WEBVTT - What Will China’s Economy Look Like In 10 Years? 0:00:02.000 --> 0:00:05.160 Hey, odd lots listeners. It's Joe and Tracy here. We've 0:00:05.200 --> 0:00:08.840 got a couple of quick editors notes for you. One 0:00:08.960 --> 0:00:12.600 is our recent guest Craig Wiggins, misidentified the company Aurora 0:00:13.039 --> 0:00:16.640 as building to Scale that was around the four four 0:00:17.079 --> 0:00:20.800 mark in the Cannabis episode. The correct company is Afria. 0:00:21.600 --> 0:00:24.279 And one more note for you before we begin. We 0:00:24.360 --> 0:00:28.840 actually recorded this episode on the week of October eighth, 0:00:28.960 --> 0:00:31.520 and we refer to some events that were taking place 0:00:31.560 --> 0:00:35.360 that week, notably a pretty big market sell off globally 0:00:35.479 --> 0:00:50.440 but especially in China. Hello and welcome to another edition 0:00:50.479 --> 0:00:54.360 of the Loots Podcast. I'm Tracy Alloway and I'm Joe. 0:00:55.600 --> 0:00:58.440 So Joe, I just want to double check, but you 0:00:58.680 --> 0:01:02.080 realize that I've missed of to Hong Kong, right. I 0:01:02.480 --> 0:01:04.479 Not only am I aware of the fact that you've 0:01:04.480 --> 0:01:07.840 moved to Hong Kong, I am incredibly jealous that you 0:01:07.920 --> 0:01:09.800 now live in Hong Kong because that's one of my 0:01:09.880 --> 0:01:11.880 favorite cities in the entire world, with some of my 0:01:11.920 --> 0:01:14.840 favorite food and I think, are we gonna come out 0:01:14.840 --> 0:01:17.160 and visit you in a few weeks in Hong Kong. 0:01:17.440 --> 0:01:21.080 So I'm actually personally excited to benefit from the fact 0:01:21.120 --> 0:01:24.680 that you moved out there. Yes, and I promised to 0:01:24.720 --> 0:01:28.200 take you to some amazing restaurants. But in the meantime, 0:01:29.240 --> 0:01:31.440 one of the most exciting things about being in Hong 0:01:31.520 --> 0:01:36.200 Kong has to be, uh, writing about and observing the 0:01:36.319 --> 0:01:40.840 China story. And Hong Kong obviously is a special Administrative 0:01:40.840 --> 0:01:44.000 region in its own right, but it's a good advantage 0:01:44.040 --> 0:01:47.600 point from which to observe everything that's been going on 0:01:48.080 --> 0:01:51.240 with the Chinese economy. And as you know, this is 0:01:51.280 --> 0:01:54.640 becoming more and more important given that the U. S 0:01:54.640 --> 0:01:56.720 seems to be on a on the verge of a 0:01:56.760 --> 0:01:59.960 trade war with China. Wait, so we're not talking about 0:02:00.120 --> 0:02:03.680 Chinese food on today's episode. No, but we should. We 0:02:03.720 --> 0:02:06.760 should probably do that, we should do a odd lots 0:02:06.880 --> 0:02:11.480 food spinoff, but we're not doing that today. Today we're 0:02:13.240 --> 0:02:15.919 on No. No. I I just just all jokes aside. 0:02:16.000 --> 0:02:19.559 I'm interested for reasons beyond the food. And you're absolutely 0:02:19.639 --> 0:02:23.080 right that it just feels like there's a moment where 0:02:23.160 --> 0:02:27.760 understanding what's going on in China feels particularly important, right, 0:02:27.840 --> 0:02:31.600 And I should say, Uh, we're recording this in a 0:02:31.639 --> 0:02:37.240 week that's been particularly terrible for Chinese markets and Chinese assets. 0:02:37.560 --> 0:02:41.239 When I left the office today, the Shanghai Composite was 0:02:41.320 --> 0:02:45.560 down something like five cent ten cents. The big Internet 0:02:45.560 --> 0:02:49.280 giant that we have here had at one point dropped 0:02:49.320 --> 0:02:53.280 about seven points seven percent. So it really feels like 0:02:53.360 --> 0:02:55.880 Chinese markets are bearing the brunt of a lot of 0:02:55.919 --> 0:03:00.080 the trade war pressures. But beyond that, one thing I've 0:03:00.160 --> 0:03:02.680 learned just from being here for a few weeks is that, 0:03:02.800 --> 0:03:07.920 of course, there is this ongoing question about China's economic 0:03:08.040 --> 0:03:13.480 adjustment and whether or not uh the aspirations of China's 0:03:13.600 --> 0:03:17.480 rulers the Chinese Communist Party are going to actually be 0:03:17.600 --> 0:03:23.040 compatible with modern capitalism. Right, it feels like with China 0:03:23.240 --> 0:03:25.760 or at the intersection of a short term story and 0:03:25.800 --> 0:03:29.040 a long term story. So the short term story is 0:03:29.120 --> 0:03:31.639 maybe tensions with Trump, although that may turn into long 0:03:31.760 --> 0:03:35.360 term there's the market sell off other sort of things 0:03:35.360 --> 0:03:38.280 like that, and then the long term there's the efforts 0:03:38.320 --> 0:03:43.000 to restructure the economy, the effort to become really important 0:03:43.000 --> 0:03:45.560 in a bunch of big technological areas, which we've talked 0:03:45.560 --> 0:03:48.120 about before on the show. And so part of the 0:03:48.200 --> 0:03:50.280 question in my mind that I'm trying to wrap my 0:03:50.280 --> 0:03:53.080 head around is to what degree to the short term 0:03:53.160 --> 0:03:58.040 pressures sort of stymy the long term efforts, right, that's 0:03:58.080 --> 0:03:59.880 actually a really good way of putting it, that in 0:04:00.040 --> 0:04:02.480 her section of a short term and a long term story. 0:04:02.920 --> 0:04:05.960 So we actually have the perfect guest to talk about 0:04:06.000 --> 0:04:08.680 this today. Not only is he a sort of a 0:04:08.720 --> 0:04:12.280 long running China expert, but he might actually be the 0:04:12.320 --> 0:04:16.240 coolest economist that I know. The last time I saw 0:04:16.320 --> 0:04:18.960 him in person, he was wearing a leather jacket and 0:04:19.080 --> 0:04:22.520 jeans and he was on his way to Glastonbury. So um, 0:04:22.520 --> 0:04:26.880 pretty cool. I'm pretty excited, all right. So our guest 0:04:27.320 --> 0:04:31.440 for this episode is George Magnus. He is now an 0:04:31.480 --> 0:04:35.679 independent economist. He has also research associate at the China 0:04:35.800 --> 0:04:39.039 Center at Oxford University and so asked. He is also 0:04:39.080 --> 0:04:41.720 the author of a new book called Red Flags, all 0:04:41.760 --> 0:04:47.040 about the pressures facing China and its ruling authorities, and 0:04:47.120 --> 0:04:50.760 he has the former chief economist at UBS. So, George, 0:04:50.800 --> 0:04:53.839 thank you so much for joining us today. Well, thank 0:04:53.839 --> 0:04:57.120 you for having me. Uh So, George, I guess just 0:04:57.160 --> 0:05:00.799 as an initial question, maybe for our listeners, you could 0:05:00.800 --> 0:05:05.000 walk us through how you became a China expert in 0:05:05.040 --> 0:05:10.280 the first place. Yeah, sure, So I think my first 0:05:10.360 --> 0:05:14.280 visit to China actually was in when I was a 0:05:14.360 --> 0:05:17.200 kind of a rookie for an exchange economist at a 0:05:17.960 --> 0:05:20.120 UK merchant bank that went by the name of s 0:05:20.160 --> 0:05:24.760 G Warburg, which later was taken over by a Swiss 0:05:24.800 --> 0:05:29.880 bank corporation which eventually merged with UBS. And so that's 0:05:30.279 --> 0:05:34.120 how I kind of became kind of chief economist at UBS. 0:05:34.160 --> 0:05:37.320 And then China was very then definitely not just the 0:05:37.400 --> 0:05:38.760 kind of a place that I used to go to 0:05:38.839 --> 0:05:41.840 pitch at the People's Bank of China and the State 0:05:41.839 --> 0:05:45.279 Administration of Foreign Exchange for for f X business, but 0:05:45.400 --> 0:05:50.200 also a much more kind of meaningful kind of investigations 0:05:50.200 --> 0:05:53.200 into what made the economy tick and so on. But 0:05:53.279 --> 0:05:55.720 I think my my big break, so to speak, came 0:05:55.880 --> 0:05:59.279 when actually I took a step away from management functions 0:05:59.279 --> 0:06:02.880 at UBS and had much more time to look at 0:06:03.120 --> 0:06:06.360 serious issues like what was going on in you know, 0:06:06.440 --> 0:06:11.120 the financial crisis and sub prime mortgages and the economy 0:06:11.160 --> 0:06:13.000 on the other side of the world, which is which 0:06:13.040 --> 0:06:16.800 is China. And I really have spent the last kind 0:06:16.800 --> 0:06:19.680 of ten or fifteen years, i'd say, just trying to 0:06:19.920 --> 0:06:22.880 penetrate what is really a kind of a very opaque 0:06:23.360 --> 0:06:30.640 and still untransparent economic and particularly political system. I feel like, 0:06:31.120 --> 0:06:33.880 at best I have I'm I'm sort of a tourist 0:06:33.920 --> 0:06:36.520 when it comes to understanding China. I mean, I don't 0:06:36.520 --> 0:06:39.240 even know if I'm that good at understanding the US. 0:06:39.279 --> 0:06:41.479 But at no point have I ever felt like I 0:06:41.560 --> 0:06:44.840 had a particularly good grasp on what's really going on. 0:06:44.920 --> 0:06:48.520 I have some vague idea that they want to restructure 0:06:48.520 --> 0:06:52.360 their economy and that they have overcapacity in some legacy 0:06:52.400 --> 0:06:57.080 industrial state owned sectors. There are concerns about real estate bubbles, 0:06:57.400 --> 0:07:00.320 and they want to lead in tech. And when after 0:07:00.320 --> 0:07:03.279 I list off that that, I'm kind of coming to 0:07:03.320 --> 0:07:06.560 the end of my feel for the Chinese economy. What 0:07:06.640 --> 0:07:10.800 does it take to understand China? Is it repeated visits? 0:07:10.880 --> 0:07:14.680 Is it repeated conversations? Is it a granular understanding of 0:07:14.720 --> 0:07:17.360 the data beyond the headlines? Because I kind of feel 0:07:17.360 --> 0:07:20.920 like I'm not alone, I suspect many American commentators really 0:07:21.000 --> 0:07:23.640 have only the most vague sense of how the Chinese 0:07:23.640 --> 0:07:27.480 economy really works. Well one, Joe, I think you're probably 0:07:27.520 --> 0:07:31.000 being rather modest too. I mean, it is quite a 0:07:31.080 --> 0:07:35.040 serious effort, really to try to understand a country that 0:07:35.120 --> 0:07:37.880 basically doesn't really work in the same way that our 0:07:37.920 --> 0:07:41.800 western economies work. But I would say that, you know, 0:07:41.840 --> 0:07:43.720 a good place to start is you people need to 0:07:43.760 --> 0:07:46.680 understand a little bit about China's history and about how 0:07:46.720 --> 0:07:50.400 it got to where it is today. So obviously, during 0:07:50.440 --> 0:07:53.520 the early years of the People's Republic under Mautsi Tong, 0:07:54.240 --> 0:07:56.680 I mean, China actually grew quite quickly, but it was 0:07:57.200 --> 0:08:01.520 still a pretty impoverished place um and nothing really changed 0:08:01.600 --> 0:08:03.720 in terms of its ketch up on the rest of 0:08:03.720 --> 0:08:09.200 the world until Dank Shaping came to power in the 0:08:09.240 --> 0:08:11.600 end of the nineteen seventies beginning of the nineteen eighties, 0:08:12.040 --> 0:08:16.920 and then then things started to really move because he 0:08:16.720 --> 0:08:20.320 was he was basically renowned or is certainly people a 0:08:20.440 --> 0:08:23.560 tribute to him the phrase that you know, I don't 0:08:23.600 --> 0:08:25.240 care if it's a black cat or a yellow cat, 0:08:25.280 --> 0:08:27.640 so long as it's a cat that catches mice, And 0:08:27.720 --> 0:08:31.640 that was the kind of his way of basically saying 0:08:31.680 --> 0:08:34.120 to the Communist Party that you know, we have to 0:08:34.120 --> 0:08:37.000 be prepared to experiment with things that we haven't done before, 0:08:37.040 --> 0:08:41.560 particularly the marriage or the interaction between you know, a 0:08:41.640 --> 0:08:44.880 state run economic system and the use of market mechanisms, 0:08:44.880 --> 0:08:47.240 So people need to understand a little bit how that 0:08:47.320 --> 0:08:51.440 happened and and also how we've kind of reached a 0:08:51.480 --> 0:08:55.319 point now. And I don't really mean in two thousand 0:08:55.360 --> 0:08:57.439 and eighteen, because I think this has been brewing for 0:08:57.480 --> 0:09:00.040 about five or six years, but it's a point and 0:09:00.120 --> 0:09:02.840 I call in the book the end of extrapolation, because 0:09:03.040 --> 0:09:06.079 whatever we thought we knew about China during over the 0:09:06.160 --> 0:09:08.640 last thirty or thirty five years, I don't think you 0:09:08.679 --> 0:09:12.120 can kind of extrapolate that on a spreadsheet and say, well, 0:09:12.200 --> 0:09:14.199 because it's done this for the last you know, three 0:09:14.280 --> 0:09:16.840 or four decades, we think we can probably you know, 0:09:16.880 --> 0:09:18.960 push this forward into the future and this is what 0:09:19.080 --> 0:09:21.480 China will look like in twenty thirty or twenty forty 0:09:21.600 --> 0:09:24.920 or fifty, because I think it has reached that point 0:09:24.920 --> 0:09:28.920 where it needs a big makeover, a big transformation. And 0:09:29.000 --> 0:09:30.560 you know, you don't have to take my word for it, 0:09:30.600 --> 0:09:33.680 because in two thousand and seven and two thousand and eleven, 0:09:33.720 --> 0:09:36.520 so this is before Seeing Pin came to power. So 0:09:36.559 --> 0:09:39.960 this was when Jujintao and when Jibau were the president 0:09:40.080 --> 0:09:44.280 and the Premier of China respectively, and when Jibau notoriously 0:09:44.360 --> 0:09:47.160 said in in in both in both of these years 0:09:47.200 --> 0:09:51.959 that the Chinese economy was unstable and uncoordinated and unbalanced 0:09:52.760 --> 0:09:56.480 and needed to to change. And even as recently as 0:09:56.559 --> 0:10:00.920 last year at the Party Congress, he's said that the 0:10:00.960 --> 0:10:05.080 economy was unbalanced and inadequate to meet the people's needs 0:10:05.120 --> 0:10:08.520 for a better quality of life. So everybody agrees, including 0:10:08.559 --> 0:10:11.560 the Chinese leadership, that it needs a transformation, it needs 0:10:11.559 --> 0:10:13.760 a makeover. And so what we're all trying to get 0:10:13.760 --> 0:10:16.319 to grips with really is how to try to understand 0:10:16.360 --> 0:10:22.160 what's required and what whether this government really has the 0:10:22.240 --> 0:10:25.520 wherewithal and the nouns to be able to make it happen. 0:10:26.120 --> 0:10:28.520 So I have a sort of step back question, which 0:10:28.559 --> 0:10:31.280 is do we have a good idea of where the 0:10:31.360 --> 0:10:35.040 Chinese government actually wants to get to, Like is there 0:10:35.080 --> 0:10:39.080 a clear vision of what they want their economy to 0:10:39.160 --> 0:10:43.400 look like in ten or twenty or thirty years. Yes, 0:10:43.480 --> 0:10:47.960 we do have an idea. In fact, the thirteenth five 0:10:48.040 --> 0:10:51.280 Year Plan which was which is now sort of actually 0:10:51.360 --> 0:10:53.560 getting towards the last couple of years of its of 0:10:53.640 --> 0:10:57.720 its kind of limit. Um I mean, does layout kind 0:10:57.720 --> 0:11:02.040 of guidelines and and signed posts for how to develop 0:11:02.200 --> 0:11:07.520 China into a modern economy with with modern industries and 0:11:07.520 --> 0:11:11.640 and moving away from its kind of traditional reliance on 0:11:11.720 --> 0:11:16.200 heavy industry like steel and coal and chemicals to something 0:11:16.280 --> 0:11:19.160 that's a little bit more familiar to us, in terms 0:11:19.160 --> 0:11:23.920 of more service producing industries, more consumer oriented sectors, and 0:11:23.960 --> 0:11:26.600 so on. And I was going to say the sexier bit, 0:11:26.600 --> 0:11:28.400 but actually what I mean is kind of more interesting. 0:11:28.440 --> 0:11:32.600 Bit about China's vision really came about in two thousand 0:11:32.600 --> 0:11:36.559 and sixteen, so not that long ago, when Alpha Go, 0:11:37.440 --> 0:11:41.560 as many people may remember, beat the reigning world champion 0:11:41.960 --> 0:11:46.079 of the game Go, and this shocked the Chinese into 0:11:46.400 --> 0:11:50.199 basically saying we want to be the world masters and 0:11:50.360 --> 0:11:58.200 artificial intelligence by by so or five, and and in 0:11:58.240 --> 0:12:03.760 between time there was also a very important industrial strategy 0:12:03.800 --> 0:12:09.400 called Made in China, which happens to be basically the 0:12:09.440 --> 0:12:14.840 butt of the White House's objections to China's trade and 0:12:14.920 --> 0:12:19.600 industrial policies. And this sets out very clear quantitative, top 0:12:19.640 --> 0:12:24.360 down targets about China's aspirations to be where it wants 0:12:24.400 --> 0:12:28.320 to be in ten key sectors like um, you know, 0:12:28.400 --> 0:12:32.600 BioMed and electric vehicles and green energy and so on. 0:12:33.280 --> 0:12:39.520 By so, they definitely do have a very clear, top 0:12:39.640 --> 0:12:43.360 down vision about what they want to achieve and the 0:12:43.480 --> 0:12:45.440 kind of the time scale on which they want to 0:12:45.480 --> 0:12:49.080 do that by. But in a way that's kind of 0:12:49.120 --> 0:12:52.079 the easy bit. Right. You can say, you know, I 0:12:52.120 --> 0:12:54.120 want to be Superman, but you you don't really know 0:12:54.160 --> 0:12:56.080 how that's going to happen or what you need to 0:12:56.080 --> 0:12:58.440 do to make that happen. And this is kind of 0:12:58.480 --> 0:13:01.240 what we're all trying to this in Bowel really about 0:13:01.320 --> 0:13:05.440 Chinese policy. At the moment, I hadn't realized that the 0:13:05.480 --> 0:13:10.120 AlphaGo victory was such a wake up call moment. We 0:13:10.160 --> 0:13:12.760 had another episode where we talked about the maid in China. 0:13:14.760 --> 0:13:17.920 But one question that I have so you mentioned, okay, 0:13:17.960 --> 0:13:20.080 there was this incident. They're like, all right, we want 0:13:20.080 --> 0:13:23.160 to lead in AI. So they set out the national 0:13:23.240 --> 0:13:27.319 priority that we want to be a leader and artificial intelligence. 0:13:27.600 --> 0:13:31.359 What happens then, so they set the priority, what specifically 0:13:31.600 --> 0:13:35.400 do they do to implement it? Well, in the first place, 0:13:35.800 --> 0:13:39.120 it starts with with with targets, right, so they say that, 0:13:39.559 --> 0:13:41.360 you know, we want to be a world leader, we 0:13:41.400 --> 0:13:46.000 want to have market share of you know, or or 0:13:47.880 --> 0:13:52.080 you know, we want to reduce our dependence on UM 0:13:52.120 --> 0:13:55.680 you know, American semiconductor companies, because we want to develop 0:13:55.720 --> 0:13:58.440 these industries ourselves. In fact, that happens to be a 0:13:58.520 --> 0:14:05.160 very live issue for China, particularly since the incident that 0:14:05.200 --> 0:14:09.560 we had earlier this year when the United States basically 0:14:10.200 --> 0:14:14.080 sort of well restrained as ZnTe from being able to 0:14:15.080 --> 0:14:18.920 access products, and that was subsequently kind of softened up. 0:14:18.920 --> 0:14:21.359 It was a national security issue at the time, over 0:14:21.720 --> 0:14:26.360 zes relationships with with Iran. But the the it starts 0:14:26.400 --> 0:14:30.400 off really with you know, the prioritization of Chinese companies 0:14:31.080 --> 0:14:36.440 gaining or winning market share in specific industries and sub sectors. 0:14:37.080 --> 0:14:40.160 And then there are is a whole raft of industrial 0:14:40.240 --> 0:14:46.960 policies that range from subsidies to tax benefits to the 0:14:47.000 --> 0:14:52.440 facilitation of you know, university research departments with UM I 0:14:52.440 --> 0:14:55.840 mean nominally private companies like for example bai Do and 0:14:55.960 --> 0:15:00.160 ten Cent and UM and Ali Baba and san Me. 0:15:00.400 --> 0:15:02.000 So there are you know, with all the kind of 0:15:02.080 --> 0:15:06.120 leading tech companies in China to to basically help them 0:15:06.120 --> 0:15:08.800 along their way to achieve these targets. I mean in 0:15:08.800 --> 0:15:13.000 a way, I mean some of these companies are private 0:15:13.040 --> 0:15:16.200 already we think of them as private, but actually then 0:15:16.360 --> 0:15:18.320 they're kind of not private in the way that we 0:15:18.360 --> 0:15:21.840 think about private companies in the West, because the chief 0:15:21.840 --> 0:15:25.440 executives and the boards of these companies no precisely which 0:15:25.480 --> 0:15:27.840 side of the you know, which their their bread is 0:15:27.880 --> 0:15:30.920 buttered on. And um, you know, they wouldn't do anything 0:15:30.920 --> 0:15:34.720 to fall foul of the government, and they basically, you know, 0:15:34.840 --> 0:15:41.960 receive benefits and and favors and procurement privileges from the government. 0:15:42.000 --> 0:15:45.880 So they are nominally private, but not kind of private 0:15:45.880 --> 0:15:49.040 as we think of them. Um. So I want to 0:15:49.160 --> 0:15:52.760 zero in on the corporate story a little bit because 0:15:53.280 --> 0:15:55.720 on the day that we're recording this, we did just 0:15:55.720 --> 0:16:00.200 see a very big sell off in Chinese stocks, and 0:16:00.280 --> 0:16:03.080 it's kind of unusual. This came in the midst of 0:16:03.120 --> 0:16:05.680 a global sell off, but it was a little bit 0:16:05.720 --> 0:16:09.320 surprising because Chinese stocks had already fallen by quite a 0:16:09.320 --> 0:16:13.520 lot before today. They had really borne the brunt of 0:16:13.560 --> 0:16:17.120 some of the trade war concerns, so some people were 0:16:17.160 --> 0:16:21.800 surprised that they fell out of bed today as well. Um, 0:16:21.920 --> 0:16:26.440 what's going on here, and our Chinese companies as vulnerable 0:16:26.640 --> 0:16:29.560 to the trade war fears as the market seems to 0:16:29.560 --> 0:16:36.040 be implying, Well, it's this this particular week in which 0:16:36.040 --> 0:16:38.200 we're doing this recording is it's been quite a little 0:16:38.200 --> 0:16:41.560 bit complicated because the previous week the Chinese had been 0:16:41.600 --> 0:16:44.240 on holiday, so there's been a little bit of a 0:16:44.280 --> 0:16:49.920 catch up going on because markets have been weaker following 0:16:50.200 --> 0:16:54.760 very robust US economic data and revised interest rate expectations, 0:16:54.760 --> 0:16:56.640 So there was a little bit of catch up going on. 0:16:56.800 --> 0:16:59.520 But you're absolutely right, Tracy. I think the you know, 0:16:59.600 --> 0:17:04.960 there's there's an ongoing concern that even though the trade 0:17:05.000 --> 0:17:10.040 conflict hasn't really compromised the Chinese economy or Chinese companies 0:17:10.440 --> 0:17:15.600 in any material way as yet, and by the way, 0:17:15.720 --> 0:17:19.320 if it has, then it's probably been offset by the 0:17:19.440 --> 0:17:24.119 easing of lending and interest rate and bank reserve policies 0:17:24.160 --> 0:17:27.320 that have been taken this year. But there is an 0:17:27.320 --> 0:17:31.600 ongoing feeling that cumulatively the trade war will have an 0:17:31.600 --> 0:17:36.760 effect on the Chinese economy, aggravating what is already a 0:17:37.080 --> 0:17:41.560 slowing down in investment, and to some degree also in 0:17:41.600 --> 0:17:46.400 the consumer sector as well. So there is for example, 0:17:47.119 --> 0:17:49.800 quite close attention paid. It's always difficult to know what 0:17:49.880 --> 0:17:51.359 to make of it, but just as it is in 0:17:51.800 --> 0:17:54.840 the United States or in the EU, for example, people 0:17:54.880 --> 0:17:58.720 pay a lot of attention to the purchasing manager in disease. 0:17:59.160 --> 0:18:03.520 These are kind of vays of of major companies and 0:18:03.600 --> 0:18:07.720 medium sized companies about sentiment that are that come out 0:18:07.800 --> 0:18:11.080 usually at the first couple of trading days each month, 0:18:11.680 --> 0:18:15.959 and the ones that came out at the beginning of October, 0:18:16.080 --> 0:18:19.280 which is now just about kind of eight nine days 0:18:19.320 --> 0:18:23.560 away behind us were notable really because they were quite 0:18:23.640 --> 0:18:25.960 weak when they when you look at the curve of 0:18:26.040 --> 0:18:28.840 components that are about export orders. Okay, that's kind of 0:18:28.880 --> 0:18:31.280 what we would expect to see if tariff's are starting 0:18:31.320 --> 0:18:34.480 to have an effect. They were quite weak when it 0:18:34.560 --> 0:18:38.800 came to employment. Now that's quite important really because obviously 0:18:38.840 --> 0:18:44.040 the legitimate legitimacy of the Communist Party, you know, basically rests, 0:18:44.400 --> 0:18:48.600 amongst other things, but certainly importantly on you know, the 0:18:48.640 --> 0:18:53.240 achievement of sustainable growth in living standards and prosperity without interruption, 0:18:53.560 --> 0:18:56.440 in which high levels of employment are are really important. 0:18:56.480 --> 0:18:59.840 So if the labor market is weakening, then that's obviously 0:19:00.080 --> 0:19:02.439 think we need to kind of pay some attention to. 0:19:03.119 --> 0:19:05.879 But there were other indications in these surveys that that 0:19:06.000 --> 0:19:09.960 things are not going all that well for the economy. 0:19:10.080 --> 0:19:14.240 And I think the trade conflict is something which cumulatively, 0:19:14.240 --> 0:19:17.159 as I say, will have an effect not only on 0:19:17.440 --> 0:19:21.440 the Chinese economy, but it might if it's protracted, it 0:19:21.520 --> 0:19:25.560 might have an effect on the construction of supply chains 0:19:25.640 --> 0:19:30.440 and the location of businesses by foreign companies who may 0:19:30.560 --> 0:19:36.000 feel that it is judicious to diversify or move some 0:19:36.200 --> 0:19:40.400 activities out of China. So these things could be cumulatively 0:19:40.480 --> 0:19:43.840 quite important. George, I want to talk more about the 0:19:43.920 --> 0:19:47.239 trade board tensions in a second, but Tracy started off 0:19:47.240 --> 0:19:49.600 her question asking about the stock market, and something that 0:19:49.640 --> 0:19:52.840 I'm always sort of curious about is how important is 0:19:52.920 --> 0:19:55.240 the stock market in China? And I asked because I 0:19:55.280 --> 0:19:57.840 think it's very important here for a number of reasons. 0:19:57.840 --> 0:20:01.280 In the US, because of decent part of the population 0:20:01.359 --> 0:20:05.360 owned stocks. It is arising stock market can spur more 0:20:05.400 --> 0:20:09.240 investment as people want to flip startups onto the public market. 0:20:09.440 --> 0:20:12.359 There's all kinds of reasons to watch the U s 0:20:12.359 --> 0:20:15.600 stock market as a decent barometer for other bigger trends 0:20:15.600 --> 0:20:19.240 in the US economy. Does the Chinese stock market play 0:20:19.280 --> 0:20:22.600 that same role or is it not as good of 0:20:22.680 --> 0:20:26.439 a gauge into what's going on. No, I mean it 0:20:26.600 --> 0:20:29.880 isn't as good a gauge. I mean it's it's not 0:20:30.200 --> 0:20:35.000 widely owned by Chinese households in the way that stocks 0:20:35.200 --> 0:20:40.240 are held, either directly or through four oh one K 0:20:40.520 --> 0:20:45.280 plans or other forms of pension assets. So ownership by 0:20:45.320 --> 0:20:50.600 citizens of the Chinese equity market is not wide, and 0:20:51.520 --> 0:20:55.239 it does doesn't have the same kind of role in 0:20:55.359 --> 0:21:00.679 terms of equity rate capital raising for companies and and 0:21:00.680 --> 0:21:04.880 and wealth ownership as it does in in the United States, 0:21:04.960 --> 0:21:08.120 for example. I don't really think it has the kind 0:21:08.119 --> 0:21:12.040 of economic effect or can have the kind of galvanizing 0:21:12.240 --> 0:21:15.800 or destructive the economic effect that it might do in 0:21:16.240 --> 0:21:19.760 Western countries. So I guess I'm curious. But if you 0:21:19.800 --> 0:21:25.320 were to characterize the Chinese economy at the moment, how 0:21:25.320 --> 0:21:27.760 would you do? So? Is it strong? Is it weak? 0:21:27.960 --> 0:21:31.399 Is it going through a transition period? What does it 0:21:31.440 --> 0:21:36.080 actually look like to you? I think it's definitely going 0:21:36.119 --> 0:21:39.440 through a transition, I would say, Tracy. I mean it's um, 0:21:39.440 --> 0:21:43.800 it's it's yet another transformation. It's waiting to happen, but 0:21:43.920 --> 0:21:45.800 we don't really know what the end game is going 0:21:45.840 --> 0:21:51.119 to look like. So the basic transformation is from a 0:21:51.680 --> 0:21:55.480 or an economy that has become far too dependent on 0:21:55.680 --> 0:22:02.480 credit creation to keep growing, far too in which misallocation 0:22:02.560 --> 0:22:07.360 of resources and misallocation of lending has featured all two prominently, 0:22:07.920 --> 0:22:14.160 and which needs to basically restructure away from its over 0:22:15.160 --> 0:22:22.199 lee heavy dependence on capital investment and credit to a 0:22:22.400 --> 0:22:29.760 greater reliance on more open service producing industries and and 0:22:29.760 --> 0:22:33.200 and the consumer. So this is the kind of transition 0:22:33.280 --> 0:22:37.399 which that the Chinese call it rebalancing. So this is 0:22:37.440 --> 0:22:39.480 the kind of transformation China has got to try to 0:22:39.560 --> 0:22:44.200 go through. But it's very very early days, and we're 0:22:44.240 --> 0:22:48.159 already starting to run into a few issues with the 0:22:48.200 --> 0:22:53.959 whole de leveraging cycle, which began with great seriousness at 0:22:53.960 --> 0:22:56.159 the end of two thousand and sixteen. I think the 0:22:56.240 --> 0:23:00.520 Chinese leadership became very cognizant of the fact they could 0:23:00.560 --> 0:23:05.600 not carry on with this sort of overly heavy dependence 0:23:05.680 --> 0:23:10.000 on credit creation um and they've been partially successful in 0:23:10.680 --> 0:23:15.960 limiting the growth of lending to companies and in cleaning 0:23:16.040 --> 0:23:20.320 up some of the more egregious forms of risk in 0:23:20.960 --> 0:23:24.719 funding of that lending, in other words, through overnight and 0:23:24.960 --> 0:23:29.359 very very short maturity deposits in the inter bank market 0:23:29.520 --> 0:23:33.720 and through products that have become known as wealth management products. 0:23:33.720 --> 0:23:36.439 So they've been quite quite adept at doing that up 0:23:36.480 --> 0:23:39.199 to a point. But at the same time they haven't 0:23:39.240 --> 0:23:43.760 really been able to get a strong grip on containing 0:23:43.800 --> 0:23:47.200 the growth of debt by local governments, which are really 0:23:47.280 --> 0:23:53.200 important agents in the economy, and household debt, which previously 0:23:53.359 --> 0:23:57.000 was actually rather tame, is now on a bit of 0:23:57.040 --> 0:24:00.119 a tear. In fact, the ratio of household debt to 0:24:00.240 --> 0:24:03.960 income in China as of about June of two thousand 0:24:04.000 --> 0:24:08.240 and eighteen was almost a hundred and so, you know, 0:24:08.440 --> 0:24:12.280 it's a mixed scorecard. And during the course of this 0:24:12.400 --> 0:24:16.080 year two thousand and eighteen, we've seen lots of exhortations 0:24:16.119 --> 0:24:20.240 by the People's Bang of China and the regulatory agencies 0:24:20.240 --> 0:24:24.800 to banks to lend more, to export companies, to small companies, 0:24:25.800 --> 0:24:29.399 to local governments to spend more on infrastructure or issue 0:24:29.400 --> 0:24:34.440 more bonds to fund infrastructure. Reserve requirements for banks have 0:24:34.520 --> 0:24:38.080 been cut four times, interest rates have come down, so 0:24:38.680 --> 0:24:43.960 this kind of accumulating evidence that actually the Chinese authorities 0:24:44.040 --> 0:24:46.679 don't really like the consequences of de leveraging. And of 0:24:46.720 --> 0:24:50.159 course it's not a good thing, you know, to have 0:24:50.240 --> 0:24:53.719 to put your economy through a ringer to wash you know, 0:24:53.800 --> 0:24:55.840 leverage out of the system. But if you don't do 0:24:55.880 --> 0:24:58.199 it when times are good, you have to do it 0:24:58.240 --> 0:25:01.359 when times are bad. And the worry is that if 0:25:01.440 --> 0:25:04.360 the authorities are now kind of backing away from deleveraging 0:25:04.359 --> 0:25:08.000 a little bit, that it just exacerbates the problem down 0:25:08.080 --> 0:25:11.960 the road and it differs the rebalancing for along a 0:25:12.000 --> 0:25:17.000 long time to come. So how much of this pause 0:25:17.080 --> 0:25:21.880 on rebalancing or these exhortations two banks to lend more 0:25:22.400 --> 0:25:25.480 and to continue the credit driven growth model, how much 0:25:25.560 --> 0:25:30.639 are they in response to trade war led slow down 0:25:31.160 --> 0:25:33.440