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February 14, 2023

U.S.-China Relations


Clayton Dube photo
Clayton Dube | Director, USC U.S.-China Institute

Clayton Dube (USC U.S.-China Institute) joins Richard K. Green (USC Lusk Center for Real Estate) to discuss the condition of U.S.-China relations and the latest developments in China’s global influence on trade, supply chain issues, technology, and more. Dube highlights a challenge Chinese officials are watching closely in the coming years: stalling economic growth. To approach the “middle-income” problem, Dube notes the ways in which the government has both relaxed and tightened its grip on markets in an effort to continue the economy’s upward momentum.

Included in the discussion:

  • Security concerns between the U.S. and China
  • The important distinction between China’s total Gross Domestic Product (GDP) and GDP per capita
  • How China’s tech rivalry with the U.S. is evolving
  • Why Chinese firms have overpaid in key U.S. real estate transactions

Listen via podcast



- Okay, well, good morning, everyone. My name is Richard Green. I'm Director of the USC Lusk Center for Real Estate, and it's my pleasure to welcome you to this edition of "Lusk Perspectives," the webinar series that we started almost exactly two years and 11 months ago. We'll be coming up on our third anniversary, I think, on March 22nd. This is a child of the pandemic, because since we couldn't go outside, we needed to figure out how to amuse ourselves while we were staying inside, and so we started this webinar series. And we are delighted today to welcome to it an old favorite of the Lusk crowd, Clayton Dube. And the reason I posted a link, or I'm asking Chase to post a link, is it has his very distinguished bio. He runs the USC China-US Institute, knows a lot about China in general, China-US relations in particular, and I saw that he has something like 55 slides, so I don't wanna spend a lot of time on his bio. You can look up his myriad accomplishments if you click on the link. Clayton Dube, always great to welcome you back. Thanks for being with us today.

- Hi, Richard. Thank you so much for inviting me. It's a great opportunity to talk with you, to talk with the Lusk family. It's a large group, and I've always enjoyed meeting with it, both in-person and via Zoom, so thank you for this opportunity. I'm joining you today not from USC, but from Riverside County, which is, you know, this booming real estate zone with all sorts of warehouses and housing development projects going up. I've broadened our topic a little bit to talk about China and the world, but I will respond to the questions that people raise. And so let me go ahead and share my screen, if I might. And although I won't be able to see them, please go ahead and post questions to the chat, and when we get a moment, I'll be able to take a look at those and Richard can draw-

- Excuse me, Clayton.

- Sure?

- Not the chat. Please post them to the Q and A.

- Oh, thank you. So use the Q and A button on your Zoom screen to get access to this. So I'll be talking about China and the world broadly, but with particular attention to the rivalry that exists between China and the United States. But I wanted to begin with a Valentine, because today is Valentine's Day, and I wanted to bring you a Valentine that specifically goes out to Chinese-speaking people, but it comes from Africa, specifically from Rwanda. So you have this amazing set of performers. Shuaige Bobo is a fellow who learned Chinese in China, and has recruited other Chinese-speaking Rwandans to produce an incredible series of videos using Chinese folk songs, but also more contemporary Chinese pop. And so here's one very, very popular song from 2006 that has just been recorded in Rwanda and is a hit. Well, I would love to just let this play. This I pulled from Douyin, the original version of TikTok that is produced in China, and so these folks have developed a big following in China, singing, in this case, love songs, of very... And virtually every young Chinese can sing this song, and a lot of Chinese who are not so young can sing the song. And so just to demonstrate that, we have a version, a short few seconds, from Wang Jianlin, who is a famous in Southern California as the one-time owner of AMC. He's still currently the owner of Legendary Pictures, although he's trying to divest himself of that, and this is a real estate titan. And this is him at a performance in 2015 at their annual meeting. And so that's Wang Jianlin. As I said, at one time, he was the richest person- That's no longer the case, but you might keep that song in mind for your next business meeting. And what this is, it's a famous love song, and I extend it to you as a Valentine's gift. China sent other Valentine's gifts this month, and of course, everybody has been paying attention to this balloon extravaganza, and questions about whether or not there's now a balloon gap between the United States and China. This is the giant balloon that was shot down off the Carolina coast, and is now being investigated by the FBI, and you've had congressional hearings, including this fellow, the Assistant Secretary of Defense, talking about China is the pacing challenger, meaning we are building everything in response to and trying to anticipate what's going on with regard to China. Now, in China, you know, they've got companies that produce these things, and the United States, without missing a beat, just last Friday, announced six new Chinese companies on the entity list. These are companies that are not allowed to do business with American partners or to do business in America. So again, a big response. And on the Chinese side, they have reported that balloons intruded from the United States, intruded into China, 10 times during 2022. But this is the most famous case. The United States used balloons to surveil the Soviet Union, and in 1974, at that point, the Soviets had gotten... You know, they had already shot down a U-2 spy plane and were better at defending against this, but one of these balloons went across China and had dropped to an altitude of 10,000 feet, where it came under assault. And this is the hero, the Chinese pilot who managed to shoot the balloon down, and supposedly, this is a picture of the balloon sinking to the earth in Hubei province. So there's a lot of discussion in China about this, and the argument is, "Well, you've been doing it to us so long, why complain about us doing it to you?" And that is one of the realities. Here, you've got on the right side, a proposal to the Federal Communications Commission for permission to fly these giant balloons, and this is a Defense Department contractor. And so you've got these different entities. And of course, we use balloons to monitor the border that we share with Mexico, and so the Customs and Border Patrol, they've got their own balloon operation as well. So balloons, very much in the news. And so here are some of the places where those balloons are hanging out. But in all seriousness, and I do think that, obviously, national security is of great importance. I apologize, I was getting a Zoom call. We're all tied in now. The Chinese Communist Party, of course, has led China since 1949, and people sometimes are dismissive of the Party. They say, "Well, it's just a talk shop. They give a lot of pronouncements, and then people go off and do their own thing." And there's a certain truth to that. Chinese are incredibly independent-minded and do a wide variety of things on their own. And not every statement by the Communist Party is in fact implemented, is carried out. You'll see a couple of examples of that in just a moment. But just in 2021, the Party marked its 100th anniversary with a giant parade, celebrations, Xi Jinping wearing a Zhongshan jacket, which is what you wear when you're addressing a party gathering, as opposed to the usual suit. But I want to stress that it's important to pay attention to what the Party says, especially what a new leader, which Xi Jinping was in 2012, had to say. First about corruption. And some people said, "Well, every party leader talks about the need to wipe out corruption." Well, in Xi Jinping's case, he took down some very big tigers in the Chinese parlance, including one of his predecessors, in fact, somebody he was on the Standing Committee of the Politburo with, Zhou Yongkang, and other Politburo members, Bo Xilai, the Party Secretary of Chongqing Municipality, and Xu Caihou, who was the Vice Chair, after Xi Jinping, of the Central Military Commission. These are very big officers. And so that speaks to the effort. And so last year at this time, China broadcast this five-part documentary about the anti-corruption campaign, coloring it "Zero Tolerance." And so again, take Party pronouncements seriously, right? When Xi Jinping says, "We're going to carry these things out," it generally happens. So pay attention. Now they're going after soccer. Soccer is one of these areas they've tried to improve in over many, many decades, without success. This may not be the right test case for the anti-corruption campaign, although several noted worthies in the soccer program have been brought down already. But I turned to one of the first things that the Party under Xi Jinping took on. In addition to the anti-corruption campaign, the idea was to rework the economy. And so in 2013, they announced this new plan, and the press coverage honed in on emphasizing the market, on having the market send signals, but astute observers noted that, at the same time, they wanted the market to help allocate resources and to establish priorities, at the same time, they wanted to strengthen Party control over the overall economy and Party control within enterprises. And this is something that people didn't pay enough attention to in 2013, and is an ongoing effort. And so one of the ways that this was done is through inspections. Now, many of the inspections have been to root out corruption, but it's also been to see whether or not governance practices are changing, and whether or not the Party's structure within companies is moving forward. This very much continues. And although people have paid attention to the idea of a social credit system for your average citizen, the Party also set up a corporate social credit system for corporations. And in this, the initial study of this, carried out by a couple of scholars, found that in these large firms, those with strong political connections, so former government office holders, those people, those companies, get high scores. Were they overextended, highly leveraged? That didn't matter. That didn't matter in their social credit score. It also didn't matter who owned the company, whether or not the company was profitable, whether or not they had independent members of the board of directors... It was all about political connections. And so that, again, speaks to the centrality of the Party. Now, one of the things that we want to recognize is that China is an economic superpower, and so this chart gives us evidence of this. Now, everybody knows that China now has the second largest economy, that it has surpassed the European Union, it surpassed Japan many years ago, and it's second only to the United States. And this is incredibly important, because the economy throws off enough of a surplus that the Chinese government and that Chinese companies can strategically invest that. Now, on a per capita basis, China lags far beyond the other major units, be they the United States, Japan or the European Union, and so that's important to keep in mind. Although the cities, Beijing, Shanghai, you know, Hangzhou, are ultra-modern, and you have lifestyles equivalent to any seen in the West, many people, hundreds of millions of people in China, live on the brink of subsistence. Now, China argues that it's eliminated extreme poverty, but there's a whole lot of generic poverty still to go around. China is large, it's diverse, and it's important to keep that in mind. So even if China were to surpass the United States in terms of gross domestic product, you know, on a per capita basis, it still won't be close. But that per capita improvement means a lot to your average Chinese. Your average Chinese has seen her or his life improve, so much that they might be buying cars, might be buying houses, all of this kind of thing. This is something that people absolutely are aware of. And what's made this possible? China's economic rise. If you go back 60 years to the primary trading partners for the United States, for Britain, for Germany, for France, you can see this, and you've got the Soviet Union off in the distance, with much smaller economies connected to it. But if we move forward to 1990, we can see, of course, the rise of Japan. Japan starts to have its big network. We see Germany and France still looming very large, the United States is still the primary trading partner in 1990 with many countries, including those in Latin America, but China's starting to pop up. You've got places like Cuba, you've got places in Asia where China, in 1990, was already a principle trading partner. But skip forward to 2020, and you can see now the constellation. So you see China with many countries. Over 100 countries have China as their principle trading partner. That doesn't mean they don't do business with the United States, it's just that China now is their biggest partner. The United States still has many as a primary trading connector, as does Germany and to a lesser extent, France. This chart, this animation, shows the evolution of countries having their primary trading alliance with either China or the United States. So the blue represents the United States, and at the start of this, you see a lot more blue, but by the end of it, by 2018, you see that China has become the number one trading partner for many, many places, including in the Western Hemisphere. Now, what's made that possible? What's made it possible is partly the rise of large Chinese firms, and today, you've got 130 Chinese firms in the Fortune Global 500. But part of that story is the rise of private companies, and in 2011, only 7% of those companies that made the Fortune Global 500 were privately-owned, but by 2021, you're looking at a fourth of all of those giant Chinese companies coming from the private sector, and this is an important point that we want to dwell on a little bit. I could have chosen a whole lot more in terms of logos to share, and some of these are familiar with everybody. Everybody knows about Alibaba. Alibaba, 75%, or I'm sorry, 80% of its revenues come from China, so it's still predominantly a domestic company. Tencent, which is by far the largest company by market capitalization, 75% of its revenues come from China, even though it owns Riot Games, it's a major international video game company, it still relies on the Chinese market. Now, there are exceptions to this. Lenovo and Huawei, they get a majority of their funds, their revenues, from abroad. But you see auto companies, Geely, which owns Volvo and is producing in Brazil and elsewhere, and you've also got... BYD is not on the screen, but other consumer products companies represented here. Now, these private enterprises are not just numerous, they are the biggest employer. If you look at the red line in the chart on the right, what you see is that state-owned enterprises, employment's pretty flat, and many of these largest companies, they are capital-intensive, oil companies, telecommunications firms, those kinds of companies, but they don't employ nearly as many as those in the private sector that are producing consumer durables, as well as, you know, clothing and other items, delivering services. In the private sector, that's where the jobs, and a lot of the energy and profits, are being produced. But with this push to embed the Party throughout the economy, including in the private sector, you have private companies who are joining with the state-owned companies to what? To change their bylaws, so that they have dual appointments. So you may have a CEO who's also the Party Chair, or the chairman of the board, who is chosen by the Party Committee and serves as the chairman, so as the Party Secretary for the company. You see this going on. It's changing what's going on, not just on the state sector, but even in the large companies in the private sector. And plenty of pictures to illustrate-

- Clayton?

- Yes?

- May I ask you a question at this point?

- Sure.

- And if you wanna postpone answering it, that's fine, but I... As I'm watching this stuff, I'm thinking about... I'm trying to remember the name of the economist who... I think it was Daron Acemoglu, who came up with the term middle-income country disease, and it's about, you know, countries hit a per capita GDP in the mid-teens somewhere, and they stopped growing. And you know, there are lots of examples of this. Brazil would be one, Argentina would be one, actually, Latin Americas sort of chock full of them, but there are others as well. The exceptions have been places like Japan and Taiwan and South Korea that managed to break through, you know, pass through those middle-income income levels, and become genuinely rich countries. And Acemoglu and others, in fact, I am sure it was him, they say it's all about institutions that allow you to get from that second level to the top level in the per capita GDP tables. And it sounds like what you're talking about here are the development of institutions that are not amenable to that movement from the second tier to the first tier. And I'm not talking about gross size of the economy, I mean, if you're from a living standard standpoint. And if you wanna postpone answering or commenting, that's fine, but I just wanted to get that in there, as I'm listening you talk to party officials being insinuated in corporations, seems like the sort of an example of a bad institutional structure that people talk about.

- I would agree that it's not the choice to increase efficiency, it's not the choice to do a lot of these things. Now, the Party has proven itself quite adaptable. It's, you know, been in power now since 1949, it weathered the civil war, it's weathered all kinds of things. So it's proven adaptable, but it's proven adaptable with one objective, maintaining control. And many people argue that this fixation on control and a paranoia that any kind of loss of control will lead to a complete collapse, that that leads to this obsession with micromanaging and intruding into every space, where in fact, China's economic dynamism in the reform period since late 1978, has come from releasing people from those kinds of controls. And so it remains to be seen whether or not Xi Jinping's economic strategy of reasserting Party dominance has... You know, has the capacity to help China evade the middle-income trap. Most countries haven't. They've gotten stuck in the middle-income trap, especially in Latin America, but elsewhere as well. Those that have escaped, many of them, you know, of the 13 or so in the 1960s that have escaped, used the East Asian development model. Okay, pioneered by Japan, but adopted in Korea, Taiwan and some other places. China wants that pathway but also wants to hold on, and so some in China see Singapore, which is ostensibly a democracy, but functions as a one-party state, which is clean, it's not riddled with corruption and is high tech and sophisticated business center, but Singapore is tiny. China is quite, quite different. Now, we'll come to the Chinese effort to escape the middle-income trap in just a couple of slides, so hang in there a moment. And one of the things that China has prospered from, in the reform period, is the welcoming in, first, of foreign capital. And today, China has plenty of capital. In fact, it is one of the biggest creditors to the United States. China has tons of capital, but it still needs the managerial expertise, it still needs the market connections, it still needs the technological innovation. And so it still wants FDI. And official government data suggests, you know, levels of FDI that have continued to rise and you know, that that's continued, but it's a bit of a fiction, because if you look at non-governmental sources, Bloomberg M&A, fDi Markets and things, you're not seeing foreigners invest in the same way. Most of the foreign investment today in China is reinvestment, companies having difficulty repatriating profits, foreign companies in China, and choosing to expand production. Partly, it makes good business sense. The Chinese economy is growing, Chinese consumers are buying all kinds of stuff, and so it makes sense, most of the companies in China are in China to take advantage of that Chinese market. But at the same token, it's also, you know, structured in such a way that you can't get your money out quite so easily. Also, the official government FDI counts round-trip money, money that Chinese companies move out of China, into Hong Kong, and then bring back into China. And this kind of round-tripping winds up counting as FDI, although it's clearly not foreign indirect investment, it's just money that digitally transferred through Hong Kong. So a real issue. So the Chinese government has new policies, it's opened new sectors. The financial sector is now more open than it has been, has invited in foreign companies, because it's worried exactly about what Richard just mentioned, getting frozen in place, and wanting to escape the middle-income trap by increasing productivity. It's all about increasing productivity, because only with that can you raise wages and only with that can you raise living standards. And so China's very aware of this, and is trying desperately to break through on productivity so as to manage this. McKinsey did a study a couple of years ago that I would draw your attention to, and I've just put up some numbers that came from that study. And you can see it's a little bit older than some of the numbers that I've offered, but McKinsey's point was, China is enormous, and although China is very much part of the global economy, it's the workshop for the world after all, you know, the United States and a bunch of other countries depend on products made in China, and China's participating in international institutions, it's very much a part of the world, but if you look economically, that as it's grown, it's become even less connected in some respects. As China has grown, more of the money stays in China, more of the corporate energy is there. And so you see that China is not punching even at its weight, let alone above its weight. And so it has not succeeded in the film market. Domestically, it's got big, big films, but they don't travel, for the most part. And so we see a lot of instances where China has grown, you know, as the country has grown, it actually hasn't expanded. Now, many American companies also don't go abroad, and so that is a factor. Now, many people are aware of some of the challenges that China faces, and I've been part of the Lusk program for a few years, and so I always highlight demography, and now, everybody is sick of demography, because of the coverage that China may have actually shrunk a little bit last year, for the first time in a very, very long time. But this was inevitable. It has an aging population, partly that has speeded up as a result of the family planning program that the Party state was slowed to abandon, and only got around to it, you know, a half-dozen years ago, and that demography takes time to change these patterns, and so there's a lot of factors. Now, one of the issues is that China's working age population probably peaked around 2000, maybe a little bit after that, but is shrinking. Now, it's still large, and in China, the official retirement age for men is 60, so that's what we're using here, but you can see that that's going to be a challenge. How are you going to provide for the rising numbers of elderly? And you can see that now, if you use the kind of American standard of 65, China has 18% of its population over age 65, almost a doubling of of that in the decade. Will it be robots that care for China's elderly, as demonstrated in this picture from Shanghai? I'm not counting on that, and neither, really, is China, but they definitely need some productivity breakthroughs to not just care for the elderly, but to have an economy that can afford to care for this rapidly-aging population. And China, I would draw your attention to "Invisible China," a book by a Stanford economist that we featured, and you can find on our website, that looks at the human capital issue, and the fact that, in fact, low levels of nutrition in rural China may be a big handicap as China looks to move forward, that it diminishes mental development for too many. But China's counting on productivity, we've already said that, that that's the way out of the middle-income trap. And I didn't include it, but if you look at the United States, we had rapid productivity advance from the end of World War II, until the early 1970s, when the bottom fell out of productivity. And that's when living standards rose dramatically. China, here, it's got these very advanced factories turning out electric vehicles in southern China, the Xpeng factory, but a lot more has to be done to increase the productivity of workers, to increase energy efficiency, to reduce the environmental hit that current modes of production impose. Not everybody's on board with this. And so Wuhan, which of course, is famous as the epicenter of the pandemic, but just a couple weeks ago, we have protests of retirees who are complaining about having their health insurance benefits cut, and they were cut dramatically, and so people took to the streets to push back on that. Elsewhere, you've had pushback against pensions. Now, again, China would like to raise the retirement age, which is pretty low by Western standards. The average retirement age in OECD countries is 64, and in China, of course, we've got men and women retiring much earlier. So the average Chinese retirement age is 10 years before. And this is true even though life expectancy in China is now almost on a par with the more developed countries. But people like this fellow, he's not getting a pension, he's gonna work until he drops, and that is a big issue, because not everybody's included in the pension scheme and these pension schemes are underfunded, so you've got health insurance challenges. Now, all this sounds very familiar for Americans. Another issue for China, as it tries to embrace technology and make these kinds of breakthroughs, is the tech rivalry with the United States, and American and other countries' suspicions of China's technological prowess. Huawei and ZTE, quite famously, have come under scrutiny beginning in 2011, and you had a House report basically say, "We can't trust having Huawei or ZTE equipment in our telecommunication systems. We don't care that it may be more cost effective to use them because the pricing is better We can't take the security risk." And so these discussions have happened. During the Trump administration, of course, we had some famous cases about this, but one of the things that we wanted to stress is that this is still an issue, in fact, quite famously. And so we were worried, we, meaning generically the West, was worried about Huawei spying on us, at the same time we were busy spying on Huawei. The NSA broke into Huawei's systems to make sure that it could, but also to have a look around, and the American that Huawei had in place at the time for public relations, he said, "Yeah, this is exactly what you said we would do, and you're doing it to us." And so this, I'm not... I'm not trying to suggest equivalence, but there's a whole lot of spying going on in every direction. Now, it's not just the United States. We mobilized the so-called Five Eyes and the Western Alliance, so the federal government in Australia has banned Huawei from 5G systems, and Australia has been offering its advice to India not to use Huawei, and Germany has considered, but did not embrace a Huawei ban in their systems. Britain has Huawei fully integrated, and it's got a special lab which tested this technology and things like that, but has followed along, and is now planning to withdraw. Of course, the big issue with Huawei more recently was the transfer of American technology, that Huawei promised it would not do, to companies on this not-friendly list that the United States has, predominantly North Korea and Iran, but other places too, and Huawei was found to have transferred this technology. It could have been Qualcomm technology, could be the Android operating system, any number of technologies that Huawei signed an agreement not to transfer to these so-called pariah regimes. The daughter of the founder of Huawei, Meng Wanzhou, transiting Vancouver, is arrested in 2018. Now, she's placed under house arrest, lived in a multimillion-dollar mansion, you know, ordered in pizza, went out for Pilates and did all those kinds of things. The Chinese government was outraged, and struck back with hostage diplomacy, arresting these two Michaels, Michael Kovrig, a former diplomat, and Michael Spavor, who was running a tour business, and holding them, essentially, not in million-dollar facilities, but in prisons, and holding them as hostages. After 18 months, they actually put 'em on trial and convicted them. Finally, when a plea deal was worked out with Meng Wanzhou, the Two Michaels were allowed to return to Canada. And so these tensions remain, and so this tech rivalry. That said, American businesses are doing well in China. They worry about the tensions, they worry that the tensions are going to poison their opportunities in China. They worry about the limitations. They of course, don't want to run afoul of either government, right? They're trying to make this work. So you've got a lot going on. Now, if you look at the surveys of these companies though, you'll see that most of the companies' revenues have continued to climb, and most of the companies are profitable. They are in China for the money. Some of course, export from China. We know this because we see American branded products in Target and Walmart and everywhere else that, although it may say Black+Decker on it, it was manufactured in China. And so they're exporting, definitely taking advantage of lower costs, although labor costs have risen considerably, as the labor force has shrunk in China. But these companies are in China for China, and most are not thinking about leaving, but they're also not putting new money from the outside in, they are reinvesting profits. Now, you have some in America that are worried about China buying up America. Well, a Chinese company, Lenovo, bought IBM's PC division late in 2005. Later it bought the server division. It's done that. It's one of the leading PC companies, computer companies, in the world. Lenovo later bought Motorola from Google, Motorola, of course, a cellphone radio company. In 2013, a Chinese conglomerate bought Smithfield, this leading American producer of pork and other packaged meats, and some people were worried about that. Buying up America. Some people in the real estate business had probably paid attention as states like Texas and some other places consider banning Chinese citizens from buying single-family homes., not to mention farms and other things. Missouri talked about banning Chinese purchases of farmland and and issues like this. And so America may be closing down, and this is a great concern. Of course, if you have an asset and you wanna sell it, you want as many potential buyers as possible. But also, what does it mean that somebody who wants to have a place in the United States can't have it? So we can talk more about that. Now, Huawei has suffered as a consequence of these sanctions. It's still profitable. It's making a lot of money within China, it's still big in Africa and some other places, but it's run into some troubles. And the United States, under the Biden administration, is further increasing some of these tech sanctions. So it's a big issue. How about Chinese investment in the United States? We already talked about Smithfield and things like that. We talked about Wanda... It peaks in 2016 and it's fallen off. And so for Chinese companies, they still wanna buy biotech, they want all kinds of opportunities. There's a wind farm that somebody wants to set up in Texas. It happens to be close to a military base, and so there's worries about security. So there's a lot of different issues. But are we closing down to Chinese investment? Now, that boom in 2015, 2016, that was ridiculous speculation, and involved a lot of disastrous investments in downtown LA and other places, ut we can talk more about that, maybe, during the Q and A. Well, you have a Chinese company from Shenzhen, you know, it's most famous investor is Warren Buffett, although he's begun to divest himself of BYD Holdings, and famous for their battery technology, turning out these different enterprises in Lancaster, in Southern California. They have a a bus factory turning out electric buses, which are on the streets in Seattle, Long Beach and some other places. Some of you may even remember this commercial: New energy will create a new future.

- [Leonardo] New energy can give us a new future. In only a few steps, it can transport us anywhere.

- [Announcer] It has to.

- [Leonardo] Let us reconnect with nature, fill our lungs with clean air instead of pollution. Let us see beauty more clearly.

- Okay, so Leonardo DiCaprio doing this commercial for BYD, emphasizing that it's the environmentally sustainable automobile choice for you and others. Again, it's some of these problem projects have not yielded success, and we could talk about that at some length, but American companies have done well in China. General Electric selling locomotive engines. You've got Buick doing big business in China, you've got also Procter and Gamble, selling all kinds of personal care products. So many American companies have succeeded. But how about real estate? Real estate dominates, and I'm gonna try and wrap things up very quickly here, so we have time for questions, but real estate dominates. You know, obviously Lusk Center focused, but also, the discussion of the Chinese economy. And you see major builders who have run into problems because they've overbuilt. China has rapidly urbanized. When I first lived in China in the early 1980s, 20% of the people lived in cities. Today, it's well over 60%, well over two thirds of Chinese now live in cities, but they're still building. And so here's the question, of how to do it and how to finance it? And many companies got in the habit, you know, which they skated on the edge of legality in China, and they took money from people for properties that weren't finished, and used that to start other projects, and use that as collateral to get money for these other projects. And you've had a lot of building, because the market's been there, people have chosen to invest in real estate. They trust it more than almost any other kind of asset that you might buy. And that's led to rampant speculation, and incredibly high prices, where the sales prices in medium-sized cities, you know, dwarf what you see in the largest OECD cities. It's a giant issue. And the outside world is also on the hook, because a lot of foreign money has gone into bonds held by Evergrande and other giant Chinese builders. And you know, you can see, you know, that yes, the very rich owned most of the secondary housing, the non-primary housing, but a lot of people in China own more than one property. Partly, you want to buy as soon as you can, because if you have a son, the son's gonna need a house in order to get married. And you can see the range of Chinese cities and you know, at one end, may be the ratio of the median home price and the median annual income is manageable, but you get to Beijing, you get to Shenzhen, it's astronomical. Now, do Chinese love their houses? Absolutely, absolutely! So you have the nail house phenomena, and this particular one, I just find fascinating. So these people didn't get the price they wanted for their house, so they would not sell to the developer. The developer builds a road, they happen to be in the middle of the road, and then, you build your condominiums right next to it. And so again, you know, location, location, location, and people have a definite sense of this. Now, in Shanghai, a place that I've spent a lot of time, many people received compensation for their outdated multifamily homes in central Shanghai, but the compensation didn't allow them to buy into the condos that went into the space that they previously occupied. They had to go to the distant suburbs in order to do it. Many were happy to do it, because the housing was better, maybe they were retired, they weren't that worried about being in the center of it, but definitely, the compensation has not matched up, and so that's one of the issues, and you have land protests. Now, in terms of technological breakthroughs, the Chinese government's invested heavily in making these technological breakthroughs. They've created their GPS alternate, BeiDou, that many Chinese companies use, as well as some companies outside of China. China's desperate to develop its own intellectual property, because it relies on imported intellectual property from the United States, from Japan, from Germany. And that's why these tech sanctions have hit, is China needs this. And so they've invested heavily, but just investing is not enough. And you've seen that, you know, on the semiconductor front, where they've thrown hundreds of billions of dollars into it, without developing a competitor for Taiwan Semiconductor. I'm going to go ahead and stop, so that we have some time for questions, but I wanted to end with a couple of slides just showing who China's big trade partners are. Of course, the United States, Canada, North America looms large. Europe is bigger. Japan looms very large in Asia. But you can see, as you drill down, that China, a lot of its investment is trying to meet its energy needs, because although it's the largest producer of energy, it is by far the largest consumer of energy, and that growth in the consumption is a big issue. So it has to import oil, and so you can see that the consumption of oil has just shot up, production remaining fairly flat. China wants to get better at fracking, so that it can do more with the oil fields that it has, but that's a technological step. We can talk about what that means. One of the things that means is that you have to do business with Russia. Because of sanctions, China stopped buying a lot of Iranian oil. It still gets half of its oil from the Middle East, and in 2020, 2021, it cut back on importing American oil, but it's picked that back up. But the big beneficiary, right now, of the invasion of Ukraine, the lower prices that China is paying for Russian oil. China is the beneficiary of that. Richard, I'm just gonna go ahead and stop sharing. I have a ton more that we could talk about, but I wanna respond, specifically on the American front, but to any questions that you and others might have about China's place in the world and about its relationship with the United States.

- So before I ask you more questions, I'm just gonna remind the audience, they may place questions in the Q and A. We're gonna give people like 30 seconds to ask, and otherwise, I'm just gonna take advantage.

- Yeah, and you made a really valuable point about the overpayment for the commercial real estate. They've also overpaid on residential real estate, single-family houses too, and that's led to-

- Yeah, our data are not as good on that, so I can't... But like, when you look at what they paid for the Waldorf Astoria... I mean, I remember doing it as an exercise with my class, and I think they spent, I don't know, $2.5 billion for it or something like that, and we tried as a group to think of some way, could you get, with a redevelopment plan, to $2.5 billion and what we... You know, sort of the ultimate fixer upper, right? Or what they call value add. And we just, we couldn't get close. And this is not... I mean, we figured the property was worth, I don't know, 40% of what they paid for it, which is still a lot, but... So question, and maybe you have some insights into this and maybe you don't, but you... I mean, Greenland at least did finish Metropolis. The Oceanwide project is still staying trusting.

- On and off again, yeah.

- Any thoughts about, will China give up on that, and let... They're in default on a lot of loans. There are mechanics liens against the Oceanwide property, but what's... 'Cause this actually matters for the environment in downtown Los Angeles, which is, it really has junked it up. And not Metropolis, at least they finished. I shouldn't... But I know they've lost a lot of money on Metropolis. I mean, what does this mean, if anything, for the evolution of downtown Los Angeles?

- Well, you know more about downtown Los Angeles than I do. But, as somebody who frequents the area, and is kind of aware of these big Chinese investments, the Greenland folks realized that they overpaid and that they also didn't know about building things in the United States. They had construction in Shanghai down pat. That's where Greenland comes from. They were ready to do that. Oceanwide, same story in Beijing. But they weren't ready for how to do business here, and you've wound up with city council corruption and other things connected to this. And the Greenland officials will say, "Yeah, we should have started small and learned." And instead, you came in, you know, overpaid for the real estate, probably, to begin with, and then had exaggerated ideas about this demand for center city properties. And they said, "Well, what we should have done is build out in the San Gabriel Valley, build like the Sheraton and Hilton Hotels on Valley Boulevard. We should have done those things." So there's definitely been some learning going on. And the hotels that Shenzhen One World bought in downtown LA and out at Universal City, you know, they've managed that a little bit better, redeveloping some of those properties. But I think that it is a big challenge, because of the mechanics liens and these other things, making this work and finishing 'em, because until the projects are finished... And as you say Metropolis, at least they opened it up. Oceanwide is just this big hole, you know? And it's right at the center across from Staples. So these are big challenges. Up in San Francisco, they've been able to divest, and perhaps that might be possible, that somebody will come in and see hope, but a lot of money has already been lost. Much more money, I suspect, will have to be written off before those-

- Well, that's... That's just it. I mean, sunk cost fallacy, right? Is the money... But if somebody could buy the note at a discount, you could probably come in and finish it at this point.

- Well, that's-

- Right?

- If you can get a good enough deal. And we saw that, we had that with... I want to call it Wilshire 1000, but it may be Wilshire 1100. It's got a big Chase moniker on the top of it. Now it's this kind of strange building to the west of the 110 Freeway, and that building sat virtually empty for a quarter century. You know, that was built, initially, with Taiwan money, and it used to have World Chinese Television at the top of it. And it sat unfinished for decades, before finally, it was sold at a price that somebody was able to come in and open it up. So something like that has to happen. Now, I hope it's not gonna take a quarter century. It's already taken quite a few years.

- So Brian Jones has a sort of follow-up foundational question, which is, "Why, when they came, why real estate, and why did they overpay for it?"

- Why overpay? Again, not... You know, part of it is the marquee factor, and you know, you talk about the Waldorf Astoria, you wanna be able to brag about that, and you wanna say, "Well, we own this." And so the idea is that it's gonna reflect glory throughout the company. And you know, Anbang Insurance had no business buying any of these properties to begin with, but they did. And so part of it was the prestige factor, the bragging rights back at home, that you're at the center of LA, you are going to remake the capitalist world, okay? That China's flag will fly high. You have a lot of that, a lot of ego, hubris, get mixed up in it. And then, just insufficient knowledge of the market and what it takes to actually build something.

- You know, I have to say that the ego driving decisions is not a uniquely Chinese phenomenon. One of my favorite examples of such a thing is the Principal Life Insurance Company headquartered in Des Moines, Iowa, has a 37-story office tower. Land is free in Des Moines! There is nobody who ever built a tower in Des Moines.

- You could, you could have built a four-story stadium-sized operation, and met all of your needs.

- So just last and quick one, 'cause we have to go in about two minutes, but you know, you talked about, and you demonstrated, how much trade continues to happen, and how much the economic activities of China and the US continue to intersect. Do you think the whole idea of reshoring is overdone, and is not gonna be that big a deal, or are we gonna see fundamental changes over the next couple of years?

- Well, I think, definitely, on these very sensitive technologies, the highest level of semiconductors, you see that kind of pressure, building plants in Arizona, you know, Intel's there, and the US government is willing to subsidize this, state governments are willing to subsidize it, and to get, you know, bragging rights of bringing this stuff home. But I don't see a lot of factories coming back. And you know, think about, again, the American workforce. Where are you going to open these particular factories, if you need a particular kind of worker? And so I think that there's some big issues with this. You will see some businesses leaving China, but that doesn't mean they're necessarily coming to the United States. They may be going... A lot of Taiwan companies have moved their new investment to Vietnam. And so you're seeing a lot more of that.

- I remember when the Multifiber Arrangement expired, which basically said China had a limit on how much textiles could produce, and this was a multilateral agreement. And Bangladesh and Vietnam were very fearful that they would get blown out of the water. And then, in the end, their market share increased, because as China's gotten richer, it's becoming less competitive as a textile manufacturer. That has nothing to do with geopolitics. That's just, you know, manufacturers are going for the lowest cost place. So we are at the top of the hour. iI have to note with some amusement that we have anonymous attendee asking what you think of Xi Jinping? I'm gonna hold that question for you for the next time you join us. And Clayton Dube, it's always such a pleasure. I always get so much out of an hour with you. Thank you for being with us today.

- Thank you, Richard. I look forward to that next hour. Take care, okay?