On March 5, 2023, China set a GDP growth target of around five percent for 2023, which is lower than expected. What are the major challenges and risks for China’s economic growth in 2023 and beyond? Where do the strengths in China’s economy lie? Both the promise of continued export and consumption growth and the threat of rising debt and property sector instability raise critical questions. How will tariffs, trade imbalances, and geopolitics affect China’s economic prospects?

In an interview conducted in partnership with Peking University’s National School of Development on March 14, 2023, Dr. Hu Yifan and Dr. Lu Feng provide their forecasts of China’s economy for the coming year.

About the speakers


STEVE ORLINS: This is Steve Orlins, I’m president of the National Committee on US-China relations, and I’m thrilled to welcome two great old friends, Hu Yifan and Lu Feng, to join me tonight to discuss what is going on in China’s economy. They are both long-term participants in the Track II Economic Dialogue that we’ve been hosting for 15 years. And they’ve been very productive participants both when they come to New York and when we go to Beijing.  

Dr. Hu is the regional chief investment officer and chief China economist at UBS Wealth Management. I won’t go through her entire bio, but just to remind people, she has a Ph.D. in Economics from Georgetown University.  

Dr. Lu Feng is a professor of economics at the National School of Development at Peking University, who is our counterpart organization for our Track II Economic Dialogue. And he previously was deputy dean of that school and was selected as best professor of the year at Peking University by students. He is an expert on macroeconomics, principles of economics, and managerial economics. When I have questions about China’s economy, I turn to these two. So, they are what I call the expert’s expert.  

So, let’s start off with questions about the recently concluded two sessions. So, the National People’s Congress and the China People’s Consultative Conference just concluded, and they set targets of around five…for 5% growth, which was, I guess, slightly below what our expectations—what market expectations were. So, what are the major—what’s driving that prediction or that goal? Let’s start with Lu Feng and then we’ll go to Yifan. 

LU FENG: Thank you, and good evening, Steve. Happy to join your session again. So, to answer this question, I would like to share three points of views. Number one, if you look back over the last few months, actually, the mainstream opinion regarding China’s economic growth this year has evolved substantially. Actually, at the end of last year, even at the beginning of this year, you know, the Chinese economists inside of China, they’re looking at this year’s prospects not as, how can I say, optimistic as today. Actually, remember, in D.C. and New York when we talk about this issue with American experts on China, actually, their opinion is rather, you know, gloomy. 

But after, you know, China finally got rid of this pandemic [restrictions], as well as as the recent-most evidence indicates, the recovery in consumption has been preceded better than expected. So, I think the mainstream and our projection for this year’s growth rate has been even higher than 5%, maybe 5.5%, or even 6%, depending on the different people you talk [to]. I think the two sessions, of course, officially adopted and picked up the figure of the 5%, I think mainly on the basis of the precaution consideration.  

Number two, I think it’s rather simple to understand the logic of the growth rate and the projection in China this year, because last year, because the trouble caused by pandemic as well as all the policy of the zero-COVID, these policies—these situations severely dragged down domestic consumption. And this has contributed, I think, and served as the most important factor and explained why there’s a substantial decline of the growth rate last year. But this year, because we entered the post-COVID era finally, so I think we got rid of this most important factor. So, as a result, I think the consumption where we have another increase in incremental gross, something like 2% or 3% on the basis of last year. Last year, consumption only contributed to 1% of the GDP growth. Usually, it contributed 3.5% or 4%.  

On the other hand, the investment also has been dragged down last year. This year, I think, investment can pick up about additional 1.5% as well. So, in total, I think domestic consumption contributed to the gross rate of the GDP in China, something like 6% or slightly more than that. But because of the export—last year, export contributed something like 0.5% of the GDP growth. But this year, because of the external environment has been changed substantially, I think that this factor will tend to be negative.  

So, in summary, I think 5% is quite possible to be reached or even exceeded 5%. But if you look at—finally, I want to say, over the last 10 years also, actually, the trend level of China’s growth rate has been declined continuously, from 10% to about three years average of 6.5% in the three-year period immediately before the pandemic. So, then you can say there is something, you know, and there are still a lot of things that China needed to do to, how can I say, potentially tap fully the potential of the growth rate. I think a lot of reasons or factors behind that decline, certainly, the decline of the growth rate. But one of the reasons is still the lagging behind of the crucial areas, reform projects, or reform agenda. So, in order to fully tap out the growth potential in the future, China still needs to face the task of boosting reformed policy in certain areas. Okay. Thank you. 

ORLINS: Yifan, what would you like to add to that? 

HU YIFAN: Okay, thanks, Steve. And it’s very nice to have a chance to have the conversation, especially now, as it’s a very critical moment of the NPC. So, just like I agree with Professor Lu and just to echo his talk, I will add several points. First, I think for this NPC, I think that’s a target that the government has set, so that’s the Chinese government’s KPI this year. And then we should say the tone actually is quite pro-growth but with very modest targets. So, as Steve just mentioned, the GDP target is around 5%, so relatively modest versus market expectation.  

We think one of the reasons is probably the government wants to hold the line too. So, it’s just like hold the line and don’t want to manage expectations. But in reality, we expect this year, the 5.5% growth forecasts, consumption recovery, and also resilient investments like Professor Lu already mentioned. So, here I also want to add, like, we also see for the policy side, we see the government actually will have the continuing policy easing albeit no major stimulus. So, we think the fiscal policy to be more proactive and effective as mentioned in the two sessions. So, in our view, we think the estimated mega projects, already up to RMB 21.4 trillion, so about 3.4 trillion is planned for this year. And also we have the extended tax and fee cuts and potential consumption supports, and also some local governments already announced EV purchase subsidies and distributed consumption coupons. 

For the monetary policy side, it’s very interesting, and I think it’s mentioned to be precise and forceful. So, in our view, it’s implying a more data-dependent stance where it targeted liquidity support and credit easing. I think it’s similar to the U.S. data dependence policy. And also, I think that for the two sessions, especially mentioned that to boost market confidence, so express this support to the private business, including platform internet companies, IP rights, and tech innovations, and also a commitment to deepening SOE reforms and a further service sector open up. 

So, I think what’s on the report is important and also what’s not on the report are also important. So, we find, actually, this time, housing is for living, not for speculation, it’s not mentioned in the policy outlook. So, that means there’s an easing to the housing policy, so the government actually put more emphasis on the resolving risk of the quality developers supporting the first home and upgraded demand and also some CT-specific policies. We also think that demand-easing measures are expected to continue. 

ORLINS: These consumption coupons, how do they work? 

HU YIFAN: For the consumption coupon, last year, in 2020, I think it’s mainly, like, issued by the local government. So, they gave some consumption coupons to promote your purchase. The size is not that big. It’s mainly in the coastal regions with a better fiscal position of the local governments and I think totally, it’s less than 1% of the GDP. So, I think the size is not big, but it just gives some, like, promotions. But recently, we think the subsidies to EVs actually are quite aggressive because the national subsidies ended at the end of the last year. So, we think the local governments have started to continue. So, I think, actually, it’s both like a booster for the auto sales because the auto sales account for 10% of total consumption. And also, I think it promotes EV as a whole, like, in this kind of environment concerns. 

ORLINS: So, if you have hukou, the government issues it to everybody who’s in a particular city and if you have hukou there, you get a coupon which you then can exchange for goods? 

HU YIFAN: No, actually, the process become much simpler. I think it does not really tend to hukou anymore. That’s one of the progress. So, I think it’s just like you simply download the app and just simply mention which company you work locally, so you can use the ID number, you can get the coupons. And also, this coupon can only consume in the city. So, I think no matter if the people are residents or non-residents, I think they can all benefit from this kind of consumption coupon locally. 

ORLINS: Based on where you work? 

LU: Yeah. Where you live, where you work. 

ORLINS: Interesting. What are the kind of upside surprises could we see and what kind of downside surprises could we see in terms of the projected 5.5%? What could move it to 7% or 8%, and what could drop it to 2% or 3%? 

HU YIFAN: Okay, that’s a very good question. I think just as Professor Lu mentioned, I think for the upside, I would think first is coming from the consumption because now currently, the 5.5% forecasts, it’s based on the consumption that’s rebounded from -0.2% to 7%. But I think that we could have the chance to have that lower double-digit growth because now based on the high-frequency data for the sales on Chinese New Year, we find the consumption rebound is much stronger and faster than expected. And also, remember we have excess savings, about 4.6 trillion (RMB) during the pandemic, I think that will also give some a boost for consumption together with government support. So, that, like, could be a surprise. 

For the infrastructure side, investment, I think the infrastructure, we already mentioned mega projects, and also mainly sponsored by the special local government bonds issuance. The quota actually is the largest in history, so it’s 3.8 trillion RMB, so it can well cover most of the projects. So, we think some of the investments on manufacturing like high-end manufacturing including chips, we think that could overall boost up the overall investment.  

So, if we say the downside, I think exports could be one of the contributors. But exports normally—because that’s net exports, value-added, so it’s more like a sweep effect but still could have some negative impact. 

Another risk I can think of is for the real estate side. So, this year—last year, it’s a major drag for the GDP growth. So, combining the direct and indirect impact, we estimate its contribution to GDP is minus 3%. This year, our forecast is still negative but now to minus 0.3% but it depends on the market sentiments and also the demand, we think that could be one of the potential risks. But we think the chance is more about the other side, we think the geopolitical pressure or maybe the volatility of the U.S. economy or the financial markets, all could have some negative impact on the growth. But overall speaking, we still have the 70% of confidence for GDP growth of around 5.5%. 

ORLINS: Lu Feng, what’s your upside surprises and downside surprises? 

LU: Yeah, yes, a good question. I also agree that the main risk is the upside surprise, given the around 5% projection target set by the government, but I also agree with the specific argument by Yifan, but I would like to add some reservations. Consumption has bounced back quite strongly in the initial two months—that is encouraging. But there’s also a concern because the balance sheets for the family sector, you know, for the household sector has been damaged in the COVID period. So, I’m not quite sure whether this initial very strong bouncing back would be, how can I say, sustained in the rest of the months of this year. You know, at the end of the day, it is the beginning of this year. So, surely, you know, the consumption will recover strongly but to what extent? I think we still need to see the first-quarter and even second-quarter data.  

Number two, infrastructure, I think, investment will grow and play a very important role, but because there’s overdrawing because the infrastructure investment has been relied on to a large extent by the government to boost the investment demand in the COVID period, so, to me, I think maybe the selection of the projects has been—how can I say, been made that not to worry about the diminishing returns of these projects. So, I would not be surprised that the growth of the infrastructure investment will still be there but the growth rate would be declined significantly this year compared to last year. 

ORLINS: Both the Premier and the President talked about boosting the private sector. What does that mean? What should we be looking for in terms of structural reforms and things which are going to allow the private sector, which has been the source of most growth in China for the last 44 years? What should we look forward to? 

LU: Yeah, it is a very important question, actually, in view of the unfavorable situation faced by the private sector entrepreneurs, you know, in recent years. So, that have some negative implications for the growth rate, overall growth in China. So, this has been obviously a very important policy topic reflected by the two sessions, as well as in Premier Li Qiang’s press conference. I think maybe the new government will address this issue through several policy and channels or policy instruments, if you like. 

Number one is policy statement preservation, you know, sort of guidance, sort of guidance. For example, the top leader, Xi Jinping, as well as the new Premier, reiterated the famous two unwavering principles for both the public-owned sector as well as the non-publicly-owned sector. The second, number two is to improve the opinion of the environment. I noticed that Premier Li Qiang mentioned this in his inauguration press conference that he said last year, there was some incorrect discussion about the private entrepreneurs, you know, which makes these entrepreneurs worried and nervous. So, I think [the fact that] he mentioned this indicates that the new government may take some positive measures to guide the public opinion to change in favor of the private sector and this situation is expected to improve but underlined, of course, underlined easy relationships, you know, in this context may not go away completely in near future. 

Number three is to continue the ongoing policy adjustment towards the private sector, especially in the real estate sector as well as internet platforms, etc. Actually, this policy modification has been started last year already. Recently, you can notice that the three red lines regulation measures imposed on the real estate sector financing, as well as the so-called preventing disorderly expansion of capital regarding the internet sector, are not openly talked or even implemented anymore. So, more concrete policy measures aiming to care and nurture the private sector may be introduced in due course. Actually, this morning, you know, a couple of hours ago, I listened to the radio that says, you know, the Hangzhou municipality government has launched a new initiative collaborated with Ali, you know, to have Ali to better performed and, how can I say, more actively function. Now, there’s also this kind of policy.  

Finally, I think it is possible and hopeful that more emphasis will be given to making sure that the future regulatory policy will be designed and conducted in consistence with the principle and the requirements of the law. The new Premier emphasized in his press conference that the government would foster a market-based and law-based business environment in keeping with international standards. 市场化 (shìchǎng huà), market organization and the legalization as well as internationalization. This indicates that events similar to the regulatory storms in several sectors in 2021 may not occur again, at least for some time to come. The business environment may improve and become favorable to some extent this year and beyond. Thank you. 

ORLINS: Yifan, on that issue, what does it mean that they’re going to boost the private sector? 

HU YIFAN: I agree with Professor Lu, don’t have too much to add here. 

ORLINS: Let’s talk about the two parts of a demographic challenge that’s talked a lot about in the United States. One is obviously that the workforce of China has peaked. It is now beginning to decrease, and how is the government thinking about that? And the other it’s kind of—it’s quite different, but is the very high youth unemployment rate, and what policies the Chinese government is going to adopt to deal with that. 

LU: Okay. So, I think, sure, both China’s so-called working-age population, as well as labor force, are declining for several years now, but last year is a turning point in that. You know, the total population decreased by something like 780,000. That is the first negative growth, you know, over the last six decades, you know, immediately after the farming era in 1961. So, that is a turning point.  

But China is still the country with the largest labor force right now. And the young population, I mean, young population being aged from 16 to 24, generally speaking, this range of the aging population entered for the first time to the labor market depending on their education years. Actually, the young population, youth population, as well as annual graduates from tertiary education both still are growing. This is why the new Premier in his press conference said probably, or because of this, he said that China’s demographic dividend has not disappeared totally yet, and our talent dividend is in the making. So, the driving force for China’s development remains strong and robust.  

But saying that, I think actually last year, the unemployment situation is very acute. China suffered, especially labor market problems, last year because of the pandemic as well as we try to achieve zero-COVID policies. Apart from the high official unemployment rate of 5.5%, something like 0.4% higher than the year before, equivalent to incremental growth of 190 unemployed laborers additional, okay, 190 unemployment population. The employment pressure also reflected in the underlying decline of the labor participation ratio similar to the United States. On my calculation, it has declined by 2.5 percentage point last year compared to the year 2021. That explained something like, how can I say, 320 million laborers exited from the labor force. So, technically and statistically, they’re regarded as exited from the labor force, as a result, the labor participation measure has declined. 

On the other hand, actually, I with my colleagues are doing a small project to calculate. Actually, there’s more than something like 14 million migrant workers working in the city, they returned to the countryside because the labor market has deteriorated, they cannot find a job, they did not have resources or support, you know, they’re living in the urban area. We come back to the issue we just mentioned about the coupon, that’s a totally different situation. In the United States, your government is so generous who gave a lot of money to ordinary people. Of course, it’s good to relieve the difficulties but unfortunately, you have inflation very high, then you have to control inflation, you have higher interest rates, you have the problems like the recent crisis of Silicon Valley and the banks. 

But in this country, the resources of the rescue package mainly go to the so-called market entities. So, in other words, the private enterprises or these kinds of self-employers, rather than the ordinary working population. That’s totally different. So, as a result, in my research, actually, I do a small project on that, I calculated with my colleagues something like 14 million population returned, you know, unexpectedly from the urban area to the rural area, to their hometown of their household registration. So, that disappearance of this working population is totally out of the streaming of the official unemployment monitoring or status quo coverage. So, that indicates the problem. 

Another problem is youth unemployment. As Steve mentioned, actually, it has been picked in July, something in July, it’s something like a 19.9 percentage point. So, almost 20% of the youth are unemployed and that is a huge problem, that is a very alarming problem, and a lot of discussions last year. So, this year, I think, this year and beyond, I think the overall unemployment situation will be improved substantially because the macroeconomic situation will be improved. We discussed that already. So, as a result, the overall unemployment rate will be declined or converge to the normal level, something like, you know, four to five points and to 5%, to below 5% actually. So, the situation will be improved.  

Another factor is the retiring population will be increased because the newborn, the babies after the farming period, you know, these populations reached the age of 60. 60 is the retiring age, the official retiring age for the male population. So, from the recent years and the next few years, we will see the retiring population increasing and that will ease unemployment pressure. But the youth population would still face huge pressure. The pressure on youth unemployment will not disappear very quickly, mainly because there’s accumulated a lot of unemployment in the youth. You know, they have not found work over the last few years, so they wish to find work this year as soon as possible.  

On the other hand, a lot of people that landed on the jobs, they are not favored, they’re not as satisfactory. They want to land a new, better job. So, this year, I think we still have a critical structural problem in employment, that is youth unemployment. So, a lot of policy needed to be introduced. Actually, in the processions as well as in the new Premier press conference, they all give high priority to this area. 

ORLINS: Yeah. Yifan, anything you wanted to add on that one, the demographic challenge? 

HU YIFAN: Okay, yeah. So, I think Professor Lu has already given a full picture, so I just wanted to mention that for the government’s target this year for employment for the new job is at 12 million. So, it’s similar to the last year. So, the unemployment rate target is 5.5%. Actually, it’s relatively the highest in history. So, that means for the new jobs, creation of the new jobs, it’s also not an easy task. I think especially in Premier Xi’s media press, he makes it very clear. So, this year, I think it’s like for the stability, for the growth, and also for the new jobs are, like, the major task of the government. 

ORLINS: One of the things when I asked about upside and downside risk, neither of you mentioned geopolitical risk. So, the risk of a rupture with the United States would certainly reduce Chinese exports, so net exports would be substantially reduced. How are people—how are economists in China, not political people, thinking about it, or it’s kind of, you know, “Nothing we can do about it, so we don’t really think about it?” 

HU YIFAN: From the economists’ perspective, I think the tension between China and the U.S. could be a new normal, but we think the market should relatively get used to it as long as the communication continues. So, I think that’s very important for the two countries to still remain in talks and still can cooperate in the strategic sectors with consensus such as climate change. So, although the two countries, I think, have some fundamental disagreement, we don’t think it can be resolved in the short term, and also, especially in the strategic sectors, I think the competition will intensify. 

We also noticed for this kind of sentiment, the attitude of the U.S. maybe to China, especially for the strategic sectors, I think, for this kind of sanctions and entity list, I think that that will become also a new normal. That’s the implication. I think one of the implications is we don’t expect—we don’t want to have this kind of decoupling but we think it could be partial decoupling in some strategic sectors like chips or some AI or 5G. But other sectors, we think, still can have a lot of like areas to cooperate, including this kind of good trade as well as for climate changes. So, hopefully, I think there’s a discussion of fights or arguments, as long as this conversation continues, I think that that’s actually…it’s a new normal, we need to get used to it. 

ORLINS: Is there research on the lingering costs on China’s economy of the tariffs which were put in place during the prior U.S. administration? Or has China’s economy basically adjusted to it and there is no really GDP growth cost to those tariffs? 

HU YIFAN: Let me put it this way, yeah, I think for the Phase I trade deal, I think the U.S. and China’s tariffs averaged up to 8% comparing with around 3% of the rest of the world. So, I guess there’s a cost but who bears the costs? In my view, I think probably the U.S. consumers actually finally have to pay the cost because, in the past three years, we see China’s trade surplus to the U.S. actually has been increasing rather than decreasing. So, that means still there’s a need for Chinese goods. But for China side, I think for the export, it’s more affected by the demand, total external demand, also affected by maybe the competitors of the—like our neighbor countries. But the tariffs, of course, have some impact but I guess it can be gradually absorbed in the prices and transferring to the ultimate consumers. So, in our view, definitely, low tariffs could be more like a win-win game. 

ORLINS: Lu Feng, anything on that? 

LU: Yeah. So, a very important question, the switch and the effects should underline Yifan’s comments. So, you can see, your trade with our neighboring countries has increased, you know, especially in the East Asian countries. So, that indicates some trade activities are shifting from this country, bilateral relationships between China and the U.S. to the U.S. versus other, you know, neighboring countries of China. So, as a result, of course, the cost has increased, that the consumers in America—the American consumers will bear this adjustment.  

But on the other hand, you can see if you look at the data of the bilateral trade, actually, the whole volume of the trade has been growing as well as the surplus of the bilateral trade has been growing. So, in other words, China has absorbed the tariff, you know, and the pressure imposed by the tariffs, so that indicates or underlines the complementary relationships between these two countries are still very strong.  

So, come back to the question you mentioned about the geopolitical factors. All these factors are very important but I think usually, the economists approach the issue, assessing the economic situation, and they turn to say, “You know, what’s the external environment change in that?” We are talking about geopolitical factors. You know, of course, I think there’s a consensus that geopolitical conflicts like the Russian-Ukraine war, you know, they influenced the global economy, including China as well as the American economy. So, the prospects of these events would be very important.  

Apart from that, I think, we’re also very concerned about, for example, the sovereign debt issues, which you have close relationships with China’s interest. You know, China has become one of the single most important bilateral official creditors in these developing countries. That also links to the issue and the international communities can collaborate to solve these issues.  

But the most crucial issue in the external sector is still the bilateral relationship between China and the U.S. So, as Yifan mentioned, actually, the Biden administration has determined to go ahead with the policy, the so-called “small-yard, high-fence.” That means that in certain high technical areas, there’s a barrier would be created and there’ll be a high fence. That will introduce quite a bit of a challenge for China. Actually, you can see China last year launched a new initiative of the whole country approach, how can I say, to boost this high-tech sector and I think in two sessions, they re-structured the formal technology minister. I think all these movements, policy movements are responding to this environmental change. So, that is a very important issue.  

But saying that, actually you can see, apart from the so-called high fence, small yard areas in which, you know, there’s trade embargo or trade control, all these kinds of market entity lists, all these kinds of control measures, but for the so-called ordinary trade and the service activities, to me, my personal observation is that, you know, the Biden administration has taken relatively neutral policy approach, at least right now. Of course, they are not moving away the tariff arrangements introduced the by Trump administration. But then over the last two years also, there’s no additional serious intervention measures in the so-called ordinary goods and service trade. As a result, we see that that bilateral trade has been expanded and the trade surplus has been increased, and so far, the American government is taking a mutual approach to that. But of course, how long it will last? We don’t know. I would expect at any time, you know, in the future, if that’s necessary, the U.S. government will change the policy stance. 

But in my observation, I think maybe this year, even next year, in the Biden administration, I think these policy arrangements may still be there. And that creates sort of a temporary peaceful, relatively peaceful environment for so-called ordinary trade activities to evolve.  

ORLINS: The financial news in the United States is all about the second largest bank failure in American history, the failure of Silicon Valley Bank. How are people in China thinking about that, and is there any effect on China’s economy? 

HU YIFAN: So the SVB, I think actually starting from last Wednesday, it especially makes the markets very nervous, like there’s a big sell-off last Friday, and they’re very nervous, like, last weekend. And fortunately, for the Fed and for the Treasury and also FDIC announced a full bail-out plan, so it makes the markets relatively calm down. So, during the turmoil, we noticed that, and at first, I think quite a few—like, for the Chinese companies, they also have the account open in SVB because I guess most of the tech companies has a direct or indirect relationship with SVB. So, SVB is not like a traditional bank, it’s more like a P plus VC plus investment bank and plus commercial bank. So, it’s like an innovative model, so it can work very well during the market boom.  

But now with continuous Fed hikes and also with the falling for the treasury bonds and also like for the MSPs and also, especially for the shrinking tech values, I think that actually gave it multiple hits. And also, especially for those banks, I think, that also have this kind of mismatching of the assets for the durations, that also gave another lesson.  

Overall speaking, I think, because now the market really has concern for the continuous hikes of the Fed, actually the recent tones become much more hawkish starting from last Tuesday, but I guess the SVB case could probably, to some extent, make the Fed maybe tone down. So, the market has the expectation for the Fed hikes could be less aggressive, hopefully, and could maybe—because I don’t think the continuous aggressive hikes could really solve the problems of inflation because this time, the inflation is not on the demand side. Most of the time, it’s driven by the supply side, including how the commodity prices structure, a lack of services labor, and also the prices. So, we think less hikes or maybe more, like, pre-emptive actions could calm down the market.  

And the second, I guess, for the Chinese companies, not only good for Chinese companies, I guess I heard the earliest could be starting from next Monday and the audit will gradually give back to the depositors. So, we guess that could be—because the potential risk remains, so I guess many of the depositors could move away the money to the large banks, so the large banks could be a beneficiary. So, I guess how for the Chinese banks, especially for the SOEs, actually, to some extent, it’s probably stressing during this kind of turmoil, including the big banks in the U.S. side and we think it’s less risky for those banks.  

But overall, we think the bailout from the U.S. government this time is very rapid and also very aggressive, it calmed down the market but it’s also reflecting some loopholes. We don’t know the recession, when it will come, whether the recession is mild or serious, and whether the government can finally solve all the mess if they come. So, I think that now the market actually become much more cautious. So, we think, although in the short-term, the market calms down but still have rising concerns, especially on the U.S. economy for the Fed hikes and for the health of…especially for the tech companies. 

LU: Okay, a couple of points to Yifan’s comments, I agree, which are good. So, I think uncertainties also have implications for the China-U.S. relationships. Uncertainty, number one, you know? And maybe after, you know, a decisive approach taken by the governments, you know, the issue will go away quickly. Okay, that will only be a temporary issue, but whether there could be some feedback to the wider, you know, financial sector, cause an event, you know, in the worst situation like what happened a decade ago. So, if that happened, what’s the implication for China and U.S. relationships? 

Number two, you know, and if, for example, the United States have to give up that hardliner monetary policy to control inflation, you know, then the inflation becomes a structural issue where it reminds us of what happened in the 1970s. And that scenario, you know, I think maybe also have implications for the China-U.S. relationship. So, anyway, this is a short-term issue that maybe have long-term implications, and there are a lot of discussions actually in academic circles China on these issues. 

ORLINS: Before we lose you, Lu Feng, what’s your outlook for the RMB over the next few years? 

LU: Actually, I think if you look—of course, I’m not a macroeconomist, I’m not in a position to interject, maybe Yifan have a better opinion on that—but for me as an academic economist, if we look back over the last three or five years, actually, there’s a real reform in the mechanism of the RMB functioning. Actually, you can see in recent years, RMB several times, maybe three times, lower than seven (exchange rate of USD to RMB) and higher than seven, they fluctuate with a quite big swing, more than 15% I think. So, I think there’s a quite substantial reform effect that has been demonstrated already. So, in the future…actually, in the two sessions, you can see the official statement about the RMB is still the same, to keep the RMB stable but in line with the fundamentals of the RMB. So, I think the policy stance would be similar.  

But the specific parity of the RMB vis-a-vis U.S. dollar or a basket of currencies can fluctuate, especially…just now we talked about the problems in the American financial sector. You know, if it goes further deteriorated, you know, then your monetary policy, we’re changing the policy stance that is very hardline, you know? Or even in the extreme scenario, you gave up the 2% of the inflation target, I think that will have a huge…potentially have huge implications for the parity of RMB in the medium term. So, I don’t know, but two points are clear, you know, the market determined that to some extent, second, a lot of uncertainties in the future in terms of the parity. Thank you. 

ORLINS: Yifan, you’re the market economist. Where do you think it’s going? 

HU YIFAN: Okay, so, as a market economist, we would like to give some forecasts no matter it’s right or not. So, in our view, I think for the U.S., since now the Fed continues hiking, we think the dollar will keep its stress on to the peak of the hike. So, in this case, probably the dollar will continue to strengthen till maybe the second quarter, then maybe the Fed will pause. And I guess like, so this year, we think for the second half, maybe the dollar strength will gradually weaken. And also given the divergence of China’s growth and also the U.S. growth this year, we’re seeing actually, the CNY (Chinese Yuan) will gain its strengths for the second half. So, our forecast currently is the GDP for the CNY will…like, the U.S. CNY will be back to 6.5.  

So, for the longer term, and I wanted to just mention for continuous CLY internationalization and then we also note that hike for the oil CNY, for the digital currency, and also for China’s gold denominated for the CNY. Also, for this kind of the…like, how CNY’s continuous rise this year could be in STR. I think that could be refracting the CNY’s rising importance in global, like, for the financial system. 

 And also, actually this one, I want to mention one of the interesting topics and I guess it’s also one of the highlights in the two sessions. So, that’s for the digital economy and the digital currency. So I think we probably notice that, right? For the digital economy, the fundamentals mean data. So, including now the hottest topic like ChatGPT. ChatGPT can catch attention but cannot make revenues. But what’s the underlying key factor is the data, so now the data has become a very important factor for production. So, I think in these two sessions, the Chinese governments have the sweeping institutional reforms to focus on strategic sectors for the data, actually, it’s one of the strategic sectors, especially for the Chinese government to now identify data as one of the new factors of production alongside the land, capital, labor, and tech. So, I think that China is probably the first country to put the data in such a strategic position. So we have this new entity called the National Data Bureau. So, it’s under NDRC, to enforce data regulation and the digital economy-related policy.  

Also, we think more policy support will be expected to enhance data security and promote digital economist strategy. And also, of course, like the data usage and collection, this is a new field to, like, the global economy, and I think this part, the supervision will also be stressing and also expected to like, you know, maybe some of the regulations in the law will come out. So, I’d say like the data sector for the digital economy, probably China is one of the leaders globally. 

ORLINS: Last, last question, I promise. You know, we deal a lot with misconceptions of China in the United States and of the United States in China. What do you think are the primary economic misconceptions that the U.S. or and China have about each other? 

HU YIFAN: Okay, I have a thought. My view for China and the U.S. was this kind of fundamental is originated, including all this kind of global order, that so-called global order. So, I think the U.S. probably thinks it’s successful—it’s a success for the global order since the Second World War, so that means like global growth for internationalization, including China’s rapid growth. But under this system, I guess with a rising China, China might think there are many things that are still not that fair. For example, economically and financially, I think it’s still dollar-dominant for the financial system and it’s already showing some of the weaknesses during the financial crisis. And also, for example, the serious spillover effect, for example, for the SVB, like the small regional case of the U.S. could affect the global financial system. So, I think there are lots of these kinds of similar issues that make China maybe probably wants to, I guess, improve or maybe make some contributions. So, I guess probably that’s what we call the fundamental difference, the disagreement, but I think it can only be solved by time and also by maybe dynamic developments globally. 

So, I think probably both sides think they have their own points but I guess cannot really understand each other. China might think that global order is more like a U.S. order and the U.S. thinks its global order is successful. China does not want to challenge the order but wants to make it a better order but I guess that could be this kind of dynamic development evolution going forward. 

ORLINS: Lu Feng, anything on that one? 

LU: Yeah, I think actually, of course, any society, you know, have some misconceptions for their peers, you know, especially in the old days. For example, I remember, in the old days of my childhood, we were taught that, you know, the rest of the world, including the U.S., people are living in misery, you know? So, they are waiting for us to liberalize. So, eventually, we find out that it’s not actually true, you know? So I think a lot of misconceptions have faded away in the reform and opening period because the people have access to new knowledge, even travel, you know, globally. 

But there’s still, of course, lopsided opinions in certain constituencies of the society, you know, in China towards America. For example, in economic areas, some people think, you know, the old major policy, they are controlled by the so-called military and industrial complex, okay? To maximize the revenue or profits of selling arms, you know? So, a lot of people don’t agree with that anymore but some people still agree with that.  

Another example is, for example, at the beginning of the new century, there’s a debate about the RMB, you know, exchange rate. So, a lot of people tend to, even serious professional economists, tend to think that the pressure from the United States, you know, to impose on China, to ask China to appreciate and make the RMB fluctuate, you know, and flexible, it’s sort of a trap, you know, to induce China to get into trouble, similar to what Japan did, you know, in the ’80s. I think all these kinds of things, it’s a lopsided opinion. Actually now, if you look back, actually, a lot of people have a reflection on that but at that time, a lot of people believed that. So, these, you can say were misconceptions. 

But Steve, actually, I still think the current problems of China-U.S. relationships is getting worse or not better, you know, for some time to come. It’s not only caused by misconceptions but also caused by some real differences in position, you know, in the history, in the value system, in the principle of governance. You know better than me, you know better…actually, I read some books by some new China experts, the young generations after the ’80s, you know, like Rush Doshi, you know, like Julian…what’s the name? 

ORLINS: Gewirtz. 

LU: Gewirtz. Yeah, Julian Gewirtz, Unlikely Partners. All these people traveled in China, lived in China, or even worked in China. They know China much better than the older generation of experts. But unfortunately, you can see, you know, they position a lot more, reconcile, you know, towards China, but very tough, I can say that. So, that indicates actually we have some real differences that have to be resolved in a long time to come through different ways. So, I think in this context, I think the National Committee, you know, you guys have a lot of work to do, a lot of very important missions. 

ORLINS: Well, that’s why we asked the question so that we can focus on where there aren’t differences but there are perceptions that are different. So, yes, when there are true differences, we just point them out and move on. But when the problem is based upon incorrect facts, incorrect data, then we try to correct it. 

Yifan, Lu Feng, thank you so much. You’re both great participants in our dialogue and great interviewees for this attempt to educate Americans about what is going on in China’s economy. But thank you both so much for giving so generously of your time. 

This transcript has been lightly edited for clarity. Please refer to the video interview to ensure accuracy.