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Back to the Blog Jim Pethokoukis on China’s Economy and Pawlenty’s Plan


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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca and Jim Pethokoukis to discuss his recent trip to see China’s booming economy up close and Tim Pawlenty’s plan to get our economy back on track.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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China to US: Forget debt ceiling, cut spending
Obama’s Worst Week, Pawlenty’s Best
Pawlenty’s big economic speech
Pawlenty’s 5 percent solution
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00:23 – Jim’s Trip to China
05:55 – China’s Muslim Communitty
7:00 – Chinese Property Bubble?
14:17 – Tim Pawlenty’s Economic Plan


Jim Pethokoukis on China’s
Economy and Pawlenty’s Plan
June 10, 2011

Domenech: Well Jim, thanks so much for taking the time to join us again. It’s always a pleasure.

Pethokoukis: Yes. It’s great. Love doing it.

Domenech: I wanted to start off by just asking what your recent trip to China was like. It’s obviously, it’s a, you know, kind of a big haul to go over there and go through everything. It was interesting to follow some of your comments during your time there, but I wonder if you could give us kind of an overview of what you were doing there and what you experienced.

Pethokoukis: Well, I went there with a few other journalists. There’s a group out of Hong Kong which is trying to bring journalists over to get a, you know, what they view as a more accurate, and fair, and realistic picture of China. You know, its economy. Its people. Its government. I mean, it sometimes creates a bit of a propaganda mission because, you know, obviously they’re only going to show you, they’re only going to take you to places that they want to take you that, you know, illustrate some of the points they want to make. And what I found interesting is really less, I’m not sure I found out much new about the Chinese. A few things, you know, about the Chinese economy. But what I found interesting is like their perspective of us. What they think about America. What they think about our politics. What they think about our economy.

And probably the number one thing that really stuck with me is they think that we are the biggest bunch of cry babies in the world. Complaining about their currency. Complaining about the jobs. And why don’t you take care of your own problem. You should be happy we’re buying all your, you can’t even raise your debt ceiling. It was really striking how that theme emerged over and over again. And one thing I kind of, and this kind of relates to that. One thing I was always asking like, you know, what do you think about President Obama. You know, what do you think about, you know, some of the potential 2012 candidates that they may have heard of. And the one, and they, I think they definitely like, at least the government officials I talked to would love to have four more years of Barack Obama, but the one politician who they felt free to offer a, you know, a very candid assessment of was Donald Trump. And they pretty much hated his guts so –

Cianfrocca: Well, he returns the favor.

Pethokoukis: And that’s right. It’s a mutual hostility society between the two. So, I think if it was Trump versus Obama I think it’s easy to call for the Chinese.

Cianfrocca: You know, it’s funny. I think that, I remember Donald Trump and I really don’t want to get into a conversation about him. But 20 years ago when the, when the Japanese were buying everything, one of his points in New York real estate was, oh there’s no limit to what the Japanese will pay for real estate in Manhattan. And so that obviously turned into a crash so that kind of tells you something about that.

Pethokoukis: Right. And if they want to overpay for golf courses in California –

Cianfrocca: Right. Right.

Pethokoukis: – there’ll be a lot of (unintelligible).

Cianfrocca: And again, my favorite trade of all time is the Rockefeller organization. They sold the iconic parts, some of the Rockefeller Center right in mid town Manhattan with a huge 30 rock, a big skyscraper. They sold parts of that real estate complex to Japanese interests just before the bubble started to pop, but they also sold them a put option on the rest so they could, actually they bought a put option as part of the transaction so when the market crashed they put the rest of it to them.

Pethokoukis: Great.

Cianfrocca: I mean, it was good trading. So, I’m sure that, you know, the Chinese don’t like hearing that from Donald Trump.

So, Jim where were you in China? You mentioned Hong Kong. Did you go to Beijing and Shanghai?

Pethokoukis: I did actually go to Hong Kong, the group was from Hong Kong. But I started, I went to Beijing, I went to Shanghai, and I also went out to the northwest. The northwest territories which, you know, it’s a huge Muslim population out there. They’ve had a lot of, they had some big riots in 2009 in a city called Urumqi where they killed 200 people. And then I went even further west to the city of Kashcar (phonetic sp.) which is like the first place in China where the silk, old silk road, trading route came through China.

Cianfrocca: I was going to say, it’s the silk road.

Pethokoukis: That’s right. Exactly. Which was 90% Muslim. And the favorite story I like, it’s weird because it’s a strange mix of like ‘60s Chinese, you know, communist, you know, style architecture and Islam. But the first night that I’m Kashcar I’m in like the town square and it’s like, there’s a mosque right there. So it’s like, I think it’s like the biggest mosque in China. So that’s emptying out. So there’s men, Muslim men, you know, coming out of the mosque. There’s like these old ex, like mujahedeen guys, you know, like one arm sitting, you know, all over the plaza sitting cross legged watching on this giant television a Chinese TV series about the long march.

Cianfrocca: In Mandarin, right?

Pethokoukis: That’s right. So, it’s this weird like, and one of the reporters had been, was the foreign correspondent for Newsweek and she had been the, she had spent a lot of time in Pakistan, Afghanistan.

Cianfrocca: Right.

Pethokoukis: I asked her, you know, so how does this compare to those places? And she’s like, this is way weirder.

Cianfrocca: Weirder, yeah.

Pethokoukis: In fact, they use Kashcar in the movie the Kite Runner as a stand in for a couple Afghanistan (unintelligible).

Cianfrocca: Well, let me guess. So, you were in the northwest. They didn’t let you get anywhere Tibet, right?

Pethokoukis: No. We were very close to Tajikistan. We did not go into Tibet and it was fine. We had dinner with this Muslim family. And one of the things we asked them, because you know the Chinese are so worried about the Muslims there becoming radicalized or becoming separatists. We asked them about –

Cianfrocca: The weagors (phonetic sp.).

Pethokoukis: Yeah. Well, the weagors. You know, we asked them well, what do you think of Bin Laden? He was like who is this man? This Bin Laden you speak of. We’re like well, what do you think of terrorism? What? What are you talking about? And this was a guy, older guy who had been throughout China. Been throughout the Middle East and Asia. I would, you know, well traveled. I’m quite sure he knew who Osama bin Laden and this thing called terrorism.

Cianfrocca: Right. No. We have no terrorism here, my goodness.

Pethokoukis: Right. But we knew we had communist minors with us, so they’re all being very –

Cianfrocca: Very careful, right.

Pethokoukis: – very careful.

Domenech: Yeah. Was it –

Pethokoukis: Listen. It’s an authoritarian country and to me that was just like this like, you know, fog. And it wasn’t just the pollution there. It was this fog literally hanging over the whole trip. It’s obvious there aren’t, there’s nowhere near the levels of civil liberties that there are here.

Cianfrocca: Well, when you were in, especially in Beijing, but also in Shanghai, did you see any evidence of the property bubble starting to collapse? We’re hearing stories that property values in Beijing are not growing, I mean they’re growing at very, very moderate rates which kind of amounts to a big change. And I’m just wondering if, you know, in their less guarded moments if you got any insight on what people are thinking about all that?

Pethokoukis: Well, what’s interesting is one thing you certainly notice is that everywhere and this was, you know, whether it was in those cities or out in the northwest, there was like one, like 20 to 30, everywhere you look there are these 20 to 30 story like apartment buildings and –

Cianfrocca: Empty.

Pethokoukis: – forget about the skyscrapers that’s going up everywhere. And of course it’s a poorly housed country. I mean, again there are all these old, a lot of the buildings remind me of the old housing project, Cabrini Green in Chicago. They’re just falling apart. So certainly they need better housing. But I was talking to an economist at a big bank at Shanghai, someone who was fairly skeptical about the long term prospects about the Chinese economy, and he didn’t think there was a property bubble. He thinks there still needs to be so much investment for some of the reasons I just said. And he said, he goes this, to me he goes China is still a Japan in the 1950s. Not Japan in the 1990s. But one thing you’ve often heard about China is that they’re trying to rebalance their economy –

Cianfrocca: Yeah.

Pethokoukis: – away from investment –

Cianfrocca: Right.

Pethokoukis: – and exports, towards more consumer spending. And he didn’t really think that, and I found this guy to be pretty good, pretty smart, pretty candid. He didn’t really think that was happening. That right now so many people are making so much money on the current system that there’s not going to be this, you know, they’re not going to be letting the currency appreciate. That the current growth model, they’re just going to stick with it and, you know, until it doesn’t work any more. It’s like the old football coach, keep running that play until they learn how to stop it and that’s what’s going to happen in China.

Cianfrocca: Well so they’re, if they’re running right now, I mean, the latest figure that I saw is, and of course, take all figures officially reported numbers from China with a big, you know, with a pound of salt.

Pethokoukis: And from their companies too, yeah.

Cianfrocca: Well, the same thing basically. 50% of GPD right now is going to investment. And I just saw as we were getting on the phone with you a report that, you know, because of a trade surplus they reported a relatively low one in the current period, they’re looking, they’re setting expectations that over the weekend reserve requirements are going to be raised yet again on Chinese banks. And so you’ve got to ask. You’re telling an interesting story here Jim, because I’m thinking of it in terms of how can you run a banking system without profits and continue to keep doing, you know, to keep investing 50% of GDP. It sounds like you’re saying, that to people in China that’s a sustainable model in their minds.

Pethokoukis: I think they know that that is no way to run a railroad for decades on end. And I think eventually, I mean one of the huge risks for the Chinese economy is you have capital, you know, hundreds of billions of dollars in capital being allocated at the whim of bureaucrats as opposed to, you know, based on markets and pricing –

Cianfrocca: And rate of return.

Pethokoukis: Right. So that’s right, that’s where you start worrying about the bubble. But I think at least the feeling with some of the economists was that there still needs to be so much building in China that they can get away with it. But even those guys thought, you know, growth is kind of slow and that, you know, 15 years out they may only be growing five or six percent and then what do they do? Is that fast enough to deal with all the, you know, to provide jobs for, you know, the millions of people moving from the rural areas to the cities? And I think for right now they’re just going to go with what got them there.

Cianfrocca: Well, I think that if you’re looking out, I could completely, I could completely bite off on the idea that a build out, a massive capital asset build out, including housing, is needed in China. I just don’t buy the idea that doing it in a government driven way is going to be efficient or produce, I think they’re in a land grab. I think they’re just trying to make not just housing, but they’re still going crazy building industrial capacity.

They just want to manufacture everything that gets manufactured in the world and if they can do it, and this is the point that I have made. If they can do it without having to sweat profitability among their, you know, their state controlled investors, the banking system, they might be able to do it. Because they’ve got, they’re running such large surpluses, they have such a large amount of hard currency reserves –

Pethokoukis: Right.

Cianfrocca: – they maybe, can fund something like that. And it would be crazy and unheard of. It would be world historic.

Pethokoukis: Well, it’s amazing. I mean, they are certainly worried that, you know, wages are rising there and a lot of this low end manufacturing, I mean you could, you know, you can drive through parts of China and there’s like a whole city, you know, that makes buttons for shirts. And then there’s like a whole city that makes the plastic things that go on the end of shoe laces.

Cianfrocca: Yeah. I’ve heard of (unintelligible).

Pethokoukis: That all that stuff is going to move to Vietnam –

Cianfrocca: Sure. To Malaysia.

Pethokoukis: – you know, some of these other countries. But it’s also amazing, talking about how it’s not being driven by markets, is that, you know, they want there to be, there to be a lot more economic development in, you know, outside those eastern coastal cities and they want them move more into the interior and out west (unintelligible).

Cianfrocca: Now who is saying? Are you saying, is that policymakers are saying that?

Pethokoukis: Oh, yeah. They want to move –

Cianfrocca: Interesting.

Pethokoukis: They want a more evenly distribute growth, so they’re basically forcing some of these companies to have operations way out west. When we were out in the city of Urumqi, which is way in the northwest, a city of 2.5 million, who has ever heard of it other than these riots two years ago, there was like a plant there making solar cells.

Cianfrocca: So, is that’s why they brought you out there? How interesting.

Pethokoukis: Yeah. They want you to see all their developing, so they’re trying to put, now does it make sense for that company to be out there that far from the post?

Cianfrocca: Sure. If the investment dollars are there. I mean, you know (unintelligible).

Pethokoukis: Right. The government investment dollars are there. Right. So, the government is making –

Cianfrocca: Right. I mean, the government said to put it there.

Pethokoukis: Exactly.

Cianfrocca: I mean what, can you imagine, Ben, can you just imagine if the US government were to go to Boeing and say hey listen, we really want you to move to rural South Carolina.

Pethokoukis: Thank goodness. Once again, I was like thank goodness this can’t happen here.

(Commercial Break)

Jackson: Jim, I wanted to switch gears a little bit. You had some great analysis about Tim Pawlenty’s speech this week on the economy. I thought your line that his Chicago speech, “Was a robust reminder that all that was once good in America could be again.”

Pethokoukis: I was getting a little weepy.

Domenech: Well, one can understand why with a plan like that. You know, what do you think though is realistic about that plan and what’s not realistic?

Pethokoukis: First of all I should never blog at like 11 o’clock at night, because I start writing things like that. But listen 5% growth, I think that is a, I think that is a tall order to say the least. I think the first challenge I think for policy makers is just preventing the economy from growing far more slowly in the future, you know, than it has in the past. I mean, if you look at all these CBO forecasts it talks about the US growing, you know, 2.5%, slowing down to something closer to 2%.

Cianfrocca: I think that’s ambitious.

Pethokoukis: That’s horrific. We can’t have that.

Cianfrocca: Right.

Pethokoukis: I mean, I think you can grow if you think, if the economy is growing let’s say about, you know, 3.3% on average for the past 50 years, a little bit slower over the past 20 years thanks to the recession. But let’s take that 3.3 to 3.5% number, I think that is, that is very doable with the right policies. And if you did that, all of a sudden all those horrific debt numbers start to look a lot more doable than at the slower growth.

So, I think him saying that listen, we should be pushing for an increase in economic growth not as, as Paul Ryan (phonetic sp.) likes to say, sort of a managed decline in accepting lower growth. Which by the way, I don’t think there’s a country that has gotten out of a debt trap through just cutting spending and having lower growth. I think, I’m not sure there’s very many examples that any of you can point to that. Usually the combination of cutting spending and higher growth often through, you know, maybe a currency devaluation I don’t think, which we don’t want to do.

But no, I think the goal of faster growth is exactly the goal we should have. I know why he picked 5%, because that was the go-go ‘60s, John F. Kennedy 5% goal. And I know there were a bunch of economic conservatives pushing him very hard to come up with that number, and they won the battle, and he came up with the 5%. But what concerns me is that we don’t want to count on 5% growth as a way of solving the debt problem.

Domenech: Exactly.

Pethokoukis: What I like about Paul Ryan’s plan is that he assumed so-so growth and still made the numbers work. I don’t want to assume the highest growth rates since like the gilded age or something. I think that would solve (unintelligible) problem. That worries me.

Cianfrocca: I think that, you know, thinking about all that the big problem that we face, first of all 5% growth over some sustained period of time makes no sense to me at all. And I was a little bit concerned when I saw that, because I was figuring, you know, anybody with brains is going to really call him on that. But I’m looking at the capital position of US investors, and businesses, and the consumers, in other words, the housing bust.

And it just doesn’t make any sense to me that unless we, we’re in a mode of forced deflation because of the way the policy that we’ve engaged in, allowing the banks, the banking systems to recapitalize without taking any hits for the housing bubble collapse. And until that happened, I mean, the only way to come back to growth, which means, you know, reutilizing some of the underutilized capital assets in the economy which is just at an incredibly high rate right now of underutilization, the only way to get that back is to unlock some of the capital that is, in effect, continuing to fund the housing bubble.

Because it’s, we’re allowing the banks to kind of pretend and extend and not recognize any losses. And that’s just making it, you know, if you look at it from that, that’s incompressible. It’s like trying to squeeze water. You know, and anything you do by way of policy is going to fail to produce growth until you solve that basic capital misallocation. And nobody is talking about fixing it.

Pethokoukis: Well, I mean I haven’t heard really anything, I mean the only bit of policy I’ve heard from Republicans about the banking system, whether it’s in Congress or one of the presidential contenders, is they don’t like Dodd Frank (phonetic sp.). And that’s where the argument begins and that’s where it ends. And I think there’s been a great reluctance to talk about any policies which could be perceived as anti-bank right after an election where banks began giving to Republicans.

Domenech: Yes.

Pethokoukis: I think there’s, and I tell you, they’re crazy if they’re going to count on that money, because I think that money is not going to be there for them in 2012.

Cianfrocca: Absolutely.

Pethokoukis: So, yes. You’ve got (unintelligible) I think on politicians. Just like the, like the, you know, the letting states go bankrupt issue which was starting, you know, which was starting to get a little traction on Capitol Hill. But then the banks said no, no, no, no. You know, you can’t do that and that issue just collapsed.

Domenech: Jim, let’s close –

Pethokoukis: Isn’t that how it happened?

Domenech: Let’s close with this, Jim. I think it’s interesting to see, and you asked me this question last week and so I’m going to ask it to you.

Do you think that this nomination on the Republican side is more attractive now, given the continued jobs numbers that we’re seeing, and do you think that that’s going to continue to be the case for the next couple of months?

Pethokoukis: Listen, if the economy over the next year and a half is going to be sub 3% GDP growth, slatish (phonetic sp.) than a slightly rising wages, and an 8% plus unemployment, man I think that’s absolutely a nomination worth having. And it doesn’t surprise me that, you know, all of a sudden all these names are coming back into the mix. You know, Rick Perry. And I’m still hearing Paul Ryan, you know, in the fall and some other names. So, I think it’s worth having. I think a lot of the people might run, and now really think it’s worth having. We’ll see what the economy does.

Jackson: Well Jim, thanks again for taking the time to come on. It’s always a pleasure having you here.

Pethokoukis: This is a ton of fun. I’ll be back whenever you want me.