Broken China with Logan Wright

China's economic miracle is over — so what now? Francesca Ghiretti sits down with Logan Wright, author of Broken China: How the Economic Miracle Shattered and What It Means for the World, to unpack why the slowdown runs deeper than most assume, why there is no quick fix, and why betting on tech won't save Beijing. Plus, what a weaker China means for Europe and the world.

Find the book here: https://www.politybooks.com/bookdetail?book_slug=broken-china-how-the-economic-miracle-shattered-and-what-it-means-for-the-world--9781509570676

Logan's related Foreign Affairs article: https://www.foreignaffairs.com/china/chinas-moment-weakness

Francesca's Foreign Affairs article: https://www.foreignaffairs.com/china/how-china-misperceives-itself

Transcript

Copy Transcript Copied

SPEAKER_00 0:09

Welcome to Geoeconomic Competition. I'm Francesca Giretti, your host, and in every episode I dive into the intricacies of geoeconomics with other experts. Today we're going to talk about one of the debates that we have unpacked several times, which is about the future of China's economy. July Polybura meeting somewhat showed a leadership that is a little bit more cautious in his evaluation of China's economic performance. The data from the first half of 2026 confirm some of the existing issues, among which weak household consumption and confidence. And we'll talk about this in this episode as well. Yet there is a lot of confidence that technology, AI, some of the breakthrough will save the economy, they will bring it across the line and they will deliver the China dream. To discuss the shape of China's economies, present, past, and future, I'm very happy to have with me Logan Wright, his partner at Rhodium Group and director of China macroeconomic and financial research at Rhodium Group. And most importantly, perhaps for the episode of today, is the author of a new book, Broken China, How the Economic Miracle Shattered and What It Means for the World, which is available in the UK. So I read it, but apparently it's not available in the US. Yes. Yes. Welcome, Logan.

SPEAKER_01 1:24

Thank you, Francesca. Appreciate it so much. Um, yeah, it'll be available in the US uh September 28th. And uh look, we'll have several events uh uh launching it, including one at Center for Strategic and International Studies and several other uh think tanks around Washington uh as well.

SPEAKER_00 1:40

Fantastic. But yes, we're some of the luck for once as Europeans, we get it first. It doesn't happen very often, do you?

SPEAKER_01 1:46

Indeed. And I appreciate I appreciate your reading. I appreciate you reading it first. Uh it's like it's been um it's been it's as you know when you you do these things, it takes much longer than you think to actually you know see something you worked on for quite a bit uh finally be released, and then it feels like it takes forever, but there you are.

SPEAKER_00 2:06

I know, I know that first box with the sort of freebies is always quite exciting, but it does take a while. Right. So let's get to it. You have several arguments within the within the book, but one of the arguments is that the China's economic slowdown. So, first of all, China is going through economic slowdown, and that slowdown is structural and it has been long in the making. Ongoing issues include slowing productivity growth, and I'm citing directly from the book, weak household consumption, weak domestic demand, and growing capital outflow. I have two questions for you. So, first of all, is this the assessment that you make in the book, or did I read it wrong? And secondly, how did we get here? How did China get into this economic position?

SPEAKER_01 2:52

Um, you read it correctly, and that is the assessment. Um, but I think there's a sort of unified theory around China's slowdown within the book, which is what I'm trying to, which I think is is really missed around most of the discussion of China's economy. And it's it's why you know we focus on following the money within China's financial system so uh intensely in our work at Rhodium, but in the book as well. And the key point I would make is that the story of China's slowdown is essentially a story of a credit bubble, uh of a credit boom and bust. And basically, uh credit ends up covering up a lot of inefficiencies when it's growing very rapidly. But when it starts slowing down, and as I describe this in the book as the rise and stall of China's financial system, policymakers look a lot less capable. Um, it looks a lot more difficult to figure out how to fund all of your industrial policy um ambitions. And as borrowers are cut off, defaults start uh multiplying. So the story I tell is that after the global financial crisis, China has an investment-led economy. Everyone understands this. Investment has been encouraged by all sorts of different state policies, a captive financial system, low deposit rates. And so, therefore, the state can basically direct credit at its discretion. After the global financial crisis, there's a huge credit expansion. The money supply uh almost doubles in just three years. In eight years, you had China adding more than one-third of global GDP in new bank assets. And frankly speaking, we've never seen anything like this in the last century, century and a half, even in a single country's financial system. So those rates of credit growth, credit averaged 18% growth between 2007 and 2016. Those rates of credit growth have to come to an end simply because a financial system, when it's adding, when it's expanding relative to the size of the underlying economy, and here it's expanding so much faster relative to the size of the global economy at the same time, not just China's economy, when it's adding credit to that at that pace, basically one of two things is happening. You are either providing new financial services to new types of borrowers, what's called financial deepening. So this makes sense. For years, Chinese uh households did not have credit cards. And so if you make credit cards available, all of a sudden that is an expansion of credit, but probably a positive one in most cases. But the other thing that you're doing is you're adding financial risk and you're adding additional credit risk. These go hand in hand. If someone financial underdevelopment is one thing, and it is good to see an underdeveloped financial system expand to a certain extent, but at some point it's expanding faster than the underlying economic activity that it is financing, and therefore it's taking uh on new risk. For you know, an individual project, a bridge across a river, and I use this example in the book. The first bridge across a river is probably very productive, probably makes a lot of sense uh to do this, adds to a lot of different activity and commerce flowing back and forth. The second one slightly less so, the third one slightly less than that. Individual projects need to be evaluated based on their individual cash flows and economic returns. In aggregate, in economy wide, we think about this as credit to GDP ratios. And so when you saw China's credit to GDP ratio jump from the 140% range up to the 280% range over this time frame, it tells you that there's been a really unprecedented credit expansion underway. The slowdown right now is basically the bill for all of that past credit coming due. And so I describe this not as crisis or collapse, but decay. And the choice in China has been to continue to fund unproductive state-owned enterprises, local government financing vehicles, um, and other state-directed forms of financing and other companies, precisely because if you cut them off, it would have huge political consequences and it would also slow growth more aggressively. But that doesn't mean that there aren't borrowers who have been cut off. As credit growth expanded, the critical turning point in China's economic cycle, I would argue, was around 2017-2018, during what's called the deleveraging campaign. It was not the property sector explosion, it was not uh zero COVID, although these amplified a lot of this stress. The deleveraging campaign was a crackdown against China's shadow financing system. And shadow financing is this form of informal finance, this deepening that had been going on. Um, it allowed you know several Chinese households to access mortgage finance indirectly outside of the banking system. But again, it created additional credit risk in doing so. So as credit growth slowed and as this regulatory campaign took place, you suddenly saw a new credit risk materialize in first in the riskiest parts of the financial system, peer-to-peer lending networks, then in smaller banks like Baoshang Bank, and there was there's been a series of 30 to 40 bank um failures that have taken place uh since Baoshang defaulted in May 2019, May June 2019. In 2020, you had trust companies, which are these larger local government-backed uh informal lenders, uh start to default. In 2021, you had the property developers defaulting in significant numbers. In 2022, you had people walking away from their own mortgage loans, threatening uh not to pay them if their houses weren't delivered. And in 2023, you needed an unprecedented bailout of local government financing vehicles and local government projects. So this credit risk kept moving closer and closer to the center, you know, of uh the financial system. The problem is how to decide where to take losses, how to decide where to, you know, in economic terms, write down the capital stock. Because politically speaking, what this involves is Xi Jinping traveling to Liaoning and saying, comrades, you know, you've you know worked on at our direction in response to our five-year plans for for years, uh, but there's no future for you, and you're all out of jobs, and um all of these factories will be shut down. And there's good reasons why China doesn't do that. But the cost of maintaining that cost of credit is now limiting the capacity to reform the system. So the past is strangling the future. And you just think very differently about the, you know, there's a there's a line about the global financial crisis from uh uh, I believe it was Steve Eisman. I'm not sure if he was quoting somebody else, but they mistook leverage for genius, was the line. I mean, people in China mistook credit for competence, for long-term planning, for a different kind of more sustainable growth model. And, you know, on the flip side of credit cycles, people look a lot more, you know, on the back foot, reactive, uh less capable in general of managing uh a lot of complicated trade-offs. That's basically the story of the slowdown. It's a it's a night, it's an enormous credit boom and bust, and one of the largest that we have seen um definitely in recent history.

SPEAKER_00 10:41

Then what does China need? And you've already mentioned some of these, which is you know, the cost of the reforms that are needed is high, and therefore Chinese leadership is not particularly keen to adopt these measures. So one side of the question is what would it be needed then at this point? But the other question is how far is that from what China's leadership is currently implementing?

SPEAKER_01 11:05

Yeah, one of the arguments I make in the book is that decay is a political choice. And I think there's a perfect example of this when Xi Jinping went to Gansu in September 2024. He they do these local government inspection tours, local officials take them around. In Gansu, Xi Jinping personally discovered nothing was working at the local government level. Civil servants are not being paid, basic social services are being cut back, debt is actually strangling the capacity to operate uh localities. He came back, there was a number of there were a number of press conferences held to try to announce new stimulus measures, but in the end, there wasn't actually very much announced. There wasn't actually very much put into place. And, you know, this is an important test case because the top leader looked at a broken system and said, do we need to basically pull this up, root and branch, reform, fix this once and for all? No, they just said, here's a little money. And they said, here's, you know, a uh debt refinancing package, some debt swaps uh done for up to 10 trillion yuan, which is still no one really thinks is doing anything about the underlying scope of uh the local government debt problem. And so why is that? Like, why what is the obstacle to actually you know creating some of the more fundamental reform issues? It is certainly not an awareness of the problem, and it is certainly not an inability to grasp options available to you. It in my view, in the the argument in the book is that reform risks crisis and uh decay does not. Decay just basically means things get less and less effective over time. And essentially it transforms a discussion about China's economic outcomes into a discussion about economic narratives. And so this is why you see China no longer really talking about overtaking the US in global GDP as the highest uh largest GDP, uh, largest uh country in GDP terms in the world, because it's not really plausible. You instead hear them talking about AI, about electric vehicles, about other technological achievements. It is an attempt to sort of change the narrative away from economic performance toward, you know, a different kind of competition. And it's also, I would argue, you know, what's really responsible for the rise in trade tensions, not only in Europe uh with, but with the United States as well, because if you cannot generate domestic demand, um, trade tensions are going to are are going to be inevitable. And what you see right now is that Beijing is no longer offering the promise of economic growth or the promise of its own domestic consumer markets. They're offering far more sticks than carrots, they're offering far more threats uh relative to inducements. So, I mean, this is the the dilemma. You can say, uh I like to put it this way who stops Xi Jinping from going on television and telling everyone and going on television tomorrow and saying, comrades, the fiscal and financial system we've had has worked for the last 10 to 15 years, but it's not gonna work for the next decade for us because we've exhausted our capacity to expand it. Uh, so we're going to change, we're going to reduce state-owned enterprise investment, we're going to get rid of a lot of this waste. Uh, but this is good for you because we're going to change the tax system, we're going to create new subsidies, we're going to equalize migrant workers' pensions between urban and rural areas, and we're going to, you know, create the foundation for uh consumption, you know, for consumption-led growth, uh, which frankly will be better for everyone's standard of living, uh, which has really been under pressure from this sort of jobless growth that we've had for years. Why doesn't he do that? Um, you know, what's the even though that will mean slower growth? And he would have to acknowledge that even though that would mean slower growth in the short term as investment, you know, weakened. So I think there's, you know, three kind of categories of of reasons. Analytically, they just don't believe that. So they just don't believe that growth is as weak as as what it look appears to be. And we would argue there's very little evidence the economy is growing at all right now. If you look at the just even the official expenditure side components and proxies over the last year, there's an ideological reason. The East is rising, the West is declining. So therefore, no one can say, you know, China has this kind of problem and you're not going to advance this view internally. But I think the real reason is strategic. It's because you're trying to push back against de-risking, you're trying to push back against uh protection, you know, trade defenses, you're trying to push back against export controls. And so therefore, you need a domestic market that's worth arguing about. You can't be saying that's worth fighting for uh in the rest of the world. You can't be saying that there's really no prospect of domestic growth in the ways that we've seen it in the past. Now, I think that's self-defeating, but but I think that's really where the logic comes from in terms of why this is the way uh we're seeing these messages the way that we are.

SPEAKER_00 16:17

And I'm gonna ask you about narratives and data in a second, which again, not to diminish any other part of the book, because the book is amazing, but it's definitely the two things that I enjoyed the most in terms of arguments. But I I want to ask a very direct question, which is obviously part of the narrative that is coming out of Beijing these days, is yes, there are things are not working out that well, but technology will save us. And that has also brought some sort of a U-turn from Xi Jinping self towards the tech sector and the leadership in the tech sector. Is that uh what is going to happen? So is technology going to save China's economy?

SPEAKER_01 16:56

Um, no, and I I think there's a few issues to think about here. One is that the technological sector, the the new strategic industries that China focuses on um are very small in GDP terms. So it is completely fair to say that Chinese firms can make technological achievements, that these can be world-leading firms in some areas, but they're not actually that large relative to the size of China's underlying economy. It is reasonable to project higher rates of growth. Um, but again, you're not likely to see the fiscal and financial system reallocate resources toward uh these sectors. So they would have to be basically growing organically outside of levels of state support that we've seen in the past. So we did an analysis uh based on newly based on uh input-output tables released last year, where we estimated that uh the size of the new strategic industries in 2025 was about 6.3% of GDP, and they had grown about one percentage point of GDP from 2023 to 2025. Set that against a collapse of property investment, local government infrastructure investment, and traditional vehicles, for example, that was six times as large uh during that time frame. So it's really the past strangling the future in this regard. The financial system is not necessarily funding uh these enterprises in a way that would uh facilitate some of their rapid growth. Now, many are pursuing are able to fund independently through the equity market, and you know, there's different ways that this can happen, but it's the way we think about it in sort of a macro framework. These are interesting industry-specific stories. They're not really macroeconomic stories. The second reason is um I would argue that this focus on technological development probably makes China's problems worse and rather than better, precisely because the marginal demand for everything that is, these are capital-intensive industries, they're not labor-intensive industries, they're not shoring up household consumption, they're not employing large numbers of new people. The marginal demand for everything that is produced in China with these new industries is still outside of China rather than inside of China. And so if you can get faster productivity growth in many of these industries for a longer period of time, I would argue it extends a model that has to adjust anyway and is going to be under greater pressure to adjust later on. So it's probably more accurate to think about all these technological investments as national security-based investments. And they can deliver national security benefits, they can deliver different choke points uh to Beijing over time. But I think it's important to sort of view them that way. They're not really a growth strategy as we would understand it. The other point that's worth making, and Ya Shen Wang has made this uh very recently, is that there's no real evidence that productivity growth in China economy-wide is improving. I mean, uh there's there probably will be some of that evidence coming about in terms of advanced manufacturing sectors in the in the next few years, but it's certainly not apparent at this point that it's delivering economy-wide improvements in total factor productivity.

SPEAKER_00 20:15

But then we get to the point of at a certain point you mentioned uh um there's little evidence uh that the economy is growing at all. And again, in the book you sort of unpacked the all the different indicators that kind of show, well, the economy probably isn't growing that much at all. And this brings me to one of the first kind of nerdy arguments, which is data reliability and what kind of issues data reliability leads to, not just for analysts in general, but in relation to the narrative of how strong China is and how strong China's economy is and how resilient it's going to be in the future. In a second, I'm gonna ask you about the flip side of this, which is this uh um myth of a long-sighted leadership in China who has a clear idea about how the next 500 years are going to develop. But let's stick with data for now.

SPEAKER_01 21:08

No problem. And um, everyone, please listening to this, uh, there's an entire chapter in the book uh talking about the fourth chapter talking about the reliability of economic data and why the story of China's growth is so contested and you know the politics associated the politics and and uh security implications associated with data presentation. So please do check that out. But one of the arguments I make within the within that chapter of the book is that there used to be a reasonable debate about the accuracy of China's GDP growth, in which it was it was obvious that there were errors being made on both sides. So, in other words, there was smoothing of the data that went on, but you could say that it was lower in some years where it should have been higher, it was higher, and some years it should have been lower. And this was sort of the state of the discussion over China's economy for most. Of the 2000s and 2010s. And I lived in Beijing from 2001 to 2015, in Hong Kong from 15 to 2022. I remember following all of these discussions intensely in terms of looking at data reliability and thinking through this. And the NBS used to sort of engage on some of these issues more directly as well. There's an anecdote in the book about Lu Xian Pai, the famed China scholar, interviewing Deng Xiaoping or talking to Deng Xiaoping in the 70s and asking about population statistics. And Dung basically sort of said, you really shouldn't take these at face value. We know that local officials distort them higher and city officials distort them lower, and we assume on balance they're generally accurate. And I think that Chinese officials for a long time sort of thought about GDP growth that way. One of the best explanations I ever received from someone who was in the system, but a former official, was that they didn't believe the data, of course, but they thought that they were sort of fiscal or financial targets rather than, you know, official sort of economic growth targets. In other words, they're basically mechanisms of communication from the central government to local governments in terms of how these data, you know, how these data are communicated. So that's the history of this. It has entirely changed since 2022 and since the collapse of the property market. And so this is one of the points that needs to be made is that there's a long-standing debate about the accuracy of Chinese economic data, and you can basically throw it all out because since 2022, it's virtually impossible to defend what they're producing. And we make this argument, you know, openly at Rhodium. We have alternative estimates based on China's expenditure side GDP components. We do not think that these are an accurate new set of SNA compliant tables. Our point is they are probably closer to a picture that will allow you to ask more relevant questions about what's happening in the economy and for policymakers to frame discussions around rather than the assumption that China is still averaging since the collapse of its property sector, which was 20 to 25% of its economy, that it is still basically averaging the same pace of investment growth as it did before the property sector. So China officially says that the economy is still growing close to 5% over ever since 2022 and the zero COVID years. I've never seen an economy that has had 5% real GDP growth with three years of deflation over three years with three years of deflation. It's not obvious, especially in an investment-led economy, what is offsetting that decline in uh property investment given how large it was. So there is a clear discrepancy in growth. There is a reasonable debate about how large that discrepancy is at this point. Um, but in stock terms, we think it could be as much as 10 to 11% of GDP uh just based on the overstatements over the last uh five years. And so why does this happen? And what can you take away from this? Again, there's reasons that China needs to present its economy as more resilient for its own str for its own strategic purposes, but no one is ever going to be proven right in this discussion. There's a lot of discussion in the book about uh the IMF, the World Bank, um OECD. If you're within one of these institutions, you're thinking about cross-country comparisons. You're not thinking about picking a fight with China over the accuracy of their economic data. But it creates problems for how they message, you know, how they message global growth as well. And if you think about it this way, if your global growth estimate is too high because China's too large a proportion of it, your global inflation estimate is too high too. And if your global inflation estimate is too high, monetary policy in several economies that might actually need to invest to prevent some of the reliance upon Chinese supply chains from taking place becomes more difficult. And so this is all, I think, I mean, not exactly through this mechanism, but I think this is all an attempt to try to discourage disinvestment, discourage um uh de-risking, to discourage alternate uh investments in alternative supply chains. And this is the narrative competition that sort of Beijing engages in, uh, but it's also just about the stability and competence of the Chinese state as well.

SPEAKER_00 26:43

And these element of uh discouraging, de-risking, while at the same time perhaps increasing the perception in third countries that China is such a formidable opponent that it doesn't even make sense to start anything against China is also part of that idea that Chinese leadership is so long-sighted, so well prepared, they've seen it all coming, they're incredibly resilient, and therefore, with our you know, sort of democratic turn turnover and with our more short-term decisions, what's even the point to engage with something like that?

SPEAKER_01 27:20

And this is where I mean, first of all, I think that's absolutely what the message is. And when you see and hear stories of people going to China being awed by robotics factories, being awed by, you know, all of the, it's like the robots are doing different things at this point. Look at the really fast uh auto assembly. These are messages that are meant to discourage new investments. And if the message is like these will be cheaper and we'll be more productive, that is an attempt to, you know, reduce uh to mitigate de-risking uh steps uh that are, you know, that are taking place. And so speaking about the longer-term planning aspect, this is one of the arguments I have been the most skeptical of for my entire career. And this is simply by living in Beijing, you never get the sense that there's really much long-term planning going on at all. And it's not that surprising for anyone who's interacted with the Chinese state in any significant length of time. The way I kind of put it is there's a lot of long-term planning in China, but it changes every three to six months. Or more accurately, you have several long-term plans that um different variables that will conflict with one another. And stating that this long-term plan prevailed over this long-term plan, and therefore we defaulted into this mode, is not evidence that there is a huge planning-oriented uh device behind the state that is that is this far-seeing and capable of judging this. That the point of the book and the title of the book, um, in terms of the assessment of where China's fiscal and financial system are, is that absolutely no one in China planned to create the world's single single largest single country credit expansion in over a century. No one planned to allow shadow banks operating outside of Beijing's regulatory purview to extend about eight or nine trillion dollars in credit in just three or four or five years, and to allow banks to evade regulation as quickly as they did. These were the byproducts of political choices between the regulatory impulses to rein these in and the potential impacts on growth if they did not rein those in. They contributed to the stock market boom and bust. They contributed to the property sector's boom and bust. And no one in Beijing planned for their most important industry to collapse and in a way that has severely impacted economic growth, has triggered domestic deflation, and has produced the widespread trade tensions that Beijing is now facing. Now, you know, Francesca, your own work, the foreign affairs piece you you wrote in the last uh few months, um, highlights exactly this. Beijing cannot attribute the failures of their policy to things that are structural and nature within their uh their model. They like in economic terms to say, we just have problems of confidence or we have problems of local government implementation. That's an easier sell than trying to explain actually, we really can't maintain the same pace of credit growth, therefore we can't maintain the same pace of investment growth, and government revenue is under the same strain from the same sources. So I think that if you look at if if economic growth is the foundation of China's inexorable rise, and China's inexorable rise is their most important political message, it's very difficult to look at economic policy in China and see any evidence of a proactive longer-term plan. You overwhelmingly see evidence of reactive measures trying to respond to the last crisis. Uh, people used to call this sort of the Beijing Fire Department when I was in China, precisely because you've created, you're trying to control too many things, you can't control volatility everywhere, suddenly it explodes in one market or another, and then you're responding. But you're certainly not able to direct resources over a longer period of time to the sectors you want to, precisely because you're not doing that right now. And for anyone who really thinks that, you know, this is a financial system that's working, uh, 58% of all new loans and the overall proportion of credit is is uh declining, the overall growth rate of credit is declining. 58% of all new loans are directed at uh companies that are paying less than the loan prime rate. So they're certainly not the faster growing dynamic companies that China wants to fund for the future. And that proportion has risen linearly since 2020, 2021, when it was sort of in the mid-20s. This is reflective of the broader financial decay that's underway. You're extending these loans at lower rates to companies that can't repay you. You'd rather keep them alive rather than write down the capital stock. And if I could just plug someone else's uh work on this as well, Yaakov Fagin is a Soviet historian. And I I struggle with this question of, you know, what was the Soviet economic reform debate like and where did it where did it come from? And I always thought it was sort of a debate about what happened in the 1980s. And Fagin's work, which he has from the Soviet archives, basically says the Soviets reached this point in the early 1960s, and Berezhnev reached a very similar point where they could have deepened reforms uh far more uh significantly, but that would have created too many ideological concerns for the Soviet state. And so they essentially also decided on embrace decay and embrace sort of stagnation as a slower uh pace for reform. And what did they rely upon to try to boost productivity? What they called at the time the scientific technical revolution and cybernetics. And Fagin's very aware of how this is playing, you know, in in in Chinese debates uh right now. But it's definitely it's something I cite within the book, you know, extensively and and the only work I have seen that that discusses the Soviet debate in that kind of detail.

SPEAKER_00 33:35

And you know what I find funny? Well, maybe funny is a strong word, but if you think about how much time and effort the CCPS spent in studying the collapse of the Soviet Union and how to avoid making the same mistakes and avoid the same faith, it is funny now that they're facing a similar inability, well a sort of unwillingness to do what needs to be done to future-proof their economy. Now, I'm not saying that China is on the same path, but it is far from the path of a big economic success. And to your point about abandoning the dream of being the largest economy in the world and doubling down and being a tech power, I'm not sure contemporary China knows who it is or how to be without that economic success story. And the other side of this, and we're finally moving to the implication for the world part of the podcast, and we're going to try to close with this, although interesting podcasts are always difficult to keep short. So the other side of this is a thing that leaves me always surprised, and probably at this point really shouldn't. And it is the resilience of the argument that China is the future. Despite all the evidence and experience, we'll still have this selective memory by which we forget or set aside all the evidence and buy into this narrative over and over again, regardless of how many weaknesses and vulnerabilities come to the surface. So China is the future. In technology, it's the same. No matter how many analyses we bring of the issue that China's tech ecosystem is facing, and we show how contested the space still is, China is still going to be the tech leader, and there's nothing we can do to compete with it. So the resilience of this argument and its constant return in different shapes sometimes leaves me surprised every time. And I don't know if it is because we terribly need another land of opportunities. And once China's gone, we don't know what's left, but we seem to be unable to counter that narrative of China's unavoidable success.

SPEAKER_01 35:30

So I think for years, and I discussed this in the book as well, for years, governments really didn't want to push back against that argument. And one of the reasons was you wanted China to reform. And you see, therefore, you don't want to make the argument that China's too weak to reform. And by the way, this is the purpose of the title, uh, which is Broken China, is not to say this is another bearish book about China. It's to say if the system is truly broken, what are you going to do about it? And what is actually the step to take uh to the step to take next, which is exactly um, you know, what uh I what I emphasize at this point in the rest of the in um in the discussion of what this means for the rest of the world. But that's exactly the the conundrum, which is that if uh you truly cannot uh see the path to Chinese growth, then the intellectual bubble um around this basically needs to burst for people to start looking at the the threats and um and the potential consequences of de-risking, of trade confrontation, of trade defenses differently. And the key point is if China is not going to see a source of domestic demand, the path forward is a path with more Chinese investment at lower and lower export prices. If China is the largest investor in the world and remains an investment-led economy, they can only grow relative to the rest of the world by displacing investment in other countries. And it's very obvious, especially in Europe, that where the manufacturing and export similarity is extremely strong, and this is in Germany, it's in Mexico, uh it's in Indonesia, it's in several, you know, it's in France as you know, in France as well, um, several different countries, but the threat to manufacturing centers in general is much more acute. So one of the key points uh I make in the book and in the foreign affairs article that sort of uh accompanies this is that threats from China are deterrable, not inexorable. They are manageable, they cannot be, they're not going to rise over time unless you let them, that there is an answer to disinvestment pressures, and that is to invest. But there's a it's an entirely different kind of strategic competition that the United States faces with China, for example, but it's also an entirely different economic threat that the rest of the world faces with China. It's a threat that disinvestment continues, China therefore accumulates more and more um choke points, more and more uh vulnerabilities for Western supply chains and starts using them. And if they start using them, this is basically you know weaker for growth elsewhere in the rest of the world. But when you think about China as a military and security threat to the United States, they're an industrial and technological competitiveness threat, but they're no longer a systemic rival in economic terms. So you shouldn't have the same policies thinking about China as an economy that's growing at six to seven percent in nominal terms sustainably, versus a China that's growing at 1% to 3% in nominal terms uh sustainably over time. And so that I think is one of the underappreciated aspects of uh of where we are at this stage. And it calls for, and this is what I argue in the foreign affairs piece, more aggressive investments precisely where Chinese disinvestment is strongest. And this does not have to be across-the-board tariffs, this does not have to be a broad-based industrial policy, but where you where countries are seeing their red lines of industrial resilience under threat from continued uh Chinese export growth, this is where it's easiest to just start uh putting those uh restrictions in place and to invest on the back of that. That signal by itself is likely to change the way in which China approaches the rest of the world at the same time. And again, Beijing's in a very difficult conundrum here because they're essentially in a negotiation over managing decoupling. So you can blow up that negotiation and retaliate more aggressively, but then you basically end up in the same place. If you if you're in Beijing's position, if you win, you lose. Because even if you can expand global export market share for another two, three, four years, it's not like everyone countries will give up and just say, okay, we are completely fine with having our entire manufacturing base um centralized in China, and we're completely fine with them threatening us over it from time to time if we don't do what they want. I can't see how politically that becomes a sustainable equilibrium.

SPEAKER_00 40:17

There are a couple of things that have been going through my head for a while, and I apologize to people who've heard me banging on this drum before, but uh bear with me one last time and we'll be closing with these. So, this is especially in relation to the EU-China dimension of contest. The first is what I could call evidence that China cares about access to the European market and it cares deeply about that access. If that weren't the case, they would not have got so worried about the Industrial Accelerator Act. But what I find most interesting, and maybe look, maybe I'm reading correlation where there is none, but the Europeans were struggling with access in Beijing, and then sort of June 2026 come, and it seems European leaders may be more serious than expected about countering China overcapacity across the board and for real for once. Now, this is obviously an oversimplification, but I don't want to make it too long here. So let's just say that they were serious about countering China's overcapacity. And then you have an high-level meeting between Wang Wen Tao and Mary Chefovic, and the subsequent trade and investment consultation and the four working groups, and then a visit to Beijing in the area of Safovic in October to seal, or at least you know, to seal part of the deal, or you know, to sort of sign off some progress. So this is a long way to say that the first thing that I've been that I has been going through my head is that this was a strong signal, in my opinion, that China truly needs Europe and that perhaps we failed to read those development that development as a proof of our own leverage in the bilateral relation. Now, the second point, however, is about timing. And this time I won't go and talk about again about the difference in timing between export-oriented restrictions, so read it as export controls, and demand signed restrictions such as tariffs, and how I think the latter takes longer to impose pain than the former. I'm not going to talk about that because I've done that before. I don't want to bore you about that, but I do want to talk about what seems to be sort of a mismatch in timing. At a time where the EU seems to be getting more serious about rebalancing its relationship with China, especially the economic relationship, is basically the door to 2027 when France, Italy, and Spain go to elections. And so I kind of doubt, although never say never, I suppose, but I doubt that the party that is running for election will be as willing to tell its population, look, we need to counter China. And so there will be some economic pain in the short term. But after that, we will have stopped European de-industrialization, right? So I don't think they're as willing as maybe they would have been in a non-election year. Although I do see the weakness of that argument because it does seem that we're in a constant election. So maybe that's not the case. But that is especially true if the effects of slowing down the industrialization are not felt quickly among the population, and especially they're not felt across member states equally. So maybe I'm just you know overthinking this, but the couple of things that I've been thinking about is one, and it's positive. I think it's evident at this point that China needs Europe. And two, however, it is also evident that politically the timing may be bad.

SPEAKER_01 43:35

Uh completely, completely agree. Um, understand this, and I I I think the the way I would put it is Europe does have a lot of leverage. And the restrictions on demand over time are far more salient than controls on supply that Beijing is likely to provide. Now, I think the retaliation that Europe's also worried about is also Chinese restrictions on demand. You know, essentially. You know, this probably works itself out into some sort of larger negotiation in which both sides are standing down these tools. But until you're actually developing, and I understand the you're I understand some of the parameters, the European debate, searching for sort of the perfect safeguards tool and things along those lines, which I don't think is necessarily the constraint. The constraint is is more is market access still going to be available? And you know, there's the the the counter to this argument that restrictions on demand are more, you know, are more salient than restrictions on supply over time, is often a political one, in that perhaps it is not government's responsibility, first and foremost, in a democratic system to favor these sort of industrial resilience objectives relative to consumer welfare issues. And that, you know, by itself can sort of uh limit the salience of some of the some of the measures in place. But you're exactly right. The the timing of this is uh the timing of this is difficult. It's just going to become more difficult, though. Um, I mean, I think if you put it, and I think a lot of what's changed in the European debate this year has been this awareness. First of all, there's been a lot more focus on the exchange rate, which is interesting. Um, true, but you know, probably not the sort of magic bullet that everyone thinks it's going to be, precisely because the exchange rate alone is not going to make China's industrial change the Chinese political economy that's focused on industrial policy and continued uh investment-led growth. I I've I wrote my dissertation on the exchange rate, and the irony was um that it was never used. And there's a note on our website called 20 years of Chinese Exchange Rate Policy, or missed opportunities from 20 years of missed opportunities in Chinese Exchange Rate Policy. It has never been used as a tool of macroeconomic adjustment in China, really considered as a tool of macroeconomic adjustment. So the idea that it's suddenly going to be one now that's going to solve China's external trade relations is uh is a bit far-fetched in my view. Um, but nonetheless, this is going to become more difficult over time because deflationary pressures in China are really the driver of this. And if there's no domestic demand in China itself, and it dramatically changes the logic of the trade relationship as a whole, in which, yes, Beijing can retaliate, but overwhelmingly, there's more leverage in cutting off uh consumer markets in developed economies, US, Europe, as the G7 runs a trade deficit, the rest of the world runs a trade, China, um, China and commodity producers run a trade surplus. That structure isn't going to change, but the parameters of where investment losses are taking place and how large those surpluses are. This is the entire debate about global imbalances and whether you can um reduce them sustainably over time. And I would argue that politically it's probably uh an investment push is and combined with trade defense ends up creating some of its own political protection uh over time. And it's probably a more sustainable political protection than people just needing to argue that we shouldn't do something because Beijing might retaliate more aggressively against their industry, because that threat's not going away anytime soon.

SPEAKER_00 47:24

This is the perfect final message for Europeans. I like how my guests tend to do this often, have the perfect conclusion that does not need my help at all. So, Logan, thank you for joining me today. And to listeners, if you can, go buy Logan's book, Broken China: How the Economic Miracle Shuttered and What It Means for the World. And if you cannot buy it yet, wait until the end of September and then go and buy it anyways. Thank you, Logan.

SPEAKER_01 47:51

Thank you, Francesca. Really appreciate it, and great to speak with you.