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Preroll: PolicyCast explores evidence-based policy solutions to the big problems we’re facing in our society and our world. This podcast is a production of the Kennedy School of Government at Harvard University. 

Intro (Rana Mitter): So, all of those things are creating a sense that maybe this is not a good time to be spending. Maybe this is not a good time to try and buy a car or get a bigger house or pay too much for the private education used to supplement that one child who is the one you've got and who's going to be perhaps your ticket to a better professional life in the next generation. That's the person that Xi Jinping and the standing committee of the Politburo need to be worrying about. It encompasses all of the things that currently have, if not red, at least amber flashing lights on the dashboard of China's economy. A property market which was booming for many years, but which now is finding itself very much in the doldrums, even some of the big companies beginning to go bankrupt. 

Intro (Meg Rithmire): I would say consistent messaging that we want to see a Chinese economy that's doing well. No, don't gloat, don't boast. Give them some time to work it out. So, I think this is a moment for, as my IR colleagues, international relations colleagues like to say, deterrence only works with reassurances, right? So give them the reassurance that as long as you're not invading Taiwan, as long as you are not aggressively expanding in pursuit of resources, as long as you are not weaponizing certain things, then we all want to see your economy grow. We want to see you do well. 

Intro (Ralph Ranalli): Welcome to the Harvard Kennedy School PolicyCast. I’m Ralph Ranalli. A little over a year ago, we recorded an episode of PolicyCast about a rising China—specifically how it was seemingly on an inexorable path to displace the United States as the world’s largest economy sometime in the next decade. But a funny thing happened on the silk road to China’s economic domination: Its juggernaut of an economy started to sputter and wheeze, weighed down by a growing debt-to-GDP ratio, an aging population, a devastating real estate bubble, and a loss of confidence among both foreign investors and domestic consumers. Now many economists and experts say an economically slowing—though not necessarily shrinking—China is the new normal and many new questions have arisen. How should the U.S., the E.U., and the rest of the world respond? Is it a moment China's rivals can use to their advantage, or one where great power rivalry can give way to great power cooperation? And how will an economic slowdown affect China’s geopolitical ambitions, including Taiwan? My guests today are both experienced China scholars. Professor Rana Mitter is a historian and the S.T. Lee Chair in U.S.-Asia relations at the Kennedy School and the former director of the China Center at Oxford University. Harvard Business School Associate Professor Meg Rithmire is a political scientist who studies the comparative political economy of development in Asia and China’s economic relations with the rest of the world, particularly the United States. Both professors are board members of the Belfer Center for Science & International Affairs at ����vlog���� and are affiliated with Harvard’s Fairbank Center for Chinese Studies. They’re here with me to explore some of the underlying reasons for China’s current malaise, and to offer some policy ideas to help ensure that its economic dark clouds have a silver lining. 

Ralph Ranalli: Meg, Rana, welcome to the PolicyCast. 

Meg Rithmire: Great. 

Rana Mitter: Great to be here, Ralph. 

Meg Rithmire: Thanks for having us. 

Ralph Ranalli: So less than three years ago, I remember doing a PolicyCast episode about China, and one of the themes was the inevitability of China surpassing the U.S. as the world's largest economy. For basically the past three decades, China has been seen as this unstoppable economic juggernaut, while its average economic growth was roughly three times that of the U.S.. But now things have changed and China's economy is slowing, some say dramatically. Can we just start by talking a little bit about the current economic situation in China? Rana, do you mind tackling this first? 

Rana Mitter: Absolutely, Ralph. Well, the way I think about it is not just to think about figures and statistics. We're going to talk more about that and Meg has tremendous mastery over a whole variety of those figures, particularly looking at the business area. But I find myself thinking about— supposing I was Xi Jinping. For listeners' benefit, I'm not. But supposing I was Xi Jinping waking up in the morning and thinking about my median voter. Now, I'm not thinking of holding an election. Clearly, that's not going to be compatible with the way in which the Chinese Communist Party operates, but I do spend all my time thinking about what it is that's going to keep my emerging middle class happy.  

If I'm thinking about that median person, let's call her Jiang Xiaola. I just totally made her up. But this is meant to be someone who, in a sense, epitomizes some of what the economy and its current situation means for real life today. She lives in what in China is called a third or fourth tier city. In other words, not one of the big skyscraper jungles like Shanghai or Beijing. Still a big growing place—it maybe could have 10 million people or more. A really big city by Western standards, but relatively mainstream in Chinese terms. Let's make her a single mother. That's not that common in China, because it's still a pretty socially conservative society, but it's becoming more common than it was. She works perhaps at a median level in professional services. Maybe she works in something like an accounting firm or financial services.  

She has savings. She's a bit worried about her savings, because to get better interest rates, maybe they're in some vehicle that maybe isn't as solid or safe as the more traditional banks, which don't give you much back. She does own her own property, but she owns it on a mortgage. The phrase ��á�Բ���ú, mortgage slave, is one that's actually quite common on Chinese social media, talking about people who have a huge amount of their disposable income going into actually just paying for their housing. She's got parents. As I mentioned, she doesn't have perhaps a continuing relationship with the father and his parents, but she's got her parents. They're getting older and they're going to need to live somewhere. They're going to need more healthcare. Healthcare as in the United States is certainly not free at the point of use. This is something that is worrying her in terms of how she's going to cope with all of that. Then there's a general sense that COVID was a bit of a disaster. She nearly lost one of her parents during that time. A lot of older people got very sick, many of them died.  

So, all of those things are creating a sense that maybe this is not a good time to be spending. Maybe this is not a good time to try and buy a car or get a bigger house or pay too much for the private education used to supplement that one child who is the one you've got and who's going to be perhaps your ticket to a better professional life in the next generation. That's the person that Xi Jinping and the standing committee of the Politburo need to be worrying about. It encompasses all of the things that currently have, if not red, at least amber flashing lights on the dashboard of China's economy. A property market which was booming for many years, but which now is finding itself very much in the doldrums, even some of the big companies beginning to go bankrupt. Consumers both refusing to spend money on disposable goods if they are worried about what might be coming along in the near future, and also, of course, in an economy which is structured in a way which doesn't put as much money in their pockets as would be needed to really boost consumption, and a continuing concern that maybe the global situation means that there could be a conflict with the United States. 

There could be some bigger blow up of some variety, maybe not a war, but economic sanctions that might mean that those jobs in services, in whatever it might be, become vulnerable and unemployment might even be a possibility. That's just one little take. There's a whole variety of other things that are currently troubling the economy, but through Jiang Xiaola, maybe we can see the way in which for real people in China today, the economy is not just an abstract. It's a day-to-day problem. 

Meg Rithmire: Should I jump in with the less colorful rather take on what the data say?

Ralph Ranalli: Sure, a high level view. 

Meg Rithmire: I love Rana's illustration with a lao baixing, a regular person, and how they might experience it. So, between basically the early 1980s and let's say the mid-2010s, China was growing at a very high rate between 6% and 10%. Now, we're looking at rates that are maybe 5%, maybe 3%, maybe 1.5%, maybe less. Very few people really trust the statistics right now, and that's been the case for some time actually. So, Rana just finished with mentioning the unemployment rate, which we also don't know, because once it hit basically a quarter of youth unemployment in spring 2023, it's now essentially censored, the discussion of some of these macroeconomic data within the Chinese media and social media. 

So, where we are now? Anyone would expect an economy that had been growing at a rate that looks like that, almost double digit for decades, for essentially a generation to slow down inevitably, right? So to slow down to 5%, if indeed it is 5%, is not exactly some terrific failure. It's what we might expect for an economy that's hitting its capacity in certain sectors and reorienting towards other sectors. The problem in my view is that's not exactly what's happening in the Chinese economy. It's interesting. Rana is a historian, I'm a political scientist. Neither one of us is an economist, but the economist might focus on what do these data tell us from this sector, that sector, this sector. I'm going to say some things about data, but my focus really is on these policy measures and the sources of slowdown and what I might call distortion in the Chinese economy.  

So, Rana mentioned the average person's savings. So, savings rates in China have been high for a long period of time. So, between 30 and 50% of GDP, around 35% right now, which is really terrifically high when you compare it to American savings rates, which are let's say 30% lower, if not more, and quite negative. So, then on the other hand, how has China grown for the 30 years during which it sustained that high level growth? So if you look at the GDP numbers, that growth was mostly coming through two channels. It was coming through investment, meaning new investment into the Chinese economy. Typically, that's a very good thing, that's a good source of growth. Or from export. That means external demand, things that you and I buy at stores that are made in China. After the global financial crisis and indeed, actually way before the global financial crisis, as early as the Asian financial crisis in the late 1990s, the regime started to discuss the need to shift to consumption-led growth, meaning domestic rather than external international demand, as well as innovation-led growth instead of just investment-led growth.  

So, one thing we always ask ourselves: It's okay to have debt, it's okay to have investment, but where is the investment going and is it being used productively towards something that might generate long-term consumption or sustainable patterns of economic growth? What we know is that a lot of the investment in China was indeed foreign direct investment and it was going into highly productive globalized sectors, right? These are the supply chains that are anchored in China that are very difficult to shift no matter what the preferences of various governments in my country or in Rana's home country might be. Nonetheless, a lot of that investment was going from local governments and into real estate, which is counted as part of investment in China and in fact in most places. So, we know this huge infrastructure boom in China, which is not completely irrational. That country needed roads, bridges, trains, airports to cater to this new generation of transit and facilitate industrialization and export-led growth. 

On the other hand, there's a significant over-investment in real estate for reasons anyone reading a newspaper right now has come to understand. My first book was on this about 10 years ago. So, let me just say a little bit about that real estate crisis as a source of distortion, which I think illustrates the challenge that we're in right now. So, why do we have so much investment in real estate? Well, part of the answer is in Rana's story, which is you have a high savings rate. Someone's worried about her savings, and in fact, China has a system that economists call financial repression. Meaning banks are state owned. Deposit and interest rates aren't liberalized. Capital controls prohibit these Chinese families, which again are saving between a third and half of their income, from seeing that wealth accrue interest and accrue more wealth by investing, say, abroad, even in Hong Kong or much less in New York. Chinese equity markets have been underdeveloped.  

So, as a result, they really want to put their money into real estate. That's the area in which we might see the housing prices appreciate, which they have been for the last 30 or 40 years. So, a lot of families are invested in housing and many don't even have mortgages like this average person that Rana was describing. Many have excess savings that are going into second, third, even fourth properties. They're doing that because China has a very thin social welfare system, in fact even thinner than the American social welfare system by some standards, although I'm no specialist on that. But unemployment insurance, pension insurance, health insurance, all of these things are severely underdeveloped in China. So, people are worried about how to do old-age care for their parents, much less their grandparents. The one-child policy means that demographically you have one person in the workforce for every five to six people who's retired. 

Rana Mitter: Can I just add one thought actually at that point- 

Meg Rithmire: Sure. 

Rana Mitter: ... Meg, just to continue on? But one thing that listeners should also know is that China's system in terms of social provision changed very heavily probably about 25, 30 years ago. When in the 1990s, a lot of the traditional factories and businesses from the era of Chairman Mao and afterwards were essentially privatized in the form. That meant that those outfits, which would've given old people pensions and would've provided healthcare and actually even education in some cases for kids, essentially were turned into cash and then people were left to their own devices. That's one of the things that's now coming home to roost today. 

Meg Rithmire: Which is ironic actually. I'll just drop this in case you want to come back to it later in the conversation. People I think in the West are really focused on Xi Jinping being a communist and he's very ideological. I don't believe he's ideological and I'm happy to say more about that. But if he were really ideological, we would see an economy that's much more focused on inequality and social welfare provision, but actually, we see almost none of that in contemporary China. But yes, so this dismantling of the socialist system was replaced by essentially very little to no public policy.  I mean, some experiments. I don't want to give them no credit. Rural health insurance and rural healthcare has been vastly improved in China. 

The irony to Rana's point is that once those enterprises were privatized, theoretically, the burden of providing most of the services in China and most of the public expenditures that are related to maintaining a modern state actually fall on local governments, rather than central governments in China. So, like I said, unemployment insurance in so far as it exists, pension insurance, health care, education, infrastructure, public sanitation, public health as we've seen during COVID who paid for all of the testing and all of the lockdowns? That was local governments who paid for that and they have almost no sources of discretionary income. So, the vast majority of China's tax, it goes to the central government since the mid-90s in China, yet the expenditures are left to the local governments. 

So, what is the one thing that they have at their discretion to generate those revenues, to meet their expenditure burdens? It turns out it's state-owned land in China, and so they don't exactly sell private land. I don't want to get too much in the weeds on land ownership in China. I wrote a book about that, no longer want to talk about it, but basically what you end up having is they sell long-term use rights to the land for multi-decade depending on its designated use and then those lease fees accrue immediately to local government officials who use them to close that budget gap. They also borrow using land as an asset, using indirect vehicles, which are called local government financial platforms. That is considered off balance-sheet lending, because technically, local governments aren't allowed to borrow from banks. They also don't issue their own municipal bonds on their own behalf, but implicitly local governments guarantee that debt. So, you have this cycle where as long as housing prices are increasing, everyone's happy, because households are seeing their wealth accumulate. Local governments are seeing their debt be okay, as well as their expenditures. Their revenues are coming in so they can meet their expenditure burdens. But if housing prices don't continuously go up, then the cycle becomes a vicious one rather than a distorting but possibly sustainable one. 

Ralph Ranalli: So you have this giant bubble. Meanwhile, local governments have lots of debt, even though they're technically not supposed to be able to borrow. 

Meg Rithmire: We don't know how much actually. No one does. 

Ralph Ranalli: So into this, you have the Evergrande nuclear bomb that's dropped. Evergrande was China's largest property developer and it was $300 billion in debt. And just the other day, a judge in Hong Kong ordered it liquidated. But Evergrande was just the tip of the iceberg, because you have this situation where developers were deeply in debt and were desperate for cash, so they started selling apartments before they were even built. So now, there are people in China who own properties that don't …  

Rana Mitter: That don't even exist. 

Ralph Ranalli: That don't even exist. I don't know anything that could inspire less consumer confidence. 

Rana Mitter: Well, actually, I’ve got something that could inspire even less confidence. I don't want to add to the note of bleakness here. 

Ralph Ranalli: No, please do 

Rana Mitter: But it may give a brilliant explanation of everything, including essentially what happens when you don't have a municipal bond market, which is the story you're talking about there. But there's one word I'm going to add into the story here, which is demographics. Because starting with the property market, but then moving it out and getting to this question of, "What is going to change the Chinese economy over the next 5 years, 10 years, 20 years?" And perhaps the fact that simply can't be changed, certainly by flicking a policy lever, is the very sharply changing nature of China's demographics.  

Let's start with what we mean by that. I think everyone listening will know that, essentially for about 35 years, China had famously a one-child policy. 

Now in practice there were exceptions and it wasn't literally one child for everyone, but essentially, particularly actually for urban professionals, it really was very, very much the case. To be fair, unlike an awful lot of other things in China, it was a pretty hard policy to get round in one way. I remember actually, I won't say who, but basically a very, very senior party official once told me that she actually regretted very significantly this. She could have had more than one child, but in her position, it would be absolutely impossible. But she was open about the fact that it was a great source of regret to her.  

So, it was strictly enforced and it solved—if that's the right word—a perceived problem, I'll use that word carefully, that back in the '70s and '80s, that China was going to be overpopulated and there'd be too many people. But it actually seeded a much more serious problem for the present day, which is that China's demographics is becoming one of the fastest aging anywhere in the world, but also—let me get the various bits right—it is the fastest aging demographic in a middle to higher income but not rich country. So, other countries in the region, we've got Japan, South Korea, Taiwan. These sorts of places have an even worse demographic in terms of countries getting older, but they have already relatively become rich. They have well-developed social welfare systems and they can to some extent manage the problem. 

China, as Meg was saying earlier, has not installed the social welfare system or stable future that those other countries broadly have managed to do. But the dependence on property in China builds in, if you excuse the pun, another problem, which is: Who's going to be living in this next generation of buildings, assuming they get built? If you do that, who's going to be buying huge amounts of concrete? Who's going to be buying huge amounts of raw minerals that you're basically then getting bulk site aluminum, whatever it might be, iron ore, all of these things, if you're not actually going to have the building boom? Which made sense for about 20, 25 years in the late 20th, early 21st centuries, but no longer makes sense in that context. 

Now, it has a particular effect in terms of there is still plenty of investment capital. This is much more Meg’s business, so I'll throw back to her in a moment. But overseas is one of the targets for this investment. So, if you're in Southeast Asia these days, and this may be where we go, Ralph, in terms of what's going to happen to the Chinese economy in terms of its regional and globalization. So, if you're working in say, building small electric vehicles in Malaysia, then actually Chinese investment, Chinese know-how, Chinese IP might be very important, but that doesn't help you necessarily if you're living this lower middle class life in Guangdong province or somewhere like that. So, in that context, thinking about what demographic shift over the next 20, 30 years is going to do, if we follow an absolutely straight line to the end of the century, you could get in some projections to a scenario where you have actually more people, something like 1.2 people of retirement age for every person of working age if you just have no change from now, which wouldn't necessarily happen. So, then you need to think about what's going to happen. First of all, in terms of the economy itself, as in the United States, a much larger sector of the overall Chinese economy is going to be dedicated to issues like healthcare, because essentially older people—sorry to say it, and I'm sure all of our listeners are in the first flush of youth, but as you get older, stuff starts to ache, stuff starts to fall off. 

Meg Rithmire: I wouldn't know. 

Rana Mitter: Meg would not know. Meg, congratulations, 21st birthday coming up soon. 

Meg Rithmire: Thank you. 

Rana Mitter: It's good to see that here in the studio. But for those of us who are of an older generation, it's very clear that healthcare—which is wickedly expensive in any society—is going to be more and more of a problem for China. In addition, the question of how you are going to deal with pensions. Now, China does not have a pension scheme. It has dozens of pension schemes. It has private pensions, it has state pensions, it has regional pensions. One of the things that they mostly have in common is that they're not well-funded. The Chinese Academy of Social Sciences, hardly a subversive organization in the Chinese context, has said that if there isn't an adjustment, then that system's going to go bankrupt sometime in the 2030s. So, what will happen is that the currently very generous, well, in some senses, generous retirement ages, 60 for men, 55 women, there are some exceptions but broadly at those levels, are going to have to be raised. Now, people don't protest on the streets very much in China, because of course, it leads to fierce repression from the government. 

Meg Rithmire: They used to protest a lot actually. 

Rana Mitter: They used to protest. That's true. The 1990s and 2000s, I remember- 

Meg Rithmire: Up to 2010, the Ministry of Civil Affairs released the data, the number of mass incidents was 180,000. That's defined as 500 people or more. Then they stopped releasing the data, but they used to protest a lot. 

Rana Mitter: They used to be protesting a lot. In fact, the rule of thumb used to be that you could protest about things as long as you weren't saying things like, "Therefore, the Communist Party must be-" 

Meg Rithmire: No, you protest to the regime, not against it. 

Rana Mitter: Which actually has some historical resonance because sending up a memorandum to the emperor in Beijing was a thing back in the day. But now under a much more authoritarian—even compared to the past—authoritarian political dispensation, Xi Jinping's China, it's much harder to do that. But I would be willing to bet a small amount of money that if those pension ages are raised, that might be one of the things that actually gets people on the streets, because their hard-earned pensions are being swept away, at least for a certain number of years, particularly in a very financially straightened situation. So, demographics is going to be another factor that makes the squeeze, that makes the pinch much, much harder to resolve. 

Ralph Ranalli: Right. Speaking of Xi, I did want to ask how much of this is about him in particular and his leadership style and the changes he's made to the Chinese constitution that have consolidated his power, and how much is really about broader internal systemic issues and external issues?  

Meg Rithmire: The answer is yes. I mean, what's very interesting about the conversation we've been having about the fiscal system distortion, the debt distortions, the lack of consumption, the demographic issues, none of this is particularly surprising at all. In fact, people have been calling me from the media for at least 15 years now asking what I think about the real estate bubble and is it about to pop, right? So finally, maybe it has, maybe it hasn't. Maybe it has in some places. Maybe now they're going to push mortgages again or something. We don't know this consistent dance that they do between wanting to wean the economy off of real estate and into something else and then actually getting concerned about the instability, because people do show up at Evergrande headquarters. There are a lot of protests right now actually about mortgages and about unfinished buildings and about financial fraud, actually, to Rana's point about the savings vehicles being not so regulated and not so secure.  

So, I typically think in terms of the structural reasons for China's slow-down, some of which are industrial overcapacity. Some of which are demographic change. Some of which are wages just rising and low value-add value chains moving further to Southeast Asia or other parts of the world, because Chinese workers are more expensive. The policy channel is more these fiscal distortions, the underdevelopment of the financial system. Many countries solve the aging problem through financial means, opening the capital account, allowing people to save in that way. China doesn't seem to show tolerance for doing that. 

Rana Mitter: Also allowing mass immigration, which is extremely unlikely in China. 

Meg Rithmire: Yes, exactly. Incredibly unlikely. No, that's the typical solution. Japan has tried that and failed to integrate the immigrants. Whereas China I think has no ability to even experiment with that. Then the other part of it is this expectations channel, which is more, "How good do I as a middle-class Chinese feel about the future and how much do I want to buy things like durable goods to put in my apartment?" I think it's fair to say my professional assessment is that the vibes are bad. 

Rana Mitter: It's a technical term. 

Meg Rithmire: It's a technical term. Yeah. 

Ralph Ranalli: But does it matter? I mean, with the level of repression- 

Meg Rithmire: That's a great question. 

Ralph Ranalli: ... the state control that Xi is exercising now- 

Meg Rithmire: Do the vibes matter? 

Ralph Ranalli: ... do the vibes matter? Does that opinion of the person that Rana outlined matter? 

Meg Rithmire: That's a great question. So, let me answer it in two ways. Does it matter economically? For sure, right? Do people want to spend? Do people want to invest? I mean, if you were a private entrepreneur in China, given the crackdowns that began really in 2016, not in 2020, would you want to invest and start to build something new in the Chinese economy? Maybe, maybe not, maybe not wholeheartedly. So, it works in that way. The vibes not being very good makes people less likely to take risks under an increasingly authoritarian Xi Jinping. Politically, it doesn't matter.  

I do think it matters. I mean, we might ask ourselves, and this is a whole different subject, but why do people protest less? My argument based on a lot of people doing research on this in political science is basically surveillance is now deterring protest, but actually protest was useful. It was useful in a number of ways. It was useful, because it gave the party-state information about who was performing badly, who was performing well, and what people were angry about. So, the vast majority of protests in the early 2000s were about agricultural taxes and fees and then they eliminated the agricultural tax for the first time in two millennia.  In any case, they responded.  But now if you think back to what we saw in the end of 2022 with the zero COVID policy, suddenly, everyone's appearing in the streets and they're not saying, "CCP, please save us from the COVID lockdowns." They're saying much more serious things, protesting against the CCP and against Xi Jinping. So, that's a very different dynamic. The suppression of information and the surveillance state has replaced that safety valve protest response state in a way.  

But then just in terms of Xi Jinping and the economy, and I'll just say this one thing about him, the way that they're trying to pitch it now is that all of this is an engineered slowdown in order to wean the economy off real estate and push into more innovative sectors. It's partially right and it's partially wrong. So, the iceberg event you described with Evergrande, that wasn't a surprising outcome. Everyone knew that they were tamping down on real estate and that this would be the likely outcome, not necessarily a super huge bankruptcy with contagion effects, which they did try to contain for two years before allowing the company to eventually go bankrupt. But that's not that surprising. He wants to shift into high-tech sectors, et cetera.  

But I don't think this expectations channel like the malaise in the words of Evan Osnos that the New Yorker writes, that is not an intentional outcome. Xi Jinping says things like: "Oh, it's time for Chinese to eat bitterness. It's time to stomach the pain so that we can become a greater nation by reconfiguring our economy." But then that message is also a bit frenetic, because then we've seen in the last couple of days, now it's all stimulus, return to growth, blah, blah, blah. Most Chinese people, including the stylized person that Rana described, don't really want to do that for 5 or 10 years. So, it's a bit back and forth in some ways. They want this outcome, yet they don't want the instability and the frustration that comes with it. We don't know the consequences of that. 

Ralph Ranalli: Rana, you had some fun last year when Bejing announced a 31-point plan to fix the economy, and you wrote that unless China prioritized openness and transparency at home, a 31- or a 56- or a 93-point plan wasn’t going to make a difference.  

Rana Mitter: Yeah, I think this was some time ago, that they announced a 31-point plan to stimulate the economy. My general feeling is that if you've got a good policy direction to go in, you put forward one policy or maybe two. You don't go for 31, because actually, you're just spreading … it's like making excuses for why you're not going to someone's party. If you give five reasons why you can't go, then you're lying. 

Meg Rithmire: The last one, you broke your leg. 

Rana Mitter: Yeah. Let me just briefly say something about Xi Jinping. I think I completely agree with everything that Meg says, because it saves time because she's always right. But I would say that we can overestimate, when I think you look at the reality of Chinese life, how important Xi Jinping is. Everyone knows who he is. His name often isn't mentioned that much. People use phrases like lao da, meaning the boss, but everyone knows who he is. But I think in the everyday lives of people who are not senior members of the Chinese Communist Party, they've got a lot of other things going on. I think actually, the economic, so the great journalist Evan Osnos used the phrase malaise. So, I've decided to branch out by using the phrase, anomie, which is an alternative way to go with that. 

Meg Rithmire: Very European. 

Rana Mitter: Indeed. So, China's current anomie, I think, is driven by a whole variety of factors that essentially are more sociological and are much more visible. I mean, again, people may have heard, because it's become quite famous, but social media is a really good place to check these things out. A few years ago, this expression, tang ping, lying flat, referred to you who refused to join the rat race and take these dead end jobs as they saw it. Bai lan more recently, rotting away as an expression for people who just feel that they can't get with this go-go consumerist culture with jobs that they don't find satisfying.  

Although Xi Jinping's China is the place where that's happening, that I think has a lot more to do with the interaction of a form of technologically enabled capitalism, which frankly makes the 19th century robber baron here in the U.S. look quite gentle in comparison. At least Andrew Carnegie endowed some concert halls and stuff, I suppose. Eventually, Chinese firms do that too. Combined with a much, much harsher set of secular conditions, we mentioned demographics, but there are other things like rural-urban imbalance. You've mentioned that rural healthcare is an awful lot better than it was 20 years ago. I put some of that down to what previous presidents Jiang Zemin and Prime Minister Wen Jiabao did, actually. 

Meg Rithmire: For sure. Yeah, the '90s. 

Rana Mitter: What I'd say isn't going so well, and there's a great book actually by Scott Rozelle and others, “Invisible China,” which is about education in rural China. Human capital, to use a more technical term, but people, young people and children are not being educated properly, consistently, and to the level which will fit them for these jobs, which at the recent two meetings of the Congress in China, were going to be these millions of technologically enabled higher value jobs. Well, getting from the countryside, even if you can get past the internal passport system, the hukou system, to get into the cities to take these jobs, rural dwellers are not going to have the capacity to do that with the current education levels. Those are secular problems that are not being solved easily at the moment. Xi Jinping actually uses a lot of rhetoric to talk about how the Chinese need to deal with this. Phrases like gòngtóng fùyù, the common prosperity, become part of that, but quite often the rhetoric and the reality actually have a bit of a gap. That's a different question from the very important question of political repression. I don't think anyone here would want to downplay quite how authoritarian China has become, but these are broader questions to do with secular social change as well. 

Ralph Ranalli: It’s very convoluted. Also because of the hukou system, if you're living in an urban area and you say, "Oh, maybe I'd like to go teach in a rural area," because of the hukou ecosystem, you may not be able to move back to the city from a rural village where running water might be a luxury. So, you're not going to go out there and do that.  

What I'd like to do now is put a wide-angle lens on the camera and talk a little bit about the fallouts from a slowing Chinese economy.  So, let's say Taiwan for example. So, you have this discomfort in the Chinese middle class. The Chinese middle class knows that an attack on Taiwan probably brings economic sanctions, severe economic sanctions, severe economic fallout. Does that have a cascading effect on Chinese external ambitions towards Taiwan? We've seen its military expansion, its belligerence with some of its neighbors in that military geopolitical sense. How does that play out over time, do you think? 

Rana Mitter: Well, I think it's fair to say that diplomats have noticed that China's language and China's actions actually over let's say the last half year to a year have pulled back from some of the more, put it, flamboyant language and behavior that was visible perhaps a year or so before that. The COVID pandemic was the high point or low point, depending on your viewpoint, of what became known as the wolf warrior style of diplomacy, zhan lang, which is named after this fairly tacky Chinese action movie from the 2010s in which Chinese commandos go and rescue hostages in an unnamed African state. But it's used to essentially express this idea that China's diplomatic presence in the world should be confrontational, unapologetic, and in some ways, aim much more at a domestic audience in China than at the supposed diplomatic partners that they were dealing with.  

I wouldn't say that that's gone, but it's much, much less visible now than it was a year or so ago. The summit with Joe Biden in San Francisco, the APEC Summit November last year, essentially did see the reestablishment of a variety of low level but important contacts between the two sides. In general, there've been a lot of gestures which are not altruistic. 

They're very much strategic on the part of China to try and get other countries both in the region, Asia more broadly, and actually elsewhere, to feel a little warmer towards China. So, with the Europeans, for instance, recently, within the last few months, a new regulation was put in saying that Germans and Italians can come visa free to China. That's not open to America, it's not open to Brits either, but it's clearly a way of saying, "Hey, you guys, we value you in that sense." 

Even with a country like Japan, which had traditionally been a source of immense friction because of their very painful history together, the relationship is calmer now overall than it was perhaps four or five years ago, when confrontation over the disputed islands in the East China Sea at one point threatened potentially to actually lead to conflict. I would say, though, that there are two brief things to take from that. One is that I think there is an economic factor involved. One of the overall big, big thoughts that is certainly feeding in from the think tanks to leadership in China, as much as we can tell in this very opaque process, is that for China's economy to pick up it needs stability, needs predictability. It needs good relations, particularly with neighbors who are involved in supply chains and also of course our targets for FDI. Bearing in mind, if you are sending foreign direct investment to Southeast Asia, causing a conflict that then causes Southeast Asia, the region more broadly, to go up in confrontation is not going to do much for that investment.  

But there's something else also. I think in Beijing, like everyone else in the world, everyone's waiting to see who's going to be the next president of the United States. The question of what U.S. policy will be in Asia and the world, which right at the moment is not easily predictable beyond let's say January of 2025, is something that is being thought about very carefully in Beijing. 

Meg Rithmire: I'll just say a few things about how we might think about China's economic challenges and its role in the world. So, one thing is that, in many ways, we should think of this particular transition that China's going through as, as I said, not surprising and even comparable with other processes. So, in Japan, in the 1970s and '80s and '90s, we had a period of currency appreciation, of wages going up, trade conflict—with albeit military allies. So, that's a little bit different or a lot different actually. Japan, as Rana said, had already reached a high stage of growth once that bubble popped and the period of slow to no growth began in that country. On the other hand, at that time, the Japanese government was saying, "Look, we have trade conflict. We have a maturing domestic economy. We still want global firms and globally competitive firms. We've got to pave the way for them to go out and establish zones and infrastructure." They did that throughout Southeast Asia and different parts of the world. Japanese companies have remained globally competitive for a long period of time, even outside of the domestic economic woes inside Japan. So, there's a path through which many Chinese firms, some of which remain incredibly competitive, and China's innovation ecosystem, which I would say still remains unrivaled. 

So, even though Vietnam cannot replace all of the Chinese economic ecosystem, India is nowhere close to having the logistics, the workforce, that's possible. So, firms are figuring that out as they're doing some of the cost-benefit analysis of getting a China plus one or diversification strategy. On the other hand, Chinese companies are trying to establish export processing zones to facilitate that infrastructure elsewhere in the world. Yes, it's a program also for global propaganda and maybe something like soft power or maybe something like hard power, although I think that's a bit overblown, but that's a pretty predictable sequence. It depends on whether they're able to actually achieve those goals and get some of those zones operational and get that infrastructure operational. 

But in terms of, I want to say, almost uniquely American obsession with if the economy is bad, is he going to invade Taiwan? To me, frankly, it doesn't make a lot of sense, right? So recently, Xi Jinping said the PLA should be ready to win regional wars within ... what was it, by 2027? 

Rana Mitter: 2027, I think. Yeah. 

Meg Rithmire: Which means he knows that they are not presently ready to win a regional war, meaning some military invasion in Taiwan. I think one of the most dangerous things for the CCP in terms of its challenge to its legitimacy is this broad economic malaise, broad economic downturn, which we should be mindful. Listeners should be mindful. This has never happened in the reform era in China. The people have never been challenged with watching their housing prices deflate, watching their bank accounts not grow, seeing less opportunities rather than more opportunities in the future, fewer opportunities rather than more in the future. But the only thing that would be truly catastrophic, absolutely hands down catastrophic, for the legitimacy of the Chinese Communist Party is to try to invade Taiwan and fail at doing so. So, I mean, there's a lot that goes into this, and neither of us is a scholar of Cross-Strait relations and wants to talk about deterrence for the rest of the podcast. But in any case, it's just not my view that one thing leads to another. In fact, it's actually my view that the more trouble they have at home, the more the party state's going to be focused on solving that. 

The interesting thing and the puzzling thing, even though I've been looking at some of these problems for 25 years … is that in fact, I've been looking at this for 25 years and it's puzzling because we know they need municipal bond markets. They need a property tax. They need a reform of the social welfare system. They need to advance the development of the financial sector in China, which is a huge issue. People are not going to consume. Market forces are not going to officially allocate resources unless we have a financial system that actually works. Then it's very difficult, though, for them to achieve any of those goals despite how much power we think Xi Jinping has. So, my view is that anything could happen in China over the next five years. I think one of the things that is not likely to happen is an invasion of Taiwan. 

Ralph Ranalli: What about the effect China’s slower-growing economy might have on its efforts to project soft power and to gain international influence through the Belt and Road project and other foreign investments? 

Meg Rithmire: I think Rana and I think that soft power has not been successful. 

Ralph Ranalli: Really? Even if it hasn’t been successful, I’ve read that there may be an opportunity for perhaps the U.S. or for E.U. countries to take advantage of the fact that China is increasingly looking inward? 

Rana Mitter: Forgive me for saying this, Ralph, but I think that that expression of the problem emphasizes something that I think is misleading and problematic in terms of a lot of the analysis of this question, which is that this is either/or or that there is basically a new necessary opposition coming up. Now, let's not be naive. We all know that the economic interests of China as a growing authoritarian state are not identical and in many ways inimical to those of the liberal world, more broadly speaking, but there's also a huge amount of interdependence between the two sides. Therefore, the toughest policy question being asked at the moment, and if I actually knew the answer, I would be a lot more powerful and be a lot more rich than I am at the moment, but I can make some stabs at it. It's predicated on a couple of things that actually Western policymakers do have some influence on if they choose to take it. I mean, first of all, I mean Meg give a brilliant summary of what's happening with the Chinese domestic economy, but I can summarize it in terms of what I think is going on in one phrase, which is a phrase I stole without shame, but with acknowledgment from, I think, Secretary of State Antony Blinken when he talks about what this country needs is foreign policy for the middle class. Actually, that's what I think that Xi Jinping's Communist Party is trying to do and that's one of the reasons why I think actually the invasion of Taiwan scenario in that classic amphibious attack sense is not likely. Economic pressure on Taiwan, that might be more- 

Meg Rithmire: That's already happening. 

Rana Mitter: That's already happening, but that's perhaps for a different podcast. Have us back, and we'll talk about that. But there's a separate set of things. Going back to the economy, so here is a trilemma, I think is the correct word. I don't know if the word trilemma has previously been used on this podcast, but if not, I'm happy to bring it in as a first. 

Ralph Ranalli: It's a good word. 

Rana Mitter: Because we were talking earlier about, "What is Xi Jinping's influence and where does it make a significant difference?" I'm going to give an example of what I think and, fortunately for us, also economists who know what they're talking about on this think, is that a Xi Jinping finger on the scale that right now is an inhibition on the economy. So, this is the trilemma. For political reasons, Xi Jinping and probably also the top leadership at the Standing Committee of the Politburo and others at the top level who are almost all engineers or people who have a particular scientific training. They're mostly not economists. I'm not saying that having an economist running a country is necessarily a better idea as such, but they make us sharper. Political economists are much, much better obviously. 

Meg Rithmire: I'm not sure anyone… 

Rana Mitter: Well, it depends whether you want to side hustle or not. But what has been put forward essentially as what's known as the dual circulation strategy for the economy involves at least on its surface, three things at the same time. Number one is increasing China's global trade surplus. Of course, that makes sense in political terms, because to put it in a summary, many people would say that Xi Jinping wants the rest of the world to become very dependent on China, but China to be as little dependent on the rest of the world as possible. So, that's number one.  

Number two is to stimulate domestic consumption, so that people are just buying more disposable goods and stimulating growth that way. But number three, again for political reasons, is that China's capital account is going to remain closed. The renminbi will not become an internationally tradeable currency. It's not going to be subject to the vagaries of the rise and fall of international markets. Now, most economists or pretty much all economists actually would say that of these three things, you can have two at any one time, but having all three at the same time, maybe a political desire, but economically, it's not feasible. That's one of the other reasons why factor number two, domestic consumption keeps getting squeezed over and over again, because it can't be opened out at the level that would happen if one of those other factors were to change. 

So, what does this mean in terms of policy for Westerners? Well, first of all, I think if you think you're going to basically send a policy memo to Xi Jinping and get him to change economic policy, well, good luck with that. I think it's less likely. Even the people inside the system, I'm thinking here like the NDRC, the National Development… 

Meg Rithmire: They know what the problems are and they've drafted solutions and they haven't been in the commission. 

Rana Mitter: It's a concession of Chinese prime ministers, which is traditionally the position that has more control of the economy. I mean, Wen Jiabao in some ways was I think a pretty powerful prime minister back in the 2000s. Li Keqiang, late Li Keqiang, maybe not so much. I think he was very frustrated at that. Li Qiang, the current prime minister, has been prevented from giving press conferences at the end, let alone influencing policy.  

But Westerners have control over something else, which I think makes at the moment a big difference in terms of how China's economy is regionally integrated. That's trade agreements. One of the things that the previous Trump administration and the current Biden administration have in common is that they do not have a really convincing story about opening up new markets and deeper free trade agreements in the Asia Pacific region. It's often put on the shoulders of the Trump administration, which is infamous for wanting to have fair trade as opposed to free trade as they would put it. But actually the Biden administration has come up with a framework, the Indo-Pacific Economic Framework, which is about norms. It's not about opening markets, and everyone in the region knows this.  

On the other hand, who is the biggest regional trading partner of pretty much every actor in the region? It's China. Who is behind the new shallow, but actually in some ways quite broad agreements like RCEP, the Regional Common Economic Partnership? It's China. Even countries that have a terrible political relationship including on trade with China, like Australia, are a part of that agreement, because there isn't a liberal-world-driven alternative that people can point to. The nearest thing is the CPTPP, the Comprehensive and Progressive Trans-Pacific Partnership, which doesn't have the U.S. in it. It doesn't have China at the moment. China wants to get in. The U.S. has made it clear it's not going in. President Trump, in fact, quickly took the U.S. out of the predecessor, the TPP, in his first week in office back in 2017. This is giving relatively liberal nations like Japan an absolute fit of the jitters, because seeing how the security issues in the region fit in with a story about an integrated productive economy is becoming harder and harder. So, thinking really seriously about whether trade has got itself into a spiral of inward-looking potential self-destruction is I think a really important policy priority. 

Ralph Ranalli: So we are at the time when we put the policy in PolicyCast. 

Meg Rithmire: Okay. 

Ralph Ranalli: And I think we're off to a good start. Thank you, Rana. So, Meg, if you had the ear of Western policy makers who were looking for answers on how best to create positive outcomes on relations with China moving forward from this really interesting inflection point where we are economically, what would your recommendations be? 

Meg Rithmire: Well, just to follow immediately on what Rana said, all of which was unsurprisingly very smart, and I agree with all of it. I mean, I would say one thing, which is that there was a brief moment where it was possible to think about an Indo-Pacific economic framework that had more teeth. So, when I said earlier, China still has the most powerful innovation ecosystem in the world, and even companies that are saying, "Gosh, I don't trust them anymore. I want to diversify, but I just can't do it at scale in Vietnam or in Malaysia or in India." What they actually need to recreate that economic ecosystem, innovation system is a serious regional trade framework that would allow them to do that. 

So, you asked for a policy recommendation, specifically if Senator Elizabeth Warren and Senator Sherrod Brown are listening, I really think it's time for the Democratic Party in the United States to acknowledge that trade is a fact. I mean, I personally welcome a lot of the industrial policy that has been made possible, I think, by the commercial and strategic threat that China has provided to the United States or challenge, I should say, not threat. It may be on all of our wish lists to have great manufacturing jobs back in the United States, but I think we need to think realistically about a lot of those things. If everyone wants to act as if it's a choice between getting out of China and coming back to the United States, that's not really a realistic choice. So, making those commitments to give those agreements teeth, I think would be really important.  

Secondly, I just want to say, I think basically we should do, we being the United States, what we're doing, which is consistent messaging from Janet Yellen, frequently from Gina Raimondo, and certainly from Antony Blinken and others, and sometimes Jake Sullivan, although I think sometimes that message gets a little mixed up, but more consistent messaging to say everyone wants to see China grow. No one's trying to contain and suppress the Chinese economy, as Xi Jinping loves to blame the U.S. for many of the problems within China. The economic restrictions from the United States, outbound investment restrictions, export controls, none of that is having a material effect on the … I mean, it's having effect on certain industries, but that's not the cause of economic woes in China. So, to stick to de-risking, which I think is a reasonable paradigm, I like to stick up for whenever I'm asked, which you did ask me. So, I would say consistent messaging that we want to see a Chinese economy that's doing well. No, don't gloat, don't boast. Give them some time to work it out.  

So, I think this is a moment for, as my IR colleagues, international relations colleagues like to say, deterrence only works with reassurances, right? So give them the reassurance that as long as you're not invading Taiwan, as long as you are not aggressively expanding in pursuit of resources, as long as you are not weaponizing certain things, then we all want to see your economy grow. We want to see you do well. I think it's not totally unreasonable that we might see a China in 10 or 15 years that looks a lot more like the China we saw 10 or 15 years ago. Then we have a whole new set of challenges that we have to deal with, but the point right now is not to wish them ill and instead to give them some space to grow, but also to think strategically about, as Rana was saying and as Obama said, when the TPP was initiated, who does set the rules for trade in Asia?  

So if we just want to wish for a world in which all trade is fair and we basically make everything in the United States, well, we're going to die with those wishes without a realistic set of expectations, either for what our middle class can achieve through our foreign policy or through other economic means that we may have to compensate losers from that process. Once again, I'll just say when China entered the WTO, everyone wants to talk about the China shock now and the loss of jobs, which was also fully predictable based on any accounting of economic advantages. So, what we failed to do in the United States, it's not just that China didn't play by the rules, we failed to accommodate that group of people in the United States. 

So, thinking more realistically, treating American voters as adults, and talking about what the benefits of trade are and what the cost might be and how we can allay some of those costs and how they're felt in American middle class families, that would be my set of policy recommendations.  

That might sound more like a Pollyannaish wish list, but I guess that's the privilege of being in a podcast in Cambridge, rather than in the White House. 

Ralph Ranalli: Well, thank goodness you are on this podcast in Cambridge. Rana, do you have any more policy recommendations to add? 

Rana Mitter: I'll add one to that. I mean, again, I think that Meg's prescription’s there, and I hope that a whole variety of senators from both parties are listening at this point. I'm sure that PolicyCast has a very distinguished listenership.  

I'll add one other thing, and I'll go back if I may, to my typical person, Jiang Xiaola, living in this small city. So, she has this one child. I would say something that would've been natural, I think, maybe five, even 10 years ago and should become natural again and could be very, very good for the way in which China can be embedded peacefully and cooperatively in the world, is for that child when she grows up to essentially want to come to the West and pursue the United States to study. The reason I say that is not just because I think cultural interaction and dialogue is a good thing. I think most academics, perhaps all academics you'd find would agree with that point, but actually a great deal of what is going to drive economic growth in the next decade or two is high level knowledge. That's going to be scientific knowledge, but it's also going to be scientific knowledge and exchange between societies. I think that right now, we are in danger, partly because of the understandable politics of security in both countries, of being a situation where essentially the next generation of Chinese thinkers only are in China and the next generation of Westerners only in the West. The gap between the two is difficult to bridge. 

Now, I think that nobody who works with China would in any way step aside from the idea that there are real security risks that have to be accounted for. For instance, businesspeople and politicians going to China will generally take a separate phone with them, because they don't basically want spyware to be put on them. I think this is something that has to be openly dealt with. But that's a different thing, I think, from the wider longer-term benefits that come from understanding again, human capital to use that phrase we used earlier, is richer and more developed and more productive over time if it is able to operate in more than one environment. For a lot of scientific postdocs, I think certainly the case in Europe, it may not be the case in the US, but I hope it is. In Europe, you're expected if you want to get promoted, and this is for hard sciences, we're talking about physics, chemistry, computer science, whatever, to have at least spent some postdoc time in another environment, which usually means North America. The precise point of that is not just to go to a place where people perhaps have better facilities, but where they think and work differently and it's meant to actually improve and hone you as a thinker. So much of the economy of the future in China or in the U.S. and Europe and elsewhere is going to be based on how people think. You talked about the amazing level of innovation in China. I think that's absolutely right, Meg. 

Also, we shouldn't discount the fact that the United States is still by far the most innovative economy in the world and will be, so I think, actually for a long time to come. But one of the things that could erode away at the edges of that is if the range of reference and interaction that feeds the next generation of minds is narrowed. So, thinking about how to manage that safely, sensibly, but nonetheless not try and cut off that relationship is a really important task for policy makers. 

Ralph Ranalli: Well, I want to thank you both. It's going to be just absolutely fascinating watching what unfolds with China over the next five years, and I’m glad we got to talk about it 

Meg Rithmire: Thanks, Ralph. 

Rana Mitter: Thank you. 

Meg Rithmire: It was a lot of fun. Thank you. 

Rana Mitter: Thanks. 

Outro (Ralph Ranalli): Thanks for listening. Editorial assistance for PolicyCast is provided by Nora Delaney, Robert O’Neill, and Jim Smith of the Harvard Kennedy School Office of Communications and Public Affairs. Design support is provided by Laura King and Delane Meadows. Our social media management is provided by Natalie Montaner.  If you’d like to learn more about PolicyCast or explore previous episodes, please visit our home page at . And please join us for our next episode or—even better—subscribe to PolicyCast on Apple Podcasts, Spotify, or your favorite podcasting app. That way you won’t miss any of our candid and constructive conversations about research-based policy solutions to big world problems. And until then, remember to speak bravely, and listen generously.