Thank you for joining us for this edition of the Modlin Global Analysis Podcast. I'm glad to be joined with Dan Modlin, who will be asking a series of questions. This week, he and I have been having a rich conversation that we wanted to bring you all in on China and some changes that were noted. Using about China and things that we think that are developing that are important to have a general conversation about, these are factors that particularly have economic ramifications, but I think these are important to consider.
Dan
Kevin, at your recent presentation at Lost River Cave, several people asked questions about the economic outlook for China. And it's kind of a mixed situation right now. Isn't it kind of a challenging situation for Chinese leaders?
Kevin
China does face a series of challenges. One of them was related to, of course, COVID and the policies that they had around closures. But even before COVID, there was a shift in policy outline where they call it a dual circulation economy, where they emphasize exports as much as they do on domestic consumption. When in previous time periods, they emphasized exports primarily. So when they speak of emphasizing 2 things, that is a way of elevating an emphasis on domestic consumption. And of course, that has been a component of their economy, but this is a new emphasis on where their consumers are headed with that, and we know from general economic studies that when countries start to emphasize their domestic consumption over export they will have generally slower economic growth compared to previous time periods. That does not mean that it is a recessionary condition or depression or anything close to that, but it is a slower growth model.
Dan
OK, so China may actually not be growing as we've expected it to in the past.
Kevin
The pandemic, of course, interceded within this framework, so these are the general goals that China had in the pandemic with the closures and everything intervened and caused even probably greater slowdown than they hadn't planned for. But we can't anticipate that over the coming decade that there will be less global output from China. As far as general. Here we are seeing a lot of reshoring of facilities as well as moving to companies and regions outside of China and general Asia.
Dan
On the subject of growth, just recently in May, an American economist named Bob Lucas, a macroeconomist passed away, and I understand a lot of his studies really dealt with growth itself.
Kevin
He was fascinated by economic growth and in a way his passing is a contrast to what we may be seeing going forward in China. Again, we saw China growing at 8 and 9% year over year, for the last few decades, and I think it's important for us to really consider what that outlook may look like. Does that mean it's 3 or 4% growth, which is still again significant. But it is a different way to look at what China's economy will be producing as well as what the security outlook and capabilities look like for China over this coming decade. So Lucas provides a kind of a starting point in trying to understand why states grow, and they're the impetus behind these instruments, and we know that focusing more on consumption does usually produce lower economic growth.
Dan
Lucas dealt with a concept called rational expectations. What does that mean and what does it mean to those of us who don't work in economics?
Kevin
So rational expectations is basically kind of a challenge to the models at the time that he was looking at that were based on Keynesian economics. He asserted that people were simplifying some things or not assuming human beings would think through choices and make the weight of their own choices seen so that they people just skipped over the ramifications and the choices of individuals. Whereas he brought in this micro emphasis here that individuals have a weight in their own decisions. And that has to be accounted for in economic choices, and this is particularly relevant in our conversation with inflation. And it shows how challenging it is for countries to deal with inflation. But it also creates these guardrails and what I mean by that is, is that expectations start to become a big factor in economic policy making and what society generates, but that also that governments have difficulties in. Gain expectations, especially if there is expectations, are not in line with actual conditions. So in government may be able to utilize a policy that encourages growth, but over time is really just inflationary. Over the producers and the economic decision makers will recognize that actually it's not growth, but it's inflation, and over time they. Will put that. Expectation into their models of what really is growth looks like. And therefore has this feedback effect of discouraging certain economic behavior. But it also puts a check on the flexibility that policymakers may think they have and discouraging actions. So this rational expectations actually has this feedback effect and discouraging behavior.
Dan
Kevin, we understand there are some relatively small or appearing to be small changes going on in China. Some of them relate to their approach to intelligence, some changes in that. Could those have significant economic impacts.
Kevin
So there's a lot of conversation right now in China and among Western businesses about this new intelligence law and the application of that law around the sharing of information that they're going to prohibit the sharing. Of general business information with Western businesses and what the effects of this may be. So it's speculating right now, but the terms of what is restricted is very broad and in an environment of tensions between both sides, some people are interpreting. This situation that almost any type of business information, so whether that be sales or general economic conditions or other pieces of information that is normally used in common. Others may be utilized as the Chinese Communist Party as a type of intelligence, and the individuals utilizing that information may be restricted or be punished for that. So that could have a real chilling effect on economic activity. Years ago, China started to reduce the amount of economic data available throughout the economy and this compounds this problem. So if individual businesses are unable to share information. And there is less information shared from these macro sources from the government is going to be less clear about what economic conditions look like in China. So if individual firms are seeking to invest or they're seeking to, say, sell more cars or sell more environment for more technology, it will be more difficult for them to start a conversation about this or to commit to this because. It'll be unclear what the information looks like, but also, the signal about possibly being charged or facing backlash against the party would all discourage economic activity, whereas of many other countries do not have these types of uncertainties. So in a lot of ways, this comes back. To the conversation we just had around rational expectations, will firms, knowing this imperfect information and knowing that a few firms have already been caught afoul by the Chinese Communist Party for related cities? Will they decide to exit China or will some reconsider or rebalance their exposure to China under these conditions? If it's unclear how things may look, it could be rational for them to reevaluate where their standing is within China.
Dan
Well, certainly an interesting situation and one that bears watching and through this series of podcasts, we certainly will do our best to come back and revisit several of these issues to help keep people informed. Thank you, Kevin.
Kevin
Thank you
WSJ reports on China’s general economic conditions and examples of U.S. manufacturers are reevaluating relations with China.
China's Intelligence Law 🇨🇳 📒 ⛔