In this interview with CUSEF President James Chau, Professor Lawrence Lau discusses his book "Is the Chinese Economy a Miracle or a Bubble?" and explains China's dual-track approach, which aims to implement reforms without creating losers. He also emphasizes the importance of innovation and demand growth in sustaining economic progress.
James Chau:
Professor Lau, thank you and congratulations on your new book, “Is the Chinese Economy a Miracle or a Bubble?” This book takes a deep dive into China’s dual-track approach, which was key to its economic growth — and, of course, its transition since. But at this time of global disparity, what are the lessons we can take from here and reapply everywhere?
Lawrence Lau:
Let me explain a little bit about the dual-track approach. The spirit of the dual-track approach is that there wouldn’t be any losers. That’s why it’s called reform without losers. If you really think in terms of reform, sometimes some vested interests will be hurt, right? So they will be losers. And the losers will oppose the reform. It’s true everywhere. But what we figure out from the Chinese approach is that with the dual-track approach, no losers are created. If you think about it, that’s really what every reformer dreams about — how to carry out reform without losers.
Let me give you a concrete example. I just read from the communique of the Third Plenum that China is contemplating a relaxation of the retirement age. Right now, it’s quite draconian. Retirement for women who are not a cadre is 50. If you’re a cadre it’s 55, and if you’re a man it’s 60. Now, given that the life expectancy of Chinese people today is around 78 years, that’s too early. Retiring that early is bad for women. It’s a total waste of resources right now.
But what I want to point out is that in the discussion about the extension of the retirement age, they said it would be voluntary. That is, if you want to retire, if you’re a man and you want to retire at 60, you can retire at 60. But if you don’t want to retire at 60, we’ll make it flexible. You can opt to work until you’re 65. If you think about it, there are no losers. Because you can retire at 60 as before, or you can retire at 65. Everybody wins.
Now the problem with changing the retirement age, like President Macron in France, is that he was going to raise it from 62 to 64 for everybody. So the people who are 60 or 61 who were planning to retire in one or two years were upset. So they took to the streets. As a result, it was a mess. That’s what I meant by saying that the dual track approach really allows you to have reform without losers. And I think that is something that people should always take to heart. That is when you want to make some change, make sure it’s a win-win. It’s not zero-sum. Make sure that it’s not somebody wins and somebody loses.
James Chau:
You warn of the potential risks of China becoming like the stagnating Japanese economy of the 1990s. How can China avoid becoming that middle-income trap, and what are the policies required to support that?
Lawrence Lau:
As always, you have to consider both the supply side and the demand side. One of the things that’s affecting Japan today is that there’s not enough demand. Exports have not been growing very fast. But domestically, the population is aging and there’s no fresh domestic demand. And when you don’t have enough demand, the economy cannot grow. So I think that’s part of Japan’s problem.
Now, for China, I think in the first place, it must actually try to increase aggregate demand. Even in China today there’s not enough demand relative to supply. But the other thing that China is doing is what you’ve been hearing about called new quality productivity. That is innovation. And I think China has really been in the forefront of applied innovation.
Let me give you an example. We know that PayPal has been around in the U.S. for decades and decades. But PayPal never evolved into a payment mechanism like WeChat pay or Alipay. But the Chinese are very application-oriented. They figured out immediately, “OK, you have WeChat, you have Alipay, we can use it for payments.” And that really replaced any use of checking in China. No one in China has a personal checking account because they don’t need one.
I think that what China needs to do, one is to keep up the innovation. Mostly apply innovation. The other interesting innovation is high-speed rail. The high-speed trains were not invented by China. It’s German technology. But China was able to improve it, and now actually they make the best fast trains in the world. So that’s the idea. Keep up the innovation — especially apply the innovation — but also, at the same time, keep up the growth of demand.
James Chau:
The Chinese leadership has recommitted to its social and economic goals, despite mounting challenges in precisely these areas. At the same time, there is a feeling that the Third Plenum, a recent major meeting, missed an opportunity to activate solutions for near-term growth. What’s your take on that?
Lawrence Lau:
James, I think that’s a very legitimate question. And if you look at the Third Plenum, you say, gee, nothing really significant seems to have come out of it. You have a lot of decisions, but they are all like motherhood and apple pie, right? … So what is there that’s new? I think I pointed out that this relaxation of retirement is actually quite new — and actually quite important — because the working age population in China has begun to decline, and if you just add even five years, that makes a big difference. You know how many people in China are between age 60 and 65? — 70 million. So, if you relax the retirement age from 60 to 65, you gain 70 million workers, just like that.
But I think, actually, the Chinese leadership really wants to avoid China becoming a plutocracy. That means a political situation in which money dominates. A plutocracy. I think that is really what the Chinese leaders want to avoid. The U.S. is today very much a plutocracy, at least going in the way of a plutocracy, and that’s what they want to avoid. That’s why common prosperity is important. You don’t really want your people to be polarized between those who have and those who have not. I believe that is really what the leadership was striving for.
My prediction in January this year was that the growth rate would be between 5 percent and 5.5 percent. I think right now, after the first half, China is still on track. The first half growth was actually 5 percent. Now, I’m still reasonably optimistic that it will end up about 5 percent by the end of the year. But I actually want to say that the leadership basically did not try to do anything particularly extra because of all the uncertainties they face.
If you really think about today and all the uncertainties, one is climate change. How can climate change affect the economy? We know that this year alone, just the first eight months, there was flooding everywhere, which, if you look historically, there’s never been this much. That would really have an impact on productivity, on the economy and so forth — and you have no control over climate change, so that is one uncertainty. But then there’s also geopolitical uncertainty. Even as we are talking today, we actually don’t know who will be the next American president or what the policies will be.
James Chau:
You have a habit of getting things right all the time. I’m not sure if you’re a betting man, but if you’re not you should be because in my experience with you, you tend to be right about these things. I’m not going to put you on the spot, particularly because we’re quite a number of months off, and ask you for any political predictions. But I am going to talk about economic growth. The projection that is of particular interest — not only to foreign investors but foreign investors included — because they’re looking for signs that a corner can be turned in China’s economy. Can you take anything from the Third Plenum, that recent major meeting in Beijing, that they should pay particular attention to and maybe even extract a bit of hope from?
Lawrence Lau:
I would say that if you read the communique very carefully, you will find a couple sentences about increasing aggregate demand. I’ve always had the position that China is a surplus economy, not just surplus labor. It has surplus capital, surplus production capacity, so as long as there’s demand, there will be supply. The GDP is limited by demand, not by supply. Some other countries are limited by supply. So that is a big difference. How do we know that there’s no supply problem there? We know because the Producer Price Index has been declining, which means that it’s getting cheaper and cheaper to produce things, and that can only be because there’s not enough demand relative to the supply. So that’s my first point.
But my second point is that, because of all the uncertainty, in some sense I think that the focus is not just on the economy alone or economics alone. It is on security. It’s on how peace can be maintained, and so forth. I believe that the Chinese government basically wants to retain some dry powder that they can call upon when needed, that they can use when needed, rather than pre-committing it to something. If the Chinese government can easily say we’ll redouble efforts, we'll try to do 5.5 percent this year, we’ll try to do 6 percent for the remaining half year. … They could have said that, and they might be able to do that, but that would actually require them paying attention and focusing entirely on the economy alone, which I think at this juncture may not be the best thing to do.
James Chau:
Well, I want to finish off with your book, and I think we should make it clear to everyone that you did not put these books here. I happen to have a couple of copies, and so I thought they would make a nice backdrop over here. But this book here talks about “miracle or bubble” and it puts that question forward. But you believe that China’s development is neither. It’s rather the outcome of a specific range of factors. How much of this success is due in China to working harder versus working smarter?
Lawrence Lau:
Let me put it in the following frame. I think if you look at the first 10 to 20 years of reform — let’s say from 1980 to 2000 —then it’s very much working harder. Because before 1978, China was a planned economy. So China was not operating at the efficient frontier of this economy. [Then] the economy expanded, but also you’re pushing out from the interior of the economy to the frontier — that is, you become more efficient. And so I think for this first part, you can say that it is actually working harder, because with existing resources, you manage to produce more.
Now, of course there’s also new investments. I think if you look at the stage from 2000 to now, you can see that there’s a lot of innovation. And it is really the innovation that is driving the country, the economy, forward. We mentioned fast trains. That’s one thing. But if you look at all the infrastructure in China, the new airports, the roads and so forth, they are amazing. They are really amazing. And that is really very, very much working smarter. I know you can now go into a train station and you don’t need to produce anything. You just look at the camera, and they print out a ticket for you. That’s working smarter.
James Chau:
And this is part of a lifetime’s work. This book is the product of many years of insight and knowledge. I want to thank you for informing and shaping public opinion internationally and also, on a personal note, for serving so many years as the governor of CUSEF, the China-United States Exchange Foundation.
Lawrence Lau:
Thank you.
James Chau:
Professor Lau, thank you so much. And congratulations again.
Lawrence Lau:
Thank you again.
