact on the two economies if tor the tw countries if we decoupled more? >> i think it's hard to say on an overall growth perspective. i mean, i think it's really -- i think that each economy is individually would not change that much, but the relationships with other countries' economies would change. what i mean by that is when i hear decoupling, i think generally the u.s. being concerned about selling core technology to china that's going to enable military applications or their rise generally, maybe ironic thing about that is china
also wants to decouple. they don't want to be reliant on the u.s. for those core technologies. they would have preferred to decouple more slowly, but i think the natural outcome of that is that we're creating spheres of technological spheres, at least china and the u.s., maybe europe has its own sphere, and the long-term change is what if an american company wants to do business in argentina? will it have to work on huawei systems or other chinese technological standards in order to do business there? so it's going to, i think, sort of fragment the global economy, raise transaction costs and change sort of our interaction with other specifically developing economies. >> so i'll just be brief. i think made in china 2025 was -- is, in fact, an effort to decouple, right? because it's basically saying that it wants chinese companies
to control 80% of the, you know, sort of market in ten years of critical cutting edge area technology. everything from medical devices to ai. so i think that process was already underway, and it continues, and it's being played out, so i don't think we should be under any illusion that just because they're not talking about made in china 2025, it's not happening, it is. and not only is it happening, but i think it's also being exported so i think when we're talking about spheres of influence, it is in part, exactly as you say, things like a huawei operating system, but it's also, for example, china now helping to build the health infrastructure in africa. right? so they're doing hospitals, doing good works but also then ensuring that chinese factories that are making chinese medical devices are the ones that are providing the sort of equipment for those hospitals, right? so medical devices are one of the areas of made in china 2025, and previously china had passed
a regulation that said if you don't -- to hospitals, if you don't use chinese made medical devices, then you can't be reimbursed through insurance, right? so i see this very much as, you know, first step was made by china in terms of decoupling, and now we're going to be moving towards an effort at a broader sort of export of that decoupling effort. >> thank you. thanks for a terrific panel. in the interest of time i'll dispense with my wessel like commentary and go to -- >> i'll take the time then. >> two questions. first, mr. polk for a terrific written question. i don't know if you have it in front of you, but the page 10 the paragraph under demographics, according to projections by the world bank, china's working age population
is likely to contract by over 193,000 people by 2050. a reduction of almost -- >> mine says 193,000. just a typo? >> yeah. okay. that was easy. i appreciated the emphasis that all three of you have made on the notion that we can cooperate better with our allies, the narrative, i think matters and dr. economy thank you for your thoughts on that, but it -- i would submit it's not the case that our allies are just standing by waiting to be called upon. our staff, dr. economy in preparation for the hearing gave us a copy of the article you wrote in democracy journal in spring of this year, and the first paragraph of the conclusion you say, the u.s./china trade war has already produced a near set of winners and losers. the united states and china are both losers. firms in some other countries
are the winners, malaysian and japanese, cambodia and vietnam, brazilians and so on and so forth. i'd invite our panelists to comment on the degree to which this notion of our allies are just waiting for us to come back to them and then we'll proceed together perhaps overlooks the fact that they are in the near-term benefitting to some extent, at least companies from those countries. >> well, i would say -- so that's one way in which they're benefitting, but i would say all of our allies would still welcome the type of leadership by the united states that we've exerted in the past and exemplified u.s. foreign policy in the past, but certainly i think japan provides a great example not just of a country that can benefit in some ways from the spoils of the trade war but actively and proactively leading in the international spa
space, right? so when we pulled out of the trans-pacific partnership, japan recreated it in a different form, the comprehensive progressive -- whatever, cppt, tppp, you know, so that's moving forward, right? japan is now the largest investor in southeast asia doing more infrastructure development than china, it's became much more active working in partnership with india and africa on high end infrastructure. so i think they are moving forward without us in many respects, but that doesn't mean that we shouldn't get back in the game, and again, i think there are parts of our administration actually that are very much working with japan and australia and new zealand to push back or to offer alternatives on belton road projects, so a lot of things are happening that you don't necessarily know just from following what we hear out of the white house. so it's not quite as bleak, frankly, a picture as often is portrayed.
>> yeah, i think, you know, it's complica complicated. most countries, most companies want some level of certainty, right? and so, yes, there may be short-term benefits in terms of capital flows, capital that would have been going to -- chinese capital that would have been investing in the u.s. now investing more broadly in asia. german companies have been big beneficiaries of china's opening in terms of, you know, bmw investing, bas investing, getting china of sort of wanting to show it's open to the global business community, and so it's making high profile deals. german companies have been the big beneficiaries of that. but talking to these folks, represent tuatives from those companies and those countries, they understand that it's short-term gains, and it may be not long-term gains and so
they'd prefer a world where -- they like the u.s. putting pressure on china. they'd prefer to get to a place where china was following the rules and the u.s. and china were getting along, and they didn't feel like they had to choose between the two countries because a lot of countries and companies feel like that, and so, you know, it's short-term gain, but it's from the people i talked to, it seems outweighed by the sort of feeling of long-term uncertainty at present. >> mr. talent. >> well, i see we're out of time. >> no, no, no, you're good. >> we have time? >> yeah. >> okay. i'm going to follow up on some of commissioner cleveland's questions, and particularly with regard to the chinese reserves that beijing holds. how valuable -- how big a role do they play in all of this? what are they being held in?
and i say this because for years, you know, when you talk about they're building up all this debt, it could create instability. there could be a run, this bubble, this bubble, people will come back and say yes, but they have $3 trillion in reserves, i guess it's less now. what is that held in? is that as big a backstop for them as people often portray it? just give me your opinion on that. >> yeah, so i guess i'll -- since i've obsessed over this question for the past eight years. >> like how much of it's held in their own debt? do they invest this in their own debt? >> right, so of course the exact composition of china's roughly $3 trillion in foreign exchange reserve is one of the most closely held secrets in the chinese government, and you ask yourself, why is this such a big secret? you know, because you're
supposed to reveal the exact composition to the imf anyway, but i think even people in the imf will tell you that they don't really know. as far as we can tell, you know, according to u.s. treasury data, china holds roughly a trillion, maybe a little bit more than a trillion dollars in u.s. dollar denominated treasuries and also agency securities, so a third of it we kind of know what it is, except we don't know if they have used part of their holding in treasury as collateral to get loans, in which case they don't really hold it. some people suspect that they have done this in 2015 and 2016 when a huge amount of money was leaving china. okay, so that's a big question. as for the other parts of the 3 trillion, i would say at least 300 billion of that has been lent to bri projects, right, and
that's not very liquid. so it's not exactly what you would want in the foreign exchange reserve. it's not very liquid. and then from public records, you can see that 50 to 100 billion of that is actually holding chinese stocks, right? so the foreign exchange reserve has several subsidiaries that most people know as part of this foreign exchange reserve. they've been buying stocks of chinese companies and banks in the open market in an attempt to prevent the stock prices from cratering during financial du t difficulties in the past couple of years. it's not a huge amount, but if you add all of it together, it's 50 to 100 billion, probably a little bit less than 100 billion. and then people believe generally that china holds a lot of euro denominated securities, that's pretty safe, but they don't think it's over half a trillion, right? so most people doesn't think, so the question is that leaves a gap of, you know, another sort
of 0.7 to 0.5 trillion that, you know, i think very few people know what's in it. some people believe that it's actually not really there, so there's probably around half a trillion that's actually not there because china, the foreign exchange reserve has entered into all these complex agreements with banks whereby, you know, the banks really need the dollars so the foreign exchange reserve will give them the dollars from the reserve today but then take a promissory note, a forward from the banks but then count that as cash in the foreign exchange reserve. they might have done that to the tune of several hundred billion dollars in 2015 when they were in big trouble. so again, we just don't know. >> yeah, i really like you, dr. shih. [ laughter ] >> i like the way -- i mean, because, see i'm not an economist. i am a politician, and i know that they're under pressure. they're running out of money, and they got all these reserves
there, and the temptation to borrow against that or to use that as a way to deal with the short-term pressure has to be immense. i just have to believe when you called it a ponzi game, we're being a little diskour sieve because it's the last hearing. we're going through one of our drafting sessions and we're doing this semiconductor, pledging $2 trillion to environmental reimmediamediatio everything. i looked up at everybody else and said where are they getting all this money. i've been in rooms, i was in the congress and the senate. i've been in rooms and people talk about i want to do this new program, okay, that's great, but you know, it's going to cost 8 or $10 billion, and people here freak out. and they're just throwing all this money around, and i don't know where they're getting it. i appreciate that. i also love your comment, the difference between the moderates and the hard liners is the hard liners are open about the fact
they want to beat a global head amount, the moderates want to keep kidding everybody for another five or ten years, thank you, mr. chairman. >> i appreciate senator talent's comments because this is something that i have been concerned about for some time, that if you have the kind of banking problems that we are seeing emerge with bow shung and you are trying to prevent capital flight, and you are seeing a significant decline in foreign direct investment, which normally capitalizes your economy, i have argued that it is not yet a perfect storm, but i think that there is increasing pressure on the chinese economy that we need to pay clear attention to the early warning indicators. the chairman had some wrap up comments. does anybody else have -- >> yes, well, i'm going to have to defer my discussion and
questions about private sector and how it actually exists and is defined. but i wanted to associate myself with the comments of our vice chairman on hong kong, her opening comments. i think it's a very important point that you mentioned that hong kong is an important source of capital for the mainland, and i think it's very important that people in the mainland understand that the reason that that's the case is because of hong kong's commitment to rule of law and an independent judiciary and hard line tactics and trying to manipulate those things is only going to work against the interests of the people of the mainland as well as the people of hong kong. thanks. >> any other summary comments that you all would like to offer since we've -- we've offered ours? no? get out while you can? >> thank you very much. >> thank you very much. >> thank you. >> we'll be back at 11:20. is that all right?
11:25. how about 11:25. >> tonight on c-span, today's house judiciary committee debate and vote on the process for an impeachment inquiry against president trump. >> this committee is engaged in an investigation that will allow us to determine whether to recommend articles of impeachment with respect to president trump. that is what we are doing. some call this process an impeachment inquiry. some call it an impeachment investigation. there's no legal difference between these terms, and i no longer care to argue about the nomenclature, but let me clear up any remaining doubt, the