This is an audio transcript of The Economics Show podcast episode: ‘Martin Wolf talks to Keyu Jin — Has China’s economy run out of gas?’
Martin Wolf
I have few regrets in life, but one of them is that I missed out on the chance to visit China in 1980. That was when the World Bank sent a groundbreaking first economic mission to Beijing. At the time, Deng Xiaoping had been in power for two years and was ushering in a new era of market reforms and rapid economic growth. I was a World Bank employee at the time, but because I had already announced my plan to quit, I decided to pass up this extraordinary opportunity. Instead, my first trip to China wasn’t until much later, in 1993. But I’ve been there almost every year with the exception of the pandemic period, ever since. The changes I’ve witnessed in the three decades since have astonished me. What was once an impoverished third-world country has become the world’s greatest manufacturing and exporting nation and its second superpower.
Along the way, a billion people have been lifted out of poverty and entire mega-cities replete with thickets of skyscrapers, have sprung out of nowhere. China has been on a truly exciting journey. And yet, in recent years, it seems to have run out of steam. A burst property bubble, mounting debts and increasingly hostile trade relations with the US are taking their toll. So are the days of double-digit growth well and truly over? Indeed, does China risk a lost decade of near-zero growth as Japan experienced in the 1990s? Or is all that just envious western wishful thinking? And will the Chinese juggernaut continue to pull ahead of the rest of the world?
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This is The Economic Show. I’m Martin Wolf, the FT’s chief economics commentator. Joining me in the studio is Keyu Jin, professor at the Hong Kong University of Science and Technology and Harvard. A Chinese national herself, Keyu’s work focuses on the global economy and how a resurgent and widely misunderstood China fits into it. Indeed, she’s written a book on the subject, The New China Playbook. Keyu, welcome to the show.
Keyu Jin
Great to be with you, Martin.
Martin Wolf
So first, before we talk about China, tell the listeners a little bit about yourself. How did it happen that you spent such a long time teaching in the west? Where did you get educated and how did you end up doing what you’re now doing?
Keyu Jin
Well, I am from mainland China. Born in Beijing in the 1980s, and I arrived in the US as a first exchange student to the high school in New York at age of 14. So I found myself being plucked from being a Communist party Youth League member to being straight a Democratic party supporter, given that my host family — my American host family in New York — was running for the state attorney-general. And you can imagine how much of a surprise that was to me. And also being immersed in a high school environment where people knew very, very little about China. But even more so, they had a very distorted view about China in the late 1990s. And I studied at Harvard for nine years and then landed at a job in London School of Economics in the last 15 years. So I think my perspective straddling between China, US, Europe has really helped me in understanding some of the cultural, economic policy, government issues. And I think that helping reduce the gap of understanding is so critical at a time like this.
Martin Wolf
Do you actually find personally that the tension between particularly the US and China is quite painful, given that background? Does it divide you a bit?
Keyu Jin
You know, there’s so many of us who have had this bicultural experience that find it frustrating and sad, frankly, when the frost has set upon the two nations. Because they both have provided people like us so much opportunity. I have to say that I learned so much from the west. Being in America, the vast opportunities they were so generously giving to Chinese nationals back then, and how much that has helped China in return. And I have to say, the 1980s and ‘90s, Chinese people always viewed Americans with a huge amount of admiration.
Martin Wolf
And so right now, the trade war between the United States and China has begun — restarted, as it were — but much more viciously. So this must worry you quite a bit.
Keyu Jin
Well, just to begin with, I’m not actually sure the US and China are so different fundamentally in the ideological ways and in other ways during, let’s say, the cold war with other nations. Because the competitive nature, the desire to win, maybe that is the issue, right? The family values, the dedication to work, career and aspirations for a better future. That is very, very common. Times have obviously changed after China became powerful economically, militarily, but especially technologically. And politically, maybe things have not gone in the way that the US had expected, so things start to drift apart.
But coming back to the trade issue, look, you know, China has been long preparing for this since Trump 1.0 and maybe even a couple of years before then for this reduced weakening trade and investment ties. And it has had unintended consequences on China’s part. For instance, it has totally set off a globalisation frenzy at Trump 1.0. Meaning that the Chinese companies start to think about accessing foreign markets, they move part of their supply chain production. If you look at some surveys, 80 per cent of small and medium-sized companies have already or are in the midst of implementing a globalisation strategy. So what we ultimately see is the decline in the share of exports on the US part, not so much on the others.
Martin Wolf
In fact, though, the ratio of trade to GDP in China has actually fallen quite a bit from an extraordinarily high level in about 2007, just before the financial crisis, to one that is more normal, though it is still more globalised if you look at that ratio than the US, as you point out.
Keyu Jin
Well, as China becomes bigger and richer, it will look more like the US by virtue of having a greater domestic economy. So production has grown faster than the export share. Lots of intermediate products are now made in China. But more importantly, I think the reaction to global shocks is not one of being more closed off, like what the US is doing: protectionist. It’s actually the reaction is: open up more. If you look at the range of policies just been put up in the recent months, it’s about opening as much as possible, reducing the foreign negative list, inviting foreign investors, foreign participants. And Premier Li, his reaction to Trump’s tariff threats are unilateral opening up — zero tariffs for the least developed countries. So their reaction is China’s more open to the world than before.
Martin Wolf
The United States is pretty clearly frightened of China. It’s got a much bigger population. It’s falling, but it’s vastly bigger. Its technological prowess is extraordinary. Its growth has been extraordinary. Do you think they’re right to fear China?
Keyu Jin
They are right to believe that China is their biggest competitor, absolutely. I think it misunderstands China’s intentions, or at least it’s perceived to be misunderstanding China’s intentions. Yes, is China competitive? Absolutely. I mean, competition at every level. But this is not just competing with foreigners or foreign companies, it’s the internal competition that is just so ferocious, really. It wants to have higher ambitions and goals. Prosperity being one of them, I think that’s a legitimate one.
But also a lot of its actions are reactions. If you look at upping the defence category or military spending and you know, China wants to exert a greater influence in the Asia-Pacific, that’s kind of expected of a growing power. So yes, in those areas, I can see why it is. But I think we underappreciate or we don’t talk enough about how much of Chinese trade have lifted the neighbouring countries, how much of its technologies are much more suitable for developing countries and developing south. There’s so many examples where Chinese companies have increased the capacity to be digitised for these developing countries. And if talk about EVs, but also eventually AI because they’re so cost focused. Ultimately, it is about affordability and adoption in developing countries. I think they have done good. It is an opportunity for the world. But from the point of view of the number one power, the US, it is a threat.
Martin Wolf
So unfortunately, this is a naturally competitive situation and as Thucydides told us, that can lead to great trouble. So let’s turn now to the Chinese economy and what’s going on there. We have had this staggering growth, but China, clearly, has some big macroeconomic problems. Debt associated with the property boom, which also includes local government’s debt and the great property bubble is over, indeed some said the government killed it. Is there as a result of this, a real risk that China will fall into a deflationary trap similar to Japan? In what ways is it similar and in what ways is it really different from the Japanese story?
Keyu Jin
Well, only a few years ago, the Chinese economy was described as too easily heated and very difficult to cool. And now the situation is quite simply the opposite. So monetary tightening has actually been initiated since 2015, mid-2010s. And now they’re trying to reverse it and it’s not showing some effect. But I think we need to separate what are cyclical issues — some of which is caused by property and some of the longer-term structural issues. And I think this will help us understand why in many ways it is still very different from Japan. Not least because at a very simple level, China’s still a developing country. Japan was much richer. China has 800mn of low-income and middle-income — a group by Chinese definition, which means their income is less than $500 per month. But real estate, I think, in the short term, is the primary cause of the economic challenges, quite simply because unlike in other countries, real estate embodied a shadow fiscal system and a shadow financial system — the two key pillars of the Chinese economy.
If you look at national and local debt, 90 per cent of local debt is tied to real estate. 72 per cent of national debt is tied to real estate, and local governments relied on land sales and property as the main source of revenue, so that was the fiscal system. And financially it was the same thing. Property developers were quasi-banks. So you can imagine when the real estate sector came down, there was real vulnerabilities in the economy.
But I think it is quite different from Japan. First of all, if you look at Tokyo prices, land prices drop, what, 87 per cent from the peak? We haven’t seen that kind of market adjustment in China simply because it’s not really market-driven. But also China is a much more diversified economy and the huge technological capacity and innovation being the driving force, by 2026, narrowly defined property sector will be on the cusp of being overtaken by what we call the new productive forces. So AI-driven, green tech, digital, you know, innovation-driven economy. So I think managed well. Now of course, that is a big if a five-year transition out of real estate to help the economy kind of get back on its feet.
But the potential is huge. You know, just a few numbers, service sector is only 50 per cent of the economy. In Japan, back then, was more than 70 per cent, in the US, UK 80 per cent, and so forth. Again, I want to emphasise that there are hundreds of millions of undereducated rural population, underemployed as well, who is not really formally integrated in the productive economy. Rural land reforms have not occurred. And you know, the hukou system that prevents migration of people, the movement of goods, there’s lots of internal challenges. Meaning that the potential should be at a much higher level than stagnating currently.
So coming back to your question, how to ensure that the Chinese economy will avoid the debt deflation trap and the lost decade in Japan? Well, first of all, the diversity of tools the Chinese government is equipped with and the timeliness, you can say that it’s a little bit behind, but still, I think in Japan’s case it was very delayed and not sufficient monetary, fiscal, co-ordinated policies. There’s much more co-ordination, much more flexibility in the Chinese government. But currently, you know, the government is very focused on implementing a huge fiscal stimulus package. But the real problem is that the government has not figured out how to stimulate the economy without going back to this debt explosion issue. So I think that the stimulus packages plus structural fundamental economic reforms are absolutely necessary.
Martin Wolf
So let’s look a bit one question about that past growth performance before these difficulties. There’s a very strong view in the west. I think it’s very strong in the US that what really drove Chinese growth was industrial policy. Brilliant choice of industry, fiercely encouraged technology transfer from inward investors and this was remarkably successful but also, from the western point of view, predatory. How would you answer that?
Keyu Jin
Well, Martin, I think there are lots of lessons to be drawn from China’s case. The first of which is it’s not just about the money. If you look at industrial policies of catching up, I’d say that they were not always very successful. The automotive sector, some of the semiconductor sectors and huge resource (inaudible)? Not much. I think the most successful industrial policies to date in China have been in the new emerging strategic sectors. Being EV solar panels, where there was not a latent advantage on the western part.
But it wasn’t just the financial subsidies — which weren’t enormous, to be very frank — but it was the supply chain co-ordination. It was, of course, helping the companies find the loans, co-ordinate with the bank, talent attraction, government procurement — all these policies actually worked very well. And the reason that it works, and this goes back to a fundamental characteristics of the Chinese model, is that everything is implemented at the local level, at the city level. If we take solar or EVs, this first started industrial policies at the city level. Started from 14 cities and then rolled into 40 cities and then eventually 80 cities. And the local government is gonna be judged on whether they, first of all, reach the GDP targets, but also whether they build these mini-Silicon Valley and innovation clusters.
I want to also bring one additional point, Martin, since you raise the technology transfers, don’t you think it’s funny somehow that the table has turned around? Chinese EV companies, battery companies want to set up shop in Europe and form joint ventures, and there are some mandated technology transfers going out the other way, right? Asking the Chinese to transfer technology to European companies. So Chinese companies understand that because they think there’s a trade off, access to market. And look, you know you have to give up some. So it is very interesting.
Martin Wolf
One of the interesting points, just a footnote, is the Chinese government being led predominantly by scientists and engineers do understand the science of climate change. Well, America has just elected somebody and the party that denies it’s even a reality. That doesn’t seem to be an issue in China at all.
Keyu Jin
We have other issues, and this not being one of them.
Martin Wolf
I just like to talk a bit more about the macroeconomic problem. So one view which I share is that China is as an economy, both from households and corporates, an extraordinarily high savings economy, about 40 per cent of GDP or more. And so to grow successfully, it needs investment at that level. And if you look at the investment rate — which remains very, very high — the returns that you see in terms of growth have fallen enormously. Obviously, the investment rate remained roughly where it’s been for several decades, it’s fallen a little but not much. But the growth rate has fallen from well over 10 per cent to let’s say three or four, whatever it may be. Doesn’t this indicate that basically, Chinese people are saving more and actually can be productively invested in this economy?
Keyu Jin
Yes, this has been an enduring and persistent problem. And I think China is now coming to the terms that if you want to be a rich nation, you also have to be a spending nation, not just a saving nation, as the whole mentality was around saving as a virtue.
But look, you know, China’s model is, first of all, brilliant at scaling up supply and extremely weak at raising personal demand. And there’s a reason behind that. Coming back to the political economy model of local governments, what I call in my book, “the mayor economy”. Think about what their incentives are. Their incentive is to use our resources and revenues to spend on nurturing champions, the kind of things that we talked about, the industrial policies that get some GDP growth.
But their incentives are not steered towards spending on social services, which is critical for consumption. So if you have 300mn migrant workers without access to proper social protection and infrastructure, by the way, they spend only 1/3 of an average urban worker with an equivalent income. You have 500mn rural workers whose average pension is only five per cent of the pension income of an urban consumer, and then more generally, lack access to pension and social security. This is one fundamental reason why I think consumption — especially for the high marginal propensity consumers — are still very much suppressed. So that has to be fundamentally changed.
But I also think that housing prices was really one key factor as well. You know, people really saved to invest in their kids’ education and to purchase a house. Of course, that is all a bit changing. To fundamentally change that mentality towards saving, you need a new generation, and I’m not worried about the new generation. And their propensity to spend and borrow is really quite impressive in terms of its ability to turn China potentially from a saving to a borrowing nation. If you look at the consumer credit, 85 per cent of that is accounted for by people under 35. With the new digital technologies, university students without income will have one click on Alibaba’s Taobao and use that to buy lipstick. So they’re not saving for a rainy day. But the question is, can we harness the youth so that they feel secure about their future in order to unleash that consumption power?
Martin Wolf
I was very interested in your description of the situation, which is obviously completely correct. What has struck me is that the Chinese government has been very, very reluctant to make what you might call structural policy shifts in the direction of improving pensions, which you mentioned. That there’s a problem with the hukou system that’s gone on for decades, and people have been talking about it all that long. So you really have an extraordinary dualistic economy between the urbanised population, which is very prosperous, and the hundreds of millions outside it. It’s not really one economy at all. And there seems to be a great reluctance to spend more on welfare, public consumption. This seems sort of almost emotional, it doesn’t seem rational. There’s a deep suspicion of becoming more of, might one use the word, a welfare state.
Keyu Jin
I think that China has entered into an era where social considerations are becoming increasingly important, even sometimes at the cost of growth. And certainly the leadership have put a lot more emphasis on consumers. At the same time, the social reforms — including pension reforms — have been taking place. They’ve just really significantly lagged. But I think the issue more is at the local government level, at the city level. Local governments don’t want to see potentially socially destabilising forces from the rural population, so they’re very reluctant to open up borders or to change or implement the hukou system.
But let me give you an example. In Tianjin, they have loosened some of these restrictions so that you can actually, if you purchase a property from anywhere in the country, a rural area or whatever other city, you can actually send your kid to the local school, which is unprecedented. This is to help the real estate situation. But you can see that there’s massive pent-up demand for education and healthcare access. So they want to do this in a controlled manner.
Martin Wolf
I was very struck with what you said. I remember about two decades ago, I had a conversation with the mayor of Shanghai. Maybe it was a little less, something like that. And what struck me is that the way he talked about all the people from the countryside potentially migrating into Shanghai sounded a bit like, if I may say so, Nigel Farage.
Keyu Jin
Exactly.
Martin Wolf
My God, we don’t want all these foreigners, even though they were Chinese people.
Keyu Jin
That’s exactly right. Universal problem.
Martin Wolf
Well, China is so big that it’s more like a continent, isn’t it, than a country?
Keyu Jin
But if I may add, some of the recent reforms on real estate is about village rejuvenation. A lot of the infrastructure spending coming from the fiscal stimulus is gonna focus on the villages in the rural areas. Making some of the land more based on industries and actually building these centres of consumption and spending for the rural population.
Martin Wolf
So if we were asked now, what is the potential growth rate of the Chinese economy over the next decade or two, assuming policy works reasonably well? But given where they are now, how fast might China grow?
Keyu Jin
I’d say three to four per cent. But again, you know, I think some of the key measures of success, including innovation and technology, you can’t necessarily see it all the time in the numbers, in the GDP numbers.
Martin Wolf
I would have to say that if it is three to four per cent growth and investment rates of 40 per cent of GDP don’t sound plausible, so that adjustment will have to take place, won’t it?
Keyu Jin
Yes. And hopefully productivity. You know, remember Japan’s lost decade was also a productivity lost decade. Very, very little productivity growth. But hoping that after this long dip, that consumption would also be a contributor to growth.
Martin Wolf
And if you look at that growth rate, which we just talked about, and more broadly, the social problems of China, how significant is the demographic transformation, the transition to a population which is much, much older, in which the current younger generation is smaller than the generation above them? How big of a worry is that to China and to the Chinese government?
Keyu Jin
The Chinese government is clearly concerned about it. Otherwise, they won’t be trying to encourage everybody in every way possible to have more kids. I don’t think it’s a first-order challenge for China right now. Demographics or low fertility rate, I think, is a symptom of some deeper issues. And why are people not having more kids? It was the housing problem. Housing prices were too high. Education costs were prohibitively high. So much so that my friends working in the United Nations in China said they weren’t having kids because they won’t be able to afford it. Because they needed to send them to eight tutorial classes and needed to have the best teachers and ice skating and ballet. That’s the mentality.
So clearly there are some real social structural issues that need to be resolved. But the reason I don’t think it’s the first-order issue is that there’s a huge unemployment problem currently, especially with the youth. You get these great fancy degrees and you have no job. So I think even before demographics, at least in the short term, is this massive skill education mismatch. And it’s all about expectations of the future. Why are they not having kids? Partly it’s because they don’t think the expectations is that rosy. So you need to harness the current youth in terms of giving them the proper employment and there are ways to do that. And again, I want to emphasise the hundreds of millions of rural population, low-cost, still not quite educated, labour force that can be integrated.
Martin Wolf
I mean, it’s a reality. Chinese fertility rates are very similar to those of other east Asian countries and actually southern European countries. The difference is it started going to these very low birth rates when it was poorer. But that was part of your policy, wasn’t it?
Keyu Jin
It was the one-child policy that made everybody in the urban area, and 98 per cent of the urban households had only one child. So out of my 60 classmates in middle school, only one had a sibling.
Martin Wolf
So we’re gonna take a short break now. But when we’re back, I’d like to shift the focus onto China’s relations with the rest of the world.
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Martin Wolf
So we’re back from the break. We talked about it briefly before, but just tell us a bit more on how significant a threat to the Chinese economy is US protectionism, and particularly its refusal essentially to allow transfers of some technology. The evidence seems to be China’s coping pretty well with this.
Keyu Jin
I think it’s painful in the short term for the Chinese companies, but almost certainly it will backfire in the long term, and we have already seen evidence of that. Huawei was blacklisted and look at how well it’s doing now. It almost experienced an existential death, but it forced it to spend much more on innovation, even circumventing some of these sanctions, but coming up with alternative designs. So they’re saying in China right now is rather than try to take over on the bend, let’s just switch lanes. And so that’s the mentality they have towards semiconductors, towards a range of high-tech critical sectors that are being restricted. But more importantly, it’s set off this frenzy in China. Mobilise all the resources, from the private sector to state, in undertaking these critical technological challenges. The going joke is, after Biden’s sanctions not being very effective, is thank you, Mr Biden, for these sanctions. Do you mind, by the way, sanctioning our men’s national football team as well, so that maybe they will do better? And that’s the spirit.
Martin Wolf
And I suppose this startling success of DeepSeek really proves your point.
Keyu Jin
DeepSeek is one example of many, many different levels of small breakthroughs, innovations. I mean, it took the world by surprise, but frankly, I wasn’t that surprised because what you’re observing on the ground, even the semiconductors, chips industry, the kind of alternative designs, the different routes, it’s really everywhere. You know, this is why I still have a lot of hope for the Chinese economy, because ultimately what matters is innovation. And if we look at the middle-income trap, most of these countries don’t have the domestic capacity to innovate. And that is not China’s problem.
Martin Wolf
Finally, if you look at the world now with the US starting trade wars with all its principal allies, including, right, we expect, we don’t know yet, Europe. Do you think there’s a prospect for much better economic and possibly even political relations between Europe and China in the future?
Keyu Jin
Well, Martin, I saw you in Davos and the first feeling I got was somehow the attitude has turned it just a bit warmer towards China from the European parts. You know, China wants to use the current situation with Trump as an opportunity to build a more robust relationship with this country, UK and with European nations. And here we’re talking about lots of opportunities in investment, in that kind of joint venture. We talked about the EVs, the batteries and so forth. China’s very, very interested. The fundamental question, finally, Martin, is whether we’re all gonna take a pragmatic approach or not, right? Is this gonna be economics-driven or is this gonna be politically driven? And I think the Trump shock might well be the spur of a more pragmatic, economic, pro-growth focused agenda. And I think that will serve China and Europe both very well.
Martin Wolf
Well, if America is run by somebody who doesn’t actually understand any economics at all, as far as I can see, we have to co-operate with the people who do and whatever else the Chinese do. So that’s quite important, isn’t it?
Keyu Jin
It’s an opportunity.
Martin Wolf
So, Keyu, thank you so much for joining me today. It’s been a fascinating discussion.
Keyu Jin
Always a pleasure to talk to you, Martin. Thank you.
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Martin Wolf
That’s all for this week. You have been listening to The Economics Show from the FT. This episode was produced by Laurence Knight with original music and sound engineering by Breen Turner. Our executive producer is Manuela Saragosa. The broadcast engineers are Andrew Georgiades and Rod Fitzgerald. Cheryl Brumley is the FT’s global head of audio. I’m Martin Wolf. Thanks for listening.
