Banks bear down on China’s growth but this bull is bucking the doom and gloom

Simone Del Rosario: China has a growth problem. Some analysts are warning of an imminent downward spiral for the globe’s second-largest economy. The nation is broadly missing economic expectations and now its annual growth target of 5% is in jeopardy. Today I’m talking with Doug Guthrie, a professor and director of China Initiatives at Arizona State University’s Thunderbird School of Global Management. Before that, Doug worked for Apple advising executives on China. He’ll tell you that he’s bullish on China, and you’ll hear him explain his stance throughout this interview. Doug, we’ll start with the most pressing question. Economists are starting to say that China might miss its 5% GDP target. Do you think that this is the beginning of the end to China’s enormous growth trajectory that some have been calling for for years?

Doug Guthrie: I absolutely don’t think this is the beginning of the end. I have been somebody who has studied China’s economy from the perspective of being very bullish on the gradual institutional transformation that’s been happening. So the key issue to understand is, of course, given the general global geopolitical issues, okay, we have, you know, we’re coming off the pandemic, we had the Trump era trade war, we have Biden, who still needs to be thinking about, you know, how to placate the part of the American economy that believes China is the source of all of the issues. So there’s a lot of complexity here, right. We also have concerns about whether or not the United States should be so dependent on China. So you have companies like Apple and Foxconn, and others who are thinking about India and other places in Southeast Asia, Malaysia, there’s certainly concern here. But here’s the reason this is not the beginning of the end. For the last 43 years, the Chinese government has been striking what I like to call a gradual and institutional approach to the economy, in which the party is very involved in what’s actually going on, they have not done the Milton Friedman approach of neoclassical economic theory of just letting markets run and seeing what happens, instead of each step of the way, every year. And by the way, just as an aside, we’re halfway through the year, China may or may not miss the 5.5%. You know, there are people I have a team on the ground in China, and I was just speaking with them this morning. And they’re still pretty bullish, like they think that you know, the numbers are still going to come in, and we may not hit 5.5, but it’ll be close. So, so there’s a lot of just hand-wringing and doom and gloom. But the key thing to remember is that this is a government and it’s a party state system, that yes, it’s a centrally and municipally and provincially controlled system. But it’s a system in which the officials are very, very tied to economic development, and the success of economic development their entire careers. It’s a great time to be asking this question because this is the moment of beidaihe. And every year, you know, the party takes August off, and they don’t go and sit on beaches and hang out, they go and get together and have casual conversations about what are we going to do for the second half of the year? I guarantee you those conversations are happening right now. And I’m just not that concerned. I think it’s a very, very robust economic system.

Simone Del Rosario: From the outside looking in. It doesn’t seem like the fiscal policy has really caught up to what is happening on the ground, some criticism out there saying that Beijing isn’t doing enough to help its troubled sectors. What do you say?

Doug Guthrie: Well, so certainly housing is a big concern. And there’s a lot of you know, my my collaborators on the ground, immediately mentioned that when I took this question to them, and you know, people are worried about a couple of different sectors. There’s housing, there’s also the question about manufacturing in a couple of different sectors, electronics, for example, going abroad. The automobile industry is doing great in China. However, Ford is suffering a little bit but BYD is doing great. And you know, I think Tesla’s position in China is very strong. And so, so there are sectors to worry about. But I actually think that again, this is a very complex economy. A lot of people I think, mistakenly think of the Chinese economy is just being built on, you know, the floating population and the 500 million people have cheap laborers that float around the country and provide cheap labor for organizations like Walmart. That is not what China is. China is far and away the most sophisticated manufacturing system in the world, hands down. And that can’t simply be reproduced in places like India and Malaysia. I mean, it could be but it would take 40 years. And so I think it’s quite robust.

Simone Del Rosario: We’re looking at the second-largest economy in the world, accounting for a very large percentage of the world’s GDP. Why would the United States care so much about what’s happening over in China? How does it impact on business economy?

Doug Guthrie: If you look back at the early days of the economic reforms, when 800 million people lived in abject poverty, nobody would would have predicted that by 2035, China was going to be the largest economy in the world, hands down. And I and my collaborators, we believe that number, you know, right now, China is the number two economy in the world and is soon to be the largest economy in the world. And this is not just a matter of us putting tariffs on goods. This is a matter of China, having developed the most sophisticated manufacturing supply chain in the world, and you simply can’t just say, well, we’re going to stop, have Apple stop producing iPhones in China and move them to India, this doesn’t work that way. So there’s a big threat here, China will become the largest economy in the world. And there’s not much that a single politician, whether they’re named Trump or Biden can do about it, we could do something about it, if we decided to invest in restructuring and rebuilding the manufacturing sector and doing all of the kinds of things that would, that would help us but there’s nothing we can do. And so I think, to a lot of politicians, and to a lot of people just in American society, they think that and hear that and it’s threatening, it’s scary. Wow, China, this formerly impoverished a society that was, you know, we could lambaste as a communist system that just didn’t win the battle between communism and capitalism, they’re gonna win, they’re gonna be the largest economy in the world. And there’s nothing we can do about it. There’s an added piece here, though, which is that President Xi, his own ambitions have been not just that China returned to its position as the most powerful economy in the world, but that China be respected as a geopolitical power. And so when you saw the deals happen with Saudi and Iran, and, you know, sort of the the Middle East summit, I think that there’s there’s a lot to be worried about, and the economics and politics get intertwined here. So it’s an interesting time.

Simone Del Rosario: I think that the reason that we continue to see repeated cycles of conversations about when China’s growth is going to slow down, especially seeing the last few years that they’ve had, where it has significantly slowed down from decades past, is that it’s hard to imagine that this nation can keep the level of growth they’ve seen up. And as we saw in the United States, that level of growth starts to taper after a while. What does that tapering look like? Is that going to happen to China, I know that you believe that this current situation is temporary. But surely the level of growth that they’ve seen, it’s hard to imagine that being sustained over, you know, continued decades?

Doug Guthrie: For sure, just to be clear, you know, as bullish as I am on the Chinese economy, and how smartly it’s been rebuilt over the last 40 years. I mean, nobody expected, I don’t think, double-digit growth to continue forever. I mean, it just doesn’t like, you know, the ways that math works is that when the number in the denominator gets bigger, it’s harder to get the linear economic growth and so like, it was inevitable that we would see a drop off from 14% to 10% to 5%. So my guess is that we’re gonna continue to see a leveling off and the growth but, you know, if the United States comes in any year at 3% growth, we’re happy. And so my guess is that, you know, China’s eventually going to get to that position. And we’re going to continue to see innovation on both the US side and the Chinese side, but we’re not going to return to double-digit growth. It’s never, it’s never happening in an economy this size.