For you and not a lot of time. This hour is going to fly by. Toms book is really a fantastic read and but i do think folks especially in the United States are going to find the book controversial, thats a great thing about about because if a book doesnt generate conversation, then it may not be worth reading. This is a Glass Half Full story of chinas economy and the management of the Financial System. Box offered at a time when u. S. China relations are declining and attacks from all different corners in the United States of chinas system are going. There is this argument that chinas economy, how it manages that economy is incompatible with the International System and as a result of the u. S. And others need to reduce their exposure to chinas unique risk. The book tries to answer the question, how did china managed to do it, how they managed to continue to grow without a major financial crisis. And can they keep it up . Im going to turn the floor over to tom in just a minute, he will introduce his book and then we will hear from several commentators all leading experts on chinas Financial System in their own right. Then we will open up things to discussion with our online audience, you have ways to submit questions through the chat function or through email to our staff who will forward me the questions and then i will help moderate the conversation for the remainder of the program. We were expecting a small audience for a specialty topic like this, hence a zoom room that can accommodate about 500 folks but we are overflowing. We had almost a thousand people registered for the event and so no matter what, folks will be able to watch this now or online and just a bit. Im going to turn things over to tom, he is bloombergs chief economist prior to joining Bloomberg Tom worked as china economics correspondent for the wall street journal. As an advisor to the uk executive director of the ims and policy analyst at the British Treasury and european commission. Hes also an author of understanding chinas Economic Indicators which delve deeply into chinese statistics. Tom, thank you so much writing this book. We look forward to your per dissipation and the conversation this morning. You veryabthank you very muc. Just give me a moment while i share my presentation. That looks fantastic. Does it move . It does. Fabulous. Its really never been more important that all of us understand not just chinas economy but the intersection between chinas economy, chinas Financial System, china business, china leadership, china security, and i cant think of anyone in the world who pulls the pieces together more smartly and more prohibitively than the team at csis. Im delighted that csis would host this book talk, thank you scott and the team there for helping pull this together. As i prepare to launch my book over the internet i was thrilled to be doing it with csis but i also have a concern when you do a book launching person the audience is physically their mac the kind of moral obligation to buy a copy of the book. When you do a book over the internet, perhaps that sense of moral obligation as they are or isnt quite as strong. I devised an extremely clever mechanism, which im not going to use to try to ensure i engineer maximum sales to this event. Before i start my presentation i would like everyone to raise their right hand and repeat after me b i tom orlik pledge immediately after the presentation i will order a copy of the bubble that never pops. That the compulsorily part of the pledge, im not an unreasonable man the second part is voluntary feel free to follow along if you want to and also one for each of my friends and relatives and i will also leave a positive review on amazon. With that done, let me jump into my presentation, i lived in china for 11 years from 2007 to 2018 and that entire time there was a consistent thread of pessimism even a threat of doom running through the western view on what was happening in china. Yes the story when 10 great looks pretty impressive but a little bit beneath the surface and there are problems. That is too high, china will have a financial crisis leadership cant execute on reform at two abtoo conservative, too trapped. The state sector is too big and too inefficient and chinas medium tone the prospect of that strong as a middle income track of the demographic problem is the workforce agents and yet here we are in 2020 in the china bubble has not popped. My motivation is putting pen to paper for my book was to try to understand why, what are the hidden sources of resilience and chinas economy, how does china continue to defy the pessimistic predictions of collapse and how should that shape the way we in the u. S. And europe think about engagement with china Going Forward the presentation today i want to touch on four areas where i think we didnt have the story wrong on china but we have the emphasis in the roleplays, i want to talk in particular about debt reform, the state sector and the future. First lets talk about debt, this chart tells you, i think, the way in which most foreign economists and many chinese economists think about the biggest risk of chinas economy, it shows you the ratio of debt to gdp in china. In 2008 chinas debt to gdp was arraigned 140 percent. Fastforward 2015 i met debt level has leapt 250 percent. If we look around the world we scan the history books we cant find any other countries that have taken on as much debt as china as quickly as china has. But we can find a number of countries that took on significant debt, less debt than china and still had a financial crisis. Korea in 1997 took on a lot of debt, not as much debt as china, they had a financial crisis. The u. S. In 2006 2007 took on a lot of debt, not as much debt as china, they still had the lehman shock but the great financial crisis. If we think about the borrowers, we have zombie enterprises, we have Real Estate Developers building ghost times in the desert, we have government building roots to know where, and if we look at the lender site we have the explosive growth of a shouting banker sector. Skirting the rules and regulations and growing faster than they should be. If you put all of that together it looks like an extremely risky picture. But what that picture mrs. Is something really important about financial crisis as something really important about chinas Financial System and thats whats happening on the liability side of ab remember the financial crisis do not start and did not follower because it had too many investments in Mortgage Backed securities, koreas banks did not for later because they had too much exposure to crony capitalist corporations, financial crisis start on the liability side of abfinancial crisis start because banks run out of funding. Lehman fell over because the money market decided they didnt want to fund it anymore, koreas banks and the Asian Financial crisis fell over because Foreign Investors pulled their money out of the country. What does that mean for china . China has an extremely high savings rate and has controls on moving money out of the country. What that means is that there is a continued pileup of funds in the banking business. Chinas deposit base deposit base the banks continues to grow and that means us the funding for the banks is very secure so even as problems on the asset site of the Balance Sheet increase, i am sure there are a vast quantity of hidden a athe trigger for crisis is that there stop the second area i want to talk about is chinas leadership and the capacity to execute meaningful reform on the economy and on the Financial System. Here you can see chinas previous leader aband chinas current leader xi jinping, you can see both of them plotting politely one of my observations from watching chinas leadership meetings, chinese leadership meetings more than i care to mention, is that the ability to applaud politely for sustained period of time is actually a key requirement to make it to the top of chinas leadership, if you cant applaud politely for sustained period of time you not to make it onto the standing committee. Thats a subject i think maybe western china watchers should pay more attention to. More seriously, the we have through the xi jinping era has been a consistent narrative about reform in china and its been a narrative about reform failure too much of a committeeman to push through difficult reforms, xi jinping withheld too conservative to push through the needed liberalizations. I think that narrative blinds us to some very significant progress that chinas leadership have in fact been able to make. Lets think about the two most important instruments to control the economy, the Exchange Rate and the Interest Rate, the Exchange Rate sets the price of chinese goods relative to foreign goods the Interest Rates shut sets the point of money abthe Exchange Rate and Interest Rate were managed by the government and set a low rate. If you fling the calendar forward until today in 2020 the Exchange Rate is not close to fair value and on the Interest Rate not quite so much progress has been made but Interest Rates today are substantially more market set than five, 10, 15 years ago. Because we view chinas leadership through a kind of red mist, i think we are unable to recognize some of the important progress they make on reform. That also means we then pay sufficient attention to their ability server ab significantly move the dial and Financial Risks. I want to talk about chinas a agenda. 2016 leo hur, chief Economic Advisor at the xi jinping kicked off the campaign. Nationwide campaign to reduce risk and chinas Financial Sector. With that signal from leo hur, the chinese bank of abthey knocked on the door of everything a commercial bank and said, show us your Balance Sheet. If they didnt like what they saw, either on the asset side are the liability side, if they thought the banks were taking too many risks in their lending are too many risks in terms of the sources of funding they relied on may impose meaningful punishment almost banks i remember traveling in the summer of 2017 and speaking to a group of banks and for all of them this campaign had meaningful impact, we see that in the data, this chart shows you the grace in bank lending, the riskiest part of chinas Financial System. When the Campaign Kicks off first decelerated rapidly and then actually contracted the best part of two years. We underestimate chinas leaders ability to execute underestimate chinas leadership and leadership abilities to meaningfully take steps to manage risks in the Financial System. The third area i want to talk about is the state sector, theres really no area where the contrast between the u. S. Market system and chinas state census economy is more obvious and more sharply drawn on state ownership, the u. S. The private sector the key driver of dynamism in the economy in china of the state sector plays a aba vivid illustration of that consider the revenue of chinas stateowned industrial firms, as you can see in this chart, china stateowned industrial burns were and economy, would they would be the Third Largest economy in the world. China state sector on its own is bigger than the entire german economy. In the west we view that entirely through a negative lens. We view it through the lens of inefficiency and corruption thats not an incorrect way to view it, china state sector is very inefficient. Thats not the only way to think about china state sector and that is not the way in which chinas own leadership think about the state sector, lets take a step back and try to roll with the state sector in china through the eyes of chinas leaders and to do that lets hear what abchinas gate though my great reformer, thought of mikhail gorbachev, the great reformer of the soviet union. Heres what his son said about his father, my father thinks gorbachev is an idiot, so why did he think that gorbachev was an idiot . One important reason is that gorbachev attempt to reform the soviet economy by taking his hands off the levers which control the soviet economy. By doing so he ultimately lost control and failed to execute his objectives. Chinas leaders have taken a different approach, chinas leaders have kept their hands on the levers which control the economy, the commanding heights of the bank, the oil firms, the abmany Large Industrial firms remained state owned, and that gives chinas leaders a powerful lever which they can use to execute on Development Objectives and on management of the cycle. On Development Objectives, chinas leaders can direct state banks and state firms to acquire technologies and put those technologies to work at enormous scale in the chinese economy. Bringing china closer to the productivity frontier. On management of the economic cycle, chinas leaders can direct state sector to hold onto their workers and to invest when private firms have become more cautious and that is a powerful tool of avoiding or questioning recessions, the state sector is big, the state sector is an efficient but by focusing only on those negatives we miss the crucial role that china state sector also plays as a driver of development and a powerful tool that can be used to manage the economic cycle. The last area where i think our focus in terms of thinking about china focuses only on the negatives and miss some of the positives is on chinas mediumterm great prospects. When we think about chinas mediums prospects we tend to focus on a few stumbling blocks that china faces, the working age population is shrinking, there is a middle income trap and perhaps china would be able to innovate enough a trap and a middle level of development trade wars may block chinas access to global markets. These things are true and real problems but china also has very significant positives working in its favor. These positives are so obvious that they were obvious even to adam smith, the grandfather of modern economics when he wrote his book the wealth of nations all the way back in 1776. Im just going to quite briefly from what adam smith wrote about china more than 200 years ago the great extent of the empire china, the vast multitude of its inhabitants wonder the market of that country of so great extent as to be alone sufficient to support very great manufacturers and to admit a very considerable subdivisions of labor, thats the first Crucial Point because china is so big they can achieve massive economies of scale and massive efficiency gains through my new subdivision of tasks. The second Crucial Point from adam smith, by more extensive navigation the chinese were naturally learn the art of using constructing themselves all the different machines make use in other countries as whether the other improvements of office and industry which are practiced in all the different parts of the world smith was right on that as well he was also early he was 200 years too early but when they open the door between china and the world in 1978 and even more when china joined the wto in 2001 these two powerful drivers came together and china had enormous scale and the capacity to learn from foreign technologies. When you put these two things together you have an extraordinary engine of growth. The question then becomes, has this engine run out of steam . I think the answer to that is no. The reason i think that is because of the comparison between china and japan. Lets think about when japans economy fell over in 1989, japans gdp per capita in 1989 has already caught up to the lever in the United States. Japan was already on the frontier of what was possible in terms of using technology and becoming more productive. Chinas gdp per capita today is very significantly below the level in the United States. That means there are still significant touchups to face. I think of the middle of this decade is entirely possible china will still be growing, i think the end of this decade is entirely possible china will still be growing at three percent or four percent a year. Im going to wrap up in a second but before i do, let me try to pull these pieces together and apply them to thinking about what has happened to china in the last six months. Covid19 is of course human tragedy, its also an economic and financial strapped task of the world and for china in the last two months income for the biggest borrowers in chinas economy state enterprises, Real Estate Developers, local governments has all contracted if there was a moment by the chinese bubble going to part it would be now, as income for the biggest borrowers fold their ability to serve as loans disappears and thats the moment where youd expect to see some kind of day of reckoning for chinas economy. Of course that is not what happened, in this chart you can see daily activity indicators that we built and china and other Major Economies and what you can see is that yes china fell but they didnt fall as far as other Major Economies and they picked up more quickly and now closer to normal levels of activity than most economies in the world. Why didnt we see a financial crisis . This brings me back to some of the unrecognized sources of strength in chinas economy. Chinas banks because their wellfunded can afford to give forbearance to companies abwe want you to invest more because they can do that they can prevent financial crisis breakin