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With President Xi Jinping poised to take a third term, we look at the critical geopolitical relationship between the U.S. and China to better understand its potential implications for the world's economic balance and markets. Chief Investment Officer Tony Roth speaks with David Dollar, Senior Fellow in the China Center at the Brookings Institution, about the current and future state of China's economy, the reality of the U.S.-China trade war, and the likely impacts of China's negative demographics on production. 

China, the U.S. and the Economic Balance of the World

Tony Roth, Chief Investment Officer, Wilmington Trust Investment Advisors

Dr. David Dollar, Senior Fellow, Foreign Policy, Global Economy and Development, John L. Thornton China Center, Brookings Institution

TONY ROTH: This is Tony Roth. Welcome to Wilmington Trust Capital Considerations. Today, we have a really important episode. We are joined by a terrific guest, Dr. David Dollar, who’s asked me to call him David, and we’re going to be talking about China and the relationship between the U.S. and China, which has taken another twist and turn for the worst we think in terms of some recent policy that was announced by the Biden administration. But there’s so much to talk about here and it’s probably, if not certainly, the critical geopolitical relationship to understand how the world is going to evolve over the coming decade or so.


And so, let me introduce David. He’s a Senior Fellow in the China Center at the Brookings Institution and he’s a leading expert on the Chinese economy and U.S./China relations. From 20-, 2009 to 2013, he was the U.S. Treasury’s Economy and Financial Emissary to China based in Beijing. And I think if my timing is right, that would’ve put you, David, in the Obama administration?


DAVID DOLLAR: Right, first Obama administration.


TONY ROTH: Okay. And he previously spent 20 years with the World Bank as an economist and during his time there, was the country director for China and Mongolia. He’s the author of China 2049, a book coauthored with economists from Peking University. And he is also the host of his own podcast on international trade called Dollar and Sense.

So, we really have a great episode here, more than we can talk about in the time we have. But we’re going to cover as much as we can. And remember that David, like Wilmington Trust, is nonpartisan and is not advocating for any particular party or policy, but we’re really trying to understand how these critical relationships and dynamics might develop because they have direct implications on the economic balance of the world and, by consequence, how markets react.

David, I think the place to start, because we are very ensconced globally at an economic level in this huge inflation story that’s sort of swept over the globe and, in our view, probably the biggest causal factor of the inflation was just a huge demand explosion in the wake of the pandemic, of built-up demand that came from the withholding of consumption as well as the – all that fuel for the consumption in fiscal stimulus. But for sure, a very material impact also has been on supply side and part of that is energy, the byproduct of the war in Ukraine, but probably when you talk about core inflation the biggest part has been the sort of stasis in China. China has been really singular in the world in its handling of COVID, in its—frankly I'm going to call it a failure—in terms of its ability to get a effective vaccine out to the population. And, consequently, it’s managing this pandemic still today by trying to shut down and cutoff people that are exposed to this. And because that is such a large swatch of the population on a rolling basis, it’s really impacted the economy and it’s really created in the supply-demand equation a lot of shortfall on the supply side for all kinds of things.

Now, we’re seeing the behavior maybe shift. We’ve got this party conference coming up this month and then President Xi will be over that hump, if you will, and maybe he could be—have more relaxed policy. So, David, why don’t we start with the whole approach to COVID and where you think it is and where it’s going and how, you know, as an economist you think it may impact this ongoing inflation dynamic.


DAVID DOLLAR: Thank, Tony, for having me on the show. I think you’re right that the current inflation really has three sources and that’s why it’s so persistent. It started with excess demand in the United States. So, the U.S. had its inflation first. But the Ukraine, the Russian invasion of Ukraine has had a big effect on energy and food. And Europe’s inflation started later, but now it’s very serious. And then, you're absolutely right, supply chain bottlenecks have been a third factor and definitely some of that is in China related to their zero tolerance of COVID.

Their Party Congress is scheduled from October 16 to 23 and there had been a lot, certain amount of optimism that they would relax their policies. But I actually don’t think that’s likely to happen, not quickly and in a visible way. They are concerned about the elderly population that is not fully vaccinated. They face the dilemma that their own vaccines are not very effective, and they’re worried about a disastrous situation in which millions of people die.

So, they’ve been committed to that zero tolerance. It’s had a big economic effect. And I think they’ve eased some parts of it. So, there’s a little bit of adjustment, but it’s hard to think of it as dramatic. I mean their economy is still doing quite poorly. This is going to be the poorest year in a long, long time. The IMF just marked down their forecast for the year to 3.2% and most of that is self-inflicted on the Chinese side.

So, a little bit of optimism that after the Party Congress they’ll ease up more. But I wouldn't be too optimistic.


TONY ROTH: So, David, let’s talk about the pandemic that, as it exists in China. Two questions. Have they made any progress in securing or developing on their own better vaccines or do they still Sino vaccine that’s pretty ineffective, particularly against the new variants? And then two, at some point, the Chinese have been very pragmatic, and at some point, it would seem, you know, they want to be the economic hegemony of the world. You would think that they would be very concerned around their laggard economy relative to the U.S., where they ’re falling behind in a lot of respects. Then there’s the property market, which the weak the—the weaker the overall economy is the more pernicious the, this debt problem in the real estate space is going to be as well. So, even if it’s not the next week or month, when you look out to the middle of 2023, how do you think it, do you still think it’s going to be pretty, pretty locked down and they’re going to have a bad 2023 from an economic standpoint?


DAVID DOLLAR: It, obviously it’s a country that lacks transparency.




DAVID DOLLAR: It seems that they’re not making progress on creating the modern vaccines. They’ve been trying to get the Western companies to give them technology for free, the Western pharma companies, and they’re not willing to for obvious reasons. It’s a valuable product. China’s sitting on $3 trillion of reserves. So, you know, it’s a sensible attitude to say that the Chinese government should just pay for this.

But they’re very reluctant to buy Western technology, so they’re trying hard to create their own, RMNA vaccines and I don’t think they’re making much progress. But I emphasize that lack of transparency. You know, we could wake up and suddenly see an announcement that China has a wonderful new vaccine. But I wouldn’t expect it. And then –


TONY ROTH: But then the quantities that they would need are vast.


DAVID DOLLAR: Yeah, phenomenal. I mean you’ve got 1.4 billion people, 200 million people over the age of 65. I think they’re particularly worried about that group. I mean having, you know, having done a good job with economic development they now do not want to see a large number of senior people die off.

They have a shortage of intensive care units. They’ve underinvested in hospitals and I, you know, I would say they’ve overinvested in, you know, roads and railroads, power stations, things like that. But they've underinvested in health care and now they’re, you know, facing a dilemma.

So, as we get into 2023, I'm sure they’ll make some adjustments and they understand this tension between the Zero-COVID policy and economic growth. And so, they will try to find a compromise with some adjustment in the policy. But it’s got to take something off of their potential growth.

So, IMF is forecasting 4.4 for next year. If anything, that might be slightly optimistic given the things we’re talking about. I mean we ’ve focused on COVID, which is the immediate issue. But then you raised the property sector. That's a important challenge for China as well.


TONY ROTH: It’s about half a trillion dollars by all accounts of debt that may not be good in terms of the ability of the, those obligors to make good on that debt. That's a big number. I mean they ’ve got $3 trillion of reserves. So, can they just absorb that into the sort of the state balance sheet or how do you see that playing out?


DAVID DOLLAR: Well, they have a lot of assets. So, I think there’s a classic playbook for dealing with this situation. You know, you want to come in forcefully and you want to force some of these property developers to go bankrupt. You know, and they’ve done a little bit of that, and they’ve allowed some property developers to default on bonds. But they haven’t allowed a lot of that.

So, there is a certain moral hazard in the Chinese system that financial institutions keep lending to the property sector thinking the government’s got to bail this out and the government’s been allowing some defaults and bankruptcies, but not enough to really change the attitude. I think the fundamental problem is they’ve overinvested in housing in most cities in the country and they need to come in, seize those assets, auction them off, because if the price is cut in half what was an empty building may become usable if you cut the price in half. But if you try to get the book value for these things, then you just face this fundamental issue. They’ve built way too much housing and it’s probably going to take a few, a number of years really to work that off.


TONY ROTH: Notwithstanding that problem, if they are able to grow in a, in sort of a normal unconstrained way, they can get through this fairly easily given the size of their economy.


DAVID DOLLAR: Yeah. But real estate and the backward linkages to steel, cement, etcetera, all of that’s somewhere around 25% of the economy. So, it’s hard to grow if you, if you’ve got 25% of your economy that’s really in the doldrums. It’s hard to make up for that.

That's why, you know, under Xi Jinping’s 10 years they averaged about 6% growth, which is pretty good. They almost certainly cannot do that going forward for a variety of reasons. They might work this all through in a few years but averaged over the next five years or so they’re going to be growing a lot more slowly.

So, it’s hard to see them just growing out of the problem.


TONY ROTH: Okay. So, we have a moment right now which is, I think a, going to look back in history and almost certainly look at this moment as a touchstone moment for President Xi and the future of China, because he’s the first leader since Mao to have a third term. And by all accounts, he’s going to go beyond that the way it would appear. And he really has the connotations of a strong man leader, which is sort of inimical to a traditional communist state one would think. But certainly, we ’ve seen it in Russia before and talking of Russia, he has this great affinity for Putin.

And it’s very natural and understandable, frankly, to see why China would position itself with Russia to try to create, at least on a geopolitical level, some balance to the U.S. and not have a single pole world but maybe a bipolar world in some sense. So, that’s understandable, even though Putin is a pretty unsavory character on lots of levels. How do you think that this reelection is going to move Xi in light of how vilified Putin is becoming, how sort of outrageous and unacceptable his behavior increasingly is becoming on the world stage? Where do you think he goes from here given, you know, the renewal of his lease on political life in China and the context in which this is happening?


DAVID DOLLAR: Yeah. So, I think it’s important to take some of the Chinese rhetoric seriously, you know? And if you pose this issue to Chinese leaders saying, are you looking more for a bipolar world, you know, than a unipolar one dominated by America, they will quickly respond that they think the world is multipolar and they favor a world that is multipolar.

So, I think rhetorically they’ve lined up with Russia because they don’t want to see Russia crushed in kind of a triumphalist U.S. moment. But they're actually not giving a lot of material support. They’re being very careful. Their big firms and banks are being careful to largely honor the Western sanctions. And then, I think in private conversations they’re emphasizing that there’s definitely some daylight between them and Putin.

They don’t like the way the U.S. is carving up the world between democracies and authoritarians and pushing, you know, China, Russia, Saudi Arabia, Iran. It’s very, a lot of ironies here that like who’s being pushed together in that coalition. I don’t see that as a terribly stable coalition and I think the Chinese, ironically, play something of a useful role in undermining it.


TONY ROTH: Okay. So, understanding nothing else then, David, the timing on the administration’s movement to isolate critical elements of Chinese technology, whether it be actually chip manufacturers or equipment that goes into chip manufacturing, the IP for the chips or the IP for the machines that make the chips, why now in the Biden administration? You would think that perhaps given the isolation of Russia, maybe this is an opportunity to, you know, notwithstanding how deep the problems are with China from a commercial responsibility standpoint of the Chinese appropriating, you know, illegally our intellectual capital, other countries ’intellectual capital.

But maybe this would’ve been a time not to do that, particularly given, and I – you know, we can’t answer this question I don’t think without talking about Taiwan. But particularly given the, you know, the path for Taiwan which would almost seem that it’s there for the Chinese taking if they want it at some point. There’s not – it’s not as if from a, the military standpoint the U.S. can stop the Chinese from blockading Taiwan and ultimately bringing them to their knees, that we’re going to go to war with China over that. So, it, it’s hard to sort of put it all together. Could you help us?


DAVID DOLLAR: Yeah. I think, Tony, it’s really complicated. I think you’re absolutely right. Let me point out that this year, 2022, will be a new historic record for trade between the U.S. and China in both directions. So, the U.S. will import more than ever before; the U.S. will export more than ever before. So –


TONY ROTH: As a percentage of our economy or in absolute?  


DAVID DOLLAR: No, no. In absolute terms.


TONY ROTH: Not the number.


DAVID DOLLAR: Actually, as a percentage of our economy it is diminishing a bit. But my point is we’ve got a 25% tariff on about half of what we import. We’ve got these technology restrictions. Seems like there’s a trade war going on and yet there’s enormous amount of trade that continues to take place.

Now, I support the basic idea of identifying the technologies that have military application and ringfencing them in a sense. This is something Hank Paulson has talked about to, you know, have a smaller yard with high fences.


TONY ROTH: Sounds, it sounds nice in theory but –


DAVID DOLLAR: It’s hard in practice.


DAVID DOLLAR: But what the administration doing, is doing has a clear flaw. They keep adding to the list of technologies and firms and this is creating tremendous uncertainty for the whole global business community. You don’t know if what’s legal today and occurring at a pretty high level of imports and exports, you know, that could be sanctioned tomorrow basically.

So, I think that, you know, we keep adding things and the Chinese always feel compelled to retaliate in some way. Oftentimes, that’s just symbolic. That's one reason why the, you know, trade continues at a high level. But it is worrisome that this could, you know, essentially continue to slide in a sense and there must be benefits in this trade that’s occurring. The companies involved think it’s beneficial. So, I think it would be unfortunate if the conflict between the two, the let’s call it tension between the two reaches a point where we really decouple.


TONY ROTH: Right. Is this last set of measures so significant as to bring us materially closer to that point in your mind or is this just another skirmish?


DAVID DOLLAR: I think it’s another skirmish. You know, for one thing exceptions are granted. In a lot of ways, this is just adding bureaucracy to the smooth functioning of international trade. So now, you have to get a license for something you didn’t have to get a license for before.

It is kind of remarkable how much trade continues. So, I think a lot of exceptions must be handed out and there must be different workarounds. So, for the moment I don’t see that any of these actions is make-or-break for China. But we don’t know, I don’t know where this ends.


TONY ROTH: So, I don’t, in saying what I'm about to say, I'm not trying to pick on the democrats because I this started, I think, in full force with the republicans in the prior administration. But it sort of feels like it’s more of a political act maybe be – prior to the midterms than it is an act of substance.


DAVID DOLLAR: Yeah. Thank you for pointing out at the beginning that Brookings is nonpartisan. I’ll just say , the two parties seem to be competing in who can be toughest on China. And, you know, that creates a kind of dangerous dynamic.


TONY ROTH: Right. Well, nationalism, tribalism plays well in the polls on both sides of the aisle.

So, I made some pretty, you know, even inflammatory statements around Taiwan, right? I think I said it’s there for the taking. And I say that in context of, you know, what ’s happening, what happened with Crimea, what’s happening with Ukraine, some weapons provided to provide some support but no direct intervention on the part of any friendly countries with troops on the ground, aircraft in the air, very, very little because there’s a very understandable apprehension to confront a nuclear power directly that has a strongman leader, etcetera. Very parallel situation to Taiwan in China’s, you know, backyard to say the least.

It’d almost be hard to think that China wouldn’t move forward at some point in the next, you know, five years with some kind of blockade on Taiwan and bring them to their knees? Why wouldn’t they do that? What’s your take?


DAVID DOLLAR: Well, so I'm cautiously optimistic that we won’t see conflict in the next five years and the logic of this is that, you know, any of the extreme moves you're talking about, like a blockade or cutting off data flows or financial flows, you know, or actually invading, it would be highly risky for Xi Jinping. The Taiwan military is serious military with American equipment. It will almost certainly be a bloody mess. I mean, you know, taking over an island, it’ll be a quite –


TONY ROTH: Doesn’t sound that hard relative to –


DAVID DOLLAR: Oh, well. I mean compared to –


TONY ROTH: Tell us. Take us through it.


DAVID DOLLAR: Okay. I'm not a military expert.


TONY ROTH: Of course.


DAVID DOLLAR: But look, when Russia invades Ukraine, they have a long land border.


TONY ROTH: Right, of course. Makes sense.


DAVID DOLLAR: This is going to have to be amphibious against a pretty serious military. You don’t know if the U.S. will get involved. President Biden has said four times that the U.S. would get directly involved. And so, you have to factor that in.

So, I just think there’s a, you know, pretty good chance that it all blows up in Xi Jinping’s face, you know, global sanctions against him, you know, worst case escalating war between China and the U.S. It’s very risky. The only thing I think that would provoke it in the relative near-term would be is if Taiwan declared independence. You know, then I think the risk for Xi Jinping, you know, if he doesn’t do anything in the face of Taiwan independence, I think he gets undermined in the communist party.

And this actually is one policy that’s very popular on Mainland China. I mean he would get, he would get serious blowback from the public if Taiwan declared independence and Mainland didn’t do anything. So, as long as the Taiwan leaders understand that and stick with the status quo, then I don’t see Xi Jinping taking this risk in the next five years.

Now, the problem with this analysis is if you, you know, spin it out to say 2050, it’s really hard to see what’s going to change because the Mainland has become extremely unattractive to Taiwan people, especially Taiwan youth. They saw what happened in Hong Kong. You know, they’re familiar enough to know they don’t like the system on the Mainland.

So, you would need serious change in the Mainland to make any kind of federation palatable. And I don’t know if the Chinese Communist Party is patient enough to wait 25 or 30 more years. But, you know, I come down in this sort of middle position that the scare talk about war in the next couple years that I think that’s quite unlikely. But it’s also hard to see how this gets resolved a couple decades down the road.


TONY ROTH: And I know you're not a militarist. Taiwan, a county of around 25 million versus the, you know, some one-and-a-quarter billion or so, more than that Chinese. But, you know, it is interesting that as far as I understand, Taiwan does have sort of the missile capability to reach, you know, well past Beijing, etcetera, such that if you really had, you know, a war between, you know, Taiwan could do some serious damage to China and their capital and their major cities. Is that fair?


DAVID DOLLAR: Yeah. That's right. I mean that’s part of the calculation is, you know, there would be large numbers of casualties on both sides. And, you know, the Chinese, the PRC story is that they’re all part of one China,




DAVID DOLLAR: So, if, I don’t know, I'm scared to think about numbers. I mean if hundreds of thousands of people are killed, it’s hard to see how that’s not a political, you know, failure.


TONY ROTH: Yeah. And it’s interesting to see that with all the weapons that the Ukrainians have they’ve been extremely careful to not, to very, very actively limit their incursions onto Russian, you know, territory, traditional Russian territory, not of course the annexed regions. But and so that would strongly suggest that they’re really trying to not provoke a certain kind of reaction. Taiwan, similarly, has the ability to really create some real pain for China and that, that’s going to act as a deterrent.


DAVID DOLLAR: Yeah. That's definitely one of the deterrents. I mean and then the West has held together pretty well on the economic sanctions against Russia. It’s still early days, but I think, you know, within a few years analysts will look at this and say it was all a huge mistake for Russia and Putin.


And, you know, the Chinese love to study things. So, I'm sure they’ve already got working groups studying, you know, what went wrong with the Russian military, how have the Western sanctions held up, how could you get around them. It’s going to take them a couple years just to draw the lessons from that and I definitely feel confident they’re not going to do anything reckless in the next two years or so.


TONY ROTH: So, do you have any optimism that when you think about the trajectory of China vis-à-vis the West that there could be a reproachment in the sense of China adopting practices that are more acceptable from a commercial standpoint and the West being more accepting of China as a responsible player on the world stage? Or do you think that the sort of strongman mentality of Xi is just such that—because you think about the Road and Bridge that they did, you know, a half a decade ago and they were really trying to be part of that world order. And it feels like they’ve just gone in the wrong direction. Do you think that that’s not just vis-à-vis the U.S., but Europe, etcetera. And one would think that President Xi would be very aware of that and not necessarily happy with where things have gone.


DAVID DOLLAR: Right. I mean I think objectively he’s done a bad job on a lot of things. So, the question is do other leaders and key people throughout the system understand that? And as they come out of this Party Congress, I think a key question is does Xi double down on, you know, his kind of hard-headed policies toward COVID, toward state enterprises which he favors, you know, somewhat aggressive foreign policy, supporting Russia, etcetera, at least rhetorically? You know, does he double down on that or does he recognize that, you know, they’ve really putting the golden goose at risk basically and he needs to put some pragmatists in key positions and let them continue to open up the economy?

I mean they have done some opening moves over the last few years. They’re part of this RCEP Agreement, Regional Comprehensive Economic Partnership. It’s the largest free trade deal in history. They had negotiated an investment treaty with Europe, but that's on hold.

So, it’s not impossible that they would come out of this Congress with Xi solidly in place and that he would surprise us with some pragmatists in key government positions. I wouldn’t bet on the optimistic scenario. I think I'd probably bet 60/40 on the pessimistic scenario that he doubles down.


TONY ROTH: And that has a, you know, pretty chilling impact in terms of the contribution on an ongoing basis to the kind of inflation that we’re experiencing. I mean we are in a world that other than Africa and some of the emerging areas are very much characterized by dropping demographics, the demographics being destiny and leading to a real disinflationary outcome from a consumption standpoint, less people in their prime and more productivity from technology, etcetera, etcetera.

And so, it seems very sort of tone deaf to what we ’re experiencing today to even talk about this. But when you think longer-term it’s a real phenomenon too. How do you think about things, you know, more than just a few years out after this inflation likely abates?


DAVID DOLLAR: Yeah, no. I agree, Tony. At first, I think, you know, people talk very casually about value chains leaving China, you know, maybe coming back to the U.S. for reshoring or Mexico for near shoring.


DAVID DOLLAR: We – but no, we’re not seeing very much of it.


TONY ROTH: We’re not, okay.


DAVID DOLLAR: I mean the U.S. is going to have a trillion-dollar manufacturing trade deficit this year. So, there can’t be a whole lot of reshoring. And our trade with Mexico is actually very stable. If there’s been any adjustment in our trade pattern, it’s that we’re importing a lot more from Vietnam. That has doubled in a few years.

Vietnam exported $100 billion to the U.S. last year to be our number six trading partner in terms of imports. So, there’s some adjustment in value chains. Now, a lot of that or – a lot of that actually are Chinese firms shifting some of their final assembly to Vietnam. You know, Vietnam’s open to foreign investment. It’s perfectly legal.

But, you know, let’s not get carried away. China is enormous, producing 25% of world manufacturing value-added. You know, Vietnam is small compared to that. Malaysia even, you know, also small. Indonesia can’t seem to get its act together, Mexico.

So, I think we might be in an interesting period where there are opportunities for lots of other emerging markets, but they're not seizing them with the kind of policies that you need to, you know, complement free trade. And, meanwhile, China’s going to be getting more expensive because of demographics and there’s got to be some impact from all these technology and trade sanctions the U.S. is imposing on them.

So, we may be past the kind of golden age, you know, where we, you know, have this symbiosis between advanced economies and the developing world. But that was primarily China. You know, and if that China part of that is coming to an end, you know, I would love to see India, or someone step up. But I'm not confident that they will.


TONY ROTH: Yeah. And I think if there’s one takeaway from the podcast today and it’s not to say that we’re ending imminently, but we’ll end soon, because I usually do this at the end, I think it’s that, David, so much has changed in the world from a distribution of production standpoint and is continuing to change whereby China was the low cost manufacturer of the world with unlimited capacity and now is no longer low cost, is no longer unlimited. There’s significant tension and that is inherently going to be inflationary going forward for quite some time.

It’s something that we’re going to talk about in our Capital Market Forecast. One of our three themes is really going to be on the trajectory of China and how their demographics, while on the one hand – and I'd love your thoughts on this – on the one hand their demographics are negative, they’re disruptive for their own economy because they’re a shrinking population and they’re an aging population. That also has the effect of being limiting for the rest of the world for the reasons that I just described. And they’re not making progress, if you will, in terms of, you know, increasing population rates and reproduction rates by any means. Would you adjust that at all or how do you feel about that statement?


DAVID DOLLAR: Yeah, no. I think you’re exactly right, Tony. You know, they had the one child policy for a long time, and they got rid of it a few years ago. But that’s not the only reason why fertility is so low. China’s densely populated. Housing is expensive. Schooling is expensive. A lot of independent young women, you know, don’t want to get married, don’t want to have children.

So, I think fertility’s down to something like 1.1 or 1.2 even after they got rid of the policy and replacement’s 2.1. So, their population is going to decline, and I like to focus in on what I call the urban prime age population, 25 to 55. And even in the recent period, that’s been growing rapidly, more because of migration than underlying demographics. But now, that urban population is peaking and it’s going to start coming down and it’s very hard to see what they can do.

They could do a little bit to encourage more migration, which I think would be smart, socially desirable but controversial in China. But it’s not going to have a huge effect. Basically, you know, they are going to see population and workforce decline and it’s hard to keep growing dynamically once you ’re in that situation.


TONY ROTH: And I'm going to close, David, with a statement that you're welcome to comment on or not around the market potential from an investing standpoint that China presents to the world for an investment. And, you know, it’s one that we’ve been very excited about for a long time. Obviously, people have made a lot of money given their, the growth rate of their markets and we’ve really pulled back on it of late.

We are neutral emerging markets, but a lot of the managers that we work with are underweight China for the reasons that we’ve talked about but also for the reason that we haven’t talked about, which is the uncertainty of the authoritarian regime in China and what they may do to the markets, how they regulate the markets. So, I guess it’s a two-part question that you can react to or not. But what’s your take on it, number one, on the investment opportunity? And, number two, is that – we talked about them having $3 trillion of capital reserved, but is their ability to attract that foreign capital important to them in terms of the growth of their economy or is that not really a driver for them?


DAVID DOLLAR: I think it’s important in terms of bringing in, you know, new technology, new management techniques, connection to the world market. But it’s not an important source of capital for China. I think that’s misunderstood in a lot of discussion in the U.S. China’s not dependent on foreign financing. You know, they have an enormous savings rate. I don’t think they’re going to react to, you know, what’s happening with international financial flows by changing very much.

In terms of investment opportunities, their capital markets lack transparency, as you know. I like to point out our two economies are roughly the same size at this point. We’re in the same ballpark. But our capital markets are three times bigger, because we have open, transparent markets. If you meet standards, you issue stocks and bonds.

You know, in China it’s very bureaucratic. They use the system to favor state enterprises. You probably just saw China has the most number of companies in the Fortune 500 top 500 companies in the world. I think 70% of the Chinese companies were state enterprises and they may be big and, again, included in that list, but they actually have shockingly low return on assets and profit margins.

So, you know, lots of continuing problems and frictions in the market economy.

I think there are niches. Particularly for direct investors, there are always going to be some niches in China as new products take off. And, of course, it’s an enormous market. So, I don’t see the international firms giving up on China, but I definitely see them hedging, you know, out of China for their own supply chains. And they’re very worried. You know, they’re worried this U.S./China tension is just going to get worse and worse and eventually become conflict.


TONY ROTH: Yeah. Well, it’s certainly one. Even if it’s not a military conflict, it’s essentially an economic cold war, if you will. And it’s something that we’re going to be very cognizant of as we watch that manufacturing relationship and that trade relationship, which is really so big for both countries.

So, we have to leave it there, David. But this has been fascinating. We’d love to have you back at another time. So, thank you so much for joining us today.


DAVID DOLLAR: Yeah, no. It was great talking to you, Tony, and I look forward to further discussions in the future.


TONY ROTH: Yeah. And want to remind everybody go to wilmingtontrust.com for all of our latest economic and other thought leadership, our views on the markets, etcetera. And we’ll be back soon with another podcast. Thank you all so much.





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David Dollar
Senior Fellow, Foreign Policy, Global Economy and Development, John L. Thornton China Center, Brookings Institution

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