Speaker 1: Hey, odd lots listeners. It's Joe and Tracy here. We've
Speaker 1: got a couple of quick editors notes for you. One
Speaker 1: is our recent guest Craig Wiggins, misidentified the company Aurora
Speaker 1: as building to Scale that was around the four four
Speaker 1: mark in the Cannabis episode. The correct company is Afria.
Speaker 1: And one more note for you before we begin. We
Speaker 1: actually recorded this episode on the week of October eighth,
Speaker 1: and we refer to some events that were taking place
Speaker 1: that week, notably a pretty big market sell off globally
Speaker 1: but especially in China. Hello and welcome to another edition
Speaker 1: of the Loots Podcast. I'm Tracy Alloway and I'm Joe.
Speaker 1: So Joe, I just want to double check, but you
Speaker 1: realize that I've missed of to Hong Kong, right. I
Speaker 1: Not only am I aware of the fact that you've
Speaker 1: moved to Hong Kong, I am incredibly jealous that you
Speaker 1: now live in Hong Kong because that's one of my
Speaker 1: favorite cities in the entire world, with some of my
Speaker 1: favorite food and I think, are we gonna come out
Speaker 1: and visit you in a few weeks in Hong Kong.
Speaker 1: So I'm actually personally excited to benefit from the fact
Speaker 1: that you moved out there. Yes, and I promised to
Speaker 1: take you to some amazing restaurants. But in the meantime,
Speaker 1: one of the most exciting things about being in Hong
Speaker 1: Kong has to be, uh, writing about and observing the
Speaker 1: China story. And Hong Kong obviously is a special Administrative
Speaker 1: region in its own right, but it's a good advantage
Speaker 1: point from which to observe everything that's been going on
Speaker 1: with the Chinese economy. And as you know, this is
Speaker 1: becoming more and more important given that the U. S
Speaker 1: seems to be on a on the verge of a
Speaker 1: trade war with China. Wait, so we're not talking about
Speaker 1: Chinese food on today's episode. No, but we should. We
Speaker 1: should probably do that, we should do a odd lots
Speaker 1: food spinoff, but we're not doing that today. Today we're
Speaker 1: on No. No. I I just just all jokes aside.
Speaker 1: I'm interested for reasons beyond the food. And you're absolutely
Speaker 1: right that it just feels like there's a moment where
Speaker 1: understanding what's going on in China feels particularly important, right,
Speaker 1: And I should say, Uh, we're recording this in a
Speaker 1: week that's been particularly terrible for Chinese markets and Chinese assets.
Speaker 1: When I left the office today, the Shanghai Composite was
Speaker 1: down something like five cent ten cents. The big Internet
Speaker 1: giant that we have here had at one point dropped
Speaker 1: about seven points seven percent. So it really feels like
Speaker 1: Chinese markets are bearing the brunt of a lot of
Speaker 1: the trade war pressures. But beyond that, one thing I've
Speaker 1: learned just from being here for a few weeks is that,
Speaker 1: of course, there is this ongoing question about China's economic
Speaker 1: adjustment and whether or not uh the aspirations of China's
Speaker 1: rulers the Chinese Communist Party are going to actually be
Speaker 1: compatible with modern capitalism. Right, it feels like with China
Speaker 1: or at the intersection of a short term story and
Speaker 1: a long term story. So the short term story is
Speaker 1: maybe tensions with Trump, although that may turn into long
Speaker 1: term there's the market sell off other sort of things
Speaker 1: like that, and then the long term there's the efforts
Speaker 1: to restructure the economy, the effort to become really important
Speaker 1: in a bunch of big technological areas, which we've talked
Speaker 1: about before on the show. And so part of the
Speaker 1: question in my mind that I'm trying to wrap my
Speaker 1: head around is to what degree to the short term
Speaker 1: pressures sort of stymy the long term efforts, right, that's
Speaker 1: actually a really good way of putting it, that in
Speaker 1: her section of a short term and a long term story.
Speaker 1: So we actually have the perfect guest to talk about
Speaker 1: this today. Not only is he a sort of a
Speaker 1: long running China expert, but he might actually be the
Speaker 1: coolest economist that I know. The last time I saw
Speaker 1: him in person, he was wearing a leather jacket and
Speaker 1: jeans and he was on his way to Glastonbury. So um,
Speaker 1: pretty cool. I'm pretty excited, all right. So our guest
Speaker 1: for this episode is George Magnus. He is now an
Speaker 1: independent economist. He has also research associate at the China
Speaker 1: Center at Oxford University and so asked. He is also
Speaker 1: the author of a new book called Red Flags, all
Speaker 1: about the pressures facing China and its ruling authorities, and
Speaker 1: he has the former chief economist at UBS. So, George,
Speaker 1: thank you so much for joining us today. Well, thank
Speaker 1: you for having me. Uh So, George, I guess just
Speaker 1: as an initial question, maybe for our listeners, you could
Speaker 1: walk us through how you became a China expert in
Speaker 1: the first place. Yeah, sure, So I think my first
Speaker 1: visit to China actually was in when I was a
Speaker 1: kind of a rookie for an exchange economist at a
Speaker 1: UK merchant bank that went by the name of s
Speaker 1: G Warburg, which later was taken over by a Swiss
Speaker 1: bank corporation which eventually merged with UBS. And so that's
Speaker 1: how I kind of became kind of chief economist at UBS.
Speaker 1: And then China was very then definitely not just the
Speaker 1: kind of a place that I used to go to
Speaker 1: pitch at the People's Bank of China and the State
Speaker 1: Administration of Foreign Exchange for for f X business, but
Speaker 1: also a much more kind of meaningful kind of investigations
Speaker 1: into what made the economy tick and so on. But
Speaker 1: I think my my big break, so to speak, came
Speaker 1: when actually I took a step away from management functions
Speaker 1: at UBS and had much more time to look at
Speaker 1: serious issues like what was going on in you know,
Speaker 1: the financial crisis and sub prime mortgages and the economy
Speaker 1: on the other side of the world, which is which
Speaker 1: is China. And I really have spent the last kind
Speaker 1: of ten or fifteen years, i'd say, just trying to
Speaker 1: penetrate what is really a kind of a very opaque
Speaker 1: and still untransparent economic and particularly political system. I feel like,
Speaker 1: at best I have I'm I'm sort of a tourist
Speaker 1: when it comes to understanding China. I mean, I don't
Speaker 1: even know if I'm that good at understanding the US.
Speaker 1: But at no point have I ever felt like I
Speaker 1: had a particularly good grasp on what's really going on.
Speaker 1: I have some vague idea that they want to restructure
Speaker 1: their economy and that they have overcapacity in some legacy
Speaker 1: industrial state owned sectors. There are concerns about real estate bubbles,
Speaker 1: and they want to lead in tech. And when after
Speaker 1: I list off that that, I'm kind of coming to
Speaker 1: the end of my feel for the Chinese economy. What
Speaker 1: does it take to understand China? Is it repeated visits?
Speaker 1: Is it repeated conversations? Is it a granular understanding of
Speaker 1: the data beyond the headlines? Because I kind of feel
Speaker 1: like I'm not alone, I suspect many American commentators really
Speaker 1: have only the most vague sense of how the Chinese
Speaker 1: economy really works. Well one, Joe, I think you're probably
Speaker 1: being rather modest too. I mean, it is quite a
Speaker 1: serious effort, really to try to understand a country that
Speaker 1: basically doesn't really work in the same way that our
Speaker 1: western economies work. But I would say that, you know,
Speaker 1: a good place to start is you people need to
Speaker 1: understand a little bit about China's history and about how
Speaker 1: it got to where it is today. So obviously, during
Speaker 1: the early years of the People's Republic under Mautsi Tong,
Speaker 1: I mean, China actually grew quite quickly, but it was
Speaker 1: still a pretty impoverished place um and nothing really changed
Speaker 1: in terms of its ketch up on the rest of
Speaker 1: the world until Dank Shaping came to power in the
Speaker 1: end of the nineteen seventies beginning of the nineteen eighties,
Speaker 1: and then then things started to really move because he
Speaker 1: was he was basically renowned or is certainly people a
Speaker 1: tribute to him the phrase that you know, I don't
Speaker 1: care if it's a black cat or a yellow cat,
Speaker 1: so long as it's a cat that catches mice, And
Speaker 1: that was the kind of his way of basically saying
Speaker 1: to the Communist Party that you know, we have to
Speaker 1: be prepared to experiment with things that we haven't done before,
Speaker 1: particularly the marriage or the interaction between you know, a
Speaker 1: state run economic system and the use of market mechanisms,
Speaker 1: So people need to understand a little bit how that
Speaker 1: happened and and also how we've kind of reached a
Speaker 1: point now. And I don't really mean in two thousand
Speaker 1: and eighteen, because I think this has been brewing for
Speaker 1: about five or six years, but it's a point and
Speaker 1: I call in the book the end of extrapolation, because
Speaker 1: whatever we thought we knew about China during over the
Speaker 1: last thirty or thirty five years, I don't think you
Speaker 1: can kind of extrapolate that on a spreadsheet and say, well,
Speaker 1: because it's done this for the last you know, three
Speaker 1: or four decades, we think we can probably you know,
Speaker 1: push this forward into the future and this is what
Speaker 1: China will look like in twenty thirty or twenty forty
Speaker 1: or fifty, because I think it has reached that point
Speaker 1: where it needs a big makeover, a big transformation. And
Speaker 1: you know, you don't have to take my word for it,
Speaker 1: because in two thousand and seven and two thousand and eleven,
Speaker 1: so this is before Seeing Pin came to power. So
Speaker 1: this was when Jujintao and when Jibau were the president
Speaker 1: and the Premier of China respectively, and when Jibau notoriously
Speaker 1: said in in in both in both of these years
Speaker 1: that the Chinese economy was unstable and uncoordinated and unbalanced
Speaker 1: and needed to to change. And even as recently as
Speaker 1: last year at the Party Congress, he's said that the
Speaker 1: economy was unbalanced and inadequate to meet the people's needs
Speaker 1: for a better quality of life. So everybody agrees, including
Speaker 1: the Chinese leadership, that it needs a transformation, it needs
Speaker 1: a makeover. And so what we're all trying to get
Speaker 1: to grips with really is how to try to understand
Speaker 1: what's required and what whether this government really has the
Speaker 1: wherewithal and the nouns to be able to make it happen.
Speaker 1: So I have a sort of step back question, which
Speaker 1: is do we have a good idea of where the
Speaker 1: Chinese government actually wants to get to, Like is there
Speaker 1: a clear vision of what they want their economy to
Speaker 1: look like in ten or twenty or thirty years. Yes,
Speaker 1: we do have an idea. In fact, the thirteenth five
Speaker 1: Year Plan which was which is now sort of actually
Speaker 1: getting towards the last couple of years of its of
Speaker 1: its kind of limit. Um I mean, does layout kind
Speaker 1: of guidelines and and signed posts for how to develop
Speaker 1: China into a modern economy with with modern industries and
Speaker 1: and moving away from its kind of traditional reliance on
Speaker 1: heavy industry like steel and coal and chemicals to something
Speaker 1: that's a little bit more familiar to us, in terms
Speaker 1: of more service producing industries, more consumer oriented sectors, and
Speaker 1: so on. And I was going to say the sexier bit,
Speaker 1: but actually what I mean is kind of more interesting.
Speaker 1: Bit about China's vision really came about in two thousand
Speaker 1: and sixteen, so not that long ago, when Alpha Go,
Speaker 1: as many people may remember, beat the reigning world champion
Speaker 1: of the game Go, and this shocked the Chinese into
Speaker 1: basically saying we want to be the world masters and
Speaker 1: artificial intelligence by by so or five, and and in
Speaker 1: between time there was also a very important industrial strategy
Speaker 1: called Made in China, which happens to be basically the
Speaker 1: butt of the White House's objections to China's trade and
Speaker 1: industrial policies. And this sets out very clear quantitative, top
Speaker 1: down targets about China's aspirations to be where it wants
Speaker 1: to be in ten key sectors like um, you know,
Speaker 1: BioMed and electric vehicles and green energy and so on.
Speaker 1: By so, they definitely do have a very clear, top
Speaker 1: down vision about what they want to achieve and the
Speaker 1: kind of the time scale on which they want to
Speaker 1: do that by. But in a way that's kind of
Speaker 1: the easy bit. Right. You can say, you know, I
Speaker 1: want to be Superman, but you you don't really know
Speaker 1: how that's going to happen or what you need to
Speaker 1: do to make that happen. And this is kind of
Speaker 1: what we're all trying to this in Bowel really about
Speaker 1: Chinese policy. At the moment, I hadn't realized that the
Speaker 1: AlphaGo victory was such a wake up call moment. We
Speaker 1: had another episode where we talked about the maid in China.
Speaker 1: But one question that I have so you mentioned, okay,
Speaker 1: there was this incident. They're like, all right, we want
Speaker 1: to lead in AI. So they set out the national
Speaker 1: priority that we want to be a leader and artificial intelligence.
Speaker 1: What happens then, so they set the priority, what specifically
Speaker 1: do they do to implement it? Well, in the first place,
Speaker 1: it starts with with with targets, right, so they say that,
Speaker 1: you know, we want to be a world leader, we
Speaker 1: want to have market share of you know, or or
Speaker 1: you know, we want to reduce our dependence on UM
Speaker 1: you know, American semiconductor companies, because we want to develop
Speaker 1: these industries ourselves. In fact, that happens to be a
Speaker 1: very live issue for China, particularly since the incident that
Speaker 1: we had earlier this year when the United States basically
Speaker 1: sort of well restrained as ZnTe from being able to
Speaker 1: access products, and that was subsequently kind of softened up.
Speaker 1: It was a national security issue at the time, over
Speaker 1: zes relationships with with Iran. But the the it starts
Speaker 1: off really with you know, the prioritization of Chinese companies
Speaker 1: gaining or winning market share in specific industries and sub sectors.
Speaker 1: And then there are is a whole raft of industrial
Speaker 1: policies that range from subsidies to tax benefits to the
Speaker 1: facilitation of you know, university research departments with UM I
Speaker 1: mean nominally private companies like for example bai Do and
Speaker 1: ten Cent and UM and Ali Baba and san Me.
Speaker 1: So there are you know, with all the kind of
Speaker 1: leading tech companies in China to to basically help them
Speaker 1: along their way to achieve these targets. I mean in
Speaker 1: a way, I mean some of these companies are private
Speaker 1: already we think of them as private, but actually then
Speaker 1: they're kind of not private in the way that we
Speaker 1: think about private companies in the West, because the chief
Speaker 1: executives and the boards of these companies no precisely which
Speaker 1: side of the you know, which their their bread is
Speaker 1: buttered on. And um, you know, they wouldn't do anything
Speaker 1: to fall foul of the government, and they basically, you know,
Speaker 1: receive benefits and and favors and procurement privileges from the government.
Speaker 1: So they are nominally private, but not kind of private
Speaker 1: as we think of them. Um. So I want to
Speaker 1: zero in on the corporate story a little bit because
Speaker 1: on the day that we're recording this, we did just
Speaker 1: see a very big sell off in Chinese stocks, and
Speaker 1: it's kind of unusual. This came in the midst of
Speaker 1: a global sell off, but it was a little bit
Speaker 1: surprising because Chinese stocks had already fallen by quite a
Speaker 1: lot before today. They had really borne the brunt of
Speaker 1: some of the trade war concerns, so some people were
Speaker 1: surprised that they fell out of bed today as well. Um,
Speaker 1: what's going on here, and our Chinese companies as vulnerable
Speaker 1: to the trade war fears as the market seems to
Speaker 1: be implying, Well, it's this this particular week in which
Speaker 1: we're doing this recording is it's been quite a little
Speaker 1: bit complicated because the previous week the Chinese had been
Speaker 1: on holiday, so there's been a little bit of a
Speaker 1: catch up going on because markets have been weaker following
Speaker 1: very robust US economic data and revised interest rate expectations,
Speaker 1: So there was a little bit of catch up going on.
Speaker 1: But you're absolutely right, Tracy. I think the you know,
Speaker 1: there's there's an ongoing concern that even though the trade
Speaker 1: conflict hasn't really compromised the Chinese economy or Chinese companies
Speaker 1: in any material way as yet, and by the way,
Speaker 1: if it has, then it's probably been offset by the
Speaker 1: easing of lending and interest rate and bank reserve policies
Speaker 1: that have been taken this year. But there is an
Speaker 1: ongoing feeling that cumulatively the trade war will have an
Speaker 1: effect on the Chinese economy, aggravating what is already a
Speaker 1: slowing down in investment, and to some degree also in
Speaker 1: the consumer sector as well. So there is for example,
Speaker 1: quite close attention paid. It's always difficult to know what
Speaker 1: to make of it, but just as it is in
Speaker 1: the United States or in the EU, for example, people
Speaker 1: pay a lot of attention to the purchasing manager in disease.
Speaker 1: These are kind of vays of of major companies and
Speaker 1: medium sized companies about sentiment that are that come out
Speaker 1: usually at the first couple of trading days each month,
Speaker 1: and the ones that came out at the beginning of October,
Speaker 1: which is now just about kind of eight nine days
Speaker 1: away behind us were notable really because they were quite
Speaker 1: weak when they when you look at the curve of
Speaker 1: components that are about export orders. Okay, that's kind of
Speaker 1: what we would expect to see if tariff's are starting
Speaker 1: to have an effect. They were quite weak when it
Speaker 1: came to employment. Now that's quite important really because obviously
Speaker 1: the legitimate legitimacy of the Communist Party, you know, basically rests,
Speaker 1: amongst other things, but certainly importantly on you know, the
Speaker 1: achievement of sustainable growth in living standards and prosperity without interruption,
Speaker 1: in which high levels of employment are are really important.
Speaker 1: So if the labor market is weakening, then that's obviously
Speaker 1: think we need to kind of pay some attention to.
Speaker 1: But there were other indications in these surveys that that
Speaker 1: things are not going all that well for the economy.
Speaker 1: And I think the trade conflict is something which cumulatively,
Speaker 1: as I say, will have an effect not only on
Speaker 1: the Chinese economy, but it might if it's protracted, it
Speaker 1: might have an effect on the construction of supply chains
Speaker 1: and the location of businesses by foreign companies who may
Speaker 1: feel that it is judicious to diversify or move some
Speaker 1: activities out of China. So these things could be cumulatively
Speaker 1: quite important. George, I want to talk more about the
Speaker 1: trade board tensions in a second, but Tracy started off
Speaker 1: her question asking about the stock market, and something that
Speaker 1: I'm always sort of curious about is how important is
Speaker 1: the stock market in China? And I asked because I
Speaker 1: think it's very important here for a number of reasons.
Speaker 1: In the US, because of decent part of the population
Speaker 1: owned stocks. It is arising stock market can spur more
Speaker 1: investment as people want to flip startups onto the public market.
Speaker 1: There's all kinds of reasons to watch the U s
Speaker 1: stock market as a decent barometer for other bigger trends
Speaker 1: in the US economy. Does the Chinese stock market play
Speaker 1: that same role or is it not as good of
Speaker 1: a gauge into what's going on. No, I mean it
Speaker 1: isn't as good a gauge. I mean it's it's not
Speaker 1: widely owned by Chinese households in the way that stocks
Speaker 1: are held, either directly or through four oh one K
Speaker 1: plans or other forms of pension assets. So ownership by
Speaker 1: citizens of the Chinese equity market is not wide, and
Speaker 1: it does doesn't have the same kind of role in
Speaker 1: terms of equity rate capital raising for companies and and
Speaker 1: and wealth ownership as it does in in the United States,
Speaker 1: for example. I don't really think it has the kind
Speaker 1: of economic effect or can have the kind of galvanizing
Speaker 1: or destructive the economic effect that it might do in
Speaker 1: Western countries. So I guess I'm curious. But if you
Speaker 1: were to characterize the Chinese economy at the moment, how
Speaker 1: would you do? So? Is it strong? Is it weak?
Speaker 1: Is it going through a transition period? What does it
Speaker 1: actually look like to you? I think it's definitely going
Speaker 1: through a transition, I would say, Tracy. I mean it's um,
Speaker 1: it's it's yet another transformation. It's waiting to happen, but
Speaker 1: we don't really know what the end game is going
Speaker 1: to look like. So the basic transformation is from a
Speaker 1: or an economy that has become far too dependent on
Speaker 1: credit creation to keep growing, far too in which misallocation
Speaker 1: of resources and misallocation of lending has featured all two prominently,
Speaker 1: and which needs to basically restructure away from its over
Speaker 1: lee heavy dependence on capital investment and credit to a
Speaker 1: greater reliance on more open service producing industries and and
Speaker 1: and the consumer. So this is the kind of transition
Speaker 1: which that the Chinese call it rebalancing. So this is
Speaker 1: the kind of transformation China has got to try to
Speaker 1: go through. But it's very very early days, and we're
Speaker 1: already starting to run into a few issues with the
Speaker 1: whole de leveraging cycle, which began with great seriousness at
Speaker 1: the end of two thousand and sixteen. I think the
Speaker 1: Chinese leadership became very cognizant of the fact they could
Speaker 1: not carry on with this sort of overly heavy dependence
Speaker 1: on credit creation um and they've been partially successful in
Speaker 1: limiting the growth of lending to companies and in cleaning
Speaker 1: up some of the more egregious forms of risk in
Speaker 1: funding of that lending, in other words, through overnight and
Speaker 1: very very short maturity deposits in the inter bank market
Speaker 1: and through products that have become known as wealth management products.
Speaker 1: So they've been quite quite adept at doing that up
Speaker 1: to a point. But at the same time they haven't
Speaker 1: really been able to get a strong grip on containing
Speaker 1: the growth of debt by local governments, which are really
Speaker 1: important agents in the economy, and household debt, which previously
Speaker 1: was actually rather tame, is now on a bit of
Speaker 1: a tear. In fact, the ratio of household debt to
Speaker 1: income in China as of about June of two thousand
Speaker 1: and eighteen was almost a hundred and so, you know,
Speaker 1: it's a mixed scorecard. And during the course of this
Speaker 1: year two thousand and eighteen, we've seen lots of exhortations
Speaker 1: by the People's Bang of China and the regulatory agencies
Speaker 1: to banks to lend more, to export companies, to small companies,
Speaker 1: to local governments to spend more on infrastructure or issue
Speaker 1: more bonds to fund infrastructure. Reserve requirements for banks have
Speaker 1: been cut four times, interest rates have come down, so
Speaker 1: this kind of accumulating evidence that actually the Chinese authorities
Speaker 1: don't really like the consequences of de leveraging. And of
Speaker 1: course it's not a good thing, you know, to have
Speaker 1: to put your economy through a ringer to wash you know,
Speaker 1: leverage out of the system. But if you don't do
Speaker 1: it when times are good, you have to do it
Speaker 1: when times are bad. And the worry is that if
Speaker 1: the authorities are now kind of backing away from deleveraging
Speaker 1: a little bit, that it just exacerbates the problem down
Speaker 1: the road and it differs the rebalancing for along a
Speaker 1: long time to come. So how much of this pause
Speaker 1: on rebalancing or these exhortations two banks to lend more
Speaker 1: and to continue the credit driven growth model, how much
Speaker 1: are they in response to trade war led slow down
Speaker 1: and thus sort of you know, sort of gets to
Speaker 1: the question of whether the tensions with the US and
Speaker 1: other parts of the world are sort of disrupting the
Speaker 1: long term plans. Yeah, my my views, I don't think
Speaker 1: the trade conflict to date has really had a marked
Speaker 1: effects on what the authorities probably think is going on
Speaker 1: in the economy. And if it has had any effect,
Speaker 1: it's probably been compensated for by the easing of monetary
Speaker 1: and financial policy, including, by the way, the depreciation of
Speaker 1: of the yue, which has dropped by about eight percent
Speaker 1: since the spring, pretty much offsetting the latest round of
Speaker 1: ten percent tariffs, which the White House announced in September
Speaker 1: or early October for the moment at least, but I
Speaker 1: think it will become a bigger issue, particularly as the
Speaker 1: tariffs go up to on the first of January two
Speaker 1: thousand and nineteen, and also if President Trump decided to
Speaker 1: broaden the implementation of punitive tariffs to the whole of
Speaker 1: imports from China. Great George, I wanted to ask you
Speaker 1: about this because when we talk about the things that
Speaker 1: China could possibly due to offset a slowdown in its economy,
Speaker 1: there are a couple of things that usually come up.
Speaker 1: You know. One of them is always the US treasury issue.
Speaker 1: China owns a lot of US treasuries, They're a major
Speaker 1: creditor to the US, and there's this underlying theory that
Speaker 1: at some point they could possibly sell off those holdings,
Speaker 1: basically to um make a point about US policy. Uh.
Speaker 1: And then there's also the Renman b issue that you
Speaker 1: just alluded to. They could always devalue their currency, either
Speaker 1: in an obvious or a slightly more stealthy way. But
Speaker 1: there's also a greater fear that maybe at some point
Speaker 1: China might try to overturn the US dollars supremacy in
Speaker 1: the global financial system. How realistic are either of those threats, well,
Speaker 1: I mean to the extent that anybody can predict how
Speaker 1: things are going to evolve. I think the Chinese would
Speaker 1: give them both very very serious thought from the point
Speaker 1: of view of do we really want to do this
Speaker 1: with all the consequences that they would entail, Because actually
Speaker 1: both of these policies, which so either selling US treasuries
Speaker 1: or and or allowing the yuan or the MMB to
Speaker 1: depreciate much more aggressively, would be causes of self harm
Speaker 1: and domestic instability. I think. So the treasury issue is
Speaker 1: an old chestnut. We've been here many many times before
Speaker 1: in the last kind of five to seven years, and
Speaker 1: we should remember a couple of things. One is that
Speaker 1: the Chinese have a great deal of pride in their
Speaker 1: foreign exchange reserves. I mean, they did peek out at
Speaker 1: about four trillion dollars in two thousand and fourteen. They're
Speaker 1: now kind of hovering around three trillion. So I don't
Speaker 1: think they would treat this very lightly. And I think
Speaker 1: that there's no guarantee that selling US treasuries would actually
Speaker 1: achieve the results that they would want, other than just
Speaker 1: to make the White House really angry. So during two
Speaker 1: thousand fifteen, two thousand and sixteen, when the Chinese were
Speaker 1: going through a mini financial crisis, when they were going
Speaker 1: through this, they bled about five to seven hundred billion
Speaker 1: dollars worth of US dollar reserves without really impacting the
Speaker 1: treasury market at all. Okay, so we could say that
Speaker 1: times were different then because the FED wasn't raising rates
Speaker 1: and the economy wasn't as strong. And so if China
Speaker 1: did sell its treasury holdings or some of its treasury
Speaker 1: holdings now, they would don't They would be doing so
Speaker 1: into a falling market when you know, people expect the
Speaker 1: FED to keep on raising rates and so on. That's true,
Speaker 1: so it could have, you know, a more significant effect.
Speaker 1: But I think it's it's like what happens if the
Speaker 1: first five hundred billion dollars worth of sales don't work?
Speaker 1: You know, do they keep on doing this? I mean
Speaker 1: there is a level of reserves below which they will
Speaker 1: clearly not want to go. And I think it's quite
Speaker 1: dangerous because it's um it could quite easily trigger un
Speaker 1: instability and lack of confidence in Chinese financial markets and
Speaker 1: actually induce capital outflows at a time when they're trying
Speaker 1: to stop that happening. The same applies with the currency depreciation.
Speaker 1: So I think at the moment it's quite ironic, really,
Speaker 1: but Treasury Secretary Steve munition Is basically said a few
Speaker 1: things during the I m F meetings going on in
Speaker 1: Bali about you know, China's manipulation of the currency and
Speaker 1: so on so forth. If the Chinese actually did float
Speaker 1: their currency, it would probably drop like a stone. And
Speaker 1: I think at the moment the Chinese are doing whatever
Speaker 1: they can to basically keep it from depreciating. Politically, of course,
Speaker 1: they could change that policy. They could decide that if
Speaker 1: the tariffs are going up as our schedule to do,
Speaker 1: and because of the impacts of the domestic economy and
Speaker 1: tariff's trade conflict and so on, that if they wanted
Speaker 1: to compensate by depreciating the renmin be much more aggressively,
Speaker 1: that they could allow a depreciation of maybe five ten
Speaker 1: something like that. It would be unprecedented, I would say,
Speaker 1: in in certainly in recent times, and I think it
Speaker 1: would also be highly destabilizing for China for emerging markets
Speaker 1: for China's rhetoric about wanting to be the leader of
Speaker 1: globalization as the United States retreats. So none of this
Speaker 1: stuff would really work. If China were seen to be,
Speaker 1: you know, embarking on a competitive evaluation. Would it happen
Speaker 1: politically anyway? It's possible. I don't think we can rule
Speaker 1: it out, but it's not really something that I think
Speaker 1: China's leaders, who are quite cautious and they do crave stability,
Speaker 1: I don't think they would be very aggressive in in
Speaker 1: allowing that to happen. Depreciation was probably gonna happen anyway,
Speaker 1: but I would say it will be measured. George, you
Speaker 1: mentioned earlier that you do think we're in for a
Speaker 1: protracted US China trade war. There seemed to be two
Speaker 1: dimensions to the US China tension. So the president when
Speaker 1: he talked and I'm talking about the U S. President
Speaker 1: President Trump now, when he talks about China, he he
Speaker 1: tends to focus a lot on the UH the bilateral
Speaker 1: trade deficit and wanting to balance out the numbers. And
Speaker 1: that's usually how he seems to think about the world,
Speaker 1: and most people, many mainstream economists, don't give him a
Speaker 1: lot of credit. For that viewpoint, fairly or unfairly. On
Speaker 1: the other hand, there is a more sort of sophisticated
Speaker 1: and widespread backing for the idea that something must be
Speaker 1: done to sort of counter China's industrial policy, that things
Speaker 1: like the forced transfer of technology are patently unfair and
Speaker 1: at least in spirit, violate the rules of free trade,
Speaker 1: and that something must be done to sort of counter
Speaker 1: what we were talking about earlier, the Made in China
Speaker 1: initiative and various endeavors by the country to become a
Speaker 1: dominant player in these industries. Ultimately, is there a path
Speaker 1: in your view for China to continue it's technological and
Speaker 1: industrial pursuits which might be a little bit more qualitative
Speaker 1: and also satisfy the demands of the US. Is there
Speaker 1: a is there a middle ground or are these sort
Speaker 1: of fundamentally diametrically opposed goals? Well, um, I mean, they
Speaker 1: are pretty fundamental on both sides actually, and it's quite difficult,
Speaker 1: I think to see how UM either side could actually
Speaker 1: back down and um and say that their goals have
Speaker 1: been met, because that would not be the case. And certainly,
Speaker 1: you know, China not contemplate actually any kind of intrusion
Speaker 1: on what it would regard as its sovereign right to
Speaker 1: have whatever industrial policies it deems to be appropriate. Um.
Speaker 1: And at the same time, you know, the United States
Speaker 1: has clearly recognized that, you know, China as an adversary
Speaker 1: in technological matters but also closely related that to military
Speaker 1: matters and the industrial policies that underlie both of those narratives. Really,
Speaker 1: this is a serious issue where you know, you can't
Speaker 1: really compromise, and I think I think in some respects,
Speaker 1: I think we we should, you know, basically say that
Speaker 1: whatever we think about tariffs is a policy or as
Speaker 1: a tool, but that the concept of actually calling China
Speaker 1: out on some of its practices actually is certainly a
Speaker 1: defensible position. So is there a middle ground? Well, obviously
Speaker 1: the atmospherics would have to calm down first, I imagine, um,
Speaker 1: you know, and I'm just guessing here, but I imagine that, um,
Speaker 1: in the end, the United States will accept that it
Speaker 1: cannot change China's industrial policy, but the Chinese may eventually
Speaker 1: decide that there are certain things that they could do
Speaker 1: about intellectual property protection, about market access. And I don't
Speaker 1: don't just mean rhetoric, which is kind of what we
Speaker 1: largely get after you know, meetings between senior officials or
Speaker 1: used to get them when they were having meetings. But
Speaker 1: I pr protection market access, a willingness to engage and
Speaker 1: to see where there might be some kind of mutual
Speaker 1: advantages in in agreeing on you know, different types of
Speaker 1: concessions for for industries. I mean I think that I
Speaker 1: think the technological and military issues are existential. I think
Speaker 1: it would be a mistake for either side to kind
Speaker 1: of back off so speak, And I think, you know,
Speaker 1: probably America's and the West's best kind of hope of
Speaker 1: countering China is actually is to invest more in you know,
Speaker 1: technological leadership to counter But I think there I think
Speaker 1: I hope there would be a middle ground where, you know,
Speaker 1: both sides are prepared to kind of back off a
Speaker 1: little bit and compromise. I mean, that's the only way
Speaker 1: you get to the middle ground. But I think the
Speaker 1: atmospherics have to cool down a lot from where they
Speaker 1: are at the moment, which is which is pretty feisty. So, George,
Speaker 1: you mentioned the E word existential questions. Um, basically, I
Speaker 1: have an existential question, which is that I'm acutely aware
Speaker 1: that all three of us are outsiders basically peaking into
Speaker 1: the Chinese system in varying degrees. Obviously you have a
Speaker 1: better vantage point than either Joe or I do. But
Speaker 1: I'm wondering. We've had Western commentators who have been warning
Speaker 1: about pressures on the Chinese economy for decades now, and
Speaker 1: people talking about how the depth fueled growth is going
Speaker 1: to collapse. We've seen the Chinese economies struggle at various times,
Speaker 1: but we've been pretty far off of a collapse. So
Speaker 1: I guess my question is, to what degree should we
Speaker 1: think about Chinese exceptionalism when it comes to the economy.
Speaker 1: Is there a way that China can actually buck what
Speaker 1: we think are intrinsic rules that that take place when
Speaker 1: when economies operate. So the answer to that is, I
Speaker 1: mean's a typical kind of economics answer, isn't it. It's
Speaker 1: sort of yes and no. So there are bits of
Speaker 1: Chinese exceptionism, if you want to call it that, which
Speaker 1: I think we we we do have to recognize, and
Speaker 1: it's why a lot of the kind of the calls
Speaker 1: that sometimes have been made in the last kind of
Speaker 1: five or ten years about you know, it's about to collapse,
Speaker 1: it's about to implode, etcetera. Have persistently proved wrong. And
Speaker 1: that is because the Chinese have a very kind of
Speaker 1: marked system of control and have and can deploy tools
Speaker 1: which most Western governments can't simply because of the role
Speaker 1: of the state and the role of the party in
Speaker 1: the economy. So I you know, I mean I've spoken
Speaker 1: before myself about the possibility that China would kind of
Speaker 1: come to what a lot of people have kind of
Speaker 1: now colloquially called a Minsky moment, which is sort of
Speaker 1: a point where leverage becomes far too high and causes
Speaker 1: some kind of financial policy or financial system reaction. And
Speaker 1: I mean, I think it is at that point, but
Speaker 1: I don't think it's different from the rest of us.
Speaker 1: And I don't think this is a charge about you know,
Speaker 1: you Western as you think about things in a different way.
Speaker 1: I don't think that really holds water, because the misallocation
Speaker 1: of resources from excessive reliance on credit has to be
Speaker 1: paid for one day by consumers, by governments, by creditors,
Speaker 1: by companies. Um. You know, whether whatever the system of
Speaker 1: governance you have, whether it's a kind of a free
Speaker 1: market system or whether it's a state controlled system, and
Speaker 1: what we call kind of financial deepening, which is when
Speaker 1: you know, financial assets and liabilities grow at a multiple,
Speaker 1: a big multiple of the rate of growth of the
Speaker 1: economy for years and years on end. That cannot go
Speaker 1: on ad nauseam without giving rise to bubbles, speculation, and
Speaker 1: financial risk. And I honestly believe that this is the
Speaker 1: point that China is at. When I say at the moment,
Speaker 1: I don't mean you know, in October or November two
Speaker 1: thousand and eighteen, but you know for the for the moment,
Speaker 1: meaning for the next couple of years, two or three years,
Speaker 1: and and that what the most likely manifestation of all
Speaker 1: of this as it gets resolved, is a protracted period
Speaker 1: of much lower economic growth than we've been accustomed to.
Speaker 1: That's the big call. In my view. It's possible that
Speaker 1: China could have a much bigger financial crisis, um if
Speaker 1: you think about you know, our own ten years ago, um,
Speaker 1: something along those lines. I think it's less likely because
Speaker 1: I don't think China will allow any major banks or
Speaker 1: financial institutions to go bust, and so the likelihood is
Speaker 1: that there will be repression, financial repression, and they will
Speaker 1: basically sit on and try to kind of evergreen the
Speaker 1: bad loans and the misallocated lending for as long as possible,
Speaker 1: But you know, not even centrally controlled economies can do
Speaker 1: that in perpetuity. So my feeling is this has all
Speaker 1: been building up. A lot of people have had premature
Speaker 1: calls of collapse, and the calls for collapse themselves have
Speaker 1: been wrong. But you know that there will be a
Speaker 1: hay back for all of this. I think is inevitable
Speaker 1: China or not? George, I want to ask one real
Speaker 1: quick question before we go. So Tracy mentioned at the
Speaker 1: beginning that you go to UH festivals like Glastonbury, the
Speaker 1: music festivals, but I'm sure you also go to lots
Speaker 1: of conferences and panels where elite thinkers and bankers and
Speaker 1: economists gather and talk about serious issues. And I'm curious
Speaker 1: when they look at what's going on in the US
Speaker 1: with our political paralysis and our president, and they look
Speaker 1: at what's going on in the UK dealing with Brexit,
Speaker 1: and then they look at China with these multi year
Speaker 1: plans and there's extraordinary investment into things like clean energy
Speaker 1: and artificial intelligence. Have you sensed a swing in terms
Speaker 1: of sort of elite viewpoints about the merits of a
Speaker 1: more centrally planned system. Oh, I think that's definitely. Uh,
Speaker 1: it's a good question, and I think that's definitely something
Speaker 1: that has you know, has worked his way into public
Speaker 1: discussion and political debate. Well, I would say it's not
Speaker 1: you know, look, the Chinese have this great model, you know,
Speaker 1: let's just copy it. I don't think. I don't think
Speaker 1: I hear a lot of that, But I do hear
Speaker 1: a lot of debate now about where should the lines
Speaker 1: be between what we think the private sector is capable
Speaker 1: and willing to do and where we think the government
Speaker 1: or public authorities need to step in to make things
Speaker 1: happen or to facilitate things happening more quickly. But I
Speaker 1: do think that people have just kind of looked at
Speaker 1: our own experience in the financial crisis and the build
Speaker 1: up to it and since, and looked at the alternative
Speaker 1: kind of governance systems, which obviously we see all around
Speaker 1: us now, and a lot of governments and countries have
Speaker 1: basically flirted with, or or done more than flotation with
Speaker 1: autocratic forms of government and started to sort of ask
Speaker 1: questions about, you know, where those red lines should be
Speaker 1: and should we be a bit more accommodative about what
Speaker 1: the role of the state or the role of public
Speaker 1: sector agencies might be in trying to deliver better outcomes
Speaker 1: that we all kind of want, all right, George mcnus,
Speaker 1: I'm afraid we're going to have to leave it there.
Speaker 1: Fascinating discussion. Thank you so much for me with us today.
Speaker 1: That was George Magnus, the author of Red Flags. Why
Speaker 1: She's China is in Jepardy. Thank you so, Joe. I
Speaker 1: thought that was a really interesting conversation about the future
Speaker 1: of China, and your question at the very end about
Speaker 1: whether or not China's exceptionalism has kind of caused some
Speaker 1: people to think about the benefits of Western democracy is
Speaker 1: sort of spot on. It feels like there's just sort
Speaker 1: of there's a pendulum of ideas that swings back and forth,
Speaker 1: and we're at this period where a lot of elites
Speaker 1: and intellectuals and economists in the West are fairly disgusted
Speaker 1: by what they see in the US and they sort
Speaker 1: of yearn for, uh, some of the more directed economic
Speaker 1: approaches that they see in China, particularly when it comes
Speaker 1: to investment in technology. But I always, you know, like
Speaker 1: I said, it feels like it's a pendulum, and that
Speaker 1: maybe I don't know whether we've swung all the way
Speaker 1: to one side, but I don't think that it will
Speaker 1: stay that way forever, and at some point it'll probably
Speaker 1: swing back in the other direction. Well, I will say
Speaker 1: that any China Bowl that you talked to in Hong Kong,
Speaker 1: one of the big components of their China Bowl argument
Speaker 1: is usually, China is a command economy, and it's able
Speaker 1: to order a bunch of people around or pull a
Speaker 1: bunch of lovers to engineer the outcome that it wants,
Speaker 1: which is something that you never hear about in Western societies. No,
Speaker 1: absolutely not. But then again, in five years we might
Speaker 1: be hearing, uh, China is a command economy and uh technology,
Speaker 1: technology never flourishes when there's not more market competition, and
Speaker 1: they're gonna miss allocate and pick winners and losers wrong.
Speaker 1: So you know, what they say today about how China
Speaker 1: is able to stave off downturns and all this stuff,
Speaker 1: it may not be what they say five years from now. Yeah,
Speaker 1: but it does feel like we're getting to a bit
Speaker 1: of a crunch point where whatever happens over the next
Speaker 1: two or three years is going to bolster someone's argument
Speaker 1: one way or another, Right, Tracy, when I come to visit,
Speaker 1: you can we go across and uh go into China
Speaker 1: without network out. Uh, well we can try, That's all
Speaker 1: i'm gonna say. All Right, Well I'm looking forward to
Speaker 1: seeing it. Yeah, it'll be good. There will be lots
Speaker 1: of Chinese food, I promise. All right. On that note,
Speaker 1: this has been another episode of the ad Thoughts Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Why Isn't All? You can
Speaker 1: follow me on Twitter at the Stalwark, And you should
Speaker 1: follow George on Twitter He's at George magnus one, and
Speaker 1: definitely follow our producer So for Foreheads, he's at foreheads
Speaker 1: t as well as the Bloomberg head of podcast, Francesco
Speaker 1: Levie at Francesca Today. Thanks for listening.