Top Economist The Unthinkable Is About To Happen To Chinas Economy

TITLE: Top Economist: The Unthinkable Is About to Happen to China’s Economy CHANNEL: ProfSteveKeen DATE: 2026-05-03 ---TRANSCRIPT--- China’s focused on capital formation. A huge part of their economy goes into investment rather than consumption. The rate of growth of the wages has kept up with the rate of growth of the economy, unlike the American economy. Steve Keane, the economist who warned about the 2008 crash, is back with a bold take on China. But when his views are challenged, this calm discussion turns into heated clash. Is China’s system misunderstood genius or a ticking time bomb? The policies that the Chinese have taken out are far more effective than what’s been done in Europe. You are falling into the same trap that neocclassical economists make about Western economies. I hope you put this up on YouTube.

I will. I hope you put it up good. We’re going to be in conflict and I’m sick and tired of people thinking they know what they’re talking about when they’re not understanding the accounting. This is Dom Tweed who’s an ex- studentent of mine from Kingston University. So Dom discovered my work on economics when he was a school student and then came to Kingston to meet me when I got the job in Kingston. enrolled in and did an undergraduate degree at Kingston, graduated and has now moved to China. He’s visiting me in Amsterdam right now. So I thought in some senses, who better to comment on this alleged debate that I had with Ken Cow here. Let’s have a roll. Let’s let’s have a listen to him here. So here we go. What began as I thought was going to be a debate about China and turned into my opinion was it a herang about China at which point I left. So let’s have a listen. Mr. King, thank you for being here. You’re welcome. I recently watched one of your interviews where you spoke very positively about China’s economic model. I think China’s rise over the past 40 years has been impressive. There’s no doubt about it. But I think where we may differ is is this growth sustainable? whether this engine is now running into structural uh limits. Capital formation as the core engine of China’s growth, high investment rate in infrastructure buildout. I agree that capital formation matters, but capital formation only produces long-term productivity gains when investors have confidence that their assets are protected. only 40 to 45% are classified as state-owned enterprise. But anyone who knows the Chinese political economic situation knows that if the Chinese Communist Party wants the intelligence from a private firm, if they want the private firm to uh shift their direction in certain strategic sector, the CCP has the ultimate say in terms of Yeah. Okay. But that’s not saying that’s Yes. Yes, that’s correct. Okay. But that’s not saying it’s 100% socially uh centrally planned and centrally owned. All the major private firms are subject to sudden regulatory intervention like what happened in 2021, right? We have seen abrupt crackdowns from Chinese government in tech. Uh look at what happened to Jack and the sudden cancellation of the aunt IPO. We’ve seen the crackdown in private education, the property developers just wiping out hundreds of billions in market value almost overnight. How do they confident about investing in China? Can high capital formation sustain productivity growth in a Chinese system where private property protection is conditional rather than institutionalized or protected? I’d rather have I’d rather have the government in control than the finance sector. And I think this is the major dis difference between America and China. Ken made a really interesting point here. If this was a normal market capitalist economy, the capital flight from China would undermine investment. In a normal capitalist economy, if the investors aren’t confident, you don’t get investment. You don’t get capital formation. Of course, China is not a normal capitalist economy. You the Chinese government has enormous influence over the state banks and how the state banks invest in the economy, particularly the local officials. So the local officials can tell a state bank, give a loan to this special project or this priority project or this project that the leadership has designated as a priority sector for the economy and direct investment so that even though you’ve got massive private sector capital flight, it doesn’t prevent a very high investment rate. What the capital flight does do is push down the value of the yuan on the international markets and keep Chinese exports cheap and competitive. So, China’s got a system where you’ve got massive capital flight that makes its exports cheap because it keeps the currency cheap, but it doesn’t prevent a really high investment rate. This finance situation is you basically end up having extreme wealth deciding what your development is going to be. And it often tends to be they focus focus upon paper uh rather than physical productivity. Uh it’s all speculative gains, the prices of assets and stuff. That’s what dominates the direction the economy goes in. It depends on how well the government is run. Okay. But it’s certainly better than letting what Markx once called the roving cavaliers of credit determine the direction in which your economy goes. And Kane’s also made the remark uh which was very pertinent to the 1930s that if the development of an economy is the byproduct of the activities of a casino, the job is likely to be poorly done. So you you there’s no such thing as a market economy with no constraints. There’s no such thing as a market economy without a government. China with a government sector that has some responsiveness to the to the market sector and is not as unintelligent by any means is what happens with Russia is a very different situation to letting the finance sector uh rip and you end up in the speculative world of the American economy rather than the productive basis of the Chinese economy. Well, there’s so much to unpack here, but first of all, about this financialization of American economy, that is the dream of the Chinese leadership. In one of your interviews, uh you linked the reserve currency status of the US dollar to the hollowing out of American manufacturing. You basically make the argument that reserve currency works against the uh existing empire. But that’s what Chinese dream about. Just recently, a couple weeks ago, the Chinese leader Xiinping publicly called for the Chinese yuan to be the next reserve currency. I think that would be a huge mistake. Okay, so I’m not saying the Chinese can’t make mistakes. One of the but the points of that video was to say that being the reserve currency is not a spoil of being the empire. It’s a spoiler of the empire. And this is a mistake which has been made by all previous countries. Extremely big mistake to become the reserve currency. I hope that’s just a bit of, you know, I haven’t heard the actual speech, but I hope that’s more um strutting than it is an actual objective. It has been China’s consistent policy since the 2008 financial crisis to internationalize UN and push UN into the reserve currency. And that’s one reason I’ve argued for a different system which you’re talking about with that video where there isn’t we don’t use a national currency for international trade. So I hope there are some Chinese officials listening to this saying that uh you know in my perspective I’m quite supportive of what China’s done thus far. Um since 2008 Chinese currency has been under some downward pressure. So you’ve got two forces. You’ve got China’s massive trade um balance, massive trade surplus pushing the currency up. But you’ve also got the middle classes trying to get their money out. That pushes the currency down. In 2008, China’s exports fell. I think about 40% off the top of my head. 46%. Yeah. But they never started to grow again at the rate they did before. And so to conserve the dollars, to conserve their foreign currency reserves, China is probably trying to push internationalization of the UN to settle some of their transactions in Yuan and Rimi. Yeah. To to avoid using precious foreign currency reserves. Yeah. What they’re trying to get their money out of China into which countries is into well in many forms. The first one that you often see is they want to put their money in human capital in their in their children. So they want to send their children to America, to Australia, to Britain to get university degrees and possibly even work abroad. So they want to send their children abroad. Then they want to buy apartments abroad. They want to go on holidays abroad. That there are many ways in which they want to move their capital out of China. And that’s a big cause, probably the main cause of China’s massive trade surplus because that pushes down the value of the remimi and forces China to run a massive trade surplus to compensate for the middle class that’s trying to get their money out of the country. Okay. You’re giving Chinese leadership more credit than they deserve. You think? Well, listen, I I have seen plenty of international leaderships, okay? And of the lot of them, I’ve seen Chinese comes out well and truly ahead and taking care of its own people. The extent to which the American capitalists, the top class, have screwed the American working class, uh, is very different to what China’s been doing. The policies the Chinese have taken out are far more effective than what’s been done in Europe. So, I’m sorry, we’re going to have a strong disagreement over this. You can continue making a case. Let’s see where we go. Well, if that’s weted your appetite to have a realistic approach to economics, then join me and learn realistic economics through stevekain.com. You can use my ravel software that you’ve seen me using in this video. You can talk to me and ask me questions. It’s a free book bundle that’s available just this week. To apply, go to stvekane.com or scan the QR code. So, I think this is a result of the Chinese policymaking process. The big difference between China and the West in how we do policy is that China experiments. Take the high-speed trains. Yeah, China put out an announcement I think around 2007, we want to improve the trains that tell the local government. Um, Shanghai built the mag lev, Beijing built a conventional highspeed rail lines. Lots of local governments upgraded their existing rail lines. And then Beijing looked at those responses and said, “We want conventional highspeed rail. Mlev is too expensive and difficult. We’re going to go with conventional highspeed rail.” So they let local governments experiment with policy before they roll out policy nationally. And so you have very entrepreneurial local governments who test out ideas which are often disasters frankly and then the local the central government can go and shut those down and the good ideas can be escalated to the whole country. Okay. And you’ve got a similar you’ve seen this in the UK with the so-called highspeed rail which is supposed to go up to Manchester initially. And how long have they been talking about building that line now? It’s what 15 20 years. 15 20 years. It started around a similar time when China started building its network. Yeah. And they haven’t even finished even one yet. Yes. They haven’t even finished the section to Birmingham yet. Bit of nuance. I don’t completely disagree. Sorry mate, but you started the lack of nuance. Okay, here you give me a nuance case. I’ll give you a nuance argument back. But my nuance take about the Chinese government uh lifting the people out of poverty, giving them a good life is that you’re focusing on the pre-shiinping era. You’re basically talking about the Den Xiaoing reform era basically from 1978 to roughly 2012. During that period, China focused on economic growth. Everything revolve economic growth. They have great foreign relations. The the Den Xiaoing famous saying like hide your uh uh true strengths and bite your time. And so they got into WTO, the export boom. And I admit uh millions of Chinese benefited from that boom. What I have a problem with is this general characterization that Chinese government is smart. What is happening pre-enhoing during the Maoong era that is part of the Chinese government. Now listen listen we’re going to have a this is going to be an argument not a dispate obviously uh I was in China in ’ 8182 and I saw the consequences actually saw and I was a critic of it and that is that you had a totally centralized system which had everybody terrorized so you could never admit what you actually felt the same sort of story as Russia and most of Eastern Europe as well just because China grows so fast in the past we predict that China will continue this trajectory indefinitely you know naive about actually happening in China today. The China today is radically different from China 15 years ago. It’s a it’s it’s completely different China. I would disagree with that. I reform and opening up was obviously a brilliant policy, but it created problems that had to be dealt with later. Reform and opening up created massive heavy industry. It created pollution, environmental pollution. Someone had to come in and clean that up. Xiinping is cleaning that up. It created a massive housing bubble. The Chinese government deliberately kickstarted a housing bubble after 2008 to replace the employment that they’d lost because of the loss of exports. By the time Xiinping was coming into power, they’d built enough apartment. They got to the point where they built too many. They got to the point of saturation in the market. They needed to stop building and so Xiinping essentially turned off the taps for on financing for developers. And also like the pollution was another issue. whenever APE occurred uh just after APE uh I think that was about 2016 or 2015 and it was a a sunny day and my Chinese uh guide said oh we call this APE blue skies because during APE to make the city look more attractive they literally shut down all factories within about a 30 mile radius of Beijing to mean the so the air would be clear and then when the API was over the factories go back on again and bang the pollution falls up and it became unbearable. But now, what’s what is Beijing like now when you’re there? Oh, it’s not perfect by a long way, but it’s um it’s so much better. They’re still pushing to reduce pollution because they want to improve the health. Let’s just take a look at the American Department of War. Okay. And let’s see if we find who leads them. And it’s let’s see peace through strength. That’s so Orwellian. It’s almost hilarious, isn’t it? Department of War under President Trump. Uh significant events. And here we have the leader, the obviously he’s got tons of combat experience. I think he’d had a lot of fights inside, was it CBS he used to work for? He’s a media person. It’s intriguing to talk about a purge and having people who don’t have combat experience at the top of China. But have you looked across the the ocean at this guy? He’s American government official and former television personality serving as the 29th United States Secretary of Defense since 2025. He’s published a newspaper. He’s had battles in the right-wing American politics. Never commanded an army. That’s found this this sort of stuff just becomes to me ridiculous. Lowest the birth rate since 1949. I didn’t make it’s a question of how you minimize it manage a declining population. But one of the reasons we’re having a huge it’s a huge sharp decline that even the Chinese government admit it’s becoming a problem. They’re doing every best to encourage more births by relaxing the one child policy. I think that there was a a common misconception that China’s failing to replace the population of Chinese people with well new young Chinese people. Yeah. And what they ignore here is that it’s not a like forlight replacement in economic terms. You’re taking elderly peasants who are dying sadly and you’re replacing them with young highly educated people. So you’re taking people who are very undereducated and replacing them with admittedly slightly smaller generation of people who are much better educated. And so economically the human capital of China is increasing significantly even if the population is decreasing. Because of my knowledge of what of climate change uh and knowledge how totally economists have trivialized the dangers we face. Uh we’re on the precipice of serious ecological breakdown and in that breakdown I expect to see large numbers of deaths all over the planet. The the reason we’re having an ecological crisis has got a whole range of factors. One of them is overpopulation. I’m not entirely sold on the overpopulation. No, you’re not. I think we have an overpopulation of rich people. That’s true. And the fact China has a massive supply chain to build new solar panels, new nuclear power stations, new wind turbines, which we don’t have to the same extent, is really valuable. I think there’s too many people on the planet and that’s one of the reasons we’re having ecological breakdown. But but that’s a big argument, but my point is that it’s going to create a huge fiscal pressure and young people. Fiscal pressure again comes down to whether you understand the accounting system and clearly you do not. Well, the central government is losing revenue. It’s running deficits. It’s the central revenue. Oh, for Christ’s sake. Okay, now revenue. Okay, hang on a second. Hang on a second, mate. You are falling into the same trap that neocclassical economists make about Western economies. You believe the government is borrowing money. Okay, that’s what you’re saying. Government’s in debt. That’s a problem. It’s not only borrowing, but it’s a fiscal revenue in terms of tax revenue. Okay. Spending is taxation. It’s dropping. Hang on a second. You’ve just fallen into the type of conventional thought that that I’m attacking the West over and I’m saying China’s doing the right thing. You’re saying the government should spend less than it gets back in taxation. Is that correct? No, I’m I’m saying the government spending should be limited by taxation revenue. No, I think I think a little bit of uh fiscal deficit spending doesn’t hurt economic growth too much if it’s channeled into productive investment. I don’t say I’m not saying government has zero role to play in terms of like doing deficit spending in infrastructure in national defense. Well, he clearly doesn’t understand is the Chinese government can create yuan at will. Exactly. And this is I mean that’s what I was trying to get through to him and you’ll see in a moment I tried to do build a a ravel model for him to show that point the general point that the government doesn’t borrow it creates money. And that’s a huge difference between China and the rest of the world. If you do a big enough deficit you could create inflation. China can’t print euros or pounds or yen. So they could de um devalue their currency on the international exchange markets and have to drop their currency peg. But there is no risk of them running out of yuan because they print the yuan. Exactly. And this guy does not understand China’s uh government revenue has been steadily declining because its economy is running out of dynamism because it’s running out of people. The young people are disappearing and there are more fiscal burden. The government is having huge amount of uh fiscal expenditures in terms of supporting an elderly population but not enough tax revenue from the young people. So how do they fund themselves? Let me share screen and I’m going to show you why you’re talking And I don’t mean about the west versus east, capitalism versus communism. I’m talking accounting versus not knowing how money functions. You’re accusing China of doing making the same mistake that every other country on the planet makes which is spending more than it takes back in taxation. So you have taxation and what I’ve realized is it’s everybody knows taxation reduces your net worth. So the government takes tax money out of your deposit account your deposit accounts falls that goes through reserves. That’s what actually falls as a result. Uh that turns up over here on the central bank. So reserves fall government accounts rise. So taxation increases the net worth net financial worth of the government and reduces that of the private sector. So that’s what I want to show. So taxation increases the worth of the financial sector but decreases that of the private sector. So going the opposite direction, government spends, money comes out of its account that turns up in the central bank uh account and of course the spending reduces the government’s net worth. That spending comes over to reserves it goes into deposit accounts and that increases the worth of the private sector. And that’s the point that I was trying to make to him. And there so that we you know because we use government liabilities as money the government should run a deficit. That’s the case I tried to make to him. And just on that front again again again another thing I should have had loaded already but we’ll and compare the level of government debt in the United States to China and you can actually see the pattern you were talking about earlier. No particular trend in government debt and it’s trivial 20% of GDP. Then the financial crisis strikes and that’s when the government starts spending money. Even though it’s spended quite dramatically, it’s still well below the level of American government debt, which is not a problem. Just this reality. But the thing I found fascinating was look at the pattern down here in terms of uh the rate of growth. And the American looks like a drunken sailor heading back from the boat from the brothel back to the boat again, bouncing all over the bloody place. Uh, and of course that’s co China has been fairly constant rise and now China’s running a deficit of 10% of GDP and nobody’s freaking out whereas the Americans are running a 6% of GDP and freaking out. America runs a deficit to boost aggregate demand. China takes a big chunk of that aggregate demand through its trade surplus back to China. So in a in large part China is piggybacking off other people’s stimulus. We also don’t know exactly how much the local governments are borrowing. Yeah. If you’re in a trade surplus, you’re transferring money that’s been created from the exporting country to the importing country to you. So, you’ve got more money for investment and you can grow more rapidly. The challenge China has had has been spreading that across the whole economy. Spreading that extremely good pockets of high-tech industry across all the provinces. So, you don’t just have a few clever scientists in Beijing and Shanghai. So, you have high-tech industry in all the outer provinces. And that’s what they’ve been succeeding at since reform and opening. I I wasn’t prepared for this argument at all because saying China’s not innovating is like saying that bird’s not flying. You know, it’s ridiculous to say it’s not innovating. And I came up with a couple of bad examples here. But from what I can see from China, there’s massive product innovation going on. That’s what Americans are complaining about. They can’t keep up with the rate at which China’s developing new product technologies. Yes, China’s massively ahead in in batteries, in electric vehicles. I mean, they’re probably on par with the other powers in ship building. They’re getting there in aircraft. They’re getting there in biotech. In many areas, China is innovating rapidly. What China is doing is not innovating. It’s subsidized stealing. It’s statebacked stealing on a massive scale. They’re stealing from all over the world. They’re stealing. Okay. Who did they who did they steal their rail system from? Rail system from Japan. The history of all developmental states has been the history of stealing technology. The British stole technology from the Dutch and the Germans. The Americans stole technology from the British. The Japanese stole technology from the Americans. And yes, China borrows technology from everybody else. And rightly so, because that’s how you develop. Yeah. And I certainly hope in the future that the rest of the developing world will steal China’s technology and innovate on it because frankly the idea of intellectual property, the idea that you can have an idea and make that private property is ridiculous. You’re you’re making a claim that China is doing. You’re making a claim that China is doing no innovation. There are hundreds. Okay. If China’s doing no innovation, why is it why is Chinese universities the top of the research uh research publications list these days? How do you get to the top of the research publication list while copying ideas from somewhere else? I can understand you’re ranting the system. No problem with that whatsoever. China is decentralized. You don’t have one state authority controlling all innovation. It’s the local governments doing it. It’s the provinces. And each provincial official hates the other provinial provincial officials. I saw that when I was in China. He wants to they want to be elevated above them. They want to be the one who gets the promotion to the next rank up. So they’re all in competition. So you’ve got entrepreneurial local government. The local government’s all competing to have the best electric car company, the best rocket company, the best battery company. Like for example, BYD is a Shenzhen company and they’re a really good car company, a really good electric vehicle company, but they have to compete with a hundred other little electric car companies being kept alive by their local governments, even though most of them should go bankrupt to be honest because the local government wants to keep them alive to get their little promotion to benefit their political career. And so we we I believe we’re using the internet for our current conversation. Is that correct? We’re using internet which was not invented in China either. I was making the point it was government invented not private sector. Again this is you know this kid is just so obsessed with trashing China that he finds any argument at all they can use to trash China. Was it was it invented by the private sector or the public sector? Name one innovation. Hang on a sec. I’ve just asked you a question. You’re pissing me off. You can tell that. Okay. But I’ve asked you a question. My job My job is get the truth out. It’s not to Your job is to promote your own views and not listen to me. That’s what my job is not to please. Okay, Matt, I’ve had enough of this. You can put this up on screen if you like. I’ve got better things to do with my day. Bye-bye. And that was it. What do you think? Yeah. I think he’s just obsessed with trashing China. Yeah. Exactly. There any reason at all, including reasons that are actually in China’s favor, like running a larger government deficit. Yes. Yeah. He’s not interested in a numerous discussion. He just wants to attack the Chinese government, which is not productive and not helpful. No. No. So anybody who wastes his time, if you want to get your, you know, your your biases confirmed about China failing, watch him for the entertainment value, but don’t think he’s giving you any deep analysis. So I must say, I see this problem in the Western media all the time. There were two narratives you see. China’s taking over the world and China’s going to collapse. Exactly. The only you almost never see balanced nu nuanced analysis like China is ahead in these industries and behind in these industries. China is probably the biggest economy in the world, but there’s quite a lot of economies, you know, catching up with them or um there’s quite a lot of medium-sized economies around them keeping them in check. China was never going to be the biggest global hedgeimony in the way America was. China was never going to have 50% of manufacturing in the way America did after World War II. China was going to be probably the largest economy among a load of other large economies. So, America, Europe, India in the future.