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New Cold War: China

Hugo Scott-Gall: On today’s podcast I have with me three guests who have extensive experience in China. We’re going talk about how U.S.-China geopolitical tensions have the potential to dramatically shape economic growth and investment opportunities in China and around the globe. Our guests will provide insights on how investors can navigate these challenges.

First we have, Malcolm Riddell, the founder of Real Debate, also CHINADebate, which is a platform for China analysis commentary interviews with top China experts. Malcolm’s been an investment banker, a diplomat, a lawyer, an academic, and a spy. That’s pretty cool.

Also with me is, Dr. Michael Spence, the Philip H. Knight professor emeritus of management at the Graduate School of Business at Stanford University. He’s also the senior fellow of the Hoover Institution at Stanford and a distinguished visiting fellow of the Council on Foreign Relations. Also, he has a Nobel Prize. That’s pretty cool too.

And lastly is Vivian Lin Thurston. Vivian is a portfolio manager here at William Blair. She is comanager on two China portfolios and a comanager on our foreign emerging market growth portfolio. So, welcome to all three of you, delighted you’re here.

I think we’re going to have a lot to talk about. In fact, I know we have a lot to talk about. So, we’re going to mostly focus on China and its external relationship, hence, the cold war. We’ll do a little bit on China domestically if we have time at the end.

So, Malcolm, I thought I would start with you, which is, let’s talk about China and its relationship with the rest of the world. As we stand today, what do you think China’s geopolitical goals are in the near term and the longer term? How does China see itself in the global power structure? What does it view its rightful and natural place is? So, Malcolm, you can have first bite on that.

Malcolm Riddell: Thank you. And I’ll be brief on a very long and complex subject. We need just a bit of history to really answer the question. That is for a couple thousand years, China, in its domain in Asia, considered itself to be the middle kingdom. That is, the Zhongguo, we’ll call it the center of the universe, the center of power, the center of culture.

And starting in the 1840s, China missed the Industrial Revolution. Britain didn’t, and neither did the other countries. And over a period of time, they’ve been published on what China calls the Century of Humiliation, which ended up with China being sort of divided up among the powers, Western powers and Japan, into a semi-colonial status. And that includes also invasion by Japan and World War II. It’s just a bad century for China.

So, what China sees today is that what is happening with China’s rise, what we call its rise, it’s not rise at all. It’s just retaking its rightful place in the geopolitical system. And whether it views itself just in the region as being the one that needs to be the hegemon or in the world remains to be seen. But if I had to put just a few of roles there, I would say the first thing is to return to that predominance enjoyed in Asia. We know that as the Middle Kingdom before the West intruded.

The second thing is it wants to re-establish control over the territories that the Communist party considers to be greater China. And that’s not just Xinjiang and Tibet, which are in the news a lot today, but Hong Kong, which we’ve seen. And most importantly, the one that’s left is Taiwan. And this of course is the source of really greatest tension between the U.S. and China and also what the economists call the most dangerous place on Earth because of the potential for it to spark a conflict with China.

I would say also the third thing is, as I mentioned, that China, the relationship it had with its neighbors was what we called a tribute relationship. And that is that the neighbors would send emissaries to give tribute to the emperor and acknowledge the emperor as the great leader of the area. In exchange, they would have the right to trade. In fact, it looks very much like what we see today.

So, we see China trying to recover that sphere of influence that it had before through activities in the South China Sea, the Belt Road Initiative and these things. I’d say the fourth thing would be commanding the respect of great powers in the Council of the World. Now Xi Jinping and China really feel dissed. I mean they just think they’ve done great things, and they’re just not getting any respect. And I’d say that this is causing a lot of the tension that we’re seeing.

Longer term, I would say the idea is to push the U.S. at least out of the Western Pacific and also to take a much greater role in shaping the world order as it stands today to serve China or to create alternative world order that fits China’s ambitions. And I’ll leave it with that.

Hugo Scott-Gall: Thanks, Malcolm. So, Michael, I’ll throw it to you, which is everything Malcolm’s just described, can that be done in a peaceful and smooth way? Has it ever been done in a peaceful and smooth way?

Dr. Michael Spence: Relatively rarely does a rising power do this without tension. So, I think we’re experiencing that now. Let me just add to what Malcolm says. I know everything he said is right on target. And these things are related to each other. But on the economic front, they want to become a high-income country, highly prosperous, living well, and so on. And their performance over the last 40 years is about as spectacular as you can get in pursuing that kind of objective.

And the only other thing I would say, Hugh, and I’m not sure Malcolm and Vivian would agree with this, but China under the current president, has certainly been more aggressive externally than the previous period when they were really focused domestically on growth and development and not much more. And Deng Xiaoping had a view of that, which is whatever your long-term goals, you sort of take advantage of the global economy and the advanced countries to achieve those goals. So, this is a big change.

But if the title of this thing is Cold War, let me just say, so far, at least, I have not been able to detect any evidence whatsoever that China has the goal of exporting their governance system globally. They don’t say they’re going to do that. They respect other people’s differences with respect to governance. They don’t like other people’s disrespect for their form of governance. So, it’s a way of seeing the world, and it’s really different from the postwar period in which we had a kind of international sort of communist movement.

Hugo Scott-Gall: So, Vivian, in your opinion, how does misunderstandings between different political systems, different economic systems get resolved? Because misunderstanding caused a number of issues in the previous major cold war between U.S. and the USSR or the West and the USSR. So, with your almost unique perspective having grown up in China, how do you think these kind of misunderstandings can be resolved to avoid costly misunderstandings?

Vivian Lin Thurston: Yeah. Thank you, Hugo. And I definitely think this is a great point. Economy development I think will be kind of a saving force if any. If I think about China now versus 100, 150 years ago, as Malcolm mentioned earlier, the whole history recount. The difference is China is no longer a small country from an economy perspective and especially people’s desire to get better, better quality of living. You cannot bring back that.

So, because I think the geopolitical desire of a country has to be also in the context of their domestic side of the agenda. And China has 1.4 billion people. Now they just crossed the 10,000 USD per capita GDP, which is a remarkable kind of an achievement. So, I think from the Chinese government perspective, the key is how to continue to make this country, this 1.4 billion people continue to be satisfied with that prosperity, the growth, that kind of stability and peace.

So, I think the geopolitical side of consideration, even global economic side of considering what had to fit with this type of priority to a larger extent. So, I want to add a little bit about the geopolitical side of consideration. I agree with both Mike and Malcolm. Because of history as it is that Chinese government’s goal, or whole Chinese people’s goal, is to restatute that respect they feel they deserve from the rest of the world or probably their understanding, Hugo, to a point. There’s a lot of misunderstanding.

And then secondly, I think they want to make sure they protect the sovereignty of this country. So, there’s still a lot of remaining legacy issues, such as Taiwan, and then resurgence of the Tibet or Hong Kong or the Xinjiang issue. So, they feel they need to first protect the sovereignty of it. And that would really put it as the core of the geopolitical kind of a development with the rest of the world. So, I just want to add that perspective. They want to first protect that, which is a big deal because in the 100 years of that very difficult time as a country, they got invaded all the time. So, I think that is a big focus on that geopolitical fact.

Hugo Scott-Gall: So, Mike, as an economist, your view on really how the relationship between the U.S. and China evolves economically, can it just be a little bit of friction here and there, but overall, you’ve got two economic superpowers, the two most important economies in the world, that can kind of rubble up. Or does it actually deteriorate? And will more and more countries around the world have to sort of choose which economic system they’re going to be in?

How does this kind of play out because this is different from U.S. versus USSR? These are two huge economies that are the dominant economies of the world. So, kind of help us think about that, not just kind of next year but 5 years, 10 years out.

Dr. Michael Spence: Yeah. So, there’s lots of different views on this, Hugh, and all of us will want to comment on it. It was easier to operate in a relatively and increasingly open global environment when China was not a powerhouse economically and not a powerhouse technologically. One of the things that makes it very complicated now other than sort of generalized tensions, and I want to come back to that question in a minute, is that they are now technological competitors.

And we know that technology and science and things like that kind of flow around the world. And they have national security implications. I mean, we are living in a world of dual-use technologies, many of which were developed on the commercial side, the science and commercial side, like artificial intelligence. And so, the national security agenda is fairly dramatically on the American side but really on both sides interfering with the challenge of building as cooperative a relationship as possible.

I think both sides share somewhere down the line a desire to make this structure that’s going to have to be different from the postwar one as inclusive as possible. Nobody wants to produce a structure in which the lower-income countries just don’t have any access and no way to grow. I mean, I just don’t think that’s where China wants to go, and it’s not where the Western countries want to go either.

But it’s going to be a lot more complicated. And the last thing I wanted to say is both sides really have to decide on one of two models. One is the models is we’ll cooperate where we can and where it’s really important for both sides but also for the whole world like climate change, like health, and there’s a long list if things where there’s no downside and lots of upside. But then agree to differ or even have different value systems and not even like the other system in other respects, that’s Model 1.

Model 2 is you link them all together, right? If you don’t like their human rights performance, then we’re not going to cooperate on economic performance. And the only way we’re going to be able to make progress is if both sides in one form or another — I mean, there’s shades of gray in this — but in one form or another adopt the first model because there are genuine differences across countries and cultures including these two or the West versus China in different values, social stability versus freedom of a variety of kinds, etc. Those aren’t going to go away, right?

So, we’re going to have differences. And if we decide to pick a fight every time we find a difference that’s meaningful to us in terms of our own value system, it’s going to make it doubly difficult to make progress and cooperating where there’s a huge potential mutual benefit.

Hugo Scott-Gall: Malcolm, would you agree with that? Do you see that if you just filter out some of the noise, there is actually underlying that that sort of common shared goal, shared intent to agree to disagree on certain things, but on really big things, actually agree and coordinate and perhaps that optimistic view from Mike there was tested during the ongoing COVID pandemic? And do you think that was a test that the corporation succeeded or failed in? So, do you think there is that agenda to actually, on bigger picture things, to actually work together?

Malcolm Riddell: I think we’re going to get there. What’s happening now though is especially beginning with President Trump’s administration, the tension rose greatly. And essentially, our tax on China, even to calling for regime change to a certain extent, has made things very tough. At the same time, China has become prickly and just not wanting to get what they call any interference in its internal affairs. So, I think we can get to where Mike’s going, but right now, we’ve got a problem.

For example, let’s take climate change, and I’ll get to COVID in a second. But when we get to climate change, President Biden came in with the idea that he would put this in a separate silo, and it’s a common interest to every power, every country, every person on the planet, and they’ve worked together on this. China, for whatever reason, at this point, its initial negotiating position is, yes, we’ll work with you on climate change if you meet certain requirements that we want that are political requirements. And so, we’re not quite there. We’re not at this area where we can actually work together in a smooth way on issues of common interest. I think we’ll get there.

As far as COVID, again, I think the previous U.S. administration made it very difficult for China to cooperate with us. And whether they would or they wouldn’t, we really don’t have a test. I don’t consider that to be an adequate test because of the rhetoric that came out from that. If I look though at what we’re talking about at how we’re going to deal with this — you’re talking about the economic tensions.

It’s interesting, Xi Jinping sort of — I’m going to get to this in greater detail in some other questions — but has revamped the economy to make it more self-sufficient. He’s introduced, for example, the dual circulation strategy, which we won’t go into in great detail here, but this is an economic strategy that is meant to enhance to a great extent the internal economy and make it less dependent on the outside world because he sees the outside world as a pretty dangerous place. And I think he’s got good evidence that there at least in the past have been forces in the U.S. that were inimical to China’s economic growth.

In technology, as Mike mentioned, there’s not much question, but beginning with former President Trump, we’ve done what we can to limit China’s access to technology and to hard technologies such as semiconductors in certain areas. And so, they want to move more into a greater area of self-sufficiency.

Now if we’d been in an era where we didn’t have these tensions, I think it would be reasonable to say that China wouldn’t feel that economic threat from the outside world, the sort of things we saw in the trade war and the like and probably wouldn’t be taking these steps to sort of pull in to be more self-sufficient.

At the same time, it still wants to keep its relationships with the rest of the world. It’s not becoming completely separated or decoupled, as the popular phrase is, but it’s definitely reacting to what it perceives as threats from the outside world. So, in a sense, these tensions are creating vast changes in the Chinese economy to deal with that tension.

Hugo Scott-Gall: Just following on from that, Malcolm, do you see China’s weaker points in securities driving still a lot of its geopolitical strategy? And you could argue, and please do, with me if you think I’m wrong. But maybe, China has, not quite an Achilles’ heel but weaknesses where it has big trade deficits. So of course, energy, it imports energy, food. Maybe, and tell me if you think it’s wrong, but demographics, falling fertility rates, aging population, those things could be construed to be certainly weaknesses or maybe insecurities. And are they driving geopolitical strategy?

And then the endgame of the question is, once those things have been resolved — and maybe you can throw in some gaps in intellectual property, so some semiconductors for example. Once those things have been resolved, does China then retreat once China resolves what it sees as its weaknesses? It doesn’t need to buy as much energy from the rest of the world or as much food, does it then become self-sufficient and then have less interest in the rest of the world? Is that its endgame? Is that what it wants?

Malcolm Riddell: Again, the endgame, that’s farther out than I can go. But I have my own method of analysis. And one of these is to look at China’s vulnerabilities. And I do this because this is what Xi Jinping has ordered to be done, and that is he wanted to see where the choke points were throughout the Chinese economy, where the outside world could harm China and where the things that are happening in China could cause a collapse or a downturn. So, I think what you’re seeing is Xi Jinping is very concerned about the weakness, and he’s taking steps to address them.

And let’s take an internal example. We saw, with this question, falling population, one of the issues is that it costs a lot of money to raise a kid in China. And one of those reasons is because the competitive nature to get into a good university. There is not such great quality online tutoring that everybody feels, well, if I don’t do it, maybe my kid’s at a disadvantage. It’s not very good. And so, he just wiped out that industry. Now that makes it cheaper to have a kid, so it was more likely that people will be interested in having children, same thing with real estate prices.

So, you look at that from these lenses, you see that he’s looking at vulnerabilities and then taking policy actions internally to do that. If you look externally, as I said, if you take things like semiconductors, China, for years, has been trying to build its own semiconductor industry. For example, we see Europe now beginning to make its move to do that, but China’s doing it because it saw a vulnerability. And that is, it was dependent on its economic growth and its technological development on the outside world for that technology and for that hardware. And so, it’s taking steps to deal with these.

Now what happens when all that’s done? I don’t think China necessarily retreats from the world, but I think the more vulnerabilities that it solves, the more robust the political actions will be. And I think it’s sort of maybe the opposite of what you’re saying. I can see a more assertive China that feels it has its vulnerabilities shored up. Just to give a quick example, people talk about China wanting to invade Taiwan to get the PSMC semiconductor fabs, which I believe in any war would be destroyed anyway.

But the point of that is that China doesn’t want to do that because it would lose its access to semiconductors what such as it has. So, all these things are complicated, but I think the more Xi Jinping takes care of vulnerabilities, the more you will see a more assertive China.

Hugo Scott-Gall: As I was asking my question, I could see you shaking your head, Mike, which I view as a good thing. So, tell me why you were disagreeing with what was implied in my question, which is what Malcolm has really said there, which is, as China resolves these things, he thinks China becomes more assertive rather than more insular. Is that why you were kind of shaking your head?

Dr. Michael Spence: Well, I wasn’t disagreeing with that specifically, Hugo. What I was thinking to myself, I look at everybody as, you know, starting to think about resilience and vulnerability and self-sufficiency. It’s not just China. I mean, for example, drugs in the context of the pandemic. So, I don’t want to single out China in this respect. And we probably have to worry about rare earths, many of which are mined in China. But I do think that trend is legitimate.

But the reason I was shaking my head is I think in discussing the geopolitical context, we’re in danger of losing sight of the point that Vivian made. I mean, China is not a person. It’s 1.4 billion people and a pretty powerful leader and governance structure. And I think that thinking about what China’s going to be like in the future really requires one to understand what the Chinese people want. And I think they want this process of modernization growth to develop.

I shook my head specifically when Malcolm was talking not because I like picking fights with Malcolm. I usually lose. But China has a major inequality problem. Their Gini coefficient is somewhere in the mid to high 40s. And so, I think one of the things that economists think about and talk about, as well as policymakers, is inclusive growth patterns. And they’ve had stunningly spectacular growth but a pretty serious problem of inequality that’s not all that dissimilar to the one that we have in the United States.

So, I think a lot of the actions that you’re seeing taken are directed not at some kind of external agenda but an important domestic agenda that’s kind of front and center for the Chinese people. If they lose control of important aspects of the growth patterns — and I’m going to turn this over to Vivian in a minute — but on the inequality front, on the inclusiveness front, on the corruption front, that then they know they risk losing the support that the Communist Party needs to govern effectively.

Hugo Scott-Gall: Vivian, I guess, would you agree with that final sentiment from Mike there, and also, would you agree that even though China, the government is asserting more control of the economy, there’s still enough space to solve some of these, whatever we call them, weaknesses, insecurities, things that China wants but doesn’t still have and therefore needs the rest of the world for?

Vivian Lin Thurston: Yeah. First of all, I do agree with Mike. And also, I agree with Malcolm. I think both are very good experts in the very complex issues in China. But I should also step back a little bit. What about the U.S.? What is the U.S. trying to accomplish in this relationship with China? I think China’s very clear about what they want to accomplish, right? They want to either restore the respect or understanding from the West or the world domestic economy and bring people up to the prosperity and then continue to reform.

But what does the U.S. try to accomplish during this new form of the relationship between these two countries? I’m not quite so sure, right? I mean, we know the U.S./China new relationship is as strategic competitors now. So, if the U.S. endgame of doing this is try to make sure China is no longer a competitive threat or competitors, and then the question is, first of all, is this thought correct from an economic perspective?

Secondly, how can the U.S. achieve that goal, whether all the things the U.S. has done in the past three-plus years achieving that goal or even go the other way? As Malcolm mentioned earlier, China realized, oh, now, they need to be more self-independent on semiconductor. Before, the U.S. was pushing on that, China was okay, rely on the rest of the world to import it, 40-plus percent of the world’s semiconductor kind of thing. So, this is something, I find it quite interesting.

I don’t think the U.S. is very clear, both from political side, economic side, or private sector side, or even general public side or know what exactly the U.S. would like to accomplish. And this is not the same as during the real Cold War time, in the ’50s, ’60s, and ’70s. So, that’s my first kind of point.

Second point, you can see that there is a symmetrical attitude between China and the U.S. versus this conflict or tension, which is very true given what you mentioned before. So, basically, the U.S. has been the one probably more proactively putting China in this competitive status whether geopolitically, economically, system wise, ideologically.

And China tends to react and respond to that because China understands as a rising power, we are still not as big as the U.S. And they’re governing system and their ideological system can never be replicated in rest of the world. I think Malcolm mentioned that to Mike. It cannot be exported, that government system.

So, they want to make sure they are fine. But now they see this continuous tension, threat coming through, and they have to respond. And if I use not a good analogy in schools, you have big kid and small kid, and the small kid knows they shouldn’t pick on the fight, right, because they have everything to lose. And I think that has been what I see the essence of Chinese attitude. But they cannot sit there doing nothing. So, they have to use rhetoric and response to react to all those.

But at the same time, they pursue their own endgame and goal. Actually, when China started opening and reform in 1978. Basically, is reform opening? They need to continue to reform. Reform means that previously the China economic system was this communism and socialism and doesn’t fit.

So, they need to reform, means to grow this capitalistic or market-driven economy. And then externally, they need to continue to open, open up. And this is exactly what I’ve seen in recent times, the dual circulation that Malcolm also mentioned before. Externally, even those things become very complicated. They continue to open up their relationship to more multilateral kind of relationship, whether it’s economically speaking, whether it’s geopolitically speaking, not just with the U.S., right?

So, I think this is something we probably need to be more cognizant about that. Two different countries are looking at things a little bit differently. And then the question is, would China deviate from what they are doing under this complex backdrop? My point is probably not. Next.

Hugo Scott-Gall: So, I’ve got a couple more questions around China external geopolitics. And I wanted to do a little bit on China —

Malcolm Riddell: Can I take just a second just to respond to Vivian because I have a little bit of a different point of view? Vivian, I don’t know. I’m not saying this is right. But if you remember, we were in a period of engagement with China supporting China’s entry into WTO, opening trade, having most favored status for our trade, essentially trying to support China’s growth. And then something happened.

Now, why would the U.S., within a few years, not want to support China anymore and suddenly we’re in this conflict? Did the U.S. policy of 40-odd years just change? Did we just say, oh my God, we’ve just been wrong, China, or under Xi Jinping, did he take actions that were threatening to the U.S., rightly or wrongly threatening?

And I’ll give just a couple of examples. Well, first, the longstanding ones we know about are questions of intellectual property theft and not complying with WTO requirements. But let’s just take some under Xi Jinping. Xi Jinping essentially claimed that China, I think very spurious, and the International Court of Justice said the same thing, claims that it essentially has the entire South China Sea as its backyard and started to build islands and militarize that area, certainly upsetting its neighbors and making Taiwan, Japan, Korea, and our allies certainly feel threatened and our feeling that this was in contradiction to what Xi Jinping promised President Obama.

If we go to a second point, and this is where I think there was nothing wrong with this. This is a PR sort of problem. But China says made in China 2025, we’re going to take over the world in the advanced technologies. And everybody says, huh, I thought we were all working together on this, and now you’re going to just try to beat the pants off us. And we got scared and did these things.

So, I think some of these aggressive actions by Xi Jinping during that administration turned the attitude rightly or wrongly. And so, because don’t forget all those years of engagement and support that we gave to China. So, something changed. I don’t see it so much from the U.S. side. As far as the U.S. goal, I think the U.S. goal is pretty clearly containment or weakening of China.

Vivian Lin Thurston: That’s a great point. I just thought about why actually suddenly two countries turn into this kind of relationship. I do feel economic changes is a big one, GDP.

Malcolm Riddell: Yep.

Vivian Lin Thurston: So, Xi actually took over in 2012, and nothing happened yet as you’re trying to do the anticorruption measure. At that time, China has 8.5 trillion GDP dollars, U.S., more than double. Now fast forward, 2020, China’s at 14.5 trillion. U.S. now is 21 trillion. So, the gap has narrowed tremendously even in the last five plus, six years. And then in the same time, the growth of China continued. And as you mentioned correctly that China, Xi, at the beginning put out made in as of 2025. So, I wonder, is this really a more rhetoric kind of a misunderstanding, or —

Malcolm Riddell: That’s what I think from that. Yeah.

Vivian Lin Thurston: Yeah, because think about when we talk about China has made it very clear. They want to grow this country. They want to have technological advancement. They want their 1.4 billion people to continue to feel prosperity and peace. So, for them to have Made in 2025, I think it’s a natural evolution of that goal because China used to be the factory of the world, right? Walmart, Target, they all do that in China. And the environmental impact becomes so big and labor intensive.

This model doesn’t work for China anymore because they continue to advance to higher value add. So, for them to have 2025 made in China, it’s not uncommon to think about that, right? But if you think about that, it’s clear of increased competition. And that could be another discussion back to what the U.S. should think about in this. So, if China should be smart, maybe they should just be quiet, keep doing what they’re doing without putting —

Malcolm Riddell: That was Deng Xiaoping’s advice, but he did —

Vivian Lin Thurston: But at the end of the day, it’s the same, right?

Malcolm Riddell: But he did say, for now, hide your strength. And so, they’re pretty strong now. And Xi Jinping’s making some moves. He’s made folks nervous.

Vivian Lin Thurston: Yeah. So, — it’s interesting an interesting observation, I think, back to what I was saying earlier. What’s the endgame from the U.S., and how can the U.S. achieve the endgame? And then how can we understand or interpret what China is doing in every kind of area?

Dr. Michael Spence: I think the American endgame is either unclear or incoherent in the following sense. I mean, nobody that I know reasonably argues that China can be held back in terms of economic and social progress but also technology. I mean, it just doesn’t work that way, right? Nobody contained nuclear weapons. All the major powers got them in three or four years. And this other stuff is leakier than that. And just to advance a point both of you made, China got bigger.

So, the relationship was bound to change. But if you look out into the future, unless there’s some catastrophic event in their development, they’re going to be bigger than everybody else for a significant period of time. So, it’s very difficult for me at least to understand what the American position is on this unless there’s a bunch of people making policy mostly on the national security front who really think you can contain or hold China down. But I wouldn’t bet my kids’ savings on that front.

Vivian Lin Thurston: Yeah. One more point and I will hand it back to Hugo. I agree with you, Mike, and Malcolm too. And I do think in the end, U.S. and China, as we observed, it should be a win-win situation, current relationship, but not a zero sum game

Dr. Michael Spence: Absolutely.

Vivian Lin Thurston: — kind of relationship. That’s to Malcolm’s point earlier. The U.S. supported China going into WTO and all that. The U.S. also benefitted from that, right? If you look at it, U.S. inflation being no inflation for a long period of time because you can import such a cheaply made but it’s equally good quality of products from China. So, U.S. consumers benefit from this.

So, to some extent, it’s a win-win situation. But now, if you pursue this kind of a new era of the relationship without clear understanding of what you want to achieve, and think about, it’s a zero-sum game. I think it’s not good for either country. It’s not good for the global order or economic growth.

Malcolm Riddell: I wish you and Mike were on the National Security Council because I think, all the signals I get, I agree with Mike, it’s pretty muddled. But it is not that they’re searching to ways to cooperate and have a win-win situation.

Dr. Michael Spence: Agreed, we’re going the opposite direction.

Malcolm Riddell: Yeah.

Hugo Scott-Gall: So, I just want to pivot to domestically and ask, I suppose a little bit of a provocative question, just to see what you think, which is common prosperity. Is that a genuine desire to improve outcomes for a majority of society, or is that actually just a way of retaining power?

And so, to put it more provocatively, we talked about socialism and China’s characteristics, so we’re now talking about communism and digital characteristics. So, is what’s happening around common prosperity and more about a strengthening of power, or is it actually a very healthy hygienic cleanup of an economy that has maybe overextended or grown to uneven or grown, I guess, in too buccaneer a fashion? So, I’ll throw that to you. You’re the economist here, Mike. I’ll throw it to you.

Dr. Michael Spence: Well, I’ll start. And I think everybody will have a view on this. In statistics, there’s a problem called collinearity, when two variables are very highly correlated, and so you can’t tell which one is having a causal effect. The reason I mention that is that I believe that — this is from personal relationships with policymakers of the type that both Vivian and Malcolm also have — there is a genuine commitment to inclusive growth.

On the other hand, you could argue that a major failure on that front would threaten the authority of the Communist Party and ultimately stability in that system. And that’s the collinearity problem. So, the skeptic, the cynic, about their motivation can always argue that it’s only really about it’s just another dimension of sort of staying in power.

And so, let me say one other thing, Hugo, and then I’ll stop. I do think there’s genuine disagreement about the path forward and reform among really smart, talented people who are leading this in China, both in the previous generation and now. And they’re going to have to find their way through it. But I think on the current path, they are running some risk of inserting the state sufficiently deeply into the economy as to partially suffocate its innovativeness and dynamism. Now they’re famous in China for sort of not getting things absolutely right because you can’t. It’s too complicated a process and then making midcourse corrections.

So, the hope is that if they cross that line and start to experience diminished dynamism that ultimately drives the prosperity, that they’ll sort of make a midcourse correction. But right now, I think there’s some risk that the ideological left, the hardliners, will have sufficient influence that they’ll stay on the course of inserting the state too far into the economy.

And I’m saying this because you asked about control. And I think there is a desire on the part of a subset of the quote, “political spectrum” in China, to have a much higher degree of control than most of us think is consistent with innovation.

Hugo Scott-Gall: Vivian, how do you think about that control ideology, innovation, pragmatism?

Vivian Lin Thurston: I agree with Mike that directionally speaking, we have seen this increase. The left side of the ideology for control, especially on the macro level of the economy, right? And that’s what we’ve been seeing a lot in recent times. And China, actually, governmental control in any industry isn’t really a new view. But previously, it’s more from the macro side of consideration or some reform side of consideration. This, I think is the first time maybe start looking at some, we don’t know, social agenda or political agenda side. So, I do think incrementally that the risks have risen.

And the question is also to Mike’s point how far they will go on this. And I like to believe that because their key goal is still trying to make sure the prosperity of these 1.4 billion people. And we just don’t want them to do too far along the other side and then to do the midcourse correction. And then the damage will be so big that it may be difficult to even go back on track. So, I still think that probability of happening is still low, given that Mike also pointed out there are different ideological debates within China among those in leadership about what’s the best way forward. So, I think it’s not a one voice, as I understand.

And then I think China does put this growth target in that GDP growth at a very high level of the priority given that it does pertain with employment with the social stability if you will. So, if and when this impact on the political side starts to really take a toll on the growth side of the target and goal, it will show immediately. It’s already shown recently this broader-based slowdown. So, it’d be interesting to see in the next couple quarters how the recent phenomenon we saw on the political side, whether it will stabilize a little bit or continue. But definitely, I think it’s a very important thing to watch going forward.

Hugo Scott-Gall: So, what I need to do now and what I want to do now is thank all three of you for what I hope everyone agrees has been a really rich and thorough conversation about a lot of important things which are in flux.

Malcolm Riddell: Thank you, Hugo.

Vivian Lin Thurston: Thank you. Bye.

Dr. Michael Spence: Nice to see you. Fun to be part of it.