Saxophone Dialogue with Wu Xiaoqiu: Will the War Crisis Lead to a Financial Crisis?

Ask AI · How does Sachs view the mechanism by which policy errors trigger financial crises?

Text by Feng Biao

Edited by Liu Peng

On March 21, the Renmin University of China Chongyang Financial Research Institute hosted the “Global Experts” Forum. Professor Jeffrey Sachs, a renowned economist from Columbia University, and Wu Xiaoqiu, a first-level professor and director of the National Financial Research Institute at Renmin University of China, engaged in an in-depth dialogue on the theme “Path to 2035: China, the U.S., and the World.”

Regarding current geopolitical conflicts and their impact on the economy and finance, Sachs, known for proposing “shock therapy,” believes that the failure of U.S. institutions is eroding its global credibility, while Trump’s unpredictable policies make future developments uncertain. Looking back at past financial crises, policy mistakes often serve as the root cause of crises.

Looking Ahead to 2035: Will China’s Economy Surpass the U.S.?

Looking ahead to 2035, Sachs straightforwardly states that the entire U.S. political system is dysfunctional, and the next decade will face difficulties in both international and domestic order.

Specifically, on the domestic economic front in the U.S., Sachs believes that the country currently cannot reach political consensus on major issues such as economic restructuring, infrastructure development, healthcare, education, and income distribution. In his view, China has successfully launched its 15th Five-Year Plan, but the U.S. lacks a unified strategy and plan, focusing instead on who will win the next election or whether Trump will be impeached. The political polarization and division within the U.S. have already peaked, creating a turbulent development environment.

Sachs specifically discussed recent U.S. military actions against Iran. He believes the U.S. aims to maintain dominance in the Middle East and West Asia, but the results have been disappointing. The reckless decision to initiate war was a significant mistake. This conflict not only damages regional stability but also destroys infrastructure and reveals to other countries that the U.S. cannot be relied upon as a trustworthy protector.

Therefore, Sachs argues that U.S. efforts to dominate the world will instead lead to ongoing conflicts. In a multipolar world, even if the U.S. intends to remain a global hegemon, it can no longer control everything.

Wu Xiaoqiu, from China’s perspective, outlined a development vision and strategic confidence toward 2035. He believes that according to China’s 14th Five-Year Plan, by 2035, China aims to reach the level of a moderately developed country. Based on this development goal and demographic changes, China’s GDP in 2035 is expected to be around 30 trillion yuan, roughly comparable to the U.S. GDP of $30.8 trillion in 2025. However, China’s per capita GDP still lags significantly behind the U.S.

In Wu’s view, despite the complex and severe external environment, China’s large-scale market, complete industrial system, and ongoing technological innovation give it the capacity to maintain long-term positive fundamentals. He states, “The 14th Five-Year Plan has clear priorities, establishing six emerging pillar industries and six future industries.” Reflecting on China’s manufacturing breakthroughs over the past decade, 32 of the 35 “bottleneck” technologies identified for self-reliance have been fundamentally improved by 2025, with a domestic substitution rate reaching 70%. Only three remain under development. While China still trails in some areas, in many fields it has shifted from lagging behind to running parallel or even leading.

Regarding the comparison of economic scales between China and the U.S., or whether China’s economy will surpass the U.S. by 2035, Sachs believes that if measured by purchasing power parity (PPP), China may already surpass the U.S. in total. However, from the exchange rate perspective, China’s per capita GDP is only about one-sixth of the U.S. It’s important to note that these statistics may not fully reflect the actual economic situation of both countries. In his view, the real income and living standards of citizens are more indicative. Chinese people’s living standards are not far behind those in the U.S.

For example, Sachs mentions that life expectancy and healthcare conditions are similar in China and the U.S., but healthcare costs in the U.S. are many times higher, so income comparisons alone are not very meaningful.

Will a financial crisis occur? Sachs: It’s hard to predict what mistakes Trump might make

Recently, military conflicts involving the U.S., Israel, and Iran have caused crude oil prices to surge and market turbulence. Could this war crisis spread to the economy and finance?

Sachs believes that the 2008 financial crisis was mainly caused by underlying instability in the economy and major mistakes by decision-makers. What was the mistake in 2008? Sachs states that the U.S. Treasury Secretary at the time decided to punish Lehman Brothers by forcing it into bankruptcy instead of allowing it to merge with another bank. On September 14, 2008, Lehman was required to file for bankruptcy. The next day, September 15, the entire financial market panicked, leading to weeks of financial turmoil. This crisis ultimately caused a global economic downturn lasting five years. Sachs suggests that if the U.S. Treasury had not pushed Lehman into bankruptcy, the crisis might have been avoided. Furthermore, he notes that nearly 100 years ago, the U.S. financial crisis contributed to the Great Depression, which was also influenced by errors in central bank policies.

Therefore, Sachs believes that financial crises are difficult to predict and are not solely due to economic fundamentals but also require extremely poor decisions. He advises avoiding foolish policies and not being overly rigid in economic management to prevent fragile economies from becoming even more vulnerable.

Sachs also adds that Trump is highly unpredictable—he has no clear plan, and no one understands what mistakes he might make, even Trump himself.

Regarding Trump’s series of trade policies since his second term, Sachs argues that the U.S. is unwilling to engage in rule-based systems. The U.S. rejects the United Nations, dismisses the WTO, and has withdrawn from the climate agreement. Currently, U.S. policies are not built on a rule-based system but on a power-based system.

In Sachs’s view, if the U.S. refuses to participate in rule-based trade systems, other countries should let the U.S. withdraw and continue to participate in the system according to the rules.