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- Former Communist Atheist Explains Why A Market Economy With Churches Works
- China Is In Need Of Spiritual Reform To Save Economy
- When A Country Lacks Faith In God, The Nation Becomes Its God
"I think there are four flash points of global geopolitical situations, and out of the four I identify three as already being ignited, namely the Ukraine-Russian War, the Middle East War situation, and also southern China between Pakistan and India. And so the fourth one is between China and Taiwan. I think this is not just a geographical military conflict. I also think this is a turning point for civilization. If there's a war break out between China and Taiwan, not only is it a disaster for a geopolitical situation, but also it's a test of our virtue and faith." —Dr. Peter Zhao, as stated by his translator
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Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany.
We have a guest today, Dave, that is a well-known economist, but also sees economics the way I think you do, where I heard at one time from a friend of mine, economics is politics applied to spiritual faith and you really can't separate the three, economics, politics, and values. And so we have Peter Zhao with you right now in Amsterdam.
David: Peter Zhao is an economist who spent time working for the Communist Party Central Committee and has done extensive research, is very well published, 200-plus articles, and respected in the field. To be honest with you, I don't know anyone else on the planet who's had 10 million Twitter followers. I suppose you could find somebody out there, but certainly no economists. And as some of his ideas have challenged the status quo in China, there is a certain cancel culture there as well, a certain limitation of views beyond a certain threshold, and so you won't find his Twitter handle anymore, and you won't find the 10 million followers.
But his ideas have been very influential in China, and I've gotten to know him through the years. I have immense respect for him. Kevin, I'll be honest, this doesn't happen very often, but there is a handful of people that I see from across the room and I just want to cross the room as fast as I can and give them a hug. I love them. I respect them. I hold them in such high regard, and we don't see each other often enough. I just am ecstatic to have a reunion.
Kevin: Well, David, your family, your dad first when I came to work for him, and you, value highly speaking the truth no matter what the cost, and oftentimes there is a huge cost. And so I really look forward to this interview. Also, just a note to our listeners, the interview with Dr. Peter Zhao today, the voice you hear will be the interpreter.
David: Well, it's a real pleasure to introduce to our listening audience someone who I've had a tremendous amount of respect for a long time. Peter, you and I have shared ideas about China since we first met in Singapore in 2015. First, we were on a panel at an economics conference discussing macroeconomic trends, and later we got to speak privately and expand on several global macro themes.
Since then, I've had the privilege of seeing you at these same economic conferences. Here we are in Amsterdam for the discussion today, and I've always appreciated your insights. My thoughts and musings on China are those of an outside observer. Your reflections, however, are those of a true insider. Trained as a PhD economist in China with continued studies at Harvard, you've worked as an advisor to the Central Committee in China, and as a member of the Communist Party have a unique set of insights. I'd love to review your current take on what is today the second-largest economy in the world. We'll get to some questions here in a minute, but thank you for adding your perspectives and insights.
Peter: I'm so glad to meet you and we can talk like this. I ask my friend to help me with language.
David: Excellent. So we'll do some translation, and I'm so glad that you're here with us. Well, initial reforms in China began under Deng Xiaoping more than 50 years ago, and then rapidly increased after acceptance into the WTO, World Trade Organization, in December of 2001. How would you characterize Chinese growth in the pre-2000, post-2000, and finally the post-global financial crisis periods?
Translator: Yeah, China's economic growth has three phases. So phase one is pre-year 2000, which the growth can be categorized as low cost, low labor cost, and infrastructure investment-based growth. So we can say that in a way we're chasing, China's catching up, the industrialization and modernization, sort of the characteristic of the first phase of Chinese economic growth.
So since China's joining of WTO in 2001, China basically had a golden 10 years of growth, which can be categorized as exporting driven and high investment driven growth. By post-2008, a global financial crisis. China's economy is more and more dependent on government credit and government driven, which covered the structural problem. It was more like a Keynes kind of—
David: Keynesian interventionism.
Translator: Keynesian interventionism, which those hidden problems is more and more kind of popping up right now and become more problems.
David: The scale of the problems is something that many analysts are concerned about, and we'll get to that in a moment. So export-led growth has been the model used in China, favoring tradable goods over domestic consumption. In the US, domestic consumption makes up 70% of GDP, and it's much less in China with almost a mercantile or export focus. What is the state of the Chinese economy now?
Translator: So the current state of China's economy I would categorize as very, very severe, almost close to US Great Depression level. So all the problems that's accumulated and hidden over the years is about to basically explode at the same time. So these multiple crises are the crisis of high debt level and the demographic problem right now. So it's like declining of new birth rate and the credit or the confidence for the private enterprises and also decoupling with the world economy. The risk is increasing with decoupling, so it's close to the limitation of the dependency on the government investment and export [unclear].
David: There seems to be a little irony. Today in the US, we want to pursue export led growth. We're moving back to an older mercantile model. That's what the Trump administration has said they want to do, shift from having a trade deficit, with the surplus being with our trade partner, in this case China, and we want to equalize. We don't want the deficit in surplus, so we have US tariffs, and they are an attempt to reinvigorate that US production and manufacturing, resolve our trade deficit. What is your perspective on the global trade imbalances and the tariff war?
Translator: The root problem is not a tariff. It is basically the imbalance of the trade of the world. The fundamental problem is the difference in political systems, [unclear] institute differences and also in the deficit in trust. So the US problem of tariff, the deficit trade, China has the same problems, and many countries in the world have the same problems. So it's not the only problem that US has. The fundamental problem right now is US and China don't trust each other. The attempt for the US to rebuild this manufacturing capability is fundamentally because the US doesn't trust China, because they're treating each other as enemies.
To prevent this potential war between the US and China, the US basically is attempting to rebuild this manufacturing so the US doesn't rely on China on this manufacturing capability. The tariff problem is only the surface. The fundamental problem is the difference in values, the difference in systems. So, the goal of the US is to basically rebuild this manufacturing capability to prevent this potential war or worst-case scenario with China.
David: Some have argued that state intervention and the massive credit provisions by the People's Bank of China following the global financial crisis show us a new and better approach to economic planning and stability. I think of it as Keynesianism on steroids. Having spent time as a member of the Communist Party, what is your perspective?
Translator: China's economy pre-Deng Xiaoping's economic reformation was government-planned. It's like Marxism. So, it's proven it's not working. It's a failure. And after 2008, China started stimulating the economy, which found another trap. It sort of looked like it worked.
David: Keynesian.
Translator: Keynesianism, it sort of worked for a period of time. However, right now, it's proven that's also not working. China's already failed twice. The first failure was the Marxism. The planned economy proved didn't work. So, the second failure is proven not working was the Keynesianism. It's government-heavy intervention, [unclear] didn't work. A lot of the foreign friends, the China's economy made a misjudgment. They felt that China's economy was working, which I think it's not, because of the government intervention. It is proven to be a failure right now.
David: When you look at economic growth around the world, Chinese economic growth has driven most of the improvement for several decades. Where do you see global economic growth coming from going forward?
Translator: A global economy also slowed down after 2008, global financial crisis. The growth has been slowing down by about 1.5%. So, with the Chinese slowing down, the whole global economy hasn't really recovered back to pre-2008 level. However, you could look at countries like India or Vietnam. It looked like their economy is looking very vibrant. And we look at the new frontier, such as AI, is driving a new kind of growth. So, we're not too pessimistic about the future or the current state of the global growth.
David: One of the major initiatives in recent times from China is the One Belt, One Road program, the new Silk Road, if you will, different technologies. Is it fair to characterize the Belt/Road project as a soft power substitute for Western influence in the world?
Translator: Yeah, certainly. The Belt and Road initiative is basically a tool for China, for its geopolitical purpose. But because of this lacking virtual guidance and trust by contractual trust, its soft power is still really hard to establish and its influence among the countries.
David: So, you're saying lacking in virtue and lacking in trust without the power of contract implementation or what would be implied by a guarantee, you do this, we'll do that, and we're working together?
Translator: Yeah, that's right. The influence of China's Belt and Road initiative has to be built on the foundation of trust and a mutual respect of the local cultures. So, without this trust and mutual respect of his culture, an initiative could turn into a new sort of colonization.
David: New colonialism?
Translator: Yes, you said it. And also, potential trap for debt.
David: So, the gifts come with strings attached. We'll talk a little bit about geopolitics. Are you concerned about potential conflict in Eastern China, specifically Taiwan and many of the military overtures that we've seen over the last several years? What are your thoughts? What do you reflect on there?
Translator: Yeah. So, I do worry about it. I think there are four flash points of global geopolitical situations. And out of the four, I identify three as already been ignited, namely the Ukraine-Russian war, the Middle East war situation, also Southern China between Pakistan and India. And so, the fourth one is between China and Taiwan. I think this is not just a geographical military conflict. I also think this is a turning point for civilization. If there's a war break out between China and Taiwan, not only is the disaster for geopolitical situation, but also it's a test of virtue and faith. So, the real question to ask China is how China is going to face the future, unity by force? Or it's, how does China win people's heart?
David: Thinking back to when you advised the central committee, understanding how they process decision-making, if the economy in China continues to deteriorate, does that encourage them to spend more to direct economic growth, perhaps through fiscal stimulus and consumption-oriented initiatives like we did in the United States, just sending government checks for people to spend, or does it instead potentially increase the risk of a decision to create a diversion, a distraction where Taiwan could be a reason for national rallying and unity in a time of economic hardship?
Translator: My opinion is with deterioration of China's economy, the probability for China to start a war against Taiwan is decreasing. The reason is because the fundamental confidence of Chinese people is based on China is growing more and more powerful and catching up, even passing US as a large, big power of the global economy. But their practical reality is, as the Chinese economy is slowing down, the confidence of people is decreasing, therefore there's less confidence for China to beat US economy, and to be strong, and therefore take over Taiwan.
The other path you mentioned, can China stimulate the domestic consumption by physical stimulus, bringing in cash and giving to people. I also think that's less likely, because this will require a fundamental political reform, which will basically determine how this wealth is going to be distributed among people.
If you look at Chinese history for the past thousands of years, China has never been a consumption-driven economy. A consumption-driven society or economy has to be depend on inclusion. Basically, if you look at Chinese history, it's always one small group of people deprive or exploit a large group of people. It's never been inclusive, equally, so that the mass majority of society can be wealthy enough to create a consumption-driven economy. So, I don't think there's a path for consumption-driven economy to be created by physical stimulation.
David: So, we talked about there being an increase in credit expansion after global financial crisis on a scale I think has never been seen in the world, to resolve the slowing economy and to keep the economy in China healthy. There's so much debt in the system now. If you can't continue to stimulate growth that way and you are dealing with a massive credit overhang, what keeps the PBOC from running the printing presses, from inflating and attacking the debt through inflation?
Translator: I think there's only one power, which is the market itself. When the people keep printing more cash and pumping the economy, when there's less and less of that effect or there's zero effect, where there's a negative effect, it has to stop.
David: So, back to the map and in relationships between countries. Chinese map that Xi Jinping prefers, shows the nine-dash line and assumes an extensive territorial claim. Would you rate the probability of conflict as low, medium, or high in relation to the nine-dash line?
Translator: I think the nine-dash line and the Southern China Sea conflicts, the probability for that to happen is mid to high. The reason is of nationalism. If you look across history, across countries, when nationalism keep increasing and there's no limit to it, it's very easy to become a crisis. So, I think the nine-dash line is not only a geopolitical problem, but also, it's a spiritual problem. It's a war, it's a battle between power and stewardship. Another way to explain this, when people of a country, they don't have true faith, then basically, they believe in their own country, their nation. So, they're worshiping their country, the power of their country. They're just idol worshiping, and that will basically lead to extreme nationalism, which is very, very dangerous.
David: So, you bring up faith. This is a personal question. You were sent to explore the US economy and what perhaps could be the demise of capitalism on some time frame. So, you're at Harvard making economic observations and cultural observations, and you see a system that works, not one that's broken. Tell us about the conclusions that you came to and how that led to your own expression of faith.
Translator: At that time, it was only research and observation, but it looks more and more important today, that observation become more and more important today. So, my observation and research back in 2002 was that the fundamental difference between United States and the other countries in the world is, there's so many churches across the country, and Christian values and Christian faith played a very important role in the fundamentals of the US. Then I reached a conclusion, the market economy between the US and China is not only because of—I categorize the US as a market economy with churches and the China's economy without churches. Then the conclusion is, if China's economy can be based on Christian values and virtues, then China's economy can be much better than now, and the relationship between China and the US can be much better now too.
Peter: And this will benefit for China's economy.
Translator: Unfortunately, China's headed the other way, which leverages nationalism to stimulate the economy, which leads to the conflicts of geopolitical situation and crisis. Well, the US is not without it's own problems, and we see US as becoming more like Europe, and Europe is becoming more Muslim. That's our observation. However, we see US still has a strong foundation of conservative Christianity, which is leading US back to its path.
David: So, you really do see the fundamental differences between the largest economy in the world and the second-largest economy in the world as values based. You can't just count the numbers of widgets sold, the amount of product that moves across borders. This is a difference of worldviews based on a very different set of values.
Peter: Yeah. I agree with you totally.
Translator: I actually think US is a very different country. Not only US is different from China. US is also different from European countries. So, the French economist, a political scholar—
Peter: Tocqueville.
David: de Tocqueville.
Translator: Yeah. Tocqueville. Okay. I'm struggling how to translate the French name. And when he came to US and did his research, his observation is US people is very different from French. The value systems are very different from that of the French. The society, based on the citizens and also the churches, are also very different between US and France. So, America is a conservative Christian society. Europe is a post-Christian, worldly society.
David: Well, it was Aleksandr Solzhenitsyn leaving the Soviet Union, making the reflection as he came to the US like de Tocqueville did, that the reason why Russia went through the turmoil that it did is because they forgot God. And what you're describing in Europe is a secular expression, a country that was once robust in faith and virtue, which has left that aside for a much more pragmatic approach to life. Deirdre McCloskey is a famous US economist, has written multiple books on the history and the importance of virtue as it informs the basis of our market economy. It's an absolutely fascinating read, and the scholarship is top-notch. We are becoming more secular in the United States. There are many people in the United States who would suggest that we are in a post-virtuous or post-Christian society in the United States.
So, I hear your observation as an observer of US culture, and it is different than Europe. Hopefully, we're not on that same path of abandoning virtue. We may find there's complications with that. When you think about your observations in 2002—I think the Wall Street Journal ran an article talking about some of those observations in 2008—is the best way forward for the US or any country to consider virtue, to consider values, to consider faith as a basis for culture? And if that basis is strong, if that foundation is strong, then the market economy works brilliantly.
Translator: I think this viewpoint is still very, very important today. My view is even the West, when they trying to use Keynesianism to stimulate the economy is basically losing its foundation of its virtue and values. Keynesianism is used occasionally as a means to stimulate the economy. Maybe it works, but it becomes like drugs. It's hard to quit, becomes addictive. Then it's poisonous. That's basically the reason of current US debt problem that we're facing.
David: So, thinking about debt, we know that China has tried to grow, and much has been written about the collapse in real estate in China. You have the developers like Country Garden and Vanke and many other developers are coming under intense pressure, to the point of insolvency. This week we have the yields on Country Garden bonds at over 4300%. They started the year at 619%, which I thought was a very high yield. Is consumption-led growth a solution or a substitute for investment directed by the state? I guess what I'm looking for is, what works? What is the solution for the Chinese? They've got a mess. How do you clean this up?
Translator: I don't think there's a solution for the Chinese real estate problem. It's an endless dark tunnel, and it won't see the end. By 2050, it's predicted that the Chinese population could go under 1 billion. By the end of the century, it is predicted Chinese population could decline to 340 million.
David: Wow. My response is the same as yours. Wow.
Translator: In that regard, there's no fundamental for China to have a war against the US. A country is declining, its population is aging. There's just no foundation for China to wage a war. Hong Kong's real estate crash, the price for listings declined by 60%, and the real estate bubble collapse in Japan, the price declined by 90%. So I predict if China's real estate bubble burst, it could be even worse than Hong Kong and Japan because at the same timing, there's the decline in population.
So, I think there are only two ways to stabilize China's economy. Number one, China has to reestablish a relationship with the United States to solve its geopolitical problem. And the second is basically not only economic reform, but also political reform, to reestablish people's confidence and to really establish a consumption-driven economy.
David: You're a peacemaker that can bring a message to two different audiences. One, the Central Committee. What would your message be to the Central Committee in your role as peacemaker? What would your message be to the Trump Administration in your role as a peacemaker?
Translator: I think with Trump's priorities, one goal—with two sub-points—is one goal is to reestablish US as the leadership position in the global economy. And to support that there two supporting points. One is physically to reestablish US manufacturing base and spiritually to return to conservative Christianity.
David: And what would your council be to the Central Committee, the Chinese Central Committee.
Translator: To reestablish the trust between China and the West, especially with the US, and to establish a political system with inclusion, reestablish confidence with the market economy and consumption.
David: One problem, if they establish a political system with inclusion, what you described as basically all of Chinese history is going a different direction. Instead of one small group exploiting a large group, now you have something that puts everyone on an equal playing field. That's a different form of revolution.
Translator: Well, China has only two ways, to live or die. In order to live, you have to change. If you don't change, you're going to die. Let's recall what Deng Xiaoping started the economic reform. He said, "There are only two choices. If we reform, we live, you don't, we die."
If you look at the past thousands of years, China is probably facing the most critical moment in China's history. China is facing, in the next 40 to 60 years, the population will decline by one billion. This has never happened in China's history in the past thousands of years, right? And so China doesn't have a foundation to challenge US to be the number one. Not only that, China is facing the challenge of being defeated from within, losing its power and completely collapse. So China has no choice. To open, meaning to be friends, to re-establish trust with the West and to change from within. To change fundamentally its political system, not just the financial system. The political system has to change from within.
David: Maybe not a popular message with Xi Jinping.
Translator: But I think the best advice for him, if he takes this advice, he may remain in the history with a better name. He has a chance to have a higher position than Deng Xiaoping if he takes this advice.
David: Well, I recall a man by the name of Kondratiev who was tasked with cycles within the US economy and within the cycles of capitalism in order to prove to the Russians when they would succeed, when Marxism would succeed and capitalism would fail. And he did his cycle studies and came to the conclusion that, quite the opposite, it was not capitalism at risk, it was communism at risk, and that the cycle was a terminal one. It wasn't really a cycle, it was just an end point for communism. Whereas there was a dynamism to the capitalist system, and the cycles were very difficult at times, but there was an unlocking of creativity, and I think that's what you're getting at when you suggest values are something that serve as the foundation for a free market or capitalist system.
So Peter, when I think of Kondratiev and I think of you, you were sent to explore and to study and to make observations about the U.S. system, and you, too, came to the conclusion that there is something very dynamic about the US system, but unexpectedly it's not an economic input, it's values-based input, it's a spiritual input. I don't know that Kondratiev came to the conclusion that there was a spiritual dynamic, but I think it's not without coincidence. When tasked with proving the demise, the conclusion's a little bit different.
Thank you for joining us. As always, it's great to see you. I wish you safe travel home and look forward to our continued friendship.
Peter: My pleasure.
Kevin: Well again, David, values really apply to everything, politics, economics, and our spiritual faith. I thought it was fascinating to hear Peter talk about markets and churches and how important that is for inclusion of the people.
David: Sometimes we have guests on and it is an interview. Today, I experienced this as a dialogue with my Chinese brother, and it was a delight to pick his brain on a number of critical topics as we try to figure out how the world resolves big issues. Some are, frankly, almost too big to be solved, and that is where radical change, radical transformation, whether it's of a political system or an economic system, have to be considered. And he's left us with much to chew on.
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Well, you've been listening to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany and our guest today, Dr. Peter Zhao. You can find us at mcalvany.com and you can call us at (800) 525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
