����vlog����

Mari Megias:

Good day, everyone. I am Mari Megias in the Office of Alumni Relations and Resource Development at Harvard Kennedy School, and I’m very pleased to welcome you to this first Wiener Conference Call of the 2020–2021 academic year. I am excited that we are now using Zoom for these calls, and hope that this platform will enhance your connection with our expert faculty. 

Today, we are joined by Professor Anthony Saich who is the director of the Ash Center for Democratic Governance and Innovation and the Daewoo Professor of International Affairs at Harvard Kennedy School, where he teaches courses on comparative political institutions, democratic governance and transitional economies, with a focus on China. Professor Saich also serves as the director of the Rajawali Foundation Institute for Asia and the faculty chair of the China Programs, the Asia Energy Leaders Program, and the Leadership Transformation in Indonesia Program. We are so fortunate that he has chosen to share his expertise today with the Kennedy School’s alumni and friends. Professor Saich?

Anthony Saich:

Thanks very much, Mari. Good morning, good afternoon, and good evening, to those of you who are Zooming in with us today.

I thought what I would do is make some brief comments, on three different topics. First, some general comments about the state of the U.S.-China relationship. Secondly, to touch on China’s response to global pressure on the economy and then third, that will lead me into the question of whether decoupling is possible. But then of course, I’d like to hear from you, about things that are on your mind.

It’s quite clear that China’s development, obviously, is reshaping geopolitics, and many other countries, including the United States, is grappling with how do you deal with that situation and that rise? Some years ago, Mike Blanton already said that he felt the relationship was at a tipping point, where we were in the danger of our fears actually outweighing our hopes for the relationship. What interests me, I think, is that most analysts, wherever they fall on the spectrum within the U.S., tend to have the same starting point, but then begin to diverge about what possible consequences and solutions for that might be. 

I think bearing that in mind, there are two important discontinuities, which I think sort of shape the sections and reactions to the relationship. The first is that for the first time in history, the world’s largest economy will not be a Western nation and it has a different set of values, a different set of institutions, and a different political outlook from those of us in the West. Of course, this I think is what underpins the discussions about the need to challenge this rise and potentially containment for the United States of America. We’ve seen under President Trump something that started with trade, moving much more to a confrontation across the board, has been evident in more recent speeches by Vice President Pence and Secretary of State Pompeo. We also see the promotion of the Indo-Pacific Project, for example.

But on this first issue, it’s also the case though, that for the first time, the world’s largest economy, will not be the one that enjoys the highest living standards and quality of life. That I think gives some hope to those who favor some form of continued engagement. Is China really capable of exerting the strength to challenge, in a robust way, the institutions which have guided global development over the last period of time, since the Second World War. Or is it actually weak internally such that over time it’s going to have to direct much of its energy to reforming its economy and maybe ultimately reforming political institutions.

A second discontinuity is that, are we going to see—and this could be very problematic—an economic Asia with China at the core, which is in some ways reinforced by the U.S.’s withdrawal from TPP, the Trans-Pacific Partnerships. Of course, as we know, China is playing the dominant role in many of the economies around Southeast Asia and even into Central Asia. So are we seeing an economic Asia with China at the core? But what we’re still seeing is a security Asia with the United States at the core? Of course, China doesn’t really have a decent set of allies within the region, whereas the U.S. retains a number of important relationships there.

But let me turn to a second question and that is, how is China responding to the pressures which are coming upon them? Essentially, what it is now doing, it’s trying to make globalization work on its own terms. In May of this year, General Secretary Xi Jinping launched the mysterious phrase of the dual circulation strategy. It took us a little bit of time to work out what that meant. But it actually, if it works, could have very significant consequences for the global economy. The first circulation that he referred to is a shift away from global integration, so less reliance on trade, less reliance on foreign investment back into China. But it’s worth pointing out just how important the foreign engagement is. It’s 10 percent of jobs related to foreign investments in China, 18 percent of the corporate taxes, 30 percent of economic output, was 44 percent of exports, 50 percent of imports. Those are all pre-COVID figures.

So first is a shift away. That’s the first circulation from that global integration. The second is towards domestic reliance, the second circulation that they’re talking about. So building up capacity within China, the Made in China 2025 Plan, for example. Trying to develop capabilities that it’s too reliant on the world outside for the present period of time, and to boost consumption as a major driver of growth. So why is it doing that? Well I think the answers are fairly obvious. First of all, there’s the trade war with the United States of America, which the Chinese leadership do not see abating. I think even if there was a change of administration, they think those pressures would still be there.

Secondly, there’s the political pressure to relocate manufacturing chains. Again, something which I think they feel is now a longer term trend.

Thirdly, decoupling, which I want to come onto in more detail, in a moment, they see that as an enduring trend and something they’re going to have to work out and deal with, over time.

Fourthly, they do see weak global trade because of the pandemic, and there’s an uncertainty around the recovery. While the Chinese economy may seem to be recovering at the present time, they’re not convinced that those in the European Union and the United States of America and elsewhere will recover sufficiently to bolster that global trade.

Then last and very importantly, they want to guard against economic exposure. For example, their exposure in their weakness, when it comes to things such as semi-conductors.

So then the question becomes, will that happen? Is it possible? I think there’s a number of arguments against it happening as fully as the Chinese leadership would intend. The first is that foreign multinationals are still very committed to China. In 2019, U.S. companies, for example, sold $250 billion worth of goods to the domestic market in China.

Secondly, as many of you on this call will know, integrated manufacturing systems are not easy to replicate. In January, I was with the dean in Vietnam and we were talking with the prime minister and various others there and they were saying that their difficulty in sort of accommodating a shift to manufacturing was quite significant and, in fact, some of the factories which had relocated from China— and some of them actually were Chinese companies—were still reliant on the provision of crucial component parts coming from China.

Also, a third point is that China’s been talking about this shift in its economy and boosting consumption for over 15 years. Now, Chinese citizens are consuming—you only have to wander around any city to see that. But if you look at it as a percentage of gross domestic product, consumption is only increased by 2 percent over about a 15-year period—and it will probably have dropped again as a result of the COVID problems. So this is something they’ve been trying to engineer for a long period of time and the major way they’re seeing of getting out of the COVID slump, has really been through increased state investment and low interest and sometimes negative loans to their state-owned enterprises.

Lastly, as Michael Pettis pointed out in the Financial Times, this is a very difficult political shift to make, because first, it means households will have to increase their share of wealth. Now will the elites, will the Communist Party, allow that to take place? Will the state-owned enterprises allow that to take place? That’s a very significant political challenge. And also it will impact on export competitiveness: If wages do go up, then of course that’s going to reduce China’s export competitiveness.

So, let me for the third and final set of comments then, touch on this question of decoupling. As I said just a little bit earlier in this session, I’ll give a good academic answer, which is, it depends. One thing I do think is important to point out at the beginning is that decoupling did not start with the administration of President Trump. China decided to block Facebook, Twitter, Google, and a range of other foreign technologies so as it could protect and build up its own domestic capacities. So I think we need to break out potential for decoupling across a number of different sectors.

First of all, trade. In the short-term, China clearly was willing to make concessions for the trade deal in January, because that is basically buying its time to diversify its trading portfolio. China is vulnerable to the U.S. restricting markets to Chinese goods and services because they remain significant. But China of course is less significant to overall U.S. exports. China is 8 percent only of U.S. exports. But China is less vulnerable than it was and in certain areas, of course, we— the U.S. consumer is vulnerable. Eighty-two percent of mobile phones, 94 percent of laptop computers. So what China needs to do is deescalate the trade war until its dependence on the U.S. export market is less critical, which is why I think it signed the trade deal in January.

If we look at foreign direct investment, I think decoupling is likely to increase, with U.S. firms looking for alternate destinations and also conversely, with Washington placing more restrictions there. The total stock of U.S. FDI, again, pre-COVID, in China, was $269 billion. But the cumulative amount of Chinese investment into the U.S., was only $148 billion, and it dropped significantly in 2018.

Of course, for the U.S., their investments in China, are strategic. They’re part of the global production chains and supply chains. That is not the case with Chinese investments into the United States of America. Many of them were driven by trophy projects, often by private enterprise. If we look at capital markets, that is very difficult to unwind and, I think, is less likely. Because the exposure is too great. The U.S.-China bilateral financial relationship is something like $5 trillion U.S. dollars. China has no real alternative to the diversity debt and liquidity of the U.S. capital markets. Last year, for the first time in a quarter of a century, China ran a modest account deficit. I think that may well be a long-term structural deficit, over time, because China’s going to have a net financing requirement. 

That leads to a couple of comments about the importance of Hong Kong. Hong Kong’s financial and capital markets are extremely important. It’s an essential gateway, providing access to foreign currency and playing a crucial role in integrating China’s financial system with global markets. In 2018, 65 percent of FDI access to China, via Hong Kong and the markets in Hong Kong, reduced the need for China to use its foreign exchange reserves, thus limiting the volatility of the Renminbi exchange. It’s where many of the IPOs have been launched—that will probably increase. It’s a gateway for moving portfolio investment.

China doesn’t have any real alternatives. If you think about its financial sector, Renminbi internationalization is limited. There’s capital controls. There’s stock market interventions. Inbound FDIs declining, outbound FDIs declining and so on and so forth. Also, at the present time, Shanghai, as a result of that, clearly could not take over as a global financial center for China. Also, it’s difficult for Hong Kong to find alternatives. Macau is not effective, obviously, and Singapore really operates in different areas of the capital markets to those in Hong Kong.

So capital markets is one area where we’re going to see much less likelihood for decoupling. Currency use I think is interesting. Most trade as you all know is still conducted in dollars and currently, the Renminbi obviously cannot serve that function. Trade swaps, it is true, are increasing, but they’re still not major. I think this is why we’re seeing China focusing on digital currency. I think is why China wants to push ahead with digital currency, because it knows it cannot replace the greenback in certain areas of trade, but it wants to establish dominance, I think, in the field of digital currency.

The last and I think, one of the most contentious and problematic, is going to be technology and AI. This of course is already happening. It’s going to increase, with the United States security concerns and increasing security concerns, in other countries, outside of China. Also, because of China’s desire to become a dominant player and standard setter in new industries, I think that is going to put tremendous pressure on many countries, in Southeast Asia and Central Asia. They may have to be forced to choose one or the other: Western-based systems of technology, or Chinese-based systems.

So let me conclude by coming back to the relationship and just say that China is a reality and we do have to find ways, therefore, to deal with it. It does seem to me, that from the United States’ perspective, we need to be clear about those areas that we want to challenge China on, where we would want to confront China on. There are so many issues related to global governance and the management of global, public goods where we need to engage China and other countries—India, Brazil, others—to find solutions. Climate change, caring for the oceans, pandemics, certain areas of global regulation related to financial movements, and so forth.

So I think we have to be clear about a strategy of where can we move towards corporation and where can we not, and make it clear to the Chinese authorities which those areas are. So let me conclude there and I’m happy to field questions, comments, either related to what I talked about, or anything else that’s on your mind.

Mari Megias:

Great, thank you very much. So we are going to open the session up for questions now. Please note that this event is on the record and a recording will be posted later online. To ask a question, please use the virtual hand raising feature of Zoom. Margaret Miller will notify you via Zoom’s chat feature when it’s your turn to speak. Please note that you may experience a short lag time, so be sure to unmute yourself and turn on your video when you hear from Margaret. Finally, our participants would appreciate it if you could state your name before you ask your question. 

So I’m going to start things off by asking a question that was submitted earlier by Gerald Hane, ����vlog���� class of 1985, PhD 1992. That question is, “How is China’s growing influence affecting U.S. relations in other parts of the globe, such as Southeast Asia?”

Anthony Saich:

Yeah, that’s an extremely important question. I think it goes back to one of the comments I made in my opening remarks that there’s no doubt that we’re seeing an economic Asia, with China increasingly at the core, which is differentiated from the security Asia. What we are seeing is now a number of countries, Laos, Kampuchea for example, basically under Chinese control, to all intents and purposes. Myanmar is coming under increasing pressure and because of the U.S. withdrawal from more active engagement in Myanmar recently, China’s putting tremendous pressure there.

I think on this technology question, it is going to be a problem. A country like Vietnam, where we were recently, they said, “Look, we have to live with both. We have to find a way to live with the U.S., which is becoming an increasingly important partner. But, we have to maintain and manage our relationship with China.”

I think what we’re beginning to see is a number of countries, Australia of course, the most notable and recent example, India, Japan, really beginning to come closer to the United States’ position of wanting to challenge China’s outward behavior and its internal practices. I think where we’re seeing an interesting area for development is within the European Union, where China had invested very heavily in some of the southern European countries—Greece, Portugal, Spain—and really acquired strategic assets that would not have been allowed in the north and that did lead to political support, blocking earlier statements on human rights behavior, for example, within the European Union. Hungary has been very influenced by Chinese investment.

So to some extent, that’s worked, but I think it’s beginning to wear off, effectively, and I think the European Union is pulling together closer to some kind of CFIUS-like approach towards Chinese investments within the European Union while taking a tougher view around questions of human rights. Of course, Africa remains a huge open area for debate with growing Chinese investment throughout Africa, and a perception, although I don’t think is necessarily true, of Western withdrawal from investment within Africa and the kind of political consequences that that might have.

So there is no doubt, as I said at the very beginning, China is changing geopolitics and China’s rise is global engagement, will continue to change geopolitics.

Q: Thank you for an informative talk. I have a question from the left field, which I hope you’ll tolerate for one minute. To what extent do you think that U.S.-China struggle is carried on under a false pretense? The basic thrust of the matter is that Asia is rising and is an enlightened a ation as the U.S. is, as compared to others. We feel very uncomfortable about it. We remember how in World War II, we interned Japanese-Americans, but not German- and Italian-Americans. How in the 1970s and early 1980s, we bashed Japan. Now, see how we are bashing China, as I think we would all bash India, if India’s economy threatens to catch up with. So forgive me for a question from the left field, but I think it needs to be cleared.

Yeah, I mean I think this is an important. I mean, I do think the Trump administration is equal-opportunity bashing. I mean it’s gone after the European Union, it’s gone after Canada, it’s gone after Mexico. But I do think you have a point that there is a particular concern and we’ve seen a number of essays about, will Asia lead in this century? Is the American century finished? There’s no doubt that there have been racist responses. Anti-Asian sentiment in the United States, when COVID started, was very strong and increasing and is still there.

I think the United States does need to find a way to work more collaboratively and cooperatively with a strengthened Asia. There is going to be a lot of growth there. I mean as you say, India’s going to become an increasingly important economy. Japan, to a large extent, America has reconciled with. I think it is something that policymakers are going to have to deal with.

I do think though there is a lot of concern elsewhere, within Asia, about China’s rise and China’s intentions. So I don’t think that is limited solely to the United States of America. So I’m not sure it’s 100 percent a false pretense. But there are definite concerns there about how to deal with a rising nation and of course, many Americans sort of tell themselves stories of American exceptionalism. Its dominance and its preeminence. Clearly, in the world moving forward, there is going to be no nation which is going to be preeminent across the board.

Joe Nye has often talked about what he calls the three-dimensional chess game. Some areas you confront, some areas you have to collaborate, and there are many challenges we’re facing that cannot be dealt with without cooperation between the United States and a whole range of large nations and other dominant, emerging powers.

Q: Good morning. My question to you sir, is that you intimated the middle class in China and an emboldened middle class will have power influence indirectly proportional to central control, which may very well create problems internally, which thus far, Xi is attempting to control if not corral, through means very, very stringent and strident. In the larger scale, economics is politics. Economics is political public. How do you anticipate China migrating as a world-class nation-state, fully participatory in understanding that their peoples have a voice vocative as well as civil rights and more importantly, the military component, because China is now building greatly, and I believe their navy is in excess of that of the American Navy and this is from Jim Stavridis, who is becoming very, very concerned. I thank you, Sir.

Great, well there’s a lot of levels of complexity to that excellent question. The middle class, of course in classical theory, Barrington Moore, et cetera, et cetera, you don’t have democracy without the middle class. I think at the moment, the middle class is expanding hugely. I mean it depends on your calculations, maybe 250 million people. McKinsey and others expect that to grow, over time.

I think at the moment, that middle class is a product of Communist Party policy. I don’t see any signs of evidence, except over kind of NIMBY, not-in-my-backyard-type protests, that it’s taking on and challenging political power in any concerting way. The one area where it has really pushed back, which is push the government is around, is the environment—as people have grown more wealthy, they’ve wanted to live in a better air and have better water and better food safety. That has really pushed the government to move in that area.

I do agree over time, that they’re going to have to find ways, which is going to be more inclusive for the views of their citizens. Just relying simply on sort of hearing systems and the opinion polls and feedback loops that they have, I don’t think is going to be sufficient over the longer term. That is going to, I think, create some kind of political challenge and problem, over the longer term. Again, not of the immediate, short-term. Many of the middle-class people I know are quite aware of what is happening in their country. They’re quite aware of the world outside, but many of them fear that, “If you could get us to be, safely, and you could tell us how to do it, we would accept it.” But I think many of them fear chaos, potential dislocation, trying to make that transition, which I think holds them back.

On the military, yes, there’s no doubt and I think where China’s particularly investing in the military, is not only the navy, because of the more aggressive moves in the South China and East China Seas and across Taiwan Straits, but is also in high-tech and cyber warfare. Anybody you speak to in that field will tell you that’s where a lot of the money is going. 

I think there’s going to be one significant challenge to military investment. Again, over the medium to longer term and that is the aging of the Chinese population. This next year, is a key turning point in China’s demographics. It’s going to get to a point very soon, where, well not very soon, in about 10 years, where you’re going to have one worker having to support three people not working. Also the dependency ratios are shifting very dramatically. That’s going to raise the proverbial guns versus butter debates. How much do you put into social support? How much do you put into the military? So I think there is a long-term funding challenge there.

On the question as a world-class power, I think what China, you see this already, in terms of China’s actions. I think it’s going to be very supportive of those organizations that coincide with its interest. It’s been very supportive within the World Trade Organization. It’s now, because of America’s attitude, taking a stronger role within the World Health Organization. But I think other organizations, globally, that do not meet its objectives, it is going to confront and take on. The Human Rights Council in Vienna, of course, being an example. Of course the U.S. has its own views on that, as well. Also, building things like the Digital Silk Road.

So I think there’s going to be a mixed pattern to that. I do actually think with the agreement between President Obama and General Secretary Xi Jinping around climate change was significant, because I don’t think Paris would have happened without that. I think those kinds of areas, if they can be found, where China feels that it is part of the new global framework, that might make it feel more comfortable with its global role.

Q: My question is more historical, if that’s okay. Because you wrote about intellectuals in China and you wrote, your new book is about the finding friends and making allies. I would like to ask, how do you see, there’s a lot of talk about influence operations, about united party work in the West, real or imagined. I want to ask you, what do you think has broken? I mean if China is so good in making friends and making allies, what happened? Is it a political moment? Is it what is called a singular failure point of Xi Jinping, or is it something else? Thank you.

Yeah no, that’s a very good and important question. The finding allies and making friends, of course was when it was only 53 Communist Party members and they suddenly needed to find friends to survive and they were very successful with that. What has happened moving forward, I think, China has always maintained what it calls the United Front Organization. It has waxed and waned domestically. It has been more important at times, when China has stressed economic growth and development, because it needs to bring in the kind of technicians, the kinds of engineers, that it needs to push the economy forward and is being more tolerant towards those kinds of professionals.

When it has taken a more radical, political stance, which I think is happening under Xi Jinping, for particular reasons, about insecurities and concerns that he may see in their system. It’s tended to be a harsher environment for intellectuals, more broadly defined. I don’t think that is affecting technicians and scientists in the current leadership, at all.

Now externally, a lot of the United Front work had two main objectives. One was of course to promote China’s messages overseas. Did that through a number of its front organizations. Going back to Africa, for example. It’s bought up a lot of local newspapers, for example. A lot of local African countries’ local newspapers can’t afford foreign correspondents. So it receives feeds from China’s international correspondence. Television stations, broadcasting, so on and so forth. So that is all geared to pushing its message and Times Square had the big advert for Chinese news so on and so forth.

The second, of course, aspect related to that has been to encourage important people to come back to China, if not full-time, at least part-time. So to drive through the 10,000 Talents Program, to bring back scientists again, to bring back technicians and even if they wouldn’t go back 100 percent of their time, at least to say, link up with their labs in China. Maybe spend a semester in China, or a semester overseas. My own field around public policy, public administration, there was a slew of appointments, so people working in those fields overseas, who became deans or deputy deans in those growing schools, within China. But often, they did half and half. Half the year in China, half the year back in mainly the U.S.

What has happened, I think, as we’ve seen a more aggressive diplomacy from China, and this started at two central work conferences on foreign affairs, 2014 and 2018. Xi Jinping, in 2018, he made it very clear, all foreign service offices were first and foremost members of the Chinese Communist Party. What they had to do first and foremost was present the Communist Party views on international affairs. We’ve seen that playing out. Tough statements, “We’re not going to be bullied. We’re not going to be pushed around.” So you see the rise of what we call wolf-worrier diplomacy. Pushing back very strongly. Then as countries have stood up to China, it’s tried to mobilize those United Front networks, again to push back. Whether that is trying to find sympathetic politicians, sympathetic organizations. Australia and Canada also have probably been two of the most extreme cases of that, where those conflicts have erupted. I think that what that has done, I mean there’s always activity in Hong Kong, of course, for decades. I think what that has done, is sort of highlighted to many who weren’t aware, that that kind of work has been going on for a long period of time.

I think a number of countries are now sort of questioning. In the U.S., for example, you’ve had the big pushback on the Confucian Institutes, which were first welcomed for teaching Chinese language, for teaching Chinese culture, and now under the current administration, the push to have many of those closed down. So I think it’s a mixture of those things together and also, external perceptions, beginning to change and a better understanding of how China has engaged and has worked overseas for a period of time.

Q: Sir, will you please comment on the current state of the Belt and Road Initiative and whether pushback from countries who cannot meet their debt obligations has created situations not intended or foreseen by China? Thank you.

This is a really interesting question. First, I don’t think Belt and Road exists, or ever existed really, as a strategy. It’s a slogan. Like lots of things in China. Develop the West. Belt and Road. Infrastructure. These are slogans which are thrown out by the central leadership and then people fill them in, as they see fit.

Now, every province in China has its own Belt and Road strategy, because it wants to get on the gravy train of potentially loose money, for that. State-owned enterprises have been part of that. I think a number of things are happening. First is that, the administration in Beijing has now decided, quite clearly, that state-owned enterprises will be at the core of the Belt and Road Initiative, because that helps it meet its political objectives much more clearly. But I think also importantly, I think they feel it gives them a better oversight of what is happening with those projects, related to your other point, about some of the criticism and some of the pushback.

On the plus side, there is no doubt that there is a massive need for infrastructure investment, if it’s done really well. The existing financial institutions cannot meet that need. So to that extent, I think the Chinese investment should be welcomed. But I think what we’ve seen is, a lot of the negativity about the investments, the structure of the loans, the kinds of debts which are being incurred, has increased pushback and not just in countries in Central Asia, but also, for example, Thailand, Malaysia, Indonesia, have all pushback. Myanmar has pushback. That’s why I think we saw a very different tone in the two Belt and Road big parties in Beijing.

In the first one, it was very silver tree. General Secretary Xi Jinping, was very glowing about what this would do for the world. It was very ambitious, although not very detailed. We still don’t really know which countries are actually included in Belt and Road. As David Dollar has pointed out, more of Chinese investment goes to countries which are outside of what they talk about as Belt and Road, than actually goes inside the Belt and Road.

But if you fast forward to the one last year, it was a much more sober affair and there I think, China was acknowledging some of the criticisms, the debt that had been accumulated. The corruption, potentially. The wastage. The inappropriate projects. So, and a number of people in China had raised with the leadership, that this was actually working against China’s reputation overseas and that it should be looked at in a more considered manner and I think that has been taking place.

One major problem with a lot of the Chinese loans and a lot of the Chinese investment, is that they do not cover operational costs and the management costs. So you build a hospital, you build a road, you build a railway, but then it becomes incumbent on the countries which have received that to find the funding for the maintenance and the operational costs. Sometimes, they just don’t have that money. Many of them are highly, some of them are highly indebted countries and as a result, the projects come in for a lot of criticism and are not being used as effectively as they might be. It is going to become a major problem for China, as a lot of this debt falls due. Will they undertake debt relief? There’s pressure for them to think about that. Can they restructure the debt? Or will they simply take over assets, as they have done in one or two cases.

Q: My question is about the digital RMB. Do you think this is a step towards opening up the RMB to the world market and releasing it from its capital controls?

I don’t really know, to be quite honest, an answer to that question. I mean, it’s possible. I mean I know a lot of the international investors really desperately want to get involved in that sector. They’re particularly interested with the Digital Silk Road and the expansion along the Belt and Road lines to become a part of that program. But I would, it’s not really a field I know enough about to be able to give you a serious answer. I’m sorry about that.

Q: How you see the restrictions on Chinese students coming to study in the U.S. and to stay of course for employment after graduation, and how that’s going to play out in the future and impact relationships between China and the U.S?

I mean this is really important, because if you think about when there was a real Cold War, where I grew up in Europe, very little contact with the Soviet Union. Very little interaction, a few academics maybe, virtually no students. So this is a tremendously important area, that I think has to be thought through carefully. Anywhere between 250,000, 350,000 Chinese students, studying in the U.S. Let alone the number studying in Europe and in Australia, Japan and elsewhere.

So I think we have to find ways, I understand there are security concerns, maybe in certain STEM areas. Those should be monitored, I think, quite justifiably. But I think for many of the other students, we should be as accommodating and welcoming as possible. We have a number of young PhD students come to the Ash Center every year to do one year of their PhD research with us. They experience an environment which is very different from their academic home. They can interview, they can visit people, they can go to archives with the proper permissions. They can use the libraries freely.

So I think all those things are extremely important and they do foster longer-term relationships, as they get to know their fellow students. I mean I think in a previous generation, a lot of sympathy towards Taiwan came from the fact that there were many students here from Taiwan who grew up together with American undergraduates and they’ve maintained those contacts throughout the years, and I think we’ve seen a similar phenomenon with those coming from mainland China.

So I do think it’s important. I do think it should be maintained. I do understand that there might be security concerns, but those should be imposed judiciously. I do think it should not be used as a funding excuse, which I think has taken over some of the coverage, about the monies that they bring into the colleges and the universities. But that leads into another big question about who really should be funding state and public education, which has of course dropped dramatically, since the 1980s and dropped even more so, since the ’08–’09 global financial crisis.

So it’s a really important area and one that we think a lot about here at Harvard. I think, sorry, last thing I would say on this, is it’s really important, I think, to have Chinese voices in our classes. That we don’t remain insular. As long as its respectful a debate. Of course, many of those who come, don’t go back home, loving America. A little knowledge can be a dangerous thing.

Q: Good morning, professor. Thank you very much for taking the time today. My question relates back to your points on decoupling and on the potential limits to China’s degrees of freedom and really pursuing full-on decoupling. One point, I don’t think you raised, but I’m curious to hear your views on is, to what degree does the debt situation in the Chinese economy really limit the ability of the Chinese government to continue pushing with the inward focus? What I mean by that is, we look at simple statistics, total debt to GDPs, in the 250 to 300 range, depending on what you look at, household debt to income is well over 100 percent. We see price to income ratios in the real estate market at 16 times in major cities. We see a real estate bubble. We see bank, nominal bank bad loans, at only 1 or 2 percent, but most of us believe they’re probably in the mid-teens, if not, higher. A shadow banking system that has been slowed down, but still kind of lurks at the peripheries of the economy, with a good amount of bad debt, kind of hidden in the shadows. I think of Michael Pettis’s, Professor Pettis’ very good phrase that, “In China, GDP is an input, not an output. One chooses the level of GDP one wishes to achieve, one directs the debt to the SOEs, or the real estate, or the infrastructure areas, one wishes to, and one creates the output one wishes to.” That has worked quite well. But at these levels, I begin to wonder if a reckoning is not due. It seems to me that the government is aware of the problem, but I’m not quite certain if they have a solution, or are really dedicated to what’s needed to create a solution for this problem and I’d be curious to hear your views. Thank you.

Yeah, thank you. You provided a lot of information on the backdrop to that. I tend to follow Michael Pettis on this, with his views. My view on this is it’s not an immediate short-term problem, because obviously much of that debt is domestic. But it is a medium- to long-term problem that the Chinese Communist Party has shown no capability to control consistently, in the last decade or more. As you say, debt is extremely high. We don’t really know how high. We do know a lot of it is also embedded with local governments. That is putting on tremendous pressure for its social support systems.

One of the things which has kept the Chinese government relatively popular in the countryside and some poorer areas is its investment in social welfare. Some polling we looked at from 2003 to 2016 showed that support rose most strongly amongst the poorest and those who were in the most peripheral areas. But can you keep maintaining that, because the pressure for that social welfare investment is heavily focused on local government and with the aging coming in which I mentioned earlier, that obligation for local governments is going to increase and it’s going to be very, very difficult for them to meet those obligations.

I agree entirely on the input-output comment that you made. What we’ve seen is that, whatever the Communist Party says, its immediate response is, open the spigots, pump out more money, which it has done, in terms of the infrastructure investment and also, as I said, at the very low interest and sometimes negative interest rates to the state-owned enterprises, to get the GDP figures up. Of course a system which is driven by targets, even though in theory, they gave up the GDP target, means that that is what people are going to conform to. And banks, local governments, are always going to make sure they hit those targets, and if that means pumping out more money, that’s what it is.

I think this goes back to a fundamental question and that is the political structure within China. It has been saying really since 2002, 2003, it’s going to undertake these reforms. If you list what Hu Jintao  laid out, they’re almost identical to what Xi Jinping and Li Ka-shing has been talking about in many of their documents and it doesn’t happen. That is because, that core of the Communist Party support, within the state-owned sector, within the real estate sector, is so powerful and the middle classes have benefited from it reasonably, that it makes it very hard to shift that particular battleship.

I once remember being told an aircraft carrier takes something like 20 kilometers to actually come to a halt and this is going to be a very long halt to get the Chinese system off debt-growth. It knows it needs to, but it hasn’t been able to do it and I think it’s going to be problematic. I don’t think it’s an immediate problem. But I think it is a very dangerous medium- to long-term problem.

Q: Thanks very much for your time. So just on the overall issue of China as a rising power, challenging America as the incumbent power, how do you ultimately think this plays out? What pieces of analysis or framework, that you’re looking at, that helps you guide your view?

Yeah, thanks. I mean I would rather look at the UK where I’m from, than the United States. Having fought a war, we were able to find accommodation then the idea of the Thucydides Trap. I don’t think the Thucydides Trap is necessarily the right one, unless people make it a self-fulfilling prophecy. I think my personal view is that as I think I may have said already, China is a reality. It’s there. It can’t be ignored. We don’t know what is going to happen domestically with its political system. We have to act on the basis, we can produce different scenarios. We have to act on the basis that it is what it is, and that’s the way it’s going to behave, moving forward, over the short to medium term and our strategy needs to reflect that.

So I think what we have to think about is something beyond what we did with the Soviet Union, because there’s far more potential for engagement. I think we do need to keep strong militarily to deter Chinese actions, particularly with relationship to an issue like Taiwan. We need to beef up in the area of cyber security, which I’m sure people are doing. There’s, I think I said earlier, we need to be clear about those areas where we’re never going to get to agreement and try and set up some kind of mechanism at least to inform one another on those.

A second set, category of issues that I would say, are those where we might be able to get into some dialogue, but we have differing views. Then a third area, which I hope, would be able to build some levels of mutual trust, where we can cooperate. As I said earlier, I would posit those in the framework of producing global, public goods, which is to the benefit of everybody, and that’s where I think we might need to focus attention and provide opportunities, to prevent problems breaking out.

I mean the biggest danger is accidents. If you created a hostile environment, no one thought when Archduke Ferdinand was assassinated, we’d finish out with World War I. United Kingdom and Germany, we were intermarried with one another. The royal families were intermarried with one another. We used to call him Uncle Willie and yet, conflict happened. So, there’s a very volatile and dangerous potential for accidents to get out of control. Fishing boat accidents, that escalates. It’s very dangerous at the moment.

Mari Megias:

Great, well thank you very much for that question. With that, we’re going to conclude our first Wiener Conference call of the 2020–2021 academic year. Apologies to those for whom we did not get to your questions, but we look forward to seeing you at the next call, on October 15, with Robert Livingston. Thank you very much.

Anthony Saich:

Yep and thank you all for joining in and for all the excellent questions.