- The Chinese people and the Chinese government feel that Joe Biden and the Biden administration are trying to contain China's growth, destabilize the party, and maybe push for regime change.

[lighthearted music] [logo whooshing] - Hello and welcome to "GZERO World", I'm Ian Bremmer.

And on the global stage, there are no recent economic success stories as big as China.

Between 1978 and 2017, 40 years, China averaged almost 10% annual GDP growth, transforming from a closed, centrally planned economy to a global economic powerhouse that could rival the United States.

But, over the last decade, Chinese President, Xi Jinping, has been moving the country away from the pro-investment policies of his predecessors and back to its socialist roots.

Xi's vision is one of strong state control where businesses can form with the goals of the Chinese Communist Party, not the other way around.

Today, we're taking you behind the Great Wall to see what's really happening in China and how China's emerging middle class is responding.

My guest is Shaun Rein, he's Managing Director of the China Market Research Group.

Don't worry, I've also got your puppet regime.

- If Ryan Gosling ain't too old to play Ken, then I'm sure as heck young enough to play Martin Sheen again.

- But first, a word from the folks who help us keep the lights on.

- [Announcer] Funding for "GZERO World" is provided by our lead sponsor, Prologis.

- [Announcer] Every day, all over the world, Prologis helps businesses of all sizes lower their carbon footprint and scale their supply chains with a portfolio of logistics and real estate and an end-to-end solutions platform, addressing the critical initiatives of global logistics today.

Learn more at prologis.com.

- [Announcer] And by, Cox Enterprises is proud to support GZERO.

We're working to improve lives in the areas of communications, automotive, clean tech, sustainable agriculture, and more.

Learn more at cox.career/news.

Additional funding provided by Jerre and Mary Joy Stead and.

[lighthearted music] [logo whooshing] - China's economic success is a story we all know.

- Well, the International Monetary Fund expects China to claim the world's highest GDP growth both this year and next year.

- [Reporter] Around 800 million people lifted out of poverty.

The life expectancy has gone from about 35 to 77 years.

- Is quite simply the most successful case of economic development in human history.

- But behind that growth lies a paradox.

China is a communist country, founded on Marxist principles, and yet, for the better part of the last 40 years it's been solidly pro-business.

China's state capitalist system has fueled decades of strong economic growth, but whether Beijing can keep that engine running and overtake the United States to become the world's largest economy and beyond is the million Yuan question.

Right now, indicators are mixed.

- [Reporter] China's economic growth is set to fall behind the rest of Asia for the first time since 1990.

- China's GDP growth has been on a sharp relative decline since 2010, accepting a big jump coming out of the 2020 pandemic.

What happened?

Well, half a century ago, Mao Zedong's cultural revolution tried to rid China of any remnants of capitalism but, when Deng Xiaoping rose to power in 1978, he began opening China up to the global market.

Cities, factories, and universities filled, manufacturing, technology, and entrepreneurship exploded.

China's middle class ballooned.

In 2001, China joined the World Trade Organization and Mao's anti-capitalist paradise quickly became the world's largest exporter.

In 2008, when the financial crisis hit, the government pumped massive amounts of money into the economy to protect jobs.

They invested in infrastructure projects like airports and railways.

They also racked up a mountain of debt, which fell on the balance sheets of local governments who then started selling publicly owned land to pay for it, which created a giant real estate bubble.

The government will need to keep spending to keep growing, which means abandoning the strategy that propped up its economy in the first place.

It also needs to boost domestic consumption and find a way to deal with an aging and shrinking population.

No small task.

There's also the problem of the rest of the world.

Surging inflation has reduced demand for Chinese exports.

United States is limiting China's access to advanced semiconductors, with power innovation, while western economies are moving their supply chains to friendlier countries and closer to home.

Finally, there's Xi Jinping himself.

Chinese president has been on a campaign to reign in China's private sector and build resiliency from the West into its domestic economy.

Beijing's regulatory might has cracked down on everything, from tech and finance to gaming and entertainment.

China's harsh zero COVID policy ground its economy to a halt and led to the most widespread anti-government protests in decades, mostly among China's newly emerged middle class.

Now government debt is at record highs and youth unemployment is surging, threatening the social pact that gives the Chinese Communist Party legitimacy and widespread support.

So maybe the real limits to the party's goals won't come from the West at all but, instead, from within.

Can communist ideology mixed with capitalist ambition sustain growth into the future?

Is Xi setting up China for another four decades of economic success?

Here to answer those questions and more is my guest, Managing Director of the China Market Research Group, Shaun Rein.

Shaun Rein, thanks so much for joining us.

- Thanks for having me, Ian, on my first trip back to the United States in four years.

- In four years, and you've lived in China now for some 25 years.

- Yeah, for most of the last 25 years I've been living in China.

I'm actually born and raised in Concord, New Hampshire but around the mid-90s I went to China to study at Nankai University and I found that I loved what was happening on the ground.

There was this electric optimism when I was interviewing and happiness there that wasn't properly being reflected in the New York Times and in the Wall Street Journal.

I thought I wanted to go to graduate school, focus on Chinese studies, and learn as much as I could about the country from a sociological or anthropological view, and then I ended up just living there the last 25 years.

- We want to talk a lot about China, but I first want to ask because it's going to come up.

Bloomberg has banned you, right?

But yet CNBC, no problem.

You've had a book of yours not published in China.

How do you navigate someone who's from the US, living now for a long time in China, dealing with an incredibly politicized environment?

- That's a great question, Ian.

Actually, I've written three books on China and all three of them have been banned for sale in China.

Yet, at the same time, many Western media outlets think that I am a tool of the Chinese government and so they banned me.

So, as you said, Bloomberg has officially banned me because they said I'm too pro-China in my analysis but I actually don't think I am, so I think I'm fairly balanced.

If you look at all of my writings, I will say what's good about China.

For instance, the Chinese government has uplifted 800 million people out of poverty over the last 40 years but, at the same time, I'm willing to be critical.

- Over the course of the last few years, you have gone from being one of the most noteworthy bulls on China and their expectations for economic growth to, frankly, one of the more pessimistic viewers of where China is going economically.

Why the pivot?

- I think there are a couple things.

I mean, we've known each other for about 10 years now and I've always been one of China's biggest bulls for 25 years, but starting really early March of 2022 I started to become more negative on the economy.

- [Ian] The middle of COVID.

- Middle of COVID, right when Shanghai locked down.

I think people underestimated how much the lingering effects, not just economically but psychologically that lockdown would have on China, and I was right.

Right now, about 50% of Shanghainese, according to the Chinese government, are suffering from anxiety and depression, so that's hurting consumer confidence.

That's why you see there wasn't the revenge shopping in January and February after China opened its borders and ended zero COVID.

Goldman Sachs, JP Morgan, they were very critical of me because they said China's going to have revenge spending.

- Well, they've very bullish of what they expect coming out of the pandemic, like really a strong, V-shaped recovery for China.

- They said a V-shaped and I said there wouldn't be and they were critical of me, and there are three reasons why I thought China's economy was weak and why I'm a bear right now.

The first is, the income levels in 2022 were low so many Chinese, if not most Chinese, actually had their salaries cut.

There was a lot of unpaid furloughs.

There were times where three, 400 million Chinese were actually locked down in their homes because of zero COVID so no business was done.

After the borders opened and after we were allowed to go outside again, a lot of consumers said, "We don't have money.

We haven't had the stimulus like the United States had over the previous three years."

Chinese government really didn't loosen monetary policy so they said, "Let's save for a rainy day."

But there's two bigger issues, Ian.

The second issue is geopolitics, okay?

I think, at the end of the day, the Chinese people and the Chinese government feel that Joe Biden and the Biden administration, I think some people in China will call it the regime, are trying to contain China's growth, destabilize the party, and maybe push for regime change.

- Here you're talking about semiconductors, cloud computing, 5G, that sort of thing.

- Exactly.

When the Chinese get good at something, so when the Chinese get good at 5G and telecom, like they were with Huawei, all of a sudden the United States says, "This is a national security risk.

We need to ban Huawei from not just the United States but they need to coerce European nations like the United Kingdom or the Dutch or the Australians, not to use Huawei telecom equipment."

When the Chinese get good in mobile apps, like Temu or Shein or TikTok, which is really popular in the United States, members of Congress try to ban that and say it's a national security risk.

- When you say that, now, of course, American social media apps, like Facebook and like Twitter, can't have access to China.

I mean, the Chinese don't see that as reciprocity in some ways?

- Not really because there's a slight difference, and it's a very fine line.

Facebook and Twitter could have been allowed in China, is what the Chinese government says, if they followed Chinese government rules, and house all of the data in China and allow the Chinese government access as needed.

And so, that's why LinkedIn, until very recently, was fully allowed in China and was very active.

Actually, Microsoft made the decision to close LinkedIn in China, it wasn't from the Chinese government.

When it comes to TikTok, it's no matter what TikTok does, simply because it's Chinese, simply because China is run by the Communist Party, it's automatically guilty until proven innocent.

- And yet, it's the most popular app, still, among American teenagers right now in the social space.

- Yeah, because- - It's rhetoric but they're still making a lot of money.

- They're making a lot of money but the question is that there's a sort of Damocles that's hanging over TikTok and all Chinese apps.

And so, they're saying, "Do we actually want to invest in the United States right now?"

The reality is not.

If you look at it, the investment from China into the US has dropped about 95% over the last five years.

- What I'm hearing from you is not so much that the United States is unfair in its treatment to China as much as there is no trust in this relationship because, for everything you just said, the Americans would say, for them, this sort of Damocles is hanging over them because they don't have access to an independent judiciary and Mintz Group would suddenly get raided or Bain would suddenly get raided or they can suddenly be shut down.

It feels to me like there's literally no trust in this relationship between the two most important economies of the world.

- Yeah, there's no trust and there's very little communication right now.

I was talking to one of my good friends who was a deputy secretary, and he's very pro-China in many ways, an American one.

He was a former US ambassador and he said, "The problem right now, Shaun, is I don't know who to talk to in China and I don't even know if I can get access to that type of person."

I think, over the last five years, you had a fraying of relations.

There was a lack of people exchanges and just no trust, starting from the Trump administration, but then it really went downhill under Biden.

I think part of that was accelerated by COVID.

Because of zero COVID, none- - [Ian] No connections, no travel, nothing.

- None of the top seven members of the standing committee of the political bureau of China left for three full years.

Han Zheng, who is now the Vice President, he left basically the day zero COVID ended, and China has been doing a charm offensive over the last six months.

After Xi Jinping was named chairman for a third term, his first meeting was with the President of Vietnam.

He also met with the President of Pakistan and he actually traveled to Saudi Arabia for the GCC to try to improve relations with the Middle East.

So what you've seen is China has launched a massive, massive charm offensive to Europe, to the Middle East, to Asia and Africa, and really focused on the global south over the last six months but they've been very hesitant to try to forge relations with the United States again.

That's one of the reasons why consumer confidence, why business confidence is so low right now in China, and while the economy is really in a very negative state.

- You talked about Chinese consumption not rebounding as quickly as we'd expect.

We talked about geopolitics at the high level, particularly the US, the G-7, advanced industrial economies being problematic headwinds there.

You said there were three, what's the third?

- The third one is a little bit more sensitive.

I think part of the problem is, people have trusted the Chinese government to do the right thing.

It was almost they were like invincible.

For the first 25 years of my life in China, whenever there was a problem, the everyday peasant would say, "Don't worry, the party will fix things."

- When you have 40 years of 10% growth on average, you can say that.

- They did a great job, you have to give them credit, but zero COVID wasn't done well.

And so, a lot of people, especially those who are from Shanghai, especially the wealthy in Shanghai, suffered the most during zero COVID.

They're starting to lose some of their support for the party in certain members because they feel that, A, the government didn't do a good job of implementation.

And second, there's also a fear that China is moving towards socialism, so they fear that China's not pro-business like it has been in the last 20 years.

They see that Jack Ma is no longer in charge of Alibaba, which is one of the giant internet companies in the country and was actually kind of forced to split into six different companies.

- He was kind of seen as a hero by a lot of young Chinese.

- Oh, he was a rockstar.

People in China love Jack Ma.

You need to think of him as Elon Musk, Warren Buffett, Bill Gates, and Steve Jobs all wrapped into one.

He was the person that every young person in China wanted to be for the last 20 years, someone who was able to rise as a peasant, make a lot of money.

He's really popular but he was taken down, in large part, because his company truthfully became too powerful.

It started to pose a lot of systemic threats.

- But it could have been too powerful against the Americans.

I mean, you'd think that a confident Chinese leadership with a leader like Xi Jinping who gets rid of term limits, he's there for life, he's consolidated all of the leaders around him that are loyal.

Wouldn't he want someone that could take the fight globally for China, someone that could inspire the Chinese, "This is the kind of thing I could do."

It doesn't feel like the kind of thing a leader who wants to be a superpower would suddenly go after.

- That's a great question, Ian.

I think there's two parts to answer that.

First, Jack Ma started becoming almost like a foreign minister of his own.

What he was saying publicly wasn't always the same thing that Xi Jinping and Li Keqiang, who was the prime minister at the time, was saying.

For instance, after Trump launched the trade war, which has really crippled China's economy over the last several years, Jack Ma said, "Don't worry, Trump's a good guy, let's give him time."

When he said that, it was almost like he was rivaling statesmanship and he was creating his own policies.

I think that's something that probably upset the Chinese government but I think, even more importantly, as a businessman I actually support the crackdown on Alibaba and the tech sector because Alibaba controlled too many sectors.

He was in insurance, he was in banking, he was in e-commerce, he was in movie ticket buying, he was in transportation, he was in taxis.

Basically, any business that was profitable, Alibaba or Tencent controlled it, and so it started to stifle fair market competition.

It started to stifle innovation and consumer choice so I think the Chinese government was right to crack down.

Their problem is they didn't do a very good job of communicating, not just to the Chinese but to the international investor community, what were the underlying reasons and the need for this crackdown, so I think people were scared.

- In part, because they took him out.

- Well, he still has his shares.

Well, he sold out but he still has his money.

They haven't put him in jail, they haven't taken his money away.

- He was under house arrest for a period of time, no?

- No, I think that was a rumor.

I don't know, but some of his closest friends or my close friends, and they said he was fine just laying low, let the political winds go as they are.

But I think there's a fear, Ian, in China right now amongst the wealthy that China's making a sharp shift towards socialism.

I think one of the great things about China over the last 40 years was that if you worked hard and you were willing to take a risk, borrow money, pool money with friends, you could get rich like Jack Ma.

But the problem is that- - To get rich is patriotic.

- It is patriotic but there became too many haves and have-nots.

The genie co-efficient was too high.

- That was a Chinese communist phrase.

- Yeah, and I think it was good, but it also reached the point where some people, in the Tier One cities especially, were just too rich, while the Communist Party was almost neglecting the needs of 850 million people living in the countryside.

And so, under Xi Jinping, the government has launched common prosperity, which is an initiative where they're trying to get education access, healthcare access to the 850 million peasants.

If you say to Xi or to the Communist Party you disagree with the crackdown on education, you disagree with the crackdown on technology, they're going to say, "Oh, you mean you don't want to take care of these poor people?"

So that's hard.

It's hard to say that you disagree with what they're doing because there's reason.

It's not evil intention, they're trying to help the majority, but the real movers and shakers of the country, they've lost that excitement.

They've lost that ability to take risks so there's a lot of capital flight.

A lot of these wealthy Chinese are moving to Singapore.

A lot of them are moving to Australia.

Some are coming to the United States right now because they're saying, "You know what?

I've already made my money.

There's a serious crackdown on corruption.

We're not sure if the country's moving towards a 1960 socialist type standpoint.

Let's just leave or let's just take a wait and see attitude."

- Because profitability in China, efficiency in China, has been driven more by the private sector but then by state owned enterprises.

So if we see the Chinese government now starting to freeze out some of those people, I mean, you're not going to see 5% growth, right?

- Yeah, and that's the big problem.

I mean, the real movement, the real excitement of the last 20, 30 years in China's economy has been from the private sector.

But the state-owned enterprises are getting larger, they're getting more important and more critical for the economy, especially now.

Because, actually, when you look at it, the government has tried easing monetary policy over the last quarter but almost no private SMEs have been willing to borrow money because they just don't have the confidence.

So, SOEs are state-owned enterprises, they're owned by the Chinese government and they actually report to the Chinese government, while SMEs are small/medium enterprises that are owned by private entrepreneurs.

Actually, borrowing by state-owned enterprises went up 8% last quarter year-over-year.

It's the SOEs that are pushing the economy but their goal isn't economic efficiency.

Their goal isn't making profits.

Their goal is to do what the Chinese government wants them to do as a public good.

So, for instance, there's about a 20.8% youth unemployment rate right now so the government is pushing SOEs to hire, even though they don't need them.

The SOEs are good for the economy, on the one hand, but they're also sucking the efficiency and the profit making ability on the other side.

That's why I'm becoming more bearish.

- At the same time as the Indian government is investing very, very heavily in new technology and expanding the private sector and, of course, the demographics are much more attractive.

- Yeah, you're starting to see a lot of European and American companies, especially.

They're trying to de-risk from China, and so they're looking to manufacture or source from other nations.

You see a lot of the top companies are saying, "You know what?

We're not going to leave China."

Let's be clear.

They're not getting up and moving their operations but they're not investing into China.

That's why FDI into China only went up 2% in Q1 of this year.

What they are doing is looking at India, they're looking at Vietnam and, especially for the American companies, they're moving closer and setting up shop in Mexico.

The Indian economy, I think they're probably the greatest growth opportunity over the next 5, 10 years.

- Shaun Rein, thank you so much.

- Thanks for having me.

[lighthearted music] - The Xi regime, the Biden regime.

How about a puppet regime?

Roll that tape.

- Janet, this actors' and writers' strike just won't end, soon we'll have no movies at all.

Where can we find creative minds willing to put their self-interest above everything else?

Wait, I know.

Get me some politicians.

- I do my own stance, comfortable with the nudity, ration language skills, and only union I was ever in was Soviet one.

- Next.

- Right, here's the pitch.

A wildly charismatic prime minister was unjustly ousted for just having a good time.

- Next.

- Look, if Ryan Gosling ain't too old to play Ken, then I'm sure as heck young enough to play Martin Sheen again.

- Next.

- Den, Den, in the criminal justice system, the paper will be represented by me.

- Imagine a world where women can drive but journalists... - So it's war movie so we will need F-16s, long range measles, cluster bombs.

- No.

For the last time, I will not play Winnie the Pooh.

And frankly, it's a little hurtful.

- God, these guys are all awful.

We got anyone else?

What?

One more?

All right, send him in.

- Hi, I'm Kim Jong-Un.

Non-union, six foot five.

I am not only an actor, I am also a visionary.

[gentle music] - Don't do it.

- Stay back.

Don't come any closer.

- Take my hand, I'll pull you back in.

- No, stay where you are.

I mean it, I'll let go.

- No, you won't.

- What do you mean no, I won't?

No.

Don't presume to tell me what I will and will not do.

You don't know me.

I am the supreme leader of North Korea and I will launch a whole missile attack on the entire western world.

- No, no.

Stay in character Kim, and I mean Rose.

[faint applauding] - Okay, you know what?

Maybe we'll just start paying the actors.

♪ Puppet regime ♪ - That's our show this week.

Come back next week and if you like what you see or even if you don't but you wonder how this plays out between China and the United States, who wins?

Is that the right question?

Check us out at gzeromedia.com.

[upbeat music] [upbeat music continues] [upbeat music continues] [no audio] [bright music] - [Announcer] Funding for "GZERO World" is provided by our lead sponsor, Prologis.

- [Announcer] Every day, all over the world, Prologis helps businesses of all sizes lower their carbon footprint and scale their supply chains with a portfolio of logistics and real estate and an end-to-end solutions platform, addressing the critical initiatives of global logistics today.

Learn more at prologis.com - [Announcer] And by, Cox Enterprises is proud to support GZERO.

We're working to improve lives in the areas of communications, automotive, clean tech, sustainable agriculture, and more.

Learn more at cox.career/news.

Additional funding provided by Jerre and Mary Joy Stead and.

[gentle music]